Malvern Bancorp, Inc. Reports Fourth Quarter and Fiscal Year End 2020 Operating Results

Malvern Bancorp, Inc. (NASDAQ_ MLVF)

PAOLI, PA — Malvern Bancorp, Inc. (NASDAQ: MLVF), the parent company of Malvern Bank, National Association, has reported operating results for the fourth fiscal quarter and fiscal year ended September 30, 2020.

Net income for the quarter ended September 30, 2020 amounted to $2.2 million, or $0.30 per fully diluted common share, compared with net income of $2.7 million, or $0.35 per fully diluted common share, for the quarter ended September 30, 2019. The decreases in net income and diluted earnings per share from the fourth quarter of 2019 were primarily due to a decrease in net interest income. Net interest income for the quarter ended September 30, 2020 was $432,000 lower than in the quarter ended September 30, 2019. This decrease was mainly driven by the lower interest rate environment. Annualized return on average assets (“ROAA”) was 0.74 percent for the quarter ended September 30, 2020, compared to 0.86 percent for the quarter ended September 30, 2019, and annualized return on average equity (“ROAE”) was 6.08 percent for the quarter ended September 30, 2020, compared with 7.65 percent for the quarter ended September 30, 2019.

For the fiscal year ended September 30, 2020, net income amounted to $6.4 million, or $0.84 per fully diluted common share, compared with net income of $9.3 million, or $1.22 per fully diluted common share, for the fiscal year ended September 30, 2019. The decreases in net income and diluted earnings per share were primarily due to higher loan loss provision expense necessitated by the COVID-19 pandemic and lower net interest income, as well as the partial charge-off of $2.3 million in the first fiscal quarter ended December 31, 2019 related to one commercial loan relationship. ROAA was 0.52 percent for the fiscal year ended September 30, 2020, compared to 0.80 percent for the fiscal year ended September 30, 2019, and ROAE was 4.42 percent for the fiscal year ended September 30, 2020, compared with 6.78 percent for the fiscal year ended September 30, 2019.

“We continue to operate in an unprecedented environment of sustained low interest rates and, of course, the pandemic. While the economic outlook remains uncertain, we are encouraged by the resiliency of our customers who are also adapting to their own difficult operating conditions. I am very proud of the Malvern Bank team, which continues to execute day-to-day to fulfill our highest priority – to be a trusted partner to our customers, especially in difficult times,” commented Anthony C. Weagley, President and Chief Executive Officer.

Ongoing Impact of COVID–19

The Company continues to take the necessary steps to protect the health and well-being of both its employees and clients, and to assist clients who have been impacted by the COVID-19 pandemic.  The Company also continues to focus on meeting the needs of its client base during the pandemic by maintaining close communication with both individual and commercial customers and allowing for deferral extensions on an as-needed, case-by-case basis.

There remains significant uncertainty about COVID-19, including the extent and duration of the impact on individuals, communities and the Company. While it is not possible to know at this time the full impact that COVID-19 will have on the Company’s operations, the Company will continue to disclose potentially material items of which it is aware.

Paycheck Protection Program (“PPP”) Loans 

As of September 30, 2020, the Company funded 255 Small Business Administration (“SBA”) PPP loans, totaling $20.8 million for existing and new customers with an average loan size of approximately $81,000. These loans are expected to generate net origination fees of approximately $574,000, to be recognized over the life of the loans or when the loan is forgiven. The Company continues to work with customers on applying for loan forgiveness.

Loan Deferrals

The Bank continues to provide payment deferrals and forbearances to business customers and mortgage customers that are experiencing hardship because of the effects of COVID-19. At September 30, 2020, the Company had 44 COVID-19-related modified loan deferrals totaling approximately $146.6 million (down approximately $166.9 million or 53% from 153 COVID-19-related modified loan deferrals totaling approximately $313.5 million at June 30, 2020). At November 3, 2020, the Company had 20 COVID-19-related modified loan deferrals totaling $92.9 million or 8.9% of total loans. Of the remaining $92.9 million deferrals, approximately $56.3 million or 60.6% of the deferrals are paying the contractual interest payments.

Statement of Income Highlights at September 30, 2020

  • Net interest income decreased $432,000, or 5.8 percent, for the three months ended September 30, 2020 when compared to the three months ended September 30, 2019. The decrease was mainly attributable to interest rate cuts by the Board of Governors of the Federal Reserve.
  • Net interest margin (“NIM”) increased to 2.48 percent for the quarter ended September 30, 2020, compared to 2.45 percent for the prior year’s quarter and 2.29 percent in the sequential quarter ended June 30, 2020. These increases were driven by the reduction in interest expense, partially offset by a decrease in interest-earning assets. On a linked quarter basis, the average yield on interest-earning assets increased 14 basis points and the total cost of funds decreased 8 basis points, as the cost of interest-bearing deposits decreased 11 basis points.
  • The Company did not record a provision during the three-month period ended September 30, 2020. For the fiscal year ended September 30, 2020, the Company recorded a provision for loan losses of $3.2 million. Due to the uncertainty created by COVID-19, the Company believes that additional provisioning might be required in future quarters until businesses have fully reopened and deferral periods have expired.
Linked Quarter Financial Ratios
(unaudited)
As of or for the quarter ended: 9/30/20
6/30/20
3/31/20
12/31/19
9/30/19
Return on average assets (1) 0.74 % 0.48 % 0.61 % 0.26 % 0.86 %
Return on average equity (1) 6.08 % 4.06 % 5.29 % 2.19 % 7.65 %
Net interest margin (1) 2.48 % 2.29 % 2.25 % 2.33 % 2.45 %
Loans / deposits ratio 116.83 % 117.45 % 110.56 % 106.14 % 106.64 %
Shareholders’ equity / total assets 12.08 % 11.92 % 11.58 % 11.40 % 11.26 %
Efficiency ratio, non-GAAP (1) (2) (3) 60.3 % 66.0 % 60.9 % 58.9 % 55.0 %
Book value per common share $ 19.23 $ 18.86 $ 18.67 $ 18.48 $ 18.35

(1)   Annualized.
(2)   Information reconciling non-GAAP measures to GAAP measures is presented beginning on pages 10 and 11 in this press release.
(3)   Efficiency ratio is a non-GAAP financial measure and is defined as other expense, excluding certain non-core items, as a percentage of net interest income plus other income.

Linked Quarter Income Statement Data
(unaudited)
(in thousands, except share and per share data)

For the quarter ended: 9/3/20 6/3/20 3/31/20 12/31/19 9/3/19
Net interest income $ 6,986 $ 6,631 $ 6,793 $ 6,888 $ 7,418
Provision for loan losses 435 625 2,150
Net interest income after provision for loan losses 6,986 6,196 6,168 4,738 7,418
Other income 692 389 964 443 551
Other expense 4,558 4,684 4,638 4,422 4,453
Income before income tax expense 3,120 1,901 2,494 759 3,516
Income tax expense (benefit) 886 447 586 (26 ) 817
Net income $ 2,234 $ 1,454 $ 1,908 $ 785 $ 2,699
Earnings per common share
Basic $ 0.30 $ 0.19 $ 0.25 $ 0.10 $ 0.35
Diluted $ 0.30 $ 0.19 $ 0.25 $ 0.10 $ 0.35
Weighted average common shares outstanding
Basic 7,522,199 7,538,375 7,663,771 7,665,842 7,663,242
Diluted 7,522,360 7,538,375 7,663,771 7,665,842 7,663,593

Net Interest Income

Net interest income was $7.0 million for the quarter ended September 30, 2020, a decrease of $432,000, or 5.8 percent, from $7.4 million for the quarter ended September 30, 2019. The decline continues to be driven by the Federal Reserve Board’s zero rate policy, as the yield on interest earning assets has declined 45 basis points for the period. However, the net interest spread on an annualized basis increased from 2.19 for the quarter ended September 30, 2019 to 2.31 percent for the quarter ended September 30, 2020.

For the quarter ended September 30, 2020, the Company’s NIM increased by 3 basis points to 2.48 percent, as compared to the quarter ended September 30, 2019. This increase was primarily driven by the decrease in the cost of interest-bearing deposits, which decreased by 58 basis points compared to the fourth fiscal quarter of 2019.

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As of September 30, 2020, they have a total of $28.0 million of average interest-bearing cash balances. This excess liquidity diluted the NIM by approximately 9 basis points.   In addition, they have $20.5 million of PPP loans that had a slightly dilutive effect on their NIM. The PPP loans have an annual interest rate of 1.00 percent plus the accretion of the origination fee.

Net interest income was $27.3 million for the fiscal year ended September 30, 2020, a decrease of $1.8 million, or 6.1 percent, from $29.1 million for the fiscal year ended September 30, 2019. The change for the fiscal year ended September 30, 2020 was primarily the result of the low rate environment and an increase in total interest-bearing liabilities of $41.1 million, partially offset by an increase of $48.3 million in the average balance of loans. The net interest spread was 2.12 percent and 2.31 percent for the fiscal year ended September 30, 2020 and 2019, respectively.

For the fiscal year ended September 30, 2020, the Company’s NIM decreased by 24 basis points to 2.33 percent as compared to 2.57 percent for the fiscal year ended September 30, 2019.

Total Interest Income

For the quarters ended September 30, 2020 and September 30, 2019, total interest income was $10.6 million and $12.7 million, respectively. Average interest-earning assets decreased $83.7 million for the quarter ended September 30, 2020 when compared to the quarter ended September 30, 2019, while the average yield on interest-earning assets declined 45 basis points when compared to the same period in 2019. The average yield was affected by the Federal Reserve Board’s zero rate policy.

For the fiscal year ended September 30, 2020, total interest income was $44.4 million, a decrease of $3.3 million, or 6.8 percent, from $47.7 million for the fiscal year ended September 30, 2019. The decline in total interest income was driven primarily by a lower earning asset yield of 41 basis points.

Interest Expense

For the quarter ended September 30, 2020, interest expense decreased by $1.7 million, or 32.1 percent, to $3.6 million, compared to the quarter ended September 30, 2019, primarily due to decreased rates on deposits and other interest-bearing liabilities. The decrease in interest expense on deposits is primarily attributable to a decrease of $59.7 million in certificate deposits, and a 58 basis point decrease in the rate on interest-bearing deposits.   The decrease in deposits was a strategic decision to reduce excess cash on the balance sheet, match funding expectations and improve the margin. The reduction in certificates was primarily listing service deposits and the reduction in money market were primarily public funds deposits.

The annualized average rate of total interest-bearing liabilities decreased 8 basis points to 1.43 percent for the quarter ended September 30, 2020, compared to 1.51% for the third (June 30, 2020) fiscal quarter of 2020.   For the quarter ended September 30, 2020, the average balance of total interest-bearing liabilities decreased by $16.1 million, reflecting a decrease in the average balance of total interest-bearing deposit accounts of $9.7 million and a decrease in the average balance of borrowings of $6.4 million, compared to the quarter ended June 30, 2020.  

Total interest expense decreased by $1.5 million, or 8.0 percent, to $17.1 million for the fiscal year ended September 30, 2020, compared to the fiscal year ended September 30, 2019. The average rate of total interest-bearing liabilities decreased to 1.68 percent for the fiscal year ended September 30, 2020, from 1.90 percent for the fiscal year ended September 30, 2019. At the same time, the average balance of total interest-bearing liabilities increased by $41.1 million. This increase primarily reflects an increase in the average balance of interest-bearing deposits of $24.7 million and an increase in the average balance of borrowings of $16.4 million.

Other Income

Other income increased $141,000, or 25.6 percent, during the fourth fiscal quarter of 2020 compared with the fourth fiscal quarter of 2019. The increase in other income was primarily due to increases of $148,000 in gain on sale of investments and $102,000 in gain on sale of loans, offset by a decrease of $108,000 in service charges and other fees. The gain on sale of investments resulted from managing and optimizing portfolio activity in the ordinary course of business. The gain on sale of loans was a result of a strategic effort to originate and sell residential loans in this low interest rate environment. The decline in service charges and other fees was primarily the result of lower loan swap fees through the Bank’s commercial loan hedging program in the fourth quarter of 2019.

For the fiscal year ended September 30, 2020, total other income decreased $104,000 compared to the year ended September 30, 2019. This decrease was primarily a result of decreases of $480,000 in service charges and other fees, partially offset by increases of $302,000 in gain on sale of investments and $79,000 in gain on sale of loans. The decrease in service charges and other fees during the fiscal year ended September 30, 2020 is primarily due to the recognition of approximately $428,000 less of net swap fees through the Bank’s commercial loan hedging program. Consistent with the quarter, the increase on the sale of investments resulted from managing and optimizing normal portfolio activity. Also consistent with the quarterly results, the gain on sale of loans was a result of a strategic effort to originate and sell residential loans in this low interest rate environment.

Other Expense

Other expense for the quarter ended September 30, 2020 increased $105,000, or 2.4 percent, when compared to the quarter ended September 30, 2019. The increase was primarily due to increases of $117,000 in salaries and employee benefits, $88,000 in professional fees, which included COVID-19-related expenses, and $75,000 in federal deposit insurance premium expense.  These increases were partially offset by decreases of $124,000 in other real estate owned (“OREO”) expense, net, and $66,000 in other operating expenses. The increase in salary and employee benefits was mainly due to adding employees throughout the year and was offset partially by other reductions in staff in response to conditions brought on by the pandemic during the quarter ended September 30, 2020. The increased federal deposit premium resulted from the Deposit Insurance Fund reserve ratio exceeding the required reserve ratio during the fourth quarter of 2019. This was the second consecutive quarter the Bank did not receive a credit from the fund and does not have a credit balance that can be used to offset premiums in future quarters. The decrease in OREO expense, net, was due to rent received from an OREO property that more than covered the expenses related to that property. The decrease in other operating expenses primarily related to events and travel that were postponed in response to COVID-19.

For the fiscal year ended September 30, 2020, total other expense increased $815,000, or 4.7 percent, compared to the fiscal year ended September 30, 2019. This increase primarily reflects a $348,000 increase in salaries and employee benefits, a $247,000 increase in the Pennsylvania shares tax, and a $196,000 increase in professional fees. These increases were partially offset by a $104,000 decrease in OREO expense, net, and a $66,000 decrease in the federal deposit insurance premium. The increase in salaries and employee benefits during the fiscal year ended September 30, 2020 reflects normal increases to salary and benefits and additional hires to support overall franchise growth. The increased Pennsylvania shares tax was due to the Bank not being subject to this tax until the second quarter of 2019.   The increase in professional fees was due to higher legal and professional services expenses of $182,000 and $160,000, respectively, partially offset by lower audit and accounting expenses of approximately $143,000. The decrease in OREO expense, net, was due to successfully managing and leasing the space while actively working to dispose of the associated property. The reduction in the federal deposit insurance premium resulted from the Deposit Insurance Fund reserve ratio exceeding the official required reserve ratio, which in turn generated credits to qualified participating banks. These credits have been fully utilized in fiscal 2020.

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Income Taxes

The Company recorded $886,000 in income tax expense during the quarter ended September 30, 2020 compared to $817,000 in income tax expense during the quarter ended September 30, 2019. The effective tax rates for the Company for the quarters ended September 30, 2020 and 2019 were 28.4 percent and 23.2 percent, respectively.

For the fiscal year ended September 30, 2020, income tax expense decreased $576,000, or 23.3 percent, to $1.9 million from $2.5 million for the fiscal year ended September 30, 2019. The effective tax rates for the Company for the fiscal year ended September 30, 2020 and 2019 were 22.9 percent and 20.9 percent, respectively. Tax expense for the fiscal year ended September 30, 2020 was positively impacted by discreet items recorded in the first fiscal quarter ended December 31, 2019.

Statement of Condition Highlights at September 30, 2020

  • Gross loans totaled $1.041 billion at September 30, 2020, increasing $23.7 million or 2.3 percent, compared to September 30, 2019.
  • Total assets stood at $1.211 billion at September 30, 2020, decreasing $53.8 million, or 4.3 percent, compared to September 30, 2019. The decline in assets was driven by the strategic reduction in cash due from interest-bearing deposits in other institutions to better match loan funding expectations and improve the margin.
  • The deposit mix improved with the reduction of wholesale certificates of $14.8 million and reduction of money market public fund deposits of $58.5 million from September 30, 2019 to September 30, 2020. Deposits totaled $890.9 million at September 30, 2020, a decrease of $62.9 million, or 6.6 percent, compared to September 30, 2019. The reductions in deposits are in line with the Bank’s overall funding strategy to reduce excess balance sheet cash and better match funding needs.
  • Non-performing assets (“NPAs”) were 1.25 percent of total assets at September 30, 2020, compared to 0.64 percent at September 30, 2019. Excluding one OREO property of $5.8 million, NPAs were 0.77 percent of total assets and 0.18 percent of total assets at September 30, 2020 and September 30, 2019, respectively. The allowance for loan losses as a percentage of total non-performing loans was 118.6 percent at September 30, 2020, compared to 434.6 percent at September 30, 2019.
  • The Company’s ratio of shareholders’ equity to total assets was 12.08 percent at September 30, 2020, compared to 11.26 percent at September 30, 2019.
  • Book value per common share amounted to $19.23 at September 30, 2020, compared to $18.35 at September 30, 2019.

Linked Quarter Statement of Condition Data

(in thousands, unaudited)  

At quarter ended: 9/30/20 6/30/20 3/31/20 12/31/19 9/30/19
Cash and due from depository institutions $ 16,386 $ 30,653 $ 1,829 $ 1,337 $ 1,400
Interest-bearing deposits in depository institutions 45,053 28,291 124,239 158,465 152,143
Investment securities, available for sale, at fair value 31,541 33,245 21,839 23,723 18,411
Investment securities held to maturity 14,970 15,921 18,046 20,578 22,485
Restricted stock, at cost 9,622 9,766 10,913 11,115 11,129
Loans receivable, net of allowance for loan losses 1,030,069 1,028,093 1,002,907 992,629 1,007,714
OREO 5,796 5,796 5,796 5,796 5,796
Accrued interest receivable 3,714 5,680 4,121 4,061 4,253
Operating lease right-of-use-assets 2,638 2,799 2,959 3,119
Property and equipment, net 6,274 6,355 6,476 6,594 6,678
Deferred income taxes, net 3,341 3,103 2,974 2,806 2,840
Bank-owned life insurance 25,400 20,270 20,144 20,018 19,891
Other assets 16,573 13,873 13,869 8,341 12,482
Total assets $ 1,211,377 $ 1,203,845 $ 1,236,112 $ 1,258,582 $ 1,265,222
Deposits $ 890,906 $ 884,444 $ 915,900 $ 943,819 $ 953,811
FHLB advances 130,000 130,000 133,000 133,000 133,000
Subordinated debt 24,776 24,737 24,697 24,658 24,619
Operating lease liabilities 2,671 2,824 2,976 3,128
Other liabilities 16,694 18,309 16,389 10,442 11,284
Shareholders’ equity 146,330 143,531 143,150 143,535 142,508
Total liabilities and shareholders’ equity $ 1,211,377 $ 1,203,845 $ 1,236,112 $ 1,258,582 $ 1,265,222

The following table sets forth the Company’s consolidated average statement of condition for the quarters presented.

Condensed Consolidated Average Statement of Condition

(in thousands, unaudited)

For the quarter ended: 9/30/20 6/30/20 3/31/20 12/31/19 9/30/19
Investment securities $ 48,549 $ 43,349 $ 40,165 $ 40,855 $ 42,256
Interest-bearing cash accounts 27,996 76,828 148,580 122,234 143,297
Loans 1,041,345 1,028,996 1,010,767 1,006,729 1,015,251
Allowance for loan losses (11,071 ) (10,618 ) (9,756 ) (10,095 ) (10,143 )
All other assets 107,512 85,169 63,434 62,341 61,615
Total assets $ 1,214,331 $ 1,223,724 $ 1,253,190 $ 1,222,064 $ 1,252,276
Non-interest-bearing deposits $ 49,139 $ 46,450 $ 41,916 $ 41,716 $ 44,104
Interest-bearing deposits 842,727 852,330 892,583 864,317 896,928
FHLB advances 130,000 136,121 133,000 133,000 133,000
Other short-term borrowings 276 275 54
Subordinated debt 24,760 24,719 24,680 24,641 24,602
Other liabilities 20,853 20,509 16,440 14,805 12,413
Shareholders’ equity 146,852 143,319 144,296 143,585 141,175
Total liabilities and shareholders’ equity $ 1,214,331 $ 1,223,724 $ 1,253,190 $ 1,222,064 $ 1,252,276

Deposits

The following table reflects the composition of the Company’s deposits as of the dates indicated.

(in thousands, unaudited)

At quarter ended: 9/30/20 6/30/20 3/31/20 12/31/19 9/30/19
Demand:
Non-interest-bearing $ 50,422 $ 47,443 $ 42,874 $ 41,273 $ 55,684
Interest-bearing 303,682 277,238 291,191 327,956 302,039
Savings 45,072 43,702 43,550 40,908 41,875
Money market 277,711 281,419 280,173 279,883 276,644
Time 214,019 234,642 258,112 253,799 277,569
Total deposits $ 890,906 $ 884,444 $ 915,900 $ 943,819 $ 953,811

Loans

For the quarter ended September 30, 2020, the Company originated a total new loan volume of $45.7 million, which was partially offset by prepayments of $14.2 million, amortization of $6.5 million, loan payoffs of $22.3 million, and participations of $689,000. Total loan growth for the three months ended September 30, 2020 included an increase of $3.1 million of PPP loans.

Total net loans amounted to $1.030 billion at September 30, 2020 compared to $1.008 billion at September 30, 2019, for a net increase of $22.4 million or 2.2 percent year to year. The allowance for loan losses amounted to $11.1 million, or 1.09 percent of total loans, excluding PPP loans, at September 30, 2020 and $10.1 million or 0.99 percent at September 30, 2019. Average loan balances for the quarter ended September 30, 2020 totaled $1.041 billion as compared to $1.015 billion for the quarter ended September 30, 2019, representing a 2.6 percent increase.

At the end of the fourth fiscal quarter of 2020, the gross loan portfolio remained weighted toward two primary components: commercial and the core residential portfolio, with commercial loans accounting for 67.2 percent and single-family residential real estate loans accounting for 23.3 percent. Construction and development loans amounted to 6.6 percent and consumer loans represented 3.0 percent of the gross loan portfolio at such date. The increase in the gross loan portfolio at September 30, 2020 compared to September 30, 2019 primarily reflected an increase of $22.1 million in residential mortgage loans and $25.0 million in construction and development loans, which were partially offset by a decrease of $18.9 million in commercial loans, net of $20.8 million of PPP commercial and industrial loan originations, and a decrease of $4.6 million in consumer loans.

The following table reflects the Company’s loan portfolio composition (excluding loans held for sale) as of the dates indicated.

(in thousands, unaudited)
At quarter ended: 9/3/20 6/3/20 3/31/20 12/31/19 9/3/19
Residential mortgage $ 242,090 $ 246,215 $ 240,633 $ 234,738 $ 220,011
Construction and Development:
Residential and commercial 65,703 56,999 52,313 49,095 40,346
Land 3,110 3,535 3,579 3,625 3,420
Total construction and development 68,813 60,534 55,892 52,720 43,766
Commercial:
Commercial real estate 497,215 501,955 511,467 521,495 543,452
Farmland 7,517 7,531 7,537 7,563 7,563
Multi-family 67,767 66,416 59,978 43,473 62,884
Commercial and industrial 116,584 115,899 96,574 99,494 99,747
Other 10,142 8,397 7,604 8,569 4,450
Total commercial 699,225 700,198 683,160 680,594 718,096
Consumer:
Home equity lines of credit 17,128 18,097 18,441 18,372 19,506
Second mortgages 10,711 11,704 12,393 13,179 13,737
Other 2,851 2,074 2,112 2,160 2,030
Total consumer 30,690 31,875 32,946 33,711 35,273
Total loans 1,040,818 1,038,822 1,012,631 1,001,763 1,017,146
Deferred loan costs, net 326 338 832 828 663
Allowance for loan losses (11,075 ) (11,067 ) (10,556 ) (9,962 ) (10,095 )
Loans Receivable, net $ 1,030,069 $ 1,028,093 $ 1,002,907 $ 992,629 $ 1,007,714

At September 30, 2020, the Company had $132.0 million in overall undisbursed loan commitments, which consisted primarily of available usage from active construction facilities, unused commercial lines of credit, and home equity lines of credit.

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Asset Quality

Non-accrual loans totaled $9.3 million at September 30, 2020 and $1.8 million at September 30, 2019. The portfolio of non-accrual loans at September 30, 2020 was comprised of two commercial real estate loans with an aggregate outstanding balance of approximately $7.0 million, fifteen residential real estate loans with an aggregate outstanding balance of approximately $2.0 million, and eleven consumer loans with an aggregate outstanding balance of approximately $280,000. The increase in non-accrual loans compared to September 30, 2019 was due primarily to one commercial real estate loan with an outstanding balance of approximately $6.7 million moving to non-accrual status during the first quarter of fiscal 2020.

At September 30, 2020, NPAs totaled $15.1 million, or 1.25 percent of total assets, as compared with $8.1 million, or 0.64 percent of total assets, at September 30, 2019.

OREO totaled $5.8 million at both September 30, 2020 and September 30, 2019. Excluding the $5.8 million of OREO, NPAs totaled $9.3 million, or 0.77 percent of total assets at September 30, 2020, and $2.3 million, or 0.18 percent of total assets at September 30, 2019.

Performing TDR loans were $13.4 million at September 30, 2020 and $12.2 million at September 30, 2019. One commercial real estate loan in the amount of $10.6 million previously classified as non-impaired moved to substandard impaired and was accruing interest during the second (March 31, 2020) fiscal quarter of 2020.  Management subsequently restructured this loan and reclassified it as a performing TDR during the third fiscal quarter ended June 30, 2020. There were no new TDRs in the fourth fiscal quarter of 2020.

Non-Performing Asset and Other Asset Quality Data:

(dollars in thousands, unaudited) 

As of or for the quarter ended: 9/30/20 6/30/20 3/31/20 12/31/19 9/30/19
Non-accrual loans(1) $ 9,279 $ 8,871 $ 8,655 $ 8,649 $ 1,821
Loans 90 days or more past due and still accruing 58 265 168 1 502
Total non-performing loans 9,337 9,136 8,823 8,650 2,323
OREO 5,796 5,796 5,796 5,796 5,796
Total NPAs $ 15,133 $ 14,932 $ 14,619 $ 14,446 $ 8,119
Performing TDR loans $ 13,418 $ 13,640 $ 3,243 $ 3,460 $ 12,170
NPAs / total assets 1.25 % 1.24 % 1.18 % 1.15 % 0.64 %
Non-performing loans / total loans 0.90 % 0.88 % 0.87 % 0.86 % 0.23 %
Net (recoveries) charge-offs $ (8 ) $ (76 ) $ 31 $ 2,283 $ 11
Net (recoveries) charge-offs /average loans(2) % (0.03 )% 0.01 % 0.91 % %
Allowance for loan losses / total loans 1.09 % 1.08 % 1.04 % 0.99 % 0.99 %
Allowance for loan losses / non-performing loans 118.6 % 121.1 % 119.6 % 115.2 % 434.6 %
Total assets $ 1,211,377 $ 1,203,845 $ 1,236,112 $ 1,258,582 $ 1,265,222
Total gross loans 1,040,818 1,038,822 1,012,631 1,001,763 1,017,146
Average loans 1,041,345 1,028,996 1,010,767 1,006,729 1,015,251
Allowance for loan losses 11,075 11,067 10,556 9,962 10,095

(1)   Fifteen loans totaling approximately $8.2 million, or 88.4 percent of the total non-accrual loan balance, were making payments as of September 30, 2020.
(2)   Annualized.

The allowance for loan losses at September 30, 2020 amounted to approximately $11.1 million, or 1.09 percent of total loans excluding PPP loans, a non-GAAP measure, compared to $10.1 million, or 0.99 percent of total loans, at September 30, 2019. The Company did not record a provision for loan losses during the fiscal quarters ended September 30, 2020 and September 30, 2019.

Capital

At September 30, 2020, total shareholders’ equity amounted to $146.3 million, or 12.08 percent of total assets, compared to $142.5 million, or 11.26 percent of total assets at September 30, 2019. The Company’s capital position provides a source of strength and continues to significantly exceed all regulatory capital guidelines. The Bank’s common equity Tier 1 capital ratio was 15.94 percent, Tier 1 leverage ratio was 13.30 percent, Tier 1 risk-based capital ratio was 15.94 percent and the total risk-based capital ratio was 17.04 percent. At September 30, 2019, the Bank’s common equity Tier 1 capital ratio was 15.38 percent, Tier 1 leverage ratio was 12.23 percent, Tier 1 risk-based capital ratio was 15.38 percent and the total risk-based capital ratio was 16.40 percent.

Non-GAAP Financial Measures

In addition to the results presented in accordance with generally accepted accounting principles (“GAAP”), this press release includes certain non-GAAP financial measures. The Company’s management believes that the supplemental non-GAAP information provided in this press release is utilized by market analysts and others to evaluate a company’s financial condition and, therefore, that such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures presented by other companies.

The Company’s net income and EPS including non-core income and expense items, is presented in the table below.

(in thousands)
For the quarter ended: 9/30/20 6/3/20 3/31/20 12/31/19 9/3/19
Net income as reported under GAAP $ 2,234 $ 1,454 $ 1,908 $ 785 $ 2,699
Non-core items, net of tax:
OREO expense(1) (8 ) 22 73 87
Net investment security gains (107 ) (1 ) (138 ) (1 )
Swap fees(2) (71 )
Other(3) 32 24 31 54 16
Core net income, non-GAAP $ 2,151 $ 1,499 $ 1,801 $ 912 $ 2,730
Adjusted Earnings per common share:
Diluted $ 0.29 $ 0.20 $ 0.24 $ 0.12 $ 0.36
Weighted average common shares outstanding:
Diluted 7,522,360 7,538,375 7,663,771 7,665,842 7,663,593
(1)   Non-core items include OREO expense relating to one commercial real estate loan for all quarters presented.
(2)   Upfront recognition of net swap fees through the Bank’s commercial loan hedging program.
(3)   Items such as accelerated payoff and non-accrual interest amounts are included in non-core items.
For the quarter ended: 9/30/20 6/3/20 3/31/20 12/31/19 9/30/19
Earnings per share GAAP $ 0.30 $ 0.19 $ 0.25 $ 0.10 $ 0.35
Plus/(less):
OREO expense, net investment
security gains, swap fees and other (0.01 ) 0.01 (0.01 ) 0.02 0.01
Adjusted Earnings per common share non-GAAP $ 0.29 $ 0.20 $ 0.24 $ 0.12 $ 0.36

The Company’s other income including and excluding net investment securities gains and net swap fees is presented below. The Company’s management believes that many investors evaluate other income without regard to such gains.

(in thousands)
For the quarter ended: 9/30/20 6/3/20 3/31/20 12/31/19 9/30/19
Other income as reported under GAAP $ 692 $ 389 $ 964 $ 443 $ 551
Less: Net investment securities gains 149 1 180 1
Less: Net swap fees 92
Other income, excluding net investment securities gains and net swap fees $ 543 $ 388 $ 784 $ 443 $ 458

“Efficiency ratio” is a non-GAAP financial measure and is defined as other expense, excluding certain non-core items, as a percentage of net interest income, plus other income, calculated as follows:

(dollars in thousands)
For the quarter ended: 9/30/20 6/30/20 3/31/20 12/31/19 9/3/19
Other expense as reported under GAAP $ 4,558 $ 4,684 $ 4,638 $ 4,422 $ 4,453
Less: non-core items(1) (11 ) 29 (1 ) 71 113
Other expense, excluding non-core items, non-GAAP $ 4,569 $ 4,655 $ 4,639 $ 4,351 $ 4,340
Net interest income $ 6,986 $ 6,631 $ 6,793 $ 6,888 $ 7,418
Non-core items(2) 45 32 41 52 21
Net interest income, including non-core items, non-GAAP 7,031 6,663 6,834 6,940 7,439
Other income, excluding net gain on sale of investments and net swap fees 543 388 784 443 458
Total $ 7,574 $ 7,051 $ 7,618 $ 7,383 $ 7,897
Efficiency ratio, non-GAAP 60.3 % 66.0 % 60.9 % 58.9 % 55.0 %
(1)   Non-core items include OREO expense relating to one commercial real estate loan for all quarters presented.
(2)   Items such as accelerated payoff and non-accrual interest amounts are included in non-core items.

The Company’s efficiency ratio, calculated on a GAAP basis, without excluding net investment securities gains, swap fees, and without deducting non-core items from other expense, follows:

For the quarter ended: 9/30/20 6/30/20 3/31/20 12/31/19 9/3/19
Efficiency ratio on a GAAP basis 59.4 % 66.7 % 59.8 % 60.3 % 55.9 %

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