Malvern Bancorp (MLVF) 10-Q 2013 FY Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended:  December 31, 2012
or
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from ______ to ______

Commission File Number: 000-54835

MALVERN BANCORP, INC.

(Exact name of Registrant as specified in its charter)

Pennsylvania	45-5307782
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
42 E. Lancaster Avenue, Paoli, Pennsylvania	19301
(Address of Principal Executive Offices)	(Zip Code)

(610) 644-9400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

YES x  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o  NO x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:  As of February 11, 2013, 6,558,473 shares of the Registrant’s common stock were issued and outstanding.

MALVERN BANCORP, INC.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of December 31, 2012 and September 30, 2012 (Unaudited)	2
	Consolidated Statements of Income for the Three Months Ended December 31, 2012 and 2011 (Unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 and 2011 (Unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended December 31, 2012 and 2011 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 and 2011 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosure	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
SIGNATURES		56

Malvern Bancorp, Inc. and Subsidiaries

Consolidated Statements of Financial Condition (Unaudited)

	December 31, 2012			September 30, 2012
	(Dollars in thousands, except per share data)
Assets
Cash and due from depository institutions	$	1,273		$	1,413
Interest bearing deposits in depository institutions		114,647			130,497
Cash and Cash Equivalents		115,920			131,910
Investment securities available for sale, at fair value		85,208			80,508
Restricted stock, at cost		3,654			4,147
Loans receivable, net of allowance for loan losses of $7,571 and $7,581, respectively		446,271			457,001
Other real estate owned		3,788			4,594
Accrued interest receivable		1,440			1,521
Property and equipment, net		7,571			7,675
Deferred income taxes, net		6,881			6,775
Bank-owned life insurance		14,890			15,286
Other assets		2,407			2,395
Total Assets	$	688,030		$	711,812
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Deposits-noninterest-bearing	$	23,823		$	23,062
Deposits-interest-bearing		511,253			517,926
Total Deposits		535,076			540,988
FHLB advances		48,000			48,085
Advances from borrowers for taxes and insurance		4,663			1,006
Accrued interest payable		238			266
Stock subscription escrow		-			56,677
Other liabilities		1,983			2,154
Total Liabilities		589,960			649,176
Commitments and Contingencies		-			-
Shareholders’ Equity
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued		-			-
Common stock, $0.01 par value, 40,000,000 shares authorized, issued and outstanding: 6,558,473 and 6,102,500, respectively		66			62
Additional paid-in capital		60,286			25,846
Retained earnings		39,267			38,596
Treasury stock—at cost, 2012, 0 shares; 2011, 50,000 shares		-			(477	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,176	)		(2,032	)
Accumulated other comprehensive income		627			641
Total Shareholders’ Equity		98,070			62,636
Total Liabilities and Shareholders’ Equity	$	688,030		$	711,812

See notes to unaudited consolidated financial statements.

2

Malvern Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Three Months Ended December 31,
	2012			2011
	(Dollars in thousands, except per share data)
Interest and Dividend Income
Loans, including fees	$	5,533		$	6,427
Investment securities, taxable		329			432
Investment securities, tax-exempt		52			4
Dividends, restricted stock		5			-
Interest-bearing cash accounts		31			9
Total Interest and Dividend Income		5,950			6,872
Interest Expense
Deposits		1,517			1,853
Long-term borrowings		430			434
Total Interest Expense		1,947			2,287
Net Interest Income		4,003			4,585
Provision (Credit) for Loan Losses		400			(300	)
Net Interest Income after Provision (Credit) for Loan Losses		3,603			4,885
Other Income
Service charges and other fees		331			207
Rental income		63			66
Gain on sale of investments, net		27			455
Gain on sale of loans, net		164			-
Earnings on bank-owned life insurance		722			134
Total Other Income		1,307			862
Other Expense
Salaries and employee benefits		1,848			1,589
Occupancy expense		482			508
Federal deposit insurance premium		217			232
Advertising		180			186
Data processing		319			294
Professional fees		364			455
Other real estate owned expense, net		425			185
Other operating expenses		458			487
Total Other Expenses		4,293			3,936
Income before income tax (benefit) expense		617			1,811
Income tax (benefit) expense		(54	)		560
Net Income	$	671		$	1,251
Basic Earnings Per Share*	$	0.11		$	0.20

* Basic earnings per share for the prior period have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which was completed on October 11, 2012.

See notes to unaudited consolidated financial statements.

3

Malvern Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended December 31,
	2012			2011
	(In thousands)
Net Income	$	671		$	1,251
Other Comprehensive Income:
Changes in net unrealized gains on securities available for sale		5			609
Gains realized in net income		(27	)		(455	)
		(22	)		154
Deferred income tax effect		8			(52	)
Total other comprehensive (loss) income		(14	)		102
Total comprehensive income	$	657		$	1,353

See notes to unaudited consolidated financial statements.

4

Malvern Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(Dollars in thousands, except share and per share data)
Balance, October 1, 2011	$	62		$	25,889		$	36,637	$	(477	)	$	(2,178	)	$	351		$	60,284
Net Income		-			-			1,251		-			-			-			1,251
Other comprehensive income		-			-			-		-			-			102			102
Committed to be released ESOP shares (3,351 shares)		-			(16	)		-		-			36			-			20
Balance, December 31, 2011	$	62		$	25,873		$	37,888	$	(477	)	$	(2,142	)	$	453		$	61,657
Balance, October 1, 2012	$	62		$	25,846		$	38,596	$	(477	)	$	(2,032	)	$	641		$	62,636
Net Income		-			-			671		-			-			-			671
Other comprehensive loss		-			-			-		-			-			(14	)		(14	)
Cancellation of common stock		(62	)		62			-		-			-			-			-
Cancellation of treasury stock		-			(477	)		-		477			-			-			-
Additional ESOP shares converted at exchange rate of 1.0748 (18,040 shares at $10/share)		-			180			-		-			(180	)		-			-
Dissolution of mutual holding company		-			100			-		-			-			-			100
Proceeds from issuance of common stock, net of offering expenses of $1.6 million		66			34,567			-		-			-			-			34,633
Committed to be released ESOP shares (3,571 shares)		-			8			-		-			36			-			44
Balance, December 31, 2012	$	66		$	60,286		$	39,267	$	-		$	(2,176	)	$	627		$	98,070

See notes to unaudited consolidated financial statements.

5

Malvern Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended December 31,
	2012			2011
	(In thousands )
Cash Flows from Operating Activities
Net income	$	671		$	1,251
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation expense		172			186
Provision (credit) for loan losses		400			(300	)
Deferred income tax (benefit) expense		(100	)		442
ESOP expense		44			20
Accretion of premiums and discounts on investment securities, net		(101	)		(71	)
Amortization of mortgage servicing rights		6			11
Net gain on sale of investment securities available for sale		(27	)		(455	)
Net gain on sale of loans		(164	)		-
Gain on sale of other real estate owned		(96	)		(38	)
Write down of other real estate owned		505			111
Amortization of loan origination fees and costs		(569	)		(338	)
Decrease in accrued interest receivable		81			92
(Decrease) increase in accrued interest payable		(28	)		21
(Decrease) increase in other liabilities		(171	)		100
Earnings on bank-owned life insurance		(722	)		(134	)
Increase in other assets		(292	)		(263	)
Decrease in prepaid FDIC assessment		208			222
Net Cash (Used in) Provided by Operating Activities		(183	)		857
Cash Flows from Investing Activities
Proceeds from maturities and principal collections:
Investment securities held to maturity		-			255
Investment securities available for sale		9,886			8,181
Proceeds from sales of investment securities available for sale		17			13,928
Purchases of investment securities available for sale		(14,496	)		(17,560	)
Proceeds from sale of loans		4,567			-
Loan purchases		(4,371	)		(5,632	)
Loan originations and principal collections, net		10,865			23,981
Proceeds from sale of other real estate owned		399			1,926
Additions to mortgage servicing rights		(18	)		-
Net decrease in restricted stock		493			268
Purchases of property and equipment		(68	)		(88	)
Net Cash Provided by Investing Activities		7,274			25,259
Cash Flows from Financing Activities
Net decrease in deposits		(5,912	)		(3,174	)
Repayment of long-term borrowings		(85	)		(252	)
Increase in advances from borrowers for taxes and insurance		3,657			1,655
Return of excess stock subscription funds		(20,841	)		-
Cash from mutual holding company reorganization		100			-
Net Cash Used in Financing Activities		(23,081	)		(1,771	)
Net (Decrease) Increase in Cash and Cash Equivalents		(15,990	)		24,345
Cash and Cash Equivalents - Beginning		131,910			33,496
Cash and Cash Equivalents - Ending	$	115,920		$	57,841
Supplementary Cash Flows Information
Interest paid	$	1,975		$	2,266
Non-cash transfer of loans to other real estate owned	$	2		$	109
Non-cash transfer of loans to investment securities available for sale	$	-		$	10,671
Subscription funds transferred to equity	$	34,633		$	-

See notes to unaudited consolidated financial statements.

6

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Organizational Structure and Nature of Operations

On May 19, 2008, Malvern Federal Savings Bank (“Malvern Federal Savings” or the “Bank”) completed its reorganization to the mutual holding company form of organization and formed Malvern Federal Bancorp, Inc. (the “Mid-Tier Holding Company”) to serve as the “mid-tier” stock holding company for the Bank.  In connection with implementation of the mutual holding company form of organization in 2008, the Company sold 2,645,575 shares of its common stock to certain members of the Bank and the public at a purchase price of $10.00 per share.  In addition, the Company issued 3,383,875 shares, or 55% of the then outstanding shares, of its common stock to Malvern Federal Mutual Holding Company, which was a federally chartered mutual holding company (the “Mutual Holding Company”), and contributed 123,050 shares (with a value of $1.2 million), or 2.0% of the then outstanding shares, to the Malvern Federal Charitable Foundation, a newly created Delaware charitable foundation.  In addition to the shares of Malvern Federal Bancorp, Inc. which it owned, Malvern Federal Mutual Holding Company was capitalized with $100,000 in cash.  An Employee Stock Ownership Plan (“ESOP”) was established which borrowed approximately $2.6 million from Malvern Federal Bancorp, Inc. to purchase 241,178 shares of common stock in the 2008 offering.  Principal and interest payments of the loan are being made quarterly over a term of 18 years at a fixed interest rate of 5.0%.

On October 11, 2012, Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp-New”) completed the “second-step” conversion of the Bank from the mutual holding company structure to the stock holding company structure pursuant to a Plan of Conversion and Reorganization. Upon completion of the conversion and reorganization, Malvern Federal Mutual Holding Company and the Mid-Tier Holding Company ceased to exist.  Malvern Bancorp, Inc., a Pennsylvania company, became the holding company for the Bank and owner of all of the issued and outstanding shares of the Bank’s common stock. In connection with the conversion and reorganization, 3,636,875 shares of common stock, par value $0.01 per share, of the Malvern Bancorp, Inc., were sold in a subscription offering to certain depositors of the Bank and other investors for $10 per share, or $36.4 million in the aggregate, and 2,921,598 shares of common stock were issued in exchange for the outstanding shares of common stock of the former Mid-Tier Holding Company for the Bank, Malvern Federal Bancorp, Inc., held by the “public” shareholders of the Mid-Tier Holding Company (all shareholders except the Mutual Holding Company). Each share of common stock of the Mid-Tier Holding Company was converted into the right to receive 1.0748 shares of common stock of the new Malvern Bancorp, Inc. in the conversion and reorganization. The total shares outstanding upon completion of the stock offering and the exchange were approximately 6,558,473.  Treasury stock of the former Mid-Tier Holding Company was cancelled.

The Company is a Pennsylvania chartered corporation which owns all of the issued and outstanding shares of the Bank’s common stock, the only shares of equity securities which the Bank has issued.  The Company does not own or lease any property, but instead uses the premises, equipment and furniture of the Bank.  At the present time, the Company employs only persons who are officers of Malvern Federal Savings to serve as officers of the Company.  The Company also uses the Bank’s support staff from time to time.  These persons are not separately compensated by the Company.

Malvern Federal Savings Bank is a federally chartered stock savings bank which was originally organized in 1887 and is operating out of its headquarters in Paoli, Pennsylvania and eight full service financial center offices in Chester and Delaware Counties, Pennsylvania.  The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and investment securities.  The Bank’s principal sources of funds are deposits, repayments of loans and investment securities, maturities of investments and interest-bearing deposits, other funds provided from operations and wholesale funds borrowed from outside sources such as the Federal Home Loan Bank of Pittsburgh (the “FHLB”).  These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, commercial real estate mortgage loans, construction and development loans, home equity loans and lines of credit and other consumer loans.  The Bank derives its income principally from interest earned on loans, investment securities and, to a lesser extent, from fees received in connection with the origination of loans and for other services. The Bank’s primary expenses are interest expense on deposits and borrowings and general operating expenses.  Funds for activities are provided primarily by deposits, amortization of loans, loan prepayments and the maturity of loans, securities and other investments and other funds from operations.

The Bank, the Mid-Tier Holding Company and the Mutual Holding Company previously were regulated by the Office of Thrift Supervision (the “OTS”). As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the OTS was eliminated and, as of July 21, 2011, the regulatory oversight functions and authority of the OTS related to the Bank were transferred to the Office of the Comptroller of the Currency (the “OCC”) and the regulatory oversight functions and authority of the OTS related to savings and loan holding companies, such as the Company and, previously, the Mid-Tier Holding Company, were transferred to the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or the “FRB”).

7

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Organizational Structure and Nature of Operations (Continued)

The Company and its subsidiaries, Malvern Federal Holdings, Inc., a Delaware company, and the Bank and the Bank’s subsidiaries, Strategic Asset Management Group, Inc. (“SAMG”) and Malvern Federal Investments, Inc., a Delaware company, provide various banking services, primarily accepting deposits and originating residential and commercial mortgage loans, consumer loans and other loans through the Bank’s eight full-service branches in Chester and Delaware Counties, Pennsylvania.  SAMG owns 50% of Malvern Insurance Associates, LLC.  Malvern Insurance Associates, LLC offers a full line of business and personal lines of insurance products.  As of December 31, 2012 and September 30, 2012, SAMG’s total assets were $42,000 and $42,000, respectively.  There was no income reported for SAMG for the three months ended December 31, 2012 and 2011.  The Company is subject to competition from various other financial institutions and financial services companies.  The Company is also subject to the regulations of certain federal agencies and, therefore, undergoes periodic examinations by those regulatory agencies.

In accordance with the subsequent events topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or the “ASC”), the Company evaluates events and transactions that occur after the statement of financial condition date for potential recognition and disclosure in the consolidated financial statements.  The effect of all subsequent events that provide additional evidence of conditions that existed at the statement of financial date are recognized in the unaudited consolidated financial statements as of December 31, 2012.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements at December 31, 2012 and for the three months ended December 31, 2012 include the accounts of Malvern Bancorp, Inc. and its subsidiaries. The consolidated financial statements at September 30, 2012 and for the three months ended December 31, 2011 include the accounts of Malvern Federal Bancorp, Inc. and its subsidiaries.  All significant intercompany transactions and balances have been eliminated.

The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all the information or footnotes necessary for a complete presentation of financial condition, operations, changes in shareholders’ equity, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included.  The results for the three months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2013, or any other period.  The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the evaluation of other-than-temporary impairment of investment securities and fair value measurements.

8

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within Chester and Delaware Counties, Pennsylvania.  Note 5 discusses the types of investment securities that the Company invests in.  Note 6 discusses the types of lending that the Company engages in.  The Company does not have any significant concentrations to any one industry or customer.  Although the Company has a diversified portfolio, its debtors ability to honor their contracts is influenced by, among other factors, the region’s economy.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from depository institutions and interest bearing deposits.

The Company maintains cash deposits in other depository institutions that occasionally exceed the amount of deposit insurance available.  Management periodically assesses the financial condition of these institutions and believes that the risk of any possible credit loss is minimal.

Investment Securities

Debt securities held to maturity are securities that the Company has the positive intent and the ability to hold to maturity; these securities are reported at amortized cost and adjusted for unamortized premiums and discounts.  Securities held for trading are securities that are bought and held principally for the purpose of selling in the near term; these securities are reported at fair value, with unrealized gains and losses reported in current earnings.  At December 31, 2012 and September 30, 2012, the Company had no investment securities classified as trading.  Debt securities that will be held for indefinite periods of time and equity securities, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available for sale.  Realized gains and losses are recorded on the trade date and are determined using the specific identification method. Securities held as available for sale are reported at fair value, with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (“AOCI”). Management determines the appropriate classification of investment securities at the time of purchase.

Securities are evaluated on a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary.  To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value.  The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Loans Receivable

The Company, through the Bank, grants mortgage, construction, commercial and consumer loans to customers.  A substantial portion of the loan portfolio is represented by residential and commercial mortgage loans secured by properties located throughout Chester County, Pennsylvania and surrounding areas.  The ability of the Company’s debtors to honor their contracts is dependent upon, among other factors, the real estate and general economic conditions in this area.

9

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Loans receivable that management has the intent and ability to hold until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs.  Interest income is accrued on the unpaid principal balance.  Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans using the interest method.  The Company is amortizing these amounts over the contractual lives of the loans.

The loans receivable portfolio is segmented into residential loans, construction and development loans, commercial loans and consumer loans.  The residential loan segment has one class, one- to four-family first lien residential mortgage loans. The construction and development loan segment consists of the following classes: residential and commercial and land loans. Residential construction loans are made for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Commercial construction loans are made for the purpose of acquiring, developing and constructing a commercial structure.  The commercial loan segment consists of the following classes: commercial real estate loans, multi-family real estate loans, and other commercial loans, which are also generally known as commercial and industrial loans or commercial business loans. The consumer loan segment consists of the following classes: home equity lines of credit, second mortgage loans and other consumer loans, primarily unsecured consumer lines of credit.

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collection of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.  The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

In addition to originating loans, the Company purchases consumer and mortgage loans from brokers in our market area.  Such purchases are reviewed for compliance with our underwriting criteria before they are purchased, and are generally purchased without recourse to the seller.  Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

Allowance for Loan Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the consolidated statement of financial condition date and is recorded as a reduction to loans. Reserves for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of financial condition. The allowance for loan losses (“ALLL”) is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged-off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than when they become 120 days past due on a contractual basis or earlier in the event of the borrower’s bankruptcy or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably estimated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, the composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

10

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class that are not considered impaired.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, as adjusted for qualitative factors.  These qualitative risk factors include:

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3.	The nature and volume of the loan portfolio and terms of loans.
4.	The experience, ability, and depth of lending management and staff.
5.	The volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications.
6.	The quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.
7.	The existence and effect of any concentrations of credit and changes in the level of such concentrations.
8.	The effect of external factors, such as competition and legal and regulatory requirements.

The qualitative factors are applied to the historical loss rates for each class of loan. In addition, while not reported as a separate factor, changes in the value of underlying collateral (for regional property values) for collateral dependent loans is considered and addressed within the economic trends factor.  A quarterly calculation is made adjusting the reserve allocation for each factor within a risk weighted range as it relates to each particular loan type, collateral type and risk rating within each segment.  Data is gathered and evaluated through internal, regulatory, and government sources quarterly for each factor.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

In addition, the allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include categories of “pass,” “special mention,” “substandard” and “doubtful.” Assets classified as “Pass” are those protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Assets which do not currently expose the insured institution to sufficient risk to warrant classification as substandard or doubtful but possess certain identified weaknesses are required to be designated “special mention.” If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.   “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

Residential Lending.  Residential mortgage originations are secured primarily by properties located in the Company’s primary market area and surrounding areas. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 15 to 30 years.  We also offer adjustable rate mortgage (“ARM”) loans where the interest rate either adjusts on an annual basis or is fixed for the initial one, three, five or seven years and then adjusts annually.

11

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

We underwrite one- to four-family residential mortgage loans with loan-to-value ratios of up to 95%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property.  We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans.  We require that a licensed appraiser from our list of approved appraisers perform and submit to us an appraisal on all properties secured by a first mortgage on one- to four-family first mortgage loans.

In underwriting one- to four-family residential mortgage loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Most properties securing real estate loans made by the Company are appraised by independent fee appraisers approved by the Board of Directors.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage loan originations. Our single-family residential mortgage loans generally are underwritten on terms and documentation conforming to guidelines issued by Freddie Mac and Fannie Mae.

Construction and Development Loans. During fiscal 2010, the Company generally ceased originating any new construction and development loans. Previously, we originated construction loans for residential and, to a lesser extent, commercial uses within our market area. We generally limited construction loans to builders and developers with whom we had an established relationship, or who were otherwise known to officers of the Bank. Our construction and development loans currently in the portfolio typically have variable rates of interest tied to the prime rate which improves the interest rate sensitivity of our loan portfolio.

Construction and development loans generally are considered to involve a higher level of risk than one-to four-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effect of economic conditions on developers, builders and projects.  Additional risk is also associated with construction lending because of the inherent difficulty in estimating both a property’s value at completion and the estimated cost (including interest) to complete a project. The nature of these loans is such that they are more difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not pre-sold and thus pose a greater potential risk than construction loans to individuals on their personal residences.  In order to mitigate some of the risks inherent to construction lending, we inspect properties under construction, review construction progress prior to advancing funds, work with builders with whom we have established relationships, require annual updating of tax returns and other financial data of developers and obtain personal guarantees from the principals.

Commercial Lending.  During fiscal 2010, the Company generally ceased originating new commercial or multi-family real estate mortgage loans and we are no longer purchasing whole loans or participation interests in commercial real estate or multi-family loans from other financial institutions. Commercial and multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.

Most of the Company’s commercial business loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable.  The commercial business loans which we originated may be either a revolving line of credit or for a fixed term of generally 10 years or less. Interest rates are adjustable, indexed to a published prime rate of interest, or fixed. Generally, equipment, machinery, real property or other corporate assets secure such loans. Personal guarantees from the business principals are generally obtained as additional collateral.

12

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Consumer Lending Activities. The Company currently originates most of its consumer loans in its primary market area and surrounding areas.  The Company originates consumer loans on both a direct and indirect basis. Consumer loans generally have higher interest rates and shorter terms than residential mortgage loans; however, they have additional credit risk due to the type of collateral securing the loan or in some case the absence of collateral.  As a result of the declines in the market value of real estate and the deterioration in the overall economy, we are continuing to evaluate and monitor the credit conditions of our consumer loan borrowers and the real estate values of the properties securing our second mortgage loans as part of our on-going efforts to assess the overall credit quality of the portfolio in connection with our review of the allowance for loan losses.

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Once all factor adjustments are applied, general reserve allocations for each segment are calculated, summarized and reported on the ALLL summary.  ALLL final schedules, calculations and the resulting evaluation process are reviewed quarterly by the Bank’s Asset Classification Committee and the Bank’s Board of Directors.

In addition, Federal bank regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value.  The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary.  This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property.  Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices.  Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

13

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Loan Servicing

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets.  For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value.  Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.  Capitalized servicing rights are reported in other assets and are amortized into non-interest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.  Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type.  Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche.  If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

Troubled Debt Restructurings

Loans whose terms are modified are classified as troubled debt restructurings (“TDRs”) if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.  Concessions granted under a troubled debt restructuring may be modified by means of extending the maturity date of the loan, reducing the interest rate on the loan to a rate which is below market, a combination of rate adjustments and maturity extensions, or by other means including covenant modifications, forbearances or other concessions. However, the Company generally only restructures loans by modifying the payment structure to interest only or by reducing the actual interest rate. We do not accrue interest on loans that were non-accrual prior to the troubled debt restructuring until they have performed in accordance with their restructured terms for a period of at least six months.  We continue to accrue interest on troubled debt restructurings which were performing in accordance with their terms prior to the restructure and continue to perform in accordance with their restructured terms.  Management evaluates the ALLL with respect to TDRs under the same policy and guidelines as all other performing loans are evaluated with respect to the ALLL.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the previously established carrying amount or fair value less cost to sell.  Revenue and expenses from operations, disposition gains and losses, and changes in the valuation allowance are included in other expenses from other real estate owned.

Restricted Stock

Restricted stock represents required investments in the common stock of a correspondent bank and is carried at cost. As of December 31, 2012 and September 30, 2012, restricted stock consists solely of the common stock of the Federal Home Loan Bank of Pittsburgh.

Management’s evaluation and determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of an investment’s cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the  level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

14

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Property and Equipment

Property and equipment are carried at cost.  Depreciation is computed using the straight-line and accelerated methods over estimated useful lives ranging from 3 to 39 years beginning when assets are placed in service.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income for the period.  The cost of maintenance and repairs is charged to expense as incurred.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank-Owned Life Insurance

The Company invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses.  BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees.  The Bank is the owner and beneficiary of the policies.  This life insurance investment is carried at the cash surrender value of the underlying policies.  Earnings from the increase in cash surrender value of the policies are included in other income on the statement of income.

Advertising Costs

The Company follows the policy of charging the costs of advertising to expense as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws and a determination of the differences between the tax and the financial reporting basis of assets and liabilities.  Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

A valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax assets will not be realized.  The Company’s policy is to evaluate the deferred tax asset on a quarterly basis and record a valuation allowance for our deferred tax asset if we do not have sufficient positive evidence indicating that it is more likely than not that some or all of the deferred tax asset will be realized.  The Company’s policy is to account for interest and penalties as components of income tax expense.

Commitments and Contingencies

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the statement of financial condition when they are funded.

15

Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Segment Information

The Company has one reportable segment, “Community Banking.”  All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others.  For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk.  Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale investment securities, are reported as a separate component of the shareholders’ equity section of the statement of financial condition, such items, along with net income, are components of comprehensive income.  The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”) as of December 31, 2011.  ASU No. 2011-05 amended prior comprehensive income guidance. 

Reclassifications

Certain reclassifications have been made to the previous years’ consolidated financial statements to conform to the current year’s presentation.  These reclassifications had no effect on the Company’s results of operations.

Note 3 – Earnings Per Share

Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned ESOP shares.  Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities reduced by unearned ESOP shares.  As of December 31, 2012 and for the three months ended December 31, 2012 and 2011  the Company had not issued and did not have any outstanding CSEs and at the present time, the Company’s capital structure has no potential dilutive securities.  The calculation for the three months ended December 31, 2011 has been adjusted for the exchange and additional share issuance in the reorganization and offering completed on October 11, 2012.

The following table sets forth the composition of the weighted average shares (denominator) used in the earnings per share computations.

	Three Months Ended December 31,
	2012			2011
	(Dollars in thousands, except per share amounts)
Net Income	$	671		$	1,251
Weighted average common shares outstanding		6,503,954			6,102,500
Exchange rate from offering		-			1.0748
Adjusted weighted average shares outstanding		6,503,954			6,558,967
Average unearned ESOP shares		(197,215	)		(209,392	)
Weighted average shares outstanding – basic		6,306,739			6,349,575
Earnings per share – basic	$	0.11		$	0.20

16

Notes to Consolidated Financial Statements (Unaudited)

Note 4 – Employee Stock Ownership Plan

The Company maintains an employee stock ownership plan (“ESOP”) for substantially all of its full-time employees. Certain senior officers of the Bank have been designated as Trustees of the ESOP.  Shares of the Company’s common stock purchased by the ESOP are held until released for allocation to participants.  Shares released are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of all eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released.  To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital.  During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of the Mid-Tier Holding Company’s common stock (which have since been converted to shares of the Company’s common stock at the 1.0748 exchange ratio) for approximately $2.6 million, an average price of $10.86 per share, which was funded by a loan from Malvern Federal Bancorp, Inc. The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP.  The loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026.  Shares are released to participants proportionately as the loan is repaid.  During the three months ended December 31, 2012 and 2011, there were 3,571 and 3,351 shares committed to be released, respectively.  At December 31, 2012, there were 193,220 unallocated shares and 65,933 allocated shares held by the ESOP which had an aggregate fair value of approximately $2.6 million.

Note 5 - Investment Securities

At December 31, 2012 and September 30, 2012, all of the Company’s mortgage-backed securities consisted of securities backed by residential mortgage loans.

Investment securities available for sale at December 31, 2012 and September 30, 2012 consisted of the following:

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
U.S. government agencies	$	29,451	$	227	$	(14	)	$	29,664
State and municipal obligations		12,413		182		(26	)		12,569
Single issuer trust preferred security		1,000		-		(179	)		821
Corporate debt securities		2,006		42		-			2,048
		44,870		451		(219	)		45,102
Mortgage-backed securities:
FNMA:
Adjustable-rate		1,129		65		-			1,194
Fixed-rate		527		45		-			572
FHLMC, adjustable-rate		232		11		-			243
GNMA, fixed-rate		1		-		-			1
CMO, fixed-rate		37,499		611		(14	)		38,096
		39,388		732		(14	)		40,106
	$	84,258	$	1,183	$	(233	)	$	85,208

17

Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
U.S. government agencies	$	23,674	$	247	$	-		$	23,921
FHLB notes		695		1		-			696
State and municipal obligations		9,217		186		(16	)		9,387
Single issuer trust preferred security		1,000		-		(236	)		764
Corporate debt securities		2,006		51		-			2,057
		36,592		485		(252	)		36,825
Mortgage-backed securities:
FNMA:
Adjustable-rate		1,144		71		-			1,215
Fixed-rate		647		63		-			710
FHLMC, adjustable-rate		248		13		-			261
GNMA, adjustable-rate		1		-		-			1
CMO, fixed-rate		40,904		600		(8	)		41,496
		42,944		747		(8	)		43,683
	$	79,536	$	1,232	$	(260	)	$	80,508

During the first quarter of fiscal 2013, a municipal security in a loss position of $10,000 was sold for approximately $17,000 which resulted in a gain of approximately $27,000. Proceeds from sales of securities available for sale during the first quarter of fiscal 2012 were $13.9 million. Gross gains of $455,000 were realized on these sales.

18

Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

The following tables summarize the aggregate investments at December 31, 2012 and September 30, 2012 that were in an unrealized loss position.

	December 31, 2012
	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Investment Securities Available for Sale:
U.S. government agencies	$	4,984	$	(14	)	$	-	$	-		$	4,984	$	(14	)
State and municipal obligations		3,391		(26	)		-		-			3,391		(26	)
Single issuer trust preferred security		-		-			821		(179	)		821		(179	)
Mortgage-backed securities:
CMO, fixed-rate		1,835		(14	)		-		-			1,835		(14	)
	$	10,210	$	(54	)	$	821	$	(179	)	$	11,031	$	(233	)

	September 30, 2012
	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Investment Securities Available for Sale:
State and municipal obligations	$	-	$	-		$	18	$	(16	)	$	18	$	(16	)
Single issuer trust preferred security		-		-			764		(236	)		764		(236	)
Mortgage-backed securities:
CMO, fixed-rate		2,527		(8	)		-		-			2,527		(8	)
	$	2,527	$	(8	)	$	782	$	(252	)	$	3,309	$	(260	)

As of December 31, 2012, the estimated fair value of the securities disclosed above was primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of December 31, 2012, the Company held five U.S. government agency securities, nine tax-free municipal bonds, two mortgage-backed securities and one single issuer trust preferred security which were in an unrealized loss position.  The Company does not intend to sell and expects that it is not more likely than not that it will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of December 31, 2012 represents other-than-temporary impairment.

During the quarter ended December 31, 2012, the gross unrealized loss of the single issuer trust preferred security improved by $57,000 from an unrealized loss at September 30, 2012 of $236,000 to an unrealized loss of $179,000 as of December 31, 2012.  The historic changes in the economy and interest rates have caused the pricing of agency securities, mortgage-backed securities, and trust preferred securities to widen dramatically over U.S. Treasury securities into the December 2012 quarter, but overall trends have stabilized within the market.  On a quarterly basis, management will continue to monitor the performance of this security and the markets to determine the true economic value of this security.

19

Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

At December 31, 2012 and September 30, 2012 the Company had no securities pledged to secure public deposits.

The amortized cost and fair value of debt securities by contractual maturity at December 31, 2012 follows:

	Available For Sale
	Amortized		Fair
	Cost		Value
	(In thousands)
Within 1 year	$	17,845	$	17,730
Over 1 year through 5 years		11,692		11,935
After 5 years through 10 years		15,333		15,437
Over 10 years		-		-
		44,870		45,102
Mortgage-backed securities		39,388		40,106
	$	84,258	$	85,208

Note 6 - Loans Receivable and Related Allowance for Loan Losses

Loans receivable consisted of the following for the periods indicated below:

	December 31, 2012			September 30, 2012
	(In thousands)
Residential mortgage	$	231,463		$	231,803
Construction and Development:
Residential and commercial		18,580			20,500
Land		3,285			632
Total Construction and Development		21,865			21,132
Commercial:
Commercial real estate		103,086			112,199
Multi-family		2,172			2,087
Other		7,447			7,517
Total Commercial		112,705			121,803
Consumer:
Home equity lines of credit		21,968			20,959
Second mortgages		62,672			65,703
Other		848			762
Total Consumer		85,488			87,424
Total loans		451,521			462,162
Deferred loan costs, net		2,321			2,420
Allowance for loan losses		(7,571	)		(7,581	)
Total loans receivable, net	$	446,271		$	457,001

20

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2012 and September 30, 2012.  Activity in the allowance is presented for the three months ended December 31, 2012 and 2011 and the year ended September 30, 2012, respectively.

	Three Months Ended December 31, 2012
				Construction and Development						Commercial								Consumer
	Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Multi-family		Other			Home Equity Lines of Credit		Second Mortgages			Other			Unallocated			Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,487		$	724		$	11		$	3,493		$	10	$	226		$	160	$	1,389		$	16		$	65		$	7,581
Charge-offs		(44	)		(50	)		-			(155	)		-		-			-		(184	)		(4	)		-			(437	)
Recoveries		-			-			-			-			-		21			1		5			-			-			27
Provision		42			528			(3	)		(349	)		92		(162	)		8		275			-			(31	)		400
Ending Balance	$	1,485		$	1,202		$	8		$	2,989		$	102	$	85		$	169	$	1,485		$	12		$	34		$	7,571
Ending balance: individually evaluated for impairment	$	-		$	-		$	-		$	335		$	-	$	-		$	-	$	-		$	-		$	-		$	335
Ending balance: collectively evaluated for impairment	$	1,485		$	1,202		$	8		$	2,654		$	102	$	85		$	169	$	1,485		$	12		$	34		$	7,236
Loans receivable:
Ending balance	$	231,463		$	18,580		$	3,285		$	103,086		$	2,172	$	7,447		$	21,968	$	62,672		$	848					$	451,521
Ending balance: individually evaluated for impairment	$	4,423		$	2,707		$	-		$	5,105		$	-	$	175		$	22	$	723		$	-					$	13,155
Ending balance: collectively evaluated for impairment	$	227,040		$	15,873		$	3,285		$	97,981		$	2,172	$	7,272		$	21,946	$	61,949		$	848					$	438,366

21

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

	Three Months Ended December 31, 2011
				Construction and Development						Commercial									Consumer
	Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Multi-family			Other			Home Equity Lines of Credit			Second Mortgages			Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	1,458		$	1,627		$	49		$	4,176		$	49		$	317		$	220		$	2,154		$	16		$	35	$	10,101
Charge-offs		(475	)		(412	)		-			(494	)		-			(88	)		(36	)		(456	)		(16	)		-		(1,977	)
Recoveries		-			1,139			-			-			-			1			-			50			1			-		1,191
Provision		356			(1,531	)		(38	)		937			(44	)		30			(14	)		(87	)		17			74		(300	)
Ending Balance	$	1,339		$	823		$	11		$	4,619		$	5		$	260		$	170		$	1,661		$	18		$	109	$	9,015
Ending balance: individually evaluated for impairment	$	-		$	104		$	-		$	1,067		$	-		$	-		$	-		$	19		$	-		$	-	$	1,190
Ending balance: collectively evaluated for impairment	$	1,339		$	719		$	11		$	3,552		$	5		$	260		$	170		$	1,642		$	18		$	109	$	7,825
Loans receivable:
Ending balance	$	218,846		$	23,201		$	632		$	131,283		$	639		$	9,162		$	21,942		$	77,254		$	885				$	483,844
Ending balance: individually evaluated for impairment	$	1,178		$	3,431		$	-		$	7,689		$	-		$	176		$	-		$	479		$	-				$	12,953
Ending balance: collectively evaluated for impairment	$	217,668		$	19,770		$	632		$	123,594		$	639		$	8,986		$	21,942		$	76,775		$	885				$	470,891

22

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

	Year Ended September 30, 2012
				Construction and Development						Commercial									Consumer
	Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Multi-family			Other			Home Equity Lines of Credit			Second Mortgages			Other			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Beginning   balance	$	1,458		$	1,627		$	49		$	4,176		$	49		$	317		$	220		$	2,154		$	16		$	35	$	10,101
Charge-offs		(1,367	)		(826	)		-			(951	)		(113	)		(88	)		(72	)		(1,184	)		(22	)		-		(4,623	)
Recoveries		-			1,139			-			5			-			2			2			141			4			-		1,293
Provision		1,396			(1,216	)		(38	)		263			74			(5	)		10			278			18			30		810
Ending Balance	$	1,487		$	724		$	11		$	3,493		$	10		$	226		$	160		$	1,389		$	16		$	65	$	7,581
Ending balance: individually evaluated for impairment	$	-		$	-		$	-		$	351		$	-		$	-		$	-		$	-		$	-		$	-	$	351
Ending balance: collectively evaluated for impairment	$	1,487		$	724		$	11		$	3,142		$	10		$	226		$	160		$	1,389		$	16		$	65	$	7,230
Loans receivable:
Ending balance	$	231,803		$	20,500		$	632		$	112,199		$	2,087		$	7,517		$	20,959		$	65,703		$	762				$	462,162
Ending balance: individually evaluated for impairment	$	3,971		$	3,788		$	-		$	4,837		$	-		$	175		$	23		$	447		$	-				$	13,241
Ending balance: collectively evaluated for impairment	$	227,832		$	16,712		$	632		$	107,362		$	2,087		$	7,342		$	20,936		$	65,256		$	762				$	448,921

23

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2012 and September 30, 2012.

	Impaired Loans With Specific Allowance				Impaired Loans With No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)
December 31, 2012:
Residential mortgage	$	-	$	-	$	4,423	$	4,423	$	5,782
Construction and Development:
Residential and commercial		-		-		2,707		2,707		3,474
Commercial:
Commercial real estate		2,292		335		2,813		5,105		5,708
Other		-		-		175		175		175
Consumer:
Home equity lines of credit		-		-		22		22		37
Second mortgages		-		-		723		723		910
Total impaired loans	$	2,292	$	335	$	10,863	$	13,155	$	16,086
September 30, 2012:
Residential mortgage	$	-	$	-	$	3,971	$	3,971	$	5,344
Construction and Development:
Residential and commercial		-		-		3,788		3,788		5,615
Commercial:
Commercial real estate		2,306		351		2,531		4,837		5,300
Other		-		-		175		175		175
Consumer:
Home equity lines of credit		-		-		23		23		37
Second mortgages		-		-		447		447		743
Total impaired loans	$	2,306	$	351	$	10,935	$	13,241	$	17,214

24

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

The following table presents the average recorded investment in impaired loans and related interest income recognized for three months ended December 31, 2012 and 2011.

	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Cash Basis Collection on Impaired Loans
	(In thousands)
Three Months Ended December 31, 2012:
Residential mortgage	$	4,162	$	11	$	18
Construction and development:
Residential and commercial		3,566		-		152
Commercial:
Commercial real estate		4,874		49		70
Other		176		2		2
Consumer:
Home equity lines of credit		22		-		1
Second mortgages		524		-		1
Total	$	13,324	$	62	$	244
Three Months Ended December 31, 2011:
Residential mortgage	$	1,567	$	3	$	8
Construction and development:
Residential and commercial		4,316		-		-
Commercial:
Commercial real estate		6,972		73		84
Multi-family		192		1		1
Consumer:
Home equity lines of credit		42		-		-
Second mortgages		570		-		-
Other		5		-		-
Total	$	13,664	$	77	$	93

25

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

The following table presents the classes of the loan portfolio summarized by loans considered to be rated as pass and the categories of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2012 and September 30, 2012.

	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
December 31, 2012:
Residential mortgage	$	226,800	$	148	$	4,515	$	-	$	231,463
Construction and Development:
Residential and commercial		4,182		1,443		12,955		-		18,580
Land		2,653		632		-		-		3,285
Commercial:
Commercial real estate		82,626		4,091		16,034		335		103,086
Multi-family		2,172		-		-		-		2,172
Other		5,846		1,219		382		-		7,447
Consumer:
Home equity lines of credit		21,946		-		22		-		21,968
Second mortgages		61,488		-		1,184		-		62,672
Other		822		23		3		-		848
Total	$	408,535	$	7,556	$	35,095	$	335	$	451,521
September 30, 2012:
Residential mortgage	$	227,651	$	149	$	4,003	$	-	$	231,803
Construction and Development:
Residential and commercial		6,920		1,497		12,083		-		20,500
Land		-		632		-		-		632
Commercial:
Commercial real estate		89,646		4,441		17,761		351		112,199
Multi-family		2,087		-		-		-		2,087
Other		5,849		900		768		-		7,517
Consumer:
Home equity lines of credit		20,936		-		23		-		20,959
Second mortgages		64,672		38		993		-		65,703
Other		761		-		1		-		762
Total	$	418,522	$	7,657	$	35,632	$	351	$	462,162

26

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

The following table presents loans that are no longer accruing interest by portfolio class.

	December 31, 2012		September 30, 2012
	(In thousands)
Non-accrual loans:
Residential mortgage	$	4,021	$	3,540
Construction and Development:
Residential and commercial		2,707		3,788
Commercial:
Commercial real estate		3,108		1,458
Other		201		201
Consumer:
Home equity lines of credit		22		23
Second mortgages		1,128		739
Total non-accrual loans	$	11,187	$	9,749

Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months.  Interest income that would have been recognized on nonaccrual loans had they been current in accordance with their original terms was $171,000 and $178,000 for the three months ended December 31, 2012 and 2011, respectively.  There were no loans past due 90 days or more and still accruing interest at December 31, 2012 and September 30, 2012

27

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by whether a loan payment is “current,” that is, it is received from a borrower by the scheduled due date, or the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories as of December 31, 2012 and September 30, 2012.

	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Total Loans Receivable
	(In thousands)
December 31, 2012:
Residential mortgage	$	226,182	$	654	$	606	$	4,021	$	5,281	$	231,463
Construction and Development:
Residential and commercial		7,440		-		8,433		2,707		11,140		18,580
Land		3,285		-		-		-		-		3,285
Commercial:
Commercial real estate		99,978		-		-		3,108		3,108		103,086
Multi-family		2,172		-		-		-		-		2,172
Other		7,246		-		-		201		201		7,447
Consumer:
Home equity lines of credit		21,646		-		300		22		322		21,968
Second mortgages		60,559		880		105		1,128		2,113		62,672
Other		842		4		2		-		6		848
Total	$	429,350	$	1,538	$	9,446	$	11,187	$	22,171	$	451,521
September 30, 2012:
Residential mortgage	$	226,861	$	1,020	$	382	$	3,540	$	4,942	$	231,803
Construction and Development:
Residential and commercial		16,712		-		-		3,788		3,788		20,500
Land		632		-		-		-		-		632
Commercial:
Commercial real estate		108,963		-		1,778		1,458		3,236		112,199
Multi-family		2,087		-		-		-		-		2,087
Other		7,316		-		-		201		201		7,517
Consumer:
Home equity lines of credit		20,716		-		220		23		243		20,959
Second mortgages		63,824		854		286		739		1,879		65,703
Other		758		-		4		-		4		762
Total	$	447,869	$	1,874	$	2,670	$	9,749	$	14,293	$	462,162

28

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

Restructured loans deemed to be TDRs in accordance with ASC 310-10-35 are typically the result of extension of the loan maturity date or a reduction of the interest rate of the loan to a rate that is below market, a combination of rate and maturity extension, or by other means including covenant modifications, forbearance and other concessions. However, the Company generally only restructures loans by modifying the payment structure to require payments of interest only for a specified period or by reducing the actual interest rate. Once a loan becomes a TDR, it will continue to be reported as a TDR during the term of the restructure.

The Company had 15 loans classified as TDRs with an outstanding balance of $9.5 million and $9.6 million at December 31, 2012 and September 30, 2012, respectively. Of the total TDR loans, eight loans deemed TDRs with an aggregate balance of $3.9 million at December 31, 2012 were classified as impaired; however, they were performing prior to the restructure and continued to perform under their restructured terms through December 31, 2012, and, accordingly, were deemed to be performing loans at December 31, 2012 and we continued to accrue interest on such loans through such date. At December 31, 2012, three TDRs with an aggregate balance of $2.7 million were deemed non-accruing TDRs. The $2.7 million of TDRs deemed non-accruing TDRs, which were also deemed impaired at December 31, 2012, were comprised of two construction and development loans with an aggregate balance of $1.3 million and one commercial real estate loan with a balance of $1.4 million at December 31, 2012.  Four loans deemed TDRs with an aggregate balance of $2.9 million at December 31, 2012 were not classified as impaired and were performing under their restructured terms and, accordingly, were deemed to be performing loans at December 31, 2012 and we continued to accrue interest on such loans through such date.  At September 30, 2012, thirteen loans deemed TDRs with an aggregate balance of $8.2 million were classified as impaired; however, they were performing prior to the restructure and continued to perform under their restructured terms as of September 30, 2012. During fiscal 2012 we charged-off $37,000 with respect to one home equity line of credit loan which was deemed a TDR. At September 30, 2012, two TDRs with an aggregate balance of $1.4 million were deemed non-accruing TDRs. The $1.4 million of TDRs deemed non-accruing TDRs, which were also deemed impaired at September 30, 2012, were comprised of two construction and development loans.  All of such loans have been classified as TDRs since we modified the payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the allowance for loan losses. The level of any defaults will likely be affected by future economic conditions. A default on a troubled debt restructured loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. No defaults on troubled debt restructured loans occurred during the three months ended December 31, 2011 on loans modified as a TDR within the previous 12 months.

29

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

The following table presents our TDR loans as of December 31, 2012 and September 30, 2012.

	Total Troubled Debt Restructurings				Troubled Debt Restructured Loans That Have Defaulted on Modified Terms YTD
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(Dollars in thousands)
At December 31, 2012:
Residential mortgage		4	$	857		-	$	-
Construction & Development:
Residential and commercial		2		1,333		2		1,333
Land Loan		2		1,145		-		-
Commercial:
Commercial real estate		6		5,958		1		1,367
Other		1		175		-		-
Total		15	$	9,468		3	$	2,700
At September 30, 2012:
Residential mortgage		4	$	864		-	$	-
Construction & Development:
Residential and commercial		2		1,426		2		1,426
Land Loan		2		1,148		-		-
Commercial:
Commercial real estate		6		6,000		-		-
Other		1		175		-		-
Total		15	$	9,613		2	$	1,426

The following table reports the performing status of TDR loans. The performing status is determined by the loans compliance with the modified terms.

	December 31, 2012				September 30, 2012
	Performing		Non-Performing		Performing		Non-Performing
	(In thousands)
Residential mortgage	$	857	$	-	$	864	$	-
Construction and Development:
Residential and commercial		-		1,333		-		1,426
Land loan		1,145		-		1,148		-
Commercial:
Commercial real estate		4,591		1,367		6,000		-
Other		175		-		175		-
Total	$	6,768	$	2,700	$	8,187	$	1,426

30

Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable and Related Allowance for Loan Losses (Continued)

There was no TDR activity for the three months ended December 31, 2012.  The following table shows the TDR activity for the three months ended December 31, 2011.

	December 31, 2012						December 31, 2011
	Restructured During Period
	Number of Loans		Pre- Modifications Outstanding Recorded Investments		Post- Modifications Outstanding Recorded Investments		Number of Loans		Pre- Modifications Outstanding Recorded Investments			Post- Modifications Outstanding Recorded Investments
	(Dollars in thousands)
Troubled Debt Restructurings:
Residential mortgage		-	$	-	$	-		4		$	1,061		82
Construction and Development:
Residential and commercial		-		-		-		2			1,810		1,810
Land loans		-		-		-		2			1,169		1,157
Commercial:
Commercial real estate		-		-		-		7			7,986		7,897
Other		-		-		-		1			175		15
Total troubled debt restructurings		-	$	-	$	-		16		$	12,201	$	11,921

Note 7 - Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined) and of risk-based capital (as defined) to risk-weighted assets (as defined).

Management believes, as of December 31, 2012, that the Bank met all capital adequacy requirements to which it was subject.

As of December 31, 2012, the most recent notification from the regulators categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.  To be categorized as well-capitalized, the Bank must maintain minimum tangible, core, and risk-based ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

31

Notes to Consolidated Financial Statements (Unaudited)

Note 7 - Regulatory Matters (Continued)

The Bank’s actual capital amounts and ratios are also presented in the table:

Actual

For Capital Adequacy Purposes

To be Well Capitalized under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

As of December 31, 2012:

Tangible Capital (to tangible assets)

$

80,707

11.96

%

$

≥ 10,119

≥1.50

%

N/A

Core Capital (to adjusted tangible assets)

80,707

11.96

≥26,985

≥4.00

$

≥33,731

≥ 5.00

%

Tier 1 Capital (to risk-weighted assets)

80,707

19.94

≥16,186

≥4.00

≥24,280

≥ 6.00

Total risk-based Capital (to risk-weighted assets)

85,796

21.20

≥32,373

≥8.00

≥40,466

≥10.00

As of September 30, 2012:

Tangible Capital (to tangible assets)

$

54,436

7.70

%

$

≥ 10,601

≥1.50

%

N/A

Core Capital (to adjusted tangible assets)

54,436

7.70

≥28,269

≥4.00

$

≥35,336

≥ 5.00

%

Tier 1 Capital (to risk-weighted assets)

54,436

12.96

≥16,801

≥4.00

≥25,202

≥ 6.00

Total risk-based Capital (to risk-weighted assets)

59,715

14.22

≥33,602

≥8.00

≥42,003

≥10.00

During the quarter ended December 31, 2012, the Company contributed $25.0 million in additional capital to the Bank upon the successful completion of the “second-step” conversion and offering on October 11, 2012.

32

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements

The Company follows FASB ASC Topic 820 “Fair Value Measurements,” to record fair value adjustments to certain assets and to determine fair value disclosures for the Company’s financial instruments. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

The Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2— Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3— Valuation is generated from model-based techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy.

Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.

FASB ASC Topic 825 “Financial Instruments” provides an option to elect fair value as an alternative measurement for selected financial assets and financial liabilities not previously recorded at fair value.  The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.

33

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

The table below presents the balances of assets measured at fair value on a recurring basis:

	December 31, 2012
	Total		Level 1		Level 2		Level 3
	(In thousands)
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	29,664	$	-	$	29,664	$	-
State and municipal obligations		12,569		-		12,569		-
Single issuer trust preferred security		821		-		821		-
Corporate debt securities		2,048		-		2,048		-
Total investment securities available for sale	$	45,102		-		45,102		-
Mortgage-backed securities available for sale:
FNMA:
Adjustable-rate		1,194		-		1,194		-
Fixed-rate		572		-		572		-
FHLMC, adjustable-rate		243		-		243		-
GNMA, fixed-rate		1		-		1		-
CMO, fixed-rate		38,096		-		38,096		-
Total mortgage-backed securities available for sale		40,106		-		40,106		-
Total	$	85,208	$	-	$	85,208	$	-

	September 30, 2012
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Investment securities available for sale:
Debt securities:
U.S. government agencies	$	23,921	$	-	$	23,921	$	-
FHLB notes		696		-		696		-
State and municipal obligations		9,387		-		9,387		-
Single issuer trust preferred security		764		-		764		-
Corporate debt securities		2,057		-		2,057		-
Total investment securities available for sale		36,825		-		36,825		-
Mortgage-backed securities available for sale:
FNMA:
Adjustable-rate		1,215		-		1,215		-
Fixed-rate		710		-		710		-
FHLMC, adjustable-rate		261		-		261		-
GNMA, adjustable-rate		1		-		1		-
CMO, fixed-rate		41,496		-		41,496		-
Total mortgage-backed securities available for sale		43,683		-		43,683		-
Total	$	80,508	$	-	$	80,508	$	-

The Company monitors and evaluates available data to perform fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date event or a change in circumstances that affects the valuation method chosen.  There were no changes at December 31, 2012 and September 30, 2012.

34

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at December 31, 2012 and September 30, 2012:

	December 31, 2012
	Total		Level 1		Level 2		Level 3
	(In thousands)
Other real estate owned	$	2,688	$	-	$	-	$	2,688
Impaired loans		2,527		-		-		2,527
Total	$	5,215	$	-	$	-	$	5,215

	December 31, 2012
	Fair Value at September 30, 2012		Valuation Technique	Unobservable Input	Range
	(Dollars in thousands)
Other real estate owned	$	2,688	Appraisal of collateral(1) (2)	Collateral discounts(2)		6-63	%
Impaired loans		2,527	Appraisal of collateral(1) (2)	Collateral discounts(2)		0	%
Total	$	5,215

(1) Fair value is generally determined through independent appraisals of the underlying collateral.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

	September 30, 2012
	Total		Level 1		Level 2		Level 3
	(In thousands)
Other real estate owned	$	2,991	$	-	$	-	$	2,991
Impaired loans		5,925		-		-		5,925
Total	$	8,916	$	-	$	-	$	8,916

	September 30, 2012
	Fair Value at September 30, 2012		Valuation Technique	Unobservable Input	Range
	(Dollars in thousands)
Other real estate owned	$	2,991	Appraisal of collateral(1) (2)	Collateral discounts(2)		20-63	%
Impaired loans		5,925	Appraisal of collateral(1) (2)	Collateral discounts(2)		0-16	%
Total	$	8,916

(1) Fair value is generally determined through independent appraisals of the underlying collateral.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

35

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

The following table shows quantitative information regarding significant techniques and inputs used at December 31, 2012 for assets measured using unobservable inputs (Level 2):

	Fair Value at December 31, 2012		Valuation Technique	Unobservable Input	Method or Value as of December 31, 2012
	(In thousands)
Servicing rights	$	118	Discounted rate	Discount rate		11.00	%	Rate used through   modeling period
				Loan prepayment speeds		27.56	%	Weighted-average   CPR
				Servicing fees		0.25	%	Of  loan balance
				Servicing costs		6.25	%	Monthly servicing   cost per account
						25.00	%	Additional monthly servicing cost per loan on loans more than 30 days delinquent
						0.00	%	Of loans more than 30 days delinquent

The following table shows quantitative information regarding significant techniques and inputs used at September 30, 2012 for assets measured using unobservable inputs (Level 2):

	Fair Value at September 30, 2012		Valuation Technique	Unobservable Input	Method or Value as of September 30, 2012
	(In thousands)
Servicing rights	$	107	Discounted rate	Discount rate		11.00	%	Rate used through   modeling period
				Loan prepayment speeds		28.04	%	Weighted-average   CPR
				Servicing fees		0.25	%	Of loan balance
				Servicing costs		6.25	%	Monthly servicing   cost per account
						25.00	%	Additional monthly servicing cost per loan on loans more than 30 days delinquent
						0.00	%	Of loans more than 30 days delinquent

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methods.  However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  FASB ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements.

Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

36

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2012 and September 30, 2012. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2012 and September 30, 2012 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following assumptions were used to estimate the fair value of the Company’s financial instruments:

Cash and Cash Equivalents—These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Investment Securities—Investment and mortgage-backed securities available for sale (carried at fair value) are measured at fair value on a recurring basis. Fair value measurements for these securities are typically obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. The Company had no Level 1 or Level 3 securities as of December 31, 2012 or September 30, 2012.  

Loans Receivable—We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 825 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect partial write-downs for impairment or the full charge-off of the loan carrying value. The valuation of impaired loans is discussed below. The fair value estimate for FASB ASC 825 purposes differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by loan type and rate. The fair value of loans is estimated by discounting contractual cash flows using discount rates based on current industry pricing, adjusted for prepayment and credit loss estimates.

Impaired Loans—Impaired loans are valued utilizing independent appraisals that rely upon quoted market prices for similar assets in active markets. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. The appraisals are adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date and are considered level 3 inputs.

Accrued Interest Receivable—This asset is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Restricted Stock—Although restricted stock is an equity interest in the FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.

Other Real Estate Owned—Assets acquired through foreclosure or deed in lieu of foreclosure are recorded at estimated fair value less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered level 3 inputs. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of, among other factors, changes in the economic conditions.

37

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

Deposits—Deposit liabilities are carried at cost. As such, valuation techniques discussed herein for deposits are primarily for estimating fair value for FASB ASC 825 disclosure purposes. The fair value of deposits is discounted based on rates available for borrowings of similar maturities. A decay rate is estimated for non-time deposits. The discount rate for non-time deposits is adjusted for servicing costs based on industry estimates.

Long-Term Borrowings—Advances from the FHLB are carried at amortized cost. However, we are required to estimate the fair value of long-term debt under FASB ASC 825. The fair value is based on the contractual cash flows discounted using rates currently offered for new notes with similar remaining maturities.

Accrued Interest Payable—This liability is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Commitments to Extend Credit and Letters of Credit—The majority of the Company’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

Mortgage Servicing Rights—The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available. Assumptions, such as loan default rates, costs to service, and prepayment speeds significantly affect the estimate of future cash flows. Mortgage servicing rights are carried at the lower of cost or fair value.

The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2012 and September 30, 2012 are presented below:

	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	115,920	$	115,920	$	115,920	$	-	$	-
Investment securities available for sale		85,208		85,208		-		85,208		-
Loans receivable, net		446,271		466,935		-		-		466,935
Accrued interest receivable		1,440		1,440		-		1,440		-
Restricted stock		3,654		3,654		3,654		-		-
Mortgage servicing rights		118		118		-		118		-
Financial liabilities:
Savings accounts		42,233		42,233		42,233		-		-
Checking and NOW accounts		114,967		114,967		114,967		-		-
Money market accounts		67,822		67,822		67,822		-		-
Certificates of deposit		309,954		317,115		-		317,115		-
FHLB advances		48,000		54,024		-		54,024		-
Accrued interest payable		238		238		-		238		-

38

Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

	September 30, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and cash equivalents	$	131,910	$	131,910	$	131,910	$	-	$	-
Investment securities available for sale		80,508		80,508		-		80,508		-
Loans receivable, net		457,001		479,613		-		-		479,613
Accrued interest receivable		1,521		1,521		-		1,521		-
Restricted stock		4,147		4,147		4,147		-		-
Mortgage servicing rights		107		107		-		107		-
Financial liabilities:
Savings accounts		41,712		41,712		41,712		-		-
Checking and NOW accounts		110,178		110,178		110,178		-		-
Money market accounts		70,955		70,955		70,955		-		-
Certificates of deposit		318,143		326,974		-		326,974		-
FHLB advances		48,085		56,102		-		56,102		-
Accrued interest payable		266		266		-		266		-

Note 9 – Income Taxes

The following is reconciliation between the statutory federal income tax rate of 34% and the effective income tax rate on income before income taxes:

	Three Months Ended December 31,
	2012			2011
	(In thousands)
At federal statutory rate	$	210		$	616
Adjustments resulting from:
Tax-exempt interest		(18	)		(2	)
Low-income housing credit		-			(11	)
Earnings on bank-owned life insurance		(245	)		(46	)
Other		(1	)		3
	$	(54	)	$	560
Effective tax rate		(8.76	%)		30.93	%

39

Notes to Consolidated Financial Statements (Unaudited)

Note 9 – Income Taxes (Continued)

Deferred income taxes at December 31, 2012 and September 30, 2012 were as follows:

	December 31, 2012			September 30, 2012
	(In thousands)
Deferred Tax Assets:
Allowance for loan losses	$	3,493		$	3,362
Nonaccrual interest		377			374
Write-down of real estate owned		394			222
Alternative minimum tax (AMT) credit carryover		83			64
Low-income housing tax credit carryover		337			337
Supplement Employer Retirement Plan		397			384
Charitable contributions		172			198
Depreciation		65			33
State net operating loss		771			800
Federal net operating loss		1,901			2,166
Other		73			74
Total Deferred Tax Assets		8,063			8,014
Valuation allowance for state net operating loss		(771	)		(800	)
Valuation allowance for charitable contributions		(48	)		(74	)
Total Deferred Tax Assets, Net of Valuation Allowance	$	7,244		$	7,140
Deferred Tax Liabilities:
Unrealized gain on investments available for sale		(323	)		(329	)
Mortgage servicing rights		(40	)		(36	)
Total Deferred Tax Liabilities		(363	)		(365	)
Deferred Tax Assets, Net	$	6,881		$	6,775

40

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations hereunder).  Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Malvern Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, or future or conditional terms such as “will,” “would,” “should,” “could,” “may,” “likely,” “probably,” or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumption, many of which are difficult to predict and generally are beyond the control of Malvern Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Malvern Bancorp, Inc. is or will be doing business, being less favorable than expected;(6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Malvern Bancorp, Inc. will be engaged. Malvern Bancorp, Inc. undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

As used in this report, unless the context otherwise requires, the terms “we,” “our,” “us,” or the “Company” refer to Malvern Bancorp, Inc., a Pennsylvania chartered corporation, and the term the “Bank” refers to Malvern Federal Savings Bank, a federally chartered savings bank and wholly owned subsidiary of the Company.  In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

General

On October 11, 2012, Malvern Bancorp, Inc. (the “Company” or “Malvern Bancorp-New”) completed the “second-step” conversion of the Bank from the mutual holding company structure to the stock holding company structure pursuant to a Plan of Conversion and Reorganization. Upon completion of the conversion and reorganization, Malvern Bancorp-New, a Pennsylvania company, became the holding company for Malvern Federal Savings Bank (“Malvern Federal Savings” or the “Bank”) and owner of all of the issued and outstanding shares of the Bank’s common stock. In connection with the conversion and reorganization, 3,636,875 shares of common stock, par value $0.01 per share, of the Malvern Bancorp-New, were sold in a subscription offering to certain depositors of the Bank and other investors for $10 per share, or $36.4 million in the aggregate, and 2,921,598 shares of common stock were issued in exchange for the outstanding shares of common stock of the former federally chartered mid-tier holding company for the Bank, Malvern Federal Bancorp, Inc. (the “Mid-Tier Holding Company”) held by the “public” shareholders of the Mid-Tier Holding Company (all shareholders except Malvern Federal Mutual Holding Company). Each share of common stock of the Mid-Tier Holding Company was converted into the right to receive 1.0748 shares of common stock of the Malvern Bancorp-New in the conversion and reorganization. As a result of the stock offering and reorganization, the Company had $56.7 million of subscriptions, which were held in a deposit escrow account at the Bank at September 30, 2012. Upon completion of the stock offering and the exchange on October 11, 2012, 6,558,473 shares of Malvern Bancorp-New common stock were issued and outstanding.  Per share amounts for the quarter ended December 31, 2011 have been adjusted to reflect the second-step conversion.  See Note 3 of the Notes to Consolidated Financial Statements.

41

Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements.  These policies are described in Note 2 of the notes to our consolidated financial statements included elsewhere.  The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results.  These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses.  The allowance for loan losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of financial condition. The allowance for loan losses (“ALLL”) is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than when they become 120 days past due on a contractual basis or earlier in the event of the borrower’s bankruptcy, or if there is an amount deemed uncollectible.  Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance.  The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, the composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, as adjusted for qualitative factors.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Once all factor adjustments are applied, general reserve allocations for each segment are calculated, summarized and reported on the ALLL summary.  ALLL final schedules, calculations and the resulting evaluation process are reviewed quarterly by the Asset Classification Committee and the Board of Directors.

In addition, Federal bank regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not previously have been available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses at December 31, 2012 was appropriate under U.S. GAAP.

42

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The allowance is adjusted for other significant factors that affect the collectibility of the loan portfolio as of the evaluation date including changes in lending policy and procedures, loan volume and concentrations, seasoning of the portfolio, loss experience in particular segments of the portfolio, and bank regulatory examination results. Other factors include changes in economic and business conditions affecting our primary lending areas and credit quality trends. Loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment. We review key ratios such as the allowance for loan losses to total loans receivable and as a percentage of non-performing loans; however, we do not try to maintain any specific target range for these ratios.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the OCC (and, previously, the OTS), as an integral part of its examination processes, periodically reviews our allowance for loan losses. The OCC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Fair Value Measurements.  The Company uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

Under FASB ASC Topic 820, Fair Value Measurements, the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

● Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

● Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

● Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

Under FASB ASC Topic 820, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820.

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Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations. At December 31, 2012, the Company had $5.2 million of assets that were measured at fair value on a non-recurring basis using Level 3 measurements.

Income Taxes.  We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses.  We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective.  Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income.  In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.  An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. Our net deferred tax asset amounted to $6.9 million at December 31, 2012.  Other than a $771,000 allowance with respect to state net operating losses and $48,000 allowance with respect to charitable contributions, we have not established a valuation allowance against our net deferred tax asset as we believe it is more likely than not that the remaining amount of the asset will be realized.  In evaluating the need for a valuation allowance, we must estimate our taxable income in future years and viable tax planning strategies we could employ so that the asset would not go unused.  Our deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance with respect to our deferred tax asset is necessary, we may incur a charge to earnings and a reduction to regulatory capital for the amount included therein.

Other-Than-Temporary Impairment of Securities – Securities are evaluated on a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

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Comparison of Financial Condition at December 31, 2012 and September 30, 2012

Our total assets decreased $23.8 million or 3.3% to $688.0 million at December 31, 2012 compared to $711.8 million at September 30, 2012. The decrease was primary due to a $16.0 million or 12.1% decrease in cash and cash equivalents and $10.7 million or 2.4% reduction in net loans receivable. The decrease was partially offset by a $4.7 million or 5.8% increase in investment securities.

Our total liabilities decreased $59.2 million or 9.1% to $590.0 million at December 31, 2012 compared to $649.2 million at September 30, 2012. The decrease was primarily due to $56.7 million decrease in stock subscription escrow, reflecting the closing of our second-step conversion on October 11, 2012, and $5.9 million decrease in total deposits. Our total deposits were $535.1 million at December 31, 2012 compared to $541.0 million at September 30, 2012. These decreases were partially offset by a $3.7 million increase in advances for borrowers for taxes and insurance.

Shareholders’ equity increased by $35.4 million to $98.1 million at December 31, 2012 compared to $62.6 million at September 30, 2012.  The increase was primarily due to the “second-step” conversion of the Bank from the mutual holding company structure to the stock holding company structure on October 11, 2012. In connection with the conversion and reorganization, 3,636,875 shares of common stock, par value $0.01 per share, of the Malvern Bancorp, Inc., were sold in a subscription offering to certain depositors of the Bank and other investors for $10 per share, or $36.4 million in the aggregate, and 2,921,598 shares of common stock were issued in exchange for the outstanding shares of common stock of the former Mid-Tier Holding Company for the Bank, Malvern Federal Bancorp, Inc., held by the “public” shareholders of the Mid-Tier Holding Company (all shareholders except the Mutual Holding Company). Treasury stock of the former Mid-Tier Holding Company was cancelled.  Retained earnings increased by $671,000 to $39.3 million at December 31, 2012 primarily as a result of the $671,000 net income during the first quarter of fiscal 2013.  Our ratio of equity to assets was 14.25% at December 31, 2012.

Asset Quality

The table below sets forth the amounts and categories of loans delinquent more than 30 days but less than 90 days at the dates indicated.

	December 31, 2012		September 30, 2012		December 31, 2011
	(In thousands)
Loans 31-89 days delinquent:
Residential mortgage	$	1,260	$	1,402	$	1,408
Construction and Development:
Residential and commercial		8,433		-		-
Commercial:
Commercial real estate		-		1,778		3,170
Consumer:
Home equity lines of credit		300		220		20
Second mortgages		985		1,140		1,182
Other		6		4		7
Total	$	10,984	$	4,544	$	5,787

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During the quarter ended December 31, 2012, our loans more than 30 days but less than 90 days delinquent increased by $6.4 million to $11.0 million at December 31, 2012 compared to $4.5 million at September 30, 2012.  The primary reason for this increase was due to four construction and development loans to one borrower, with an outstanding balance of $8.4 million at December 31, 2012, becoming more than 30 days past due in the quarter. These four loans, which had been classified as “substandard” during the quarter ended September 30, 2012, are for site development for a 190 unit residential townhouse community in Downingtown, Pennsylvania, and for the demolition and redevelopment for mixed use commercial and residential purposes of six duplex multi-family homes and nine parcels of vacant land on approximately 7 acres in Downingtown, Pennsylvania.  We are attempting to negotiate a loan modification agreement with the borrower which, among other things, would result in the loans being brought current. However, if a satisfactory loan modification agreement cannot be structured, these loans are likely to be placed on non-accrual status during the second quarter of fiscal 2013.

Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets.  We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system.  Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets.  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected.

Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.  Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”

The table below sets forth information on our classified assets and assets designated special mention at the dates indicated.

	December 31, 2012		September 30, 2012		December 31, 2011
	(In thousands)
Classified assets:
Substandard(1)	$	38,883	$	40,226	$	35,496
Doubtful		335		351		666
Loss		-		-		-
Total classified assets		39,218		40,577		36,162
Special mention assets		7,556		7,657		9,663
Total classified and special mention assets	$	46,774	$	48,234	$	45,825

(1) Includes other real estate owned of $3.8 million, $4.6 million and $6.4 million, at December 31, 2012, September 30, 2012 and December 31, 2011, respectively.

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The following table sets forth non-performing assets and performing troubled debt restructurings which are neither non-accruing nor more than 90 days past due and still accruing in our portfolio at the dates indicated.  Loans are generally placed on non-accrual status when they are 90 days or more past due as to principal or interest or when the collection of principal and/or interest becomes doubtful.  There were no loans past due 90 days or more and still accruing interest for the periods shown.  Troubled debt restructurings (“TDR”) are loans which are modified in a manner constituting a concession to the borrower, such as forgiving a portion of interest or principal making loans at a rate materially less than that of market rates, when the borrower is experiencing financial difficulty.

	December 31, 2012			September 30, 2012			December 31, 2011
	(In thousands)
Non-accruing loans:
Residential mortgage	$	4,021		$	3,540		$	2,562
Construction or development:
Residential and commercial(1)		2,707			3,788			4,841
Commercial:
Commercial real estate(2)		3,108			1,458			1,694
Other		201			201			209
Consumer:
Home equity lines of credit		22			23			37
Second mortgages		1,128			739			1,065
Total non-accruing loans		11,187			9,749			10,408
Other real estate owned and other foreclosed assets:
Residential mortgage		841			1,262			2,489
Commercial:
Commercial real estate		2,126			2,405			3,908
Multi-family		405			486			-
Other		-			-			34
Consumer:
Second mortgages		416			441			-
Total REO		3,788			4,594			6,431
Total non-performing assets		14,975			14,343			16,839
Performing troubled debt restructurings:
Residential mortgage		857			864			882
Construction or development:
Land		1,145			1,148			1,157
Commercial:
Commercial real estate		4,591			6,000			7,897
Other		175			175			175
Total TDRs		6,768			8,187			10,111
Total non-performing assets and performing troubled debt restructurings	$	21,743		$	22,530		$	26,950
Ratios:
Total non-accrual loans as a percent of gross loans		2.48	%		2.11	%		2.15	%
Total non-performing assets as a percent of total assets		2.18	%		2.01	%		2.53	%
Total non-performing assets and performing troubled debt restructurings as a percent of total assets		3.16	%		3.17	%		4.04	%

(1) At December 31, 2012, includes two loans classified as TDRs in the aggregate amount of $1.3 million.

(1) At September 30, 2012, includes two loans classified as TDRs in the amount of $1.4 million.

(2) At December 31, 2012, includes one loan classified as TDR in the amount of $1.4 million.

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At December 31, 2012, our total non-performing assets amounted to $15.0 million, a decrease of $632,000 compared to total non-performing assets at September 30, 2012. At December 31, 2012, the Company’s total non-accruing loans amounted to $11.2 million, or 2.48% of total loans, compared to $9.7 million of non-accruing loans, or 2.11% of total loans at September 30, 2012.  The primary reason for the $1.4 million increase in non-accruing loans at December 31, 2012 compared to September 30, 2012 was one commercial real estate loan, with an outstanding balance of $1.4 million at December 31, 2012, becoming more than 90 days past due, which resulted in its transfer from performing troubled debt restructured loan status to non-accrual status.  This loan is secured by a mixed-use (warehouse and office space) commercial property located in Delaware County, Pennsylvania. We believe this loan is well secured and do not expect that its resolution will result in any loss.

For the three months ended December 31, 2012 and 2011, additional gross interest income which would have been recorded had all of our non-accruing loans been current in accordance with their original terms amounted to $171,000 and $178,000, respectively.  The amount that was included in interest income on such loans was $23,000 for the three months ended December 31, 2012.

Our non-performing assets include REO in addition to non-performing loans.  At December 31, 2012, our total REO amounted to $3.8 million, a decrease of $806,000 compared to total REO at September 30, 2012. The $806,000 decrease in REO at December 31, 2012 compared to September 30, 2012, was due to $399,000 of sales of REO, at a net gain of $96,000, and $505,000 in reductions to REO fair values which are reflected in other REO expense during the first quarter of fiscal 2013.

While not considered non-performing, our performing troubled debt restructurings are closely monitored as they consist of loans that have been modified where the borrower is experiencing financial difficulty.  Troubled debt restructurings may be deemed to have a higher risk of loss than loans which have not been restructured.  At December 31, 2012, our total performing troubled debt restructurings amounted to $6.8 million compared to $8.2 million of performing troubled debt restructurings at September 30, 2012. The reduction in troubled debt restructurings at December 31, 2012 compared to September 30, 2012 was due primarily to the transfer of a $1.4 million TDR to non-accrual status during the quarter, as discussed above.

Comparison of Operating Results for the Three Months Ended December 31, 2012 and 2011

General.  Our net income was $671,000 for the three months ended December 31, 2012 compared to net income of $1.3 million for the three months ended December 31, 2011.  On a per share basis, the net income was $0.11 per share for the quarter ended December 31, 2012, compared to net income of $0.20 per share (as adjusted) for the quarter ended December 31, 2011.  The primary reason for the $580,000 reduction in our net income in the first quarter of fiscal 2013 compared to the first quarter in fiscal 2012 was a $700,000 difference in the provision (credit) to the allowance for loan losses.  Our interest rate spread was 2.23% and our net interest margin was 2.44% for the three months ended December 31, 2012, compared to a net interest spread of 2.80% and a net interest margin of 2.92% for the three months ended December 31, 2011.

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Average Balances, Net Interest Income, and Yields Earned and Rates Paid.  The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.  Tax-exempt income and yields have not been adjusted to a tax-equivalent basis.  All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

	Three Months Ended December 31,
	2012								2011
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
	(Dollars in Thousands)
Interest Earning Assets:
Loans receivable(1)	$	460,882		$	5,533		4.80	%	$	496,717		$	6,427		5.18	%
Investment securities		85,422			381		1.78			83,827			436		2.08
Deposits in other banks		106,916			31		0.12			42,177			9		0.09
FHLB stock		3,787			5		0.53			5,160			-		0.00
Total interest-earning assets		657,007			5,950		3.62			627,881			6,872		4.38
Non-interest-earning assets		35,150								36,564
Total assets	$	692,157							$	664,445
Interest Bearing Liabilities:
Demand and NOW accounts	$	87,221			40		0.18		$	88,868			78		0.35
Money market accounts		69,172			72		0.42			87,340			173		0.79
Savings accounts		42,115			7		0.07			44,845			12		0.11
Time deposits		314,743			1,398		1.78			308,364			1,590		2.06
Total deposits		513,251			1,517		1.18			529,417			1,853		1.40
FHLB borrowings		48,014			430		3.58			48,972			434		3.54
Total interest-bearing           liabilities		561,265			1,947		1.39			578,389			2,287		1.58
Non-interest-bearing liabilities		44,323								24,803
Total liabilities		605,588								603,192
Shareholders’ Equity		86,569								61,253
Total liabilities and shareholders’ equity	$	692,157							$	664,445
Net interest-earning assets	$	95,742							$	49,492
Net interest income; average interest rate spread				$	4,003		2.23	%				$	4,585		2.80	%
Net interest margin							2.44	%							2.92	%
Average interest-earning assets to average interest-bearing liabilities		117.06	%							108.56	%

(1) Includes non-accrual loans during the respective periods. Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.

Interest and Dividend Income.  Our interest and dividend income decreased for the three months ended December 31, 2012 by $922,000 or 13.4% over the comparable fiscal 2012 period to $6.0 million.  Interest income on loans decreased in the three months ended December 31, 2012 over the prior comparable period in fiscal 2012 by $894,000, or 13.9%.  The decrease in interest earned on loans in the first quarter of fiscal 2013 was due primarily to a $35.8 million, or 7.2%, decrease in the average balance of our outstanding loans as well as a 38 basis point decrease in the average yield earned on our loan portfolio in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012.  Interest income on investment securities decreased by $55,000, or 12.6%, in the first quarter of fiscal 2013 compared to the comparable prior fiscal year period.  The average yield on investment securities decreased 30 basis points to 1.78% for the three months ended December 31, 2012 from 2.08% for the same period ended 2011.

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Interest Expense.  Our interest expense for the three month period ended December 31, 2012 was $1.9 million, a decrease of $340,000 from the three month period ended December 31, 2011.  The reason for the decrease in interest expense in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was a 22 basis point decrease in average rate paid on total deposits together with a decrease in the average balance of our total deposits of $16.2 million, or 3.1%, in the first quarter of fiscal 2013 compared to first quarter of fiscal 2012 due primarily to a $18.2 million decrease in the average balance of money market accounts. The average rate paid on total deposits decreased to 1.18% for fiscal 2013 from 1.40% for fiscal 2012.  Our expense on borrowings amounted to $430,000 in the first quarter of fiscal 2013 compared to $434,000 in the first quarter of fiscal 2012.  The average balance of our borrowings decreased by $958,000 in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012, however, the average cost of borrowed funds increased to 3.58% in the first quarter of fiscal 2013 compared to 3.54% in the first quarter of fiscal 2012.

Provision/(Credit) for Loan Losses.  The provision for loan losses was $400,000 for the three months ended December 31, 2012 compared to a credit of $300,000 for the three months ended December 31, 2011. A $1.1 million recovery during the three months ended December 31, 2011, contributed to the $700,000 difference in the provision for loan losses for the December 31, 2012 and December 31, 2011 fiscal quarters. Our net charge-offs for the quarter ended December 31, 2012 were $410,000. Our ratio of net charge-offs to the total allowance for loan losses was 21.7% for the quarter ended December 31, 2012. As of December 31, 2012, the balance of the allowance for loan losses was $7.6 million, or 1.68% of gross loans and 67.68% of non-accruing loans, compared to an allowance for loan losses of $7.6 million or 1.64% of gross loans and 77.76% of non-accruing loans at September 30, 2012.

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The following table sets forth an analysis of our allowance for loan losses for the periods indicated.

	For the three Months Ended  December 31,						For the Year Ended September 30,
	2012			2011			2012
	(Dollars in Thousands)
Balance at beginning of period	$	7,581		$	10,101		$	10,101
Provision (credit) for loan losses		400			(300	)		810
Charge-offs:
Residential mortgage		44			475			1,367
Construction and development
Residential and commercial		50			412			826
Commercial:
Commercial real estate		155			494			951
Multi-family		-			-			113
Other		-			88			88
Consumer:
Home equity lines of credit		-			36			72
Second mortgages		184			456			1,184
Other		4			16			22
Total charge-offs		437			1,977			4,623
Recoveries:
Construction and development
Residential and commercial		-			1,139			1,139
Commercial:
Commercial real estate		-			-			5
Other		21			1			2
Consumer:
Home equity lines of credit		1			-			2
Second mortgages		5			50			141
Other					1			4
Total recoveries		27			1,191			1,293
Net charge-offs		410			786			3,330
Balance at end of period	$	7,571		$	9,015		$	7,581
Ratios:
Ratio of allowance for loan losses to non-accrual loans		67.68	%		86.62	%		77.76	%
Ratio of net charge-offs to average loans outstanding, Annualized for the three-month periods ended December 31, 2012 and 2011		0.36	%		0.64	%		0.70	%
Ratio of net charge-offs to total allowance for loan losses (annualized for the three-month periods ended December 31, 2012 and 2011)		21.68	%		34.88	%		43.93	%

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Other Income.  Our other, or non-interest, income increased by $445,000, or 51.6%, to $1.3 million for the three months ended December 31, 2012 compared to $862,000 for the three months ended December 31, 2011.  The increase in other income during the first quarter of fiscal 2013 was primarily due to a one-time, tax free death benefit of approximately $596,000 received pursuant to a bank-owned life insurance policy. In addition, we recorded a net gain on the sale of loans in the amount of $164,000 during the quarter ended December 31, 2012.

Other Expenses.  Our other, or non-interest, expenses increased by $357,000, or 9.1%, to $4.3 million in the quarter ended December 31, 2012 compared to $3.9 million for the three months ended December 31, 2011. The increase in other operating expenses in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 was due primarily to a $259,000 increase in salaries and employee benefits in fiscal 2013 when compared to the same period in fiscal 2012.  The increase in salaries and employee benefits expense in the quarter ended December 31, 2012 primarily reflects an increase in the number of employees in our secondary market program as well as in support staff in the Credit Review Department and Mortgage Loan Department. Our net other real estate owned expense increased by $240,000 in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. The increase in other real estate owned expense was due primarily to aggregate write-downs of $505,000 in the carrying value of other real estate owned during the quarter ended December 31, 2012, primarily reflecting declines in the market value of such properties. These increases were partially offset by a $91,000 decrease in professional fees in the December 31, 2012 compared to the quarter ended December 31, 2011.

Income Tax (Benefit) Expense.  Our income tax benefit was $54,000 for the three months ended December 31, 2012 compared to income tax expense of $560,000 for the three months ended December 31, 2011.  The income tax benefit for the quarter ended December 31, 2012 primarily reflects the $1.2 million decrease in pre-tax income during the quarter ended December 31, 2012.  Our effective Federal tax rate was (8.8%) and 30.9% for the three months ended December 31, 2012 and 2011, respectively.  The effective federal tax rate was (8.8%) due to a one-time, non-taxable death benefit paid on BOLI for $596,000 during the quarter ended December 31, 2012.

Liquidity and Capital Resources

Our primary sources of funds are from deposits, FHLB borrowings, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity.  At December 31, 2012, our cash and cash equivalents amounted to $115.9 million.  In addition, at such date our available for sale investment securities amounted to $85.2 million.

In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs.  In recent years we have utilized borrowings as a cost efficient addition to deposits as a source of funds.  Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member.  Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge residential mortgage loans and mortgage-backed securities as well as our stock in the Federal Home Loan Bank as collateral for such advances.

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We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses.  At December 31, 2012, we had certificates of deposit maturing within the next 12 months amounting to $133.8 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be remaining with us.  For the three months ended December 31, 2012, the average balance of our outstanding FHLB advances was $48.0 million.  At December 31, 2012, we had $48.0 million in outstanding long-term FHLB advances and we had $178.7 million in potential FHLB advances available to us.  In addition, at December 31, 2012, we had $50.0 million available pursuant to an existing line of credit with the FHLB.

The following table summarizes our contractual cash obligations at December 31, 2012.

	Payments Due by Period
	To One Year		After One to Three Years		After Three to Five Years		After Five Years		Total
	(Dollars in Thousands)
Long-term debt obligations	$	-	$	-	$	-	$	48,000	$	48,000
Certificates of deposit		133,845		110,925		42,349		22,935		310,054
Operating lease obligations		209		516		429		4,548		5,702
Total contractual obligations	$	134,054	$	111,441	$	42,778	$	75,483	$	363,756

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

Impact of Inflation and Changing Prices

The financial statements, accompanying notes, and related financial data of the Company presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in purchasing power of money over time due to inflation.  The impact of inflation is reflected in the increased cost of operations. Most of our assets and liabilities are monetary in nature; therefore, the impact of interest rates has a greater impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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Item 3 - Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies as well as the methods used to manage its exposure to the risk of loss from adverse changes in market prices and rates market, see Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations – How We Manage Market Risk” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.  There has been no material change in the Company’s asset and liability position since September 30, 2012.

Item 4.  Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Not applicable.

Item 1A - Risk Factors

See Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012. There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) On October 11, 2012, the Company completed the “second-step” conversion of the Bank from the mutual holding company structure to the stock holding company structure pursuant to a plan of conversion and reorganization.  Upon completion of the conversion and reorganization, Malvern Bancorp, Inc., a new Pennsylvania company, became the holding company for the Bank and sole owner of all of the issued and outstanding shares of the Bank’s common stock.  In connection with the conversion and reorganization, 3,636,875 shares of common stock, par value $.01 per share, of the Company were sold in a subscription offering to certain depositors of the Bank for $10 per share, or $36.4 million in the aggregate (the “Offering”), and 2,921,598 shares of common stock were issued in exchange for the outstanding shares of common stock of the former federally chartered Mid-Tier Holding Company for the Bank held by the “public” shareholders of the Mid-Tier Holding Company (the “Exchange”). Each share of common stock of the Mid-Tier Holding Company was converted into the right to receive 1.0748 shares of common stock of the Malvern Bancorp-New in the conversion and reorganization.

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Pursuant to a registration statement on Form S-1 (File No. 333-181798), which was declared effective by the SEC on August 10, 2012, 6,558,762 shares of common stock were registered and 6,558,473 were issued in the Offering and the Exchange. The Offering commenced on August 22, 2012 and was completed on October 11, 2012.  Stifel, Nicolaus & Company, Incorporated (“Stifel”) was engaged to assist in the marketing of the common stock in the Offering. For their services, Stifel received a fee of 1.0% of the aggregate dollar amount of common stock sold in the Offering, excluding shares sold to officers, employees and directors and their immediate families.  Stifel also received an advisory and administrative fee of $30,000.

Expenses related to the Offering were approximately $1.6 million, including the fees and expenses paid to Stifel described above, none of which were paid to officers or directors of the Company or the Bank or associates of such persons. Net proceeds of the Offering were approximately $34.7 million. Of the net proceeds of the Offering, $25.0 million was contributed to the Bank.  All other proceeds were retained by the Company for future capital needs and general corporate purposes.

Initially, both the Company and the Bank have invested the net proceeds from the Offering in short-term investments until these proceeds can be deployed for other purposes.

(c) Purchases of Equity Securities

Not applicable

Item 3 - Defaults Upon Senior Securities

There are no matters required to be reported under this item.

Item 4 - Mine Safety Disclosure

There are no matters required to be reported under this item.

Item 5 - Other Information

There are no matters required to be reported under this item.

Item 6 - Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Section 302 Certification of the Chief Financial Officer

32.1 Section 1350 Certification

The following Exhibits are being furnished* as part of this report:

No.	Description
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema Document.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.*

* These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MALVERN BANCORP, INC.
February 12, 2013	By:	/s/ Ronald Anderson
		Ronald Anderson
		President and Chief Executive Officer

February 12, 2013	By:	/s/ Dennis Boyle
		Dennis Boyle
		Senior Vice President and Chief Financial Officer

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