UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

 

☒	QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

OR

 

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ________________________ to _______________________

 

Commission file number: 0-55087   

 

 

DELANCO BANCORP, INC.

(Exact name of small business issuer as specified in its charter)

 

New Jersey   (State or other jurisdiction of incorporation or organization)

80-0943940  (I.R.S. Employer Identification No.)

 

615 Burlington Avenue, Delanco, New Jersey 08075

(Address of principal executive offices)

(856) 461-0611

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

Yes ☒                  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☒                  No ☐

 

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 “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[X]

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

No ☒

 

As of November 12, 2014 there were 945,425 shares of the registrant’s common stock outstanding.

 

 

DELANCO BANCORP, INC.

 

FORM 10-Q

 

Index

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Statements of Financial Condition at September 30, 2014 (Unaudited) and March 31, 2014	2
	Consolidated Statements of Income for the Three and Six Months Ended September 30, 2014 and 2013 (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended September 30, 2014 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended September 30, 2014 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2014 and 2013 (Unaudited)	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signatures		33

  

 

Part I. Financial Information

Item 1. Financial Statements

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

 

		September 30, 2014				March 31, 2014
		(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions		$	615,824			$	505,735
Interest-bearing deposits with depository institutions			4,596,676				2,826,904
Total cash and cash equivalents			5,212,500				3,332,639
Investment securities:
Securities available-for-sale (amortized cost of $2,172,400 and $2,185,959 at September 30, 2014 and March 31, 2014, respectively)			2,040,205				1,973,370
Securities held-to-maturity (fair value $24,906,258 and $25,410,461 at September 30, 2014 and March 31, 2014, respectively)			25,719,743				26,975,907
Total investment securities			27,759,948				28,949,277
Loans, net of allowance for loan losses of $1,228,399 at September 30, 2014 , $1,448,298 at March 31, 2014			80,704,832				83,539,442
Accrued interest receivable			447,615				462,284
Real estate owned			3,412,600				1,949,825
Federal Home Loan Bank, at cost			261,300				271,300
Premises and equipment, net			6,589,786				6,668,552
Deferred income tax, net			1,867,700				1,722,601
Bank-owned life insurance			164,666				165,197
Other assets			299,304				335,245
Total assets		$	126,720,251			$	127,396,362
LIABILITIES
Deposits
Non-interest bearing		$	8,144,524			$	7,852,030
Interest bearing			100,908,688				102,772,669
Total deposits			109,053,212				110,624,699
Advances from Federal Home Loan bank			3,000,000				2,000,000
Accrued interest payable			5,773				6,556
Advance payments by borrowers for taxes and insurance			344,830				328,815
Other liabilities			675,730				684,289
Total liabilities		$	113,079,545			$	113,644,359
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized at September 30, 2014 and March 31, 2014, no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized at September 30, 2014 and March 31, 2014, 945,425 shares issued and outstanding at September 30, 2014 and March 31, 2014,		$	9,454			$	9,454
Additional paid-in capital			9,972,504				9,956,750
Retained earnings, substantially restricted			4,394,090				4,569,378
Unearned common stock held by employee stock ownership plan			(592,168	)			(592,168	)
Accumulated other comprehensive (loss)			(143,174	)			(191,411	)
Total stockholder’s equity			13,640,706				13,752,003
Total liabilities and stockholders’ equity		$	126,720,251			$	127,396,362

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended September 30,								Six Months Ended September 30,
		2014				2013				2014				2013
INTEREST INCOME
Loans		$	926,137			$	994,378			$	1,865,942			$	2,040,804
Investment securities			180,238				177,363				361,130				336,706
Total interest income			1,106,375				1,171,741				2,227,072				2,377,510
INTEREST EXPENSE
Interest-bearing checking accounts			10,205				10,394				20,046				20,484
Passbook and money market accounts			26,212				33,069				52,261				65,931
Certificates of deposits			110,591				147,425				223,355				309,002
Federal Home Loan Bank Advances			4,964			−					9,322			−
Total interest expense			151,972				190,888				304,984				395,417
Net interest income			954,403				980,853				1,922,088				1,982,093
Provision for loan losses			300,000				116,500				375,000				206,500
Net interest income after provision for loan losses			654,403				864,353				1,547,088				1,775,593
NON-INTEREST INCOME
Increase in cash surrender value of bank-owned life insurance			−			−					−				5,809
Loss on sale of real estate owned			−				(51,585	)			−				(85,681	)
Service charges			39,715				37,847				74,916				72,882
Rental income			25,633				36,271				51,769				74,549
Other			5,838				5,083				8,833				9,324
Total non-interest income			71,186				27,616				135,518				76,883
NON-INTEREST EXPENSE
Salaries and employee benefits			420,245				374,750				841,894				769,894
Advertising			6,021				5,800				10,510				11,712
Office supplies, telephone and postage			35,727				18,831				59,225				34,527
Loan expenses			32,910				41,076				102,811				103,624
Occupancy expense			156,359				159,489				303,516				310,596
Federal insurance premiums			42,687				53,349				85,786				106,796
Real estate owned loss reserve			78,302				77,500				78,302				77,500
Data processing expenses			55,748				57,217				110,732				113,339
ATM expenses			10,258				8,194				17,282				15,111
Bank charges and fees			17,138				16,580				34,862				33,614
Insurance and surety bond premiums			27,854				20,845				47,111				42,227
Dues and subscriptions			7,474				6,476				13,695				11,064
Professional fees			80,049				58,432				159,006				127,969
Real Estate Owned expense, net			63,197				28,400				109,252				68,527
Other			29,219				26,153				58,168				47,589
Total non-interest expense			1,063,188				953,092				2,032,152				1,874,089
LOSS BEFORE INCOME TAX EXPENSE			(337,599	)			(61,123	)			(349,546	)			(21,613	)
Income tax (benefit)			(159,995	)			(18,185	)			(174,258	)			(12,385	)
NET LOSS			(177,604	)			(42,938	)			(175,288	)			(9,228	)
LOSS PER COMMON SHARE		$	(0.19	)		$	(0.05	)		$	(0.19	)		$	−

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

Six months Ended 

		September 30, 2014				September 30, 2013
Net loss		$	(175,288	)		$	(9,228	)
Other comprehensive loss net of tax:
Postretirement benefit plan adjustment, net of deferred tax expense (benefit) of $(3,240) for six months ended			−				(4,860	)
Unrealized gain (loss) on investment securities available for sale, net of deferred tax (benefit) of $32,158 and $(87,460) for the six months ended			48,237				(131,189	)
Other comprehensive income (loss)			48,237				(136,049	)
Total Comprehensive (loss)		$	(127,051	)		$	(145,277	)

 

See Notes to the Unaudited Consolidated Financial Statements

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

		Common Stock								Additional Paid-in				Retained				Common Stock Held				Accumulated Other-Comprehensive				Total Stockholders’
		Shares				Amount				Capital				Earnings				by ESOP				Income (Loss)				Equity
Balance at March 31, 2014			945,425			$	9,454			$	9,956,750			$	4,569,378			$	(592,168	)		$	(191,411	)			13,752,003
Net loss															(175,288	)											(175,288	)
Other comprehensive income, net of tax:																							48,237				48,237
Employee stock option expense											15,754																15,754
Balance at September 30, 2014			945,425			$	9,454			$	9,972,504			$	4,394,090			$	(592,168	)		$	(143,174	)		$	13,640,706

 

See Notes to the Unaudited Consolidated Financial Statements.

  

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

		Six months Ended September 30,
		2014				2013
Cash flow from operating activities
Net loss		$	(175,288	)		$	(9,228	)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax benefit			(177,257	)			(37,400	)
Depreciation			129,457				136,448
Discount accretion net of premium amortization			(1,459	)			28,607
Provision for loan losses			375,000				206,500
Increase in cash surrender value from bank owned life insurance			−				(5,809	)
(Gain) Loss on sale of real estate owned			−				85,681
Compensation expense for stock options			15,754				−
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable			14,669				(19,375	)
Other assets			36,474				(250	)
Increase (decrease) in:
Accrued interest payable			(783	)			(1,774	)
Other liabilities			(8,559	)			(85,651	)
Net cash provided by operating activities		$	208,008			$	297,749
Cash flows from investing activities
Proceeds of securities available for sale			13,559				15,729
Purchases of securities held-to-maturity			(500,000	)			(10,022,500	)
Proceeds from maturities and principal repayments of securities held-to-maturity			1,757,622				3,452,830
Redemption of investment required by law – stock in Federal Home Loan Bank			10,000				21,200
Proceeds from sale of real estate owned			219,020				545,634
Net decrease in loans			777,815				4,451,661
Purchases of premises and equipment			(50,691	)			(5,561	)
Net cash provided by(used in) investing activities		$	2,227,325			$	(1,541,007	)
Cash flows from financing activities
(Decrease) increase in deposits			(1,571,487	)			361,659
Increase in advance payments by borrowers for taxes and insurance			16,015				10,316
Increase in federal Home Loan bank Advances			1,000,000				3,626,739
Net cash provided by (used) in financing activities		$	(555,472	)		$	3,998,714

  

 

		Six months Ended September 30,
		2014				2013
Net increase in cash and cash equivalents		$	1,879,861			$	2,755,456
Cash and cash equivalents, beginning of the period			3,332,639				6,722,766
Cash and cash equivalents, end of period		$	5,212,500			$	9,478,222
Supplemental Disclosures:
Cash paid during the period for interest		$	296,445			$	397,191
Cash paid during the period for income taxes		$	5,500			$	1,000
Loans transferred to foreclosed real estate during the period		$	1,725,243				176,113
Net change in unrealized gain (loss) on securities available-for-sale net of tax		$	48,237			$	(131,189	)

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

September 30, 2014

 

(1)	Basis of Presentation

 

On October 16, 2013, Delanco Bancorp, Inc., a New Jersey corporation (the “Company”), became the holding company for the Bank upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the “Conversion”). The Conversion involved the sale by the Company of 525,423 shares of common stock in a subscription and community offering, including shares purchased by the Bank’s employee stock ownership plan, the exchange of 420,002 shares of common stock of the Company for shares of common stock of the former Delanco Bancorp, Inc. (“old Delanco Bancorp”) held by persons other than Delanco MHC (the “MHC”), and the elimination of old Delanco Bancorp and the MHC. Net proceeds received from the reorganization and stock offering totaled $3,280,000, net of costs of $923,000. Net income per share and the weighted average shares outstanding for the six months ended September 30, 2013 have been restated to reflect the Conversion.

 

Financial information presented in this Quarterly Report on Form 10-Q is derived in part from the consolidated financial statements of the Company and subsidiaries on and after October 16, 2013 and from the consolidated financial statements of old Delanco Bancorp and subsidiaries prior to October 16, 2013.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the six month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the consolidated financial statements and footnotes thereto of the Company included in the Company’s annual report on Form 10-K for the year ended March 31, 2014.

 

(2)	Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the 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 losses on loans and the evaluation of deferred taxes.

 

(3)	Deferred Income Taxes

 

We use the asset and liability method of accounting for income taxes. 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. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.

 

 

The calculation of deferred taxes for GAAP capital differs from the calculation of deferred taxes for regulatory capital. For regulatory capital, deferred tax assets that are dependent upon future taxable income for realization are limited to the lesser of either the amount of deferred tax assets that the institution expects to realize within one year of the calendar quarter-end date, or 10% of the Bank’s Tier I capital. As a result of this variance, our Tier I regulatory capital ratio is lower than our GAAP capital ratio by 115 basis points.

  

(4)	Income Taxes

 

The Bank accounts for uncertainties in income taxes in accordance with Financial ASC Topic 740 “Accounting for Uncertainty in Income Taxes”. ASC Topic 740 prescribes a threshold and measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Bank has determined that there are no significant uncertain tax positions requiring recognition in its financial statements.   

 

Tax years 2010 through 2013 remain subject to examination by Federal and New Jersey taxing authorities. In the event the Bank is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense.

 

(5)	Earnings Per Share

 

Basic earnings per share (“EPS”) are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

The difference between the common shares issued and the common shares outstanding for the purposes of calculating basic EPS is a result of the unallocated ESOP shares.

 

As a result of the Conversion, all share information for periods prior to December 31, 2013, has been revised to reflect the .5711 exchange ratio. Dilutive earnings per share was not adjusted for 20,000 outstanding options which would have had an antidilutive effect on earnings.

 

The calculated basic and dilutive EPS are as follows:

 

		Six months Ended September 30,
		2014				2013
Numerator
Denominators:
Basic shares outstanding			945,425				945,425*
Effect of dilutive securities			945,425				945,425
Dilutive shares outstanding
Earnings per share:
Basic			$(0.19)				$(0.05)
Dilutive			$(0.19)				$(0.05)

 

*Adjusted to reflect the stock conversion that took place on October 16, 2013.

 

  

(6)	Regulatory Agreement

 

On December 17, 2012, the Bank received a formal written agreement (the “Agreement”) with the Office of the Comptroller of the Currency (the “OCC”) dated November 21, 2012.  The Agreement supersedes and terminates the Order to Cease and Desist entered into by and between the Bank and the Office of Thrift Supervision on March 17, 2010.

 

The Agreement requires the Bank to take the following actions:

 

●

prepare a three-year strategic plan that establishes objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, liability structure, reduction in the volume of nonperforming assets, and product line development;

 

●

prepare a capital plan that includes specific proposals related to the maintenance of adequate capital, identifies strategies to strengthen capital if necessary and includes detailed quarterly financial projections.  If the OCC determines that the Bank has failed to submit an acceptable capital plan or fails to implement or adhere to its capital plan, then the OCC may require the Bank to develop a contingency capital plan detailing the Bank’s proposal to sell, merge or liquidate the Bank;

 

●

prepare a criticized asset plan that will include strategies, targets and timeframes to reduce the Bank’s level of criticized assets;

 

●

implement a plan to improve the Bank’s credit risk management and credit administration practices;

 

●

implement programs and policies related to the Bank’s allowance for loan and lease losses, liquidity risk management, independent loan review and other real estate owned;

 

●

review the capabilities of the Bank’s management to perform present and anticipated duties and to recommend and implement any changes based on such assessment;

 

●

not pay any dividends or make any other capital distributions without the prior written approval of the OCC;

 

●

not make any severance or indemnification payments without complying with regulatory requirements regarding such payments; and

 

●

comply with prior regulatory notification requirements for any changes in directors or senior executive officers.

 

The Agreement will remain in effect until terminated, modified, or suspended in writing by the OCC.

 

The Agreement does not require the Bank to maintain any specific minimum regulatory capital ratios. However, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 capital to adjusted total assets ratio of at least 8%, a Tier 1 capital to risk-weighted assets ratio of at least 12% and a total capital to risk-weighted assets ratio of at least 13%. The Bank's ratios of Tier 1 capital to adjusted total assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets at September 30, 2014 were 9.04%, 15.92% and 17.17%, respectively.

 

 

(7)	Recent Accounting Pronouncements

 

There were no recent accounting pronouncements since the March 31, 2014 audited financial statements.

 

 

(8)	Fair Value of Financial Instruments

 

ASC Topic 820-10 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosure requirements for fair value measurements. ASC Topic 820 does not require any new fair value measurements. The adoption of ASC Topic 820-10 did not have a material impact on the consolidated financial statements.

 

ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as described below:

 

	●	Level 1	Level 1 input are unadjusted quoted prices in active markets for identical assets or liabilities.
	●	Level 2	Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets, quoted prices in markets that are not considered to be active, and observable inputs other than quoted prices such as interest rates.
	●	Level 3	Level 3 inputs are unobservable inputs.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

 

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

Significant

in Active

Other

Other

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

September 30, 2014

Available-for-sale securities

$

173

$

1,867

$

--

March 31, 2014

Available-for-sale securities

$

183

$

1,790

$

--

  

 

Assets and Liabilities on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2014 and March 31, 2014 are as follows (dollars in thousands):

 

		Fair Value Measurements at Reporting Date Using
		Quoted Prices				Significant				Significant
		in Active				Other				Other
		Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)
September 30, 2014
Impaired loans		$	--			$	--			$	4,760
Real estate owned			--				--				3,046
Total		$	--			$	--			$	7,806
March 31, 2014
Impaired loans		$	--			$	--			$	6,021
Real estate owned			--				--				1,950
Total		$	--			$	--			$	7,970

 

The fair value of impaired loans and real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input significant to the fair value measurement.

 

As required by ASC Topic 825-10-65, the estimated fair value of financial instruments at September 30, 2014 and March 31, 2014 was as follows:

 

		September 30, 2014
		Carrying Amount				Level 1				Level 2				Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents		$	5,212			$	5,212			$	−			$	−
Investment securities			27,892				173				26,773				−
Loans – net			80,705				−				−				80,189
FHLB stock			261				261				−				−
Accrued interest receivable			448				448				−				−
Bank–owned life insurance			165				165				−				−
Real estate owned			3,413				−				−				3,413
Total financial assets		$	118,096			$	6,259			$	26,773			$	83,602
Financial Liabilities:
Deposits		$	109,053			$	8,145			$	101,014			$	−
Advance payments by borrowers for taxes and insurance			345				345				−				−
Advances Federal Home Loan Bank			3,000				3,000				−				−
Accrued interest payable			6				6				−				−
Total financial liabilities		$	112,404			$	11,496			$	101,014			$	−

  

 

		March 31, 2014
		Carrying Amount				Level 1				Level 2				Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents		$	3,333			$	3,333			$	−			$	−
Investment securities			29,162				−				27,384				−
Loans – net			83,539				−				−				83,059
FHLB stock			271				271				−				−
Accrued interest receivable			462				462				−				−
Bank–owned life insurance			165				165				−				−
Real estate owned			1,950				−				−				1,950
Total financial assets		$	118,882			$	4,231			$	27,384			$	85,009
Financial Liabilities:
Deposits		$	110,625			$	7,852			$	103,249			$	−
Advances from Federal Home Loan Bank			2,000				2,000				−				−
Advance payments by borrowers for taxes and insurance			684				684				−				−
Accrued interest payable			7				7				−				−
Total financial liabilities		$	113,316			$	10,543			$	103,249			$	−

 

Off-balance sheet instruments

 

Off-balance sheet instruments are primarily comprised of loan commitments and unfunded lines of credit which are generally priced at market rate at the time of funding. Therefore, these instruments have nominal value prior to funding.

 

September 30, 2014

March 31, 2014

Contract Value

Estimated Fair Value

Contract Value

Estimated Fair Value

Off-balance sheet instruments

Commitments to extend credit

$

5,734

$

−

$

5,710

$

−

 

(9)

Loans

 

The Bank monitors and assesses the credit risk of its loan portfolio using the classes set forth below. These classes also represent the segments by which the Bank monitors the performance of its loan portfolio and estimates its allowance for loan losses.

 

Residential real estate loans consist of loans secured by one to four family residences located in the Bank’s market area. The Bank has originated one to four family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property without requiring mortgage insurance. A mortgage loan originated by the Bank, for owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years. Non-owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years. Adjustable rate loan terms limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan based on the type of loan.

 

 

Commercial real estate loans are generally originated in amounts up to the lower of 80% of the appraised value or cost of the property and are secured by improved property such as multi-family dwelling units, office buildings, retail stores, warehouses, church buildings and other non-residential buildings, most of which are located in the Bank’s market area. Commercial real estate loans are generally made with fixed interest rates which mature or re-price in 5 to 7 years with principal amortization of up to 25 years.

 

Commercial loans include short and long-term business loans and commercial lines of credit for the purposes of providing working capital, supporting accounts receivable, purchasing inventory and acquiring fixed assets. The loans generally are secured by these types of assets as collateral and/or by personal guarantees provided by principals of the borrowers.

 

Construction loans will be made only if there is a permanent mortgage commitment in place. Interest rates on commercial construction loans are typically in line with normal commercial mortgage loan rates, while interest rates on residential construction loans are slightly higher than normal residential mortgage loan rates. These loans usually are adjustable rate loans and generally have terms of up to one year.

 

Consumer loans include installment loans and home equity loans, secured by first or second mortgages on homes owned or being purchased by the loan applicant. Home equity term loans and credit lines are credit accommodations secured by either a first or second mortgage on the borrower’s residential property. Interest rates charged on home equity term loans are generally fixed; interest on credit lines is usually a floating rate related to the prime rate. The Bank generally requires a loan to value ratio of less than or equal to 80% of the appraised value, including any outstanding prior mortgage balance.

 

Loans at September 30, 2014 and March 31, 2014 are summarized as follows (dollars in thousands):

 

		September 30,				March 31,
		2014				2014
Residential (one-to four-family) real estate		$	62,355			$	63,524
Multi-family and commercial real estate			8,636				10,414
Commercial			1,794				1,307
Home equity			7,681				8,144
Consumer			714				686
Construction			843				1,009
Total loans			82,023				85,084
Net deferred loan origination fees			(90	)			(97	)
Allowance for loan losses			(1,228	)			(1,448	)
Loans, net		$	80,705			$	83,539

 

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At September 30, 2014, the loans-to-one-borrower limitation was $1.9 million; this excluded an additional 10% of adjusted capital funds or approximately $1.3 million, which may be loaned if collateralized by readily marketable securities. At September 30, 2014, there were no loans outstanding or committed to any one borrower, which individually or in the aggregate exceeded the Bank’s loans to-one-borrower limitations of 15% of capital funds.

 

 

A summary of the Bank’s credit quality indicators is as follows:

 

Pass – A credit which is assigned a rating of Pass shall exhibit some or all of the following characteristics:

 

a.

Loans that present an acceptable degree of risk associated with the financing being considered as measured against earnings and balance sheet trends, industry averages, etc. Actual and projected indicators and market conditions provide satisfactory evidence that the credit will perform as agreed.

 

b.

Loans to borrowers that display acceptable financial conditions and operating results. Debt service capacity is demonstrated and future prospects are considered good.

 

c.

Loans to borrowers where a comfort level is achieved by the strength of the cash flows from the business or project and the strength and quantity of the collateral or security position (i.e.; receivables, inventory and other readily marketable securities) as supported by a current valuation and/or the strong capabilities of a guarantor.

 

Special Mention – Loans on which the credit risk requires more than ordinary attention by the Loan Officer. This may be the result of some erosion in the borrower’s financial condition, the economics of the industry, the capability of management, or changes in the original transaction. Loans which are currently sound yet exhibit potentially unacceptable credit risk or deteriorating long term prospects, will receive this classification. Loans which deviate from loan policy or regulations will not generally be classified in this category, but will be separately reported as an area of concern.

 

Classified – Classified loans include those considered by the Bank to be substandard, doubtful or loss.

 

An asset is considered “substandard” if it involves more than an acceptable level of risk due to a deteriorating financial condition, unfavorable history of the borrower, inadequate payment capacity, insufficient security or other negative factors within the industry, market or management. Substandard loans have clearly defined weaknesses which can jeopardize the timely payment of the loan.

 

Assets classified as “doubtful” exhibit all of the weaknesses defined under the substandard category but with enough risk to present a high probability of some principal loss on the loan, although not yet fully ascertainable in amount.

 

Assets classified as “loss” are those considered uncollectible or of little value, even though a collection effort may continue after the classification and potential charge-off.

 

Non-Performing Loans

 

Non-performing loans consist of non-accrual loans (loans on which the accrual of interest has ceased), loans over ninety days delinquent and still accruing interest, renegotiated loans and impaired loans. Loans are generally placed on non-accrual status if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more, unless the collateral is considered sufficient to cover principal and interest and the loan is in the process of collection.

 

The Bank continues to work with its borrowers where possible and is pursuing legal action where the ability to work with the borrower does not exist.  As of September 30, 2014, the Bank has entered into formal forbearance agreements with three relationships totaling $683 thousand that require current payments while the borrowers restructure their finances.

 

 

The following table represents loans by credit quality indicator at September 30, 2014 (dollars in thousands):

 

		Pass				Special Mention Loans				Classified Loans				Non-Performing Loans				Total
Residential real estate		$	59,295			$	−			$	128			$	2,932			$	62,355
Multi-family and commercial real estate			6,224				716				530				1,166				8,636
Commercial			1,493				221				80				−				1,794
Home equity			7,681				−				−				−				7,681
Consumer			710				−				−				4				714
Construction			784				−				−				59				843
		$	76,187			$	937			$	738			$	4,161			$	82,023

 

The following table represents past-due loans as of September 30, 2014 (dollars in thousands):

 

										Greater
		30-59				60- 89				than 90
		Days Past				Days Past				Days Past				Total Past								Total Loan
		Due				Due				Due				Due				Current				Balances
Residential real estate		$	947			$	1,194			$	1,291			$	3,432			$	58,923			$	62,355
Multi-family and commercial real estate			374				413				1,021				1,808				6,828				8,636
Commercial			−				170				24				194				1,600				1,794
Home Equity			11				145				−				156				7,525				7,681
Consumer			19				71				4				94				620				714
Construction			−				59				−				59				784				843
Total Loans			1,351				2,052				2,340				5,743				76,280			$	82,023
Percentage of Total Loans			1.65	%			2.50	%			2.85	%			7.00	%			93.00	%			100.0	%

 

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same for non-accrual loans discussed above. At September 30, 2014, the Bank had 19 loan relationships totaling $2.4 million in non-accrual loans as compared to 23 relationships totaling $4.1 million at March 31, 2014. The average balance of impaired loans totaled $5.0 million for the six months ended September 30, 2014 as compared to $6.0 million for the year ended March 31, 2014, and interest income recorded on impaired loans for the six months ended September 30, 2014 totaled $96 thousand as compared to $235 thousand for the year ended March 31, 2014.

 

 

The following table represents data on impaired loans at September 30, 2014 and March 31, 2014 (dollars in thousands):

 

		September 30, 2014				March 31, 2014
Impaired loans for which a valuation allowance has been provided		$	−			$	846
Impaired loans for which no valuation allowance has been provided		$	4,406			$	5,175
Total loans determined to be impaired		$	4,406			$	6,021
Allowance for loans losses related to impaired loans		$	−			$	288
Average recorded investment in impaired loans		$	4,970			$	5,964
Cash basis interest income recognized on impaired loans		$	96			$	235

 

The following table presents impaired loans by portfolio class at September 30, 2014 (dollars in thousands):

 

		Recorded Investment				Unpaid Principal Balance				Related Valuation Allowance				Average Recorded Investment				Interest Income Recognized While on Impaired Statues
Impaired loans with no valuation allowance:
Residential real estate		$	2,875			$	2,830			$	−			$	2,965			$	53
Multi-family and commercial real estate			1,503				1,446				−				1,801				41
Commercial			24				24				−				62				1
Home equity			47				47				−				184				−
Consumer			−				−				−				1				−
Construction			59				59				−				59				1
Total		$	4,508			$	4,406			$	−			$	5,072			$	96

 

The following table presents impaired loans by portfolio class with no valuation allowance at March 31, 2014 (dollars in thousands):

 

		Recorded Investment				Unpaid Principal Balance				Related Valuation Allowance				Average Recorded Investment				Interest Income Recognized While on Impaired Statues
Impaired loans with no valuation allowance:
Residential real estate		$	2,387			$	2,345			$	−			$	2,185			$	130
Multi-family and commercial real estate			2,443				2,443				−				2,556				88
Commercial			108				108				−				183				−
Home equity			219				219				−				155				8
Consumer			−				−				−				4				−
Construction			60				60				−				51				3
Subtotal		$	5,217			$	5,175			$	−			$	5,134			$	229

  

 

The following table presents impaired loans by portfolio class with a valuation allowance at March 31, 2014 (dollars in thousands):

 

		Recorded Investment				Unpaid Principal Balance				Related Valuation Allowance				Average Recorded Investment				Interest Income Recognized While on Impaired Statues
Impaired loans with a valuation allowance:
Residential real estate		$	153			$	153			$	28			$	153			$	6
Multi-family and commercial real estate			693				693				260				677				−
Commercial			−				−				−				−				−
Home equity			−				−				−				−				−
Consumer			−				−				−				−				−
Construction			−				−				−				−				−
Subtotal		$	846			$	846			$	288			$	830			$	6

 

Total Impaired Loans by Portfolio Class at March 31, 2014

 

		Recorded Investment				Unpaid Principal Balance				Related Valuation Allowance				Average Recorded Investment				Interest Income Recognized While on Impaired Statues
Total impaired loans:
Residential real estate		$	2,540			$	2,498			$	28			$	2,338			$	136
Multi-family and commercial real estate			3,136				3,136				260				3,233				88
Commercial			108				108				−				183				−
Home equity			219				219				−				155				8
Consumer			−				−				−				4				−
Construction			60				60				−				51				3
Total		$	6,063			$	6,021			$	288			$	5,964			$	235

  

 

The following table represents nonaccrual loans as of September 30, 2014 and March 31, 2014 (dollars in thousands):

 

		Sept. 30, 2014				March 31, 2014
Non-accrual loans:
Residential real estate		$	1,217			$	1,277
Multi-family and commercial real estate			639				981
Commercial			24				108
Consumer			4				−
Home Equity			47				219
Construction			−				−
Total non-accrual loans			1,931				2,585
Accruing loans past due 90 days or more:
Residential real estate		$	−			$	−
Multi-family and commercial real estate			−				100
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			−				−
Total accruing loans past due 90 days or more			−				100
Troubled Debt Restructurings:
In non-accrual status:
Residential real estate		$	75			$	672
Multi-family and commercial real estate			382				847
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			−				−
Total troubled debt restructurings in non-accrual status			457				1,519
Performing under modified terms:
Residential real estate			1,194				548
Multi-family and commercial real estate			770				1,309
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			59				60
Total troubled debt restructurings performing under modified terms:			2,023				1,917
Total troubled debt restructurings			2,480				3,436
Total non-performing loans			4,411				6,121
Real estate owned			3,413				1,950
Total non-performing assets			7,824				8,071
Non-performing loans as a percentage of loans			5.38	%			7.19	%
Non-performing assets as a percentage of loans and real estate owned			9.16	%			9.27	%
Non-performing assets as percentage of total assets			6.17	%			6.34	%

  

 

During the six months ended September 30, 2014, the Bank experienced a $1.7 million net decrease in non-accrual loans. This change reflects the downgrading of ten loan relationships to non-accrual status totaling $1.5 million during the six months ended September 30, 2014. The downgraded loans consisted of five residential mortgages totaling $909 thousand, five commercial loans totaling $549 thousand, one home equity loan totaling $47 thousand and one consumer loan for $4 thousand. These additions to the non-accruals were offset by four residential mortgages for $831 thousand, one commercial real estate loan for $128 thousand and a home equity loan for $46 thousand that returned to accruing status, one commercial loan for $56 thousand that was paid in full, one commercial loan for $108 thousand that was paid off in a short sale, three residential loans that were partially charged off by $33 thousand due to updated valuations, four residential loans in the amount of $735 thousand and two commercial relationships consisting of two commercial real estate loans of $1.2 million that were transferred to real estate owned after a partial charge-off of $230 thousand due to valuation updates.

 

The following table presents troubled debt restructurings that occurred during the periods ended September 30, 2014 and March 31, 2014 and loans modified as troubled debt restructurings within the previous 3 and 12 month periods and for which there was a payment default during the period.

  

September 30, 2014

March 31, 2014

Outstanding Recorded Investment

Outstanding Recorded Investment

Number of Contracts

Pre-Modification

Post- Modification

Number of Contracts

Pre-Modification

Post- Modification

Troubled debt restructurings:

Residential real estate

−

$

−

$

−

1

$

120

$

123

 

Number of Contracts

Recorded Investment

Number of Contracts

Recorded Investment

Troubled debt restructurings that subsequently defaulted:

Residential real estate

−

$

−

$

−

$

−

$

−

$

−

  

 

The following table presents the changes in real estate owned (REO), net of valuation allowance, for the periods ended September 30, 2014 and March 31, 2014:

 

		September 30,				March 31,
		2014				2014
Balance, beginning of period		$	1,950			$	2,470
Additions from loan foreclosures			1,725				856
Additions from capitalized costs			−				3
Dispositions of REO			(184	)			(690	)
Gain (loss) on sale of REO			−				(86	)
Valuation adjustments in the period			(78	)			(603	)
Balance, end of period		$	3,413			$	1,950

 

The following table presents the changes in fair value adjustments to REO for the periods ended September 30, 2014 and March 31, 2014:

 

		September 30,				March 31,
		2014				2014
Balance, beginning of period		$	676			$	73
Valuation adjustments added in the period			78				675
Valuation adjustments on disposed properties during the period			(35	)			(72	)
Balance, end of period		$	719			$	676

 

The following table sets forth with respect to the Bank’s allowance for losses on loans (dollars in thousands):

 

		September 30,				March 31,
		2014				2014
Balance at beginning of period		$	1,448			$	1,033
Provision:
Commercial			23				141
Commercial real estate			238				628
Residential real estate			116				266
Home Equity			12				21
Consumer			(13	)			(103	)
Construction			(1	)			4
Total provision			375				957
Charge-offs:
Commercial			−				127
Commercial real estate			557				378
Residential real estate			78				100
Home equity			−				4
Consumer			−				16
Recoveries			(40	)			(83	)
Total Net Charge-Offs		$	595			$	542
Balance at end of period		$	1,228			$	1,448
Period-end loans outstanding		$	82,023			$	85,084
Average loans outstanding		$	83,143			$	87,327
Allowance as a percentage of period-end loans			1.50	%			1.70	%
Net charge-offs as a percentage of average loans			0.72	%			0.62	%

  

 

Additional details for changes in the allowance for loan by loan portfolio as of September 30, 2014 are as follows (dollars in thousands):

 

Allowance for Loan Losses

 

		Commercial				Commercial Real Estate				Residential Real Estate				Home Equity				Consumer				Construction				Total
Balance, beginning of year		$	58			$	635			$	656			$	65			$	30			$	4			$	1,448
Loan charge-offs			−				(557	)			(78	)			−				−				−				(635	)
Recoveries			−				25				5				−				10				−				40
Provision for loan losses			23				238				116				12				(13	)			(1	)			375
Balance, end of period		$	81			$	341			$	699			$	77			$	27			$	3			$	1,228
Ending balance for loans individually evaluated for impairment		$	−				−				−				−				−				−				−
Ending balance for loans collectively evaluated for impairment		$	81			$	341			$	699			$	77			$	27			$	3			$	1,228
Loans receivable:		$	1,794			$	8,636			$	62,355			$	7,681			$	714			$	843			$	82,023
Ending balance
Ending balance: loans individually evaluated for impairment		$	−			$	1,879			$	2,217			$	−			$	−			$	−			$	4,096
Ending balance: loans collectively evaluated for impairment		$	1,794			$	6,757			$	60,138			$	7,681			$	714			$	843			$	77,927

  

  

The Bank prepares an allowance for loan loss model on a quarterly basis to determine the adequacy of the allowance. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the loan portfolio, delinquency statistics, results of independent loan review and related classifications. The Bank’s historic loss rates and the loss rates of peer financial institutions are also considered.

 

On a monthly basis, the loan committee meets to review each problem loan and determine if there has been any change in collateral value due to changes in market conditions. Each quarter, when calculating the allowance for loan loss, the loan committee reviews an updated loan impairment analysis on each problem loan to determine if a specific provision for loan loss is warranted. Management reviews the most recent appraisal on each loan adjusted for holding and selling costs. In the event there is not a recent appraisal on file, the Bank will use the aged appraisal and apply a discount factor to the appraisal and then adjust the holding and selling costs from the discounted appraisal value.

 

In evaluating the Bank’s allowance for loan loss, the Bank maintains a loan committee consisting of senior management and the Board of Directors that monitors problem loans and formulates collection efforts and resolution plans for each borrower.

 

For the six months ending September 30, 2014, the Bank experienced 11 partial charge-offs related to 9 relationships totaling $635 thousand as compared to three charge-offs relating to three loan relationships totaling $111 thousand and eleven partial charge-offs relating to eleven loan relationships totaling $514 thousand for the year ended March 31, 2014.  

 

At September 30, 2014, the Bank maintained an allowance for loan loss ratio of 1.50% to loans outstanding. Non-performing assets have decreased by $247 thousand over their stated levels at March 31, 2014, representing a non-performing asset to total asset ratio of 6.17% at September 30, 2014 as compared to a non-performing asset to total asset ratio of 6.34% at March 31, 2014.

 

The Bank’s charge-off policy states that any asset classified loss shall be charged-off within thirty days of such classification unless the asset has already been eliminated from the books by collection or other appropriate entry. On a quarterly basis, the loan committee will review past due, classified, non-performing and other loans, as it deems appropriate, to determine the collectability of such loans. If the loan committee determines a loan to be uncollectable, the loan shall be charged to the allowance for loan loss. In addition, upon reviewing the collectability, the loan committee may determine a portion of the loan to be uncollectable; in which case that portion of the loan deemed uncollectable will be partially charged-off against the allowance for loan loss.

 

  

(10)	Investment Securities

 

Investment securities have been classified according to management’s intent. The amortized cost of securities and their approximate fair values as of September 30, 2014 and March 31, 2014 are as follows:

 

		Held-to-Maturity September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
(Dollars in Thousands)
Federal Farm Credit Bank Bond		$	5,444			$	−			$	(239	)		$	5,205
Federal Home Loan Bank Bonds			7,069				−				(306	)			6,763
Federal Home Loan Mortgage Corporation Bonds			1,997				−				(90	)			1,907
Federal National Mortgage Association			9,499				11				(285	)			9,225
Municipal Bond			470				5				−				475
			24,479				16				(920	)			23,575
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation			501				34				−				535
Federal National Mortgage Association			528				48				−				576
Government National Mortgage Corporation			212				8				−				220
			1,241				90				−				1,331
Total		$	25,720			$	106			$	(920	)		$	24,906

 

		Held-to-Maturity March 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
(Dollars in Thousands)
Federal Home Loan Bank Bonds		$	6,568			$	−			$	(524	)		$	6,044
Federal Farm Credit Bonds			5,944				−				(387	)			5,557
Federal Home Loan Mortgage Corporation Bonds			1,997				−				(167	)			1,830
Federal National Mortgage Association Bond			10,498				17				(597	)			9,918
Municipal Bond			547				1				−				548
			25,554				18				(1,675	)			23,897
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation			610				43				(7	)			646
Federal National Mortgage Association			583				54				(4	)			633
Government National Mortgage Corporation			229				7				(2	)			234
			1,422				104				(13	)			1,513
Total		$	26,976			$	122			$	(1,688	)		$	25,410

 

		Available for Sale
		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Federal Home Loan Bank Bonds		$	1,500			$	−			$	(95	)		$	1,405
Federal National Mortgage Association Bond			500				−				(38	)			462
Mutual Fund Shares			173				−								173
		$	2,173			$	−			$	(133	)		$	2,040

 

		Available for Sale
		March 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Federal Home Loan Bank Bonds		$	1,500			$	−			$	(148	)		$	1,352
Federal National Mortgage Association Bond			500				−				(62	)			438
Mutual Fund Shares			186				−				(3	)			183
		$	2,186			$	−			$	(213	)		$	1,973

 

 

The following is a summary of maturities of securities held-to-maturity and available-for-sale as of September 30, 2014 and March 31, 2014:

 

		September 30, 2014
		Held to Maturity								Available for Sale
(Dollars in Thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:
One year or less		$	470			$	475			$	−			$	−
After one year through five years			2,002				2,001				−				−
After five years through ten years			5,419				5,227				−				−
After ten years			17,829				17,203				2,000				1,867
Equity securities			−				−				173				173
		$	25,720			$	24,906			$	2,173			$	2,040

 

		March 31, 2014
		Held to Maturity								Available for Sale
(Dollars in Thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:
One year or less		$	547			$	548			$	−			$	−
After one year through five years			1,502				1,500				−				−
After five years through ten years			8,418				7,928				−				−
After ten years			16,509				15,434				2,000				1,790
Equity securities			−				−				186				183
		$	26,976			$	25,410			$	2,186			$	1,973

 

The amortized cost and fair value of mortgage-backed securities are presented in the held-to-maturity category by contractual maturity in the preceding table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties.

 

Information pertaining to securities with gross unrealized losses at September 30, 2014 and March 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

		September 30, 2014
		Less Than 12 Months								12 Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
(Dollars in Thousands)
Federal Home Loan Bank Bonds		$	968			$	(10	)		$	7,199			$	(391	)		$	8,167			$	(401	)
Federal Farm Credit Bonds			−				−				5,205				(239	)			5,205				(239	)
Federal Home Loan Mortgage Corporation Bonds			−				−				1,906				(91	)			1,906				(91	)
Federal National Mortgage Association			499				(1	)			8,678				(321	)			9,177				(322	)
Total		$	1,467			$	(11	)		$	22,988			$	(1,042	)		$	24,455			$	(1,053	)

  

 

		March 31, 2014
		Less Than 12 Months								12 Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
(Dollars in Thousands)
Federal Home Loan Bank Bonds		$	3,606			$	(371	)		$	3,790			$	(301	)		$	7,396			$	(672	)
Federal Farm Credit Bonds			3,282				(217	)			1,775				(171	)			5,057				(388	)
Federal Home Loan Mortgage Corporation Bonds			1,100				(77	)			902				(97	)			2,002				(174	)
Federal National Mortgage Association			7,687				(512	)			1,349				(151	)			9,036				(663	)
Mutual funds shares			183				(3	)			−				−				183				(3	)
			15,858				(1,180	)			7,816				(720	)			23,674				(1,900	)
Mortgage-Backed Securities:
Government National Mortgage Corporation			−				−				26				(1	)			26				(1	)
Total		$	15,858			$	(1,180	)		$	7,842			$	(721	)		$	23,700			$	(1,901	)

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

At September 30, 2014, the 52 debt securities with unrealized losses have depreciated 3.69% from the Bank’s amortized cost basis. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

 

  

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

 

Management’s discussion and analysis of the financial condition and results of operations at and for the six months ended September 30, 2014 and 2013 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

 

Forward-Looking Statements

 

This quarterly report contains forward-looking statements that are based on assumptions and may describe our future plans, strategies and expectations. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.

 

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of our loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, changes in real estate market values in our area, and changes in relevant accounting principles and guidelines.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

General

 

Delanco Bancorp, Inc. is the holding company for Delanco Federal Savings Bank. Delanco Federal Savings Bank operates from two offices in Burlington County, New Jersey. Delanco Federal Savings Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate a variety of consumer and business loans.

 

Balance Sheet Analysis

 

Overview. Total assets at September 30, 2014 were $126.7 million, a decrease of $700 thousand from total assets of $ 127.4 million at March 31, 2014. Total liabilities decreased $500 thousand from $113.6 million at March 31, 2014 to $113.1 million at September 30, 2014. Total stockholders’ equity decreased $100 thousand to $13.6 million at September 30, 2014, primarily due to net loss offset by the increase in other comprehensive income related to increased values in the held to maturity portfolio.

 

Loans. At September 30, 2014, total loans, net, were $80.7 million, or 63.7% of total assets. Overall loans decreased by $2.8 million primarily due to payoffs in the portfolio and the transfer of defaulted loans into real estate owned. Commercial and multi-family real estate loans decreased by $1.8 million, residential real estate loans decreased by $1.2 million, home equity loans decreased by $463 thousand and commercial loans increased by $487 thousand.

 

Total nonperforming loans at September 30, 2014 decreased $1.7 million from March 31, 2014.

 

Securities. The investment securities portfolio was $27.8 million, or 21.9% of total assets, at September 30, 2014. At that date, 4.5% of the investment portfolio was invested in mortgage-backed securities, while the remainder was invested primarily in U.S. Government agency and other debt securities. Investment securities decreased $1.2 million compared to March 31, 2014. The decrease was primarily due to calls of debt securities.

 

Deposits. Total deposits were $109.1 million at September 30, 2014, a decrease of $1.6 million compared to March 31, 2014. Deposits decreased as we made a conscious effort to reduce our reliance on high costing time deposits. Core deposits remained constant for the six months while time deposits decreased by $1.6 million.

 

 

Results of Operations for the Three and Six Months Ended September 30, 2014 and 2013

 

Financial Highlights.  The net loss for the three months ended September 30, 2014 was $178 thousand as compared to a net loss of $43 thousand for the same prior year period. The net loss for the six months ended September 30, 2014 was $175 thousand as compared to a net loss of $9 thousand for the same prior year period. The decrease in net income for the three-month period was primarily the result of a higher loan loss provision, decreased net interest income, increased salaries and employee benefits, professional fees and real estate owned expense. The decrease in net income for the six-month period was primarily the result of the same factors listed above for the three month variances.

 

Net Interest Income.   Net interest income decreased $60 thousand to $1.9 million for the six months ended September 30, 2014 as compared to the prior year period. The Bank saw an increase in the interest rate spread (7 basis points) and an increase in net interest margin (1basis points) for the six month period.  The rates earned on assets declined, resulting in a 3.0% decrease in total net interest income for the six months ending September 30, 2014 compared to the six months ended September 20, 2013. Total interest expense decreased by 22.9% between the same periods.

 

Average loans in the six months ended September 30, 2014 decreased $4.3 million, or 5.0%, compared with the same period in 2013, driven by payoffs in the residential and commercial mortgage portfolios. Average investment securities in the six months ended September 30, 2014 increased $1.2 million, or 4.5%, compared to the same period in 2013. The increase in the investment portfolio was due to purchases of debt securities. Declining interest rates decreased the average yield on earning assets to 3.89% for the six months ended September 30, 2014, compared with 4.0% for the same period in 2013.

 

Average interest-bearing deposits in the six months ended September 30, 2014 decreased $5.6 million or 5.2%, compared with the same period in 2013. Declining interest rates decreased the average cost of deposits to 0.54%, compared with 0.71% for the same period in 2013.

 

Provision for Loan Losses.  The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  We evaluate the need to establish allowances against losses on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.  Provisions for loan losses were $300 thousand for the three months and $375 thousand in the six months ended September 30, 2014 compared to $117 thousand in the three months and $207 thousand in the six months ended September 30, 2013.  We had $350 thousand in net charge-offs in the three months and $595 thousand in net charge-offs in the six months ended September 30, 2014 compared to $120 thousand and $291 thousand in net charge-offs in the same prior year periods. The charge-offs were primarily the result of re-evaluations of the collateral securing classified assets.

 

Non-Interest Income.  Non-interest income increased $59 thousand in the six-month period ending September 30, 2014 compared to the six-month period ended September 20, 2013 primarily due to no losses on real estate owned for both the three and six months ending September 30, 2014.

 

Non-Interest Expenses.  Non-interest expenses increased $45 thousand for the three months and $158 thousand in the six months ending September 30, 2014 compared to the six months ended September 30, 2013 primarily due to increased salary and employee benefit and real estate owned expenses offset by decreased federal insurance premiums. The increases in real estate owned expense are related to the increased number of properties in real estate owned and the increases in professional fees are related to the ongoing collection efforts on the classified assets.

 

 

Liquidity Management 

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of and payments on investment securities and borrowings from the Federal Home Loan Bank of New York, Atlantic Central Bankers Bank and the Federal Reserve Bank of Philadelphia. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

 

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2014, cash and cash equivalents totaled $5.2 million. At September 30, 2014, we had $3.0 million in outstanding borrowings and had arrangements to borrow up to $15.2 million from the Federal Home Loan Bank of New York and $1 million from Atlantic Central Bankers Bank.

 

At September 30, 2014, substantially all of our investment securities were classified as held to maturity. We have classified our investments in this manner, rather than as available for sale, because they were purchased primarily to provide a source of income and not to provide liquidity. We anticipate that a portion of future investments will be classified as available for sale in order to give us greater flexibility in the management of our investment portfolio.

 

A significant use of our liquidity is the funding of loan originations. At September 30, 2014, we had $550 thousand in loan commitments outstanding. We also had $5.2 million in unused lines of credit. Historically, many of the lines of credit expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2014 totaled $23.5 million, or 52.7% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are the origination and purchase of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

 

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. As of September 30, 2014 and March 31, 2014, the Company had $716 thousand in cash and cash equivalents.  Substantially all of the Company’s cash and cash equivalents were obtained from proceeds it retained from the Bank’s mutual-to-stock conversion completed in October 2013. In addition to its operating expenses, Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions.

 

The Company can receive dividends from the Bank. Payment of such dividends to the Company by the Bank is limited under federal law. The amount that can be paid in any calendar year, without prior regulatory approval, cannot exceed the retained net earnings (as defined) for the year plus the preceding two calendar years. Under the terms of its written agreement with the OCC, the Bank is not permitted to pay dividends without prior regulatory approval. In addition, at the request of the Federal Reserve, the Company has adopted resolutions that prohibit it from declaring or paying any dividends or taking any dividends or other distributions that would reduce the capital of the Bank without the prior written consent of the Federal Reserve.

 

 

 

Capital Management. We are subject to various regulatory capital requirements administered by the OCC, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. See note 6 of the notes to the Consolidated Financial Statements.

 

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

 

For the quarter ended September 30, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable as the Company is a smaller reporting company.

 

Item 4.   Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1.     Legal Proceedings

 

Delanco Bancorp is not involved in any pending legal proceedings. Delanco Federal Savings Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition and results of operations.

 

Item 1A.   Risk Factors

 

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014, which could materially and adversely affect the Company’s business, financial condition or future results. The risks described in the Company’s Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

 

 

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

 

Not applicable.

 

Item 3.     Defaults upon Senior Securities

 

Not Applicable.

 

Item 4.     Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.     Other Information

 

None.

 

Item 6.     Exhibits

 

3.1	Certificate of Incorporation(1)
3.2	Bylaws(2)
4.0	Form of Specimen Stock Certificate(3)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

________________________________

 

(1) Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 (File No. 333-189244) filed with the Commission on June 12, 2013.

(2) Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 (File No. 333-189244) filed with the Commission on June 12, 2013.

(3) Incorporated by reference to Exhibit 4.0 to the Company’s Form S-1 (File No. 333-189244) filed with the Commission on June 12, 2013.

 

 

Signatures

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	DELANCO BANCORP, INC.
Dated: November 14, 2014	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and
		Chief Executive Officer
Dated: November 14, 2014	By:	/s/ Eva Modi
		Eva Modi
		Chief Financial Officer

                                          

 

 

 

 

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