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EX-32.0 - EXHIBIT 32.0 - Delanco Bancorp, Inc.ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - Delanco Bancorp, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Delanco Bancorp, Inc.ex31-1.htm

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 June 30, 2015

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-accerlated filer   ☐

 Smaller reporting company  ☒

 

(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 August 6, 2015 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 June 30, 2015 (Unaudited) and March 31, 2015

2
     
 

Consolidated Statements of Operations for the Three Months Ended June 30, 2015 and 2014 (Unaudited)

3
     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2015 (Unaudited)

4
     
 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2015 (Unaudited)

5
     
 

Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2015 and 2014 (Unaudited) 

6
     
 

Notes to Unaudited Consolidated Financial Statements

8
     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29
     

Item 4.

Controls and Procedures

29
     
Part II. OTHER INFORMATION  
     

Item 1.

Legal Proceedings

30
     

Item 1A.

Risk Factors

30
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30
     

Item 3.

Defaults upon Senior Securities

30
     

Item 4.

Mine Safety Disclosures

30
     

Item 5.

Other Information

30
     

Item 6.

Exhibits

30
   
Signatures 31

 

 
1

 

 

Part I. Financial Information

Item 1. Financial Statements

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

 

   

June 30,

2015

   

March 31,

2015

 
   

(unaudited)

         

ASSETS

               

Cash and cash equivalents

               

Cash and amounts due from banks

  $ 764,453     $ 687,488  

Interest-bearing deposits

    6,600,831       9,762,960  

Total cash and cash equivalents

    7,365,284       10,450,448  

Investment securities:

               

Securities held-to-maturity (fair value $24,109,282 and $24,566,903 at June 30, 2015 and March 31, 2015, respectively)

    24,532,815       24,617,338  

Securities available-for-sale (amortized cost of $1,148,760 and $1,154,418 at June 30, 2015 and March 31, 2015, respectively)

    1,100,896       1,127,515  

Total investment securities

    25,633,711       25,744,853  

Loans, net of allowance for loan losses of $1,156,926 at June 30, 2015 (unaudited), $1,185,178 at March 31, 2015

    81,307,723       80,146,397  

Accrued interest receivable

    391,352       436,840  

Real estate owned

    2,434,992       2,433,483  

Federal Home Loan Bank, at cost

    298,800       306,300  

Premises and equipment, net

    6,472,215       6,490,331  

Deferred income taxes

    2,087,600       2,060,233  

Bank-owned life insurance

    169,252       169,252  

Other assets

    327,234       334,613  

Total assets

  $ 126,488,163     $ 128,572,750  
                 

LIABILITIES

               

Deposits

               

Non-interest bearing deposits

  $ 11,112,303     $ 10,733,275  

Interest bearing deposits

    96,950,384       99,464,844  

Total deposits

    108,062,687       110,198,119  

Advances from Federal Home Loan bank

    4,000,000       4,000,000  

Accrued interest payable

    4,577       5,763  

Advance payments by borrowers for taxes and insurance

    368,900       320,356  

Other liabilities

    857,474       876,221  

Total liabilities

    113,293,638       115,400,459  
                 

COMMITMENTS AND CONTINGENCIES

               
                 

STOCKHOLDERS’ EQUITY

               

Preferred stock, $.01 par value, 5,000,000 authorized at June 30, 2015 and March 31, 2015, no shares issued

               

Common stock, $.01 par value, 20,000,000 shares authorized; 945,425 shares issued and outstanding at June 30, 2015 and March 31, 2015

  $ 9,454     $ 9,454  

Additional paid-in capital

    9,973,641       9,965,764  

Retained earnings, substantially restricted

    3,963,479       3,936,546  

Unearned common stock held by employee stock ownership plan

    (546,617 )     (546,617 )

Accumulated other comprehensive (loss)

    (205,432 )     (192,856 )

Total stockholder’s equity

    13,194,525       13,172,291  

Total liabilities and stockholders’ equity

  $ 126,488,163     $ 128,572,750  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
2

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

 

   

Three Months Ended

June 30,

 
   

2015

   

2014

 

INTEREST INCOME

               

Loans

  $ 896,377     $ 939,805  

Investment securities

    165,875       180,892  

Total interest income

    1,062,252       1,120,697  
                 

INTEREST EXPENSE

               

Interest-bearing checking accounts

    9,012       9,841  

Passbook and money market accounts

    26,376       26,049  

Certificates of deposits

    100,495       112,764  

Federal Home Loan Bank Advances

    6,900       4,358  

Total interest expense

    142,783       153,012  
                 

Net interest income

    919,469       967,685  

Provision for loan losses

    10,000       75,000  

Net interest income after provision for loan losses

    909,469       892,685  
                 

NON-INTEREST INCOME

               

Income (loss) from bank-owned life insurance

          (531 )

Gain (loss) on sale of real estate owned

    (8,152 )      

Service charges

    33,008       35,201  

Rental income

    38,438       26,136  

Other

    3,632       3,526  

Total non-interest income

    66,926       64,332  
                 

NON-INTEREST EXPENSE

               

Salaries and employee benefits

    408,760       421,649  

Advertising

    6,471       4,489  

Office supplies, telephone and postage

    25,373       23,498  

Loan expenses

    15,906       69,901  

Net occupancy expense

    147,274       147,157  

Real estate loss reserve

    38,993        

Federal insurance premiums

    42,906       43,099  

Data processing expenses

    58,760       54,984  

ATM expenses

    6,118       7,024  

Bank charges and fees

    19,985       17,724  

Insurance and surety bond premiums

    24,245       19,257  

Dues and subscriptions

    10,316       6,221  

Professional fees

    72,636       78,957  

Real Estate Owned expense

    55,034       46,055  

Other

    34,917       28,949  

Total non-interest expense

    967,694       968,964  
                 

INCOME (LOSS) BEFORE INCOME TAX EXPENSE

    8,701       (11,947 )
                 

Income tax expense (benefit)

    (18,232 )     ( 14,263 )
                 

NET INCOME

  $ 26,933     $ 2,316  

INCOME PER COMMON SHARE

  $ 0.03     $ 0.00  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
3

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

Three Months Ended  
             
   

June 30,

2015

   

June 30,

2014

 
                 

Net income

  $ 26,933     $ 2,316  
                 

Unrealized gain (loss) available for sale:

               

Unrealized holding gain (loss), net of deferred tax (benefit) of ($19,146) and $25,965 in 2015 and 2014

    (12,576 )     38,947  
                 

Total other comprehensive income

  $ 14,357     $ 41,263  

 

See Notes to the Unaudited Consolidated Financial Statements

 

 
4

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

    Common Stock                      

Unearned

Employee

      Accumulated          
   

Shares

   

Amount

     

Additional 

Paid-in 

Capital

     

Retained

Earnings

     

Stock 

Ownership 

Plan

     

Other-

Comprehensive

Income (Loss)

     

Total

Stockholders'

Equity

 

Balance at March 31, 2015

    945,425       9,454     $ 9,965,764     $ 3,936,546       (546,617 )     (192,856 )     13,172,291  

Comprehensive income

                                                       

Net income

                            26,933                       26,933  

Other comprehensive income, net of tax:

                                            (12,576 )     (12,576 )
                                                         

Employee stock option expense

                    7,877                               7,877  
                                                         

Balance at June 30, 2015

    945,425     $ 9,454     $ 9,973,641     $ 3,963,479       (546,617 )     (205,432 )   $ 13,194,525  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
5

 

  

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

   

Three Months Ended

June 30,

 
   

2015

   

2014

 

Cash flow from operating activities

               

Net Income

  $ 26,933     $ 2,316  

Adjustments to reconcile net income to net cash provided by operating

activities:

               

Deferred income taxes

    (18,982 )     (12,013 )

Depreciation

    65,434       64,349  

Discount accretion net of premium amortization

    3,305       (511 )

Provision for loan losses

    10,000       75,000  

Income from bank owned life insurance

          531  

(Gain)Loss on sale of real estate owned

    8,152        

Compensation expense for stock options

    7,877       7,877  

Changes in operating assets and liabilities

               

(Increase) decrease in:

               

Accrued interest receivable

    45,488       38,133  

Pre-Paid income taxes

    (2,250 )     (5,500 )

Other assets

    9,630       49,573  

Increase (decrease) in:

               

Accrued interest payable

    (1,187 )     (1,532 )

Other liabilities

    (18,747 )     (139,668 )

Net cash provided by operating activities

  $ 135,653     $ 78,555  
                 
                 

Cash flows from investing activities

               

Proceeds of securities available for sale

    5,658       8,127  

Purchases of securities held-to-maturity

    (2,000,000 )      

Proceeds from maturities and principal repayments of securities held-to-maturity

    2,081,217       1,151,699  

Redemption (purchase)of investment required by law – stock in Federal Home Loan Bank

    7,500       (32,100 )

Proceeds from sale of real estate owned

    45,023       219,020  

Net (increase) decrease in loans

    (1,226,009 )     584,890  

Purchases of premises and equipment

    (47,318 )     (39,586 )

Net cash provided by(used in) investing activities

  $ (1,133,929 )   $ 1,892,050  
                 

Cash flows from financing activities

               

(Decrease) increase in deposits

    (2,135,432 )     (2,581,257 )

Increase in advance payments by borrowers for taxes and insurance

    48,544       45,765  

Increase in federal Home Loan bank Advances

          1,000,000  

Net cash used in financing activities

  $ (2,086,888 )   $ (1,535,492 )

  

 
6

 

 

 

   

Three Months Ended

June 30,

 
   

2015

   

2014

 
                 

Net (decrease) increase in cash and cash equivalents

  $ (3,085,164 )   $ 435,113  
                 

Cash and cash equivalents, beginning of the period

    10,450,448       3,332,639  
                 

Cash and cash equivalents, end of period

  $ 7,365,284     $ 3,767,752  
                 

Supplemental Disclosures:

               
                 

Cash paid during the period for interest

  $ 143,970     $ 154,544  
                 

Cash paid during the period for income taxes

  $ 2,500     $ 5,500  
                 

Loans transferred to foreclosed real estate during the period

  $ 96,621     $ 1,280,266  
                 

Net change in unrealized gain (loss) on securities available-for-sale net of tax

  $ (12,576 )   $ 38,947  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
7

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

June 30, 2015

 

(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.

 

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 three month period ended June 30, 2015 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, 2015.

     

(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 13 basis points.

 

 
8

 

     

(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 2012 through 2014 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.

 

The calculated basic and dilutive EPS are as follows:

 

   

Three Months Ended

June 30,

 
   

2015

   

2014

 

Numerator

  $ 26,933     $ 2,316  

Denominators:

               

Basic shares outstanding

    903,021       899,681  

Effect of dilutive securities

    1,546       124  

Dilutive shares outstanding

    904,567       899,805  

Earnings per share:

               

Basic

  $ 0.03     $ 0.00  

Dilutive

  $ 0.03     $ 0.00  

 

     

(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.

 

 
9

 

 

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.

 

We have submitted strategic and capital plans to the OCC and have developed the other plans and policies required by the written agreement. The written 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. Separately, 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 June 30, 2015 were 8.75%, 16.02% and 17.29%, respectively.

 

(7)

Recent Accounting Pronouncements

 

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715) as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

 
10 

 

 

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40) as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015 and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This ASU is not expected to have a significant impact on the Company’s 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

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant Other

Unobservable

Inputs

(Level 3)

 

June 30, 2015

                       

Available-for-sale securities

  $ 1,101     $     $  
                         

March 31, 2015

                       

Available-for-sale securities

  $ 1,127     $     $  

 

 
11

 

 

Assets and Liabilities on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2015 and March 31, 2015 are as follows (dollars in thousands):

 

   

Fair Value Measurements at Reporting Date Using

 
   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Other

Unobservable

Inputs

(Level 3)

 

June 30, 2015

                       

Impaired loans

                  $ 4,724  

Real estate owned

                     2,435  
Total                   $ 7,159  

March 31, 2015

                       

Impaired loans

                  $ 4,522  
Real estate owned                     2,433  
Total                   $ 6,955  

 

  

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 June 30, 2015 and March 31, 2015 was as follows:

 

   

June 30, 2015

 
   

Carrying Amount

   

Level 1

   

Level 2

   

Level 3

 

(Dollars in Thousands)

                               

Financial Assets:

                               

Cash and cash equivalents

  $ 7,365     $ 7,365     $     $  

Investment securities

    25,682             25,682        

Loans – net

    81,308                   80,759  

FHLB stock

    299       299              

Accrued interest receivable

    391       391              

Bank–owned life insurance

    169       169              

Real estate owned

    2,435                   2,435  

Total financial assets

  $ 117,649     $ 8,224     $ 25,682     83,234  
                                 

Financial Liabilities:

                               

Deposits

  $ 108,063     $ 11,112     $ 96,951     $  

Advance payments by borrowers for taxes and insurance

    4,000       4,000              

Advances Federal Home Loan Bank

    369       369              

Accrued interest payable

    5       5              

Total financial liabilities

  $ 112,437     $ 15,486     $ 96,951     $  

 

 
12

 

 

   

March 31, 2015

 
   

Carrying Amount

   

Level 1

   

Level 2

   

Level 3

 

(Dollars in Thousands)

                               

Financial Assets:

                               

Cash and cash equivalents

  $ 10,450     $ 10,450     $     $  

Investment securities

    25,772             25,694        

Loans – net

    80,146                   79,675  

FHLB stock

    306       306              

Accrued interest receivable

    437       437              

Bank-owned life insurance

    169       169              

Total financial assets

  $ 117,280     $ 11,362     $ 25,694     $ 79,675  
                                 

Financial Liabilities:

                               

Deposits

  $ 110,198     $ 10,733     $ 99,411     $  

Advances from Federal Home Loan Bank

    4,000       4,000              

Advance payments by borrowers for taxes and insurance

    320       320              

Accrued interest payable

    6       6              

Total financial liabilities

  $ 114,524     $ 15,059     $ 99,411     $  

 

 

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.

 

 

   

June 30, 2015

   

March 31, 2015

 
   

Contract

Value

   

Estimated

Fair Value

   

Contract Value

   

Estimated

Fair Value

 

Off-balance sheet instruments

                               

Commitments to extend credit

  $ 8,366     $     $ 8,840     $  

 

 
13

 

 

(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 June 30, 2015 and March 31, 2015 are summarized as follows (dollars in thousands):

 

   

June 30,

   

March 31,

 
   

2015

   

2015

 
                 

Residential (one-to four-family) real estate

  $ 63,229     $ 62,789  

Multi-family and commercial real estate

    8,715       7,979  

Commercial

    2,177       1,913  

Home equity

    7,605       8,006  

Consumer

    582       678  

Construction

    241       56  

Total loans

    82,549       81,421  

Net deferred loan origination fees

    (84 )     (90 )

Allowance for loan losses

    (1,157 )     (1,185 )

Loans, net

  $ 81,308     $ 80,146  

 

 
14

 

 

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At June 30, 2015, the loans-to-one-borrower limitation was $1.8 million; this excluded an additional 10% of adjusted capital funds or approximately $1.2 million, which may be loaned if collateralized by readily marketable securities. At June 30, 2015, 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.

 

 
15

 

 

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 June 30, 2015, the Bank has entered into formal forbearance agreements with three relationships totaling $344 thousand that require current payments while the borrowers restructure their finances

 

The following table represents loans by credit quality indicator at June 30, 2015 (dollars in thousands):

   

Pass

   

Special

Mention

Loans

   

Classified

Loans

   

Non-

Performing

Loans

   

Total

 

Residential real estate

  $ 61,085     $     $     $ 2,144     $ 63,229  

Multi-family and commercial real estate

    6,042       596       420       1,657       8,715  

Commercial

    1,952       23       202             2,177  

Home equity

    7,594                   11       7,605  

Consumer

    582                         582  

Construction

    185                   56       241  
    $ 77,440     $ 619     $ 622     $ 3,868     $ 82,549  

 

The following table represents past-due loans as of June 30, 2015 (dollars in thousands):

   

30-59

Days Past

Due

   

60- 89

Days Past

Due

   

Greater

than 90

Days Past

Due

   

Total Past

Due

   

Current

   

Total Loan

Balances

 

Residential real estate

  $ 839     $ 935     $ 1,443     $ 3,217     $ 60,012     $ 63,229  

Multi-family and commercial real estate

                886       886       7,829       8,715  

Commercial

    98                   98       2,079       2,177  

Home Equity

    315             11       326       7,279       7,605  

Consumer

    29                   29       553       582  

Construction

                            241       241  

Total Loans

  $ 1,281     $ 935     $ 2,340     $ 4,556     $ 77,993     $ 82,549  

Percentage of Total Loans

    1.55 %     1.13 %     2.84 %     5.52 %     94.48 %     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 June 30, 2015, the Bank had 16 loan relationships totaling $2.3 million in non-accrual loans as compared to 17 relationships totaling $2.3 million at March 31, 2015. The average balance of impaired loans totaled $4.9 million for the three months ended June 30, 2015 as compared to $4.7 million for the year ended March 31, 2015, and interest income recorded on impaired loans for the three months ended June 30, 2015 totaled $45 thousand as compared to $201 thousand for the year ended March 31, 2015.

 

 
16

 

 

The following table represents data on impaired loans at June 30, 2015 and March 31, 2015 (dollars in thousands):

 

   

June 30,

2015

   

March 31,

2015

 

Impaired loans for which a valuation allowance has been provided

  $     $  

Impaired loans for which no valuation allowance has been provided

  $ 4,724     $ 4,522  

Total loans determined to be impaired

  $ 4,724     $ 4,522  

Allowance for loans losses related to impaired loans

  $     $  

Average recorded investment in impaired loans

  $ 4,999     $ 4,707  

Cash basis interest income recognized on impaired Loans

  $ 45     $ 201  

 

 

The following table presents impaired loans by portfolio class at June 30, 2015 (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

  $ 2,667     $ 2,617     $     $ 2,718     $ 16  

Multi-family and commercial real estate

    2,054       2,006             2,133       24  

Commercial

    34       34             34       4  

Home equity

    11       11             11        

Consumer

                      47        

Construction

    56       56             56       1  

Total

  $ 4,822     $ 4,724     $     $ 4,999     $ 45  

 

 

The following table presents impaired loans by portfolio class with no valuation allowance at March 31, 2015 (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

  $ 2,600     $ 2,535     $     $ 2,743     $ 65  

Multi-family and commercial real estate

    1,860       1,814             1,727       130  

Commercial

    35       35             31       1  

Home equity

    11       11             130        

Consumer

    71       71             18       2  

Construction

    56       56             58       3  

Subtotal

  $ 4,633     $ 4,522     $     $ 4,707     $ 201  

 

 
17

 

 

The following table represents nonaccrual loans as of June 30, 2015 and March 31, 2015 (dollars in thousands):

 

   

June 30,

2015

   

March 31,

2015

 

Non-accrual loans:

               

Residential real estate

  $ 1,033     $ 880  

Multi-family and commercial real estate

    657       662  

Commercial

           

Consumer

          71  

Home equity

    11       11  

Construction

           

Total non-accrual loans

    1,701       1,624  
                 

Accruing loans past due 90 days or more:

               

Residential real estate

  $     $  

Multi-family and commercial real estate

           

Commercial

           

Consumer

           

Home Equity

           

Construction

           

Total accruing loans past due 90 days or more

           
                 

Troubled debt restructurings:

               

In non-accrual status:

               

Residential real estate

  $ 410     $ 484  

Multi-family and commercial real estate

    229       229  

Commercial

           

Consumer

           

Home Equity

           

Construction

           

Total troubled debt restructurings in non-accrual status

    639       713  

Performing under modified terms:

               

Residential real estate

    701       696  

Multi-family and commercial real estate

    771       773  

Commercial

           

Consumer

           

Home Equity

           

Construction

    56       56  

Total troubled debt restructurings performing under modified terms:

    1,528       1,525  

Total troubled debt restructurings

    2,167       2,238  

Total non-performing loans

    3,868       3,862  

Real estate owned

    2,435       2,433  

Total non-performing assets

    6,303       6,295  
                 

Non-performing loans as a percentage of loans

    4.69 %     4.74 %

Non-performing assets as a percentage of loans and real estate owned

    7.42 %     7.51 %

Non-performing assets as percentage of total assets

    4.98 %     4.90 %

 

 
18

 

 

During the three months ended June 30, 2015, the Bank experienced a $3 thousand net increase in non-accrual loans. This change reflects the downgrading of two loan relationships to non-accrual status totaling $268 thousand during the three months ended June 30, 2015. The downgraded loans consisted of one residential mortgages totaling $153 thousand and one commercial real estate loan totaling $115 thousand. These additions to the non-accruals were offset by one commercial loan for $118 thousand that was paid in full, one residential loan in the amount of $75 thousand was transferred to real estate owned and the charge-off of one consumer loan in the amount of $71 thousand.

 

 

The following table presents troubled debt restructurings that occurred during the periods ended June 30, 2015 and March 31, 2015 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.

  

   

June 30, 2015

   

March 31, 2015

 
           

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     $ 96     $ 111  

 

   

Number of
Contracts

   

Recorded Investment

   

Number of
Contracts

   

Recorded Investment

 

Troubled debt restructurings that subsequently defaulted:

                               

Residential real estate

        $           $  

 

 
19

 

 

The following table presents the changes in real estate owned (REO), net of valuation allowance, for the periods ended June 30, 2015 and March 31, 2015:

 

   

June 30,

   

March 31,

 
   

2015

   

2015

 

Balance, beginning of period

  $ 2,433     $ 1,950  

Additions from loan foreclosures

    97       2,332  

Additions from capitalized costs

           

Dispositions of REO

    (48 )     (1,592 )

Gain (loss) on sale of REO

    (8 )     (82 )

Valuation adjustments in the period

    (39 )     (175 )

Balance, end of period

  $ 2,435     $ 2,433  

 

 

 

The following table presents the changes in fair value adjustments to REO for the periods ended June 30, 2015 and March 31, 2015:

 

   

June 30,

   

March 31,

 
   

2015

   

2015

 

Balance, beginning of period

  $ 851     $ 676  

Valuation adjustments added in the period

    39       642  

Valuation adjustments on disposed properties during the period

    (219 )     (467 )

Balance, end of period

  $ 671     $ 851  

 

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

 

   

June 30,

2015

   

March 31,

2015

 
                 

Balance at beginning of period

  $ 1,185     $ 1,448  

Provision:

               

Commercial

    17       45  

Commercial real estate

    (12 )     176  

Residential real estate

    (49 )     177  

Home Equity

    (6 )     21  

Consumer

    59       (25 )

Construction

    1       (4 )
                 

Total Provision

    10       390  
                 

Charge-Offs:

               

Commercial

          19  

Commercial Real Estate

          598  

Residential real estate

          142  

Home Equity

           

Consumer

    71       4  

Recoveries

    (33 )     (110 )

Total Net Charge-Offs

    38       653  

Balance at end of period

    1,157     $ 1,185  

Period-end loans outstanding

    82,549     $ 81,421  

Average loans outstanding

  $ 82,428     $ 83,253  
                 

Allowance as a percentage of period-end loans

    1.40 %     1.46 %

Net charge-offs as a percentage of average loans

    0.05 %     0.78 %

 

 
20

 

 

Additional details for changes in the allowance for loan by loan portfolio as of June 30, 2015 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

  $ 86     $ 289     $ 702     $ 87     $ 21     $     $ 1,185  

Loan charge-offs

                            (71 )           (71 )

Recoveries

    1       16       10             6             33  

Provision for loan losses

    17       (12 )     (49 )     (6 )     59       1       10  
                                                         

Balance, end of period

  $ 104     $ 293     $ 663     $ 81     $ 15     $ 1     $ 1,157  
                                                         

Ending balance for loans individually evaluated for impairment

                                                       

Ending balance for loans collectively evaluated for impairment

  $ 104     $ 293     $ 663     $ 81     $ 15     $ 1     $ 1,157  
                                                         

Loans receivable:

                                                       

Ending balance

  $ 2,177     $ 8,715     $ 63,229     $ 7,605     $ 582     $ 241     $ 82,549  

Ending balance: loans individually evaluated for impairment

  $ 34     $ 1,813     $ 2,464     $ 11     $     $ 56     $ 4,378  

Ending balance: loans collectively evaluated for impairment

  $ 2,143     $ 6,902     $ 60,765     $ 7,594     $ 582     $ 185     $ 78,171  

 

 

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.

 

 
21

 

 

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 three months ending June 30, 2015, the Bank experienced one charge-off related to one relationship totaling $71 thousand as compared to two charge-offs relating to two loan relationships totaling $23 thousand and partial charge-offs relating to 17 loan relationships totaling $603 thousand for the year ended March 31, 2015.

 

At June 30, 2015, the Bank maintained an allowance for loan loss ratio of 1.40% to loans outstanding. Non-performing assets have increased by $8 thousand over their stated levels at March 31, 2015, representing a non-performing asset to total asset ratio of 4.98% at June 30, 2015 as compared to a non-performing asset to total asset ratio of 4.90% at March 31, 2015.

 

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 June 30, 2015 and March 31, 2015 are as follows:

 

   

Held-to-Maturity

June 30, 2015

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

(Dollars in Thousands)

                               
                                 

Federal Farm Credit Bank Bond

  $ 7,433     $     $ (156 )   $ 7,277  

Federal Home Loan Bank Bonds

    7,070       9       (144 )     6,935  

Federal Home Loan Mortgage Corporation Bonds

    1,997             (54 )     1,943  

Federal National Mortgage Association

    6,999       6       (159 )     6,846  
      23,499       15       (513 )     23,001  

Mortgage-Backed Securities:

                               
                                 

Federal Home Loan Mortgage Corporation

    398       25             423  

Federal National Mortgage Association

    451       43             494  

Government National Mortgage Corporation

    185       7             192  
      1,034       75             1,109  

Total

  $ 24,533     $ 90     $ (513 )   $ 24,110  

 

 
22

 

 

   

Held-to-Maturity

March 31, 2015

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

(Dollars in Thousands)

                               
                                 

Federal Home Loan Bank Bonds

  $ 7,569     $ 25     $ (62 )   $ 7,532  

Federal Farm Credit Bonds

    6,437             (55 )     6,382  

Federal Home Loan Mortgage Corporation Bonds

    1,997       2       (20 )     1,979  

Federal National Mortgage Association Bond

    6,999       16       (46 )     6,969  

Municipal Bond

    470       2             472  
      23,472       45       (183 )     23,334  

Mortgage-backed securities:

                               
                                 

Federal Home Loan Mortgage Corporation

    454       33             487  

Federal National Mortgage Association

    495       49             544  

Government National Mortgage Corporation

    196       6             202  
      1,145       88             1,233  

Total

  $ 24,617     $ 133     $ (183 )   $ 24,567  

 

 

   

Available for Sale

 
   

June 30, 2015

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

Federal Home Loan Bank Bonds

  $ 500     $     $ (23 )   $ 477  

Federal National Mortgage Association Bond

    500             (25 )     475  

Mutual Fund Shares

    149                   149  
    $ 1,149     $     $ (48 )   $ 1,101  

 

   

Available for Sale

 
   

March 31, 2015

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

Federal Home Loan Bank Bonds

  $ 500     $     $ (10 )   $ 490  

Federal National Mortgage Association Bond

    500             (17 )     483  

Mutual Fund Shares

    154       1             155  
    $ 1,154     $ 1     $ (27 )   $ 1,128  

 

 
23

 

 

The following is a summary of maturities of securities held-to-maturity and available-for-sale as of June 30, 2015 and March 31, 2015:

 

   

June 30, 2015

 
   

Held to Maturity

   

Available for Sale

 

(Dollars in Thousands)

 

Amortized

Cost

   

Fair Value

   

Amortized

Cost

   

Fair Value

 

Amounts maturing in:

                               

One year or less

  $ 500     $ 507     $        

After one year through five years

    1,001       997              

After five years through ten years

    9,573       9,395              

After ten years

    13,459       13,211       1,000       952  

Equity securities

                149       149  
    $ 24,533     $ 24,110     $ 1,149     $ 1,101  

 

   

March 31, 2015

 
   

Held to Maturity

   

Available for Sale

 

(Dollars in Thousands)

 

Amortized

Cost

   

Fair Value

   

Amortized

Cost

   

Fair Value

 

Amounts maturing in:

                               

One year or less

  $ 971     $ 980     $     $  

After one year through five years

    1,000       999              

After five years through ten years

    8,911       8,839              

After ten years

    13,735       13,749       1,000       973  

Equity securities

                154       155  
    $ 24,617     $ 24,567     $ 1,154     $ 1,128  

 

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.

 

 
24

 

 

Information pertaining to securities with gross unrealized losses at June 30, 2015 and March 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

   

June 30, 2015

 
   

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

  $ 3,530     $ (60 )   $ 2,393     $ (107 )   $ 5,923     $ (167 )

Federal Farm Credit Bonds

    4,426       (63 )     2,851       (93 )     7,277       (156 )

Federal Home Loan Mortgage Corporation Bonds

    1,460       (37 )     483       (17 )     1,943       (54 )

Federal National Mortgage Association

    3,927       (72 )     2,388       (112 )     6,315       (184 )

Total

  $ 13,343     $ (232 )   $ 8,115     $ (329 )   $ 21,458     $ (561 )

 

 

 

   

March 31, 2015

 
   

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

  $ 2,457     $ (20 )   $ 2,451     $ (52 )   $ 4,907     $ (72 )

Federal Farm Credit Bonds

    2,478       (14 )     2,903       (42 )     5,382       (55 )

Federal Home Loan Mortgage Corporation Bonds

    988       (12 )     492       (8 )     1,480       (20 )

Federal National Mortgage Association

    1,493       (7 )     2,442       (57 )     3,936       (64 )

Mutual funds shares

                                   

Total

    7,416       (53 )     8,288       (159 )     15,705       (211 )

 

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 June 30, 2015, the 45 debt securities with unrealized losses have depreciated 2.3% 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.

 

 
25

 

 

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 three months ended June 30, 2015 and 2014 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 June 30, 2015 were $126.5 million, a decrease of $2.1 million from total assets of $128.6 million at March 31, 2015. Total liabilities decreased $2.1 million from $115.4 million at March 31, 2015 to $113.3 million at June 30, 2015. Total stockholders’ equity increased $22 thousand to $13.2 million at June 30, 2015, primarily due to the increase in retained earnings as a result of the quarterly net income.

 

 

Loans. At June 30, 2015, total loans, net, were $81.3 million, or 64.3% of total assets. Overall loans increased by $1.2 million primarily due to increased loans originations. Commercial and multi-family real estate loans increased by $736 thousand, residential real estate loans by $440 thousand, commercial loans by $264 thousand and construction loans by $185 thousand while home equity loans decreased by $401 thousand and consumer loans decreased by $96 thousand.

 

Total nonperforming loans at June 30, 2015 increased $6 thousand from March 31, 2015.

 

 
26

 

 

Securities. The investment securities portfolio was $25.6 million, or 20.3% of total assets, at June 30, 2015. At that date, 4.0% 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 $111 thousand compared to March 31, 2015. The decrease was primarily due to calls of debt securities.

 

Deposits. Total deposits were $108.1 million at June 30, 2015, a decrease of $2.1 million compared to March 31, 2015. Deposits decreased as we made a conscious effort to reduce our reliance on high costing time deposits. Core deposits decreased for the three months by $ 511 thousand while time deposits decreased by $1.6 million.

 

Results of Operations for the Three Months Ended June 30, 2015 and 2014

 

Financial Highlights.  Net income for the three months ended June 30, 2015 was $27 thousand as compared to a net income of $2 thousand for the same prior year period. The increase in net income for the three month period was primarily the result of decreased provisions for loan losses.

 

Net Interest Income.   Net interest income decreased $48 thousand to $919 thousand for the three months ended June 30, 2015 as compared to the prior year period. The Bank saw a decrease in the interest rate spread (7 basis points) and a decrease in net interest margin (5 basis points) for the three month period.  The rates earned on assets declined, resulting in a 5.2% decrease in total interest income for the three months ending June 30, 2015 compared to the three months ended June 30, 2014. Total interest expense decreased by 6.7% between the same periods.

 

Average loans in the three months ended June 30, 2015 decreased $1.1 million, or 1.3%, compared with the same period in 2014, driven by payoffs in the residential and commercial mortgage portfolios as well as the transfer of loans into REO. Average investment securities in the three months ended June 30, 2015 decreased $2.9 million, or 10.2%, compared to the same period in 2014. The decrease in the investment portfolio was due to calls of debt securities. Declining interest rates decreased the average yield on earning assets to 3.70% for the three months ended June 30, 2015, compared with 3.91% for the same period in 2014.   

 

Average interest-bearing deposits in the three months ended June 30, 2015 decreased $4.3 million or 4.2%, compared with the same period in 2014. Declining interest rates decreased the average cost of deposits to 0.56%, compared with 0.58% for the same period in 2014.

 

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 $10 thousand in the three months ended June 30, 2015 compared to $75 thousand in the three months ended June 30, 2014.  We had $38 thousand in net charge-offs in the three months ended June 30, 2015 compared to $258 thousand in net charge-offs in the same prior year period.

 

Non-Interest Income.  Non-interest income increased $3 thousand in the three month period ending June 30, 2015 compared to the three month period ended June 30, 2014 primarily due to rental income from REO properties partially offset by losses from the sale of real estate owned.

 

Non-Interest Expenses.  Non-interest expenses decreased $1 thousand in the three months ending June 30, 2015 compared to the three months ended June 30, 2014 primarily due to decreased salary and employee benefits and legal fees offset by increased real estate loss reserve.

 

 
27

 

 

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 June 30, 2015, cash and cash equivalents totaled $7.4 million. At June 30, 2015, we had $4 million in outstanding borrowings and had arrangements to borrow up to $11.5 million from the Federal Home Loan Bank of New York and $1 million from Atlantic Central Bankers Bank.

 

At June 30, 2015, 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 June 30, 2015, we had $2.8 million in loan commitments outstanding. We also had $5.6 million in unused lines of credit and $40 thousand in unfunded constructions draws. 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 June 30, 2015 totaled $24.8 million, or 60.0% 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 recent 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 June 30, 2016. 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 June 30, 2015, the Company had $461 thousand in cash and cash equivalents compared to $716 thousand as of March 31, 2015.  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.  

 

 
28

 

 

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.

 

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 June 30, 2015, 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.

 

 
29

 

 

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, 2015, 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

 

31.1

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 June 30, 2015, 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 Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

__________________________________

 

 (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. 

 

 
30

 

 

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: August 14, 2015

By:

/s/ James E. Igo

 

 

 

James E. Igo

 

 

 

Chairman, President and

 

    Chief Executive Officer  

 

 

 

 

 

 

 

 

 

 

 

 

 

Dated: August 14, 2015

By:

/s/ Eva Modi

 

 

 

Eva Modi

 

 

 

Chief Financial Officer

 

 

 

 

31