United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

 

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended March 31, 2016

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _________ to __________

 

Commission File Number: 000-55087

 

DELANCO BANCORP, INC.

(Exact name of registrant 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 (Address of principal executive offices)	08075 (Zip Code)

 

Issuer’s telephone number: (856) 461-0611

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

 

	Common Stock, par value $0.01 per share
	(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ____   No X

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  ____   No   X

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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  X  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X   No  ___

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   X

 

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   [   ] (Do not check if a smaller reporting company)	Smaller reporting company      [X]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes  ____   No  X

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2015 was approximately $8.9 million.

 

The number of shares outstanding of the registrant’s common stock as of June 8, 2016 was 945,425.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

INDEX

 

		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	18
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	38
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	39
Item 11.	Executive Compensation	39
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	39
Item 13.	Certain Relationships and Related Transactions, and Director Independence	40
Item 14.	Principal Accounting Fees and Services	40
Part IV
Item 15.	Exhibits and Financial Statement Schedules	40
SIGNATURES		42

  

 

This report contains certain “forward-looking statements” within the meaning of the federal securities laws that are based on assumptions and may describe future plans, strategies and expectations of Delanco Bancorp, Inc. (“Delanco Bancorp” or the “Company”) and Delanco Federal Savings Bank (“Delanco Federal” or the “Bank”). These forward-looking statements are generally identified by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “projects” and similar expressions.

 

Management’s 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 the operations of Delanco Bancorp and its subsidiaries include, but are not limited to, the following: interest rate trends; the general economic climate in the market area in which we operate, as well as nationwide; our ability to control costs and expenses; competitive products and pricing; loan delinquency rates and changes in federal and state legislation and regulation. Additional factors that may affect our results are discussed in this Annual Report on Form 10-K under “Item 1A—Risk Factors.” These risks and uncertainties should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. We assume no obligation to update any forward-looking statements.

 

PART I

 

ITEM 1.

BUSINESS

 

General

 

We are headquartered in Delanco Township, New Jersey and operate as a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses within our market areas. Delanco Federal is engaged primarily in the business of attracting deposits from the general public and using such funds to originate one- to four-family real estate loans and to a much lesser extent, multi-family and nonresidential real estate loans, home equity and consumer loans which we primarily hold for investment. Delanco Federal also maintains an investment portfolio. Delanco Federal’s primary federal regulator is the Office of the Comptroller of the Currency (the “OCC”). The FDIC, through the Deposit Insurance Fund, insures Delanco Federal’s deposit accounts up to the applicable legal limits. Delanco Federal is a member of the Federal Home Loan Bank (“FHLB”) of New York.

 

Effective October 16, 2013, Delanco Bancorp completed its public stock offering in connection with the conversion of Delanco MHC (the “MHC”) from the mutual holding company to the stock holding company form of organization (the “Conversion”). As a result of the Conversion, the Company succeeded old Delanco Bancorp, a federal corporation (“old Delanco Bancorp”), as the holding company for Delanco Federal and the MHC ceased to exist. A total of 525,423 shares of Company common stock were sold in a subscription and community offering at $8.00 per share, including shares purchased by the Delanco Federal Savings Bank’s employee stock ownership plan (the “ESOP”). Additionally, approximately 420,093 shares were issued to the stockholders of old Delanco Bancorp (other than the MHC) in exchange for their shares of old Delanco Bancorp common stock at an exchange ratio of 0.5711 share of Company common stock for each share of old Delanco Bancorp common stock.

 

Delanco Bancorp’s business activity is the ownership of the outstanding capital stock of Delanco Federal. Delanco Bancorp does not own or lease any property but instead uses the premises, equipment and other property of Delanco Federal with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement. In the future, Delanco Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.

 

Our website address is www.delancofsb.com. Information on our website should not be considered a part of this report.

 

Market Area

 

We are headquartered in Delanco Township, New Jersey. In addition to our main office, we operate a full-service branch office in Cinnaminson, New Jersey. Delanco and Cinnaminson are in western Burlington County, New Jersey, across the Delaware River from northeastern Philadelphia. We consider Burlington County to be our primary market area. 

 

  

The population of Burlington County has remained steady in recent years, while unemployment has remained high, creating challenges for the growth of our business. The 2015 Census-estimated population of Burlington County was approximately 450,000. Burlington County’s population is projected to remain steady through 2017. The Philadelphia-Camden-Wilmington, PA-NJ-DE-MD metropolitan statistical area, of which Burlington County is a part, is the sixth largest in the United States as of July 2012 with an estimated population of 6.0 million. The city of Philadelphia is the fifth most populous city in the United States.

 

According to the National Association of REALTORS, the median sales price for existing single-family homes in the Philadelphia metropolitan area decreased from $234,900 in 2007 to $204,900 in March 2015. In comparison, the median sales price for existing single-family homes in the United States decreased from $217,900 in 2007 to $210,700 in March 2015.

 

Competition

 

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies. Several large banks operate in our market area, including Bank of America, Wells Fargo & Company, TD Bank and PNC Bank. These institutions are significantly larger than us and, therefore, have significantly greater resources. We also face competition for customers’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2015, which is the most recent date for which data is available from the FDIC, we held 1.08% of the deposits in Burlington County, New Jersey.

 

Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies, such as insurance companies, securities companies and specialty finance companies.

 

We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Federal law permits affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

 

Lending Activities

 

One- to Four-Family Residential Loans. We offer three types of residential mortgage loans: fixed-rate loans, balloon loans and adjustable-rate loans. We offer fixed-rate mortgage loans with terms of 15, 20 or 30 years and balloon mortgage loans with terms of five, ten or 15 years. We offer adjustable-rate mortgage loans with interest rates and payments that adjust annually after an initial fixed period of one or three years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal to a percentage above the one year U.S. Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6.0% over the initial interest rate of the loan. We generally retain all of the mortgage loans that we originate, although from time to time we have sold some of the 30-year, fixed-rate mortgage loans that we originated. If we choose to sell any mortgages in the future, it would be with the servicing of the loans retained by Delanco Federal.

 

Borrower demand for adjustable-rate or balloon loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate or balloon loans. The relative amount of fixed-rate, balloon and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. We have seen little demand for adjustable-rate loans in the low interest rate environment that has prevailed in recent years. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

 

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. We do not offer loans with negative amortization and generally do not offer interest only loans.

 

  

We will make loans with loan-to-value ratios up to 95%; however, we require private mortgage insurance for loans with a loan-to-value ratio over 80%. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.

 

Commercial and Multi-Family Real Estate Loans. We have traditionally offered fixed- and adjustable-rate mortgage loans secured by a variety of commercial and multi-family real estate, such as small office buildings, warehouses, retail properties and small apartment buildings. We originate a variety of fixed- and adjustable-rate commercial real estate and multi-family real estate loans generally for terms up to five to seven years and payments based on an amortization schedule of up to 25 years. Adjustable-rate loans are typically based on the Prime Rate and the Constant Maturity Treasury rate. Loans are secured by first mortgages, and amounts generally do not exceed 80% of the property’s appraised value.

 

Construction Loans. We originate loans to individuals to finance the construction of residential dwellings. We also make construction loans for small commercial development projects. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually nine months for residential properties and 12 months for commercial properties. Upon completion of the construction phase, the loan typically converts to a permanent mortgage loan and is reclassified as such. Loans generally can be made with a maximum loan to value ratio of 90% on residential construction and 80% on commercial construction, based on appraised value as if complete. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also will require an inspection of the property before disbursement of funds during the term of the construction loan.

 

Commercial Loans. We offer commercial business loans to professionals, sole proprietorships and small businesses in our market area. We offer installment loans for capital improvements, equipment acquisition and long-term working capital. These loans are secured by business assets other than real estate, such as business equipment and inventory, or are backed by the personal guarantee of the borrower. We originate lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. We also offer accounts receivable lines of credit.

 

When making commercial business loans, we consider the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral.

 

Consumer Loans. Our consumer loans consist primarily of home equity loans and lines of credit. We occasionally make loans secured by passbook or certificate accounts and automobile loans.

 

We offer home equity loans with a maximum combined loan to value ratio of 80% or less. Home equity lines of credit have adjustable rates of interest that are indexed to the Prime Rate as published by The Wall Street Journal. Home equity loans have fixed interest rates and terms that typically range from five to 15 years. Some of our home equity loans are originated as five-year balloon loans with monthly payments based on a 20- to 30-year amortization schedule.

 

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

 

Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary sources of loan originations are existing customers, walk-in traffic, advertising and referrals from customers.

 

From time to time, we have purchased participations in loans from the Thrift Institutions Community Investment Corporation of New Jersey and other banking institutions to supplement our lending portfolio. Loan participations totaled $1.4 million at March 31, 2016. Loan participations are also subject to the same credit analysis and loan approvals as loans we originate. We are permitted to review all of the documentation relating to any loan in which we participate. However, in a purchased participation loan, we do not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings.

 

 

In the past, we have sold some of the 30-year fixed rate loans that we originated to the Federal Home Loan Bank of New York for interest risk management purposes. In recent periods we have retained all of the loans that we have originated. We may sell loans from time to time in the future to help manage our asset/liability mix and limit our interest rate risk. We intend to retain the servicing on any loans sold.

 

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. The board of directors has granted loan approval authority to our President and Chief Executive Officer up to prescribed limits, based on the officer’s experience and tenure. All loans over $500,000 with respect to residential mortgage loans and smaller amounts with respect to other types of loans must be approved by the loan committee of the board of directors or the full board.

 

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At March 31, 2016, our regulatory limit on loans to one borrower was $1.8 million. At that date, our largest lending relationship was $1.4 million and was secured by residential real estate. These loans were performing in accordance with their terms at March 31, 2016.

 

Loan Commitments. We issue commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.

 

Loan Underwriting Risks.

 

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

 

Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

 

Commercial and Multi-Family Real Estate Loans. Loans secured by commercial and multi-family real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial and multi-family real estate loans. In reaching a decision on whether to make a commercial or multi-family real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25x. An environmental survey or environmental risk insurance is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

 

Commercial Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

 

  

Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Investment Activities

 

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of New York and Atlantic Community Bankers Bank stock.

 

At March 31, 2016, our investment portfolio totaled $23.7 million, or 18.3% of total assets, and consisted primarily of mortgage-backed securities and debt securities of government sponsored enterprises.

 

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy. The Asset/Liability Committee is responsible for implementation of the investment policy and monitoring our investment performance. Our board of directors reviews the status of our investment portfolio on a monthly basis, or more frequently if warranted.

 

Deposit Activities and Other Sources of Funds

 

General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

 

Deposit Accounts. Substantially all of our depositors are residents of New Jersey. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and certificates of deposit. In addition to accounts for individuals, we also offer commercial checking accounts designed for the businesses operating in our market area. We do not have any brokered deposits. From time to time we promote various accounts in an effort to increase deposits.

 

Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, and customer preferences and concerns. We generally review our deposit mix and pricing bi-weekly. Our deposit pricing strategy has generally been to offer competitive rates and to be towards the top of the local market for rates on all types of deposit products.

 

Borrowings. We have the ability to utilize advances from the Federal Home Loan Bank of New York, Atlantic Community Bankers Bank and the Federal Reserve Bank of Philadelphia to supplement our investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Atlantic Central Bankers Bank provides correspondent banking services, both credit and noncredit, to financial institutions in the Mid-Atlantic region. As a member, we are required to own capital stock in Atlantic Central Bankers Bank and are authorized to apply for advances under an unsecured line of credit. The Federal Reserve Bank of Philadelphia functions as a central reserve bank providing credit for member financial institutions. We are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. At March 31, 2016, we had arrangements to borrow up to $9.6 million from the Federal Home Loan Bank of New York and $1 million from the Atlantic Central Bankers Bank.

 

  

Personnel

 

As of March 31, 2016, we had 21 full-time equivalent employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

 

Subsidiaries

 

The only subsidiary of Delanco Bancorp is Delanco Federal. Delanco Federal has two active subsidiaries, DFSB Properties, LLC, and DFSB Properties II, LLC which is the title holder for repossessed real estate.

 

Regulation and Supervision

 

General

 

Delanco Federal, as a federal savings association, is currently subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and by the FDIC as the insurer of its deposits. Delanco Federal is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Delanco Federal must file reports with the OCC concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OCC to evaluate Delanco Federal’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for loan losses for regulatory purposes. Any change in such policies, whether by the OCC, the FDIC or Congress, could have a material adverse impact on Delanco Bancorp and Delanco Federal and their operations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes to the regulation of Delanco Federal. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated and responsibility for the supervision and regulation of federal savings associations such as Delanco Federal was transferred to the OCC on July 21, 2011. The OCC is the agency that is primarily responsible for the regulation and supervision of national banks. Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as Delanco Federal, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.

 

Certain of the regulatory requirements that are applicable to Delanco Federal and Delanco Bancorp are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Delanco Federal and Delanco Bancorp. 

 

  

Federal Banking Regulation

 

Business Activities. The activities of federal savings banks, such as Delanco Federal, are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

 

Capital Requirements. In early July 2013, the Federal Reserve Board and the OCC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

 

The rules include new risk-based capital and leverage ratios, which became effective January 1, 2015, and revised the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to Delanco Federal are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. In addition, the rules assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. However, instruments issued prior to May 19, 2010 will be grandfathered for institutions with consolidated assets of $15 billion or less. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period.

 

The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

The OCC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances.

 

Prompt Corrective Regulatory Action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The OCC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

 

Insurance of Deposit Accounts. Delanco Federal’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance per account owner is currently $250,000. Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.

 

  

The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.

 

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Delanco Federal. Management cannot predict what insurance assessment rates will be in the future.

 

Loans to One Borrower. Federal law provides that savings associations are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

 

Qualified Thrift Lender Test. Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities but also including education, credit card and small business loans) in at least nine months out of each 12-month period.

 

A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and the Dodd-Frank Act also specifies that failing the qualified thrift lender test is a violation of law that could result in an enforcement action and dividend limitations. As of March 31, 2016, Delanco Federal maintained 92.1% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

 

Limitation on Capital Distributions. Federal regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OCC is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OCC regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. If an application is not required, the institution must still provide 30 days prior written notice to, and receive the non-objection of, the Federal Reserve Board of the capital distribution if, like Delanco Federal, it is a subsidiary of a holding company, as well as an informational notice filing to the OCC. If Delanco Federal’s capital ever fell below its regulatory requirements or the OCC notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the OCC could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OCC determines that such distribution would constitute an unsafe or unsound practice.

 

Community Reinvestment Act. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to satisfactorily comply with the provisions of the Community Reinvestment Act could result in denials of regulatory applications. Responsibility for administering the Community Reinvestment Act, unlike other fair lending laws, is not being transferred to the Consumer Financial Protection Bureau. Delanco Federal received an “outstanding” Community Reinvestment Act rating in its most recently completed examination.

 

Transactions with Related Parties. Federal law limits Delanco Federal’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with Delanco Federal, including Delanco Bancorp and its other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.

 

  

The Sarbanes-Oxley Act of 2002 generally prohibits loans by Delanco Bancorp to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Delanco Federal’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that Delanco Federal may make to insiders based, in part, on Delanco Federal’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.

 

Enforcement. The OCC currently has primary enforcement responsibility over savings associations and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings association. If action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

 

Federal Home Loan Bank System. Delanco Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Delanco Federal, as a member of the Federal Home Loan Bank of New York, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Delanco Federal was in compliance with this requirement with an investment in Federal Home Loan Bank stock at March 31, 2016 of $254 thousand.

 

Federal Reserve Board System. The Federal Reserve Board regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $103.6 million; a 10% reserve ratio is applied above $103.6 million. The first $14.5 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. Delanco Federal complies with the foregoing requirements.

 

Other Regulations

 

Delanco Federal’s operations are also subject to federal laws applicable to credit transactions, including the:

 

	●	Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	●	Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
	●	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	●	Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
	●	Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
	●	rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

 

 

The operations of Delanco Federal also are subject to laws such as the:

 

●

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

	●	Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
	●	Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

  

Holding Company Regulation

 

General. As a savings and loan holding company, Delanco Bancorp is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations regarding its activities. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to Delanco Federal.

 

Pursuant to federal law and regulations and policy, a savings and loan holding company such as Delanco Bancorp may generally engage in the activities permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act and certain other activities that have been authorized for savings and loan holding companies by regulation.

 

Federal law prohibits a savings and loan holding company from, directly or indirectly or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings association, or savings and loan holding company thereof, without prior written approval of the Federal Reserve Board or from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

 

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

 

Source of Strength. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

 

Dividends. The Federal Reserve Board has the power to prohibit dividends by savings and loan holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which also applies to savings and loan holding companies and which expresses the Federal Reserve Board’s view that a holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

 

 

Acquisition of Delanco Bancorp. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

 

Regulatory Agreement

 

Delanco Federal is a party to a formal written agreement with the OCC dated November 21, 2012. The written agreement supersedes and terminates the Order to Cease and Desist issued by the Office of Thrift Supervision on March 17, 2010.

 

The written agreement requires Delanco Federal to take the following actions:

 

	●	prepare a three-year strategic plan that establishes objectives for Delanco Federal’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 Delanco Federal has failed to submit an acceptable capital plan or fails to implement or adhere to its capital plan, then the OCC may require Delanco Federal to develop a contingency capital plan detailing Delanco Federal’s proposal to sell, merge or liquidate Delanco Federal;
	●	prepare a criticized asset plan that will include strategies, targets and timeframes to reduce Delanco Federal’s level of criticized assets;
	●	implement a plan to improve Delanco Federal’s credit risk management and credit administration practices;
	●	implement programs and policies related to Delanco Federal’s allowance for loan and lease losses, liquidity risk management, independent loan review and other real estate owned;
	●	review the capabilities of Delanco Federal’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 written agreement does not require Delanco Federal to maintain any specific minimum regulatory capital ratios. However, by letter dated January 2, 2013, the OCC established higher individual minimum capital requirements for Delanco Federal. Specifically, Delanco Federal must maintain Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 capital at least equal to 12% of risk-weighted assets, and total capital at least equal to 13% of risk-weighted assets. At March 31, 2016, Delanco Federal’s Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 8.67%, 15.99% and 17.26%, respectively.

 

  

ITEM 1A.

RISK FACTORS

 

We have experienced net losses in each of the last two fiscal years and we may not return to profitability in the near future.

 

We have experienced net losses of $18 thousand and $633 thousand for the years ended March 31, 2016 and 2015, respectively. Our profitability has suffered due to lower net interest income resulting from the prolonged low interest rate environment, as well as heightened provisions for loan losses, expenses for and losses on the sale of real estate owned and other problem loan expenses. For the year ended March 31, 2016, we incurred net real estate owned expenses and losses of $427 thousand and other problem loan expenses of $74 thousand. For the year ended March 31, 2015, we incurred provision expenses of $390 thousand, real estate owned expenses and losses of $877 thousand, and other problem loan expenses of $160 thousand. At March 31, 2016, non-performing assets and troubled debt restructurings totaled $6.1 million, or 4.74% of total assets. As we work through our problem assets, we may incur additional expenses and losses on real estate owned and other problem loan expenses, while continued high levels of problem assets may result in additional provisions for loan losses, all of which would impede our return to profitability. In addition, our earnings have been adversely affected by a shrinking net interest margin caused by the protracted low interest rate environment and its impact on earning asset yields. Our net interest margin was 3.15% for the year ended March 31, 2016, as compared to 3.26% for the year ended March 31, 2015. Our average yield on earning assets declined to 3.63% for the year ended March 31, 2016, from 3.78% for the year ended March 31, 2015 as higher yielding loans were paid off or refinanced at lower market rates and higher yielding securities were called by the issuer and replaced with lower yielding investments. Continued low market interest rates could cause further declines in our net interest margin, as our ability to reduce our cost of funds to offset further reductions in asset yields is limited.

 

We are a party to a formal written agreement with the OCC and our failure to comply with that agreement may result in further regulatory enforcement actions, including restrictions on our operations.

 

Delanco Federal is a party to a formal written agreement with the OCC dated November 21, 2012. The written agreement supersedes and terminates the Order to Cease and Desist issued by the Office of Thrift Supervision on March 17, 2010. The written agreement requires Delanco Federal to take certain actions and implement certain policies and procedures aimed at improving Delanco Federal’s capital, earnings and asset quality. The written agreement does not require Delanco Federal to maintain any specific minimum regulatory capital ratios. However, by letter dated January 2, 2013, the OCC established higher individual minimum capital requirements for Delanco Federal. Specifically, Delanco Federal must maintain Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 capital at least equal to 12% of risk-weighted assets, and total capital at least equal to 13% of risk-weighted assets. At March 31, 2016, Delanco Federal’s Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk based-capital ratio were 8.67%, 15.99% and 17.26% respectively.

 

The written agreement will remain in effect until terminated, modified, or suspended in writing by the OCC. A failure to comply with the written agreement could result in the initiation of further enforcement actions by the OCC, including the imposition of civil monetary penalties. The written agreement has resulted in additional regulatory compliance expense for the Company. A detailed description of the written agreement can be found at “Regulation and Supervision—Regulatory Agreement.”

 

A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

 

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued elevated unemployment levels may result in higher than expected loan delinquencies, increases in our non-performing and criticized classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations. As a result of the economic downturn, our non-performing assets and troubled debt restructurings jumped from $1.8 million at March 31, 2008 to $9.0 million at March 31, 2009 and then to $10.3 million at March 31, 2010. Since that time, the amount of non-performing assets and troubled debt restructurings has declined to $6.1 million at March 31, 2016. Reduction in problem assets has been slow, and the process has been exacerbated by the condition of some of the properties securing non-performing loans, the lengthy foreclosure process in New Jersey, and extended workout plans with certain borrowers. As we work through the resolution of these assets, the continued economic problems that exist in the financial markets could have a negative impact on the Company.

 

 

A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

 

Adverse conditions in the local economy or real estate market could hurt our profits.

 

Our success depends to a large degree on the general economic conditions in Burlington County, New Jersey and the surrounding areas that comprise our market. Our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. At March 31, 2016, 76.0% of our loan portfolio consisted of loans secured by real estate in Burlington County. We have relatively few loans outside of our market area, and, as a result, we have a greater risk of loan defaults and losses in the event of a further economic downturn in our market area, as adverse economic conditions may have a negative effect on the ability of our borrowers to make timely payments of their loans. Further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished.

 

Our local economy may affect our future growth possibilities and operations in our primary market area. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand in our market area. Continued adverse conditions in our local economy may limit funds available for deposit and may negatively affect demand for loans, both of which could have an impact on our profitability.

 

An inability to maintain our regulatory capital position could require us to raise additional capital, which may not be available on favorable terms or at all.

 

At March 31, 2016, Delanco Federal’s Tier 1 leverage ratio was 8.67%, which was in compliance with the individual minimum capital requirement imposed by the OCC that requires Delanco Federal to maintain a Tier 1 leverage ratio of at least 8%. Losses on loans, impairments to securities, declines in earnings or a combination of these or other factors could change Delanco Federal’s capital position in a relatively short period of time. If we are unable to remain in compliance with the individual minimum capital requirement imposed by the OCC, we may be required to raise additional capital. The need to raise substantial additional funds may force our management to spend more time in managerial and financing related activities than in operational activities. We may not be able to secure the required funding or it may not be available on favorable terms. Additional offerings of our common stock will dilute the ownership interest and possibly the book value per share of our current shareholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings.

 

Our allowance for loan losses may be inadequate, which could hurt our earnings.

 

When borrowers default and do not repay the loans that we make to them, we may lose money. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. If our estimates and judgments regarding such matters prove to be incorrect, our allowance for loan losses might not be sufficient, and additional loan loss provisions might need to be made. Depending on the amount of such loan loss provisions, the adverse impact on our earnings could be material. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios.

 

The economic downturn that began in 2007 has required us to make significant additions to our allowance for loan losses. For the year ended March 31, 2008 through the year ended March 31, 2015, provisions for loan losses totaled $7.8 million. During this same period, we had net charge-offs of $7.1 million. For our most recent fiscal year ended March 31, 2016, we had recaptured $71 thousand of loan loss reserves and had net charge-offs of $15 thousand. At March 31, 2016, the allowance for loan losses was $1.1 million, which represented 1.32% of total loans and 25.2% of non-performing loans. A large loss could deplete the allowance and require substantial provisions to replenish the allowance, which would negatively affect earnings.

 

 

In addition, bank regulators may require us to make a provision for loan losses or otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our loan loss allowance. Any increase in our allowance for loan losses or loan charge-offs as required by such regulatory authorities could have a material adverse effect on our financial condition and results of operations. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Loan Losses” for a discussion of the procedures we follow in establishing our loan loss allowance.

 

Our previous emphasis on commercial lending may expose us to increased lending risks.

 

At March 31, 2016, $11.9 million, or 14.2%, of our loan portfolio consisted of commercial and multi-family real estate loans and commercial business loans, up from $9.9 million at March 31, 2015. Of these loans, $1.3 million were non-performing at March 31, 2016. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property or a business. These types of loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for potential losses.

 

If our foreclosed real estate is not properly valued or if our reserves are insufficient, our earnings could be reduced.

 

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as foreclosed real estate and at certain other times during the holding period of the asset. Our net book value in the loan at the time of foreclosure and thereafter is compared to the updated fair value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s net book value over its fair value less estimated selling costs. If our valuation process is incorrect, or if property values decline, the fair value of our foreclosed real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs. In addition, bank regulators periodically review our foreclosed real estate and may require us to recognize further charge-offs. Significant charge-offs to our foreclosed real estate could have a material adverse effect on our financial condition and results of operations.

 

Historically low interest rates may adversely affect our net interest income and profitability.

 

In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than historically available. This has been a significant factor in the decrease in the amount of our net interest income to $3.7 million for the year ended March 31, 2016 from $3.8 million for the year ended March 31, 2015 and $3.9 million for the year ended March 31, 2014. Our ability to lower our interest expense to offset declines in asset yields is limited at current interest rate levels. The Federal Reserve Board has indicated its intention to maintain low interest rates in the near future. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may continue to decrease, which would have an adverse effect on our profitability.

 

Changes in interest rates may hurt our earnings and asset value.

 

Our net interest income is the interest we earn on loans and investment less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk Management.”

 

 

If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.

 

We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. As of March 31, 2016, our investment portfolio included securities with an amortized cost of $23.7 million and an estimated fair value of $23.9 million. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities to their fair value. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.

 

Impairment of our deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

 

As a result of losses in prior years, we maintain a deferred tax asset (that is an asset recognized to reflect an expected benefit to be realized in the future) that may be used to reduce the amount of tax that we would otherwise be required to pay in future periods. Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At March 31, 2016, our net deferred tax asset was $2.1 million, of which $1.9 million was disallowed for regulatory capital purposes. If we are required in the future to take a valuation allowance with respect to our deferred tax asset, our financial condition and results of operations would be negatively affected.

 

Strong competition within our market area could hurt our profits and slow growth.

 

We face intense competition in making loans, attracting deposits and hiring and retaining experienced employees. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits, which reduces our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. At June 30, 2015, which is the most recent date for which data is available from the FDIC, we held 1.08% of the deposits in Burlington County, New Jersey. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

 

We are dependent upon the services of key executives and we could be harmed by the loss of their services.

 

We rely heavily on our President and Chief Executive Officer, James E. Igo, and on our Chief Financial Officer, Eva Modi. The loss of Mr. Igo or Ms. Modi could have a material adverse impact on our operations because, as a small company, we have fewer management-level personnel that have the experience and expertise to readily replace these individuals. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition, and results of operations. We do not have employment agreements with our executive officers.

  

 

If we do not rent the excess office space in our Cinnaminson branch building, it will negatively impact earnings.

 

Our Cinnaminson branch was designed and built to have rental units for third party tenants. Our inability to rent all of those units will necessitate that Delanco Federal cover some or all of the operating expenses for the building without the rental income to offset those expenses, thus having a negative impact on our earnings. Currently, none of the three rental units are occupied by third party tenants.

 

Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position.

 

In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes resulted in broad reform and increased regulation impacting financial institutions. The Dodd-Frank Act has created a significant shift in the way financial institutions operate. The Dodd-Frank Act restructured the regulation of depository institutions by merging the Office of Thrift Supervision, which previously regulated Delanco Federal, into the OCC, and assigning the regulation of savings and loan holding companies, including Delanco Bancorp, to the Federal Reserve Board. The Dodd-Frank Act also created the Consumer Financial Protection Bureau to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008 through 2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs. Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or collateral for loans. Future legislative changes could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.

 

New capital rules generally require insured depository institutions to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.

 

In July 2013, the federal regulators adopted final rules for the Basel III capital framework. These rules substantially amended the regulatory risk-based capital rules applicable to Delanco Federal. The rules phase in over time beginning in 2015 and become fully effective in 2019. Beginning in 2015, Delanco Federal’s minimum capital requirements were (i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Delanco Federal’s leverage ratio requirement will remain at 4%. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision and examination by the Federal Reserve Board and the OCC, our primary federal regulators, and by the FDIC, as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Delanco Federal rather than for holders of Delanco Bancorp common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

 

Our information systems may experience an interruption or breach in security.

 

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

 

We are dependent on our information technology and telecommunications systems and third-party service providers; systems failures, interruptions and security breaches could have a material adverse effect on us.

 

Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.

 

Our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to expend significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities.

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners; and personally identifiable information of our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties; disrupt our operations and the services we provide to customers; damage our reputation; and cause a loss of confidence in our products and services, all of which could adversely affect our business, revenues and competitive position. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.

 

To remain competitive, we must keep pace with technological change.

 

Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

We conduct our business through our main office in Delanco, New Jersey and our branch office in Cinnaminson, New Jersey, both of which we own. The net book value of our land, buildings, furniture, fixtures and equipment was $6.3 million as of March 31, 2016.

 

 

ITEM 3.

LEGAL PROCEEDINGS

 

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The common stock of Delanco Bancorp is quoted on the OTCQB Marketplace under the symbol “DLNO.” The following table sets forth the high and low sales prices of the common stock, as reported by the OTCQB Marketplace, during each quarter of fiscal 2016 and 2015. As of June 15, 2016 there were approximately 179 holders of record of the Company’s common stock.

 

For the Year Ended March 31, 2016		High				Low
First Quarter		$	9.30			$	7.65
Second Quarter			9.60				8.91
Third Quarter			9.40				8.92
Fourth Quarter			10.00				9.04

  

For the Year Ended March 31, 2015		High				Low
First Quarter		$	8.38			$	8.00
Second Quarter			8.28				7.25
Third Quarter			8.00				6.92
Fourth Quarter			8.20				6.85

  

Delanco Bancorp has never declared or paid a cash dividend on its common stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any determination to pay dividends on our common stock will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.

 

The Company’s ability to pay dividends may depend, in part, on its receipt of dividends from Delanco Federal. The OCC and Federal Reserve Board regulations limit dividends and other distributions from Delanco Federal to us. No insured depository institution may make a capital distribution if, after making the distribution, the institution would be undercapitalized or if the proposed distribution raises safety and soundness concerns. In addition, any payment of dividends by Delanco Federal to Delanco Bancorp that would be deemed to be drawn out of Delanco Federal’s bad debt reserves would require the payment of federal income taxes by Delanco Federal at the then current income tax rate on the amount deemed distributed. See note 14 of the notes to consolidated financial statements included herein. Delanco Bancorp does not contemplate any distribution by Delanco Federal that would result in this type of tax liability.

 

Under OCC regulations, an application to and the prior approval of the OCC is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under applicable regulations (i.e., generally examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. If an application is not required, an institution must still provide prior notice to the Federal Reserve Board of the capital contribution if it is a subsidiary of a holding company. In such circumstances, notice must also be provided to the OCC. Under the terms of its written agreement with the OCC, Delanco Federal is not permitted to pay dividends without prior regulatory approval. In addition, at the request of the Federal Reserve Board, Delanco Bancorp 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 Delanco Federal without the prior written consent of the Federal Reserve Board.

  

 

Purchases of Equity Securities

 

The Company did not repurchase any shares of its common stock in the year ended March 31, 2016 and currently has no publicly announced repurchase programs. At the request of the Federal Reserve Board, the Company has adopted resolutions that prohibit it from repurchasing any shares of its stock without the prior approval of the Federal Reserve Board.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

		Years Ended March 31,
(Dollars in thousands, except per share data)		2016				2015				2014
Financial Condition Data:
Total assets		$	129,415			$	128,573			$	127,396
Investment securities			23,735				25,745				28,949
Loans receivable, net			82,198				80,146				83,539
Deposits			111,865				110,198				110,625
Borrowings			3,000				4,000				2,000
Total stockholders’ equity			13,296				13,172				13,752
Operating Data:
Interest income			4,270				4,368				4,668
Interest expense			570				599				729
Net interest income			3,700				3,769				3,939
Provision for loan losses			(71	)			390				957
Net interest income after provision for loan losses			3,771				3,379				2,982
Noninterest income			165				186				191
Noninterest expenses			4,006				4,523				4,336
Income before taxes			(70	)			(958	)			(1,163	)
Income tax benefit			(52	)			(325	)			(400	)
Net income (loss) (1)		$	(18	)		$	(633	)		$	(763	)
Per Share Data:
Earnings (loss) per share, basic (1)		$	(0.02	)		$	(0.70	)		$	(0.85	)
Earnings (loss) per share, diluted (1)			(0.02	)			(0.70	)			(0.85	)
Weighted average shares – basic (1)			906,720				903,201				899,681
Weighted average shares – diluted (1)			906,720				903,201				899,681

  

  

		Years Ended March 31,
		2016				2015				2014
Performance Ratios:
Return on average assets			(0.01	)%			(0.49	)%			(0.59	)%
Return on average equity			(0.14	)			(4.66	)			(6.21	)
Interest rate spread (1)			3.07				3.21				3.28
Net interest margin (2)			3.15				3.26				3.33
Noninterest expense to average assets							3.53				3.34
Efficiency ratio (3)			103.66				114.36				105.00
Average interest-earning assets to average interest-bearing liabilities			115.08				109.74				108.74
Average equity to average assets			10.34				10.60				9.47
Equity to assets at period end			10.27				10.25				10.79
Capital Ratios (4):
Tangible capital			8.67				8.66				9.23
Core capital			8.67				8.66				9.23
Total risk-based capital			17.26				16.87				17.42
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans			1.32				1.46				1.70
Allowance for loan losses as a percent of nonperforming loans			25.20				30.70				24.10
Net charge-offs to average outstanding loans during the period			0.02				0.78				0.62
Non-performing loans as a percent of total loans			5.24				4.74				7.19
Non-performing assets to total assets			4.74				4.90				6.26

 

---

(1)	Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2)	Represents net interest income as a percent of average interest-earning assets.

(3)	Represents noninterest expense divided by the sum of net interest income and noninterest income.

(4)	Capital ratios are for Delanco Federal.

  

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the financial statements and notes to the financial statements that appear at the end of this report.

 

Overview

 

Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and small businesses.

 

We have experienced net losses of $18 thousand and $633 thousand for the years ended March 31, 2016 and 2015, respectively. Our profitability has suffered due to lower net interest income resulting from the prolonged low interest rate environment, as well as heightened provisions for loan losses, expenses for real estate owned and other problem loan expenses. For the year ended March 31, 2016, we had net interest income of $3.7 million and recognized a $71 thousand recapture of provision for loan losses, net real estate owned expenses and losses of $427 thousand, and other problem loan expenses of $74 thousand. For the year ended March 31, 2015, we had net interest income of $3.8 million and incurred provision expenses of $390 thousand, real estate owned expenses and losses of $877 thousand, and other problem loan expenses of $160 thousand. At March 31, 2016, non-performing assets and troubled debt restructurings totaled $6.1 million, or 4.74% of total assets.

 

Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.

 

Our earnings have been adversely affected by a shrinking net interest margin caused by the protracted low interest rate environment and its impact on earning asset yields. Our net interest margin was 3.15% for the year ended March 31, 2016, as compared to 3.26% for the year ended March 31, 2015. Our average yield on earning assets declined to 3.63% for the year ended March 31, 2016, from 3.78% for the year ended March 31, 2015 as higher yielding loans were paid off or refinanced at lower market rates and higher yielding securities were called by the issuer and replaced with lower yielding investments.

 

A secondary source of income is non-interest income, which is revenue that we receive from providing products and services. The majority of our non-interest income generally comes from service charges (mostly from service charges on deposit accounts). In some years, we recognize income from the sale of loans and securities. Our facility in Cinnaminson includes space that we will rent to other businesses. Currently, the units are vacant.

 

Allowance 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.

 

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, loan expenses, data processing expenses and other miscellaneous expenses, such as office supplies, telephone, postage, advertising and professional services.

 

Our largest noninterest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. We have incurred additional noninterest expenses as a result of operating as a public company. These additional expenses consist primarily of legal and accounting fees and expenses of shareholder communications and meetings. In the future, we may recognize additional annual employee compensation expenses stemming from share-based compensation. We cannot determine the actual amount of this expense at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.

 

 

Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities.

 

Critical Accounting Policies

 

In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. Our significant accounting policies are described in the notes to our financial statements.

 

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

 

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is either charged to or a credit to income. Determining the amount of the allowance for loan losses involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See note 2 to the consolidated financial statements.

 

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. 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 Delanco Federal’s Tier I capital. As a result of this variance, our Tier I regulatory capital ratio is lower than our GAAP capital ratio by 1 basis points.

 

Balance Sheet Analysis

 

Overview. Total assets at March 31, 2016 were $129.4 million, an increase of $842 thousand, or 0.06%, from total assets of $128.6 million at March 31, 2015. The change in the asset composition primarily reflected an increase in cash and cash equivalents and outstanding loans, and a decrease in investments. Total liabilities at March 31, 2016 were $116.1 million, an increase of $719 thousand, or 0.06%, from total liabilities of $115.4 million at March 31, 2015. The change in liabilities primarily reflected a decrease in advances from Federal Home Loan Bank offset by an increase in non- interest bearing deposits as we concentrated on increasing our core deposits and chose not to match competitors’ rates on certificates of deposit. Total stockholders’ equity increased by $123 thousand, primarily due to decrease in comprehensive loss for the year of $73 thousand.

 

 

Loans. At March 31, 2016, total loans, net, were $82.2 million, or 63.5% of total assets. During the year ended March 31, 2016, loans increased by $2.1 million due primarily to new originations of commercial real estate loans and home equity loans that exceeded the payoffs and principal repayments on existing loans. Commercial and multi-family real estate loans increased by $1.6 million, commercial loans increased by $377 thousand, home equity loans increased by $522 thousand while residential loans decreased by $538 thousand. Net loans experienced an increase for the first time since March 31, 2011 as we increased our lending activities after focusing on working out our problem assets and managing our asset size in order to maintain our capital ratios.

 

Table 1: Loan Portfolio Analysis

 

		2016								2015								2014
March 31, (Dollars in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Real estate loans:
Residential		$	62,251				74.7	%		$	62,789				77.1	%		$	63,524				74.7	%
Commercial and multi-family			9,569				11.5				7,979				9.8				10,414				12.2
Construction			54				0.1				56				0.1				1,009				1.2
Total real estate loans			71,874				86.3				70,824				87.0				74,947				88.1
Commercial loans			2,290				2.7				1,913				2.4				1,307				1.5
Consumer loans:
Home equity			8,528				10.2				8,006				9.8				8,144				9.6
Other			682				0.8				678				0.8				686				0.8
Total consumer loans			9,210				11.0				8,684				10.6				8,830				10.4
Total loans			83,374				100.0	%			81,421				100.0	%			85,084				100.0	%
Net deferred loan fees			(77	)							(90	)							(97	)
Allowance for losses			(1,099	)							(1,185	)							(1,448	)
Loans, net		$	82,198							$	80,146							$	83,539

 

The following table sets forth certain information at March 31, 2016 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude applicable loans in process, unearned interest in consumer loans and net deferred loan costs. Our adjustable-rate mortgage loans generally do not provide for downward adjustments below the initial discounted contract rate. When market interest rates rise, the interest rates on these loans may increase based on the contract rate (the index plus the margin) exceeding the initial interest rate floor.

 

Table 2: Contractual Maturities and Interest Rate Sensitivity

 

March 31, 2016 (Dollars in thousands)		Real Estate Loans				Commercial Loans				Consumer Loans				Total Loans
Amounts due in:
One year or less		$	2,262			$	362			$	1,367			$	3,991
More than one to five years			3,819				643				2,678				7,140
More than five years			65,793				1,285				5,165				72,243
Total		$	71,874			$	2,290			$	9,210			$	83,374
Interest rate terms on amounts due after one year:
Fixed-rate loans		$	65,549			$	875			$	4,152			$	70,576
Adjustable-rate loans			4,063				1,053				3,691				8,807
Total		$	69,612			$	1,928			$	7,843			$	79,383

 

Securities. The investment securities portfolio was $23.7 million, or 18.3% of total assets, at March 31, 2016. At that date 3.7% 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. The portfolio decreased $2 million in the year ended March 31, 2016 due to the called U.S. Government agency securities.

 

 

Table 3: Investment Securities

 

		2016								2015								2014
March 31, (Dollars in thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value				Amortized Cost				Fair Value
Securities available for sale:
Government sponsored enterprise securities		$	500			$	497			$	1,000			$	972			$	2,000			$	1,790
Certificates of Deposit			1,500				1,531				−				−				−				−
Mutual funds			122				122				154				155				186				183
Total available for sale			2,122				2,150				1,154				1,127				2,186				1,973
Securities held to maturity:
Government sponsored enterprise securities			19,972				20,033				23,002				22,862				25,007				23,350
Municipal securities			736				735				470				472				547				548
Mortgage-backed securities			877				938				1,145				1,233				1,422				1,513
Total held to maturity			21,585				21,706				24,617				24,567				26,976				25,411
Total		$	23,707			$	23,856			$	25,771			$	25,694			$	29,162			$	27,384

 

The following table sets forth the stated maturities and weighted average yields of our investment securities at March 31, 2016. Approximately $392 thousand of mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These re-pricing schedules are not reflected in the table below.

 

Table 4: Investment Maturities Schedule

 

		One Year or Less								More than One Year to Five Years								More than Five Years to Ten Years								More than Ten Years								Total
March 31, 2016 (Dollars in thousands)		Carrying Value				Weighted Average Yield				Carrying Value				Weighted Average Yield				Carrying Value				Weighted Average Yield				Carrying Value				Weighted Average Yield				Carrying Value				Weighted Average Yield
Securities available-for-sale:
Government sponsored enterprise securities		$	−				−	%		$	−				−	%		$	−				−	%			500				2.35	%		$	500				2.75
Certificates of deposit			−				−				1,000				2.26				500				2.4				−				−				1,500				2.31
Mutual funds			−				−				−				−				−				−				−				−				122				−
Total available for sale			−				−				1,000				2,26				500				2.4				500				2.35				2,122				−
Securities held to maturity:
Government sponsored enterprise securities		$	−				−	%		$	945				1.48	%		$	8,111				2.37	%			10,916				2.83	%		$	19,972				2.58
Municipal securities			736				0.75				−				−				−				−				−				−				736				0.75
Mortgage-backed securities			−				−				−				−				252				2.53				625				3.56				877				3.26
Total held to maturity			736				0.75				945				1.48				8,363				2.37				11,541				2.87				21,585				2.54
Total			736				0.75	%			1,945				1.88	%			8,863				2.37	%			12,041				2.87	%			23,707				−

 

Deposits. Our deposit base is comprised of demand deposits, money market and passbook accounts and time deposits. We consider demand deposits and money market and passbook accounts to be core deposits. At March 31, 2016, core deposits were 65.0% of total deposits, up from 60.7% at March 31, 2015. We do not have any brokered deposits. Total deposits increased by $1.7 million in the year ended March 31, 2016 as core deposits increased by $5.9 million and certificates of deposit decreased by $4.2 million. During the year ended March 31, 2016, we chose not to match the highest time deposit rates in our market in an effort to reduce our funding costs.

 

 

Table 5: Deposits

 

		2016								2015								2014
March 31, (Dollars in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Noninterest-bearing demand deposits		$	12,054				10.8	%		$	10,733				9.74	%		$	7,852				7.1	%
Interest-bearing demand deposits			23,028				20.6				20,816				18.89				19,638				17.8
Savings and money market accounts			37,682				33.7				35,330				32.06				36,896				33.3
Certificates of deposit			39,101				34.9				43,319				39.31				46,239				41.8
Total		$	111,865				100.0	%		$	110,198				100.0	%		$	110,625				100.0	%

 

Table 6: Time Deposit Maturities of $100,000 or more

 

March 31, 2016 (Dollars in thousands)		Certificates of Deposit
Maturity Period
Three months or less		$	1,845
Over three through six months			1,613
Over six through twelve months			3,025
Over twelve months			5,777
Total		$	12,260

 

Table 7: Time deposits by rate

 

				At March 31,
(Dollars in thousands)				2016				2015				2014
0.00	-	0.99%		$	21,696			$	26,143			$	27,342
1.00	-	1.99%			14,773				12,866				12,374
2.00	-	2.99%			2,632				4,310				6,351
3.00	-	3.99%			−				−				172
Total				$	39,101			$	43,319			$	46,239

 

Table 8: Time deposits by rate and maturity

 

				Amount Due
(Dollars in thousands)				Less Than One Year				More Than One Year to Two Years				More Than Two Years to Three Years				More Than Three Years to Four Years				More Than Four Years				Total at March 31, 2015				Percent of Total Certificate Accounts
0.00	-	0.99%		$	17,373			$	4,044			$	279			$	−			$	−			$	21,696				55.5	%
1.00	-	1.99%			3,404				4,138				3,095				2,359				1,777				14,773				37.8
2.00	-	2.99%			2,313				−				−				−				319				2,632				6.7
Total				$	23,090			$	8,182			$	3,374			$	2,359			$	2,096			$	39,101				100.0	%

 

 

Borrowings. We have borrowing arrangements with the FHLB and Atlantic Community Banker’s Bank to provide an additional source of liquidity.

 

Table 9: Borrowings

 

March 31, (Dollars in thousands)		2016				2015				2014
Maximum amount outstanding at any month end during the period:
Advances		$	4,000			$	5,000			$	2,000
Average amount outstanding during the period (1):
Advances			3,500				3,667				458
Weighted average interest rate during the period (1):
Advances			0.64	%			0.66	%			0.43	%
Balance outstanding at end of period:
Advances		$	3,000			$	4,000				2,000
Weighted average interest rate at end of period:
Advances			0.57	%			0.69	%			0.43	%

 

(1)	Averages are based on month-end balances.

 

Results of Operations for the Years Ended March 31, 2016 and 2015

 

Financial Highlights. Net loss for the year ended March 31, 2016 was $18 thousand compared to net loss of $633 thousand for the year ended March 31, 2015. Our profitability has suffered due to expenses for real estate owned and other problem loan expenses. In addition, our earnings have been adversely affected by a shrinking net interest margin caused by the protracted low interest rate environment and its impact on earning asset yields. Our net interest margin was 3.15% for the year ended March 31, 2016, as compared to 3.26% for the year ended March 31, 2015. Our average yield on earning assets declined to 3.63% for the year ended March 31, 2016, from 3.78% for the year ended March 31, 2015 as higher yielding loans were paid off or refinanced at lower market rates and higher yielding securities were called by the issuer and replaced with lower yielding investments.

 

Table 10: Summary Income Statements

 

Year Ended March 31, (Dollars in thousands)		2016				2015				2016 v. 2015				% Change
Net interest income		$	3,700			$	3,769			$	(69	)			(1.8	)%
Provision for loan losses			(71	)			390				(461	)			NM
Noninterest income			165				186				(21	)			11.3
Noninterest expenses			4,007				4,523				(516	)			11.4
Net income (loss)			(18	)			(633	)			(615	)			(97.2	)
Return on average equity			(0.14	)%			(4.66	)%
Return on average assets			(0.01	)			(0.49	)

 

Net Interest Income. Net interest income for the year ended March 31, 2016 was $3.7 million compared to $3.8 million for the year ended March 31, 2015, a decrease of 1.8%. The net interest margin decreased 11 basis points to 3.15% for the year ended March 31, 2016, as average interest-earning assets increased $1.9 million while average interest-bearing liabilities decreased $3.3 million. Also contributing to the decrease in the net interest margin was a 15 basis point decrease in the average yield on interest-earning assets, which exceeded the 1 basis point decrease in the average cost of interest-bearing liabilities.

 

For the year ended March 31, 2016, interest income declined 2.2% compared to the prior year. Interest income on loans decreased $45 thousand as the average balance increased $2.6 million and the average yield declined 20 basis points. Interest income on investment securities decreased $53 thousand, as lower average volumes exceeded lower yields on investments.

 

For the year ended March 31, 2016, interest expense declined 5.0% compared to the prior year, as the average balance of interest bearing deposits decreased $3.1 million and the average rate paid decreased 1 basis points. The decrease in deposits was driven by a decrease of $4.2 million in certificates of deposit, which was partially offset by increases in demand deposits and savings and money market accounts.

 

 

Table 11: Analysis of Net Interest Income

 

Year Ended March 31, (Dollars in thousands)		2016				2015				2016 v. 2015				% Change
Components of net interest income
Loans		$	3,600			$	3,645			$	(45	)			(1.2	)%
Investment securities			670				723				(53	)			(7.3	)
Total interest income			4,270				4,368				(98	)			(2.2	)
Deposits			544				576				(32	)			(5.5	)
Borrowings			26				23				3				13.0
Total interest expense			570				599				(29	)			(4.8	)
Net interest income			3,700				3,769				(69	)			(1.8	)
Average yields and rates paid
Interest-earning assets			3.63	%			3.78	%		(15		)bp
Interest-bearing liabilities			0.56				0.57				(1	)
Interest rate spread			3.07				3.21				(14	)
Net interest margin			3.15				3.26				(11	)
Average balances
Loans		$	83,666			$	81,079			$	2,587				3.2	%
Investment securities			25,420				27,725				(2,305	)			(8.3	)
Earning assets			117,487				115,628				1,859				1.6
Interest-bearing deposits			98,587				101.696				(3,109	)			(3.1	)
Interest bearing borrowings			3,500				3,666				(166	)			(4.5	)

 

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. If it is determined that the amount in the allowance is greater than is necessary according to evaluation, a negative provision is recorded and is reflected in earnings. Provisions for loan losses were a negative $71 thousand in the year ended March 31, 2016 compared to $390 thousand in the year ended March 31, 2015. The negative provision for loan losses was primarily attributable to management’s systematic evaluation of risk associated with the loan portfolio and continuing lower historical loss rates. We had $139 thousand in charge-offs in the year ended March 31, 2016, compared to $763 thousand in charge-offs in the year ended March 31, 2015.

 

The allowance for loan losses was $1.1 million, or 1.32% of total loans outstanding as of March 31, 2016 as compared with $1.2 million, or 1.46% as of March 31, 2015. An analysis of the changes in the allowance for loan losses is presented under “Risk Management – Analysis and Determination of the Allowance for Loan Losses.”

 

Noninterest Income. Noninterest income was $164 thousand for the year ended March 31, 2016 compared to $186 thousand for the prior year.

 

Table 12: Noninterest Income Summary

 

Year Ended March 31, (Dollars in thousands)		2016				2015				$ Change				% Change
Service charges		$	125			$	137			$	(12	)			(8.8	)%
Rental income			19				29				(10	)			34.5
Income from bank owned life insurance			5				4				1				25
Other			15				16				(1	)			(6.3	)
Total		$	164			$	186			$	(22	)			(11.8	)%

 

Noninterest Expense. Noninterest expense was $4.0 million for the year ended March 31, 2016 compared to $4.5 million for the prior year. The decrease in noninterest expense over the prior year was primarily due to decrease in impairment losses on real estate owned and loan expenses partially offset by a increase in real estate owned expenses.

 

  

Table 13: Noninterest Expense Summary

 

Year Ended March 31, (Dollars in thousands)		2016				2015				$ Change				% Change
Salaries and employee benefits		$	1,659			$	1,629			$	30				1.8	%
Advertising			24				24				−				−
Office supplies, telephone and postage			110				108				2				1.8
Loan expenses			74				160				(86	)			(53.7	)
Occupancy expense			622				615				7				1.1
Federal deposit insurance premiums			171				171				−				−
Real estate owned impairment losses			247				642				(395	)			(61.5	)
Data processing expenses			238				223				15				6.7
ATM expenses			35				36				(1	)			(2.8	)
Bank charges and fees			85				70				15				21.4
Insurance and surety bond premiums			88				99				(11	)			(11.1	)
Dues and subscriptions			46				30				16				53.3
Professional fees			285				349				(64	)			(18.3	)
Real estate owned expenses, net			177				153				24				15.7
Net loss on sale of real estate owned			3				82				(79	)			(96.3	)
Other			142				132				10				7.6
Total		$	4,006			$	4,523			$	(517	)			(11.4	)%

 

Income Tax Expense (Benefit). The benefit for income taxes was $53 thousand for 2016, compared to a benefit of $325 thousand for 2015.

 

  

Average Balance Sheets and Related Yields and Rates

 

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using month-end balances, and nonaccrual loans are included in average balances only. Management does not believe that use of month-end balances instead of daily average balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant.

 

Table 14: Average Balance Tables

 

Year Ended March 31, (Dollars in thousands)		Average Balance				2016 Interest and Dividends				Yield/ Cost				Average Balance				2015 Interest and Dividends				Yield/ Cost
Assets:
Interest-earning assets:
Loans		$	83,666			$	3,600				4.30	%		$	81,079			$	3,645				4.50	%
Investment securities			25,420				661				2.60				27,725				719				2.59
Other interest-earning assets			8,401				9				0.11				6,824				4				0.06
Total interest-earning assets			117,487				4,270				3.63				115,628				4,368				3.78
Noninterest-earning assets			10,245												12,349
Total assets		$	127,732											$	127,977
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits		$	21,959			$	40				0.18	%		$	22,132			$	40				0.18	%
Savings and money market accounts			35,557				108				0.30				35,059				104				0.30
Certificates of deposit			41,071				396				0.96				44,505				432				0.97
Total interest-bearing deposits			98,587				544				0.55				101,696				576				0.57
FHLB advances			3,500				26				0.74				3,666				23				0.63
Total interest-bearing liabilities			102,087				570				0.56				105,362				599				0.57
Noninterest-bearing demand deposits			11,537												8,578
Other noninterest-bearing liabilities			895												470
Total liabilities			114,519												114,410
Retained earnings			13,213												13,567
Total liabilities and retained earnings		$	127,732											$	127,977
Net interest income						$	3,700											$	3,769
Interest rate spread											3.07	%											3.21	%
Net interest margin											3.15												3.26
Average interest-earning assets to average interest-bearing liabilities			115.08	%											109.74	%

 

  

Rate/Volume Analysis. The following tables set forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes due to both volume and rate have been allocated proportionally to the volume and rate changes. The net column represents the sum of the prior columns.

 

Table 15: Net Interest Income – Changes Due to Rate and Volume

 

2016 Compared to 2015 (Dollars in thousands)		Volume				Rate				Net
Interest income:
Loans receivable		$	122			$	(167	)		$	(45	)
Investment securities			(60	)			2				(58	)
Other interest-earning assets			1				4				5
Total			63				(161	)			(98	)
Interest expense:
Deposits			(12	)			(20	)			(32	)
FHLB advances			(1	)			4				3
Total			(13	)			(16	)			(29	)
Increase (decrease) in net interest income			76				(145	)			(69	)

 

Risk Management

 

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

 

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. In January 2013, we engaged an independent third party to conduct periodic loan portfolio reviews. See “Regulation and Supervision—Regulatory Agreement” for further information on certain regulatory directives applicable to our credit functions.

 

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is acquired at foreclosure and subsequently sold. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own.

 

Analysis of Nonperforming and Classified Assets. We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.

 

 

Table 16: Nonperforming Assets

 

March 31, (Dollars in thousands)		2016				2015				2014
Nonaccrual loans:
Residential real estate		$	1,333			$	880			$	1,277
Commercial and multi-family real estate			553				662				981
Construction			−				−				−
Commercial			21				−				107
Home equity			111				11				219
Consumer			−				71				−
Total			2,018				1,624				2,584
Accruing loans past due 90 days or more:
Residential real estate			−				−				−
Commercial and multi-family real estate			−				−				100
Construction			−				−				−
Commercial			−				−				−
Consumer			−				−				−
Total			−				−				100
Troubled debt restructurings:
In nonaccrual status			744				713				1,519
Performing under modified terms			1,607				1,525				1,917
Total debt restructurings			2,351				2,238				3,436
Total non-performing loans			4,369				3,862				6,120
Real estate owned			1,764				2,433				1,950
Total nonperforming assets		$	6,133			$	6,295			$	8,070
Total nonperforming loans to total loans			5.24	%			4.74	%			7.19	%
Total nonperforming loans to total assets			3.38				3.00				4.80
Total nonperforming assets and troubled debt restructurings to total assets			4.74				4.90				6.33

 

Table 17: Loan Delinquencies

 

		March 31,
		2016								2015								2014
(Dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				30-59 Days Past Due				60-89 Days Past Due				30-59 Days Past Due				60-89 Days Past Due
Residential real estate		$	577			$	224			$	495			$	1,325			$	1,473			$	307
Commercial real estate			-				289				-				117				494				870
Commercial			340				21				98				-				199				-
Home equity			50				-				34				89				255				241
Consumer			-				-				30				-				79				-
Total		$	967			$	534			$	657			$	1,531			$	2,500			$	1,418

 

At March 31, 2016, we had 18 loan relationships totaling $2.8 million in nonaccrual loans as compared to 17 relationships totaling $2.3 million at March 31, 2015.  During the year ended March 31, 2016, we experienced a $425 thousand net increase in nonaccrual loans.  This change reflects the transfer to real estate owned of three loans totaling $279 thousand and the return of one loan totaling $229 thousand to accruing status, the full payoff of two loans for $179 thousand, and the charge-off of one loan for $71 thousand. The changes were offset by the downgrading of eight loan relationships to nonaccrual status totaling $1.2 million during the year ended March 31, 2016.  The downgraded loans consisted of four relationships representing residential mortgages totaling $902 thousand, one home equity loan totaling $34 thousand, one commercial loan totaling $21 thousand and two commercial real estate loans totaling $221 thousand.

 

  

At March 31, 2016, our real estate owned consisted of ten single family homes with a total carrying value of $1.25 million, two mixed-use properties with a total carrying value of $159 thousand, one office building with a carrying value of $100 thousand and one commercial office condominium with a carrying value of $253 thousand. At that same date, we had thirteen loans in the process of foreclosure with respect to property that had an appraised value of $3.3 million.

 

Interest income that would have been recorded for the year ended March 31, 2016 had non-accruing loans been current according to their original terms amounted to $141 thousand. No uncollected interest related to nonaccrual loans was included in interest income for the year ended March 31, 2016.

 

Federal regulations require us to review and classify our assets on a regular basis. In addition, the OCC has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. This category includes other real estate owned. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. These are considered criticized assets. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.

 

Table 18: Criticized/Classified Assets

 

March 31, (Dollars in thousands)		2016				2015				2014
Special mention assets		$	343			$	737			$	363
Substandard assets			6,274				6,794				8,078
Doubtful assets			-				-				260
Loss assets			-				-				-
Total criticized/classified assets		$	6,617			$	7,531			$	8,701

 

Other than disclosed in the above tables, there are no other loans that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

 

Analysis and Determination of the Allowance 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.

 

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific valuation allowance on identified problem loans; (2) a general valuation allowance on the remainder of the loan portfolio; and (3) an unallocated component. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available to absorb losses in the loan portfolio.

 

For loans that are classified as impaired, we establish an allowance when the discounted cash flows (or collateral value or observable market price) of the loan is lower than its carrying value. We also establish a specific allowance for classified loans that do not have an individual allowance. The evaluation is based on our asset review and classified loan list.

 

We establish a general allowance for loans that are not classified to recognize the inherent losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. The allowance percentages have been derived using percentages commonly applied under the regulatory framework for Delanco Federal and other similarly-sized institutions. The percentages may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated periodically to ensure their relevance in the current economic environment. An unallocated component is maintained to cover uncertainties that could affect our estimate of probable losses.

 

 

We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans and other loans that management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in collateral value would result in our charging off the loan or the portion of the loan that was impaired.

 

The OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. The OCC may require us to make additional provisions for loan losses based on judgments different from ours.

 

At March 31, 2016, our allowance for loan losses represented 1.32% of total gross loans. The allowance for loan losses decreased 7.3% from March 31, 2015 to March 31, 2016.

 

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

 

Table 19: Allocation of Allowance of Loan Losses

 

		2016								2015								2014
March 31, (Dollars in thousands)		Amount				% of Loans in Category to Total Loans				Amount				% of Loans in Category to Total Loans				Amount				% of Loans in Category to Total Loans
Residential real estate		$	568				74.7	%		$	702				77.1	%		$	656				74.7	%
Commercial and multi-family real estate			339				11.5				289				9.8				635				12.2
Construction			-				0.1				-				0.1				4				1.2
Commercial			80				2.7				86				2.4				58				1.5
Home equity			87				10.2				87				9.8				65				9.6
Consumer			25				0.8				21				0.8				30				0.8
Unallocated			-				-				-				-				-				-
Total allowance for loan losses		$	1,099				100.0	%		$	1,185				100.0	%		$	1,448				100.0	%

 

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

  

  

Table 20: Analysis of Loan Loss Experience 

 

Year Ended March 31, (Dollars in thousands)		2016				2015				2014
Allowance at beginning of period		$	1,185			$	1,448			$	1,033
Provision for loan losses			(71	)			390				957
Charge offs:
Residential real estate loans			40				142				100
Commercial and multi-family real estate loans			17				598				378
Construction loans			−				−				−
Commercial loans			−				19				127
Home equity loans			11				−				4
Consumer loans			71				4				16
Total charge-offs			139				763				625
Recoveries			124				110				83
Net charge-offs			15				653				542
Allowance at end of period		$	1,099			$	1,185			$	1,448
Allowance to nonperforming loans			25.2	%			30.7	%			23.66	%
Allowance to total loans outstanding at the end of the period			1.32				1.46				1.70
Net charge-offs (recoveries) to average loans outstanding during the period			0.02				0.78				0.62

 

Interest Rate Risk Management. Our earnings and the market value of our assets and liabilities are subject to fluctuations caused by changes in the level of interest rates. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes originating balloon loans or loans with adjustable interest rates and promoting core deposit products and short-term time deposits.

 

We have an Asset/Liability Management Committee to coordinate all aspects involving asset/liability management. The committee consists of our President and Chief Executive Officer, Chief Financial Officer, Senior Vice President, two lending officers and the manager of our Cinnaminson office. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

 

We use an interest rate sensitivity analysis prepared by a third party vendor to review our level of interest rate risk. Economic Value of Equity (EVE) is a measure of long-term interest rate risk. This analysis measures the difference between the market values of the assets and the liabilities. In this analysis the program calculates the discounted cash flow (market value) of each category on the balance sheet under each of five rate conditions. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or a 100 basis point decreases in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in EVE over a variety of interest rate scenarios. The following table presents the change in our EVE at March 31, 2016 that would occur in the event of an immediate change in interest rates based on our assumptions, with no effect given to any steps that we might take to counteract that change.

  

  

Table 21: EVE Analysis

 

			Economic Value of Equity (Dollars in thousands)												Economic Value of Equity as % of Market Value of Assets
Basis Point (“bp”) Change in Rates			$ Amount				$ Change				% Change				NPV Ratio				Change
300				12,512				(3,475	)			(21.7	)%			10.80	%			(11.0	)%
200				13,452				(2,535	)			(15.9	)			10.99				(9.5	)
100				15,146				(841	)			(5.3	)			11.88				(2.1	)
0				15,987				−				−				12.14
(100)				19,774				3,787				23.7				14.52				19.6

 

The program uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

 

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 March 31, 2016, cash and cash equivalents totaled $12.1 million. At March 31, 2016, we had $3 million in outstanding borrowings and had arrangements to borrow up to $9.6 million from the Federal Home Loan Bank of New York and $1 million from Atlantic Central Bankers Bank.

 

At March 31, 2016, the majority 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 have designated a portion of our investments 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 March 31, 2016, we had $1.2 million in loan commitments outstanding. In addition, we had $6.2 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 March 31, 2016 totaled $23.1 million, or 59.0% 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, such as other deposits 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 March 31, 2017. 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.

 

Delanco Bancorp is a separate entity apart from Delanco Federal and must provide for its own liquidity. As of March 31, 2016, Delanco Bancorp had $480 thousand in cash and cash equivalents compared to $461 thousand as of March 31, 2015.  Substantially all of Delanco Bancorp’s cash and cash equivalents were obtained from proceeds it retained from the stock offering completed in October 2013.  In addition to its operating expenses, Delanco Bancorp may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions.

 

Delanco Bancorp can receive dividends from Delanco Federal.  Payment of such dividends to Delanco Bancorp by Delanco Federal 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, Delanco Federal is not permitted to pay dividends without prior regulatory approval. In addition, at the request of the Federal Reserve, Delanco Bancorp 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 Delanco Federal 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 “Regulation and Supervision—Regulation of Federal Savings Associations—Capital Requirements,” “Regulation and Supervision—Regulatory Agreement” and note 24 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 information about our loan commitments and unused lines of credit, see note 21 to the consolidated financial statements..

 

For the year ended March 31, 2016, 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 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Information required by this item is included herein beginning on page F-1.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

	(a)	Disclosure 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.

 

 

	(b)	Internal Control Over Financial Reporting
		Management’s report on internal control over financial reporting is incorporated herein by reference to the section captioned “Management’s Report on Internal Control Over Financial Reporting” immediately preceding the Company’s Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

 

	(c)	Changes in Internal Control Over Financial Reporting
		Except as indicated herein, there were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2016 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B.

OTHER INFORMATION

 

None.

  

  

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors

 

For information concerning Delanco Bancorp’s directors, the information contained under the section captioned “Item 1—Election of Directors” in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

 

Executive Officers

 

For information relating to officers of Delanco Bancorp, the section captioned “Item 1—Election of Directors” in the Proxy Statement is incorporated by reference.

 

Compliance with Section 16(a) of the Exchange Act

 

For information regarding compliance with Section 16(a) of the Exchange Act, the information contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.

 

Disclosure of Code of Ethics

 

The Board of Directors has adopted a Code of Ethics that applies to all employees of the Company. A copy of the code of ethics can be obtained, without charge, upon written request to James E. Igo, Delanco Bancorp, Inc., 615 Burlington Avenue, Delanco, New Jersey 08075.

 

Audit Committee Matters

 

For information regarding the audit committee and its composition and the audit committee financial expert, the section captioned “Corporate Governance—Committees of the Board of Directors—Audit Committee” in the Proxy Statement is incorporated by reference.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information regarding executive compensation is set forth under the section captioned “Executive Compensation” in the Proxy Statement and is incorporated herein by reference.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Stock Ownership

 

	a)	Security Ownership of Certain Beneficial Owners
		Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

	b)	Security Ownership of Management
		Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

	c)	Changes in Control
		Management of Delanco Bancorp knows of no arrangements, including any pledge by any person or securities of Delanco Bancorp, the operation of which may at a subsequent date result in a change in control of the registrant.

  

 

	d)	Equity Compensation
		The following table sets forth information as of March 31, 2016 about Company common stock that may be issued under the Delanco Bancorp, Inc. 2008 Equity Incentive Plan. The plan was approved by Delanco Bancorp’s stockholders on August 18, 2008.

 

Plan Category		Number of securities to be issued upon the exercise of outstanding options, warrants and rights (a)				Weighted-average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the column (a)) (c)
Equity compensation plans approved by stockholders			20,000			$	8.00				44,043
Equity compensation plans not approved by stockholders			N/A				N/A				N/A
Total			20,000			$	8.00				44,043

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information relating to certain relationships and related transactions and director independence is set forth under the sections captioned “Transactions with Related Persons” and “Corporate Governance and Board Matters – Director Independence” in the Proxy Statement and is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information relating to the principal accountant fees and services is set forth under the section captioned “Ratification of the Independent Registered Public Accounting Firm” in the Proxy Statement and is incorporated herein by reference.

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(1)

The financial statements required in response to this item are incorporated by reference from Item 8 of this report.

 

(2)

All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

 

  

(3)

Exhibits

 

3.1	Certificate of Incorporation of Delanco Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-189244) filed with the Securities and Exchange Commission on June 12, 2013)

3.2	Bylaws of Delanco Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-189244) filed with the Securities and Exchange Commission on June 12, 2013)

4.0	Stock Certificate of Delanco Bancorp, Inc. (Incorporated herein by reference to Exhibit 4.0 to the Registration Statement on Form S-1 (File No. 333-189244) filed with the Securities and Exchange Commission on June 12, 2013)

10.1	Regulatory Agreement dated November 21, 2012, by and between Delanco Federal and the OCC (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on December 21, 2012)

10.2	Delanco Federal Employee Severance Compensation Plan (Incorporated by reference from Exhibit 10.5 of the Form 10-KSB filed with the Securities and Exchange Commission on July 13, 2007)

10.3	Delanco Federal Directors Retirement Plan (Incorporated herein by reference to Exhibit 10.5 to the Registration Statement on Form SB-2 (File No. 333-139339))

10.4	Delanco Bancorp, Inc. 2008 Equity Incentive Plan (Incorporated herein by reference the Company’s definitive proxy materials for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on July 17, 2008)

21.0	Subsidiaries

23.1	Consent of Connolly, Grady & Cha, P.C.

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 Annual Report on Form 10-K for the year ended March 31, 2016, 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.

   

  

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	DELANCO BANCORP, INC.
Date: June 29, 2016	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and Chief Executive Officer

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

Name		Title	Date
/s/ James E. Igo		Chairman, President and Chief Executive Officer	June 29, 2016
James E. Igo
/s/ Eva Modi		Senior Vice President and Chief Financial Officer	June 29, 2016
Eva Modi		(principal financial and accounting officer)
/s/ Thomas J. Coleman, III		Director	June 29, 2016
Thomas J. Coleman, III
/s/ John A. Latimer		Director	June 29, 2016
John A. Latimer
/s/ Daniel R. Roccato		Director	June 29, 2016
Daniel R. Roccato
/s/ James W. Verner		Director	June 29, 2016
James W. Verner
/s/ Renee C. Vidal		Director	June 29, 2016
Renee C. Vidal

  

 

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and of the preparation of our consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.

 

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of its internal control over financial reporting as of March 31, 2016, using the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of March 31, 2016, the Company’s internal control over financial reporting was effective based on the criteria.

 

This annual report does not include an attestation report of the Company’s Independent Registered Public Accounting Firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s Independent Registered Public Accounting Firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

 

Delanco Bancorp, Inc. and Subsidiary

March 31, 2016 and 2015

  

Contents

 

		Page
Report of Independent Registered Public Accounting Firm		F-1
Financial Statements
	Consolidated Statements of Financial Condition As of March 31, 2016 and 2015	F-2
	Consolidated Statements of Operations Years Ended March 31, 2016 and 2015	F-3
	Consolidated Statements of Comprehensive (Loss) Years Ended March 31, 2016 and 2015	F-4
	Consolidated Statements of Changes in Stockholders’ Equity Years Ended March 31, 2016 and 2015	F-5
	Consolidated Statements of Cash Flows Years Ended March 31, 2016 and 2015	F-6
	Notes to Consolidated Financial Statements	F-7

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

 

To the Board of Directors and Stockholders

Delanco Bancorp, Inc.

615 Burlington Avenue

Delanco, New Jersey 08075

 

We have audited the accompanying consolidated statements of financial condition of Delanco Bancorp, Inc. and Subsidiary (the Company) as of March 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delanco Bancorp, Inc. and Subsidiary as of March 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

   

 

/s/ Connolly, Grady & Cha, P.C.

 

Certified Public Accountants

 

Philadelphia, Pennsylvania

 

June 29, 2016

 

  

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

  

  

See accompanying notes to consolidated financial statements.

 

 

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

 

 

See accompanying notes to consolidated financial statements.

 

 

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive (Loss)

Years Ended March 31, 2016 and 2015

 

   

See accompanying notes to consolidated financial statements.

 

 

 

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended March 31, 2016 and 2015

 

     

See accompanying notes to consolidated financial statements.

 

 

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

 

  

See accompanying notes to consolidated financial statements.

 

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

 

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

 

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

  

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

  

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

  

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

 

 

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016 and 2015

  

F-47