Delanco Bancorp, Inc. - FORM 10-Q

Attached files

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

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

For the transition period from ______________ to _____________

Commission file number: 0-55087

DELANCO BANCORP, INC.

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

New Jersey

(State or Other Jurisdiction of Incorporation

or Organization)

80-0943940

(I.R.S. Employer Identification No.)

615 Burlington Avenue, Delanco, New Jersey 08075

(Address of Principal Executive Offices)

(856) 461-0611

(Issuer’s telephone number)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 ☒ No ☐

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

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
(Do not check if a smaller reporting company)	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

No ☒

As of August 7, 2017 there were 945,425 shares of the registrant’s common stock outstanding.

DELANCO BANCORP, INC.

FORM 10-Q

Index

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Statements of Financial Condition at June 30, 2017 (Unaudited) and March 31, 2017	2

	Consolidated Statements of Operations for the Three Months Ended June 30, 2017 and 2016 (Unaudited)	3

	Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2017 (Unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2017 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2017 and 2016 (Unaudited)	6

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults upon Senior Securities	30

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

Signatures		32

Part I. Financial Information

Item 1. Financial Statements

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

	June 30, 2017			March 31, 2017
	(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from banks	$	390,772		$	511,355
Interest-bearing deposits		6,825,755			6,487,188
Total cash and cash equivalents		7,216,527			6,998,543
Investment securities:
Securities available-for-sale (amortized cost of $2,582,944 and $2,588,817 at June 30, 2017 and March 31, 2017, respectively)		2,591,470			2,594,888
Securities held-to-maturity (fair value $21,954,235 and $21,797,695 at June 30, 2017 and March 31, 2017, respectively)		22,575,925			22,622,835
Total investment securities		25,167,395			25,217,723
Loans, net of allowance for loan losses of $1,005,316 at June 30, 2017 (unaudited), $1,001,449 at March 31, 2017		83,825,378			84,414,361
Accrued interest receivable		356,505			378,243
Real estate owned		1,219,083			1,271,302
Federal Home Loan Bank, at cost		122,400			124,300
Premises and equipment, net		5,995,473			6,047,703
Deferred income taxes		1,906,470			1,981,950
Bank-owned life insurance		178,514			178,514
Other assets		268,487			374,714
Total assets	$	126,256,232		$	126,987,353

LIABILITIES
Deposits
Non-interest bearing deposits	$	10,661,622		$	11,703,567
Interest bearing deposits		100,534,848			100,377,179
Total deposits		111,196,470			112,080,746
Accrued interest payable		5,762			6,273
Advance payments by borrowers for taxes and insurance		526,770			500,485
Other liabilities		966,516			908,005
Total liabilities		112,695,518			113,495,509

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 5,000,000 authorized at June 30, 2017 and March 31, 2017, no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized; 945,425 shares issued and outstanding at June 30, 2017 and March 31, 2017	$	9,454		$	9,454
Additional paid-in capital		10,040,983			10,029,506
Retained earnings, substantially restricted		4,092,385			4,036,465
Unearned common stock held by employee stock ownership plan		(455,514	)		(455,514	)
Accumulated other comprehensive (loss)		(126,594	)		(128,067	)
Total stockholder’s equity		13,560,714			13,491,844
Total liabilities and stockholders’ equity	$	126,256,232		$	126,987,353

See Notes to the Unaudited Consolidated Financial Statements.

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

	Three Months Ended June 30,
	2017			2016
INTEREST INCOME
Loans	$	898,979		$	892,478
Investment securities		157,521			174,933
Total interest income		1,056,500			1,067,411

INTEREST EXPENSE
Interest-bearing checking accounts		8,338			10,741
Passbook and money market accounts		30,977			29,667
Certificates of deposits		84,295			91,440
Federal Home Loan Bank Advances		15			2,748
Total interest expense		123,625			134,596

Net interest income		932,875			932,815
Recapture of loan loss		(20,000	)		(48,000	)
Net interest income after recapture for loan losses		952,875			980,815

NON-INTEREST INCOME
(Loss) on sale of real estate owned		−			(5,532	)
Gain on sale of an asset		71,516			−
Service charges		29,020			32,835
Rental income		9,600			12,435
Other		4,107			3,480
Total non-interest income		114,243			43,218

NON-INTEREST EXPENSE
Salaries and employee benefits		410,376			397,028
Advertising		4,218			4,565
Office supplies, telephone and postage		26,100			25,232
Loan expenses		13,373			28,376
Net occupancy expense		141,094			143,376
Real estate loss reserve		52,218			13,100
Federal insurance premiums		22,031			42,798
Data processing expenses		61,817			64,614
ATM expenses		11,443			6,305
Bank charges and fees		22,141			21,493
Insurance and surety bond premiums		20,621			21,107
Dues and subscriptions		7,238			11,529
Professional fees		80,783			54,851
Real Estate Owned expense		27,980			32,585
Other		36,517			34,162
Total non-interest expense		937,950			901,121

INCOME BEFORE INCOME TAX EXPENSE		129,168			122,912

Income tax expense		73,248			63,095

NET INCOME	$	55,920		$	59,817
INCOME PER COMMON SHARE	$	0.06		$	0.07

See Notes to the Unaudited Consolidated Financial Statements.

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

Three Months Ended

	June 30, 2017		June 30, 2016

Net income	$	55,920	$	59,817

Unrealized gain (loss) available for sale:
Unrealized holding gain (loss), net of deferred tax (benefit) of 3,411 and $16,918 in 2017 and 2016		1,473		8,388

Total other comprehensive income	$	57,393	$	68,205

See Notes to the Unaudited Consolidated Financial Statements

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	Common Stock								Unearned Employee			Accumulated
	Shares		Amount		Additional Paid-in Capital		Retained Earnings		Stock Ownership Plan			Other- Comprehensive Income (Loss)			Total Stockholders' Equity
Balance at March 31, 2017		945,425		9,454	$	10,029,506	$	4,036,465		(455,514	)		(128,067	)		13,491,844
Comprehensive income
Net income								55,920								55,920
Other comprehensive income, net of tax:													1,473			1,473

Employee stock option expense						11,477										11,477

Balance at June 30, 2017		945,425		9,454		10,040,983		4,092,385		(455,514	)		(126,594	)		13,560,714

See Notes to the Unaudited Consolidated Financial Statements.

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended June 30,
	2017			2016
Cash flow from operating activities
Net Income	$	55,920		$	59,817
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		74,498			61,894
Depreciation		58,629			66,152
Discount accretion net of premium amortization		121			(26,763	)
Recapture for loan losses		(20,000	)		(48,000	)
Loss on sale of real estate owned		−			5,532
Gain on sale of an asset		(71,516	)		−
Compensation expense for stock options		11,477			8,805
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable		21,738			42,986
Other assets		106,227			98,178
Increase (decrease) in:
Accrued interest payable		(511	)		(530	)
Other liabilities		58,511			139,163
Net cash provided by operating activities	$	295,094		$	407,234


Cash flows from investing activities
Proceeds of securities available for sale		505,873			5,822
Purchases of securities available for sale		(500,000	)		(500,000	)
Purchases of securities held-to-maturity		−			(7,500,000	)
Proceeds from maturities and principal repayments of securities held-to-maturity		46,789			13,875,845
Redemption of investment required by law – stock in Federal Home Loan Bank		1,900			84,500
Proceeds from sale of real estate owned		−			284,233
Net (increase) in loans		732,718			(1,362,764	)
Purchases of premises and equipment		(6,399	)		(5,545	)
Net cash provided by(used in) investing activities	$	780,881		$	4,882,091

Cash flows from financing activities
(Decrease) in deposits		(884,276	)		(399,996	)
Increase in advance payments by borrowers for taxes and insurance		26,285			20,203
(Decrease) in Federal Home Loan Bank Advances		−			(2,000,000	)
Net cash used in financing activities	$	(857,991	)	$	(2,379,793	)

	Three Months Ended June 30,
	2017		2016

Net (decrease) increase in cash and cash equivalents	$	217,984	$	2,909,532

Cash and cash equivalents, beginning of the period		6,998,543		12,127,388

Cash and cash equivalents, end of period	$	7,216,527	$	15,036,920

Supplemental Disclosures:

Cash paid during the period for interest	$	135,217	$	142,978

Cash paid during the period for income taxes	$	2,500	$	2,500

Loans transferred to foreclosed real estate during the period	$	−	$	110,624

Net change in unrealized gain (loss) on securities available-for-sale net of tax	$	1,473	$	8,388

See Notes to the Unaudited Consolidated Financial Statements.

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

June 30, 2017

(1)

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the three month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the consolidated financial statements and footnotes thereto of the Company included in the Company’s annual report on Form 10-K for the year ended March 31, 2017.

(2)

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for losses on loans and the evaluation of deferred taxes.

(3)

Deferred Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.

The calculation of deferred taxes for GAAP capital differs from the calculation of deferred taxes for regulatory capital. For regulatory capital, deferred tax assets that are dependent upon future taxable income for realization are limited to the lesser of either the amount of deferred tax assets that the institution expects to realize within one year of the calendar quarter-end date, or 10% of the Bank’s Tier I capital. As a result of this variance, our Tier I regulatory capital ratio is lower than our GAAP capital ratio by 113 basis points.

(4)

Income Taxes

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

Tax year 2016 remains subject to examination by Federal and 2014 through 2016 by New Jersey taxing authorities. In the event the Bank is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense.

(5)

Earnings Per Share

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

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

The calculated basic and dilutive EPS are as follows:

	Three Months Ended June 30,
	2017		2016
Numerator	$	55,920	$	59,817
Denominators:
Basic shares outstanding		910,239		906,720
Effect of dilutive securities		7,449		3,290
Dilutive shares outstanding		917,688		910,010
Earnings per share:
Basic	$	0.06	$	0.07
Dilutive	$	0.06	$	0.07

(6)

Regulatory Agreement

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

The Agreement requires the Bank to take the following actions:

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

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

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

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

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

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

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

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

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

We have submitted strategic and capital plans to the OCC and have developed the other plans and policies required by the written agreement. The written agreement will remain in effect until terminated, modified, or suspended in writing by the OCC.

The Agreement does not require the Bank to maintain any specific minimum regulatory capital ratios. Separately, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 capital to adjusted total assets ratio of at least 8%, a Tier 1 capital to risk-weighted assets ratio of at least 12% and a total capital to risk-weighted assets ratio of at least 13%. The Bank's ratios of Tier 1 capital to adjusted total assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets at June 30, 2017 were 9.26%, 16.52% and 17.78%, respectively.

(7)

Recent Accounting Pronouncements

In March 2017, the FASB issued ASU 2017-08: Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This Accounting Standards update amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not currently hold any callable debt securities with a premium. As a result, the Company does not anticipate an impact to the consolidated financial statements.

Also in March 2017, the FASB issued ASU 2017-07: Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Topic 715, Compensation—Retirement Benefits, requires an entity to present net periodic pension cost and net periodic postretirement benefit cost as a net amount that may be capitalized as part of an asset where appropriate, Users have communicated that the service cost component generally is analyzed differently from the other components of net periodic pension cost and net periodic postretirement benefit cost. To improve the consistency, transparency, and usefulness of financial information for users, the amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company's current-accounting treatment and presentation of net periodic pension cost and not periodic postretirement benefit cost is consistent with the provisions in ASU-2017. As a result, the Company does not anticipate an impact to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03: Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). The amendments in this update add and amend SEC paragraphs pursuant to the SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force (EITF) meetings. The Company does not anticipate a material impact to the consolidated financial statements at this time.

Also in January 2017, the FASB issued ASU 2017-01: Business Combinations (Topic 805), Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update affect all reporting entities that must determine whether they have acquired or sold a business. Public business entities should apply the amendments in this update to annual periods beginning after December 15, 2017, including interim periods within those periods. The Company intends to comply with the effective date of this update and does not anticipate an impact to the consolidated financial statements at this time.

In December 2016, the FASB issued ASU 2016-20; Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this update cover a variety of Topics in the Codification related to the new revenue recognition standard (Accounting Standards Update No. 2014-09). The amendments in this update represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company does not anticipate a material impact to the consolidated financial statements.

Also in December 2016, the FASB issued ASU 2016-19: Technical Corrections and Improvements. The amendments in this update cover a wide range of Topics in the Codification. The amendments in this update represent changes to make corrections or improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company does not anticipate a material impact to the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Task Force. Stakeholders indicated that diversity exists in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230. Statement of Cash Flows. This update addresses that diversity. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should he included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The Company evaluated the amendments of this update and does not anticipate an impact to the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15: Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments arc presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This update addresses the following eight cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from foe settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not anticipate a material impact to the consolidated financial statements at this time.

In June 2016, the FASB issued ASU 2016-13: Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update are effective for fiscal years beginning after December 15, 2019. The Company is in the process of evaluating the impact of this guidance but expects that the impact will likely be material to the consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this update address narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The amendments in this update affect the guidance in Accounting Standards Update No, 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The Company does not anticipate a material impact to the consolidated financial statements at this time.

In April 2016, the FASB issued ASU 2016-10: Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this update clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements in Topic 606. The Company does not anticipate a material impact to the consolidated financial statements at this time.

In March 2016, the FASB issued ASU 2016-09: Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Board is issuing this update as part of its initiative to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No, 123 (revised 2004), Share-Based Payment. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate a material impact to the consolidated financial statements at this time.

Also in March 2016, the FASB issued ASU 2016-08: Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this update clarify the implementation guidance included in Topic 606 on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements in Topic 606. The Company does not anticipate a material impact to the consolidated financial statements at this time.

Also in March 2016, the FASB issued ASU 2016-07: Investments – Equity Method and Joint Ventures (Topic 323). To simplify the accounting for equity method investments, the amendments in this update eliminate the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company does not anticipate a material impact to the consolidated financial statements at this time.

Also in March 2016, the FASB issued ASU 2016-05: Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The term novation refers to replacing one counterparty to a derivative instrument with a new counterparty. That change occurs for a variety of reasons, including financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, or in response to laws or regulatory requirements. The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company does not anticipate a material impact to the consolidated financial statements at this time.

Also in March 2016, the FASB issued ASU 2016-04: Liabilities— Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. When an entity sells a prepaid stored-value product (such as gift cards, telecommunication cards, and traveler's checks), it recognizes a financial liability for its obligation to provide the product holder with the ability to purchase goods or services at a third-party merchant. When a prepaid stored-value product goes unused wholly or partially for an indefinite time period, the amount that remains on the product is referred to as breakage. There currently is diversity in the methodology used to recognize breakage. Subtopic 405-20 includes derecognition guidance for both financial liabilities and nonfinancial liabilities, and Topic 606. Revenue from Contracts with Customers, includes authoritative breakage guidance but excludes financial liabilities. The amendments in this update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606, The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier application is permitted, including adoption in an interim period. The Company does not anticipate a material impact to the consolidated financial statements at this time.

(8)

Fair Value of Financial Instruments

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

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

●

Level 1

Level 1 input are unadjusted quoted prices in active markets for identical assets or liabilities.

●

Level 2

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

●

Level 3

Level 3 inputs are unobservable inputs.

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

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
June 30, 2017
Available-for-sale securities	$	−	$	2,591	$	−

March 31, 2017
Available-for-sale securities	$	−	$	2,595	$	−

Assets and Liabilities on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2017 and March 31, 2017 are as follows (dollars in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
June 30, 2017
Impaired loans	$	−	$	−	$	4,533
Real estate owned		−		−		1,219
Total	$	−	$	−	$	5,752
March 31, 2017
Impaired loans	$	−	$	−	$	4,883
Real estate owned		−		−		1,271
Total	$	−	$	−	$	6,154

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

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

As required by ASC Topic 825-10-65, the estimated fair value of financial instruments at June 30, 2017 and March 31, 2017 was as follows:

	June 30, 2017
	Carrying Amount		Level 1		Level 2		Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents	$	7,217	$	7,217	$	−	$	−
Investment securities-available for sale		2,583		−		2,951		−
Investment securities-held to maturity		22,576		−		21,954		−
Loans receivable – net		83,825		−		−		84,235
FHLB stock		122		122		−		−
Accrued interest receivable		357		357		−		−
Bank–owned life insurance		179		179		−		−
Real estate owned		1,219		−		−		1,219
Total financial assets	$	118,078	$	7,875	$	24,905	$	85,454

Financial Liabilities:
Deposits- non-interest bearing	$	10,662	$	10,662	$	−	$	−
Deposits – interest bearing		100,535		−		100,225		−
Advances from Federal Home Loan Bank		−		−		−		−
Advance payments by borrowers for taxes and insurance		527		527		−		−
Accrued interest payable		6		6		−		−
Total financial liabilities	$	111,730	$	11,195	$	100,225	$	−

	March 31, 2017
	Carrying Amount		Level 1		Level 2		Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents	$	6,999	$	6,999	$	−	$	−
Investment securities-available for sale		2,589		−		2,595		−
Investment securities-held to maturity		22,623		−		21,798		−
Loans receivable,– net		84,414		−		−		83,833
FHLB stock		124		124		−		−
Accrued interest receivable		378		378		−		−
Bank-owned life insurance		179		179		−		−
Real estate owned		1,271		−		−		1,271
Total financial assets	$	118,577	$	7,680	$	24,393	$	85,104

Financial Liabilities:
Deposits-non-interest bearing	$	11,704	$	11,704	$	−	$	−
Deposits-interest bearing		100,377		−		99,183		−
Advances from Federal Home Loan Bank		−		−		−		−
Advance payments by borrowers for taxes and insurance		500		500		−		−
Accrued interest payable		6		6		−		−
Total financial liabilities	$	112,587	$	12,210	$	99,183	$	−

Off-balance sheet instruments

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

June 30, 2017

March 31, 2017

Contract

Value

Estimated

Fair Value

Contract Value

Estimated

Fair Value

Off-balance sheet instruments

Commitments to extend credit

6,682

−

6,620

−

Loans

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

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

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

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

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

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

Loans at June 30, 2017 and March 31, 2017 are summarized as follows (dollars in thousands):

	June 30,			March 31,
	2017			2017

Residential (one-to four-family) real estate	$	60,471		$	61,419
Multi-family and commercial real estate		11,677			12,071
Commercial		2,194			1,858
Home equity		9,021			8,812
Consumer		615			637
Construction		912			680
Total loans		84,890			85,477
Net deferred loan origination fees		(60	)		(62	)
Allowance for loan losses		(1,005	)		(1,001	)
Loans, net	$	83,825		$	84,414

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At June 30, 2017, the loans-to-one-borrower limitation was $1.9 million; this excluded an additional 10% of adjusted capital funds or approximately $1.3 million, which may be loaned if collateralized by readily marketable securities. At June 30, 2017, there were no loans outstanding or committed to any one borrower, which individually or in the aggregate exceeded the Bank’s loans to-one-borrower limitations of 15% of capital funds.

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

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

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

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

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

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

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

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

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

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

Non-Performing Loans

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

The Bank continues to work with its borrowers where possible and is pursuing legal action where the ability to work with the borrower does not exist. As of June 30, 2017, the Bank has entered into formal forbearance agreements with six relationships totaling $864 thousand that require current payments while the borrowers restructure their finances

The following table represents loans by credit quality indicator at June 30, 2017 (dollars in thousands):

	Pass		Special Mention Loans		Classified Loans		Non- Performing Loans		Total
Residential real estate	$	57,866	$	−	$	−	$	2,605	$	60,471
Multi-family and commercial real estate		10,594		−		169		914		11,677
Commercial		1,989		−		34		171		2,194
Home equity		8,740		−		−		281		9,021
Consumer		615		−		−		−		615
Construction		860		−		−		52		912
	$	80,664	$	−	$	203	$	4,023	$	84,890

The following table represents past-due loans as of June 30, 2017 (dollars in thousands):

	30-59 Days Past Due			60- 89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Current			Total Loan Balances
Residential real estate	$	487		$	294		$	1,543		$	2,324		$	58,147		$	60,471
Multi-family and commercial real estate		239			355			626			1,220			10,457			11,677
Commercial		−			−			171			171			2,023			2,194
Home Equity		40			−			186			226			8,795			9,021
Consumer		40			−			−			40			575			615
Construction		−			−			−			−			912			912
Total Loans	$	806		$	649		$	2,526		$	3,981		$	80,909		$	84,890
Percentage of Total Loans		0.9	%		0.8	%		3.0	%		4.7	%		95.3	%		100.0	%

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same for non-accrual loans discussed above. At June 30, 2017, the Bank had 16 loan relationships totaling $2.7 million in non-accrual loans as compared to 17 relationships totaling $3.2 million at March 31, 2017. The average balance of impaired loans totaled $4.6 million for the three months ended June 30, 2017 as compared to $5.1 million for the year ended March 31, 2017, and interest income recorded on impaired loans for the three months ended June 30, 2017 totaled $41 thousand as compared to $173 thousand for the year ended March 31, 2017.

The following table represents data on impaired loans at June 30, 2017 and March 31, 2017 (dollars in thousands):

	June 30, 2017		March 31, 2017
Impaired loans for which a valuation allowance has been provided	$	−	$	−
Impaired loans for which no valuation allowance has been provided		4,620		4,883
Total loans determined to be impaired		4,620		4,883
Allowance for loans losses related to impaired loans		−		−
Average recorded investment in impaired loans		4,691		5,225
Cash basis interest income recognized on impaired Loans	$	41	$	173

The following table presents impaired loans by portfolio class at June 30, 2017 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized While On Impaired Statues
Impaired loans with no valuation allowance:
Residential real estate	$	2,293	$	2,232	$	−	$	2,295	$	16
Multi-family and commercial real estate		1,890		1,884		−		1,892		20
Commercial		171		171		−		171		3
Home equity		281		281		−		281		1
Consumer		−		−		−		−		−
Construction		56		52		−		56		1
Total	$	4,691	$	4,620	$	−	$	4,695	$	41

The following table presents impaired loans by portfolio class with no valuation allowance at March 31, 2017 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized While On Impaired Statues
Impaired loans with no valuation allowance:
Residential real estate	$	2,289	$	2,239	$	−	$	2,711	$	60
Multi-family and commercial real estate		2,162		2,141		−		2,060		94
Commercial		171		171		−		153		9
Home equity		283		279		−		242		7
Consumer		−		−		−		1		−
Construction		57		53		−		58		3
Subtotal	$	4,963	$	4,883	$	−	$	5,225	$	173

The following table represents nonaccrual loans as of June 30, 2017 and March 31, 2017 (dollars in thousands):

	June 30, 2017			March 31, 2017
Non-accrual loans:
Residential real estate	$	1,179		$	1,180
Multi-family and commercial real estate		252			506
Commercial		171			172
Consumer		−			−
Home equity		55			53
Construction		−			−
Total non-accrual loans		1,657			1,911

Accruing loans past due 90 days or more:
Residential real estate	$	−		$	−
Multi-family and commercial real estate		−			−
Commercial		−			−
Consumer		−			−
Home Equity		−			−
Construction		−			−
Total accruing loans past due 90 days or more		−			−

Troubled debt restructurings:
In non-accrual status:
Residential real estate	$	738		$	740
Multi-family and commercial real estate		186			425
Commercial		−			−
Consumer		−			−
Home Equity		131			131
Construction		−			−
Total troubled debt restructurings in non-accrual status		1,055			1,296
Performing under modified terms:
Residential real estate		688			693
Multi-family and commercial real estate		476			240
Commercial		−			−
Consumer		−			−
Home Equity		95			95
Construction		52			52
Total troubled debt restructurings performing under modified terms:		1,311			1,080
Total troubled debt restructurings		2,366			2,376
Total non-performing loans		4,023			4,287
Real estate owned		1,219			1,271
Total non-performing assets		5,242			5,558

Non-performing loans as a percentage of loans		4.74	%		5.02	%
Non-performing assets as a percentage of loans and real estate owned		6.09	%		6.41	%
Non-performing assets as percentage of total assets		4.15	%		4.38	%

During the three months ended June 30, 2017, the Bank experienced a $495 thousand net decrease in non-accrual loans. This change reflects the sale of a commercial real estate loan with a book balance of $253 thousand, one commercial real estate loan for $239 thousand that returned to accruing status, principal reductions of $4 thousand through amortizations offset by an advance of $2 thousand to the principal balance of a loan.

The following table presents troubled debt restructurings that occurred during the periods ended June 30, 2017 and March 31, 2017 and loans modified as troubled debt restructurings within the previous three and 12 month periods and for which there was a payment default during the period.

June 30, 2017

March 31, 2017

Outstanding Recorded
Investment

Number of
Contracts

Pre-Modification

Post-
Modification

Number of
Contracts

Pre-Modification

Post-
Modification

Troubled debt restructurings:

Residential real estate

−

Number of
Contracts

Recorded Investment

Number of
Contracts

Recorded Investment

Troubled debt restructurings that subsequently defaulted:

Residential real estate

−

The following table presents the changes in real estate owned (REO), net of valuation allowance, for the periods ended June 30, 2017 and March 31, 2017:

	June 30,			March 31,
	2017			2017
Balance, beginning of period	$	1,271		$	1,763
Additions from loan foreclosures		−			500
Additions from capitalized costs		−			26
Dispositions of REO		−			(922	)
Gain (loss) on sale of REO		−			(34	)
Valuation adjustments in the period		(52	)		(62	)
Balance, end of period	$	1,219		$	1,271

The following table presents the changes in fair value adjustments to REO for the periods ended June 30, 2017 and March 31, 2017:

	June 30,		March 31,
	2017		2017
Balance, beginning of period	$	104	$	227
Valuation adjustments added in the period		52		62
Valuation adjustments on disposed properties during the period		−		(185	)
Balance, end of period	$	156	$	104

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

	June 30, 2017			March 31, 2017

Balance at beginning of period	$	1,001		$	1,099
Provision:
Commercial		−			(45	)
Commercial real estate		(20	)		(61	)
Residential real estate		−			98
Home Equity		−			29
Consumer		−			(45	)
Construction		−			2

Total Provision		(20	)		(22	)

Charge-Offs:
Commercial		−			−
Commercial Real Estate		−			71
Residential real estate		−			102
Home Equity		−			42
Consumer		−
Recoveries		(24	)		(139	)
Total Net Charge-Offs		(24	)		76
Balance at end of period	$	1,005		$	1,001
Period-end loans outstanding	$	84,890		$	85,477
Average loans outstanding	$	85,435		$	84,426

Allowance as a percentage of period-end loans		1.18	%		1.17	%
Net charge-offs as a percentage of average loans		(0.03	%)		0.09	%

Additional details for changes in the allowance for loan by loan portfolio as of June 30, 2017 are as follows (dollars in thousands):

Allowance for Loan Losses

	Commercial		Commercial Real Estate			Residential Real Estate		Home Equity		Consumer		Construction		Total
Balance, beginning of year	$	64	$	274		$	575	$	74	$	12	$	2	$	1,001
Loan charge-offs		−		−			−		−		−		−		−
Recoveries		1		17			4		−		2		−		24
Provision for loan losses		−		(20	)		−		−		−		−		(20	)

Balance, end of period	$	65	$	271		$	579	$	74	$	14	$	2	$	1,005

Ending balance for loans individually evaluated for impairment		−		−			−		−		−		−		−
Ending balance for loans collectively evaluated for impairment	$	65	$	271		$	579	$	74	$	14	$	2	$	1,005

Loans receivable:
Ending balance	$	2,194	$	11,677		$	60,471	$	9,021	$	615	$	912	$	84,890
Ending balance: loans individually evaluated for impairment	$	187	$	1,407		$	2,373	$	514	$	−	$	52	$	4,533
Ending balance: loans collectively evaluated for impairment	$	2,007	$	10,270		$	58,098	$	8,507	$	615	$	860	$	80,357

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

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

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

For the three months ending June 30, 2017, the Bank experienced no charge-offs as compared to one charge-off relating to one loan relationship totaling $40 thousand and partial charge-offs relating to three loan relationships totaling $175 thousand for the year ended March 31, 2017.

At June 30, 2017, the Bank maintained an allowance for loan loss ratio of 1.18% to loans outstanding. Non-performing assets have decreased by $316 thousand over their stated levels at March 31, 2017, representing a non-performing asset to total asset ratio of 4.15% at June 30, 2017 as compared to a non-performing asset to total asset ratio of 4.38% at March 31, 2017.

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

(10) Investment Securities

Investment securities have been classified according to management’s intent. The amortized cost of securities and their approximate fair values as of June 30, 2017 and March 31, 2017 are as follows:

	Held-to-Maturity June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Dollars in Thousands)

U.S. Government Agency Bonds	$	20,418	$	−	$	(659	)	$	19,759
Municipal Bond		1,536		−		(1	)		1,535
Mortgage-Backed Securities		622		38		−			660
Total	$	22,576	$	38	$	(660	)	$	21,954

	Held-to-Maturity March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Dollars in Thousands)

U.S. Government Agency Bonds	$	20,418	$	−	$	(865	)	$	19,553
Municipal Bond		1,536		−		(3	)		1,533
Mortgage-backed securities:		669		58		(15	)		712
Total	$	22,623	$	58	$	(883	)	$	21,798

	Available for Sale
	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificate of deposit		2,500		9		−			2,509
Mutual Fund Shares		83		−		(1	)		82
	$	2,583	$	9	$	(1	)	$	2,591

	Available-for-Sale
	March 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S .Government Agency Bonds	$	500	$	−	$	−		$	500
Certificates of Deposit		2,000		8		−			2,008
Mutual Fund Shares		89		−		(2	)		87
Total	$	2,589	$	8	$	(2	)	$	2,595

The following is a summary of maturities of securities held-to-maturity and available-for-sale as of June 30, 2017 and March 31, 2017:

	June 30, 2017
	Held to Maturity				Available for Sale
(Dollars in Thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	1,539	$	1,535	$	500		500
After one year through five years		500		497		2,000		2,009
After five years through ten years		8,555		8,330		−		−
After ten years		11,982		11,592		−		−
Equity securities		−		−		83		82
	$	22,576	$	21,954	$	2,583	$	2,591

	March 31, 2017
	Held to Maturity				Available for Sale
(Dollars in Thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	1,536	$	1,534		−		−
After one year through five years		500		497		−		−
After five years through ten years		8,573		8,292		2,000		2,008
After ten years		12,014		11,475		500		500
Mutual fund shares		−		−		89		87
	$	22,623	$	21,798	$	2,589	$	2,595

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

Information pertaining to securities with gross unrealized losses at June 30, 2017 and March 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Continuous Unrealized					Continuous Unrealized
	Losses Existing For					Losses Existing For
	Less Than 12 Months					12 Months or Greater				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
June 30, 2017	Value		Losses			Value		Losses		Value		Losses
U.S Government Agency Bonds		19,759		(659	)		−		−		19,759		(659	)
Municipal Bonds		1,535		(1	)		−		−		1,535		(1	)
Total	$	21,294	$	(660	)		−		−		21,294		(660	)

	Continuous Unrealized					Continuous Unrealized
	Losses Existing For					Losses Existing For
	Less Than 12 Months					12 Months or Greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2017	Value		Losses			Value		Losses			Value		Losses
U.S Government Agency Bonds	$	19,553	$	(864	)	$	−	$	−		$	19,553	$	(864	)
Certificates of deposit		249		(1	)		−		−			249		(1	)
Municipal Bonds		1,536		(3	)		−		−			1,536		(3	)
Mutual fund shares		−		−			87		(2	)		87		(2	)
Mortgage –Backed Securities:		−		−			216		(15	)		216		(15	)
Total		21,338		(868	)		303		(17	)		21,641		(885	)

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

At June 30, 2017, the 39 debt securities with unrealized losses have depreciated 3.0% from the Bank’s amortized cost basis. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

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

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended June 30, 2017 and 2016 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

Forward-Looking Statements

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

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

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

General

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

Balance Sheet Analysis

Overview. Total assets at June 30, 2017 were $126.3 million, a decrease of $700 thousand from total assets of $127.0 million at March 31, 2017. Total liabilities decreased $800 thousand from $113.5 million at March 31, 2017 to $112.7 million at June 30, 2017. Total stockholders’ equity increased $69 thousand to $13.6 million at June 30, 2017, primarily due to the increase in retained earnings as a result of the quarterly net income.

Loans. At June 30, 2017, total loans, net, were $83.8 million, or 66.4% of total assets. Overall loans decreased by $587 thousand from March 31, 2017 primarily due to payoffs exceeding loans originations. During the three months ended June 30, 2017, commercial and multi-family real estate loans decreased by $394 thousand, residential real estate loans by $948 thousand and consumer loans decreased by $22 thousand offset by increases in commercial loans by $336 thousand, home equity loans by $209 thousand and construction loans by $232 thousand.

Total nonperforming loans at June 30, 2017 decreased $264 thousand from March 31, 2017.

Securities. The investment securities portfolio was $25.2 million, or 19.9% of total assets, at June 30, 2017. At that date, the portfolio breakdown was 81.1% in U.S. Government agency bonds, 9.9% in certificates of deposits, 6.1% in municipal bonds, 2.5% in mortgage-backed securities and 0.4% in mutual funds. Investment securities decreased $50 thousand compared to March 31, 2017. The decrease was primarily due to amortization of the mortgage-backed securities.

Deposits. Total deposits were $111.2 million at June 30, 2017, a decrease of $900 thousand compared to March 31, 2017. Deposits decreased as we made a conscious effort to reduce our reliance on high costing time deposits. Core deposits decreased for the three months by $100 thousand and time deposits decreased by $782 thousand.

Results of Operations for the Three Months Ended June 30, 2017 and 2016

Financial Highlights. Net income for the three months ended June 30, 2017 was $56 thousand as compared to net income of $60 thousand for the same prior year period. The decrease in net income for the three month period was primarily the result of increased income tax expense.

Net Interest Income. Net interest income was $933 thousand for the three months ended June 30, 2017 and for the prior year period. The Bank saw an increase in the interest rate spread (17 basis points) and an increase in net interest margin (13 basis points) for the three month period ended June 30, 2017. Total interest income decreased 1.0% for the three months ending June 30, 2017 compared to the three months ended June 30, 2016. Total interest expense decreased by 8.2% between the same periods.

Average loans for the three months ended June 30, 2017 increased $2.9 million, or 3.5%, compared with the same period in 2016, as production of new loans exceeded the amounts from normal amortization and payoffs of exiting loans. Average investment securities for the three months ended June 30, 2017 increased $3.2 million, or 14.7%, compared to the same period in 2016. The increase in the investment portfolio was due to purchases of debt securities. Decreasing interest rates decreased the average yield on earning assets to 3.63% for the three months ended June 30, 2017, compared with 3.67% for the same period in 2016.

Average interest-bearing deposits for the three months ended June 30, 2017 increased $10.6 million or 10.6%, compared with the same period in 2016. Declining interest rates decreased the average cost of deposits to 0.45%, compared with 0.52% for the same period in 2016.

Provision for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. Provisions for loan losses recaptured $20 thousand in the three months ended June 30, 2017 compared to $48 thousand in the three months ended June 30, 2016. We had no charge-offs and recoveries totaled $24 thousand in the three months ended June 30, 2017 compared to no charge-offs and $64 thousand in recoveries for the same prior year period.

Non-Interest Income. Non-interest income increased $71 thousand for the three month period ending June 30, 2017 compared to the three month period ended June 30, 2016 primarily due to the sale of an asset.

Non-Interest Expenses. Non-interest expenses increased $37 thousand for the three months ending June 30, 2017 compared to the three months ended June 30, 2016 primarily due to increase in real estate loss reserve.

Liquidity Management

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2017, cash and cash equivalents totaled $7.2 million. At June 30, 2017, we had no outstanding borrowings and had arrangements to borrow up to $10.4 million from the Federal Home Loan Bank of New York and $1 million from Atlantic Central Bankers Bank.

At June 30, 2017, substantially all of our investment securities were classified as held to maturity. We have classified our investments in this manner, rather than as available for sale, because they were purchased primarily to provide a source of income and not to provide liquidity. We anticipate that a portion of future investments will be classified as available for sale in order to give us greater flexibility in the management of our investment portfolio.

A significant use of our liquidity is the funding of loan originations. At June 30, 2017 we had $1.1 million in loan commitments outstanding. We also had $5.5 million in unused lines of credit and $58 thousand in unfunded construction draws. Historically, many of the lines of credit expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of June 30, 2017 totaled $19.3 million, or 51.3% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2018. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. As of June 30, 2017, the Company had $399 thousand in cash and cash equivalents compared to $400 thousand as of March 31, 2017. Substantially all of the Company’s cash and cash equivalents were obtained from proceeds it retained from the Bank’s mutual-to-stock conversion completed in October 2013. In addition to its operating expenses, Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions.

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

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

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

For the quarter ended June 30, 2017, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable as the Company is a smaller reporting company.

Item 4.

Controls and Procedures

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

Part II. Other Information

Item 1.	Legal Proceedings

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

Item 1A.	Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2017, which could materially and adversely affect the Company’s business, financial condition or future results. The risks described in the Company’s Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

	Not applicable.

Item 3.	Defaults upon Senior Securities

	Not Applicable.

Item 4.	Mine Safety Disclosures.

	Not Applicable.

Item 5.	Other Information

	None.

Item 6.	Exhibits

3.1	Certificate of Incorporation⁽¹⁾

3.2	Bylaws⁽²⁾

4.0	Form of Specimen Stock Certificate⁽³⁾

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.0	Section 1350 Certification

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, 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.

__________________________________

(1)	Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 (File No. 333-189244) filed with the Commission on June 12, 2013.
(2)	Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 (File No. 333-189244) filed with the Commission on June 12, 2013.
(3)	Incorporated by reference to Exhibit 4.0 to the Company’s Form S-1 (File No. 333-189244) filed with the Commission on June 12, 2013.

Signatures

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

	DELANCO BANCORP, INC.




Dated: August 14, 2017	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and
		Chief Executive Officer




Dated: August 14, 2017	By:	/s/ Eva Modi
		Eva Modi
		Chief Financial Officer

Attached files

Delanco Bancorp, Inc. Reports

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