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 December 31, 2014

OR

 

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

 

For the transition period from ______________ to _____________

Commission file number: 0-55087   

 

 

DELANCO BANCORP, INC.

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

 

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

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

 

615 Burlington Avenue, Delanco, New Jersey 08075

(Address of principal executive offices)

(856) 461-0611

(Issuer’s telephone number)

Not Applicable

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

 

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

Yes ☒                  No ☐

 

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

Yes ☒                  No ☐

 

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

 

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

 

(Do not check if a smaller reporting company)

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

As of February 12, 2015 there were 945,425 shares of the registrant’s common stock outstanding.

 

 

DELANCO BANCORP, INC.

 

FORM 10-Q

 

Index

				Page No.
PART I. FINANCIAL INFORMATION
Item 1.		Consolidated Statements of Financial Condition at December 31, 2014 (Unaudited) and March 31, 2014		2
		Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2014 and 2013 (Unaudited)		3
		Consolidated Statements of Comprehensive Income (Loss) for the Nine Months Ended December 31, 2014 (Unaudited)		4
		Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2014 (Unaudited)		5
		Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2014 and 2013 (Unaudited)		6
		Notes to Unaudited Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		32
Item 4.		Controls and Procedures		33
Part II. OTHER INFORMATION
Item 1.		Legal Proceedings		33
Item 1A.		Risk Factors		33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3.		Defaults upon Senior Securities		33
Item 4.		Mine Safety Disclosures		33
Item 5.		Other Information		33
Item 6.		Exhibits		34
Signatures				35

 

 

Part I. Financial Information

Item 1. Financial Statements

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

 

		December 31, 2014				March 31, 2014
		(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions		$	630,504			$	505,735
Interest-bearing deposits with depository institutions			6,705,274				2,826,904
Total cash and cash equivalents			7,335,778				3,332,639
Investment securities:
Securities available-for-sale (amortized cost of $2,164,205 and $2,185,959 at December 31, 2014 and March 31, 2014, respectively)			2,089,638				1,973,370
Securities held-to-maturity (fair value $25,357,207 and $25,410,461 at December 31, 2014 and March 31, 2014, respectively)			25,674,123				26,975,907
Total investment securities			27,763,761				28,949,277
Loans, net of allowance for loan losses of $1,178,798 at December 31, 2014 , $1,448,298 at March 31, 2014			80,078,612				83,539,442
Accrued interest receivable			413,236				462,284
Real estate owned			2,712,741				1,949,825
Federal Home Loan Bank, at cost			306,300				271,300
Premises and equipment, net			6,533,876				6,668,552
Deferred income tax, net			1,959,050				1,722,601
Bank-owned life insurance			164,666				165,197
Other assets			248,817				335,245
Total assets		$	127,516,837			$	127,396,362
LIABILITIES
Deposits
Non-interest bearing		$	8,943,888			$	7,852,030
Interest bearing			100,077,608				102,772,669
Total deposits			109,021,496				110,624,699
Advances from Federal Home Loan bank			4,000,000				2,000,000
Accrued interest payable			684				6,556
Advance payments by borrowers for taxes and insurance			312,756				328,815
Other liabilities			650,384				684,289
Total liabilities		$	113,985,320			$	113,644,359
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized at December 31, 2014 and March 31, 2014, no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized at December 31, 2014 and March 31, 2014, 945,425 shares issued and outstanding at December 31, 2014 and March 31, 2014,		$	9,454			$	9,454
Additional paid-in capital			9,959,179				9,956,750
Retained earnings, substantially restricted			4,218,099				4,569,378
Unearned common stock held by employee stock ownership plan			(546,617	)			(592,168	)
Accumulated other comprehensive (loss)			(108,598	)			(191,411	)
Total stockholder’s equity			13,531,517				13,752,003
Total liabilities and stockholders’ equity		$	127,516,837			$	127,396,362

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended December 31,								Nine Months Ended December 31,
		2014				2013				2014				2013
INTEREST INCOME
Loans		$	888,334			$	935,616			$	2,754,276			$	2,976,420
Investment securities			182,853				192,811				543,983				529,517
Total interest income			1,071,187				1,128,427				3,298,259				3,505,937
INTEREST EXPENSE
Interest-bearing checking accounts			10,378				10,609				30,424				31,093
Passbook and money market accounts			26,452				28,203				78,713				94,134
Certificates of deposits			106,778				134,987				330,133				443,989
Federal Home Loan Bank Advances			7,164				97				16,486				97
Total interest expense			150,772				173,896				455,756				569,313
Net interest income			920,415				954,531				2,842,503				2,936,624
Provision for loan losses			−				406,557				375,000				613,057
Net interest income after provision for loan losses			920,415				547,974				2,467,503				2,323,567
NON-INTEREST INCOME
Increase in cash surrender value of bank-owned life insurance			−				−				−				5,809
Loss on sale of real estate owned			(11,078	)			−				(11,078	)			(85,681	)
Service charges			33,235				32,815				108,151				105,697
Rental income			26,349				33,820				78,118				108,369
Other			3,531				1,715				12,364				11,039
Total non-interest income			52,037				68,350				187,555				145,233
NON-INTEREST EXPENSE
Salaries and employee benefits			388,128				405,789				1,230,022				1,175,683
Advertising			7,239				6,760				17,749				18,472
Office supplies, telephone and postage			22,512				19,499				81,737				54,026
Loan expenses			14,775				56,212				117,586				159,836
Occupancy expense			143,768				162,789				447,284				473,385
Federal insurance premiums			42,384				53,175				128,170				159,971
Real estate owned loss reserve			314,845				71,500				393,147				149,000
Data processing expenses			57,084				57,068				167,816				170,407
ATM expenses			9,048				8,765				26,330				23,876
Bank charges and fees			17,251				17,137				52,113				50,751
Insurance and surety bond premiums			26,289				20,471				73,400				62,698
Dues and subscriptions			6,516				7,010				20,211				18,074
Professional fees			100,423				57,290				259,429				185,259
Real Estate Owned expense			65,627				23,744				174,879				92,271
Other			39,253				33,552				97,421				81,141
Total non-interest expense			1,255,142				1,000,761				3,287,294				2,874,850
LOSS BEFORE INCOME TAX BENEFIT			(282,690	)			(384,437	)			(632,236	)			(406,050	)
Income tax benefit			(106,699	)			(154,327	)			(280,957	)			(166,712	)
NET LOSS			(175,991	)			(230,110	)			(351,279	)			(239,338	)
LOSS PER COMMON SHARE		$	(0.19	)		$	(0.26	)		$	(0.39	)		$	(0.27	)

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

Nine Months Ended

---

 

		December 31, 2014				December 31, 2013
Net loss		$	(351,279	)		$	(239,338	)
Other comprehensive loss net of tax:
Postretirement benefit plan adjustment, net of deferred tax expense (benefit) of $(3,240) for nine months ended			−				(4,860	)
Unrealized gain (loss) on investment securities available for sale, net of deferred tax (benefit) of $29,827 and $(117,188) for the nine months ended			82,813				(169,773	)
Other comprehensive income (loss)			82,813				(174,633	)
Total Comprehensive (loss)		$	(268,466	)		$	(413,971	)

 

See Notes to the Unaudited Consolidated Financial Statements

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

		Common Stock								Additional Paid-in				Retained				Common Stock Held				Accumulated Other-Comprehensive				Total Stockholders’
		Shares				Amount				Capital				Earnings				by ESOP				Income (Loss)				Equity
Balance at March 31, 2014			945,425			$	9,454			$	9,956,750			$	4,569,378			$	(592,168	)		$	(191,411	)			13,752,003
Net loss															(351,279	)											(351,279	)
Other comprehensive income, net of tax:																							82,813				82,813
Employee stock option expense											23,631																23,631
Shares of common stock transferred to ESOP for services											(21,202	)							45,551								24,349
Balance at December 31, 2014			945,425			$	9,454			$	9,959,179			$	4,218,099			$	(546,617	)		$	(108,598	)		$	13,531,517

 

See Notes to the Unaudited Consolidated Financial Statements.

  

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended December 31,
		2014				2013
Cash flow from operating activities
Net Loss		$	(351,279	)			(239,338	)
Adjustments to reconcile net loss to net cash provided by operating activities:
ESOP amortization			24,349				33,075
Deferred income taxes			(291,658	)			(192,477	)
Depreciation			193,635				188,459
Discount accretion net of premium amortization			(2,374	)			28,105
Provision for loan losses			375,000				613,057
Income from bank owned life insurance			−				(5,809	)
Loss on sale of real estate owned			11,078				85,681
Compensation expense for stock options			23,631				7,231
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable			49,048				(9,472	)
Other assets			86,959				354,111
Increase (decrease) in:
Accrued interest payable			(5,872	)			(7,781	)
Other liabilities			(33,905	)			45,426
Net cash provided by operating activities			78,612				900,268
Cash flows from investing activities
Proceeds of securities available for sale			21,754				22,778
Purchases of securities held-to-maturity			(1,500,000	)			(11,621,500	)
Proceeds from maturities and principal repayments of securities held-to-maturity			2,804,158				3,553,193
Purchase of investment required by law – stock in Federal Home Loan Bank			(35,000	)			(23,800	)
Proceeds from sale of real estate owned			864,532				545,634
Net decrease in loans			1,447,304				2,951,711
Purchases of premises and equipment			(58,959	)			(14,742	)
Net cash provided by(used in) investing activities			3,543,789				(4,586,726	)
Cash flows from financing activities
Decrease in deposits			(1,603,203	)			(3,483,970	)
Decrease in advance payments by borrowers for taxes and insurance			(16,059	)			(231,862	)
Net proceeds from issuance of common stock			−				3,376,374
Purchase of common stock in connection with ESOP			−				(189,152	)
Increase in Federal Home Loan Bank advance			2,000,000				1,000,000
Net cash provided by financing activities			380,738				471,390

 

 

		Nine months Ended December 31,
		2014				2013
Net decrease in cash and cash equivalents		$	4,003,139			$	(3,215,068	)
Cash and cash equivalents, beginning of the period			3,332,639				6,722,766
Cash and cash equivalents, end of period			7,335,778				3,507,698
Supplemental Disclosures:
Cash paid during the period for interest			445,143				576,997
Cash paid during the period for income taxes			2,000				2,000
Loans transferred to foreclosed real estate during the period			1,827,367				856,353
Net change in unrealized gain (loss) on securities available-for-sale net of tax			82,813				(169,773	)

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

December 31, 2014

 

(1)           Basis of Presentation

 

On October 16, 2013, Delanco Bancorp, Inc., a New Jersey corporation (the “Company”), became the holding company for the Bank upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the “Conversion”). The Conversion involved the sale by the Company of 525,423 shares of common stock in a subscription and community offering, including shares purchased by the Bank’s employee stock ownership plan, the exchange of 420,002 shares of common stock of the Company for shares of common stock of the former Delanco Bancorp, Inc. (“old Delanco Bancorp”) held by persons other than Delanco MHC (the “MHC”), and the elimination of old Delanco Bancorp and the MHC. Net proceeds received from the reorganization and stock offering totaled $3,280,000, net of costs of $923,000. Net income per share and the weighted average shares outstanding for the three and nine months ended December 31, 2014 have been restated to reflect the Conversion.

 

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

 

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

 

(2)           Use of Estimates

 

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

 

(3)           Deferred Income Taxes

 

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

 

 

The calculation of deferred taxes for GAAP capital differs from the calculation of deferred taxes for regulatory capital. For regulatory capital, deferred tax assets that are dependent upon future taxable income for realization are limited to the lesser of either the amount of deferred tax assets that the institution expects to realize within one year of the calendar quarter-end date, or 10% of the Bank’s Tier I capital. As a result of this variance, our Tier I regulatory capital ratio is lower than our GAAP capital ratio by 120 basis points.

  

(4)           Income Taxes

 

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

 

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

 

(5)           Earnings Per Share

 

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

 

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

 

As a result of the Conversion, all share information for periods prior to December 31, 2013, has been revised to reflect the .5711 exchange ratio.

 

The calculated basic and dilutive EPS are as follows:

 

		Three Months Ended December 31,								Nine Months Ended December 31,
		2014				2013				2014				2013
Numerator		$	(175,991	)		$	(230,110	)		$	(351,279	)		$	(239,338	)
Denominators:
Basic shares outstanding			903,201				899,681				903,201				899,681
Effect of dilutive securities
Dilutive shares outstanding			903,201				899,681				903,201				899,681
Earnings per share:
Basic		$	(0.19	)		$	(0.26	)		$	(0.39	)		$	(0.27	)
Dilutive		$	(0.19	)		$	(0.26	)		$	(0.39	)		$	(0.27	)

 

 

(6)           Regulatory Agreement      

 

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

 

The Agreement requires the Bank to take the following actions:

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

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

 

The Agreement does not require the Bank to maintain any specific minimum regulatory capital ratios. However, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 capital to adjusted total assets ratio of at least 8%, a Tier 1 capital to risk-weighted assets ratio of at least 12% and a total capital to risk-weighted assets ratio of at least 13%. The Bank's ratios of Tier 1 capital to adjusted total assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets at December 31, 2014 were 8.82%, 15.73% and 16.99%, respectively.

 

 

(7)           Recent Accounting Pronouncements

 

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

 

(8)           Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
December 31, 2014
Available-for-sale securities		$	165			$	1,925			$	−
March 31, 2014
Available-for-sale securities		$	183			$	1,790			$	−

 

 

Assets and Liabilities on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2014 and March 31, 2014 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)
December 31, 2014
Impaired loans		$	−			$	−			$	4,977
Real estate owned			−				−				2,713
Total		$	−			$	−			$	7,690
March 31, 2014
Impaired loans		$	−			$	−			$	6,021
Real estate owned			−				−				1,950
Total		$	−			$	−			$	7,971

 

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 December 31, 2014 and March 31, 2014 was as follows:

 

		December 31, 2014
		Carrying Amount				Level 1				Level 2				Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalent		$	7,336			$	7,336			$	−			$	−
Investment securities			27,838				165				27,282				−
Loans – net			80,079				−				−				80,856
FHLB stock			306				306				−				−
Accrued interest receivable			413				413				−				−
Bank–owned life insurance			165				165				−				−
Real estate owned			2,713				−				−				2,713
Total financial assets		$	118,850			$	8,385			$	27,282			$	83,569
Financial Liabilities:
Deposits		$	109,021			$	8,944				99,723				−
Advance payments by borrowers for taxes and insurance			313				313				−				−
Advances Federal Home Loan Bank			4,000				4,000				−				−
Accrued interest payable			1				1				−				−
Total financial liabilities		$	113,335			$	13,258			$	99,723			$	−

 

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

 

 

Off-balance sheet instruments

 

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

 

December 31, 2014

March 31, 2014

Contract Value

Estimated Fair Value

Contract Value

Estimated Fair Value

Off-balance sheet instruments

Commitments to extend credit

$

7,497

$

−

$

5,710

$

−

 

(9)           Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

		December 31,				March 31,
		2014				2014
Residential (one-to four-family) real estate		$	62,076			$	63,524
Multi-family and commercial real estate			8,065				10,414
Commercial			1,895				1,307
Home equity			7,789				8,144
Consumer			645				686
Construction			873				1,009
Total loans			81,343				85,084
Net deferred loan origination fees			(85	)			(97	)
Allowance for loan losses			(1,179	)			(1,448	)
Loans, net		$	80,079			$	83,539

 

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At December 31, 2014, the loans-to-one-borrower limitation was $1.8 million; this excluded an additional 10% of adjusted capital funds or approximately $1.2 million, which may be loaned if collateralized by readily marketable securities. At December 31, 2014, there were no loans outstanding or committed to any one borrower, which individually or in the aggregate exceeded the Bank’s loans to-one-borrower limitations of 15% of capital funds.

 

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

 

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

 

a.

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

 

b.

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

 

c.

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

 

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

 

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

 

 

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

 

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

 

Non-Performing Loans

 

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

 

The Bank continues to work with its borrowers where possible and is pursuing legal action where the ability to work with the borrower does not exist.  As of December 31, 2013, the Bank has entered into formal forbearance agreements with three relationships totaling $811 thousand that require current payments while the borrowers restructure their finances.

 

The following table represents loans by credit quality indicator at December 31, 2014 (dollars in thousands):

 

		Pass				Special Mention Loans				Classified Loans				Non- Performing Loans				Total
Residential real estate			59,711				−				−				2,365				62,076
Multi-family and commercial real estate			5,155				771				424				1,715				8,065
Commercial			1,772				24				99				−				1,895
Home equity			7,778				−				−				11				7,789
Consumer			574				−				−				71				645
Construction			817				−				−				56				873
			75,807				795				523				4,218				81,343

 

 

 

The following table represents past-due loans as of December 31, 2014 (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			347				1,230				1,797				3,374				58,702				62,076
Multi-family and commercial real estate			369				−				947				1,316				6,749				8,065
Commercial			−				−				−				−				1,895				1,895
Home Equity			404				−				11				415				7,374				7,789
Consumer			−				−				71				71				574				645
Construction			−				−				56				56				817				873
Total Loans			1,120				1,230				2,882				5,232				76,111				81,343
Percentage of Total Loans			1.4	%			1.5	%			3.5	%			6.4	%			93.6	%			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 December 31, 2014, the Bank had 19 loan relationships totaling $2.9 million in non-accrual loans as compared to 23 relationships totaling $4.1 million at March 31, 2014. The average balance of impaired loans totaled $4.8 million for the nine months ended December 31, 2014 as compared to $6.0 million for the year ended March 31, 2014, and interest income recorded on impaired loans for the nine months ended December 31, 2014 totaled $158 thousand as compared to $235 thousand for the year ended March 31, 2014.

 

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

 

		December 31, 2014				March 31, 2014
Impaired loans for which a valuation allowance has been provided		$	−			$	846
Impaired loans for which no valuation allowance has been provided			4,977				5,175
Total loans determined to be impaired		$	4,977			$	6,021
Allowance for loans losses related to impaired loans		$	−			$	288
Average recorded investment in impaired loans		$	4,843			$	5,964
Cash basis interest income recognized on impaired Loans		$	158			$	235

 

 

The following table presents impaired loans by portfolio class at December 31, 2014 (dollars in thousands):

 

		Recorded Investment				Unpaid Principal Balance				Related Valuation Allowance				Average Recorded Investment				Interest Income Recognized While On Impaired Status
Impaired loans with no valuation allowance:
Residential real estate		$	2,886			$	2,837			$	−			$	2,846			$	46
Multi-family and commercial real estate			2,014				1,967				−				1,722				103
Commercial			35				35				−				41				1
Home equity			11				11				−				159				5
Consumer			71				71				−				16				1
Construction			56				56				−				59				2
Subtotal		$	5,073			$	4,977			$	−			$	4,843			$	158

 

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

 

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

 

 

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

 

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

 

Total Impaired Loans by Portfolio Class at March 31, 2014

 

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

 

 

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

 

		December 31, 2014				March 31, 2014
Non-accrual loans:
Residential real estate		$	1,184			$	1,277
Multi-family and commercial real estate			564				981
Commercial			−				108
Consumer			71				−
Home Equity			11				219
Construction			−				−
Total non-accrual loans			1,830				2,585
Accruing loans past due 90 days or more:
Residential real estate		$	−			$	−
Multi-family and commercial real estate			−				100
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			−				−
Total accruing loans past due 90 days or more			−				100
Troubled Debt Restructurings:
In non-accrual status:
Residential real estate		$	613			$	672
Multi-family and commercial real estate			439				847
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			−				−
Total troubled debt restructurings in non-accrual status			1,052				1,519
Performing under modified terms:
Residential real estate			567				548
Multi-family and commercial real estate			768				1,309
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			−				60
Total troubled debt restructurings performing under modified terms:			1,335				1,917
Total troubled debt restructurings			2,387				3,436
Total non-performing loans			4,217				6,121
Real estate owned			2,713				1,950
Total non-performing assets			6,930				8,071
Non-performing loans as a percentage of loans			5.18	%			7.19	%
Non-performing assets as a percentage of loans and real estate owned			8.24	%			9.27	%
Non-performing assets as percentage of total assets			5.43	%			6.34	%

 

 

During the nine months ended December 31, 2014, the Bank experienced a $1.2 million net decrease in non-accrual loans. This change reflects the downgrading of twelve loan relationships to non-accrual status totaling $2.3 million during the nine months ended December 31, 2014. The downgraded loans consisted of seven residential mortgage totaling $1.5 million, five commercial loan relationships consisting of five loans totaling $709 thousand, one home equity loan totaling $11 thousand and one consumer loan totaling $71 thousand. These additions to the non-accruals were offset by five residential mortgages for $935 thousand, two home equity loans totaling $219 thousand and one commercial loan for $128 thousand that returned to accruing status; one commercial loan for $56 thousand that was paid in full; one commercial loan totaling $108 thousand that was paid through a short sale; one commercial loan totaling $19 thousand that was charged off; four residential mortgages totaling $735 thousand and three commercial relationships consisting of three commercial real estate loans totaling $1.3 million that were transferred to real estate owned after a partial charge off of $230 thousand due to valuation updates.

 

The following table presents troubled debt restructurings that occurred during the periods ended December 31, 2014 and March 31, 2014 and loans modified as troubled debt restructurings within the previous 9 and 12 month periods and for which there was a payment default during the period.

  

		December 31, 2014												March 31, 2014
						Outstanding Recorded Investment												Outstanding Recorded Investment
		Number of Contracts				Pre- Modification				Post- Modification				Number of Contracts				Pre- Modification				Post- Modification
Troubled debt restructurings:
Residential real estate			1			$	96			$	110				1			$	120			$	123

 

Number of Contracts

Recorded Investment

Number of Contracts

Recorded Investment

Troubled debt restructurings that subsequently defaulted:

Residential real estate

−

$

−

-

$

-

 

  

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

 

		December 31,				March 31,
		2014				2014
Balance, beginning of period		$	1,950			$	2,470
Additions from loan foreclosures			1,827				856
Additions from capitalized costs			−				3
Dispositions of REO			(853	)			(690	)
Gain (loss) on sale of REO			(11	)			(86	)
Valuation adjustments in the period			(200	)			(603	)
Balance, end of period		$	2,713			$	1,950

 

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

 

		December 31,				March 31,
		2014				2014
Balance, beginning of period		$	676			$	73
Valuation adjustments added in the period			393				675
Valuation adjustments on disposed properties during the period			(193	)			(72	)
Balance, end of period		$	876			$	676

 

 

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

 

		December 31, 2014				March 31, 2014
Balance at beginning of period		$	1,448			$	1,033
Provision:
Commercial			73				141
Commercial real estate			168				628
Residential real estate			136				266
Home Equity			12				21
Consumer			(13	)			(103	)
Construction			(1	)			4
Total Provision		$	375			$	957
Charge-Offs:
Commercial		$	19			$	127
Commercial Real Estate			594				378
Residential real estate			113				100
Home Equity			−				4
Consumer			4				16
Recoveries			(86	)			(83	)
Total Net Charge-Offs			644				542
Balance at end of period		$	1,179			$	1,448
Period-end loans outstanding		$	81,343			$	85,084
Average loans outstanding		$	81,219			$	87,327
Allowance as a percentage of period-end loans			1.45	%			1.70	%
Net charge-offs as a percentage of average loans			0.79	%			0.62	%

 

 

Additional details for changes in the allowance for loan by loan portfolio as of December 31, 2014 are as follows (dollars in thousands):

 

Allowance for Loan Losses

 

		Commercial				Commercial Real Estate				Residential Real Estate				Home Equity				Consumer				Construction				Total
Balance, beginning of year		$	58			$	635			$	656			$	65			$	30			$	4			$	1,448
Loan charge-offs			(19	)			(594	)			(113	)			−				(4	)			−				(730	)
Recoveries			1				62				7				−				16				−				86
Provision for loan losses			73				168				136				12				(13	)			(1	)			375
Balance, end of period		$	113			$	271			$	686			$	77			$	29			$	3			$	1,179
Ending balance for loans individually evaluated for impairment		$	35			$	1,967			$	2,837			$	11			$	−			$	56			$	4,906
Ending balance for loans collectively evaluated for impairment			1,860				6,098				59,239				7,778				645				817			$	76,437
Loans receivable:
Ending balance		$	1,895			$	8,065			$	62,076			$	7,789			$	645			$	873			$	81,343
Ending balance: loans individually evaluated for impairment		$	35			$	1,967			$	2,837			$	11			$	−			$	56			$	4,906
Ending balance: loans collectively evaluated for impairment			1,860				6,098				59,239				7,778				645				817			$	76,437

 

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 nine months ending December 31, 2014, the Bank experienced two full charge-offs relating to two loan relationships totaling $23 thousand and fourteen partial charge-offs related to thirteen relationships totaling $708 thousand as compared to three charge-offs relating to three loan relationships totaling $111 thousand and eleven partial charge-offs relating to eleven loan relationships totaling $514 thousand for the year ended March 31, 2014.

 

 

At December 31, 2014, the Bank maintained an allowance for loan loss ratio of 1.45% to loans outstanding. Non-performing assets have decreased by $1.1 million over their stated levels at March 31, 2014, representing a non-performing asset to total asset ratio of 5.43% at December 31, 2014 as compared to a non-performing asset to total asset ratio of 6.34% at March 31, 2014.

 

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

 

(10)         Investment Securities

 

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

 

		Held-to-Maturity December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
(Dollars in Thousands)
Federal Farm Credit Bank Bond		$	5,944			$	1			$	(138	)		$	5,807
Federal Home Loan Bank Bonds			7,069				10				(151	)			6,928
Federal Home Loan Mortgage
Corporation Bonds			1,997				−				(47	)			1,950
Federal National Mortgage Association			8,999				11				(96	)			8,914
Municipal Bond			470				4				−				474
			24,479				26				(432	)			24,073
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation			484				33				−				517
Federal National Mortgage Association			509				49				−				558
Government National Mortgage Corporation			202				7				−				209
			1,195				89				−				1,284
Total		$	25,674			$	115			$	(432	)		$	25,357

 

 

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

 

 

		Available for Sale
		December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Federal Home Loan Bank Bonds		$	1,500			$	−			$	(50	)		$	1,450
Federal National Mortgage Association Bond			500				−				(25	)			475
Mutual Fund Shares			164				1				−				165
		$	2,164			$	1			$	(75	)		$	2,090

 

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

 

 

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

 

		December 31, 2014
		Held to Maturity								Available for Sale
(Dollars in Thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:
One year or less		$	470			$	474			$	−			$	−
After one year through five years			1,501				1,504				−				−
After five years through ten years			8,419				8,251				−				−
After ten years			15,284				15,128				2,000				1,925
Equity securities			−				−				164				165
		$	25,674			$	25,357			$	2,164			$	2,090

 

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

 

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

 

 

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

 

		December 31, 2014
		Less Than 12 Months								12 Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
(Dollars in Thousands)
Federal Home Loan Bank Bonds		$	−			$	−			$	−			$	(201	)		$	8,091			$	(201	)
Federal Farm Credit Bonds			−				−				−				(138	)			5,444				(138	)
Federal Home Loan Mortgage Corporation Bonds			−				−				−				(47	)			1,997				(47	)
Federal National Mortgage Association			−				−				−				(121	)			7,999				(121	)
Total		$	−			$	−			$	−			$	(507	)		$	23,531			$	(507	)

 

 

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

 

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

 

At December 31, 2014, the 47 debt securities with unrealized losses have depreciated .02% 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 and nine months ended December 31, 2014 and 2013 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

 

Forward-Looking Statements

 

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

 

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

 

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

 

General

 

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

 

Balance Sheet Analysis

 

Overview. Total assets at December 31, 2014 were $127.5 million, an increase of $100 thousand from total assets of $127.4 million at March 31, 2014. Total liabilities increased $400 thousand from $113.6 million at March 31, 2014 to $114 million at December 31, 2014. Total stockholders’ equity decreased $200 thousand to $13.5 million at December 31, 2014, primarily due to net loss offset by the increase in other comprehensive income related to increased values in the held to maturity portfolio.

 

Loans. At December 31, 2014, total loans, net, were $80.1 million, or 62.8% of total assets. Overall loans decreased by $3.4 million, primarily due to payoffs and amortization of existing loans exceeding the origination of new loans as well as the conversion of $1.8 million of non-performing loans into real estate owned during the period. Commercial and multi-family real estate loans decreased by $2.3 million, residential real estate loans decreased by $1.4 million, residential construction loans decreased by $137 thousand, home equity loans decreased by $355 thousand and commercial loans increased by $588 thousand.

 

 

Total nonperforming loans at December 31, 2014 decreased $1.9 million from March 31, 2014 primarily due to the conversion of $1.8 million of non-performing loans into real estate owned during the period.

 

 Securities. The investment securities portfolio was $27.8 million, or 21.8% of total assets, at December 31, 2014. At that date, 4.3% of the investment portfolio was invested in mortgage-backed securities, while the remainder was invested primarily in U.S. Government agency and other debt securities. Investment securities decreased $1.2 million compared to March 31, 2014. The increase was primarily due to debt securities being called.

 

Deposits. Total deposits were $109.0 million at December 31, 2014, a decrease of $1.6 million compared to March 31, 2014. Deposits decreased as we made a conscious effort to attract core deposits and reduce our reliance on high costing time deposits. Core deposits grew for the nine months by $1.1 million while time deposits decreased by $2.7 million. Borrowing rates also made it more attractive to borrow money than compete for the higher cost time deposits.

 

Results of Operations for the Three and Nine Months Ended December 31, 2014 and 2013

 

Financial Highlights.  Net loss for the three and nine months ended December 31, 2014 was $176 thousand and $351 thousand, respectively as compared to a net loss of $230 thousand and $239 thousand for the same prior year periods. The decrease in net loss for the three months was primarily the result of no additional provisions to loan loss reserves which was partly offset by the increase in the real estate owned loss reserve and professional fees. The increase in the nine month periods was primarily the result of real estate owned expenses and salaries and benefit expense.

 

Net Interest Income.   Net interest income decreased $35 thousand to $920 thousand for the three months and $100 thousand to $2.8 million for the nine months ended December 31, 2014. The Bank saw a decrease in the interest rate spread (10 basis point) and an increase in net interest margin (1 basis points) for the nine month period.  The rates earned on assets declined, resulting in a 5.1% decrease in total interest income for the three months ending December 31, 2014 compared to the three months ended December 31, 2013. Total interest expense decreased by13.3% between the same periods.

 

Average loans in the nine months ended December 31, 2014 decreased $4.3 million, or 5.0%, compared with the same period in 2013, driven by payoffs and amortization of the portfolio as well as the conversion of non-performing loans into real estate owned. Average investment securities in the nine months ended December 31, 2014 increased $100 thousand, or 0.4%, compared to the same period in 2013. The increase in the investment portfolio was due to purchases of debt securities. Declining interest rates decreased the average yield on earning assets to 3.71% for the nine months ended December 31, 2014, compared with 4.08% for the same period in 2013.

 

Average interest-bearing deposits in the nine months ended December 31, 2014 decreased $1.8 million or 1.8%, compared with the same period in 2013. Declining interest rates decreased the average cost of deposits to 0.53%, compared with 0.67% for the same period in 2013

 

Provision for Loan Losses.  The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  We evaluate the need to establish allowances against losses on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.  Provisions for loan losses were $0 in the three months and $375 thousand in the nine months ended December 31, 2014 compared to $407 thousand in the three months and $613 thousand in the nine months ended December 31, 2013.  We had $96 thousand in charge-offs in the three months and $730 thousand in the nine months ended December 31, 2014, compared to $202 thousand and $494 thousand in charge-offs in the same prior year periods. We had recoveries to the allowance of $46 thousand in the three months and $86 thousand in the nine months ended December 31, 2014 as compared to $4 thousand and $96 thousand in recoveries in the same prior year period.

 

 

Non-Interest Income.  Non-interest income decreased $16 thousand in the three month period ending December 31, 2014 compared to the three month period ended December 31, 2013, primarily due to a loss on the sale of real estate owned of $11 thousand in the quarter and a decrease in rental income on real estate owned in the period versus the previous year. Non-interest income increased $43 thousand in the nine months ended December 31, 2014 compared to the same period in the prior year, primarily due to smaller losses on sale of real estate, $11 thousand in 2014 as compared to $86 thousand in 2013 partially offset by the decrease in rental income on real estate owned of $30 thousand from 2013 to 2014.

 

Non-Interest Expenses.  Non-interest expenses increased $254 thousand in the three months ending December 31, 2014 compared to the three months ended December 31, 2013 primarily due to an increase in the real estate owned loss reserve provision of $243 thousand over the prior period. Non-interest expense increased in the nine months ended December 31, 2014 by $412 thousand over the same period in the prior year primarily due to the increases in the real estate owned loss reserve provision of $244 thousand, real estate owned expense of $83 thousand and professional fees of $74 thousand, partially offset by decreases in loan expenses of $42 thousand and federal deposit insurance of $32 thousand.

 

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 December 31, 2014, cash and cash equivalents totaled $7.3 million. At December 31, 2014, we had $4.0 million outstanding borrowings and had arrangements to borrow up to $15.4 million from the Federal Home Loan Bank of New York and $1.0 million from Atlantic Central Bankers Bank.

 

At December 31, 2014, substantially all of our investment securities were classified as held to maturity. We have classified our investments in this manner, rather than as available for sale, because they were purchased primarily to provide a source of income and not to provide liquidity. We anticipate that a portion of future investments will be classified as available for sale in order to give us greater flexibility in the management of our investment portfolio.

 

A significant use of our liquidity is the funding of loan originations. At December 31, 2014, we had $1.5 million in outstanding loan commitments. In addition we had $5.9 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 December 31, 2014 totaled $23.8 million, or 54.6% 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 December 31, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

 

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

 

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. As of December 31, 2014, the Company had $736 thousand in cash and cash equivalents compared to $714 thousand as of December 31, 2013.  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 December 31, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable as the Company is a smaller reporting company.

 

 

Item 4.   Controls and Procedures

 

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

 

Part II. Other Information

 

Item 1.   Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

Not Applicable.

 

Item 3.   Defaults upon Senior Securities

 

Not Applicable.

 

Item 4.   Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.   Other Information

 

None.

 

 

 

Item 6.   Exhibits

 

3.1	Certificate of Incorporation(1)
3.2	Bylaws(2)
4.0	Form of Specimen Stock Certificate(3)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

 

---

 

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

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

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

 

 

Signatures

 

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

 

 

	DELANCO BANCORP, INC.
Dated: February 17, 2015	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and Chief Executive Officer
Dated: February 17, 2015	By:	/s/ Eva Modi
		Eva Modi
		Chief Financial Officer

               

 

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