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, 2016

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 9, 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 December 31, 2016 (Unaudited) and March 31, 2016	1
	Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2016 and 2015 (Unaudited)	2
	Consolidated Statements of Comprehensive Income for the Nine Months Ended December 31, 2016 (Unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2016 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2016 and 2015 (Unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		30

  

 

Part I. Financial Information

Item 1. Financial Statements

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

 

		December 31, 2016				March 31, 2016
		(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from banks		$	702,565			$	585,364
Interest-bearing deposits			10,320,101				11,542,024
Total cash and cash equivalents			11,022,666				12,127,388
Investment securities:
Securities available-for-sale (amortized cost of $2,096,668 and $2,121,777 at December 31, 2016 and March 31, 2016, respectively)			2,104,869				2,150,093
Securities held-to-maturity (fair value $21,848,380 and $21,706,150 at December 31, 2016 and March 31, 2016, respectively)			22,660,982				21,584,538
Total investment securities			24,765,851				23,734,631
Loans, net of allowance for loan losses of $1,016,218 at December 31, 2016 (unaudited), $1,099,232 at March 31, 2016			83,026,561				82,197,809
Accrued interest receivable			357,367				369,138
Real estate owned			1,722,800				1,763,628
Federal Home Loan Bank, at cost			124,300				253,800
Premises and equipment, net			6,107,352				6,290,047
Deferred income taxes			2,002,800				2,066,535
Bank-owned life insurance			173,914				174,252
Other assets			262,164				437,797
Total assets		$	129,565,775			$	129,415,025
LIABILITIES
Deposits
Non-interest bearing deposits		$	11,710,881			$	12,054,146
Interest bearing deposits			103,069,451				99,810,501
Total deposits			114,780,332				111,864,647
Advances from Federal Home Loan bank			−				3,000,000
Accrued interest payable			1,109				5,830
Advance payments by borrowers for taxes and insurance			454,354				433,034
Other liabilities			898,076				815,802
Total liabilities			116,133,871				116,119,313
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 5,000,000 authorized at December 31, 2016 and March 31, 2016, no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized; 945,425 shares issued and outstanding at December 31, 2016 and March 31, 2016		$	9,454			$	9,454
Additional paid-in capital			10,010,014				9,988,509
Retained earnings, substantially restricted			3,999,681				3,918,476
Unearned common stock held by employee stock ownership plan			(455,514	)			(501,065	)
Accumulated other comprehensive (loss)			(131,731	)			(119,662	)
Total stockholder’s equity			13,431,904				13,295,712
Total liabilities and stockholders’ equity		$	129,565,775			$	129,415,025

 

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,
		2016				2015				2016				2015
INTEREST INCOME
Loans		$	875,015			$	910,027			$	2,641,794			$	2,720,113
Investment securities			144,313				161,583				460,080				495,362
Total interest income			1,019,328				1,071,610				3,101,874				3,215,475
INTEREST EXPENSE
Interest-bearing checking accounts			11,512				10,743				33,664				29,056
Passbook and money market accounts			30,158				26,624				89,850				79,198
Certificates of deposits			90,016				101,031				272,014				300,295
Federal Home Loan Bank Advances			336				5,978				5,148				19,858
Total interest expense			132,022				144,376				400,676				428,407
Net interest income			887,306				927,234				2,701,198				2,787,068
Provision (recovery)for loan losses			26,000				−				(22,000	)			10,000
Net interest income after provision for loan losses			861,306				927,234				2,723,198				2,777,068
NON-INTEREST INCOME
Gain(Loss) on sale of real estate owned			300				(1,115	)			(2,540	)			(3,096	)
Service charges			31,351				28,358				93,781				99,019
Rental income			9,597				15,969				34,632				83,898
Other			3,581				3,656				11,010				11,237
Total non-interest income			44,829				46,868				136,883				191,058
NON-INTEREST EXPENSE
Salaries and employee benefits			403,015				416,893				1,200,653				1,248,971
Advertising			3,844				7,894				15,221				17,535
Office supplies, telephone and postage			23,613				29,560				77,620				82,039
Loan expenses			6,561				14,276				40,893				62,140
Occupancy expense			146,685				155,811				440,038				462,220
Federal insurance premiums			1,247				43,083				86,673				128,669
Real estate owned loss reserve			49,000				−				62,100				48,285
Data processing expenses			61,431				61,894				188,589				181,257
ATM expenses			11,310				7,297				27,610				21,221
Bank charges and fees			20,504				20,890				64,606				63,641
Insurance and surety bond premiums			20,575				19,981				65,304				69,069
Dues and subscriptions			8,831				10,933				33,285				35,204
Professional fees			77,164				68,037				202,784				220,087
Real Estate Owned expense			31,831				59,836				93,982				200,333
Other			35,175				36,962				105,036				104,847
Total non-interest expense			900,786				953,347				2,704,394				2,945,518
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)			5,349				20,755				155,687				22,608
Income tax expense (benefit)			2,030				8,133				74,482				(12,217	)
NET INCOME			3,319				12,622				81,205				34,825
INCOME PER COMMON SHARE		$	.00			$	.01			$	0.09			$	0.04

 

See Notes to the Unaudited Consolidated Financial Statements.

  

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(Unaudited)

 

Nine Months Ended

---

 

		December 31, 2016				December 31, 2015
Net Income		$	81,205			$	34,825
Other comprehensive loss net of tax:
Unrealized gain (Loss) on investment securities available for sale, net of deferred tax of $3,280 and $1,710 for the nine months ended			(12,069	)			4,275
Other comprehensive income (loss)			(12,069	)			4,275
Total Comprehensive Income		$	69,136			$	39,100

 

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, 2016			945,425			$	9,454			$	9,988,509			$	3,918,476			$	(501,065	)		$	(119,662	)		$	13,295,712
Net income															81,205												81,205
Other comprehensive income, net of tax:
Change in unrealized gain on securities- available- for-sale, net of deferred income tax()																							(12,069	)			(12,069	)
Employee stock option expense											26,415																26,415
Shares of common stock transferred to ESOP for services											(4,910	)							45,551								40,641
Balance at December 31, 2016			945,425			$	9,454			$	10,010,014			$	3,999,681			$	(455,514	)		$	(131,731	)		$	13,431,904

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended December 31,
		2016				2015
Cash flow from operating activities
Net Income (Loss)		$	81,205			$	34,825
Adjustments to reconcile net loss to net cash provided by operating activities:
ESOP amortization			45,551				33,075
Deferred income taxes			71,780				(14,468	)
Depreciation			194,432				198,048
Discount accretion net of premium amortization			(31,307	)			5,601
Provision(recovery) for loan losses			(22,000	)			10,000
Loss on sale of real estate owned			2,540				3,096
Compensation expense for stock options			21,505				23,631
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable			11,771				54,689
Other assets			175,971				79,426
Increase (decrease) in:
Accrued interest payable			(4,721	)			(5,098	)
Other liabilities			82,274				(28,331	)
Net cash provided by operating activities			629,001				394,494
Cash flows from investing activities
Proceeds of securities available for sale			525,109				524,433
Purchases of securities available for sale			(500,000	)			(1,500,000	)
Purchases of securities held-to-maturity			(19,965,000	)			(4,736,250	)
Proceeds from maturities and principal repayments of securities held-to-maturity			18,919,864				5.503,192
(Purchase) sale of investment required by law – stock in Federal Home Loan Bank			129,500				52,500
Proceeds from sale of real estate owned			466,285				470,718
Net (increase) decrease in loans			(1,234,749	)			(3,626,310	)
Purchases of premises and equipment			(11,737	)			(61,078	)
Net cash provided by(used in) investing activities			(1,670,728	)			(3,372,795	)
Cash flows from financing activities
Increase in deposits			2,915,685				2,231,916
Increase in advance payments by borrowers for taxes and insurance			21,320				87,292
(Decrease)in Federal Home Loan Bank advance			(3,000,000	)			(1,000,000	)
Net cash provided by financing activities			(62,995	)			1,319,208

 

 

		Nine Months Ended December 31,
		2016				2015
Net (decrease) in cash and cash equivalents		$	(1,104,722	)		$	(1,659,093	)
Cash and cash equivalents, beginning of the period			12,127,388				10,450,448
Cash and cash equivalents, end of period			11,022,666				8,791,355
Supplemental Disclosures:
Cash paid during the period for interest			402,467				443,654
Cash paid during the period for income taxes			2,500				2,500
Loans transferred to foreclosed real estate during the period			610,148				246,382
Net change in unrealized gain on securities available-for-sale net of tax			(12,069	)			4,275

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

December 31, 2016

 

(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 and nine month periods ended December 31, 2016 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, 2016.

 

(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 107 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 2015 remains subject to examination by Federal and 2013 through 2015 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 December 31,								Nine Months Ended December 31,
		2016				2015				2016				2015
Numerator		$	3,319			$	12,622			$	81,205			$	34,825
Denominators:
Basic shares outstanding			910,239				906,720				910,239				906,720
Effect of dilutive securities			4,252				2,222				4,252				2,222
Dilutive shares outstanding			914,491				908,942				914,491				908,942
Earnings per share:
Basic		$	0.00			$	0.01			$	0.09			$	0.04
Dilutive		$	0.00			$	0.01			$	0.09			$	0.04

 

 

(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 December 31, 2016 were 8.96%, 16.35% and 17.61%, respectively.

 

 

(7)	Recent Accounting Pronouncements

 

There was one recent amendment to an accounting pronouncements since the March 31, 2016 audited financial statements.

 

In August 2015, the FASB issued ASU 2015-14: Revenue from Contracts with Customers – Deferral of the Effective Date. On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. For public business entities, the effective date was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In response to stakeholders’ requests to defer the effective date of the guidance in Update 2014-09 and in consideration of feedback received through extensive outreach with preparers, practitioners and users of financial statements, the Board issued proposed Accounting Standards Update, Revenue from Contracts with Customers: Deferral of the Effective Date. The amendments in this update defer the effective date of Update 2014-09 for all entities by one year. Public business entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company intends to comply with the effective date of this update.

 

(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 inputs 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, 2016
Available-for-sale securities		$	−			$	2,105			$	−
March 31, 2016
Available-for-sale securities		$	−			$	2,150			$	−

 

 

Assets and Liabilities on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2016 and March 31, 2015 are as follows (dollars in thousands):

 

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
December 31, 2016
Impaired loans		$	−			$	−			$	4,852
Real estate owned			−				−				1,723
Total		$	−			$	−			$	6,575
March 31, 2016
Impaired loans		$	−			$	−			$	4,966
Real estate owned			−				−				1,763
Total		$	−			$	−			$	6,729

 

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, 2016 and March 31, 2016 was as follows:

 

		December 31, 2016
		Carrying Amount				Level 1				Level 2				Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents		$	11,023			$	11,023			$	−			$	−
Investment securities-available for sale			2,105				−				2,105				−
Investment securities-held to maturity			22,661				−				22,661				−
Loans – net			83,027				−				−				82,942
FHLB stock			124				−				−				−
Accrued interest receivable			357				357				−				−
Bank–owned life insurance			174				174				−				−
Real estate owned			1,723				−				−				1,723
Total financial assets		$	121,194			$	11,554			$	24,766			$	84,665
Financial Liabilities:
Deposits-non-interest bearing		$	11,711			$	11,711			$	−			$	−
Deposits-interest bearing			103,069				−				102,350				−
Advance payments by borrowers for taxes and insurance			454				454				−				−
Accrued interest payable			1				1				−				−
Total financial liabilities		$	115,235			$	12,166			$	102,350			$	−

 

 

		March 31, 2016
		Carrying Amount				Level 1				Level 2				Level 3
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents		$	12,127			$	12,127			$	−			$	−
Investment securities-available for sale			2,122				−				2,150				−
Investment securities-held to maturity			21,585				−				21,640				−
Loans receivable,– net			82,198				−				−				84,744
FHLB stock			254				254				−				−
Accrued interest receivable			369				369				−				−
Bank-owned life insurance			174				174				−				−
Real estate owned			1,763				−				−				1,763
Total financial assets		$	120,592			$	12,924			$	23,790			$	86,507
Financial Liabilities:
Deposits-non-interest bearing		$	12,054			$	12,054			$	−			$	−
Deposits-interest bearing			99,811				−				99,900				−
Advances from Federal Home Loan Bank			3,000				3,000				−				−
Advance payments by borrowers for taxes and insurance			433				433				−				−
Accrued interest payable			6				6				−				−
Total financial liabilities		$	115,304			$	15,493			$	99,900			$	−

 

 

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, 2016

March 31, 2016

Contract Value

Estimated Fair Value

Contract Value

Estimated Fair Value

Off-balance sheet instruments

Commitments to extend credit

$

8,430

$

−

$

7,469

$

−

 

(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, 2016 and March 31, 2016 are summarized as follows (dollars in thousands):

 

		December 31, 2016				March 31, 2016
Residential (one-to four-family) real estate		$	62,069			$	62,251
Multi-family and commercial real estate			9,902				9,569
Commercial			2,036				2,290
Home equity			8,825				8,528
Consumer			642				682
Construction			635				54
Total loans			84,109				83,374
Net deferred loan origination fees			(66	)			(77	)
Allowance for loan losses			(1,016	)			(1,099	)
Loans, net		$	83,027			$	82,198

 

 

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At December 31, 2016, 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, 2016, 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, 2016, the Bank has entered into formal forbearance agreements with six relationships totaling $871 thousand that require current payments while the borrowers restructure their finances.

 

The following table represents loans by credit quality indicator at December 31, 2016 (dollars in thousands):

 

		Pass				Special Mention Loans				Classified Loans				Non- Performing Loans				Total
Residential real estate		$	59,112			$	−			$	−			$	2,957			$	62,069
Multi-family and commercial real estate			8,552				−				174				1,176				9,902
Commercial			1,830				−				−				206				2,036
Home equity			8,781				−				−				44				8,825
Consumer			642				−				−				−				642
Construction			582				−				−				53				635
		$	79,499			$	−			$	174			$	4,436			$	84,109

 

 

The following table represents past-due loans as of December 31, 2016 (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		$	712			$	473			$	1,993			$	3,178			$	58,891			$	62,069
Multi-family and commercial real estate			−				239				694				933				8,969				9,902
Commercial			−				214				171				385				1,651				2,036
Home Equity			−				88				216				304				8,521				8,825
Consumer			3				15				−				18				624				642
Construction			−				−				−				−				635				635
Total Loans		$	715			$	1,029			$	3,074			$	4,818			$	79,291			$	84,109
Percentage of Total Loans			0.8	%			1.2	%			3.7	%			5.7	%			94.3	%			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 December 31, 2016, the Bank had 18 loan relationships totaling $3.3 million in non-accrual loans as compared to 18 relationships totaling $2.8 million at March 31, 2016. The average balance of impaired loans totaled $5.2 million for the nine months ended December 31, 2016 as compared to $5.0 million for the year ended March 31, 2016, and interest income recorded on impaired loans for the nine months ended December 31, 2016 totaled $125 thousand as compared to $201 thousand for the year ended March 31, 2016.

  

 

The following table represents data on impaired loans at December 31, 2016 and March 31, 2016 (dollars in thousands):

 

		December 31, 2016				March 31, 2016
Impaired loans for which a valuation allowance has been provided		$	−			$	—
Impaired loans for which no valuation allowance has been provided			5,031				4,966
Total loans determined to be impaired			5,031				4,966
Allowance for loans losses related to impaired loans			−				—
Average recorded investment in impaired loans			5,246				5,054
Cash basis interest income recognized on impaired loans			125				201

 

The following table presents impaired loans by portfolio class at December 31, 2016 (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		$	2,371			$	2,315			$	−			$	2,822			$	38
Multi-family and commercial real estate			2,167				2,146				−				2,025				71
Commercial			206				206				−				139				7
Home equity			318				311				−				200				7
Consumer			−				−				−				2				−
Construction			58				53								58				2
Total		$	5,120			$	5,031			$	−			$	5,246			$	125

 

The following table presents impaired loans by portfolio class at March 31, 2016 (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		$	2,964			$	2,920			$	−			$	2,913			$	71
Multi-family and commercial real estate			1,938				1,935				−				1,992				117
Commercial			56				56				−				34				9
Home equity			−				−				−				39				1
Consumer			−				−				−				16				−
Construction			59				54				−				60				3
Subtotal		$	5,017			$	4,965			$	−			$	5,054			$	201

 

 

The following table represents nonaccrual loans as of December 31, 2016 and March 31, 2016 (dollars in thousands):

 

		December 31, 2016				March 31, 2016
Non-accrual loans:
Residential real estate		$	1,252			$	1,333
Multi-family and commercial real estate			508				553
Commercial			206				−
Consumer			−				21
Home Equity			44				111
Construction			−				−
Total non-accrual loans			2,010				2,018
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		$	914			$	744
Multi-family and commercial real estate			425				−
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			−				−
Total troubled debt restructurings in non-accrual status			1,339				744
Performing under modified terms:
Residential real estate			791				787
Multi-family and commercial real estate			243				766
Commercial			−				−
Consumer			−				−
Home Equity			−				−
Construction			53				54
Total troubled debt restructurings performing under modified terms:			1,087				1,607
Total troubled debt restructurings			2,426				2,351
Total non-performing loans			4,436				4,369
Real estate owned			1,723				1,764
Total non-performing assets			6,159				6,133
Non-performing loans as a percentage of loans			5.27	%			5.24	%
Non-performing assets as a percentage of loans and real estate owned			7.18	%			7.20	%
Non-performing assets as percentage of total assets			4.75	%			4.74	%

 

 

During the nine months ended December 31, 2016, the Bank experienced a $586 thousand net increase in non-accrual loans. This change reflects the downgrading of six loan relationships to non-accrual status totaling $1.3 million during the nine months ended December 31, 2016. The downgraded loans consisted of two residential mortgages totaling $486 thousand, three commercial loan relationships consisting of five loans totaling $612 thousand and one home equity loan totaling $172 thousand. These additions to the non-accruals were offset by one residential mortgage loan for $100 thousand and one home equity loan for $77 thousand that returned to accruing status; one commercial loan for $40 thousand that was charged off and two residential mortgages totaling $468 thousand that were transferred to real estate owned.

 

The following table presents troubled debt restructurings that occurred during the periods ended December 31, 2016 and March 31, 2016 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, 2016												March 31, 2016
						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				77				95				1			$	164			$	173

 

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, 2016 and March 31, 2016:

 

		December 31, 2016				March 31, 2016
Balance, beginning of period		$	1,764			$	2,433
Additions from loan foreclosures			610				332
Additions from capitalized costs			9				−
Dispositions of REO			(595	)			(752	)
Gain (loss) on sale of REO			(3	)			(3	)
Valuation adjustments in the period			(62	)			(246	)
Balance, end of period		$	1,723			$	1,764

 

The following table presents the changes in fair value adjustments to REO for the periods ended December 31, 2016 and March 31, 2016:

 

		December 31, 2016				March 31, 2016
Balance, beginning of period		$	227			$	851
Valuation adjustments added in the period			62				247
Valuation adjustments on disposed properties during the period			(185	)			(871	)
Balance, end of period		$	104			$	227

 

 

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

 

		December 31, 2016				March 31, 2016
Balance at beginning of period		$	1,099			$	1,185
Provision:
Commercial			(40	)			(12	)
Commercial real estate			(23	)			9
Residential real estate			87				(132	)
Home Equity			(13	)			11
Consumer			(35	)			53
Construction			2				−
Total provision			(22	)			(71	)
Charge-offs:
Commercial			−				−
Commercial real estate			71				17
Residential real estate			102				40
Home equity			−				11
Consumer			−				71
Recoveries			(112	)			(124	)
Total Net Charge-Offs		$	61			$	15
Balance at end of period		$	1,016			$	1,099
Period-end loans outstanding		$	84,109			$	83,374
Average loans outstanding		$	83,416			$	83,666
Allowance as a percentage of period-end loans			1.21	%			1.32	%
Net charge-offs as a percentage of average loans			0.07	%			0.02	%

 

 

Additional details for changes in the allowance for loan by loan portfolio as of December 31, 2016 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		$	80			$	339			$	568			$	87			$	25			$	−			$	1,099
Loan charge-offs			−				(71	)			(102	)			−				−				−				(173	)
Recoveries			28				48				8				−				28				−				112
Provision for loan losses			(40	)			(23	)			87				(13	)			(35	)			2				(22	)
Balance, end of period		$	68			$	293			$	561			$	74			$	18			$	2			$	1,016
Ending balance for loans individually evaluated for impairment		$	133			$	1,666			$	2,455			$	545			$	−			$	53			$	4,852
Ending balance for loans collectively evaluated for impairment			1,903				8,236				59,614				8,280				642				582			$	79,257
Loans receivable:
Ending balance		$	2,036			$	9,902			$	62,069			$	8,825			$	642			$	635			$	84,109
Ending balance: loans individually evaluated for impairment		$	133			$	1,666			$	2,455			$	545			$	−			$	53			$	4,852
Ending balance: loans collectively evaluated for impairment		$	1,903			$	8,236			$	59,614			$	8,280			$	642			$	582			$	79,257

 

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, 2016, the Bank experienced one full charge-off relating to one loan relationship totaling $40 thousand, one partial charge-off related to one relationship totaling $31 thousand and two charge-offs on two properties when they were transferred to real estate owned totaling $102 thousand as compared to one charge-off relating to one loan relationships totaling $71 thousand and partial charge-offs relating to three loan relationships totaling $68 thousand for the year ended March 31, 2016.

 

 

At December 31, 2016, the Bank maintained an allowance for loan loss ratio of 1.21% to loans outstanding. Non-performing assets have increased by $26 thousand over their stated levels at March 31, 2016, representing a non-performing asset to total asset ratio of 4.75% at December 31, 2016 as compared to a non-performing asset to total asset ratio of 4.74% at March 31, 2016. 

 

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, 2016 and March 31, 2016 are as follows:

 

		Held-to-Maturity December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
(Dollars in Thousands)
Federal Farm Credit Bank Bond		$	8,065			$	−			$	(324	)		$	7,741
Federal Home Loan Bank Bonds			8,353				−				(368	)			7,985
Federal Home Loan Mortgage Corporation Bonds			1,000				−				(55	)			945
Federal National Mortgage Association			3,000				−				(107	)			2,893
Municipal Bond			1,536				−				(4	)			1,532
			21,954				−				(858	)			21,096
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation			245				11				−				256
Federal National Mortgage Association			329				30				−				359
Government National Mortgage Corporation			133				4				−				137
			707				45				−				752
Total		$	22,661			$	45			$	(858	)		$	21,848

 

 

		Held-to-Maturity March 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
(Dollars in Thousands)
Federal Home Loan Bank Bonds		$	5,802			$	28			$	(4	)		$	5,826
Federal Farm Credit Bonds			9,438				21				(1	)			9,458
Federal Home Loan Mortgage Corporation Bonds			732				−				−				732
Federal National Mortgage Association Bond			4,000				17								4,017
Municipal Bond			736								(1	)			735
			20,708				66				(6	)			20,768
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation			322				26				(8	)			340
Federal National Mortgage Association			398				40				(3	)			435
Government National Mortgage Corporation			157				7				(1	)			163
			877				73				(12	)			938
Total		$	21,585			$	139			$	(18	)		$	21,706

 

 

 

		Available for Sale December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Certificates of Deposit		$	2,000			$	10			$	−			$	2,010
Mutual Fund Shares			97				−				(2	)			95
		$	2097			$	10			$	(2	)		$	2,105

 

 

		Available-for-Sale
		March 31, 2016
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Federal National Mortgage Association		$	500			$	−			$	(3	)		$	497
Certificates of Deposit			1,500				31				−				1,531
Mutual Fund Shares			122				2				(2	)			122
Total		$	2,122			$	33			$	(5	)		$	2,150

 

 

The following is a summary of maturities of securities held-to-maturity and available-for-sale as of December 31, 2016 and March 31, 2016:

 

		December 31, 2016
		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			$	1,532			$	−			$	−
After one year through five years			500				496				2,000				2,010
After five years through ten years			8,576				8,287				−				−
After ten years			12,049				11,533				−				−
Equity securities			−				−				97				95
		$	22,661			$	21,848			$	2,097			$	2,105

 

		March 31, 2015
		Held to Maturity								Available for Sale
(Dollars in Thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:
One year or less		$	736			$	735			$	−			$	−
After one year through five years			945				945				1,000				1,025
After five years through ten years			8,380				8,384				1,000				1,003
After ten years			11,524				11,642				−				−
Equity securities			−				−				122				122
		$	21,585			$	21,706			$	2,122			$	2,150

 

 

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, 2016 and March 31, 2016, 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
December 31, 2016		Value				Losses				Value				Losses				Value				Losses
Federal Farm Credit Bonds		$	7,741			$	(324	)		$	−			$	−			$	7,741			$	(324	)
Federal Home Loan Bank Bond			7,985				(368	)			−				−				7,985				(368	)
Federal National Mortgage Association			2,893				(107	)			−				−				2,893				(107	)
Federal Home Loan Mortgage Corporation Bond			945				(55	)			−				−				945				(55	)
Municipal bonds			1,536				(4	)			−				−				1,536				(4	)
Total		$	21,100			$	(858	)		$	−			$	−			$	21,100			$	(858	)

 

 

		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, 2016		Value				Losses				Value				Losses				Value				Losses
Federal Home Loan Bank Bonds		$	−			$	−			$	496			$	( 4	)		$	496			$	( 4	)
Federal Farm Credit Bonds			−				−				499				( 1	)			499				( 1	)
Federal National Mortgage Association			−				−				497				( 3	)			497				( 3	)
Municipal Bonds			735				( 1	)			−				−				735				( 1	)
Mutual fund shares			−				−				64				( 2	)			64				( 2	)
			735				( 1	)			1,556				( 10	)			2,291				( 11	)
Mortgage –Backed Securities:
Federal Home Loan Mortgage Corporation			−				−				103				(8	)			103				(8	)
Federal national Mortgage Association			−				−				154				(3	)			154				(3	)
Government national Mortgage Association			−				−				22				(1	)			22				(1	)
			−				−				279				(12	)			279				(12	)
Total		$	735			$	(1	)		$	1,835			$	(22	)		$	2,570			$	(23	)

 

 

 

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, 2016, the 42 debt securities with unrealized losses have depreciated 3.9% 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, 2016 and 2015 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, 2016 were $129.6 million, an increase of $200 thousand from total assets of $129.4 million at March 31, 2016. There was no change in the total liabilities of $116.1 million for the period ending December 31, 2016 and March 31, 2016. Total stockholders’ equity increased $100 thousand to $13.4 million at December 31, 2015, primarily due to net income and a decrease in unearned common stock held by the Bank’s ESOP.

 

Loans. At December 31, 2016, total loans, net, were $83.0 million, or 64.0% of total assets. Overall loans increased by $829 thousand during the nine months ended December 31, 2016, primarily due to the origination of new loans. Construction loans increased by $581 thousand, commercial and multi-family real estate loans by $333 thousand and home equity loans by $297 thousand while residential real estate loans decreased by $182 thousand and commercial loans by $254 thousand.

 

Total nonperforming loans at December 31, 2016 increased $67 thousand from March 31, 2016 primarily due to one residential mortgage in the amount of $95 thousand that was restructured during the period and is considered non-performing.

 

Securities. The investment securities portfolio was $24.8 million, or 19.1% of total assets, at December 31, 2016. At that date, 2.9% of the investment portfolio was invested in mortgage-backed securities, 8.1% was invested in certificates of deposit while the remainder was invested primarily in U.S. Government agency and other debt securities. Investment securities increased $1.1 million compared to March 31, 2016.

 

 

Deposits. Total deposits were $114.8 million at December 31, 2016, an increase of $2.9 million compared to March 31, 2016. Deposits increased 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 ended December 31, 2016 by $9.3 million while time deposits decreased by $4.7 million.

  

Results of Operations for the Three and Nine Months Ended December 31, 2016 and 2015

 

Financial Highlights.  Net income for the three and nine months ended December 31, 2016 was $3 thousand and $81 thousand, respectively as compared to $13 thousand and $35 thousand for the same prior year periods. The increase in net income for the nine months ended December 31, 2016 was primarily the result of decrease in additional provisions to loan loss reserves and the real estate owned loss reserve and salaries and employee benefits.

 

Net Interest Income.   Net interest income decreased $40 thousand to $887 thousand for the three months and decreased $86 thousand to $2.7 million for the nine months ended December 31, 2016. The Bank saw an increase in the interest rate spread (7 basis point) and a decrease in net interest margin (9 basis points) for the nine month period. Total interest income decreased 52 thousand for the three months ending December 31, 2016 compared to the three months ended December 31, 2015. Interest income declined 3.5% for the nine months ending December 31, 2016 compared to the nine months ended December 31, 2015. Total interest expense decreased by 8.6% between the three month period and 6.5% for the nine month period ending December 31, 2016.

 

Average loans in the nine months ended December 31, 2016 increased $390 thousand, or 0.5%, compared with the same period in 2015, as new originations were slightly higher than 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, 2016 decreased $3.8 million, or 14.8%, compared to the same period in 2015. The decrease in the investment portfolio was due to calls of debt securities due to the low interest rate environment during the period. Declining interest rates offset by the increase in outstanding balances in the loan portfolio resulted in an average yield on earning assets of 3.51% for the nine months ended December 31, 2016 and 2015.

 

Average interest-bearing deposits in the nine months ended December 31, 2016 increased $2.8 million or 2.8%, compared with the same period in 2015. Interest rates decreased the average cost of deposits to 0.52%, compared with 0.55% for the same period in 2015.

 

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 $26 thousand in the three months and a recovery of $22 thousand in the nine months ended December 31, 2016 compared to $0 in the three months and $10 thousand in the nine months ended December 31, 2015.  We had $77 thousand in charge-offs in the three months and $173 thousand in the nine months ended December 31, 2016, compared to $0 thousand and $122 thousand in charge-offs in the same prior year periods. We had recoveries to the allowance of $25 thousand in the three months and $112 thousand in the nine months ended December 31, 2016 as compared to $46 thousand and $101 thousand in recoveries in the same prior year period.

 

Non-Interest Income.  Non-interest income decreased $2 thousand in the three month period ending December 31, 2016 compared to the three month period ended December 31, 2015, primarily due to a decrease in rental income on real estate owned in the period versus the previous year. Non-interest income decreased $54 thousand in the nine months ended December 31, 2016 compared to the same period in the prior year, primarily due to the decrease in rental income on real estate owned.

 

Non-Interest Expenses.  Non-interest expenses decreased $53 thousand in the three months ending December 31, 2016 compared to the three months ended December 31, 2015 primarily due to a decrease in Federal insurance premium but was partially offset by the increase in the real estate owned loss reserve provision of $49 thousand over the prior period. Non-interest expense decreased in the nine months ended December 31, 2016 by $241 thousand over the same period in the prior year primarily due to the decreases in real estate owned expense, Federal insurance premium, and salaries and employee benefits.

 

 

 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, 2016, cash and cash equivalents totaled $11.0 million. At December 31, 2016, 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 December 31, 2016, 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, 2016, we had $2.7 million in outstanding loan commitments. In addition we had $336 thousand in unfunded construction loans and $5.3 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, 2016 totaled $21.8 million, or 56.5% 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, 2017. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

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

 

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. As of December 31, 2016, the Company had $399 thousand in cash and cash equivalents compared to $480 thousand as of December 31, 2015.  Substantially all of the Company’s cash and cash equivalents were obtained from proceeds it retained from the Bank’s mutual-to-stock conversion completed in October 2013. In addition to its operating expenses, Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions.   

 

 

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, 2016, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 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, 2016, 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, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of 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 14, 2017	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and Chief Executive Officer
Dated: February 14, 2017	By:	/s/ Eva Modi
		Eva Modi
		Chief Financial Officer

  

 

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