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, 2017

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒     No ☐

 

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

Yes ☒     No ☐

 

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

 

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

                

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

 

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

 

As of February 6, 2018 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, 2017 (Unaudited) and March 31, 2017	1
	Consolidated Statements of Income (Loss) for the Three and Nine Months Ended December 31, 2017 and 2016 (Unaudited)	2
	Consolidated Statements of Comprehensive Income for the Nine Months Ended December 31, 2017 (Unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended December 31, 2017 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2017 and 2016 (Unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		31

  

 

 

		December 31, 2017				March 31, 2017
		(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from banks		$	1,035,252			$	511,355
Interest-bearing deposits			10,700,468				6,487,188
Total cash and cash equivalents			11,735,720				6,998,543
Investment securities:
Securities available-for-sale (amortized cost of $2,066,023 and $2,588,817 at December 31, 2017 and March 31, 2017, respectively)			2,065,571				2,594,888
Securities held-to-maturity (fair value $20,655,700 and $21,797,695 at December 31, 2017 and March 31, 2017, respectively)			21,281,594				22,622,835
Total investment securities			23,347,165				25,217,723
Loans, net of allowance for loan losses of $1,005,774 at December 31, 2017 (unaudited), $1,001,449 at March 31, 2017			83,701,818				84,414,361
Accrued interest receivable			378,836				378,243
Real estate owned			1,311,438				1,271,302
Federal Home Loan Bank, at cost			102,000				124,300
Premises and equipment, net			5,878,969				6,047,703
Deferred income taxes			1,396,400				1,981,950
Bank-owned life insurance			178,514				178,514
Other assets			148,586				374,714
Total assets		$	128,179,446			$	126,987,353
LIABILITIES
Deposits
Non-interest bearing deposits		$	12,364,748			$	11,703,567
Interest bearing deposits			101,224,233				100,377,179
Total deposits			113,588,981				112,080,746
Accrued interest payable			1,734				6,273
Advance payments by borrowers for taxes and insurance			446,000				500,485
Other liabilities			892,237				908,005
Total liabilities			114,928,952				113,495,509
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 5,000,000 authorized at December 31, 2017 and March 31, 2017, no shares issued
Common stock, $.01 par value, 20,000,000 shares authorized; 945,425 shares issued and outstanding at December 31, 2017 and March 31, 2017		$	9,454			$	9,454
Additional paid-in capital			10,071,835				10,029,506
Retained earnings, substantially restricted			3,711,194				4,036,465
Unearned common stock held by employee stock ownership plan			(409,963	)			(455,514	)
Accumulated other comprehensive (loss)			(132,026	)			(128,067	)
Total stockholder’s equity			13,250,494				13,491,844
Total liabilities and stockholders’ equity		$	128,179,446			$	126,987,353

---

 

		Three Months Ended December 31,								Nine Months Ended December 31,
		2017				2016				2017				2016
INTEREST INCOME
Loans		$	897,940			$	875,015			$	2,706,558			$	2,641,794
Investment securities			163,567				144,313				481,205				460,080
Total interest income			1,061,507				1,019,328				3,187,763				3,101,874
INTEREST EXPENSE
Interest-bearing checking accounts			10,214				11,512				26,987				33,664
Passbook and money market accounts			32,954				30,158				95,798				89,850
Certificates of deposits			86,888				90,016				257,019				272,014
Federal Home Loan Bank Advances			−				336				15				5,148
Total interest expense			130,056				132,022				379,819				400,676
Net interest income			931,451				887,306				2,807,944				2,701,198
Provision (recovery)for loan losses			(25,000	)			26,000				(110,000	)			(22,000	)
Net interest income after provision for loan losses			956,451				861,306				2,917,944				2,723,198
NON-INTEREST INCOME
Gain on sale of an asset			−				−				71,516				−
Gain(Loss) on sale of real estate owned			(1,218	)			300				22,197				(2,540	)
Service charges			30,139				31,351				93,490				93,781
Rental income			9,310				9,597				28,510				34,632
Other			3,691				3,581				11,704				11,010
Total non-interest income			41,922				44,829				227,417				136,883
NON-INTEREST EXPENSE
Salaries and employee benefits			405,615				403,015				1,222,418				1,200,653
Advertising			4,708				3,844				12,615				15,221
Office supplies, telephone and postage			22,044				23,613				76,257				77,620
Loan expenses			4,925				6,561				25,158				40,893
Occupancy expense			140,376				146,685				421,574				440,038
Federal insurance premiums			19,444				1,247				61,506				86,673
Real estate owned loss reserve			−				49,000				80,218				62,100
Data processing expenses			65,226				61,431				190,930				188,589
ATM expenses			14,076				11,310				39,220				27,610
Bank charges and fees			19,566				20,504				61,194				64,606
Insurance and surety bond premiums			19,944				20,575				60,711				65,304
Dues and subscriptions			5,362				8,831				22,417				33,285
Professional fees			49,943				77,164				200,558				202,784
Real Estate Owned expense			29,010				31,831				83,432				93,982
Merger Related Expense			220,959				−				220,959				−
Other			32,950				35,175				100,601				105,036
Total non-interest expense			1,054,148				900,786				2,879,768				2,704,394
INCOME (LOSS) BEFORE INCOME TAX EXPENSE			(55,775	)			5,349				265,593				155,687
Income tax expense			422,964				2,030				590,864				74,482
NET INCOME (LOSS)			(478,739	)			3,319				(325,271	)			81,205
INCOME (LOSS) PER COMMON SHARE		$	(0.52	)		$	.00			$	(0.36	)		$	0.09

---

 

		December 31, 2017				December 31, 2016
Net Income (Loss)		$	(325,271	)		$	81,205
Other comprehensive loss net of tax:
Unrealized (loss) on investment securities available for sale, net of deferred tax of ($136) and $3,280 for the nine months ended			(3,959	)			(12,069	)
Other comprehensive (loss)			(3,959	)			(12,069	)
Total Comprehensive Income (loss)		$	(329,230	)		$	69,136

---

 

		Common Stock																Unearned Employee				Accumulated
		Shares				Amount				Additional Paid-in Capital				Retained Earnings				Stock Ownership Plan				Other- Comprehensive Income (Loss)				Total Stockholders' Equity
Balance at March 31, 2017			945,425				9,454			$	10,029,506			$	4,036,465				(455,514	)			(128,067	)			13,491,844
Comprehensive loss
Net loss															(325,271	)											(325,271	)
Other comprehensive loss, net of tax:
Change in unrealized gain on securities-available-for-sale, net of deferred income tax of--------																							(3,959	)			(3,959	)
Employee stock option expense											34,430																34,430
Shares of common stock transferred to ESOP for services											7,899								45,551								53,450
Balance at December 31, 2017			945,425				9,454				10,071,835				3,711,194				(409,963	)			(132,026	)			13,250,494

---

 

		Nine Months Ended December 31,
		2017				2016
Cash flow from operating activities
Net Income (Loss)		$	(325,271	)		$	81,205
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
ESOP amortization			45,551				45,551
Deferred income taxes			588,114				71,780
Depreciation			175,134				194,432
Discount accretion net of premium amortization			363				(31,307	)
Recovery of loan losses			(110,000	)			(22,000	)
(Gain) Loss on sale of real estate owned			(22,197	)			2,540
Compensation expense for stock options			42,329				21,505
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable			(593	)			11,771
Other assets			226,128				175,971
Increase (decrease) in:
Accrued interest payable			(4,539	)			(4,721	)
Other liabilities			(15,768	)			82,274
Net cash provided by operating activities			599,251				629,001
Cash flows from investing activities
Proceeds of securities available for sale			522,794				525,109
Purchases of securities available for sale			−				(500,000	)
Purchases of securities held-to-maturity			−				(19,965,000	)
Proceeds from maturities and principal repayments of securities held-to-maturity			1,340,878				18,919,864
Sale of investment required by law – stock in Federal Home Loan Bank			22,300				129,500
Proceeds from sale of real estate owned			311,342				466,285
Net (increase) decrease in loans			493,262				(1,234,749	)
Purchases of premises and equipment			(6,400	)			(11,737	)
Net cash provided by(used in) investing activities			2,684,176				(1,670,728	)
Cash flows from financing activities
Increase in deposits			1,508,235				2,915,685
(Increase) decrease in advance payments by borrowers for taxes and insurance			(54,485	)			21,320
(Decrease) in Federal Home Loan Bank advance			−				(3,000,000	)
Net cash provided by (used in) financing activities			1,453,750				(62,995	)

---

 

		Nine Months Ended December 31,
		2017				2016
Net increase (decrease) in cash and cash equivalents		$	4,737,177			$	(1,104,722	)
Cash and cash equivalents, beginning of the period			6,998,543				12,127,388
Cash and cash equivalents, end of period			11,735,720				11,022,666
Supplemental Disclosures:
Cash paid during the period for interest			386,242				402,467
Cash paid during the period for income taxes			2,500				2,500
Loans transferred to foreclosed real estate during the period			410,000				610,148
Net change in unrealized gain on securities available-for-sale net of tax			(3,959	)			(12,069	)

---

 

(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, 2017 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the consolidated financial statements and footnotes thereto of the Company included in the Company’s annual report on Form 10-K for the year ended March 31, 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.

 

 On December 22, 2017 federal tax law changes contained in H.R. 1 were passed into law. These changes included a reduction in the federal corporate tax rates, lowering them from 35% to 21%. Due to the date of the enactment, even though the tax rate changes do not come into effect until 2018, the analysis and measurement of our deferred tax asset as of December 31, 2017, had to take these changes into account. This resulted in a one-time $428 thousand charge, or $0.46 per diluted share, of additional income tax expense.

 

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

 

(5)	Earnings Per Share

 

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

 

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

 

The calculated basic and dilutive EPS are as follows:

 

 

 

 

(6)	Termination of Regulatory Agreement

 

On September 27, 2017, the Office of the Comptroller of the Currency (the “OCC”) terminated the formal written agreement dated November 21, 2012 between the OCC and the Bank, effective immediately. In addition, the OCC terminated the higher individual minimum capital ratios that the OCC had required for the Bank. At December 31, 2017, the Bank exceeded the minimum regulatory requirements to be considered “well capitalized.” As a result of the OCC's action, the Bank is no longer considered to be in “troubled condition.”

 

(7)	Recent Accounting Pronouncements

 

In August 2017, the FASB issued ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU-2017 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in the interim period, permitted. The Company plans to adopt ASU-2017 on April 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, the Company currently expects the adoption to have immaterial impact to the financial statements.

 

In May 2017, the FASB issued ASU 2017-09: Compensation —Stock Compensation (Topic 718): Scope of Modification Accounting. The Board is issuing this update to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a shared-based payment amount. The amendments in this update affect any entity that changes the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. To date, the Company has not changed the terms or conditions of a share-based payment award. As a result, the company does not anticipate an impact to the consolidated financial statements.

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

(8)	Fair Value of Financial Instruments

 

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

 

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

 

●    Level 1

Level 1 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):

 

 

 

Assets and Liabilities on a Non-Recurring Basis

 

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

 

 

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, 2017 and March 31, 2017 was as follows:

 

 

 

 

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.

 

 

 

(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, 2017 and March 31, 2017 are summarized as follows (dollars in thousands):

 

 

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At December 31, 2017, the loans-to-one-borrower limitation was $1.9 million; this excluded an additional 10% of adjusted capital funds or approximately $1.3 million, which may be loaned if collateralized by readily marketable securities. At December 31, 2017, there were no loans outstanding or committed to any one borrower, which individually or in the aggregate exceeded the Bank’s loans to-one-borrower limitations of 15% of capital funds.

 

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

 

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

 

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, 2017 (dollars in thousands):

 

 

 

The following table represents past-due loans as of December 31, 2017 (dollars in thousands):

 

 

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, 2017, the Bank had 16 loan relationships totaling $2.3 million in non-accrual loans as compared to 17 relationships totaling $3.2 million at March 31, 2017. The average balance of impaired loans totaled $4.2 million for the nine months ended December 31, 2017 as compared to $5.1 million for the year ended March 31, 2017, and interest income recorded on impaired loans for the nine months ended December 31, 2017 totaled $102 thousand as compared to $173 thousand for the year ended March 31, 2017.

  

 

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

 

 

The following table presents impaired loans by portfolio class at December 31, 2017 (dollars in thousands):

 

 

The following table presents impaired loans by portfolio class at March 31, 2017 (dollars in thousands):

 

 

 

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

 

 

 

During the nine months ended December 31, 2017, the Bank experienced an $895 thousand net decrease in non-accrual loans. This change reflects the return to accruing status of two commercial loan relationships consisting of three loans totaling $479 thousand, one residential loan of $222 thousand and two home equity loans for $184 thousand, the sale of one commercial loan in the amount of $253 thousand that was non-accrual, one residential mortgage totaling $410 thousand that was transferred to real estate owned and one commercial loan that was partially charged off by $35 thousand and principal repayments on other non-accrual loans of $9 thousand. These adjustments were offset by the downgrading of six loans to non-accrual status totaling $697 thousand during the nine months ended December 31, 2017. The downgraded loans consisted of three residential mortgages totaling $385 thousand, two commercial real estate loans totaling $298 thousand and one consumer loan for $14 thousand.

 

The following table presents troubled debt restructurings that occurred during the periods ended December 31, 2017 and March 31, 2017 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.

  

 

 

 

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

 

 

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

 

 

 

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

 

 

 

 

Additional details for changes in the allowance for loan by loan portfolio as of December 31, 2017 are as follows (dollars in thousands):

 

Allowance for Loan Losses

 

 

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, 2017, the Bank experienced one partial charge-off related to one relationship totaling $50 thousand as compared to one charge-off relating to one loan relationships totaling $40 thousand and partial charge-offs relating to three loan relationships totaling $175 thousand for the year ended March 31, 2017 

 

 

At December 31, 2017, the Bank maintained an allowance for loan loss ratio of 1.19% to loans outstanding. Non-performing assets decreased by $320 thousand over their stated levels at March 31, 2017, representing a non-performing asset to total asset ratio of 4.09% at December 31, 2017 as compared to a non-performing asset to total asset ratio of 4.38% at March 31, 2017. 

 

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