10-Q 1 dlno20130630_10q.htm FORM 10-Q dlno20130630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2013

OR

 

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

 

For the transition period from ______________ to _____________

Commission file number: 0-52517

 

 

DELANCO BANCORP, INC.

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

 

United States

  (State or other jurisdiction of incorporation

or organization)

36-4519533

(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 August 12, 2013 there were 1,634,725 shares of the registrant’s common stock outstanding.

 

 
 

 

 

DELANCO BANCORP, INC.

 

FORM 10-Q

 

Index

 

       

Page

No.

PART I.   FINANCIAL INFORMATION

         

Item 1.

 

Consolidated Statements of Financial Condition at June 30, 2013 (Unaudited) and March 31, 2013

 

1

         
   

Consolidated Statements of Operations for the Three Months Ended June 30, 2013 and 2012 (Unaudited)

 

2

         
   

Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2013 (Unaudited)

 

3

         
   

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2013 (Unaudited)

 

4

         
   

Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2013 and 2012 (Unaudited)

 

5

         
   

Notes to Unaudited Consolidated Financial Statements

 

7

         

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

         

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

         

Item 4.

 

Controls and Procedures

 

31

         

Part II.   OTHER INFORMATION

         

Item 1.

 

Legal Proceedings

 

31

         

Item 1A.

 

Risk Factors

 

31

         

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

         

Item 3.

 

Defaults upon Senior Securities

 

31

         

Item 4.

 

Mine Safety Disclosures

 

31

         

Item 5.

 

Other Information

 

31

         

Item 6.

 

Exhibits

 

32

         

Signatures

 

 

 

 
 

 

 

Part I. Financial Information

Item 1. Financial Statements

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

 

   

June 30,

2013

   

March 31,

2013

 
   

(unaudited)

         

ASSETS

               

Cash and cash equivalents

               

Cash and amounts due from banks

  $ 503,847     $ 506,921  

Interest-bearing deposits

    4,150,012       6,215,845  

Total cash and cash equivalents

    4,653,859       6,722,766  

Investment securities:

               

Securities held-to-maturity (fair value $24,784,858 and $20,285,670 at June 30, 2013 and March 31, 2013, respectively)

    25,930,239       20,137,886  

Securities available-for-sale (amortized cost of $2,209,613 and $2,217,032 at June 30, 2013 and March 31, 2013, respectively)

    2,079,362       2,207,018  

Total investment securities

    28,009,601       22,344,904  

Loans, net of allowance for loan losses of $1,023,614 at June 30, 2013 (unaudited), $1,032,818 at March 31, 2013

    86,084,478       88,419,084  

Accrued interest receivable

    447,360       427,736  

Premises and equipment, net

    6,786,771       6,855,000  

Federal Home Loan Bank, at cost

    181,300       202,500  

Deferred income taxes

    1,290,100       1,228,400  

Bank-owned life insurance

    159,398       153,588  

Prepaid and refundable income taxes

    500    

 

Real estate owned

    2,155,566       2,469,800  

Other assets

    299,199       590,804  

Total assets

  $ 130,068,132     $ 129,414,582  
                 

LIABILITIES

               

Deposits

               

Non-interest bearing deposits

  $ 6,955,949     $ 6,872,713  

Interest bearing deposits

    110,962,425       110,161,401  

Total deposits

    117,918,374       117,034,114  
                 

Accrued interest payable

    7,446       9,025  

Advance payments by borrowers for taxes and insurance

    373,818       366,604  

Other liabilities

    417,207       610,259  

Total liabilities

    118,716,845       118,020,002  
                 

COMMITMENTS AND CONTINGENCIES

               
                 

STOCKHOLDERS’ EQUITY

               

Preferred stock, $.01 par value, 3,000,000 shares authorized; no shares issued

               

Common stock, $.01 par value, 7,000,000 shares authorized; 1,634,725 shares issued and outstanding

    16,347       16,347  

Additional paid-in capital

    6,570,852       6,570,852  

Retained earnings, substantially restricted

    5,366,426       5,332,716  

Unearned common stock held by employee stock ownership plan

    (448,567 )     (448,567 )

Accumulated other comprehensive (Loss)

    (153,771 )     (76,768 )

Total stockholder’s equity

    11,351,287       11,394,580  

Total liabilities and stockholders’ equity

  $ 130,068,132     $ 129,414,582  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
1

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

 

   

Three months Ended

June 30,

 
   

2013

   

2012

 

INTEREST INCOME

               

Loans

  $ 1,046,426     $ 1,193,712  

Investment securities

    159,343       149,838  

Total interest income

    1,205,769       1,343,550  
                 

INTEREST EXPENSE

               

Interest-bearing checking accounts

    10,090       9,046  

Passbook and money market accounts

    32,862       52,568  

Certificates of deposits

    161,577       241,514  

Federal Home Loan Bank Advances

 

   

 

Total interest expense

    204,529       303,128  
                 

Net interest income

    1,001,240       1,040,422  

Provision for loan losses

    90,000       80,000  

Net interest income after provision for loan losses

    911,240       960,422  
                 

NON-INTEREST INCOME

               

Income from bank-owned life insurance

    5,809       6,080  

Gain (loss) on sale of real estate owned

    (34,096 )     869  

Service charges

    35,035       30,688  

Rental income

    38,278       24,426  

Other

    4,241       4,931  

Total non-interest income

    49,267       66,994  
                 

NON-INTEREST EXPENSE

               

Salaries and employee benefits

    395,144       414,694  

Advertising

    5,912       5,876  

Office supplies, telephone and postage

    15,696       22,532  

Loan expenses

    62,548       72,075  

Net occupancy expense

    151,107       173,167  

Real estate owned loss reserve

 

      25,000  

Federal insurance premiums

    53,447       53,920  

Data processing expenses

    56,122       53,631  

ATM expenses

    6,917       6,408  

Bank charges and fees

    17,034       17,673  

Insurance and surety bond premiums

    21,382       19,536  

Dues and subscriptions

    4,588       4,293  

Professional fees

    69,537       66,337  

Real estate owned expense

    40,127       15,340  

Other

    21,436       32,191  

Total non-interest expense

    920,997       982,673  
                 

INCOME BEFORE INCOME TAX EXPENSE

    39,510       44,743  
                 

Income taxes expense (benefit)

    5,800       (4,796 )
                 

NET INCOME

  $ 33,710     $ 49,539  

INCOME PER COMMON SHARE

  $ 0.02     $ 0.03  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
2

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

Three Months Ended


 

   

June 30, 2013

   

June 30, 2012

 
                 

Net income

  $ 33,710     $ 49,539  
                 

Other comprehensive income, net of tax unrealized income arising from available for sale securities during period

    (72,143 )     2,266  
                 

Postretirement benefit plan adjustment

    (4,860 )     (28,222 )
                 

Comprehensive income (loss)

  $ (43,293 )   $ 23,583  

 

See Notes to the Unaudited Consolidated Financial Statements

 

 
3

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

   

Common Stock

                   

Unearned

Employee

   

Accumulated

                 
   

Shares

   

Amount

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Stock

Ownership

Plan

   

Other-Comprehensive Income (Loss)

   

Total

Stockholders’

Equity

   

Comprehensive

Income (Loss)

 

Balance at March 31, 2013

    1,634,725     $ 16,347     $ 6,570,852     $ 5,332,716     $ ( 448,567 )   $ (76,768 )   $ 11,394,580          

Comprehensive income

                            33,710                       33,710     33,710  

Net income

                                                               

Other comprehensive income, net of tax:

                                                               

Change in unrealized gain on securities available-for-sale, net of deferred income taxes of ($48,095)

                                            (72,143 )     (72,143 )     (72,143 )

Post retirement benefit plan adjustment net of deferred taxes of ($3,239 )

                                            (4,860 )     (4,860 )     (4,860 )

Total comprehensive income

                                                          $ (43,293 )

Balance at June 30, 2013

    1,634,725     $ 16,347     $ 6,570,852     $ 5,366,426     $ (448,567 )   $ ( 153,771 )   $ 11,351,287          

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
4

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

   

Three months Ended

June 30,

 
   

2013

   

2012

 

Cash flow from operating activities

               

Net Income

  $ 33,710     $ 49,539  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Deferred income taxes

    (18,464 )     (52,582 )

Depreciation

    68,229       67,709  

Discount accretion net of premium amortization

    4,069       587  

Provision for loan losses

    90,000       80,000  

Income from bank owned life insurance

    (5,809 )     (6,080 )

Loss (gain) on sale of real estate owned

    34,096       (869 )

Changes in operating assets and liabilities

               

(Increase) decrease in:

               

Accrued interest receivable

    (19,624 )     (42,473 )

Other assets

    291,606       86,789  

Prepaid income taxes

    (500 )     160,250  

Increase (decrease) in:

               

Accrued interest payable

    (1,579 )     (3,759 )

Other liabilities

    (193,053 )     (20,526 )

Net cash provided by operating activities

  282,681     $ 318,585  
                 
                 

Cash flows from investing activities

               

Proceeds of securities available for sale

    7,418       4,740  

Purchases of securities held-to-maturity

    (8,022,500 )     (8,500,000 )

Proceeds from maturities and principal repayments of securities held-to-maturity

    2,226,077       4,143,653  

Purchase of investment required by law – stock in Federal Home Loan Bank

    21,200       16,600  

Proceeds from sale of real estate owned

    212,444       116,436  

Net decrease in loans

    2,312,299       4,872,671  

Purchases of premises and equipment

 

      (13,895 )

Net cash provided by(used in) investing activities

  $ (3,243,062 )   $ 640,205  
                 

Cash flows from financing activities

               

Net increase in deposits

    884,260       8,970  

Net (increase) decrease in advance payments by borrowers for taxes and insurance

    7,214       (12,804 )

Increase in Federal home Loan Bank Advances

 

   

 

Net cash provided by (used) in financing activities

  $ 891,474     $ (3,834 )

 

 
5

 

  

   

Three months Ended

June 30,

 
   

2013

   

2012

 
                 

Net (increase) decrease in cash and cash equivalents

  $ (2,068,907 )   $ 954,956  
                 

Cash and cash equivalents, beginning of the period

    6,722,766       6,649,685  
                 

Cash and cash equivalents, end of period

  4,653,859     $ 7,604,641  
                 

Supplemental Disclosures:

               
                 

Cash paid during the period for interest

  $ 206,108     $ 307,209  
                 

Cash paid during the period for income taxes

  500     500  
                 

Loans transferred to foreclosed real estate during the period

  $

    $ 176,113  
                 

Net change in unrealized gain on securities available-for-sale net of tax

  $ (72,143 )   $ 2,266  

 

See Notes to the Unaudited Consolidated Financial Statements.

 

 
6

 

 

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

June 30, 2013

 

(1)           Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the three month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the consolidated financial statements and footnotes thereto of Delanco Bancorp, Inc. (the “Company”) included in the Company’s annual report on Form 10-K for the year ended March 31, 2013.

 

(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 Delanco Federal Savings Bank’s (the “Bank”) Tier I capital. As a result of this variance, our Tier I regulatory capital ratio is lower than our GAAP capital ratio by 77 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.   

 

 
7

 

 

Tax years 2009 through 2012 remain subject to examination by Federal and New Jersey taxing authorities. In the event the Bank is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense.

 

(5)           Earnings Per Share

 

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

 

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

 

The calculated basic and dilutive EPS are as follows:

 

   

Three Months Ended

June 30,

 
   

2013

   

2012

 

Numerator

  $ 33,710     $ 49,539  

Denominators:

               

Basic shares outstanding

    1,589,868       1,586,664  

Effect of dilutive securities

               

Dilutive shares outstanding

    1,589,868       1,586,664  

Earnings per share:

               

Basic

  $ 0.02     $ 0.03  

Dilutive

  $ 0.02     $ 0.03  

 

(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;

 

 
8

 

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

The Agreement does not require the Bank to maintain any specific minimum regulatory capital ratios. However, in connection with its most recent examination, the OCC established higher individual minimum capital ratios for the Bank. Specifically, the Bank must maintain a Tier 1 capital to adjusted total assets ratio of at least 8%, a Tier 1 capital to risk-weighted assets ratio of at least 12% and a total capital to risk-weighted assets ratio of at least 13%. The Bank's ratios of Tier 1 capital to adjusted total assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets at June 30, 2013 were 8.00%, 14.08% and 15.33%, respectively.

 

The Bank continues to work with its borrowers where possible and is pursuing legal action where the ability to work with the borrower does not exist.  As of June 30, 2013, the Bank has entered into formal forbearance agreements with four relationships totaling $850 thousand that require current payments while the borrowers restructure their finances.

 

(7)           Recent Accounting Pronouncements

 

Below is a discussion of recent accounting pronouncements.

 

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220): The amendments in this update aim to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this pronouncement did not have a material impact on the Company’s financial condition or results of operations.

 

 
9

 

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): The amendments in this update supersede certain pending paragraphs in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private and nonprofit entities. The amendments in this update are effective for public entities for fiscal years, and interim annual periods within those years, beginning after December 15, 2011, consistent with ASU 2011-05. The adoption of this pronouncement did not have a material impact on the Company’s financial condition or results of operations.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet, Disclosure about Offsetting Assets and Liabilities (Topic 210): The objective of this update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhancement disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they offset in accordance with either Section 210-20-45 or Sections 815-10-45. These amendments are effective for annual periods beginning on or after January 3, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not anticipate any material impact to the consolidated financial statements related to this guidance.

 

In December 2011, the FASB issued ASU 2011-10, Property, Plant and Equipment (Topic 360): The objective of this update is to resolve the diversity in practice about whether the guidance in the Subtopic 360-20, Property, Plant and Equipment – Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10 Consolidation – Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not anticipate any material impact to the consolidated financial statements related to this guidance.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this pronouncement did not have a material impact on the Company’s financial condition or results of operations.

 

 
10

 

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to achieve Common Fair Value Measurement (Topic 820) and Disclosure Requirement in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staff, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurement, including a consistent meaning of the term “fair value”. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this pronouncement did not have a material impact on the Company’s financial condition on results of operations.

 

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to purchase or redeem the financial assets. The amendments in this update apply to all entities, both public and nonpublic. This ASU is effective for the first interim or annual periods beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modification of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this pronouncement did not have a material impact on the Company’s financial condition on results of operations.

 

(8)           Fair Value of Financial Instruments

 

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

 

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

 

Level 1    

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

 

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

 

●      Level 3      Level 3 inputs are unobservable inputs.

 

 
11

 

 

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

 

 

Fair Value Measurements at Reporting Date Using

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

Significant

Other

Observable

Inputs

(Level 2)

 

Significant Other

Unobservable

Inputs

(Level 3)

June 30, 2013

           

Available-for-sale securities

$─

  $ 2,079  

$─

             

March 31, 2013

           

Available-for-sale securities

$─

  $ 2,207  

$─

 

Assets and Liabilities on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2013 and March 31, 2013 are as follows (dollars in thousands):

 

 

Fair Value Measurements at Reporting Date Using

 
 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

Significant

Other

Observable

Inputs

(Level 2)

 

Significant Other

Unobservable

Inputs

(Level 3)

 

June 30, 2013

           

Impaired loans

$─

$─

  $ 5,797  

Real estate owned

 ─

 ─

    2,156  

Total

$─

$─

  $ 7,953  
             

March 31, 2013

           

Impaired loans

$─

$─

  $ 6,346  

Real estate owned

 ─

 ─

    2,470  

Total

$─

$─

  $ 8,816  

 

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.

 

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.

 

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.

 

 
12

 

 

As required by ASC Topic 825-10-65, the estimated fair value of financial instruments at June 30, 2013 and March 31, 2013 was as follows:

 

   

June 30, 2013

 
   

Carrying

Amount

   

Level 1

   

Level 2

   

Level 3

 

(Dollars in Thousands)

                               
                                 

Financial Assets:

                               

Cash and cash equivalents

  $ 4,654     $

4,654

    $

    $

 

Investment securities

    28,140      

      26,865    

 

Loans – net

    86,084      

     

      87,469  

FHLB stock

    181       181      

     

 

Accrued interest receivable

    447       447      

     

 

Bank–owned life insurance

    159       159      

     

 

Real estate owned

    2,156      

     

      2,156  

Total financial assets

  $ 121,821     $ 5,441     $ 26,865     $ 89,625  
                                 

Financial Liabilities:

                               

Deposits

  $ 117,918     $ 6,956     $ 111,947     $

 

Advance payments by borrowers for taxes and insurance

    374       374      

     

 

Accrued interest payable

    7       7      

     

 

Total financial liabilities

  $ 118,299     $ 7,337     $ 111,947     $

 

 

   

March 31, 2013

 
   

Carrying

 Amount

   

Level 1

   

Level 2

   

Level 3

 

(Dollars in Thousands)

                               
                                 

Financial Assets:

                               

Cash and cash equivalents

  $ 6,723     $ 6,723     $

    $

 

Investment securities

    22,355      

      22,493      

 

Loans – net

    88,419      

     

      91,300  

FHLB stock

    203       203      

     

 

Accrued interest receivable

    428       428      

     

 

Bank–owned life insurance

    154       154      

     

 

Real estate owned

    2,470      

     

      2,470  

Total financial assets

  $ 120,752     $ 7,508     $ 22,493     $ 93,770  
                                 

Financial Liabilities:

                               

Deposits

  $ 117,034     $ 6,873     $ 111,233     $

 

Advance payments by borrowers for taxes and insurance

    367       367      

     

 

Accrued interest payable

    9       9      

     

 

Total financial liabilities

  $ 117,410     $ 7,249     $ 111,233     $

 

 

 
13

 

 

   

June 30, 2013

   

March 31, 2013

 
   

Contract

Value

   

Estimated Fair Value

   

Contract Value

   

Estimated Fair Value

 

Off-balance sheet instruments

                               

Commitments to extend credit

  $ 6,128     $

    $ 5,893     $

 

 

(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.

 

 
14

 

 

Loans at June 30, 2013 and March 31, 2013 are summarized as follows (dollars in thousands):

 

   

June 30,

2013

   

March 31,

2013

 
                 

Residential (one-to four-family) real estate

    65,278       66,598  

Multi-family and commercial real estate

    11,512       12,402  

Commercial

    1,120       1,166  

Home equity

    8,338       8,361  

Consumer

    922       960  

Construction

    50       83  

Total loans

    87,220       89,570  

Net deferred loan origination fees

    (113 )     (118 )

Allowance for loan losses

    (1,023 )     (1,033 )

Loans, net

    86,084       88,419  

 

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At June 30, 2013, the loans-to-one-borrower limitation was $1.7 million; this excluded an additional 10% of adjusted capital funds or approximately $1.1 million, which may be loaned if collateralized by readily marketable securities. At June 30, 2013, 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.

 

 
15

 

 

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 following table represents loans by credit quality indicator at June 30, 2013 (dollars in thousands):

 

   

Pass

   

Special

Mention

Loans

   

Classified

Loans

   

Non-

Performing

Loans

   

Total

 

Residential real estate

  $ 62,635     $ 304     $ 145     $ 2,194     $ 65,278  

Multi-family and commercial real estate

    7,558       172       464       3,318       11,512  

Commercial

    649       251       34       186       1,120  

Home equity

    8,289      

     

      49       8,338  

Consumer

    922      

     

     

      922  

Construction

   

     

     

      50       50  
    $ 80,053     $ 727     $ 643     $ 5,797     $ 87,220  

 

The following table represents past-due loans as of June 30, 2013 (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

  $ 1,223     $ 800     $ 1,443     $ 3,466     $ 61,812     $ 65,278  

Multi-family and commercial real estate

    525       609       2,183       3,317       8,195       11,512  

Commercial

   

     

      186       186       934       1,120  

Home Equity

    128      

      49       177       8,161       8,338  

Consumer

    17       6      

      23       899       922  

Construction

   

     

     

     

      50       50  
                                                 

Total Loans

  $ 1,893     $ 1,415     $ 3,861     $ 7,169     $ 80,051     $ 87,220  
                                                 

Percentage of Total Loans

    2.17 %     1.62 %     4.43 %     8.22 %     91.78 %     100.00 %

 

 
16

 

 

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same for non-accrual loans discussed above. At June 30, 2013, the Bank had 21 loan relationships totaling $3.9 million in non-accrual loans as compared to 25 relationships totaling $4.4 million at March 31, 2013. The average balance of impaired loans totaled $6.0 million for the three months ended June 30, 2013 as compared to $7.2 million for the year ended March 31, 2013, and interest income recorded on impaired loans for the three months ended June 30, 2013 totaled $42 thousand as compared to $168 thousand for the year ended March 31, 2013.

 

The following table represents data on impaired loans at June 30, 2013 and March 31, 2013 (dollars in thousands):

 

   

June 30,

2013

   

March 31,

2013

 

Impaired loans for which a valuation allowance has been provided

  $

    $

 

Impaired loans for which no valuation allowance has been provided

    5,797       6,346  

Total loans determined to be impaired

  $ 5,797     $ 6,346  

Allowance for loans losses related to impaired loans

  $

    $

 

Average recorded investment in impaired loans

  $ 6,087     $ 7,245  

Cash basis interest income recognized on impaired Loans

  $ 42     $ 168  

 

The following table presents impaired loans by portfolio class at June 30, 2013 (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

  $ 2,233     $ 2,194     $

    $ 2,372     $ 25  

Multi-family and commercial real estate

    3,317       3,318      

      3,319       16  

Commercial

    186       186      

      219      

 

Home equity

    49       49      

      127      

 

Consumer

           

     

             

 

Construction

    50       50      

      50       1  
                                         

Subtotal

  $ 5,835     $ 5,797     $

    $ 6,087     $ 42  

 

 
17

 

 

The following table presents impaired loans by portfolio class at March 31, 2013) (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

  $ 2,255     $ 2,223     $

    $ 2,774     $ 83  

Multi-family and commercial real estate

    3,550       3,550      

      4,106       62  

Commercial

    235       235      

      172       8  

Home equity

    287       287      

      138       11  

Consumer

   

     

     

      3      

 

Construction

    51       51      

      52       4  
                                         

Subtotal

  $ 6,378     $ 6,346     $

    $ 7,245     $ 168  

 

 
18

 

 

 

The following table represents nonaccrual loans as of June 30, 2013 and March 31, 2013 (dollars in thousands):

 

   

June 30,

2013

   

March 31,

2013

 

Non-accrual loans:

               

Residential real estate

  $ 894     $ 992  

Multi-family and commercial real estate

    1,187       1,302  

Commercial

    186       235  

Consumer

 

   

 

Home Equity

    49       287  

Construction

 

   

 

Total non-accrual loans

  $ 2,316     $ 2,816  
                 

Troubled Debt Restructurings:

               

In non-accrual status:

               

Residential real estate

  $ 549     $ 550  

Multi-family and commercial real estate

    996       1,001  

Commercial

 

   

 

Consumer

 

   

 

Home Equity

 

   

 

Construction

 

   

 

Total troubled debt restructurings in non-accrual status

  $ 1,545     $ 1,551  

Performing under modified terms:

               

Residential real estate

    751       788  

Multi-family and commercial real estate

    1,135       1,139  

Commercial

 

   

 

Consumer

 

   

 

Home Equity

 

   

 

Construction

    50       51  

Total troubled debt restructurings performing under modified terms:

    1,936       1,978  

Total troubled debt restructurings

    3,481       3,529  

Total non-performing loans

    5,797       6,345  

Real estate owned

    2,156       2,470  

Total non-performing assets

  $ 7,953     $ 8,815  
                 

Non-performing loans as a percentage of loans

    6.65 %     7.08 %

Non-performing assets as a percentage of loans and real estate owned

    8.91 %     9.58 %

Non-performing assets as percentage of total assets

    6.11 %     6.81 %

 

During the three months ended June 30, 2013, the Bank experienced a $506 thousand net decrease in non-accrual loans. This change reflects the downgrading of two loan relationships to non-accrual status totaling $85 thousand during the three months ended June 30, 2013. The downgraded loans consisted of one residential mortgage totaling $77 thousand and one home equity loan totaling $8 thousand. These additions to the non-accruals were offset by one residential mortgage for $140 thousand and one home equity loan in the amount of $463 that were paid in full, two home equity loans totaling $245 thousand that returned to accruing status, a residential mortgage loan totaling $145 thousand that was paid through a short sale, two commercial real estate loans that were partially charged off by $10 thousand due to valuation updates and one commercial loan totaling $49 thousand that was charged off.

 

 
19

 

 

The following table presents troubled debt restructurings that occurred during the periods ended June 30, 2013 and March 31, 2013 and loans modified as troubled debt restructurings within the previous three and 12 month period and for which there was a payment default during the period.

  

   

June 30, 2013

   

March 31, 2013

 
           

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

   

    $

    $

      2     $ 339     $ 486  

  

   

Number of
Contracts

   

Recorded Investment

   

Number of
Contracts

   

Recorded Investment

 

Troubled debt restructurings that subsequently defaulted:

                               

Residential real estate