Delanco Bancorp 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2008

OR

o 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)

Check whether the issuer:  (1) 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  x                         No o

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	o	Accelerated filer	o
Non-accelerated file	o	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).

Yes  o                      No x

As of February 10, 2009 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.	Financial Statements
	Consolidated Statements of Financial Condition at
	December 31, 2008 (Unaudited) and March 31, 2008	1
	Consolidated Statements of Income for the three and nine months
	ended December 31, 2008 and 2007 (Unaudited)	2
	Consolidated Statements of Stockholders’ Equity for the nine months
	ended December 31, 2008 (Unaudited)	3
	Consolidated Statements of Cash Flows for the nine months ended
	December 31, 2008 and 2007 (Unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults upon Senior Securities	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 5.	Other Information	16
Item 6.	Exhibits	16

Signatures

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

	December 31, 2008			March 31, 2008
	(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from banks	$	600,310		$	357,136
Interest-bearing deposits		5,903,171			12,321,997
Total cash and cash equivalents		6,503,481			12,679,133
Investment securities:
Securities held-to-maturity		15,820,467			12,287,265
Securities available-for-sale		233,621			277,876
Total investment securities		16,054,088			12,565,141
Loans, net of allowance for loan losses of $1,411,070 at December 31, 2008 (unaudited), $1,353,467 at March 31, 2008		102,730,920			96,345,527
Accrued interest receivable		564,680			599,514
Premises and equipment, net		8,042,319			8,129,682
Investment required by law-stock in Federal Home Loan Bank, at cost		278,400			139,100
Deferred income taxes		432,500			395,000
Bank-owned life insurance		130,042			124,412
Prepaid income taxes		629,260			297,679
Other assets		295,702			254,568
Total assets	$	135,661,392		$	131,529,756
LIABILITIES
Deposits
Non-interest bearing deposits		5,188,092			4,860,365
Interest bearing deposits		115,097,331			112,779,708
Total deposits		120,285,423			117,640,073
Advances Federal Home Loan Bank		2,250,000		
Accrued interest payable		150,117			299,418
Advance payments by borrowers for taxes and insurance		328,088			290,864
Other liabilities		594,585			542,178
Total liabilities		123,608,213			118,772,533
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		6,679,469			6,688,921
Retained earnings, substantially restricted		6,024,101			6,730,799
Unearned employee stock ownership plan		(608,770	)		(640,810	)
Accumulated other comprehensive (loss)		(57,968	)		(38,034	)
Total stockholder’s equity		12,053,179			12,757,223
Total liabilities and stockholders’ equity	$	135,661,392		$	131,529,756

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

	Three Months Ended December 31,							Nine Months Ended December 31,
	2008				2007			2008			2007
INTEREST INCOME
Loans	$	1,368,551			$	1,626,996		$	4,524,204		$	4,723,519
Investment securities		215,205		��		318,537			609,692			761,098
Total interest income		1,583,756				1,945,533			5,133,896			5,484,617
INTEREST EXPENSE
Interest-bearing checking accounts		25,780				13,371			53,299			37,109
Passbook and money market accounts		164,198				276,148			515,477			774,391
Certificates of deposits		715,054				826,495			2,173,779			2,186,085
Advances from Federal Home Loan Bank		3,479							3,479			4,946
Total interest expense		908,511				1,116,014			2,746,034			3,002,531
Net interest income		675,245				829,519			2,387,862			2,482,086
Provision for loan losses		325,000				15,000			767,000			40,000
Net interest income after provision for loan losses		350,245				814,519			1,620,862			2,442,086
NON-INTEREST INCOME
Income from bank-owned life insurance									5,630		
Service charges		45,274				52,282			119,060			112,675
Rental income						7,833			5,875			17,753
Other		16,637				15,737			48,806			42,578
Total noninterest income		61,911				75,852			179,371			173,006
NON-INTEREST EXPENSE
Salaries and employee benefits		424,292				496,867			1,386,859			1,408,215
Advertising		13,601				17,331			42,568			43,107
Office supplies, telephone and postage		41,835				20,925			117,709			91,410
Net occupancy expense		162,716				186,547			497,554			521,792
Federal insurance premiums		32,316				5,629			83,639			12,541
Data processing expenses		38,420				30,721			103,616			94,452
ATM expenses		17,039				15,842			50,994			45,681
Bank charges and fees		19,893				14,229			52,912			40,947
Insurance and surety bond premiums		12,802				15,925			40,179			45,512
Dues and subscriptions		14,360				18,086			38,457			54,825
Professional fees		60,446				50,356			261,900			88,899
On-line banking expense		31,099				22,089			84,647			65,605
Other		55,237				41,755			124,724			122,721
Total noninterest expense		924,056				936,302			2,885,758			2,635,707
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)		(511,900	)			( 45,931	)		(1,085,525	)		( 20,615	)
Federal income tax (benefit)		(179,466	)			( 23,512	)		(382,380	)		( 22,916	)
State income tax (benefit)		1,668				( 2,000	)		3,553			( 1,809	)
Total income tax (benefit)		(177,798	)			( 25,512	)		(378,827	)		( 24,725	)
NET INCOME (LOSS)	$	(334,102)			$	(20,419	)	$	(706,698	)	$	4,110
INCOME (LOSS) PER COMMON SHARE	$	(0.21)			$	(0.01	)	$	(0.45	)	$	0.00

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Common Stock
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Unearned Employee Stock Ownership Plan			Accumulated Other- Comprehensive  Income (Loss)			Total Stockholders’ Equity
Balance at March 31, 2008		1,634,725	$	16,347	$	6,688,921		$	6,730,799		$	(640,810	)	$	(38,034	)	$	12,757,223
Comprehensive income
Net loss									(706,698	)								(706,698	)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities     available-for-sale, net of deferred income taxes of     $(13,316)															(19,934	)		(19,934	)
Allocation of unearned ESOP shares						(9,452	)					32,040						22,588
Total comprehensive loss																		(704,044	)
Balance at December 31, 2008		1,634,725	$	16,347	$	6,679,469		$	6,024,101		$	(608,770	)	$	(57,968	)	$	12,053,179

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended December 31,
	2008			2007
Cash flow from operating activities
Net income (Loss)	$	(706,698	)	$	4,110
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		(11,808	)		( 27,437	)
Depreciation		236,840			239,865
Discount accretion net of premium amortization		37,140			( 26,687	)
Provision for loan losses		767,000			40,000
Net gain on sale of non-marketable securities				
Net gain on sale of securities available-for-sale				
Income from bank-owned life insurance		(5,630	)	
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable		34,834			(227,389	)
Other assets		(41,134	)		19,971
Prepaid income taxes		(331,581	)		132,871
Increase (decrease) in:
Accrued interest payable		(149,301	)		(30,863	)
Other liabilities		52,407			(76,473	)
Net cash provided by (used in) operating activities		(117,931	)		47,968
Cash flows from investing activities
Purchases of securities available-for-sale		(1,372	)		(929	)
Purchases of securities held-to-maturity		(8,181,320	)		(1,500,000	)
Proceeds from sale of securities available-for-sale				
Proceeds from maturities and principal repayments of         securities held-to-maturity		4,610,978			2,739,074
Purchase of investment required by law – stock         in Federal Home Loan Bank		(139,300	)		(36,400	)
Net increase in loans		(7,152,393	)		(18,008,498	)
Purchases of premises and equipment		(149,477	)		(25,792	)
Net cash used in investing activities		(11,012,884	)		( 16,832,545	)
Cash flows from financing activities
Net increase(decrease) in deposits		2,645,350			20,329,299
Net increases in advances from Federal Hone Loan Bank		2,250,000		
Net increase in advance payments by           borrowers for taxes and insurance		37,225			(16,662	)
Distribution of ESOP shares		22,588		
Net cash provided by financing activities		4,955,163			20,312,637

(continued)

4

	Nine Months Ended December 31,
	2008			2007
Net increase (decrease) in cash and cash equivalents	$	(6,175,652	)	$	3,528,060
Cash and cash equivalents, beginning of the period		12,679,133			8,676,380
Cash and cash equivalents, end of period	$	6,503,481		$	12,204,440
Supplemental Disclosures:
Cash paid during the period for interest	$	2,895,336		$	3,033,394
Cash paid during the period for income taxes	$	2,300		$	—
Loans transferred to foreclosed real estate during the period	$	—		$	—
Proceeds from sales of foreclosed real estate financed through loans	$	—		$	—
Total increase (decrease) in unrealized gain on securities available-for-sale	$	33,250		$	21,840

See Notes to the Unaudited Consolidated Financial Statements.

5

DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

December 31, 2008

 (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.  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, 2008 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, 2008.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required 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 income and expenses during the reporting period. Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans.

(2)           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.

6

The calculated basic and dilutive EPS are as follows:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
Numerator	$	( 334,102	)	$	( 20,419	)	$	( 706,698	)	$	4,110
Denominators:
Basic shares outstanding		1,573,848			1,570,644			1,573,848			1,570,644
Effect of dilutive securities											
Dilutive shares outstanding		1,573,848			1,570,644			1,573,848			1,570,644
Earnings per share:
Basic	$	( 0.21	)	$	( 0.01	)	$	( 0.45	)	$	0.00
Dilutive	$	( 0.21	)	$	( 0.01	)	$	( 0.45	)	$	0.00

(3) Supervisory Agreement

On December 17, 2007, Delanco Federal Savings Bank (the “Bank”) the savings association subsidiary of the Company, entered into a Supervisory Agreement with the Office of Thrift Supervision (“OTS”).

The entry into the Supervisory Agreement was based on the Bank’s 2007 report of examination in which the OTS concluded that grounds existed for the initiation of administrative proceedings against the Bank.  Without admitting or denying that such grounds existed, the Bank determined to enter into the Supervisory Agreement to cooperate with the OTS and as evidence of the Bank’s intent to comply with all applicable laws and regulations and engage in safe and sound practices.

Pursuant to the terms of Supervisory Agreement, the Bank agreed as follows:

•           To refrain from making, investing in, purchasing or otherwise modifying any commercial loan without the prior written non-objection of the OTS.

•           By December 31, 2007, to review each commercial loan file with an outstanding principal balance that equals or exceeds $250,000, and by February 29, 2008 for all other commercial loans, to determine whether all required documentation has been obtained.   All missing or incomplete documentation must be obtained by January 31, 2008 for all commercial loans with an outstanding principal balance that equals or exceeds $250,000 and by February 29, 2008 for all other commercial loans.

•           By January 31, 2008, to implement a credit administration process utilizing an electronic system and checklists to facilitate ongoing reviews of the financial condition of borrowers and guarantors.

•           To evaluate, on a semiannually basis, the effectiveness of the Bank’s credit administration function.

•           To engage an independent, third-party service provider to conduct an internal loan review of the Bank’s lending operations on a quarterly basis.  As part of the internal loan review program, the Bank must develop and implement a risk rating system for all loans.  On a quarterly basis, the Board’s Audit Committee must provide the Board with, and the Board must review and evaluate, a written report documenting the findings and recommendations relating to the internal loan reviews.

•           By December 31, 2007, to adopt and implement a written program which satisfies certain OTS regulations and interagency guidelines regarding the identification and classification of problem assets.  The program must (i) provide for and require the maintenance of an adequate allowance for loan and lease losses; (ii) ensure the prompt charge-off of loans when proper; and (iii) require the timely and accurate reporting of criticized assets, the allowance for loan and lease losses and charge-offs in the Bank’s Thrift Financial Reports (TFRs).

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•           To prepare TFRs accurately and in accordance with applicable instructions.

•           To ensure that at the end of each quarter, the Bank’s assets have not increased by an amount greater than 2.5% of the Bank’s total assets at the end of the prior quarter.

•           To notify and receive the non-objection of the OTS before adding or replacing any Board member, employing any person as a senior executive officer or entering into or revising any contractual arrangement with any director or senior executive officer.

The Company believes that the Bank is in substantial compliance with, or has received a waiver of, the requirements of the Supervisory Agreement and has received confirmation that the OTS views the Bank to be in substantial compliance with the Supervisory Agreement.

The Bank has received relief from two portions of the Supervisory Agreement from the OTS:

· The Bank may refinance, extend or otherwise modify an existing commercial loan so long as no new or additional funds are advanced, without the need for the Regional director’s prior written non objection.

· The OTS also modified the sections regarding the internal loan review, eliminating the requirement that the Audit Committee engage an independent third party. It also reduced the scope of the reviews required on a quarterly basis.

The remainder of the Supervisory Agreement will remain in effect until terminated, modified or suspended in writing by the OTS. The failure to comply with the Supervisory Agreement could result in the initiation of formal enforcement action by the OTS, including the imposition of civil monetary penalties.

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

Management’s discussion and analysis of the financial condition and results of operations at and for the nine months ended December 31, 2008 and 2007 is intended to assist in understanding our financial condition and results of operations.  The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

Forward-Looking Statements

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

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

8

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

General

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

Balance Sheet Analysis

Overview.  Total assets at December 31, 2008 were $135.6 million, an increase of $4.1 million, or 3.1%, from total assets of $131.5million at March 31, 2008.  The increase in assets was primarily due to an increase in loans and investments but was offset by a decrease in cash.

Loans.  At December 31, 2008, total loans, net, were $102.7 million, or 75.7% of total assets.  In the nine months ended December 31, 2008, the loan portfolio grew $6.4 million, or 6.6%.  The residential real estate loan portfolio increased $6.9 million but was offset by a decrease in commercial and construction loans.

Table 1: Loan Portfolio Analysis
	December 31,						March 31,
	2008						2008
(Dollars in thousands)	Amount			Percent			Amount			Percent
Real estate loans:
Residential	$	67,883			64.8	%	$	61,007			61.7	%
Commercial and multi-family		23,011			22.0			23,974			24.2
Construction		2,670			2.5			3,121			3.2
Total real estate loans		93,564			89.3			88,102			89.1
Commercial loans		8,606			8.2			8,214			8.3
Consumer loans		2,627			2.5			2,553			2.6
Total loans		104,797			100.0	%		98,869			100.0	%
Loans in process		(546	)					(1,032	)
Net deferred loan fees		(109	)					(138	)
Allowance for losses		(1,411	)					(1,353	)
Loans, net	$	102,731					$	96,346

Nonperforming Loans. Total nonperforming loans at December 31, 2008 increased $3.6 million primarily due to 16 commercial loans and 5 residential loans being classified as nonaccrual.

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Table 2: Nonperforming Assets
	December 31,				March 31,
(Dollars in thousands)	2008				2008
Nonaccrual loans	$	3,684		$	—
Accruing loans past due 90 days or more		—				1,761
Total of nonaccrual and 90 days or more past due loans		3,684				1,761
Real estate owned		—				—
Other nonperforming assets		—				—
Total nonperforming assets		3,684				1,761
Troubled debt restructurings		—				—
Troubled debt restructurings and total nonperforming assets	$	3,684		$		1,761
Total nonperforming loans to total loans		3.5	%			1.78	%
Total nonperforming loans to total assets		2.7				1.34
Total nonperforming assets and troubled debt restructurings to total assets		2.7				1.34

Securities.  The investment securities portfolio was $16.0 million, or 11.8% of total assets, at December 31, 2008.  At that date,76.7% of the investment portfolio was invested in mortgage-backed securities, while the remainder was invested primarily inU.S. Government agency and other debt securities. The $3.5 million increase in our portfolio represents purchase of mortgage backed securities to increase our net income.

Table 3: Investment Securities
	December 31,				March 31,
	2008				2008
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Mutual funds	$	235	$	234	$	234	$	278
Total available for sale		235		234		234		278
Securities held to maturity:
U.S. Government and agency securities		3,504		3,513		3,500		3,513
Mortgage-backed securities		12,316		12,602		8,787		9,015
Total held to maturity		15,820		16,115		12,287		12,528
Total	$	16,055	$	16,349	$	12,521	$	12,806

Deposits.  Our deposit base is comprised of demand deposits, money market and passbook accounts and time deposits.  We consider demand deposits and money market and passbook accounts to be core deposits.  We do not have any brokered deposits. At December 31, 2008, core deposits were 42.8% of total deposits.  Deposits increased $2.6 million, or 2.2%, in the nine months ended December 31, 2008, as core deposits grew $3.4 million and time deposits decreased $0.8 million. Certificates of deposit declined due to the maturity of high interest rate certificates of deposit opened as a promotion of our Cinnaminson branch office.

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Table 4: Deposits
	December 31,					March 31,
	2008					2008
(Dollars in thousands)	Amount		Percent			Amount		Percent
Noninterest-bearing demand deposits	$	5,188		4.3	%	$	4,860		4.1	%
Interest-bearing demand deposits		11,283		9.4			7,839		6.7
Savings and money market accounts		35,055		29.1			35,369		30.1
Certificates of deposit		68,759		57.2			69,572		59.1
Total	$	120,285		100.0	%	$	117,640		100.0	%

Borrowings.  In recent periods, we have occasionally used short-term FHLB advances as an additional source of liquidity.  At December 31, 2008, we had $2,250,000 in  short-term advances outstanding.

Results of Operations for the Nine Months Ended December 31, 2008 and 2007

Financial Highlights. Net loss for the nine months ended December 31, 2008 was $706,698 compared to net income of $4,110 for the nine months ended December 31, 2007.  An increase of $727,000 in the provision for loan loss and higher noninterest expense primarily contributed to the net loss.

Table 5:  Summary Income Statements
Nine months ended December 31, (Dollars in thousands)	2008			2007				2008 v. 2007		% Change
Net interest income	$	2,388		$	2,482		$	(94	)		(3.8	)%
Provision for loan losses		767			40			727			1817.5
Noninterest income		179			173			6			3.5
Noninterest expenses		2,886			2,636			250			9.5
Net income		(707	)		4			(711	)		(17775.0	)
Return on average equity (annualized)		(7.52	)     %		.04	%
Return on average assets (annualized)		(0.73	)     %	─

Net Interest Income.  Net interest income decreased $94,000 to $2.4 million for the nine months ended December 31, 2008 from $2.5 million for the same period in 2007 primarily due to a decline in interest earned on loans and investment securities, partially offset by a decline in interest paid on deposits. The 28 basis point decrease in the net interest margin to 2.64% reflected the decrease in the ratio of average interest-earning assets to average interest-bearing liabilities.

Average loans in the nine months ended December 31, 2008 increased $8.7 million, or 9.6%, compared with the same period in 2007, driven by growth in residential, commercial and multi-family mortgages and home equity loans.  Average investment securities in the nine months ended December 31, 2008 increased $585,000 or 4.0%, compared to the same period in 2007.  The increase in the investment portfolio was achieved through transfer of cash and cash equivalents to higher yielding investments.  The shift in the mix of interest-earning assets, combined with lower market rates, decreased the average yield on earning assets to 5.67% for the nine months ended December 31, 2008, compared with 6.44% for the same period in 2007.

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Average interest-bearing deposits in the nine months ended December 31, 2008 increased $7.0 million, or 6.8%, compared with the same period in 2007 due to increases in savings accounts and time deposits, partially offset by lower demand deposit balances.  Average savings and money market balances increased over the prior year as higher rates for these accounts made them more attractive and we promoted a tiered money market account.  Average time deposits decreased as we promoted select deposit maturities.  Decreases in market interest rates, combined with a shift from demand deposits to money market accounts, decreased the average cost of deposits to 3.27% compared with 3.83% for the same period in 2007.

Table 6:  Analysis of Net Interest Income
Nine months ended December 31, (Dollars in thousands)	2008			2007				2008 v. 2007		% Change
Components of net interest income
Loans	$	4,524		$	4,724		$	(200	)		(4.2	)%
Investment securities		610			761			(151	)		(19.8	)
Total interest income		5,134			5,485			(351	)		(6.4	)
Deposits		2,743			2,998			(255	)		(8.5	)
Borrowings		3			5			(2	)		(40.0	)
Total interest expense		2,746			3,003			(257	)		(8.6	)
Net interest income		2,388			2,482			(94	)		(3.8	)
Average yields and rates paid
Interest-earning assets		5.67	%		6.44	%		(77	)bp
Interest-bearing liabilities		3.27			3.83			(56	)bp
Interest rate spread		2.40			2.61			(21	)bp
Net interest margin		2.64			2.92			(28	)bp
Average balances
Loans	$	100,092		$	91,342			8,750			9.6	%
Investment securities		15,108			14,523			585			4.0
Other earning assets		5,482			7,608			(2,126	)		(27.9	)
Interest-bearing deposits		111,331			104,288			7,043			6.8
Borrowings		472			139			333			239.6

 Provision for Loan Losses.  The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  We evaluate the need to establish allowances against losses on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.  Provisions for loan losses were $767,000 in the nine months ended December 31, 2008 compared to $40,000 in the same period in 2007.  The addition to the allowance was due to identified weaknesses in the loan portfolio resulting from worsening economic conditions and decreasing property values in the local market.  We had $724,000 in charge-offs in the nine months ended December 31, 2008, compared to $68,000 charge-offs in the same prior year period.

Table 7: Analysis of Loan Loss Experience
Nine months ended December 31, (Dollars in thousands)	2008			2007
Allowance at beginning of period	$	1,353		$	492
Provision for loan losses		767			40
Total charge-offs		(724	)		( 68	)
Recoveries		15		–
Net charge-offs		(709	)		( 68	)
Allowance at end of period	$	1,411		$	464
Allowance to nonperforming loans		38.3	%		38.4	%
Allowance to total loans outstanding at the end of the period		1.35			.48
Net charge-offs (recoveries) to average loans outstanding    during the period		0.71			0.07

Non-Interest Income.  Noninterest income increased in the nine months ended December 31, 2008 compared to the same period in the prior year primarily as a result of income from service charges.

Rental income declined due the vacant rental space, previously occupied.

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Table 8:  Noninterest Income Summary
Nine months ended December 31, (Dollars in thousands)	2008			2007		$ Change			% Change
Income from bank-owned life insurance	$	5	$	—		$	5			0	%
Service charges		119			113		6			5.3
Rental income		6			18		(12	)		(66.7	)
Other		49			42		7			16.7
Total	$	179		$	173		6			3.5

Non-Interest Expenses.  Noninterest expenses rose in the nine months ended December 31, 2008 over the same period in the prior year primarily due to increases in professional fees and federal insurance premiums associated with the Supervisory agreement.

Table 9:  Noninterest Expense Summary
Nine months ended December 31, (Dollars in thousands)	2008		2007		$ Change			% Change
Salaries and employee benefits	$	1,387	$	1,408	$	(21	)		(1.5	)%
Advertising		42		43		(1	)		(2.3	)
Office supplies, telephone and postage		118		91		27			29.7
Net occupancy expense		497		522		(25	)		(4.8	)
Federal insurance premiums		84		12		72			600.0
Data processing expenses		104		94		10			10.6
ATM expenses		51		46		5			10.9
Bank charges and fees		53		41		12			29.3
Insurance and surety bond premiums		40		46		(6	)		(13.0	)
Dues and subscriptions		38		55		(17	)		(30.9	)
Professional fees		262		89		173			194.4
On-line banking expenses		85		66		19			28.8
Other		125		123		2			1.6
Total	$	2,886	$	2,636		250			9.5

Liquidity and Capital Management

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

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

Our most liquid assets are cash and cash equivalents.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At December 31, 2008, cash and cash equivalents totaled $6.5 million.  In addition, at December 31, 2008, we had arrangements to borrow up to $11 million from the Federal Home Loan Bank of New York.  On December 31, 2008, we had 2,250,000 in advances outstanding.

A significant use of our liquidity is the funding of loan originations.  At December 31, 2008, we had no loan commitments outstanding.  In addition, we had $6.8 million in unused lines of credit.  Historically, many of the lines of credit expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements.  Another significant use of our liquidity is the funding of deposit withdrawals.  Certificates of deposit due within one year of December 31, 2008 totaled $46.0 million, or 66.9% of certificates of deposit.  The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2009.  We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

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Capital Management.  We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At December 31, 2008, we exceeded all of our regulatory capital requirements.  We are considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. We currently have no plans to engage in hedging activities in the future.

For the nine months ended December 31, 2008, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

Not applicable as the Company is a smaller reporting company.

Item 4.     Controls and Procedures

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

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PART II.  OTHER INFORMATION

Item 1.                        Legal Proceedings

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

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

Not Applicable.

Item 3.                       Defaults upon Senior Securities

Not Applicable.

Item 4.                       Submission of Matters to a Vote of Security Holders

Not Applicable.

Item 5.                       Other Information

None.

Item 6.                        Exhibits

3.1 Charter of Delanco Bancorp, Inc. (1)

3.2 Bylaws of Delanco Bancorp, Inc. (1)

4.0 Stock Certificate of Delanco Bancorp, Inc. (1)

10.1 Supervisory Agreement, dated December 17, 2007, by and between Delanco Federal Savings Bank and the Office of Thrift Supervision (2)

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

32.0 Section 1350 Certification

(1)	Incorporated by reference into this document from the Exhibits filed with the Securities and Exchange Commission on the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-139339.
(2)	Incorporated by reference from Exhibit 99.1 of the Form 8-K filed with the Securities andExchange Commission on December 20, 2007.

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SIGNATURES

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

	DELANCO BANCORP, INC.
Dated: February 12, 2009	By:	/s/ Douglas R. Allen, Jr.
		Douglas R. Allen, Jr.
		President, Chief Executive Officer and Chief Financial Officer (principal financial and accounting officer)

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