Delanco Bancorp 10-Q 2011 Q1 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 June 30, 2010

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 x                           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).

Yes o No x

As of August 10, 2010 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 June 30, 2010 (Unaudited) and March 31, 2010		1
	Consolidated Statements of Operations for the three months ended June 30, 2010 and 2009 (Unaudited)		2
	Consolidated Statements of Stockholders’ Equity for the three months ended June 30, 2010 (Unaudited)		3
	Consolidated Statements of Cash Flows for the three months ended June 30, 2010 and 2009 (Unaudited)		5
	Notes to Unaudited Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		18
Item 1A.	Risk Factors		18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3.	Defaults upon Senior Securities		18
Item 4.	[Removed and Reserved]		18
Item 5.	Other Information		18
Item 6.	Exhibits		19
Signatures

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

	June 30, 2010			March 31, 2010
	(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from banks	$	654,027		$	674,788
Interest-bearing deposits		5,458,957			4,208,881
Total cash and cash equivalents		6,112,984			4,883,669
Investment securities:
Securities held-to-maturity (fair value $15,237,978 and $16,806,099 at June 30, 2010 and  March 31, 2010, respectively)		14,752,538			16,359,598
Securities available-for-sale (amortized cost of $251,906 and $255,699 at June 30, 2010 and March 31, 2010, respectively)		255,950			258,163
Total investment securities		15,008,488			16,617,761
Loans, net of allowance for loan losses of $1,123,638 at June 30, 2010 (unaudited), $998,526 at March 31, 2010		105,769,203			107,204,042
Accrued interest receivable		471,906			492,682
Premises and equipment, net		7,637,994			7,723,970
Investment required by law-stock in Federal Home Loan Bank, at cost		225,200			206,700
Deferred income taxes		977,050			1,029,028
Bank-owned life insurance		141,703			136,004
Prepaid and refundable income taxes		13,512			11,822
Real estate owned		600,222			412,969
Other assets		1,089,358			1,203,676
Total assets	$	138,047,620		$	139,922,323
LIABILITIES
Deposits
Non-interest bearing deposits		4,054,884			3,940,884
Interest bearing deposits		121,074,389			123,222,698
Total deposits		125,129,273			127,163,582
Accrued interest payable		38,970			45,580
Advance payments by borrowers for taxes and insurance		414,238			424,291
Other liabilities		597,539			553,994
Total liabilities		126,180,020			128,187,447
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		6,625,801			6,625,801
Retained earnings, substantially restricted		5,814,740			5,682,964
Unearned common stock held by employee stock ownership plan		(544,688	)		(544,688	)
Accumulated other comprehensive (Loss)		(44,600	)		(45,548	)
Total stockholder’s equity		11,867,600			11,734,876
Total liabilities and stockholders’ equity	$	138,047,620		$	139,922,323

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended  June 30,
	2010		2009
INTEREST INCOME
Loans	$	1,518,180	$	1,596,819
Investment securities		178,316		167,713
Total interest income		1,696,496		1,764,532
INTEREST EXPENSE
Interest-bearing checking accounts		23,330		26,020
Passbook and money market accounts		102,533		137,695
Certificates of deposits		424,106		526,388
Federal Home Loan Bank Advances		–		9,656
Total interest expense		549,969		699,759
Net interest income		1,146,527		1,064,773
Provision for loan losses		150,000		100,000
Net interest income after provision for loan losses		996,527		964,773
NONINTEREST INCOME
Income from bank-owned life insurance		5,699		5,962
Service charges		35,429		35,845
Rental income		–		–
Other		2,945		5,026
Total noninterest income		44,073		46,833
NONINTEREST EXPENSE
Salaries and employee benefits		409,610		480,703
Advertising		4,852		9,931
Office supplies, telephone and postage		19,278		27,253
Net occupancy expense		165,749		169,250
Federal insurance premiums		72,684		57,695
Data processing expenses		32,119		45,402
ATM expenses		4,153		3,782
Bank charges and fees		24,746		30,509
Insurance and surety bond premium		14,112		16,206
Dues and subscriptions		7,596		14,058
Professional fees		62,167		47,824
Other		40,022		46,173
Total noninterest expense		857,088		948,786
INCOME BEFORE INCOME TAX EXPENSE		183,512		62,820
Income taxes		51,736		17,165
NET INCOME	$	131,776	$	45,655
INCOME PER COMMON SHARE	$	.08	$	.03

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				Additional Paid-in		Retained		Unearned Employee Stock Ownership			Accumulated Other-Comprehensive			Total Stockholders’
	Shares		Amount		Capital		Earnings		Plan			Income (Loss)			Equity
Balance at March 31, 2010		1,634,725	$	16,347	$	6,625,801	$	5,682,964	$	(544,688	)	$	(45,548	)	$	11,734,876
Comprehensive income																131,776
Net income								131,776
Other comprehensive income, net of tax:
Change in unrealized gain on securities available-for-sale, net of deferred income taxes of $(12,845)
													948			948
Total comprehensive income								131,776					948			132,724
Balance at June 30, 2010		1,634,725	$	16,347	$	6,625,801	$	5,814,740	$	(544,688	)	$	(44,600	)	$	11,867,600

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended June 30,
	2010			2009
Cash flow from operating activities
Net Income	$	131,776		$	45,655
Adjustments to reconcile net income to net cash provided by (uses in) operating activities:
Deferred income taxes		51,346			61,616
Depreciation		85,977			84,800
Discount accretion net of premium amortization		(3,645	)		(2,133	)
Provision for loan losses		150,000			100,000
Income from bank owned life insurance		(5,699	)		(5,962	)
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable		20,776			1,532
Other assets		114,318			201,985
Prepaid income taxes		(1,690	)		10,130
Increase (decrease) in:
Accrued interest payable		(6,610	)		(151,079	)
Other liabilities		43,545			(45,476	)
Net cash provided by (used in) operating activities	$	580,094		$	301,068
Cash flows from investing activities
(Purchases), sales of securities available-for-sale		3,792			(371	)
Purchases of securities held-to-maturity		(4,000,000	)		(2,000,000	)
Proceeds from maturities and principal repayments of securities held-to-maturity		5,610,705			2,247,934
Purchase of investment required by law – stock in Federal Home Loan Bank		(18,500	)		94,200
Net increase in loans		1,097,586			(3,468,942	)
Purchases of premises and equipment	–				(11,933	)
Net cash (used in) investing activities	$	2,693,583		$	(3,139,112	)
Cash flows from financing activities
Net increase (decrease) in deposits		(2,034,309	)		8,037,456
Net increase in advance payments by borrowers for taxes and insurance		(10,053	)		28,463
Increase (decrease)in Federal Home Loan Bank advances	–				(2,750,000	)
Net cash provided by (used in) financing activities	$	(2,044,362	)	$	5,315,919

(continued)

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	Three Months Ended
	June 30,
	2010		2009
Net decrease in cash and cash equivalents	$	1,229,315	$	2,477,875
Cash and cash equivalents, beginning of the period		4,883,669		1,716,955
Cash and cash equivalents, end of period	$	6,112,984	$	4,194,830
Supplemental Disclosures:
Cash paid during the period for interest	$	556,579	$	841,182
Cash paid during the period for income taxes		2,080	$	520
Loans transferred to foreclosed real estate during the period		187,253	$	–
Proceeds from sales of foreclosed real estate financed through loans	–		$	–
Total increase in unrealized gain on securities available-for-sale	$	948	$	20,135

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

June 30, 2010

 (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 month period ended June 30, 2010 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, 2010.

(2)  Use of Estimates

In preparing 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 then our GAAP capital ratio by 42 basis points.

(4)  Income Taxes

The Bank adopted the provisions of Financial ASC Topic 740 “Accounting for Uncertainty in Income Taxes” on April 1, 2007. 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.

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Federal tax years 2006 through 2009 remain subject to examination as of June 30, 2010, while tax years 2005 through 2009 remain subject to examination by state taxing jurisdictions. 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,
	2010		2009
Numerator	$	131,776	$	45,655
Denominators:
Basic shares outstanding		1,580,256		1,577,052
Effect of dilutive securities		–		–
Dilutive shares outstanding		1,580,256		1,577,052
Earnings per share:
Basic	$	.08	$	.03
Dilutive	$	.08	$	.03

(6) Cease and Desist Order

On March 17, 2010, the Bank entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the OTS, whereby the Bank consented to the issuance of an Order to Cease and Desist promulgated by the OTS, without admitting or denying that grounds exist for the OTS to initiate an administrative proceeding against the Bank.

The Order requires the Bank to take the following actions:

· maintain (i) a tier 1 (core) capital to adjusted total assets ratio of at least 6.0% and (ii) a total risk-based capital to risk-weighted assets ratio of at least 10.0% after the funding of an adequate allowance for loan and lease losses;

· If the Bank fails to meet these capital ratio requirements at any time, within 15 days thereafter prepare a written contingency plan detailing actions to be taken, with specific time frames, providing for (i) a merger with another federally insured depository institution or holding company thereof,  or (ii) voluntary liquidation;

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

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· within 30 days after the end of each quarter, beginning with the quarter ending June 30, 2010, prepare a quarterly written asset status report that will include the requirements contained in the Order;

· prepare an updated business plan that will include the requirements contained in the Order and that also will include strategies to restructure the Bank’s operations, strengthen and improve the Bank’s earnings, reduce expenses and achieve positive core income and consistent profitability;

· restrict quarterly asset growth to an amount not to exceed net interest credited on deposit liabilities for the prior quarter without the prior non-objection of the OTS;

· refrain from making, investing in or purchasing any new commercial loans without the prior non-objection of the OTS (the Bank may refinance, extend or otherwise modify any existing commercial loans, so long as no new loan proceeds are advanced as part of the transaction);

· cease to accept, renew or roll over any brokered deposit or act as a deposit broker, without the prior written waiver of the Federal Deposit Insurance Corporation;

· 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 Order, which replaces the Supervisory Agreement previously entered into between the Bank and the OTS, will remain in effect until terminated, modified, or suspended in writing by the OTS.

The Bank entered into a Supervisory Agreement with the OTS on December 17, 2007.  The Supervisory Agreement identified certain actions to be taken by the Bank to address, among other things, the deterioration in the commercial real estate loan portfolio, a substantial portion of which was generated in 2006 and 2007.  Although the Bank believes that is has taken the steps necessary to comply with the Supervisory Agreement, the commercial real estate loans that were originated prior to the Supervisory Agreement have resulted in a higher level of non-performing assets and charge-offs that have affected the Bank’s profitability.

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, 2010, the Bank has entered into formal forbearance agreements with five relationships totaling $3.7 million that require current payments while the borrowers restructure their finances.

At June 30, 2010, the Bank’s tier 1 (core) capital to adjusted total assets ratio was 7.99% and its total risk-based capital to risk-weighted assets ratio was 12.94%. At June 30, 2010, the Bank exceeded all of its regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

On July 23, 2010 the Bank received a non-objection from the OTS regarding the updated business plan that it submitted under the requirements of the Order. 

8

(7)  Recent Accounting Pronouncements

Below is a discussion of recent accounting pronouncements.  Recent pronouncements not discussed below were deemed to not be applicable to the Company.

ASC Topic 820-10-65, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

In April 2009, the FASB issued  guidance on identifying circumstances that indicate a transaction is not orderly and guidance on estimating fair value  when the volume and level of activity for the asset or liability have significantly decreased.  This guidance emphasizes that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.  This guidance was adopted by the Company, for the interim period beginning April 1, 2009, and did not have a material effect on the Company’s financial position or results of operations.

ASC Topic 320-10-65, Recognition and Presentation of Other Than Temporary Impairments

In April 2009, the FASB issued  guidance  regarding the recognition and presentation of other than temporary impairments on debt and equity securities in the financial statements.  This guidance modifies the presentation of OTTI losses and expands existing disclosure requirements about OTTI.  This guidance was adopted by the Company for the interim period beginning April 1, 2009 and did not have a material effect on the Company’s financial position or results of operations.

ASC Topic 825-10-50, Interim Disclosures about Fair Value of Instruments

In April 2009 the FASB issued guidance which requires publicly traded companies to disclose the fair value of financial instruments within the scope of FAS 107 in interim financial statements.  This guidance was adopted by the Company for the interim period beginning April 1, 2009.

ASC Topic 855, Subsequent Events

In May 2009 the FASB issued additional guidance on the evaluation of subsequent events and requires the disclosure of the date through which subsequent events have been evaluated.  This guidance was adopted by the Company for the interim period June 30, 2009.

FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

In June 2009 the FASB issued FASB Statement No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”.  (SFAS No. 168).  SFAS No. 168 established the FASB Accounting Standards Codification.  The Codification will become the exclusive authoritative reference for nongovernmental U.S.  GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants.  The contents of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth in Statement 162, which has been superseded by Statement 168.  All authoritative GAAP issued by the FASB after this Statement will be referred to as Accounting Standards Updates.  Accounting Standards Updates will not be considered authoritative in their own right, rather they will only serve to update the Codification, provide background information about the guidance and provide basis for conclusions on changes in the Codification.  The Codification retains existing GAAP without changing it except in one instance related to software revenue recognition, which does not impact the Company.  SFAS No. 168 is effective for the Company for the interim period ending September 30, 2009 and effective for the Form 10-Q for the period ending December 31, 2009, all references to authoritative literature are required to cite the Codification as opposed to legacy accounting pronouncements.

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(8)           Fair Value of Financial Instruments

 ASC Topic 820-10, “Fair Value Measurement and Disclosures” 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:

Ÿ	Level 1	Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Ÿ	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.
Ÿ	Level 3	Level 3 inputs are unobservable inputs.

A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input significant to the fair value measurement.

As required by ASC Topic 825-10-65, the estimated fair value of financial instruments at June 30, 2010 and March 31, 2010 was as follows:

	June 30, 2010				March 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents	$	6,113	$	6,113	$	4,884	$	4,884
Investment securities		15,004		15,494		16,615		17,064
Loans – net		105,679		108,978		107,204		111,865
FHLB stock		225		225		207		207
Accrued interest receivable		472		472		493		493
Total financial assets	$	127,493	$	131,282	$	129,403	$	134,513
Financial Liabilities:
Deposits	$	125,129	$	126,528	$	127,164	$	128,742
Advance payments by borrowers for taxes and insurance		414		414		424		424
Accrued interest payable		39		39		46		46
Total financial liabilities	$	125,582	$	126,981	$	127,634	$	129,212

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

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended June 30, 2010 and 2009 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

Forward-Looking Statements

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

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

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

General

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

Balance Sheet Analysis

Overview.  Total assets at June 30, 2010 were $138.0 million, a decrease of $1.9 million, or 1.4%, from total assets of $139.9 million at March 31, 2010.  The change in the asset composition reflected a decrease in investment securities of $1.6 million and a decrease in outstanding loans of $1.4 million, partially offset by an increase in cash and cash equivalents of $1.2 million.

Loans.  At June 30, 2010, total loans, net, were $105.8 million, or 76.6% of total assets.  Overall loans decreased by $1.4 million due primarily to the early payoff of loans.  Commercial and multi-family real estate loans decreased by $600,000, commercial loans decreased by $250,000 and residential real estate loans decreased by $200,000.

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Table 1:  Loan Portfolio Analysis

	June 30,						March 31,
	2010						2010
(Dollars in thousands)	Amount			Percent			Amount			Percent
Real estate loans:
Residential	$	79,416			74.3	%	$	79,637			73.5	%
Commercial and multi-family		23,358			21.8			23,998			22.2
Construction		337			0.3			395			0.4
Total real estate loans		103,111			96.4			104,030			96.1
Commercial loans		2,556			2.4			2,821			2.6
Consumer loans		1,292			1.2			1,419			1.3
Total loans		106,959			100	%		108,270			100.0	%
Loans in process	–						–
Net deferred loan fees		(66	)					(67	)
Allowance for losses		(1,124	)					(999	)
Loans, net	$	105,769					$	107,204

Non-performing Loans. Total nonperforming loans at June 30, 2010 increased $225,000 primarily due to an increase in non-performing residential real estate loans, partially offset by a decrease in non-performing commercial real estate loans.  The troubled debt restructurings as of March 31, 2010 of $3.8 million include $1.9 million of loans also reported in the non-accrual loan total.  The total for troubled debt restructurings as of June 30, 2010 does not include loans that are reported as non-accrual loans which total $1.4 million.

Table 2:  Nonperforming Assets

	June 30,			March 31,
(Dollars in thousands)	2010			2010
Nonaccrual loans	$	6,292		$	6,067
Accruing loans past due 90 days or more	–				—
Total of nonaccrual and 90 days or more past due loans		6,292			6,067
Other nonperforming assets		600			413
Total nonperforming assets		6,892			6,480
Troubled debt restructurings		2,259			3,792
Troubled debt restructurings and total nonperforming assets	$	9,151		$	10,272
Total nonperforming loans to total loans		5.88	%		5.60	%
Total nonperforming loans to total assets		4.56			4.34
Total nonperforming assets and troubled debt restructurings to total assets		6.63			7.34

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Securities.  The investment securities portfolio was $15.0 million, or 10.9 % of total assets, at June 30, 2010.  At that date, 58.3% of the investment portfolio was invested in mortgage-backed securities, while the remainder was invested primarily inU.S. Government agency and other debt securities. Investment securities decreased $1.6 million, primarily due to calls of U.S government and agency securities, while mortgage backed securities decreased due to pay-down of principal.

Table 3:  Investment Securities

	June 30,				March 31,
	2010				2010
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Mutual funds	$	252	$	256	$	256	$	258
Total available for sale						256		258
Securities held to maturity:
U.S. Government and agency securities		5,999		6,026		6,997		7,013
Mortgage-backed securities		8,754		9,212		9,363		9,793
Total held to maturity		14,753		15,238		16,360		16,806
Total	$	15,005	$	15,494	$	16,616	$	17,064

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 June 30, 2010, core deposits were 46.4% of total deposits.  Overall deposits decreased by $2.0 million as the Bank attracted core deposits and reduced its reliance on higher costing time deposits.  Core deposits grew for the quarter by $1.7 million while time deposits decreased by $3.7 million.

Table 4:  Deposits

	June 30,					March 31,
	2009					2010
(Dollars in thousands)	Amount		Percent			Amount		Percent
Noninterest-bearing demand deposits	$	4,055		3.3	%	$	3,941		3.1	%
Interest-bearing demand deposits		12,661		10.1			9,922		7.8
Savings and money market accounts		41,314		33.0			42,510		33.4
Certificates of deposit		67,099		53.6			70,791		55.7
Total	$	125,129		100.0	%	$	127,164		100.0	%

Borrowings.  In recent periods, we have occasionally used short-term FHLB advances as an additional source of liquidity.  At June 30, 2010, we did not have short-term advances outstanding.

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Results of Operations for the Three Months Ended June 30, 2010 and 2009

Financial Highlights. Net income for the three months ended June 30, 2010, was $132,000 compared to a net income of $46,000 for the three months ended June 30, 2009. The increase in net income was the result of an increase in net interest income and a decrease in non-interest expense partially offset by an increase in the loan loss provision and income taxes.

Table 5:  Summary Income Statements

Three months ended June 30, (Dollars in thousands)	2010			2009			2010 v. 2009		% Change
Net interest income	$	1,147		$	1,065		82			7.7	%
Provision for loan losses		150			100		50			50.0
Noninterest income		44			47		(3	)		(6.4	)
Noninterest expenses		857			949		(92	)		(9.7	)
Net income (loss)		132			46		86			187.0
Return on average equity (annualized)		4.44	%		1.56	%
Return on average assets (annualized)		0.38			0.14

Net Interest Income.  Net interest income increased $82,000 to $1,147,000 for the three months ended June 30, 2010 from $1,065,000 for the three months ended June 30, 2009 driven by a decline of interest paid ondeposits. Both the 11 basis point increase in our interest rate spread and the 9 basis point increase in our net interest margin reflect the improvement the Bank has made in reducing our cost of funds.  The rates earned on our assets declined, resulting in a 3.9% decrease in total interest income as compared to a 21.4% decrease in total interest expense.

Average loans in the three months ended June 30, 2010 increased $2.6 million, or 2.5%, compared with the same period in 2009, driven by growth in residential real estate loans. Average investment securities in the three months ended June 30, 2010 increased $2.8 million, or 20.7%, compared to the same period in 2009. The growth in the investment portfolio was due to the increase in U.S Government and agency securities. Declining interest rates decreased the average yield on earning assets to 5.32% for the three months ended June 30, 2010, compared with 5.81% for the same period in 2009.

Average interest-bearing deposits, savings and money markets and time deposits in the three months ended June 30, 2010 increased $7.9 million, $3.1 million and $4.8 million, respectively, compared with the same period in 2009 as the Bank benefited from the closing of nearby competitors and the desire of some depositors to deal with community banks rather than large banks due to negative publicity surrounding the larger banks. Declining interest rates decreased the average cost of deposits to 1.80%, compared with 2.40% for the same period in 2009.

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Table 6:  Analysis of Net Interest Income

Three months ended June 30, (Dollars in thousands)	2010			2009			2010 v. 2009		% Change
Components of net interest income
Loans	$	1,518		$	1,597		(79	)		(4.9	)%
Investment securities		179			168		11			6.5
Total interest income		1,697			1,765		(68	)		(3.9	)
Deposits		550			690		(140	)		(20.3	)
Total interest expense		550			700		(150	)		(21.4	)
Net interest income		1,147			1,065		82			7.7
Average yields and rates paid
Interest-earning assets		5.32	%		5.81	%	(49	)		bp
Interest-bearing liabilities		1.80			2.40		(60	)
Interest rate spread		3.52			3.41		11
Net interest margin		3.60			3.51		9
Average balances
Loans	$	107,010		$	104,400		2,610			2.5	%
Investment securities		16,513			13,684		2,829			20.7
Other earning assets		4,048			3,362		686			20.4
Interest-bearing deposits		122,148			114,282		7,866			6.9
Borrowings	–				2,560		(2,560	)		(100.0	)

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 $150,000 in the three months ended June 30, 2010 compared to $100,000 in the three months ended June 30, 2009.  We had $26,000 in charge-offs in the three months ended June 30, 2010, compared to $95,000 in charge-offs in the same prior year period.

Table 7:  Analysis of Loan Loss Experience

Three months ended June 30, (Dollars in thousands)	2010			2009
Allowance at beginning of period	$	999		$	1,547
Provision for loan losses		150			100
Total charge-offs		26			95
Recoveries		1		
Net charge-offs		25			95
Allowance at end of period	$	1,124		$	1,552
Allowance to nonperforming loans		17.86	%		18.63	%
Allowance to total loans outstanding at the end of the period		1.05			1.42
Net charge-offs (recoveries) to average loans outstanding during the period		.02			0.09

Non-Interest Income.  Noninterest income decreased slightly in the three months ended June 30, 2010 compared to the same period in the prior year.

Table 8:  Noninterest Income Summary

Three months ended June 30, (Dollars in thousands)	2010		2009		$ Change			% Change
Service charges	$	35	$	36	$	(1	)		(2.8	)%
Rental income	–		–
Other		9		11		(2	)		(18.2	)
Total	$	44	$	47		(3	)		(6.4	)

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Non-Interest Expenses.  Noninterest expenses declined in the three months ended June 30, 2010 by $92,000 over the same period in the prior year through decreases in most expense categories, but primarily in salaries and benefits, partially offset by increases in FDIC insurance premiums and professional fees incurred in our loan workout/recoveries.

Table 9:  Noninterest Expense Summary

Three months ended June 30, (Dollars in thousands)	2010		2009		$ Change			% Change
Salaries and employee benefits	$	410	$	481		(71	)		14.8	%
Advertising		5		10		(5	)		50.0
Office supplies, telephone and postage		19		27		(8	)		29.6
Net occupancy expense		166		169		(3	)		1.8
Federal insurance premiums		73		58		15			25.9
Data processing expenses		32		45		(13	)		28.9
ATM expenses		4		4	–			–
Bank charges and fees		25		31		(6	)		(19.4	)
Insurance and surety bond premiums		14		16		(2	)		(12.5	)
Dues and subscriptions		7		14		(7	)		(50.0	)
Professional fees		62		48		14			29.2
Other		40		46		(6	)		13.0	)
Total	$	857	$	949		(92	)		(9.7	)

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 June 30, 2010, cash and cash equivalents totaled $6.1 million.  In addition, at June 30, 2010, we had arrangements to borrow up to $8.1 million from the Federal Home Loan Bank of New York.  On June 30, 2010, we had no outstanding borrowings.

At June 30, 2010, substantially all of our investment securities were classified as held to maturity.  We have classified our investments in this manner, rather than as available for sale, because they were purchased primarily to provide a source of income and not to provide liquidity.   We anticipate that a portion of future investments may be classified as available for sale in order to give us greater flexibility in the management of our investment portfolio.

A significant use of our liquidity is the funding of loan originations.  At June 30, 2010 we had outstanding loan commitments of $160,000.  In addition, we had $1.5 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 June 30, 2010 totaled $42.5 million, or 63% 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 June 30, 2010.  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 June 30, 2010, 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 three months ended June 30, 2010, 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 1A.  Risk Factors

Other than as set forth below, there are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010, which could materially and adversely affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Recently enacted regulatory reform may have a material impact on our operations.

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The Dodd-Frank Act restructures the regulation of depository institutions.  The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009.  Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators.  The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well.  The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted.  The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

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

Not Applicable.

Item 3.   Defaults upon Senior Securities

Not Applicable.

Item 4.   [Removed and Reserved].

Item 5.   Other Information

None.

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Item 6.    Exhibits

3.1	Charter of Delanco Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form SB-2 (File No. 333-139339))
3.2	Bylaws of Delanco Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to the Form 8-K filed with the Securities and Exchange Commission on August 21, 2009)
4.0	Stock Certificate of Delanco Bancorp, Inc. (Incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form SB-2 (File No. 333-139339))
10.1	Order to Cease and Desist dated March 17, 2010, by and between Delanco Federal Savings Bank and the Office of Thrift Supervision (Incorporated herein by reference to Exhibit 10.1 to the Form 10-K filed with the Securities and Exchange Commission on June 28, 2010)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification

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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: August 11, 2010	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and Chief Executive Officer
Dated: August 11, 2010	By:	/s/ Eva Modi
		Eva Modi
		Chief Financial Officer

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