Delanco Bancorp 10-K 2013 FY Annual report

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number: 0-52517

DELANCO BANCORP, INC.

(Name of small business issuer 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  (Address of principal executive offices)	08075 (Zip Code)

Issuer’s telephone number: (856) 461-0611

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.01 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ____ No X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ____ No X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X   No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    X

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	[     ] (Do not check if a smaller reporting company)	Smaller reporting company	[ X ]

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2012 was approximately $6.5 million.

The number of shares outstanding of the registrant’s common stock as of June 11, 2013 was 1,634,725.

INDEX

	Part I
		Page
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	18
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	37
Item 9A.	Controls and Procedures	37
Item 9B.	Other Information	38
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance	39
Item 11.	Executive Compensation	41
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
Item 13.	Certain Relationships and Related Transactions, and Director Independence	43
Item 14.	Principal Accounting Fees and Services	44
	Part IV
Item 15.	Exhibits and Financial Statement Schedules	44
SIGNATURES		46

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This report contains certain “forward-looking statements” within the meaning of the federal securities laws that are based on assumptions and may describe future plans, strategies and expectations of Delanco Bancorp, Inc. (“Delanco Bancorp” or the “Company”), Delanco MHC and Delanco Federal Savings Bank (“Delanco Federal” or the “Bank”). These forward-looking statements are generally identified by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “projects” and similar expressions.

Management’s 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 the operations of Delanco Bancorp and its subsidiaries include, but are not limited to, the following: interest rate trends; the general economic climate in the market area in which we operate, as well as nationwide; our ability to control costs and expenses; competitive products and pricing; loan delinquency rates and changes in federal and state legislation and regulation. Additional factors that may affect our results are discussed in this Annual Report on Form 10-K under “Item 1A—Risk Factors.” These risks and uncertainties should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. We assume no obligation to update any forward-looking statements.

PART I

ITEM 1. BUSINESS

General

We are headquartered in Delanco Township, New Jersey and operate as a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses within our market areas. Delanco Federal is engaged primarily in the business of attracting deposits from the general public and using such funds to originate one- to four-family real estate loans and to a much lesser extent, multi-family and nonresidential real estate loans, home equity and consumer loans which we primarily hold for investment. Delanco Federal also maintains an investment portfolio. Delanco Federal’s primary federal regulator is the Office of the Comptroller of the Currency (the “OCC”). The FDIC, through the Deposit Insurance Fund, insures Delanco Federal’s deposit accounts up to the applicable legal limits. Delanco Federal is a member of the Federal Home Loan Bank (“FHLB”) of New York.

Delanco Bancorp, Inc. was organized in 2002 as a federal corporation at the direction of Delanco Federal, in connection with the reorganization of the Bank from the mutual form of organization to the mutual holding company form of organization. On March 30, 2007, Delanco Bancorp completed a minority stock offering.

Delanco Bancorp’s business activity is the ownership of the outstanding capital stock of Delanco Federal. Delanco Bancorp does not own or lease any property but instead uses the premises, equipment and other property of Delanco Federal with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement. In the future, Delanco Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.

Delanco Federal operates as a community-oriented financial institution offering traditional financial services to consumers and businesses in our market area. We attract deposits from the general public and use those funds to originate a variety of consumer and business loans.

Our website address is www.delancofsb.com. Information on our website should not be considered a part of this report.

Market Area

We are headquartered in Delanco Township, New Jersey. In addition to our main office, we operate a full-service branch office in Cinnaminson, New Jersey. Delanco and Cinnaminson are in western Burlington County, New Jersey, across the Delaware River from northeastern Philadelphia. We consider Burlington County to be our primary market area.

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Competition

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies. Several large banks operate in our market area, including Bank of America, Wells Fargo & Company (formerly known as Wachovia), TD Bank and PNC Bank. These institutions are significantly larger than us and, therefore, have significantly greater resources. We also face competition for customers’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2012, which is the most recent date for which data is available from the FDIC, we held 1.44% of the deposits in Burlington County, New Jersey.

Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies, such as insurance companies, securities companies and specialty finance companies.

We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Federal law permits affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

One- to Four-Family Residential Loans. We offer three types of residential mortgage loans: fixed-rate loans, balloon loans and adjustable-rate loans. We offer fixed-rate mortgage loans with terms of 15, 20 or 30 years and balloon mortgage loans with terms of five, ten or 15 years. We offer adjustable-rate mortgage loans with interest rates and payments that adjust annually after an initial fixed period of one or three years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal to a percentage above the one year U.S. Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6.0% over the initial interest rate of the loan. We generally retain all of the mortgage loans that we originate, although from time to time we have sold some of the 30-year, fixed-rate mortgage loans that we originated. If we choose to sell any mortgages in the future, it would be with the servicing of the loans retained by the Bank.

Borrower demand for adjustable-rate or balloon loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate or balloon loans. The relative amount of fixed-rate, balloon and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. We have seen little demand for adjustable-rate loans in the low interest rate environment that has prevailed in recent years. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. We do not offer loans with negative amortization and generally do not offer interest only loans.

We will make loans with loan-to-value ratios up to 95%; however, we require private mortgage insurance for loans with a loan-to-value ratio over 80%. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.

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Commercial and Multi-Family Real Estate Loans.We have traditionally offer fixed- and adjustable-rate mortgage loans secured by a variety of commercial and multi-family real estate, such as small office buildings, warehouses, retail properties and small apartment buildings. We originate a variety of fixed- and adjustable-rate commercial real estate and multi-family real estate loans generally for terms up to five to sevenyears and payments based on an amortization schedule of up to 25 years. Adjustable-rate loans are typically based on the Prime Rate and the Constant Maturity Treasury rate. Loans are secured by first mortgages, and amounts generally do not exceed 80% of the property’s appraised value.

During 2006 and 2007, we expanded our lending area to all of Pennsylvania and New Jersey, with a focus on Philadelphia and southwestern New Jersey. As a result of the economic downturn we experienced a significant increase in non-performing assets, particularly in our commercial real estate portfolio. Following a change in our senior management in 2009, we restricted our out-of-market commercial lending. We were restricted from making new commercial loans under the Cease and Desist Order issued by the Office of Thrift Supervision on March 17, 2010 and, as a result, we have made few commercial and multi-family real estate loans in recent years. The written agreement with the OCC dated November 21, 2012 eliminated this lending restriction.

Construction Loans. We originate loans to individuals to finance the construction of residential dwellings. We also make construction loans for small commercial development projects. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually nine months for residential properties and 12 months for commercial properties. Upon completion of the construction phase, the loan typically converts to a permanent mortgage loan and is reclassified as such. Loans generally can be made with a maximum loan to value ratio of 90% on residential construction and 80% on commercial construction, based on appraised value as if complete. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also will require an inspection of the property before disbursement of funds during the term of the construction loan.

Commercial Loans. We offer commercial business loans to professionals, sole proprietorships and small businesses in our market area. We offer installment loans for capital improvements, equipment acquisition and long-term working capital. These loans are secured by business assets other than real estate, such as business equipment and inventory, or are backed by the personal guarantee of the borrower. We originate lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. We also offer accounts receivable lines of credit.

When making commercial business loans, we consider the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral.

Consumer Loans. Our consumer loans consist primarily of home equity loans and lines of credit. We occasionally make loans secured by passbook or certificate accounts and automobile loans.

We offer home equity loans with a maximum combined loan to value ratio of 80% or less. Home equity lines of credit have adjustable rates of interest that are indexed to the Prime Rate as published byThe Wall Street Journal. Home equity loans have fixed interest rates and terms that typically range from five to 15 years. Some of our home equity loans are originated as five-year balloon loans with monthly payments based on a 20- to 30-year amortization schedule.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary sources of loan originations are existing customers, walk-in traffic, advertising and referrals from customers.

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From time to time, we havepurchased participations in loans from the Thrift Institutions Community Investment Corporation of New Jersey to supplement our lending portfolio.Loan participations totaled $144 thousand at March 31, 2013. Loan participations are also subject to the same credit analysis and loan approvals as loans we originate. We are permitted to review all of the documentation relating to any loan in which we participate. However, in a purchased participation loan, we do not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings.

In the past, we have sold some of the 30-year fixed rate loans that we originated to the Federal Home Loan Bank of New York for interest risk management purposes. In recent periods we have retained all of the loans that we have originated. We may sell loans from time to time in the future to help manage our asset/liability mix and limit our interest rate risk. We intend to retain the servicing on any loans sold.

Loan Approval Procedures and Authority.Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. The board of directors has granted loan approval authority to our President and Chief Executive Officer and Vice President – Lending up to prescribed limits, based on the officer’s experience and tenure. All loans over $500,000 with respect to residential mortgage loans and smaller amounts with respect to other types of loans must be approved by the loan committee of the board of directors or the full board.

Loans to One Borrower.The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At March 31, 2013, our regulatory limit on loans to one borrower was $1.8 million. At that date, our largest lending relationship was $1.1 million and was secured by residential real estate. This loan was performing in accordance with it terms at March 31, 2013.

Loan Commitments. We issue commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.

Loan Underwriting Risks.

Adjustable-Rate Loans.While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Commercial and Multi-Family Real Estate Loans.Loans secured by commercial and multi-family real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial and multi-family real estate loans. In reaching a decision on whether to make a commercial or multi-family real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25x. An environmental survey or environmental risk insurance is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

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Commercial Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of New York and Atlantic Central Bankers Bank stock.

At March 31, 2013, our investment portfolio totaled $22.3 million, or 17.3% of total assets, and consisted primarily of mortgage-backed securities and debt securities of government sponsored enterprises.

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy. The Asset/Liability Committee is responsible for implementation of the investment policy and monitoring our investment performance.Ourboard of directors reviews the status of our investment portfolio on a monthly basis, or more frequently if warranted.

Deposit Activities and Other Sources of Funds

General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. Substantially all of our depositors are residents of New Jersey. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and certificates of deposit. In addition to accounts for individuals, we also offer commercial checking accounts designed for the businesses operating in our market area. We do not have any brokered deposits. From time to time we promote various accounts in an effort to increase deposits.

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Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, and customer preferences and concerns. We generally review our deposit mix and pricing bi-weekly. Our deposit pricing strategy has generally been to offer competitive rates and to be towards the top of the local market for rates on all types of deposit products.

Borrowings. We have the ability to utilize advances from the Federal Home Loan Bank of New York, Atlantic Central Bankers Bank and the Federal Reserve Bank of Philadelphia to supplement our investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Atlantic Central Bankers Bank provides correspondent banking services, both credit and non-credit, to financial institutions in the Mid-Atlantic region. As a member, we are required to own capital stock in Atlantic Central Bankers Bank and are authorized to apply for advances under an unsecured line of credit. The Federal Reserve Bank of Philadelphia functions as a central reserve bank providing credit for member financial institutions. We are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. At March 31, 2013, we had arrangements to borrow up to $11.4 million from the Federal Home Loan Bank of New York and $1.0 million from the Atlantic Central Bankers Bank.

Personnel

As of March 31, 2013, we had 23 full-time equivalent employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Subsidiaries

The only subsidiary of Delanco Bancorp is Delanco Federal. Delanco Federal has one active subsidiary, DFSB Properties, LLC, which is the title holder for repossessed real estate.

Regulation and Supervision

General

Delanco Federal, as a federal savings association, is currently subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and by the FDIC as the insurer of its deposits. Delanco Federal is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Delanco Federal must file reports with the OCC concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OCC to evaluate Delanco Federal’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for loan losses for regulatory purposes. Any change in such policies, whether by the OCC, the FDIC or Congress, could have a material adverse impact on Delanco Bancorp and Delanco Federal and their operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes to the regulation of Delanco Federal. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated and responsibility for the supervision and regulation of federal savings associations such as Delanco Federal was transferred to the OCC on July 21, 2011. The OCC is the agency that is primarily responsible for the regulation and supervision of national banks. Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as Delanco Federal, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.

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Certain of the regulatory requirements that are applicable to Delanco Federal and Delanco Bancorp are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Delanco Federal and Delanco Bancorp.

Federal Banking Regulation

Business Activities.The activities of federal savings banks, such as Delanco Federal, are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks,e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements.The applicable capital regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% Tier 1 capital to total assets leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital less certain specified deductions from total capital such as reciprocal holdings of depository institution capital instruments and equity investments) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet activities, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor assigned by the capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is generally defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital (Tier 2 capital) include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The OCC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular risks or circumstances.See “—Regulatory Agreement” below for information on the individual minimum capital requirements currently applicable to Delanco Federal.

Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies, including savings and loan holding companies, that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. On August 30, 2012, the federal banking agencies issued proposed rules that would implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

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The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would revise the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to Delanco Bancorp and Delanco Federal under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less and phased out over a period of 10 years ending in 2022. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

Prompt Corrective Regulatory Action.Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The OCC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

Insurance of Deposit Accounts.Delanco Federal’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance per account owner is currently $250,000.Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.

The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Delanco Federal. Management cannot predict what insurance assessment rates will be in the future.

Loans to One Borrower. Federal law provides that savings associations are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

Qualified Thrift Lender Test.Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities but also including education, credit card and small business loans) in at least nine months out of each 12-month period.

A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and the Dodd-Frank Act also specifies that failing the qualified thrift lender test is a violation of law that could result in an enforcement action and dividend limitations. As of March 31, 2013, Delanco Federal maintained 87.6 % of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

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Limitation on Capital Distributions.Federal regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OCC is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OCC regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. If an application is not required, the institution must still provide 30 days prior written notice to, and receive the nonobjection of, the Federal Reserve Board of the capital distribution if, like Delanco Federal, it is a subsidiary of a holding company, as well as an informational notice filing to the OCC. If Delanco Federal’s capital ever fell below its regulatory requirements or the OCC notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the OCC could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OCC determines that such distribution would constitute an unsafe or unsound practice.  

Community Reinvestment Act.All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to satisfactorily comply with the provisions of the Community Reinvestment Act could result in denials of regulatory applications. Responsibility for administering the Community Reinvestment Act, unlike other fair lending laws, is not being transferred to the Consumer Financial Protection Bureau. Delanco Federal received an “outstanding” Community Reinvestment Act rating in its most recently completed examination.

Transactions with Related Parties.Federal law limits Delanco Federal’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with Delanco Federal, including Delanco Bancorp and Delanco MHC and their other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by Delanco Bancorp to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Delanco Federal’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that Delanco Federal may make to insiders based, in part, on Delanco Federal’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.

Enforcement.The OCC currently has primary enforcement responsibility over savings associations and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings association. If action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

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Federal Home Loan Bank System.Delanco Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Delanco Federal, as a member of the Federal Home Loan Bank of New York, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Delanco Federal was in compliance with this requirement with an investment in Federal Home Loan Bank stock at March 31, 2013 of $203 thousand.

Federal Reserve Board System.The Federal Reserve Board regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). For 2013, the regulations provided that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $71.0 million; a 10% reserve ratio is applied above $71.0 million. The first $11.5 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually and, for 2013, require a 3% ratio for up to $79.5 million and an exemption of $12.4 million. Delanco Federal complies with the foregoing requirements. In October 2008, the Federal Reserve Board began paying interest on certain reserve balances.

Other Regulations

Delanco Federal’s operations are also subject to federal laws applicable to credit transactions, including the:

• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

• Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

• rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Delanco Federal also are subject to laws such as the:

• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

• Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

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Holding Company Regulation

General.As a savings and loan holding company, Delanco Bancorp is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations regarding its activities. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to Delanco Federal.

Pursuant to federal law and regulations and policy, a savings and loan holding company such as Delanco Bancorp may generally engage in the activities permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act and certain other activities that have been authorized for savings and loan holding companies by regulation.

Federal law prohibits a savings and loan holding company from, directly or indirectly or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings association, or savings and loan holding company thereof, without prior written approval of the Federal Reserve Board or from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Source of Strength.The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Dividends. The Federal Reserve Board has the power to prohibit dividends by savings and loan holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which also applies to savings and loan holding companies and which expresses the Federal Reserve Board’s view that a holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

Acquisition of Delanco Bancorp. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

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Regulatory Agreement

Delanco Federal is a party to a formal written agreement with the OCC dated November 21, 2012. The written agreement supersedes and terminates the Order to Cease and Desist issued by the Office of Thrift Supervision on March 17, 2010.

The written agreement requires Delanco Federal to take the following actions:

● prepare a three-year strategic plan that establishes objectives for Delanco Federal’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 Delanco Federal has failed to submit an acceptable capital plan or fails to implement or adhere to its capital plan, then the OCC may require Delanco Federal to develop a contingency capital plan detailing Delanco Federal’s proposal to sell, merge or liquidate Delanco Federal;

● prepare a criticized asset plan that will include strategies, targets and timeframes to reduce Delanco Federal’s level of criticized assets;

● implement a plan to improve Delanco Federal’s credit risk management and credit administration practices;

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

● review the capabilities of Delanco Federal’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 written agreement will remain in effect until terminated, modified, or suspended in writing by the OCC.

We have submitted strategic and capital plans to the OCC and have developed the other plans and policies required by the written agreement. The written agreement will remain in effect until terminated, modified, or suspended in writing by the OCC.

The written agreement does not require Delanco Federal to maintain any specific minimum regulatory capital ratios. However, by letter dated January 2, 2013, the OCC established higher individual minimum capital requirements for Delanco Federal. Specifically, Delanco Federal must maintain Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 capital at least equal to 12% of risk-weighted assets, and total capitalat least equal to 13% of risk-weighted assets. At March 31, 2013, Delanco Federal’s Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk based-capital ratio were 7.79%, 13.41% and 14.67%, respectively.

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ITEM 1A. RISK FACTORS

We have experienced net losses in each of the last two fiscal years and we may not return to profitability in the near future.

We have experienced net losses of $324 thousand and $494 thousand for the years ended March 31, 2013 and 2012, respectively. Our profitability has suffered due to lower net interest income resulting from the prolonged low interest rate environment, as well as heightened provisions for loan losses, expenses for and losses on the sale of real estate owned and other problem loan expenses. For the year ended March 31, 2013, we incurred provision expenses of $640 thousand, real estate owned expenses and losses of $340 thousand, and other problem loan expenses of $448 thousand. For the year ended March 31, 2012, we incurred provision expenses of $1.6 million, real estate owned expenses and losses of $197 thousand, and other problem loan expenses of $203 thousand. At March 31, 2013, non-performing assets and troubled debt restructurings totaled $8.8 million, or 6.8% of total assets. As we work through our problem assets, we may incur additional expenses and losses on real estate owned and other problem loan expenses, while continued high levels of problem assets may result in additional provisions for loan losses, all of which would impede our return to profitability. In addition, our earnings have been adversely affected by a shrinking net interest margin caused by the protracted low interest rate environment and its impact on earning asset yields. Our net interest margin was 3.35% for the year ended March 31, 2013, as compared to 3.60% for the year ended March 31, 2012. Our average yield on earning assets declined to 4.22% for the year ended March 31, 2013, from 4.76% for the year ended March 31, 2012 as higher yielding loans were paid off or refinanced at lower market rates and higher yielding securities were called by the issuer and replaced with lower yielding investments. Continued low market interest rates could cause further declines in our net interest margin, as our ability to reduce our cost of funds to offset further reductions in asset yields is limited.

We are a party to a formal written agreement with the OCC and our failure to comply with that agreement may result in further regulatory enforcement actions, including restrictions on our operations.

Delanco Federal is a party to a formal written agreement with the OCC dated November 21, 2012. The written agreement supersedes and terminates the Order to Cease and Desist issued by the Office of Thrift Supervision on March 17, 2010. The written agreement requires Delanco Federal to take certain actions and implement certain policies and procedures aimed at improving Delanco Federal’s capital, earnings and asset quality. The written agreement does not require Delanco Federal to maintain any specific minimum regulatory capital ratios. However, by letter dated January 2, 2013, the OCC established higher individual minimum capital requirements for Delanco Federal. Specifically, Delanco Federal must maintain Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 capital at least equal to 12% of risk-weighted assets, and total capital at least equal to 13% of risk-weighted assets. At March 31, 2013, Delanco Federal’s Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk based-capital ratio were 7.79%, 13.41% and 14.67%, respectively.

The written agreement will remain in effect until terminated, modified, or suspended in writing by the OCC. A failure to comply with the written agreement could result in the initiation of further enforcement actions by the OCC, including the imposition of civil monetary penalties. The written agreement has resulted in additional regulatory compliance expense for the Company. A detailed description of the written agreement can be found at“Regulation and Supervision—Regulatory Agreement.”

A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued elevated unemployment levels may result in higher than expected loan delinquencies, increases in our non-performing and criticized classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations. As a result of the economic downturn, our non-performing assets and troubled debt restructurings jumped from $1.8 million at March 31, 2008 to $9.0 million at March 31, 2009 and then to $10.3 million at March 31, 2010. Since that time, the amount of non-performing assets and troubled debt restructurings has declined to $8.8 million at March 31, 2013. Reduction in problem assets has been slow, and the process has been exacerbated by the condition of some of the properties securing non-performing loans, the lengthy foreclosure process in New Jersey, and extended workout plans with certain borrowers. As we work through the resolution of these assets, the continued economic problems that exist in the financial markets could have a negative impact on the Company.

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A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

Adverse conditions in the local economy or real estate market could hurt our profits.

Our success depends to a large degree on the general economic conditions in Burlington County, New Jersey and the surrounding areas that comprise our market. Our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies.At March 31, 2013, 56.7% of our loan portfolio consisted of loans secured by real estate in Burlington County. We have relatively few loans outside of our market area, and, as a result, we have a greater risk of loan defaults and losses in the event of a further economic downturn in our market area, as adverse economic conditions may have a negative effect on the ability of our borrowers to make timely payments of their loans. Further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished.

Our local economy may affect our future growth possibilities and operations in our primary market area. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand in our market area. Continued adverse conditions in our local economy may limit funds available for deposit and may negatively affect demand for loans, both of which could have an impact on our profitability.

An inability to maintain our regulatory capital position could require us to raise additional capital, which may not be available on favorable terms or at all.

At March 31, 2013, Delanco Federal’s Tier 1 leverage ratio was 7.79%, which was not in compliance with the individual minimum capital requirement imposed by the OCC that requires Delanco Federal to maintain a Tier 1 leverage ratio of at least 8%. If we are unable to remain in compliance with the individual minimum capital requirement imposed by the OCC, we may be required to raise additional capital. The need to raise substantial additional funds may force our management to spend more time in managerial and financing related activities than in operational activities. We may not be able to secure the required funding or it may not be available on favorable terms. Additional offerings of our common stock will dilute the ownership interest and possibly the book value per share of our current shareholders.

Our allowance for loan losses may be inadequate, which could hurt our earnings.

When borrowers default and do not repay the loans that we make to them, we may lose money. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. If our estimates and judgments regarding such matters prove to be incorrect, our allowance for loan losses might not be sufficient, and additional loan loss provisions might need to be made. Depending on the amount of such loan loss provisions, the adverse impact on our earnings could be material. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios.

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The economic downturn that began in 2007 has required us to make significant additions to our allowance for loan losses. For the year ended March 31, 2008 through the year ended March 31, 2013, provisions for loan losses totaled $6.4 million. During this same period, we had net charge-offs of $5.9 million. For our most recent fiscal year ended March 31, 2013, provisions for loan losses totaled $640 thousand and net charge-offs totaled $768 thousand. At March 31, 2013, the allowance for loan losses was $1.0 million, which represented 1.2% of total loans and 16.3% of non-performing loans. A large loss could deplete the allowance and require substantial provisions to replenish the allowance, which would negatively affect earnings.

In addition, bank regulators may require us to make a provision for loan losses or otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our loan loss allowance. Any increase in our allowance for loan losses or loan charge-offs as required by such regulatory authorities could have a material adverse effect on our financial condition and results of operations. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Loan Losses” for a discussion of the procedures we follow in establishing our loan loss allowance.

Our previous emphasis on commercial lending may expose us to increased lending risks.

At March 31, 2013, $13.6 million, or 15.2%, of our loan portfolio consisted of commercial and multi-family real estate loans and commercial business loans, down from $18.6 million at March 31, 2012 and $32.2 million at March 31, 2008. Of these loans, $3.3 million were non-performing at March 31, 2013. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property or a business. These types of loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for potential losses. We were restricted from making new commercial loans under the cease and desist order issued by the Office of Thrift Supervision on March 17, 2010. The written agreement with the OCC dated November 21, 2012 eliminated this lending restriction.

If our foreclosed real estate is not properly valued or if our reserves are insufficient, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as foreclosed real estate and at certain other times during the holding period of the asset. Our net book value in the loan at the time of foreclosure and thereafter is compared to the updated fair value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s net book value over its fair value less estimated selling costs. If our valuation process is incorrect, or if property values decline, the fair value of our foreclosed real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs. In addition, bank regulators periodically review our foreclosed real estate and may require us to recognize further charge-offs. Significant charge-offs to our foreclosed real estate could have a material adverse effect on our financial condition and results of operations.

Historically low interest rates may adversely affect our net interest income and profitability.

In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than available prior to 2008. This has been a significant factor in the decrease in the amount of our net interest income to $4.0 million for the year ended March 31, 2013 from $4.5 million for the year ended March 31, 2012 and $4.8 million for the year ended March 31, 2011. Our ability to lower our interest expense to offset declines in asset yields is limited at current interest rate levels. The Federal Reserve Board has indicated its intention to maintain low interest rates in the near future. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may continue to decrease, which would have an adverse effect on our profitability.

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Changes in interest rates may hurt our earnings and asset value.

Our net interest income is the interest we earn on loans and investment less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk Management.”

If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.

We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. As of March 31, 2013, our investment portfolio included securities with an amortized cost of $22.4 million and an estimated fair value of $22.5 million. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities to their fair value. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.

Impairment of our deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

As a result of losses in prior years, we maintain a deferred tax asset (that is an asset recognized to reflect an expected benefit to be realized in the future) that may be used to reduce the amount of tax that we would otherwise be required to pay in future periods. Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At March 31, 2013, our net deferred tax asset was $1.2 million, which does not include a valuation allowance, and of which $1.1 million was disallowed for regulatory capital purposes. If we are required in the future to take a valuation allowance with respect to our deferred tax asset, our financial condition and results of operations would be negatively affected.

Strong competition within our market area could hurt our profits and slow growth.

We face intense competition in making loans, attracting deposits and hiring and retaining experienced employees. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits, which reduces our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. At June 30, 2012, which is the most recent date for which data is available from the FDIC, we held 1.44% of the deposits in Burlington County, New Jersey. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

We are dependent upon the services of key executives and we could be harmed by the loss of their services.

We rely heavily on our President and Chief Executive Officer, James E. Igo, and on our Chief Financial Officer, Eva Modi. The loss of Mr. Igo or Ms. Modi could have a material adverse impact on our operations because, as a small company, we have fewer management-level personnel that have the experience and expertise to readily replace these individuals. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition, and results of operations. We do not have employment agreements with our executive officers. See “Directors, Executive Officers and Corporate Governance.”

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If we do not rent the excess office space in our Cinnaminson branch building, it will negatively impact earnings.

Our Cinnaminson branch was designed and built to have rental units for third party tenants. Our inability to rent all ofthose units will necessitate that Delanco Federal cover some orall of the operating expenses for the building without the rental income to offset those expenses, thus having a negative impact on our earnings. Currently, two of the three rental units are occupied by third party tenants. The third office suite was formerly occupied by our employees and is currently available for rent.

Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position.

In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes resulted in broad reform and increased regulation impacting financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has created a significant shift in the way financial institutions operate. The Dodd-Frank Act restructured the regulation of depository institutions by merging the Office of Thrift Supervision, which previously regulated Delanco Federal, into the OCC, and assigning the regulation of savings and loan holding companies, including Delanco Bancorp, to the Federal Reserve Board. The Dodd-Frank Act also created the Consumer Financial Protection Bureau to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. As required by the Dodd-Frank Act, the federal banking regulators have proposed new consolidated capital requirements that will limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as capital in Delanco Federal that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. 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 regulatory burden and compliance costs. Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or collateral for loans. Future legislative changes could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the Federal Reserve Board and the OCC, our primary federal regulators, and by the FDIC, as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Delanco Federal rather than for holders of Delanco Bancorp common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We conduct our business through our main office in Delanco, New Jersey and our branch office in Cinnaminson, New Jersey, both of which we own. The net book value of our land, buildings, furniture, fixtures and equipment was $6.9 million as of March 31, 2013.

ITEM 3. LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of Delanco Bancorp is quoted on the OTC Bulletin Board under the symbol “DLNO.” The following table sets forth the high and low sales prices of the common stock, as reported by the OTC Bulletin Board, during each quarter of fiscal 2013 and 2012. As of June 1, 2013 there were approximately 290 holders of record of the Company’s common stock.

For the Year Ended March 31, 2013	High		Low
First Quarter	$	5.00	$	4.12
Second Quarter		4.50		3.60
Third Quarter		4.00		3.25
Fourth Quarter		5.50		3.10

For the Year Ended March 31, 2012	High		Low
First Quarter	$	6.30	$	5.05
Second Quarter		6.25		4.96
Third Quarter		5.75		4.77
Fourth Quarter		5.00		4.77

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Delanco Bancorp has never declared or paid a cash dividend on its common stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the forseeable future. Any determination to pay dividends on our common stock will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.

The Company’s ability to pay dividends may depend, in part, on its receipt of dividends from Delanco Federal. The OCC and Federal Reserve Board regulations limit dividends and other distributions from Delanco Federal to us. No insured depository institution may make a capital distribution if, after making the distribution, the institution would be undercapitalized or if the proposed distribution raises safety and soundness concerns. In addition, any payment of dividends by Delanco Federal to Delanco Bancorp that would be deemed to be drawn out of Delanco Federal’s bad debt reserves would require the payment of federal income taxes by Delanco Federal at the then current income tax rate on the amount deemed distributed. See note 14 of the notes to consolidated financial statements included herein. Delanco Bancorp does not contemplate any distribution by Delanco Federal that would result in this type of tax liability.

Under OCC regulations, an application to and the prior approval of the OCC is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under applicable regulations (i.e., generally examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OCC. If an application is not required, an institution must still provide prior notice to the Federal Reserve Board of the capital contribution if it is a subsidiary of a holding company. In such circumstances, notice must also be provided to the OCC. Under the terms of its written agreement with the OCC, Delanco Federal is not permitted to pay dividends without prior regulatory approval. In addition, at the request of the Federal Reserve Board, Delanco Bancorp has adopted resolutions that prohibit it from declaring or paying any dividends or taking any dividends or other distributions that would reduce the capital of Delanco Federal without the prior written consent of the Federal Reserve Board.

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ITEM 6. SELECTED FINANCIAL DATA

	Years Ended March 31,
(Dollars in thousands, except per share data)	2013			2012			2011
Financial Condition Data:
Total assets	$	129,415		$	134,308		$	136,172
Investment securities		22,345			17,699			15,944
Loans receivable, net		88,419			99,432			103,867
Deposits		117,034			121,589			120,842
Borrowings		-			-			2,100
Total stockholders’ equity		11,395			11,743			12,213
Operating Data:
Interest income		5,101			5,891			6,693
Interest expense		1,057			1,431			1,890
Net interest income		4,044			4,460			4,803
Provision for loan losses		640			1,602			440
Net interest income after provision for loan losses		3,404			2,858			4,363
Noninterest income		49			150			134
Noninterest expenses		3,987			3,751			3,740
Income before taxes		(534	)		(743	)		757
Income tax benefit		(210	)		(249	)		289
Net income (loss)	$	(324	)	$	(494	)	$	468
Per Share Data:
Earnings (loss) per share, basic	$	(0.20	)	$	(0.31	)	$	0.30
Earnings (loss) per share, diluted		(0.20	)		(0.31	)		0.30
Weighted average shares – basic		1,589,868			1,586,664			1,583,460
Weighted average shares – diluted		1,589,868			1,586,664			1,583,460

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	Years Ended March 31,
	2013			2012			2011
Performance Ratios:
Return on average assets		(0.25	)%		(0.37	)%		0.34	%
Return on average equity		(2.80	)		(4.04	)		3.89
Interest rate spread (1)		3.30			3.53			3.75
Net interest margin (2)		3.35			3.60			3.82
Noninterest expense to average assets		3.02			2.79			2.73
Efficiency ratio (3)		97.41			81.37			75.75
Average interest-earning assets to average interest-bearing liabilities		105.56			106.57			104.80
Average equity to average assets		8.77			9.10			8.76
Equity to assets at period end		8.80			8.74			8.97
Capital Ratios (4):
Tangible capital		7.79			7.93			8.67
Core capital		7.79			7.93			8.67
Total risk-based capital		14.67			14.13			14.52
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans		1.15			1.15			1.22
Allowance for loan losses as a percent of nonperformingloans		16.28			16.13			23.80
Net charge-offs to average outstanding loansduring the period		0.81			1.68			0.15
Non-performing loans as a percent of total loans		7.08			8.57			5.14
Non-performing assets to total assets		6.81			7.06			6.33

(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2) Represents net interest income as a percent of average interest-earning assets.

(3) Represents noninterest expense divided by the sum of net interest income and noninterest income.

(4) Capital ratios are for Delanco Federal.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the financial statements and notes to the financial statements that appear at the end of this report.

Overview

Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and small businesses.

We have experienced net losses of $324 thousand and $494 thousand for the years ended March 31, 2013 and 2012, respectively. Our profitability has suffered due to lower net interest income resulting from the prolonged low interest rate invironment, as well as heightened provisions for loan losses, expenses for real estate owned and other problem loan expenses. For the year ended March 31, 2013, we had net interest income of $4.0 million and incurred provision expenses of $640 thousand, real estate owned expenses and losses of $340 thousand, and other problem loan expenses of $448 thousand. For the year ended March 31, 2012, we had net interest income of $4.5 million and incurred provision expenses of $1.6 million, real estate owned expenses and losses of $197 thousand, and other problem loan expenses of $203 thousand. At March 31, 2013, non-performing assets and troubled debt restructurings totaled $8.8 million, or 6.8% of total assets.

Income.Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.

Our earnings have been adversely affected by a shrinking net interest margin caused by the protracted low interest rate environment and its impact on earning asset yields. Our net interest margin was 3.35% for the year ended March 31, 2013, as compared to 3.60% for the year ended March 31, 2012. Our average yield on earning assets declined to 4.22% for the year ended March 31, 2013, from 4.76% for the year ended March 31, 2012 as higher yielding loans were paid off or refinanced at lower market rates and higher yielding securities were called by the issuer and replaced with lower yielding investments.

A secondary source of income is non-interest income, which is revenue that we receive from providing products and services. The majority of our non-interest income generally comes from service charges (mostly from service charges on deposit accounts). In some years, we recognize income from the sale of loans and securities. Our facility in Cinnaminson includes space that we will rent to other businesses. Currently, two of the rental units are occupied.

Allowance 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.

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, loan expenses, data processing expenses and other miscellaneous expenses, such as office supplies, telephone, postage, advertising and professional services.

Our largest noninterest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. We have incurred additional noninterest expenses as a result of operating as a public company. These additional expenses consist primarily of legal and accounting fees and expenses of shareholder communications and meetings. In the future, we may recognize additional annual employee compensation expenses stemming from share-based compensation. We cannot determine the actual amount of this expense at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.

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Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities.

Critical Accounting Policies

In the preparation of our consolidated financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States. Our significant accounting policies are described in the notes to our financial statements.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses.We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See note 2 of the notes to the financial statements included in this report.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. 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’s 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.

Balance Sheet Analysis

Overview.Total assets at March 31, 2013 were $129.4 million, a decrease of $4.9 million, or 3.6%, from total assets of $134.3 million at March 31, 2012. The change in the asset composition primarily reflected decreases in outstanding loans offset by an increase in investments.Total liabilities were $118.0 million, a decrease of $4.6 million, or 3.8%, from total liabilities of $122.6 million at March 31, 2012. The change in liabilities primarily reflected a decrease in higher yielding certificates of deposit as we concentrated on increasing our core deposits and chose not to match competitors’ rates on certificates of deposit.Total stockholders’ equity decreased by $349 thousand, reflecting the net loss for the year.

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Loans.At March 31, 2013, total loans, net, were $88.4 million, or 68.3% of total assets. During the year ended March 31, 2013, loans decreased by $11.0 million due primarily to payoffs of residential and commercial real estate loans and the transfer of loan assets to other real estate owned. Commercial and multi-family real estate loans decreased by $4.7 million, commercial loans decreased by $314 thousand and residential loans decreasedby $3.6 million. Net loans have decreased $18.8 million since March 31, 2010 as we have curtailed our lending activities to focus on working out our problem assets and managing our asset size in order to maintain our capital ratios.

Table 1: Loan Portfolio Analysis
	2013						2012						2011
March 31, (Dollars in thousands)	Amount			Percent			Amount			Percent			Amount			Percent
Real estate loans:
Residential	$	66,597			74.4	%	$	70,192			69.7	%	$	70,310			66.8	%
Commercial and multi-family		12,403			13.8			17,130			17.0			21,866			20.8
Construction		83			0.1			839			0.8			374			0.4
Total real estate loans		79,083			88.3			88,611			87.6			92,550			88.0
Commercial loans		1,166			1.3			1,480			1.5			1,736			1.6
Consumer loans:
Home equity		8,361			9.3			9,987			9.9			9,912			9.4
Other		960			1.1			1,047			1.1			1,026			1.0
Total consumer loans		9,321			10.4			11,034			11.0			10,938			10.4
Total loans		89,570			100.0	%		100,675			100.0	%		105,224			100.0	%
Net deferred loan fees		(118	)					(82	)					(71	)
Allowance for losses		(1,033	)					(1,161	)					(1,286	)
Loans, net	$	88,419					$	99,432					$	103,867

The following table sets forth certain information at March 31, 2013 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.     The amounts shown below exclude applicable loans in process, unearned interest in consumer loans and net deferred loan costs.Our adjustable-rate mortgage loans generally do not provide for downward adjustments below the initial discounted contract rate. When market interest rates rise, the interest rates on these loans may increase based on the contract rate (the index plus the margin) exceeding the initial interest rate floor.

Table 2: Contractual Maturities and Interest Rate Sensitivity
March 31, 2013 (Dollars in thousands)	Real Estate Loans		Commercial Loans		Consumer Loans		Total Loans
Amounts due in:
One year or less	$	7,999	$	1,112	$	2,456	$	11,567
More than one to five years		3,812		54		3,959		7,825
More than five years		67,179		-		3,041		70,220
Total	$	78,990	$	1,166	$	9,456	$	89,612
Interest rate terms on amounts due after one year:
Fixed-rate loans	$	68,567	$	54	$	2,407	$	71,028
Adjustable-rate loans		2,424		-		4,593		7,017
Total	$	70,991	$	54	$	7,000	$	78,045

Securities.The investment securities portfolio was $22.3 million, or 17.3% of total assets, at March 31, 2013. At that date, 9.1% 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 portfolio increased $4.6 million in the year ended March 31, 2013 due to the purchase of U.S. Government agency securities.

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Table 3: Investment Securities
	2013				2012				2011
March 31, (Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale:
Government sponsored enterprise securities	$	2,000	$	1,985		-		-		-		-
Mutual funds		217		222	$	237	$	242	$	249	$	248
Total available for sale		2,217		2,207		237		242		249		248
Securities held to maturity:
Government sponsored enterprise securities		18,035		18,044		14,441		14,401		8,746		8,506
Municipal securities		64		64		104		104		144		144
Mortgage-backed securities		2,039		2,178		2,912		3,101		6,806		7,031
Total held to maturity		20,138		20,286		17,457		17,606		15,696		15,681
Total	$	22,355	$	22,493	$	17,694	$	17,848	$	15,945	$	15,929

The following table sets forth the stated maturities and weighted average yields of our investment securities at March 31, 2013. Approximately $703 thousand of mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These re-pricing schedules are not reflected in the table below.

Table 4: Investment Maturities Schedule
	One Year or Less					More than One Year to Five Years					More than Five Years to Ten Years					More than Ten Years					Total
March 31, 2013 (Dollars in thousands)	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
Securities available-for-sale:
Government sponsored enterprise securities		-		-			-		-			-		-		$	1,985		2.3	%	$	1,985		2.3	%
Mutual funds		-		-			-		-			-		-			-		-			222		-
Total available for sale		-		-			-		-			-		-			1,985		2.3			2,207		-
Securities held tomaturity:
Government sponsoredenterprise securities		-		-		$	1,000		1.3	%	$	6,422		1.9	%		10,613		2.7			18,035		2.3
Municipalsecurities	$	64		2.5	%		-		-			-		-			-		-			64		2.5
Mortgage-backedsecurities		-		-			5		10.4			-		-			2,034		3.8			2,039		3.9
Total held to maturity		64		2.5			1,005		1.3			6,422		1.9			12,647		2.8			20,138		2.5
Total	$	64		2.5	%	$	1,005		1.3	%	$	6,422		1.9	%	$	14,632		2.8	%	$	22,345		-

 

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. At March 31, 2013, core deposits were 53.3% of total deposits, up from 47.4% at March 31, 2012. We do not have any brokered deposits. Total deposits decreased by $4.6 million in the year ended March 31, 2013 as core deposits increased by $4.7 million and certificates of deposit decreased by $9.3 million. During the year ended March 31, 2013, we chose not to match the highest time deposit rates in our market in an effort to reduce our funding costs.  

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Table 5: Deposits
	2013					2012					2011
March 31, (Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent
Noninterest-bearing demand deposits	$	6,873		5.9	%	$	4,673		3.8	%	$	4,161		3.4	%
Interest-bearing demand deposits		14,882		12.7			13,086		10.8			13,136		10.9
Savings and money market accounts		40,596		34.7			39,877		32.8			39,550		32.7
Certificates of deposit		54,683		46.7			63,953		52.6			63,995		53.0
Total	$	117,034		100.0	%	$	121,589		100.0	%	$	120,842		100.0	%

Table 6: Time Deposit Maturities of $100,000 or more
March 31, 2013 (Dollars in thousands)	Certificates of Deposit
Maturity Period
Three months or less	$	2,700
Over three through six months		2,003
Over six through twelve months		4,690
Over twelve months		6,920
Total	$	16,313

Table 7: Time deposits by rate
	At March 31,
(Dollars in thousands)	2013		2012		2011
0.00 – 0.99%	$	25,623	$	16,314	$	5,360
1.00 – 1.99%		19,220		33,312		34,758
2.00 – 2.99%		8,035		9,821		13,226
3.00 – 3.99%		1,560		1,899		10,646
4.00 – 4.99%		245		2,607		5
Total	$	54,683	$	63,953	$	63,995

Table 8: Time deposits by rate and maturity
	Amount Due
(Dollars in thousands)	Less Than One Year		More Than One Year to Two Years		More Than Two Years to Three Years		More Than Three Years to Four Years		More Than Four Years		Total at March 31, 2013		Percent of Total Certificate Accounts
0.00 – 0.99%	$	21,860	$	3,487	$	276	$	-	$	-	$	25,623		46.9	%
1.00 – 1.99%		9,554		4,838		1,044		1,040		2,744		19,220		35.1
2.00 – 2.99%		1,355		1,991		2,076		2,613		-		8,035		14.7
3.00 – 3.99%		1,390		170		-		-		-		1,560		2.9
4.00 – 4.99%		243		-		-		-		2		245		0.4
Total	$	34,402	$	10,486	$	3,396	$	3,653	$	2,746	$	54,683		100.0	%

 

Borrowings.We have borrowing arrangements with the FHLB and Atlantic Central Banker’s Bank to provide an additional source of liquidity. At March 31, 2013, we had no borrowings outstanding.

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Table 9: Borrowings
March 31, (Dollars in thousands)	2013		2012			2011
Maximum amount outstanding at any month end during the period:
Advances		-	$	2,500		$	2,100
Average amount outstanding during the period (1):
Advances		-		458			175
Weighted average interest rate during the period (1):
Advances		-		0.33	%		0.89	%
Balance outstanding at end of period:
Advances		-		-			2,100
Weighted average interest rate at end of period:
Advances		-		-			0.89	%

(1) Averages are based on month-end balances.

Results of Operations for the Years Ended March 31, 2013 and 2012

Financial Highlights.Net loss for the year ended March 31, 2013 was $324 thousand compared to net loss of $494 thousand for the year ended March 31, 2012. Our profitability has suffered due to heightened provisions for loan losses, expenses for real estate owned and other problem loan expenses. In addition, our earnings have been adversely affected by a shrinking net interest margin caused by the protracted low interest rate environment and its impact on earning asset yields. Our net interest margin was 3.35% for the year ended March 31, 2013, as compared to 3.60% for the year ended March 31, 2012. Our average yield on earning assets declined to 4.22% for the year ended March 31, 2013, from 4.76% for the year ended March 31, 2012 as higher yielding loans were paid off or refinanced at lower market rates and higher yielding securities were called by the issuer and replaced with lower yielding investments.

Table 10: Summary Income Statements
Year Ended March 31, (Dollars in thousands)	2013			2012			2013 v. 2012			% Change
Net interest income	$	4,045		$	4,460		$	(415	)		(9.3	)
Provision for loan losses		640			1,602			(962	)		(60.0	)
Noninterest income		49			150			(101	)		(67.3	)
Noninterest expenses		3,987			3,751			236			6.3
Net income (loss)		(324	)		(494	)		170			34.4
Return on average equity		(2.8	)%		(4.04	)%
Return on average assets		(0.25	)		(0.37	)

Net Interest Income. Net interest income for the year ended March 31, 2013 was $4.0 million compared to $4.5 million for the year ended March 31, 2012, a decrease of 9.3%. The net interest margin decreased 25 basis points to 3.35% for the year ended March 31, 2013, as average interest-earning assets decreased $3.1 million while average interest-bearing liabilities decreased $2.2 million. Also contributing to the decrease in the net interest margin was a 54 basis point decrease in the average yield on interest-earning assets, which exceeded the 31 basis point decrease in the average cost of interest-bearing liabilities.

For the year ended March 31, 2013, interest income declined 13.41% compared to the prior year. Interest income on loans decreased $855 thousand as the average balance declined $97 million and the average yield declined 37 basis points. Partially offsetting lower interest income on loans, interest income on investment securities increased $65 thousand, as growth of the investment portfolio exceeded the impact of lower yields.

For the year ended March 31, 2013, interest expense declined 26.1% compared to the prior year, as the average balance of deposits decreased $1.8 million and the average rate paid decreased 31 basis points. The decrease in deposits was driven by a decrease 31 basis points. The decrease in deposits was driven by a decrease of $3.6 million in certificates of deposit, which was partially offset by increases in demand deposits and savings and money market accounts.

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Table 11: Analysis of Net Interest Income
Year Ended March 31, (Dollars in thousands)	2013			2012			2013 v. 2012			% Change
Components of net interest income
Loans	$	4,483		$	5,338		$	(855	)		(16.0	)%
Investment securities		618			553			65			11.8
Total interest income		5,101			5,891			(790	)		(13.4	)
Deposits		1,057			1,431			(374	)		(26.1	)
Borrowings		-			-			-			-
Total interest expense		1,057			1,431			(374	)		(26.1	)
Net interest income		4,044			4,460			(416	)		(9.3	)
Average yields and rates paid
Interest-earning assets		4.22	%		4.76	%	(54		)bp
Interest-bearing liabilities		0.92			1.23			(31	)
Interest rate spread		3.30			3.53			(23	)
Net interest margin		3.35			3.60			(25	)
Average balances
Loans	$	92,900		$	102,606		$	(9,706	)		(9.5	)%
Investment securities		22,392			16,717			5,675			33.9
Earning assets		120,754			123,850			(3,096	)		(2.5	)
Interest-bearing deposits		114,389			116,218			(1,829	)		(1.6	)

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 $640 thousand in the year ended March 31, 2013 compared to $1.6 million in the year ended March 31, 2012. The provision for loan losses was primarily attributable to management’s systematic evaluation of risk associated with the loan portfolio. We had $808 thousand in charge-offs in the year ended March 31, 2013, compared to $1.8 million in charge-offs in the year ended March 31, 2012.

The allowance for loan losses was $1.0 million, or 1.15% of total loans outstanding as of March 31, 2013 as compared with $1.2 million, or1.15% as of March 31, 2012. An analysis of the changes in the allowance for loan losses is presented under “Risk Management – Analysis and Determination of the Allowance for Loan Losses.”

Noninterest Income.Noninterest income was $49 thousand for the year ended March 31, 2013 compared to $150 thousand for the prior year. The decrease in noninterest income from the prior year was primarily due to an increase in the loss on sale of foreclosed real estate.

Table 12: Noninterest Income Summary
Year Ended March 31, (Dollars in thousands)	2013			2012			$ Change			% Change
Service charges	$	133		$	145		$	(12	)		(8.3	)%
Loss on sale of real estate owned		(152	)		(37	)		(115	)		(310.8	)
Rental income		29			22			7			31.8
Income from bank owned life insurance		6			6			-			-
Other		33			14			19			135.7
Total	$	49		$	150		$	(101	)		(67.3	)%

Noninterest Expense.Noninterest expense was $4.0 million for the year ended March 31, 2013 compared to $3.8 million for the prior year. The increase in noninterest expense over the prior year was primarily due to increased loan and real estate owned expenses partially offset by a decrease in FDIC insurance premiums and lower write downs of real estate owned.

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Table 13: Noninterest Expense Summary
Year Ended March 31, (Dollars in thousands)	2013		2012		$ Change			% Change
Salaries and employee benefits	$	1,565	$	1,583	$	(18	)		(1.1	)%
Advertising		22		25		(3	)		(12.0	)
Office supplies, telephone and postage		100		98		2			2.0
Loan expenses		448		203		245			120.7
Occupancy expense		654		649		5			0.8
Federal deposit insurance premiums		216		283		(67	)		(23.7	)
Real estate owned impairment losses		56		104		(48	)		(46.2	)
Data processing expenses		217		215		2			0.9
ATM expenses		28		25		3			12.0
Bank charges and fees		70		77		(7	)		(9.1	)
Insurance and surety bond premiums		80		80		-			-
Dues and subscriptions		23		26		(3	)		(11.5	)
Professional fees		248		208		40			19.2
Real estate owned expense		131		56		75			133.9
Other		129		119		10			8.4
Total	$	3,987	$	3,751	$	236			6.3	%

Income Tax Expense (Benefit).The benefit for income taxes was $209,000 for 2013, compared to a benefit of $249,000 for 2012.

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Average Balance Sheets and Related Yields and Rates

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using month-end balances, and nonaccrual loans are included in average balances only. Management does not believe that use of month-end balances instead of daily average balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant.

Table 14: Average Balance Tables
	2013								2012
Year Ended March 31, (Dollars in thousands)	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	92,900		$	4,483		4.83	%	$	102,606		$	5,338		5.20	%
Investment securities		22,392			605		2.70			16,717			542		3.24
Other interest-earning assets		5,462			13		0.24			4,527			11		0.24
Total interest-earning assets		120,754			5,101		4.22			123,850			5,891		4.76
Noninterest-earning assets		11,356								10,575
Total assets	$	132,110							$	134,425
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	13,532			36		0.27	%	$	12,342		$	54		0.44	%
Savings and money market accounts		41,080			186		0.45			40,516			270		0.67
Certificates of deposit		59,777			835		1.40			63,360			1,108		1.75
Total interest-bearing deposits		114,389			1,057		0.92			116,218			1,432		1.23
FHLB advances		-			-		-			335			-		-
Total interest-bearing liabilities		114,389			1,057		0.92			116,553			1,432		1.23
Noninterest-bearing demand deposits		5								4
Other noninterest-bearing liabilities		6,127								5,636
Total liabilities		120,521								122,193
Retained earnings		11,589								12,232
Total liabilities and retained earnings	$	132,110							$	134,425
Net interest income				$	4,044							$	4,459
Interest rate spread							3.30								3.53
Net interest margin							3.35								3.60
Average interest-earning assets toaverage interest-bearing liabilities		105.56	%							106.26	%

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Rate/Volume Analysis. The following tables set forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes due to both volume and rate have been allocated proportionally to the volume and rate changes. The net column represents the sum of the prior columns.

Table 15: Net Interest Income – Changes Due to Rate and Volume
2013 Compared to 2012 (Dollars in thousands)	Volume			Rate			Net
Interest income:
Loans receivable		(511	)		(344	)		(855	)
Investment securities		184			(121	)		63
Other interest-earning assets		2			-			2
Total		(325	)		(465	)		(790	)
Interest expense:
Deposits		(23	)		(352	)		(375	)
FHLB advances		-			-			-
Total		(23	)		(352	)		(375	)
Increase (decrease) in net interest income		(302	)		(113	)		(415	)

Risk Management

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. In January 2013, we engaged an independent third party to conduct periodic loan portfolio reviews. See“Regulation and Supervision—Regulatory Agreement” for further information on certain regulatory directives applicable to our credit functions.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is acquired at foreclosure and subsequently sold. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own.

Analysis of Nonperforming and Classified Assets. We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.

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Table 16: Nonperforming Assets
March 31, (Dollars in thousands)	2013			2012			2011
Nonaccrual loans:
Residential real estate		1,543		$	2,989		$	2,784
Commercial and multi-family real estate		2,303			4,255			2,374
Construction		-			-			-
Commercial		235			-			46
Home equity		287			-			189
Consumer		-			-			11
Total		4,368			7,244			5,404
Accruing loans past due 90 days or more:
Residential real estate		-			-			-
Commercial and multi-family real estate		-			-			-
Construction		-			-			-
Commercial		-			-			-
Consumer		-			-			-
Total		-			-			-
Real estate owned		2,469			846			771
Total nonperforming assets		6,837			8,090			6,175
Troubled debt restructurings		1,978			1,387			2,438
Troubled debt restructurings and total nonperforming assets	$	8,815		$	9,477		$	8,613
Total nonperforming loans to total loans		4.87	%		7.16	%		5.14	%
Total nonperforming loans to total assets		3.38	%		5.39			3.97
Total nonperforming assets and troubled debt restructurings to total assets		6.81	%		7.06			6.33

Table 17: Loan Delinquencies
	March 31,
	2013				2012				2011
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due
Residential real estate	$	1,746	$	931	$	507	$	554	$	560	$	564
Commercial real estate		314		231		572		785		286		524
Commercial		-		-		269		-		84		386
Home equity		204		-		-		42		9		44
Consumer		7		-		2		40		15		5
Total	$	2,271	$	1,162	$	1,350	$	1,421	$	954	$	1,523

At March 31, 2013, we had 25 loan relationships totaling $4.4 million in nonaccrual loans as compared to 25 relationships totaling $7.2 million at March 31, 2012.  During the year ended March 31, 2013, we experienced a $2.9 million net increase in nonaccrual loans.  This change reflects the transfer to real estate owned of ten loans totaling $2.1 million, the partial charge-off of six of the relationships transferred to real estate owned of $524 thousand and the return of one loan totaling $422 thousand to accruing status. The changes were partially offset by the downgrading of 11 loan relationships to nonaccrual status totaling $922 thousand during the year ended March 31, 2013.  The downgraded loans consisted of eight relationships representing residential mortgages and home equity loans totaling $712 thousand and three commercial loans totaling $210 thousand.  

At March 31, 2013, our real estate owned consisted of ten single family homes with a total carrying value of $1.54 million, three mixed-use properties with a total carrying value of $612 thousand, one office building with a carrying value of $185 thousand and a building lot with a total carrying value of $140 thousand. At that same date, we had 19 loans in the process of foreclosure with respect to property that had an appraised value of $3.5 million.

Interest income that would have been recorded for the year ended March 31, 2013 had non-accruing loans been current according to their original terms amounted to $277 thousand. No uncollected interest related to nonaccrual loans was included in interest income for the year ended March 31, 2013.

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Federal regulations require us to review and classify our assets on a regular basis. In addition, the OCC has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. This category includes other real estate owned. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. These are considered criticized assets. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.

Table 18: Criticized/Classified Assets
March 31, (Dollars in thousands)	2013		2012		2011
Special mention assets	$	902	$	1,045	$	1,026
Substandard assets		8,249		9,313		9,639
Doubtful assets		94		-		-
Loss assets		-		-		-
Total criticized/classified assets	$	9,026	$	10,358	$	10,665

Other than disclosed in the above tables, there are no other loans that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

Analysis and Determination of the Allowance 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.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific valuation allowance on identified problem loans; (2) a general valuation allowance on the remainder of the loan portfolio; and (3) an unallocated component. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available to absorb losses in the loan portfolio.

For loans that are classified as impaired, we establish an allowance when the discounted cash flows (or collateral value or observable market price) of the loan is lower than its carrying value. We also establish a specific allowance for classified loans that do not have an individual allowance. The evaluation is based on our asset review and classified loan list.

We establish a general allowance for loans that are not classified to recognize the inherent losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. The allowance percentages have been derived using percentages commonly applied under the regulatory framework for Delanco Federal and other similarly-sized institutions. The percentages may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated periodically to ensure their relevance in the current economic environment. An unallocated component is maintained to cover uncertainties that could affect our estimate of probable losses.

We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans and other loans that management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in collateral value would result in our charging off the loan or the portion of the loan that was impaired.

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The OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. The OCC may require us to make additional provisions for loan losses based on judgments different from ours.

At March 31, 2013, our allowance for loan losses represented 1.15% of total gross loans. The allowance for loan losses decreased 11.0% from March 31, 2012 to March 31, 2013. The decrease in the allowance was primarily attributable to the decreasing outstanding loan balances.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

Table 19: Allocation of Allowance of Loan Losses
	2013					2012					2011
March 31, (Dollars in thousands)	Amount		% of Loans in Category to Total Loans			Amount		% of Loans in Category to Total Loans			Amount		% of Loans in Category to Total Loans
Residential real estate	$	485		74.4	%	$	495		69.7	%	$	447		66.8	%
Commercial and multi-family real estate		378		13.8			469		17.0			596		20.8
Construction		-		0.1			-		0.8			-		0.4
Commercial		45		1.3			41		1.5			70		1.6
Consumer		48		9.3			58		9.9			60		9.4
Consumer		77		1.1			98		1.1			113		1.0
Unallocated		-		-			-		-			-		-
Total allowance for loan losses	$	1,033		100.0	%	$	1,161		100.0	%	$	1,286		100.0	%

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

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Table 20: Analysis of Loan Loss Experience
Year Ended March 31, (Dollars in thousands)	2013			2012			2011
Allowance at beginning of period	$	1,161		$	1,286		$	999
Provision for loan losses		640			1,602			440
Charge offs:
Residential real estate loans		26			399			-
Commercial and multi-family real estate loans		606			770			92
Construction loans		80			-			-
Commercial loans		-			46			51
Commercial loans		29			137			31
Consumer loans		67			401			32
Total charge-offs		808			1,753			206
Recoveries		40			26			53
Net charge-offs		768			1,727			153
Allowance at end of period	$	1,033		$	1,161		$	1,286
Allowance to nonperforming loans		16.30	%		13.50	%		23.80	%
Allowance to total loans outstanding at the end of the period		1.15			1.15			1.22
Net charge-offs (recoveries) to average loans outstandingduring the period		0.83			1.68			0.15

Interest Rate Risk Management.Our earnings and the market value of our assets and liabilities are subject to fluctuations caused by changes in the level of interest rates. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes originating balloon loans or loans with adjustable interest rates and promoting core deposit products and short-term time deposits.

We have an Asset/Liability Management Committee to coordinate all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

We use an interest rate sensitivity analysis prepared by a third party vendor to review our level of interest rate risk. Economic Value of Equity (EVE) is a measure of long-term interest rate risk. This analysis measures the difference between the market values of the assets and the liabilities. In this analysis the program calculates the discounted cash flow (market value) of each category on the balance sheet under each of five rate conditions. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or a 100 basis point decreases in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in EVE over a variety of interest rate scenarios. The following table presents the change in our EVE at March 31, 2013 that would occur in the event of an immediate change in interest rates based on our assumptions, with no effect given to any steps that we might take to counteract that change.

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Table 21: EVE Analysis
	Economic Value of Equity (Dollars in thousands)								Economic Value of Equity as % of Market Value of Assets
Basis Point (“bp”) Change in Rates	$ Amount		$ Change			% Change			NPV Ratio			Change
300		9,842		(3,737	)		(27.5	)%		7.43	%	(282		)bp
200		11,441		(2,138	)		(15.7	)%		8.64	%		(161	)
100		13,818		239			1.8	%		10.43	%		18
0		13,579		-			-			10.25	%		-
(100)		14,744		1,165			8.6	%		11.13	%		88

The program uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2013, cash and cash equivalents totaled $6.7 million. At March 31, 2013, we had no outstanding borrowings and had arrangements to borrow up to $11.4 million from the Federal Home Loan Bank of New York and $1.0 million from Atlantic Central Bankers Bank.

At March 31, 2013, the majority 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 have designated a portion of our investments 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 March 31, 2013, we had $212 thousand in loan commitments outstanding. In addition, we had $5.8 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 March 31, 2013 totaled $34.4 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, such as other deposits 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 March 31, 2014. 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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Our primary investing activities are the origination and purchase of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

The Company is a separate entity apart from the Bank and must provide for its own liquidity. As of March 31, 2013, the Company had $312 thousand in cash and cash equivalents compared to $296 thousand as of March 31, 2012.  Substantially all of the Company’s cash and cash equivalents were obtained from proceeds it retained from the stock offering completed in March 2007.  In addition to its operating expenses, the Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions. 

The Company can receive dividends from the Bank.  Payment of such dividends to the Company by the Bank is limited under federal law. The amount that can be paid in any calendar year, without prior regulatory approval, cannot exceed the retained net earnings (as defined) for the year plus the preceding two calendar years. Under the terms of its written agreement with the OCC, the Bank is not permitted to pay dividends without prior regulatory approval. In addition, at the request of the Federal Reserve, the Company has adopted resolutions that prohibit it from declaring or paying any dividends or taking any dividends or other distributions that would reduce the capital of the Bank without the prior written consent of the Federal Reserve.

Capital Management. We are subject to various regulatory capital requirements administered by the OCC, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. See “Regulation and Supervision—Regulation of Federal Savings Associations—Capital Requirements,”“Regulation and Supervision—Regulatory Agreement” and note 24 of the notes to the financial statements.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see note 21 of the notes to the financial statements.

For the year ended March 31, 2013, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated herein by reference to Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information required by this item is included herein beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

37

ITEM 9A. CONTROLS AND PROCEDURES

(a) Disclosure 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.

(b) Internal Control Over Financial Reporting

Management’s report on internal control over financial reporting is incorporated herein by reference to the section captioned“Management’s Report on Internal Control Over Financial Reporting” immediately preceding the Company’s Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

(c)     Changes in Internal Control Over Financial Reporting

Except as indicated herein, there were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

ITEM9 B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Company’s Board of Directors consists of five members. The Board is divided into three classes with three-year staggered terms, with approximately one-third of the directors elected each year. Ages presented are as of March 31, 2013. As of June 1, 2013, our directors are:

Thomas J. Coleman III has been a managing partner of the law firm of Raymond, Coleman, Heinhold & Norman, LLP since 2001. Age 49. Director since 2005.

Mr. Coleman’s expertise as a partner in a law firm and his involvement in business and civic organizations in the communities in which the Bank serves provide the Board valuable insight. Mr. Coleman’s years of providing legal counsel and operating a law office position him well to continue to serve as a director for the Company.

James E. Igo has served as President and Chief Executive Officer of Delanco MHC, Delanco Bancorp and Delanco Federal since March 2009 and previously served as Executive Vice President and Chief Operating Officer of Delanco Bancorp and Delanco Federal since April 2008. Mr. Igo was appointed Chairman of the Board of Delanco MHC, Delanco Bancorp and Delanco Federal in June 2010. Mr. Igo previously served as senior vice president and senior loan officer of Farmers & Mechanics Bank (“FMB”) from 1992 until FMB’s acquisition by Beneficial Bank in July 2007. Mr. Igo served as senior vice president of Beneficial Bank until April 2008. Age 56.

Mr. Igo’s extensive experience in the local banking industry and involvement in business and civic organizations in the communities in which the Bank serves affords the Board valuable insight regarding the business and operation of the Bank. Mr. Igo’s knowledge of the Company’s and the Bank’s business and history, combined with his success and strategic vision, position him well to continue to serve as our Chairman, President and Chief Executive Officer.

John A. Latimeris the President of two insurance brokers, including The Barclay Group and J.S. Braddock Agency since 1991 and 2000, respectively. Mr. Latimer has also served as a director of Proformance Insurance Company, a subsidiary of National Atlantic Holdings Corporation (Nasdaq: NAHC). Age 50. Director since 2006.

Mr. Latimer provides the Board with significant marketing and operational knowledge through his experience as president of insurance broker entities. Mr. Latimer has considerable experience in the insurance industry and the related risk assessment practice area necessary in banking operations.

James W. Verner, currently retired, served as a Section Supervisor with the New Jersey State Department of Education from 1979 until 2011. Age 61. Director of Delanco Federal since 1978 and director of Delanco MHC and Delanco Bancorp since their formation in 2002.

Mr. Verner’s career with the New Jersey Department of Education provides the Company with organizational understanding and expertise. In addition, as an active member of the community, Mr. Verner maintains contact with and is in touch with the local consumer environment.

Renee C. Vidal is a partner in the law firm of Flaster/Greenberg P.C. in Cherry Hill, New Jersey. Prior to joining Flaster/Greenberg P.C. in January 2008, Ms. Vidal served as a partner in the law firm of Cureton Caplan, PC. Ms. Vidal began her employment with Cureton Caplan in 1994. Age 45. Director since 2006.

Ms. Vidal’s expertise as a partner in a law firm and her involvement in business and civic organizations in the communities in which the Bank serves provide the Board valuable insight. Ms. Vidal’s years of providing legal counsel position her well to continue to serve as a director for the Company.

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Executive Officers and Key Employees

The Company’s executive officers are elected annually by the Board of Directors and serve at the Board’s discretion. Ages presented are as of March 31, 2013. The executive officers of Delanco Bancorp are:

Name	Position
James E. Igo	Chairman, President and Chief Executive Officer
Eva Modi	Senior Vice President and Chief Financial Officer

The officers of Delanco Federal are elected annually by the Board of Directors and serve at the Board’s discretion. The executive officers and key employees of Delanco Federal are:

Name	Position
James E. Igo	Chairman, President and Chief Executive Officer
Eva Modi	Senior Vice President and Chief Financial Officer
Douglas R. Allen, Jr.	Senior Vice President

Below is information regarding our officers who are not also directors. Each officer has held his or her current position for at least the last five years, unless otherwise stated.

Eva Modi has been Senior Vice President and Chief Financial Officer of Delanco MHC, Delanco Bancorp and Delanco Federal since March 4, 2009. Ms. Modi served as Vice President – Accounting of Delanco Federal since December, 2007. Ms. Modi was previously employed by a public accounting firm from May 2002 until November 2007 as Senior Manager. Age 52.

Douglas R. Allen, Jr. has served as Senior Vice President since March 4, 2010 and previously served as President, Chief Executive Officer and Chief Financial Officer of Delanco MHC, Delanco Bancorp and Delanco Federal since January 1, 2008. Mr. Allen joined Delanco Federal in 1976. Age 65.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own more than 10% of any registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10% stockholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file.

Based solely on its review of the copies of the reports it has received and written representations provided to the Company from the individuals required to file the reports, the Company believes that each of its executive officers and directors has complied with applicable reporting requirements for transactions in Delanco Bancorp common stock during the year ended March 31, 2013.

Disclosure of Code of Ethics

The Board of Directors has adopted a Code of Ethics that applies to all employees of the Company. A copy of the code of ethics can be obtained, without charge, upon written request to James E. Igo, Delanco Bancorp, Inc., 615 Burlington Avenue, Delanco, New Jersey 08075.

40

Audit Committee Matters

The Company maintains an Audit Committee consisting of directors James W. Verner (Chairperson), John A. Latimer and Renee C. Vidal. The Audit Committee meets periodically with independent auditors and management to review accounting, auditing, internal control structure and financial reporting matters. Each member of the Audit Committee is independent in accordance with the listing standards of The NASDAQ Stock Market. The Board of Directors has determined that the Audit Committee does not have a member who is an “audit committee financial expert.” While the Board recognizes that no individual Board member meets the qualifications required of an “audit committee financial expert,” the Board believes that appointment of a new director to the Board and to the Audit Committee at this time is not necessary as the level of financial knowledge and experience of the current members of the Audit Committee, including the ability to read and understand fundamental financial statements, is cumulatively sufficient to discharge adequately the Audit Committee’s responsibilities. The Audit Committee held three meetings during the last fiscal year. The Audit Committee operates under a written charter which is available to the public under “Investors” at www.delancofsb.com..

ITEM 11. EXECUTIVE COMPENSATION

Directors’ Compensation

The following table provides the compensation received by individuals who served as non-employee directors of the Company during the 2013 fiscal year.

Name	Fees Earned or Paid in Cash
Thomas J. Coleman III	$	7,425
William C. Jenkins (1)	$	4,550
John A. Latimer	$	7,875
James W. Verner	$	7,775
Renee C. Vidal	$	6,975

___________

(1) Mr. Jenkins resigned from the Boards of Directors of the Company and the Bank effective October 25, 2012.

Director Retirement Plan.Delanco Federal sponsors a director retirement plan for the benefit of members of the Board of Directors. All directors serving on or after the plan’s effective date of January 1, 2002 participate in the plan. Under the plan, following their retirement from the Board of Directors (upon meeting certain criteria) directors receive a monthly retirement benefit equal to 4% of their fees (including any annual retainer) multiplied by their completed years of service, up to a maximum of 80% of the final fee amount. Directors must complete at least ten years of service as an employee and/or director in order to receive a retirement benefit under the plan. Director retirement benefits are payable in equal monthly installments during the director’s lifetime, unless the director elects to receive an actuarially equivalent benefit in the form of an annuity. No benefits are payable under the plan upon a participating director’s death, unless the participant selected the annuity form of payment, in which case the director’s designated beneficiary would receive continued payments in accordance with the director’s election.

Meeting Fees for Non-Employee Directors. The following table sets forth the applicable fees that are paid to non-employee directors for their service on the Board of Directors of Delanco Federal. Directors do not receive any fees for their service on the Boards of Directors of Delanco Bancorp or Delanco MHC. Each director receives two paid absences on an annual basis.

Board of Directors of Delanco Federal:
Fee per Board Meeting	$	625
Fee per Committee Meeting:
Executive Committee	$	275
All Other Committees	$	175

41

Executive Compensation

Summary Compensation Table. The following information is furnished for the individuals serving as named executive officers during the 2013 fiscal year.

Name and Principal Position	Year	Salary ($)		Fees Earned or Paid in Cash ($)(1)		All Other Compensation ($)(2)		Total ($)
James E. Igo	2013	$	160,192	$	7,425	$	2,458	$	170,075
Chairman, President and Chief Executive Officer	2012		148,462		6,575		4,380		159,417
Eva Modi	2013	$	113,782	$	-	$	1,736	$	115,518
Chief Financial Officer	2012		101,346		-		3,178		104,524

(1) Reflects the amount of fees earned for service as a director.

(2) Reflects the amount paid by the Company for life insurance premiums and the market value of ESOP allocations.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Stock Ownership

The following table provides information as of June 1, 2013 with respect to persons and entities known to the Company to be the beneficial owner of more than 5% of the Company’s outstanding common stock. A person or entity may be considered to beneficially own any shares of common stock over which the person or entity has, directly or indirectly, sole or shared voting or investing power.

Name and Address	Number of Shares Owned			Percent of Common Stock Outstanding
Delanco MHC 615 Burlington Avenue Delanco, New Jersey 08075		899,099	(1)		55.0	%

(1) The members of the Board of Directors of Delanco Bancorp and Delanco Federal also constitute the Board of Directors of Delanco MHC.

The following table provides information as of June 1 2013 with respect to shares of Delanco Bancorp common stock that may be considered to be owned by each director, each executive officer named in the Summary Compensation Table and by all directors and executive officers of the Company as a group. A person may be considered to own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power. Unless otherwise indicated, each of the named individuals has sole voting power and sole investment power with respect to the shares shown. The number of shares beneficially owned by all directors and executive officers as a group totaled 3.9% of our outstanding common stock as of June 1, 2013. Each director owned less than 1.0% of our outstanding common stock as of that date, except for Mr. Igo who owned 1.2% of our common stock.

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Name	Number of Shares Owned
Thomas J. Coleman III		10,947
James E. Igo		19,076	(1)
John A. Latimer		7,500
Eva Modi		3,447	(1)
James W. Verner		10,400	(2)
Renee C. Vidal		5,000
All directors and executive officers asa group (7 persons)		63,272

(1) Includes 2,030 and 1,447allocated shares held in ESOP trust for Mr. Igo and Ms. Modi, respectively, which are voted by the ESOP trustee.

(2) Includes 4,210 shares held by spouse’s IRA.

Changes in Control

Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

Equity Compensation

No awards have been made under the Company’s 2008 Equity Incentive Plan (the “Plan”), which Plan was approved by stockholders. The aggregate number of shares reserved and available for issuance pursuant to awards granted under the Plan is 112,141. The Plan authorizes the issuance of 80,101 shares pursuant to stock options and 32,040 shares pursuant to restricted stock awards.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The Sarbanes-Oxley Act of 2002 generally prohibits loans by Delanco Bancorp to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by Delanco Federal to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured financial institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. Delanco Federal is therefore prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public. Notwithstanding this rule, federal regulations permit Delanco Federal to make loans to executive officers at reduced interest rates if the loan is made under a benefit program generally available to all other employees and does not give preference to any executive officer over any other employee.

Delanco Federal maintains a program that enables all full-time employees to obtain a residential mortgage loan on a primary residence at a reduction of 1% from the rates available to the public for as long as the officer remains in the employ of Delanco Federal.  Douglas R. Allen, Jr., Senior Vice President of the Bank, has a mortgage loan from Delanco Federal that was made under this program at a rate of 2.875%.  The largest amount of principal outstanding during the 2013 fiscal year on this loan was approximately $180,844 and the outstanding balance at March 31, 2013 was $176,751.  The total principal and interest paid on this loan during the 2013 fiscal year was approximately $4,093 and $6,936, respectively.

In accordance with banking regulations, the Board of Directors reviews all loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, exceed the greater of $25,000 or 5% of Delanco Federal’s capital and surplus (up to a maximum of $500,000) and such loan must be approved in advance by a majority of the disinterested members of the Board of Directors.

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Corporate Governance

The Company’s Board of Directors currently consists of five members, all of whom are independent under the listing standards of The NASDAQ Stock Market, except for James E. Igo, who is employed by the Company and the Bank as Chairman, President and Chief Executive Officer. In determining the independence of its directors, the Board considered transactions, relationships and arrangements between the Company and its directors that are not required to be disclosed in this proxy statement under the heading“Transactions with Related Persons,” including loans or lines of credit that the Bank has directly or indirectly made to Director Renee C. Vidal. The business relationships between the Company and its directors or the directors’ affiliated companies that were considered by the Board were: the law firm of Raymond, Coleman, Heinhold & Norman, LLP, of which Thomas J. Coleman III is a partner, provided legal services to the Company; and John A. Latimer is employed by The Barclay Group, Delanco Federal’s insurance broker.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees. The following table sets forth the fees billed to the Company for the years ended March 31, 2013 and 2012 by Connolly, Grady & Cha, P.C.:

	2013		2012
Audit Fees	$	63,065	$	62,535
Audit Related Fees(1)		15,964		15,667
Tax Fees(2)		6,372		7,401
All Other Fees		-		-

___________________

(1) Include fees for the review of annual and quarterly reports.

(2) Represents services rendered for tax compliance, tax advice and tax planning, including the preparation of the annual tax returns and quarterly tax payments.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by the Independent Registered Public Accounting Firm.The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In accordance with its charter, the Audit Committee approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. Such approval process ensures that the external auditor does not provide any non-audit services to the Company that are prohibited by law or regulation.

In addition, the Audit Committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by the independent registered public accounting firm. Requests for services by the independent registered public accounting firm for compliance with the auditor services policy must be specific as to the particular services to be provided.

The request may be made with respect to either specific services or a type of service for predictable or recurring services.

During the year ended March 31, 2013, all services were approved, in advance, by the Audit Committee in compliance with these procedures.

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1)     The financial statements required in response to this item are incorporated by reference from Item 8 of this report.

(2)     All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

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(3)     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, 2010)

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 Regulatory Agreement dated November 21, 2012, by and between Delanco Federal and the OCC (Incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on December 21, 2012)

10.4 Delanco Federal Employee Severance Compensation Plan (Incorporated by reference from Exhibit 10.5 of the Form 10-KSB filed with the Securities and Exchange Commission on July 13, 2007)

10.5 Delanco Federal Directors Retirement Plan (Incorporated herein by reference to Exhibit 10.5 to the Registration Statement on Form SB-2 (File No. 333-139339))

10.6 Delanco Bancorp, Inc. 2008 Equity Incentive Plan (Incorporated herein by reference the Company’s definitive proxy materials for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on July 17, 2008)

21.0	Subsidiaries
23.1	Consent of Connolly, Grady & Cha, P.C.

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

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.0 Section 1350 Certification

101 The following materials from the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text. *

* Furnished, not filed.

45

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DELANCO BANCORP, INC.
Date: June 11, 2013	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Name	Title	Date
/s/ James E. Igo	Chairman, President and Chief Executive Officer	June 11, 2013
James E. Igo
/s/ Eva Modi	Senior Vice President and Chief Financial Officer	June 11, 2013
Eva Modi	(principal financial and accounting officer)
/s/ Thomas J. Coleman, III	Director	June 11, 2013
Thomas J. Coleman, III
/s/ John A. Latimer	Director	June 11, 2013
John A. Latimer
/s/ James W. Verner	Director	June 11, 2013
James W. Verner
/s/ Renee C. Vidal	Director	June 11, 2013
Renee C. Vidal

46

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and of the preparation of our consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of its internal control over financial reporting as of March 31, 2013, using the criteria established inInternal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of March 31, 2013, the Company’s internal control over financial reporting was effective based on the criteria.

This annual report does not include an attestation report of the Company’s Independent Registered Public Accounting Firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s Independent Registered Public Accounting Firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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Delanco Bancorp, Inc. and Subsidiary

March 31, 2013 and 2012

Contents

	Page
Report of Independent Registered Public Accounting Firm	F-1
Financial Statements
Consolidated Statements of Financial Condition As of March 31, 2013 and 2012	F-2
Consolidated Statements of Operations For the Years Ended March 31, 2013 and 2012	F-3
Consolidated Statements of Comprehensive Income (Loss) For the Years Ended March 31, 2013 and 2012	F-4
Consolidated Statements of Changes in Stockholders’ Equity For the Years Ended March 31, 2013 and 2012	F-5
Consolidated Statements of Cash Flows For the Years Ended March 31, 2013 and 2012	F-6
Notes to Consolidated Financial Statements	F-7

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Delanco Bancorp, Inc.

615 Burlington Avenue

Delanco, New Jersey 08075

We have audited the accompanying consolidated statements of financial condition of Delanco Bancorp, Inc. and subsidiary (the Company) as of March 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delanco Bancorp, Inc. and subsidiary as of March 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Connolly, Grady & Cha, P.C.

Certified Public Accountants

Philadelphia, Pennsylvania

June 7, 2013

F-1

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition 

	March 31,
	2013			2012
Assets
Cash and amount due from depository institutions	$	506,921		$	569,884
Interest-bearing deposits in other banks		6,215,845			6,079,801
Total cash and cash equivalents		6,722,766			6,649,685
Investment securities
Securities held-to-maturity (fair value of $20,285,670 and $17,606,748 at March 31, 2013 and 2012, respectively)		20,137,886			17,457,498
Securities available-for-sale (amortized cost of $2,217,032 and $237,096 at March 31, 2013 and 2012, respectively)		2,207,018			241,826
Total investment securities		22,344,904			17,699,324
Loans, net of allowance for loan losses of $1,032,818 and $1,160,535 at March 31, 2013 and 2012, respectively		88,419,084			99,431,618
Accrued interest receivable		427,736			417,102
Premises and equipment, net		6,855,000			7,131,980
Federal Home Loan Bank stock, at cost		202,500			219,100
Deferred income taxes, net		1,228,400			991,000
Bank-owned life insurance		153,588			147,508
Prepaid and refundable income taxes					160,250
Real estate owned		2,469,800			845,669
Other assets		590,804			615,383
Total Assets	$	129,414,582		$	134,308,619
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Non-interest bearing deposits	$	6,872,713		$	4,673,349
Interest-bearing deposits		110,161,401			116,915,542
Total deposits		117,034,114			121,588,891
Accrued interest payable		9,025			15,912
Advance payments by borrowers for taxes and insurance		366,604			399,920
Other liabilities		610,259			560,432
Total liabilities		118,020,002			122,565,155
Commitments and Contingencies (Note 21)
Stockholders’ Equity
Preferred stock, $.01 par value, 3,000,000 shares authorized; None issued
Common stock, $.01 par value, 7,000,000 shares authorized; 1,634,725 shares issued and outstanding as of March 31, 2013 and 2012		16,347			16,347
Additional paid-in capital		6,570,852			6,590,557
Retained earnings, substantially restricted		5,332,716			5,656,867
Unearned common stock held by employee stock ownership plan		(448,567	)		(480,608	)
Accumulated other comprehensive loss		(76,768	)		(39,699	)
Total stockholders’ equity		11,394,580			11,743,464
Total Liabilities and Stockholders’ Equity	$	129,414,582		$	134,308,619

See accompanying notes to consolidated financial statements.

F-2

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations 

	Years Ended March 31,
	2013			2012
Interest Income
Loans	$	4,483,176		$	5,338,028
Investment securities		618,317			553,237
Total interest income		5,101,493			5,891,265
Interest Expense
Interest-bearing checking accounts		35,634			54,092
Passbook and money market accounts		186,335			269,568
Certificates of deposits		834,960			1,107,622
Advances from Federal Home Loan Bank					236
Total interest expense		1,056,929			1,431,518
Net interest income		4,044,564			4,459,747
Provision for loan losses		640,200			1,601,892
Net interest income after provision for loan losses		3,404,364			2,857,855
Non-Interest Income
Service charges		132,561			145,301
Income from bank-owned life insurance		6,081			5,805
Rental income		29,000			21,958
Other		33,399			13,642
Net loss on sale of real estate owned		(152,276	)		(36,382	)
Total non-interest income		48,765			150,324
Non-Interest Expense
Salaries and employee benefits		1,564,734			1,583,294
Advertising		21,862			24,730
Office supplies, telephone and postage		100,406			97,549
Loan expense		447,706			203,126
Occupancy expense		654,424			648,635
Federal insurance premiums		216,123			282,555
Real estate owned – impairment losses		56,493			104,316
Data processing expenses		217,252			215,240
ATM expenses		27,654			24,810
Bank charges and fees		69,528			77,425
Insurance and surety bond premium		79,526			80,170
Dues and subscriptions		22,942			25,863
Professional fees		248,522			208,175
Real estate owned expenses		130,906			56,368
Other		128,640			118,919
Total non-interest expense		3,986,718			3,751,175
Loss Before Income Tax Benefit		(533,589	)		(742,996	)
Income tax benefit		(209,438	)		(249,052	)
Net Loss	$	(324,151	)	$	(493,944	)
Loss per share
Basic	$	(0.20	)	$	(0.31	)
Diluted	$	(0.20	)	$	(0.31	)
Weighted average shares outstanding
Basic		1,589,868			1,586,664
Diluted		1,589,868			1,586,664

See accompanying notes to consolidated financial statements.

F-3

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Years Ended March 31, 2013 and 2012

	March 31,
	2013			2012
Net (loss)	$	(324,151	)	$	(493,944	)
Other comprehensive income (loss), net of tax:
Postretirement benefit plan adjustment, net of deferred taxes (benefit) of ($18,815) and $2,993 in 2013 and 2012, respectively		(28,222	)		4,489
Unrealized gains (loss) available-for-sale:
Unrealized holding gains (loss), net of deferred taxes (benefits) of ($5,898) and $2,385 in 2013 and 2012, respectively		(8,847	)		3,578
Other comprehensive income (loss)		(37,069	)		8,067
Total Comprehensive (Loss)	$	(361,220	)	$	(485,877	)

See accompanying notes to consolidated financial statements.

F-4

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended March 31, 2013 and 2012

	Common Stock
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Common Stock Held By ESOP			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
BALANCES, MARCH 31, 2011		1,634,725	$	16,347	$	6,606,577		$	6,150,811		$	(512,648	)	$	(47,766	)	$	12,213,321
Net loss									(493,944	)								(493,944	)
Other comprehensive income, net of tax															8,067			8,067
3204.05 shares of common stock transferred to ESOP for services						(16,020	)					32,040						16,020
BALANCES, MARCH 31, 2012		1,634,725	$	16,347	$	6,590,557		$	5,656,867		$	(480,608	)	$	(39,699	)	$	11,743,464
Net loss									(324,151	)								(324,151	)
Other comprehensive (loss), net of tax															(37,069	)		(37,069	)
3204.05 shares of common stock transferred to ESOP for services						(19,705	)					32,041						12,336
BALANCES, MARCH 31, 2013		1,634,725	$	16,347	$	6,570,852		$	5,332,716		$	(448,567	)	$	(76,768	)	$	11,394,580

See accompanying notes to consolidated financial statements.

F-5

Delanco Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows 

	Years Ended March 31,
Cash Flows from Operating Activities	2013			2012
Net loss	$	(324,151	)	$	(493,944	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of ESOP		19,705			16,020
Deferred income tax (benefit)		(270,150	)		(240,996	)
Depreciation		299,995			325,603
Amortization of premiums and accretion of discounts on securities, net		1,528			(2,859	)
Income from bank owned life insurance		(6,081	)		(5,805	)
Loss on sale of real estate owned		152,276			36,382
Provision for loan losses		640,200			1,601,892
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable		(10,634	)		41,422
Other assets		24,579			291,451
Prepaid and refundable income taxes		160,250			(160,250	)
Increase (decrease) in:
Accrued interest payable		(6,887	)		(6,746	)
Other liabilities		49,828			(38,714	)
Net cash provided by operating activities		730,458			1,363,456
Cash Flows from Investing Activities
Proceeds from sale of securities available-for-sale		20,064			12,199
Purchases of securities available-for-sale		(2,000,000	)
Purchases of securities held-to-maturity		(21,645,000	)		(19,000,000	)
Proceeds from maturities and principal repayments of securities held-to-maturity		18,966,140			17,241,424
Redemption of Federal Home Loan Bank stock		16,600			55,600
Net decrease in loans		7,825,270			2,310,406
Proceeds from sale of real estate owned		770,657			412,002
Purchases of premises and equipment		(23,015	)		(59,568	)
Net cash provided by investing activities		3,930,716			972,063
Cash Flows from Financing Activities
Net increase (decrease) in deposits		(4,554,777	)		746,481
Net increase (decrease) in advance payments by borrowers for taxes and insurance		(33,316	)		5,056
(Payments) borrowing on line of credit from Atlantic Central Bankers Bank					(1,000,000	)
(Payments on) advances from Federal Home Loan Bank					(1,100,000	)
Net cash used in financing activities		(4,588,093	)		(1,348,463	)
Net Increase in Cash and Cash Equivalents	$	73,081		$	987,056
Cash and Cash Equivalents, Beginning of Year		6,649,685			5,662,629
Cash and Cash Equivalents, End of Year	$	6,722,766		$	6,649,685
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest	$	1,063,816		$	1,438,264
Cash paid during the year for income taxes	$	1,500		$	161,920
Supplemental Disclosure of Noncash Items
Loans transferred to real estate owned	$	2,547,064		$	523,414

See accompanying notes to consolidated financial statements.

F-6

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

1.     NATURE OF OPERATIONS

Delanco Bancorp, Inc. (the “Company”) is a federally-chartered subsidiary holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, Delanco Federal Savings Bank (the “Bank”), and its wholly-owned subsidiaries, Delanco Financial Services Corporation, an inactive subsidiary, and DFSB Properties, LLC, a real estate company that holds other real estate acquired in foreclosure. The Company is majority owned by Delanco MHC, a federally chartered mutual holding company. Delanco MHC has virtually no operations or assets other than an investment in the Company, and is not included in these financial statements. The Bank provides a variety of financial services to individual and business customers located primarily in Southern New Jersey and Southeastern Pennsylvania. The Bank’s primary source of revenue is from single-family residential, commercial and multi-family real estate loans. The Bank is subject to regulation by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles (“GAAP”) and predominant practices within the banking industry. The consolidated financial statements of the Company include the accounts of Delanco Federal Savings Bank and its subsidiaries. Intercompany balances and transactions are eliminated in consolidation.     

Use of Estimates in the Preparation of Financial Statements

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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates and assumptions that are particularly susceptible to significant changes relate to the determination of the allowance for losses on loans, the fair value of financial instruments, the valuation of foreclosed real estate and the valuation of deferred tax assets. In connection with the determination of the estimated losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

A majority of the Bank’s loan portfolio consists of single-family residential, commercial and multi-family real estate loans in Southern New Jersey and Southeastern Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions.

While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

F-7

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment Securities 

Securities Held-to-Maturity: Securities that management has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using methods approximating the interest method over the period to maturity. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage-backed securities are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using methods approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments.

Securities Available-for-Sale: Available-for-sale securities consist of investment securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are included in other comprehensive income. Realized gains (losses) on available-for-sale securities are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period of maturity.

Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans and Allowance for Loan Losses

The Bank grants mortgage, commercial, consumer and lines of credit loans to customers. A substantial portion of the loan portfolio is represented by mortgage, commercial and multi-family real estate loans in Southern New Jersey and Southeastern Pennsylvania. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees and unearned discounts.

Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Interest is subsequently recognized only as received until the loan is returned to accrual status. A loan is restored to accrual status when all interest and principal payments are current and the borrower has demonstrated to management the ability to make payments of principal and interest as scheduled. The Bank’s practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

F-8

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a customer’s financial difficulties, the Bank grants a concession for other than an insignificant period of time to the customer that the Bank would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Bank strives to identify customers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Bank grants the customer new terms that provide for a reduction of either interest or principal, the Bank measures any impairment on the restructuring as previously noted for impaired loans.

Bank-Owned Life Insurance

The Bank owns a life insurance policy on the life of a retired member of the Board of Directors. The cash surrender value of the policy is recorded as an asset of the bank and changes in this value are reflected in non-interest income. Death benefit proceeds in excess of the policy’s cash surrender value will be recognized as income upon receipt. There are no policy loans offset against the cash surrender value or restrictions on the use of the proceeds.

F-9

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Premises and Equipment

Land is carried at cost. Other premises and equipment are recorded at cost and are depreciated on the straight-line method. Charges for maintenance and repairs are expensed as incurred. Depreciation and amortization are provided over the estimated useful lives of the respective assets.

Real Estate Owned

Real estate owned is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real estate owned is recorded at the lower of the carrying value of the loan or the fair value of the property, net of estimated selling costs. Costs relating to the development or improvement of the properties are capitalized while expenses related to the operation and maintenance of properties are recorded as an expense as incurred. Gains or losses upon dispositions are reflected in earnings as realized. The Company had $2,469,800and $845,669 in realestateowned atMarch 31, 2013 and 2012, respectively. The Company recorded losses of $152,276 and $36,382 on sale of real estate owned for the years ended March 31, 2013 and 2012, respectively.

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxescurrently due plus deferred taxes related primarily to tax net operating loss carryforwards and differences between the basis of available-for-sale securities, allowancefor loan losses, estimated losses on real estate owned, accumulated depreciation, and accrued employee benefits for financial and income tax reporting.

The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when assets and liabilities are recovered or settled, as well as operating loss carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part be beyond the Company’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.

Statements of Cash Flows

The Company considers all cash and amounts due from depository institutions and interest-bearing deposits in other banks with original maturities of less than 90 days to be cash equivalents for purposes of the statements of cash flows.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses totaled $21,862 and $24,730 for the years ended March 31, 2013 and 2012, respectively.

Employee Stock Ownership Plan (“ESOP”)

The Company accounts for its ESOP based on guidance by FASB ASC 718-40-50. Shares are released to participants proportionately as the loan is repaid. If the Company declares a dividend, the dividends on the allocated shares would be recorded as dividends and charged to retained earnings. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. Allocation of shares to the ESOP participants is contingent upon the repayment of the loan to the Company.

F-10

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

Basic earnings per share is calculated on the basis of net income divided by the weighted average number of shares outstanding. Diluted earnings per share includes dilutive potential shares as computed under the treasury stock method using average common stock prices. Diluted earnings per share is calculated on the basis of the weighted average number of shares outstanding plus the weighted average number of additional dilutive shares.

Reclassifications

Certain amounts as of and for the year ended March 31, 2012 have been reclassified to conform to the current year’s presentation. These changes had no effect on the Company’s results of operations or financial position.

3.     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.

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.

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 Section210-20-45 or Section815-10-45 or (2)subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they offset in accordance with either Section210-20-45 or Sections 815-10-45. These amendments are effective for annual periods beginning on or after January3, 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.
 

F-11

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

3.     RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

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.

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 ofoperations.

4.     RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve funds in vault cash or on deposit with the Federal Reserve Bank. The Bank’s vault cash satisfied the required reserve at March 31, 2013 and 2012. 

F-12

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

5.     INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities held-to-maturity and available-for-sale are as follows:

	Held-to-Maturity
	March 31,2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Federal Home Loan Bank Bonds	$	4,590,643	$	4,625	$	(17,525	)	$	4,577,743
Federal Farm Credit Bonds		3,444,266		1,324		(16,560	)		3,429,030
Federal Home Loan Mortgage Corporation Bonds		500,000				(2,198	)		497,802
Federal National Mortgage Association		9,499,365		48,995		(9,546	)		9,538,814
Municipal Bond		64,320		64,320
		18,098,594		54,944		(45,829	)		18,107,709
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation		965,204		64,850					1,030,054
Federal National Mortgage Association		780,572		64,261					844,833
Government National Mortgage Corporation		293,516		10,471		(913	)		303,074
		2,039,292		139,582		(913	)		2,177,961
Total	$	20,137,886	$	194,526	$	(46,742	)	$	20,285,670

	Held-to-Maturity
	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Federal Home Loan Bank Bonds	$	3,944,679	$	5,438	$	(8,455	)	$	3,941,662
Federal Farm Credit Bonds		3,000,000		2,330		(25,440	)		2,976,890
Federal Home Loan Mortgage Corporation Bonds		1,499,258				(6,153	)		1,493,105
Federal National Mortgage Association		5,997,304		25,730		(33,549	)		5,989,485
Municipal Bond		104,320							104,320
		14,545,561		33,498		(73,597	)		14,505,462
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation		1,429,534		89,059		(1,932	)		1,516,661
Federal National Mortgage Association		1,146,163		90,220		(243	)		1,236,140
Government National Mortgage Corporation		336,240		13,238		(993	)		348,485
		2,911,937		192,517		(3,168	)		3,101,286
Total	$	17,457,498	$	226,015	$	(76,765	)	$	17,606,748

F-13

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

5.     INVESTMENT SECURITIES (Continued)

	Available-for-Sale
	March 31, 2013
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Federal Home Loan Bank Bonds	$	1,500,000	$	1,175		$	(4,795	)	$	1,496,380
Federal National Mortgage Association		500,000		(11,562	)		488,438
Mutual Fund Shares		217,032		5,168			222,200
Total	$	2,217,032	$	6,343		$	(16,357	)	$	2,207,018

	Available-for-Sale
	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mutual Fund Shares	$	237,096	$	4,730	$	-	$	241,826

F-14

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

5.     INVESTMENT SECURITIES (Continued)

The following is a summary of the amortized cost and fair value of the Company’s investment securities held-to-maturity and available-for-sale by contractual maturity as of March 31, 2013 and 2012.

	March 31, 2013
	Held-to-maturity				Available-for-sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	64,320	$	64,320	$		$
After one year through five years		1,005,098		1,028,678
After five years through ten years		6,421,666		6,417,558
After ten years		12,646,802		12,775,114		2,000,000		1,984,818
Equity securities						217,032		222,200
	$	20,137,886	$	20,285,670	$	2,217,032	$	2,207,018

	March 31, 2012
	Held-to-Maturity				Available-for-Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	104,450	$	104,450	$		$
After one year through five years		510,271		531,593
After five years through ten years		3,444,444		3,449,467
After ten years		13,398,333		13,521,238
Equity securities						237,096		241,826
	$	17,457,498	$	17,606,748	$	237,096	$	241,826

The amortized cost and fair value of mortgage-backed securities are presented in the held-to-maturity category by contractual maturity in the preceding table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. 

F-15

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

5.     INVESTMENT SECURITIES (Continued)

Information pertaining to securities with gross unrealized losses at March 31, 2013 and 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less Than 12 Months					12 Months or Greater					Total
March 31, 2013	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Federal Home Loan Bank Bonds	$	2,454,531	$	(22,320	)	$		$			$	2,454,531	$	(22,320	)
Federal Farm Credit Bonds		2,427,706		(16,560	)							2,427,706		(16,560	)
Federal Home Loan Mortgage Corporation		497,802		(2,198	)							497,802		(2,198	)
Federal National Mortgage Association		1,978,892		(21,108	)							1,978,892		(21,108	)
		7,358,931		(62,186	)							7,358,931		(62,186	)
Mortgage-Backed Securities:
Government National Mortgage Association							31,562		(913	)		31,562		(913	)
							31,562		(913	)		31,562		(913	)
Total	$	7,358,931	$	(62,186	)	$	31,562	$	(913	)	$	7,390,493	$	(63,099	)

	Less Than 12 Months					12 Months or Greater				Total
March 31, 2012	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Federal Home Loan Bank Bonds	$	2,000,000	$	(8,455	)	$	-	$	-	$	2,000,000	$	(8,455	)
Federal Farm Credit Bonds		2,500,000		(25,440	)						2,500,000		(25,440	)
Federal Home Loan Mortgage Corporation		1,499,258		(6,153	)						1,499,258		(6,153	)
Federal National Mortgage Association		4,497,304		(33,549	)						4,497,304		(33,549	)
		10,496,562		(73,597	)						10,496,562		(73,597	)

F-16

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

5.     INVESTMENT SECURITIES (Continued)

	Less Than 12 Months					12 Months or Greater				Total
March 31, 2012	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation	$	374,299	$	(1,932	)	$	-	$	-	$	374,299	$	(1,932	)
Federal National Mortgage Association		345,832		(243	)						345,832		(243	)
Government National Mortgage Association		39,060		(993	)						39,060		(993	)
		759,191		(3,168	)						759,191		(3,168	)
Total	$	11,255,753	$	(76,765	)	$	-	$	-	$	11,255,753	$	(76,765	)

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2013, the seventeen debt securities with unrealized losses have depreciated 0.86% from the Bank’s amortized cost basis. These unrealized losses relate principally to market changes in interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

The Bank has pledged investment securities with a carrying amount of approximately $6,500,000 and $500,000 at March 31, 2013 and 2012, respectively, to the New Jersey Commissioner of Banking and Insurance under the provisions of the Government Unit Deposit Protection Act that enables the Bank to act as a public depository.

6.     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.

F-17

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

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 and 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 and multi-family 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 and multi-family real estate loans are generally made with fixed interest rates which mature or re-price in 5 to 7 years with principal amortization of up to 25 years.

Commercial loans include short and long-term business loans and commercial lines of credit for the purposes of providing working capital, supporting accounts receivable, purchasing inventory and acquiring fixed assets. The loans generally are secured by these types of assets as collateral and /or by personal guarantees provided by principals of the borrowers.

Construction loans will be made only if there is a permanent mortgage commitment in place. Interest rates on commercial construction loans are typically in line with normal commercial mortgage loan rates, while interest rates on residential construction loans are slightly higher than normal residential mortgage loan rates. These loans usually are adjustable rate loans and generally have terms of up to one year.

Consumer loans include installment loans and home equity loans, secured by first or second mortgages on homes owned or being purchased by the loan applicant. Home equity term loans and credit lines are credit accommodations secured by either a first or second mortgage on the borrower’s residential property. Interest rates charged on home equity term loans are generally fixed; interest on credit lines is usually a floating rate related to the prime rate. The Bank generally requires a loan to value ratio of less than or equal to 80% of the appraised value, including any outstanding prior mortgage balance.

Loans at March 31, 2013 and 2012 are summarized as follows:

	March 31,
	2013			2012
Residential (one to four family) real estate	$	66,597,885		$	70,191,726
Multi-family and commercial real estate		12,402,532			17,130,030
Commercial		1,165,774			1,480,322
Home equity		8,361,492			9,986,541
Consumer		959,771			1,046,744
Construction		82,849			838,841
Total loans		89,570,303			100,674,204
Net deferred loan origination fees		(118,401	)		(82,051	)
Allowance for loan losses		(1,032,818	)		(1,160,535	)
		(1,151,219	)		(1,242,586	)
Loans, net	$	88,419,084		$	99,431,618

F-18

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act) made extensive changes to the regulation of the Bank. Under the Dodd-Frank Act, the Office of Thrift Supervision (OTS) was eliminated and responsibility for the supervision and regulation of federal savings associations such as the Bank was transferred to the Office of the Comptroller of the Currency (OCC) on July 21, 2011. Under the authority issued to the OTS and now assumed by the OCC under the Home Owners Loan Act (HOLA) in 12 U.S.C. 1462 et seg. Subpart A, Section 560.93, the Bank is subject to a loans-to-one borrower limitation of 15% of capital funds. At March 31, 2013, the loans-to-one-borrower limitation was $1.8 million; this excluded an additional 10% of adjusted capital funds or approximately $1.2 million, which may be loaned if collateralized by readily marketable securities. At March 31, 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.

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.

F-19

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

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 March 31, 2013:

	Pass		Special Mention Loans		Classified Loans		Non- Performing Loans		Total
Residential real estate	$	63,418,245	$	304,427	$	199,966	$	2,675,247	$	66,597,885
Multi-family and commercial real estate		8,719,717		119,950		465,287		3,097,578		12,402,532
Commercial		642,693		254,084		34,096		234,901		1,165,774
Home equity		8,074,576						286,916		8,361,492
Consumer		959,771								959,771
Construction		31,856						50,993		82,849
	$	81,846,858	$	678,461	$	699,349	$	6,345,635	$	89,570,303

The following table represents past-due loans as of March 31, 2013:

	30-89 Days Past Due and Still Accruing			90 Days or More Past - Due and Still Accruing			Total Past Due and Still Accruing			Accruing Current Balances			Non Accrual Balances			Total Loan Balances
Residential real estate	$	2,676,307		$	-		$	2,676,307		$	62,379,000		$	1,542,578		$	66,597,885
Multi-family and commercial real estate		545,656						545,656			9,553,648			2,303,228			12,402,532
Commercial											930,873			234,901			1,165,774
Home equity		204,467						204,467			7,870,109			286,916			8,361,492
Consumer		6,738						6,738			953,033						959,771
Construction											82,849						82,849
Total Loans	$	3,433,168		$	-		$	3,433,168		$	81,769,512		$	4,367,623		$	89,570,303
Percentage of Total Loans		3.83	%	N/A		%		3.83	%		91.29	%		4.88	%		100.0	%

F-20

 Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

The following table represents loans by credit quality indicator at March 31, 2012:

	Pass		Special Mention Loans		Classified Loans		Non- Performing Loans		Total
Residential real estate	$	66,164,553	$	307,900	$	201,373	$	3,517,900	$	70,191,726
Multi-family and commercial real estate		11,245,514		248,424		576,490		5,059,602		17,130,030
Commercial		1,184,731		261,371		34,220				1,480,322
Home equity		9,986,541								9,986,541
Consumer		1,046,744								1,046,744
Construction		785,602						53,239		838,841
	$	90,413,685	$	817,695	$	812,083	$	8,630,741	$	100,674,204

The following table represents past-due loans as of March 31, 2012:

	30-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still Accruing			Total Past Due and Still Accruing			Accruing Current Balances			Non- Accrual Balances			Total Loan Balances
Residential real estate	$	1,262,391		$	-		$	1,262,391		$	65,940,824		$	2,988,511		$	70,191,726
Multi-family and commercial real estate		1,204,668						1,204,668			11,670,336			4,255,026			17,130,030
Commercial		220,673						220,673			1,259,649						1,480,322
Home equity		41,983						41,983			9,944,558						9,986,541
Consumer		41,438						41,438			1,005,306						1,046,744
Construction											838,841						838,841
Total Loans	$	2,771,153		$	-		$	2,771,153		$	90,659,514		$	7,243,537		$	100,674,204
Percentage of Total Loans		2.75	%	N/A		%		2.75	%		90.05	%		7.20	%		100.0	%

The Bank determines whether a restructuring of debt constitutes a troubled debt restructuring (“TDR”) in accordance with guidance under FASB ASC Topic 310 Receivables. The Company considers a loan a TDR when the borrower is experiencing financial difficulty and the Bank grants a concession that they would not otherwise consider but for the borrower’s financial difficulties. A TDR includes a modification of debt terms or assets received in satisfaction of the debt (including a foreclosure or a deed in lieu of foreclosure) or a combination of types. The Bank evaluates selective criteria to determine if a borrower is experiencing financial difficulty, including the ability of the borrower to obtain funds from sources other than the Bank at market rates. The Bank considers all TDR loans as impaired loans and, generally, they are put on non-accrual status. The Bank will not consider the loan a TDR if the loan modification was made for customer retention purposes. The Bank’s policy for returning a loan to accruing status requires the preparation of a well documented credit evaluation which includes the following:

● A review of the borrower’s current financial condition in which the borrower must demonstrate sufficient cash flow to support the repayment of all principal and interest including any amounts previously charged-off;

● An updated appraisal or home valuation which must demonstrate sufficient collateral value to support the debt;

● Sustained performance based on the restructured terms for at least six consecutive months;

● Approval by senior management.

F-21

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

The Bank had 15 loans totaling $3,529,218 and 15 loans totaling $3,694,879 whose terms were modified in a manner that met the criteria for a TDR as of March 31, 2013 and 2012, respectively. As of March 31, 2013, six of the TDRs were commercial real estate loans with an aggregate outstanding balance of $1,795,150; one residential construction loan with an aggregate outstanding balance of $50,993, eight were residential real estate loans with an aggregate outstanding balance of $1,683,075., The Company had one accruing TDR in the amount of $135,609 as of March 31, 2013 that was modified during the year. As of March 31, 2012, seven of the of the TDRs were commercial real estate loans with an aggregate outstanding balance of $2,702,026, one was a residential construction loan with an outstanding balance of $53,239 and the remaining loans were residential real estate loans with an aggregate outstanding balance of $1,209,614.

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 March 31, 2013, the Bank had 25 loan relationships totaling $4,367,623 in non-accrual loans as compared to 25 relationships totaling $7,243,537 at March 31, 2012. At March 31, 2013, the Bank had no impaired loan relationships in which impaired loans had a related allowance for credit losses. The average balance of impaired loans totaled $7,244,941 for 2013 as compared to $8,545,736 for 2012, and interest income recorded on impaired loans during the year ended March 31, 2013 totaled $168,207 as compared to $152,910 for March 31, 2012.

The following table represents data on impaired loans at March 31, 2013 and 2012:

	March 31,
	2013		2012
Impaired loans for which a valuation allowance has been provided
Impaired loans for which no valuation allowance has been provided	$	6,345,635	$	8,630,741
Total loans determined to be impaired	$	6,345,635	$	8,630,741
Allowance for loans losses related to impaired loans
Average recorded investment in impaired loans	$	7,244,941	$	8,545,736
Cash basis interest income recognized on impaired loans	$	168,207	$	152,910

The following table presents impaired loans with no valuation allowance at March 31, 2013:

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Annual Recorded Investment		Interest Income Recognized While On Impaired Status
Impaired loans with no valuation allowance:
Residential real estate	$	2,254,806	$	2,222,651	$	-	$	2,773,512	$	83,173
Multi-family and commercial real estate		3,550,177		3,550,177				4,105,741		61,604
Commercial		234,898		234,898				172,181		8,211
Home equity		286,916		286,916				137,938		11,486
Consumer								3,235
Construction		50,993		50,993				52,334		3,733
Subtotal	$	6,377,790	$	6,345,635	$	-	$	7,244,941	$	168,207

 

F-22

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.      LOANS (Continued)

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Annual Recorded Investment		Interest Income Recognized While On Impaired Status
Total impaired loans:
Residential real estate	$	2,254,806	$	2,222,651	$	-	$	2,773,512	$	83,173
Multi-family and commercial real estate		3,550,177		3,550,177				4,105,741		61,604
Commercial		234,898		234,898				172,181		8,211
Home equity		286,916		286,916				137,938		11,486
Consumer								3,235
Construction		50,993		50,993				52,334		3,733
Total	$	6,377,790	$	6,345,635	$	-	$	7,244,941	$	168,207

The following table presents impaired loans with no valuation allowance by portfolio class at March 31, 2012:

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Annual Recorded Investment		Interest Income Recognized While On Impaired Status
Impaired loans with no valuation allowance:
Residential real estate	$	3,357,392	$	3,343,613	$	-	$	3,442,636	$	66,366
Multi-family and commercial real estate		5,287,128		5,287,128				4,852,947		86,544
Commercial								19,363
Home equity								111,121
Consumer								119,669
Construction
Subtotal	$	8,644,520	$	8,630,741	$	-	$	8,545,736	$	152,910
Total impaired loans:
Residential real estate	$	3,357,392	$	3,343,613	$	-	$	3,442,636	$	66,366
Multi-family and commercial real estate		5,287,128		5,287,128				4,852,947		86,544
Commercial								19,363
Home equity								111,121
Consumer								119,669
Construction
Total	$	8,644,520	$	8,630,741	$	-	$	8,545,736	$	152,910

F-23

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

	March 31,
	2013			2012
Non-accrual loans:
Residential real estate	$	1,542,578		$	2,988,511
Multi-family and commercial real estate		2,303,228			4,255,026
Commercial		234,901
Home equity		286,916
Consumer
Construction
Total non-accrual loans		4,367,623			7,243,537
Troubled debt restructurings		1,978,012			1,387,204
Total non-performing loans		6,345,635			8,630,741
Real estate owned		2,469,800			845,669
Total non-performing assets	$	8,815,435		$	9,476,410
Non-performing loans as a percentage of loans		7.08	%		8.57	%
Non-performing assets as a percentage of loans and real estate owned		9.58	%		9.34	%
Non-performing assets as a percentage of total assets		6.81	%		7.06	%

At March 31, 2013, we had 25 loan relationships totaling $4.4 million in nonaccrual loans as compared to 25 relationships totaling $7.2 million at March 31, 2012.  During the year ended March 31, 2013, we experienced a $2.9 million net decrease in nonaccrual loans.  This change reflects the transfer to real estate owned of ten loans totaling $2.1 million, the partial charge-off of six of the relationships transferred to real estate owned of $524 thousand and the return of one loan totaling $442 thousand to accruing status. These changes were partially offset by the downgrading of 11 loan relationships to nonaccrual status totaling $922 thousand during the year ended March 31, 2013.  The downgraded loans consisted of eight relationships representing residential mortgages and home equity loans totaling $712 thousand and three commercial loans totaling $210 thousand.

The following table sets forth with respect to the Bank’s allowance for losses on loans:

	March 31,
	2013		2012
Balance at beginning of year	$	1,160,535	$	1,286,301
Provision:
Commercial		3,783		(3,670	)
Multi-family and commercial real estate		587,288		642,863
Residential real estate		15,827		446,174
Home equity loans		18,827		134,486
Consumer		14,475		382,039
Total Provision	$	640,200	$	1,601,892

F-24

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.      LOANS (Continued)

	March 31,
	2013			2012
Charge-Offs:
Commercial	$	686,293		$	816,329
Residential real estate		26,757			399,186
Home equity		28,649			137,347
Consumer		66,510			400,552
Recoveries		(40,292	)		(25,756	)
Total Net Charge-Offs		767,917			1,727,658
Balance at end of year	$	1,032,818		$	1,160,535
Year-end loans outstanding	$	89,570,303		$	100,674,204
Average loans outstanding	$	95,122,254		$	102,605,642
Allowance as a percentage of year-end loans		1.15	%		1.15	%
Net charge-offs as a percentage of average loans		0.81	%		1.68	%

Additional details for changes in the allowance for loan by loan portfolio as of March 31, 2013 are as follows:

Allowance for Loan Losses

	Multi-Family and Commercial		Commercial Real Estate			Residential Real Estate			Home Equity			Consumer			Total
Balance, beginning of year	$	40,516	$	468,834		$	495,435		$	57,576		$	98,174		$	1,160,535
Loan charge-offs				(686,293	)		(26,757	)		(28,649	)		(66,510	)		(808,209	)
Recoveries				8,460			837						30,995			40,292
Provision for loan losses		3,783		587,288			15,827			18,827			14,475			640,200
Balance, end of year	$	44,299	$	378,289		$	485,342		$	47,754		$	77,134		$	1,032,818

Additional details for changes in the allowance for loan by loan portfolio as of March 31, 2012 are as follows:

Allowance for Loan Losses

	Multi-Family and Commercial			Commercial Real Estate			Residential Real Estate			Home Equity			Consumer			Total
Balance, beginning of year	$	70,422		$	595,828		$	447,099		$	60,437		$	112,515		$	1,286,301
Loan charge-offs		(46,472	)		(769,857	)		(399,186	)		(137,347	)		(400,552	)		(1,753,414	)
Recoveries		20,236						1,348						4,172			25,756
Provision for loan losses		3,670			642,863			446,174			134,486			382,039			1,601,892
Balance, end of year	$	40,516		$	468,834		$	495,435		$	57,576		$	98,174		$	1,160,535

F-25

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

6.     LOANS (Continued)

The Bank prepares an allowance for loan loss model on a quarterly basis to determine the adequacy of the allowance. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the loan portfolio, delinquency statistics, results of independent loan review and related classifications. The Bank’s historic loss rates and the loss rates of peer financial institutions are also considered. In evaluating the Bank’s allowance for loan loss, the Bank maintains a loan committee consisting of senior management and the Board of Directors that monitors problem loans and formulates collection efforts and resolution plans for each borrower. On a monthly basis, the loan committee meets to review each problem loan and determine if there has been any change in collateral value due to changes in market conditions. Each quarter, when calculating the allowance for loan loss, the loan committee reviews an updated loan impairment analysis on each problem loan to determine if a specific provision for loan loss is warranted. Management reviews the most recent appraisal on each loan adjusted for holding and selling costs. In the event there is not a recent appraisal on file, the Bank will use the aged appraisal and apply a discount factor to the appraisal and then adjust the holding and selling costs from the discounted appraisal value. At March 31, 2013, the Bank maintained an allowance for loan loss ratio of 1.15% to year end loans outstanding. On a linked basis, non-performing assets have decreased by $660,974 over their stated levels at March 31, 2012 representing a non-performing asset to total asset ratio of 6.81% at March 31, 2013 as compared to a non-performing asset to total asset ratio of 7.06% at March 31, 2012. 

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

For the year ending March 31, 2013, the Bank experienced two charge-offs relating to two loan relationships totaling $66,510 and twelve partial charge-offs relating to twelve loan relationships totaling $741,699 as compared to seven charge-offs relating to seven loan relationships totaling $447,023 and nineteen partial charge-offs relating to nineteen loan relationships totaling $1,306,391 for the year ended March 31, 2012. 

In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its officers and directors. In the opinion of management, transactions with directors were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Bank. Officers of the Company are entitled to 1% loan discount, under a Bank-wide employee discount program, from those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Bank. Loans to such borrowers are summarized as follows: 

	March 31,
	2013			2012
Balance, beginning of year	$	584,413		$	575,866
Payments		(86,905	)		(65,953	)
Borrowings		175,774			74,500
Balance, end of year	$	673,282		$	584,413

F-26

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

7.     LOAN SERVICING 

Mortgage loans serviced for others are not included in the accompanying statement of financial condition. The unpaid principal balances of these loans at March 31, 2013 and 2012 are summarized as follows: 

	March 31,
	2013		2012
Mortgage Loan Servicing Portfolio:
Mortgage Partnership Finance FHLB New York	$	393,480	$	405,618

8.     ACCRUED INTEREST RECEIVABLE

Accrued interest receivable at March 31, 2013 and 2012 consists of the following:

	March 31,
	2013		2012
Loans	$	309,057	$	347,466
Investment securities		84,614		57,592
Mortgage backed securities		34,065		12,044
	$	427,736	$	417,102

9.     PREMISES AND EQUIPMENT

Premises and equipment at March 31, 2013 and 2012 consists of the following:

	March 31,
	2013			2012
Land	$	1,451,203		$	1,451,203
Buildings		6,848,967			6,848,967
Furniture, fixtures and equipment		1,915,323			1,900,900
		10,215,493			10,201,070
Accumulated depreciation		(3,360,493	)		(3,069,090	)
	$	6,855,000		$	7,131,980

Depreciation expense amounted to $299,995 and $325,603 for the years ended March 31, 2013 and 2012, respectively.

10.   FEDERAL HOME LOAN BANK STOCK

The Bank is a member of the Federal Home Loan Bank System. As a member, the Bank maintains an investment in the capital stock of the Federal Home Loan Bank of New York in an amount not less than 1% of its outstanding home loans or 1/20 of its outstanding notes payable, if any, to the Federal Home Loan Bank of New York, whichever is greater, as calculated December 31 of each year.

F-27

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

11.   DEPOSITS

Deposit account balances at March 31, 2013 and 2012 are summarized as follows:

	March 31, 2013
	Amount		Weighted Average Interest Rate			Percent of Portfolio
Non interest bearing accounts	$	6,872,713					5.87
Interest bearing checking accounts		14,881,992		0.25	%		12.72
Passbook savings accounts		15,435,874		0.10			13.19
Money Market accounts		25,019,142		0.49			21.38
Club accounts		141,351		0.39			0.12
		62,351,072					53.28
Certificates of Deposits:
0.10% to 0.99%		25,622,818		0.54			21.89
1.00% to 1.99%		19,219,919		1.44			16.42
2.00% to 2.99%		8,035,364		2.44			6.87
3.00% to 3.99%		1,559,790		3.22			1.33
4.00% & Over		245,151		4.69			0.21
		54,683,042					46.72
	$	117,034,114					100.0	%

	March 31, 2012
	Amount		Weighted Average Interest Rate			Percent of Portfolio
Non interest bearing accounts	$	4,673,349					3.84
Interest bearing checking accounts		13,086,105		0.32	%		10.76
Passbook savings accounts		14,491,025		0.20			11.92
Money Market accounts		25,244,199		0.74			20.76
Club accounts		141,683		0.40			0.12
		57,636,361					47.40
Certificates of Deposits:
0.10% to 0.99%		16,313,120		0.69			13.42
1.00% to 1.99%		9,820,787		2.40			8.08
2.00% to 2.99%		9,820,787		1.34			27.40
3.00% to 3.99%		1,899,423		3.32			1.56
4.00% & Over		2,607,328		4.00			2.14
		63,952,530					52.60
	$	121,588,891					100.0	%

The aggregate amount of time deposits including certificates of deposits with a minimum denomination of $100,000 or more was approximately $25,001,000 and $19,172,000 at March 31, 2013 and 2012, respectively.

F-28

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

11.   DEPOSITS (Continued)

Scheduled maturities of certificates of deposits at March 31, 2013 and 2012 are as follows:

	March 31,
	2013		2012
2013	$		$	35,483,437
2014		34,402,410		15,021,129
2015		10,485,591		7,108,129
2016		3,395,872		2,124,385
2017		3,653,130		3,725,308
2018		2,746,039		490,002
	$	54,683,042	$	63,952,530

The Bank held deposits from officers and directors of approximately $479,000 and $369,000 at March 31, 2013 and 2012, respectively. These transactions were on the same terms as those prevailing at the time of comparable transactions with other persons. 

12.    LINE OF CREDIT FROM ATLANTIC CENTRAL BANKERS BANK

The Bank maintains a line of credit with Atlantic Central Bankers Bank at a rate to be determined by the lender when funds are borrowed. At March 31, 2013 and 2012, the outstanding balance on the unsecured line of credit was $ -0-.

13.   ADVANCES FROM FEDERAL HOME LOAN BANK

As of March 31, 2013, the Bank had a borrowing capacity in a combination of term advances and overnight borrowings of up to $11,383,000 at the FHLB of New York.

Specific repos and other securities, with balances approximating $11,900,000 and $11,700,000 at March 31, 2013 and 2012, respectively, were pledged to the FHLB of New York as collateral.

14.   INCOME TAXES

The Company is subject to federal income tax and New Jersey state income tax.

The Company and subsidiaries file a consolidated federal income tax return. The Company’s consolidated provision for income taxes for the years ended March 31, 2013 and 2012 consists of the following:

	Years Ended March 31,
	2013			2012
Income Tax Expense (benefit)
Current federal tax expense
Federal	$			$
State		3,000			3,000
Deferred tax (benefit)
Federal		(165,538	)		(196,352	)
State		(46,900	)		(55,700	)
Total	$	(209,438	)	$	(249,052	)

F-29

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

14.   INCOME TAXES (Continued)

Valuation Allowance

Since the year ending March 31, 2007, the Company reported significant cumulative losses and generated substantial net operating losses for federal and state income tax purposes. To date, the Company has been able to utilize a substantial portion of its federal net operating losses by carrying these losses back five years. The remaining unused federal net operating losses can be carried forward for a maximum of twenty years. Due to the extensive carryforward period, among other things, the Company concluded that it was more likely than not that the federal net operating loss carryforwards would eventually be realized.

The consolidated provision for income taxes for the years ended March 31, 2013 and 2012 differs from that computed by applying federal statutory rates to income before federal income tax expense, as indicated in the following analysis:

	Years Ended March 31,
	2013			2012
Expected federal tax provision (benefit) at 34% rate	$	(181,420	)	$	(252,619	)
State income tax effect		(27,881	)		3,709
Municipal bond interest		(137	)		(142	)
Income tax (benefit)	$	(209,438	)	$	(249,052	)
Effective tax rate (benefit)		(39.3	%)		(33.5	%)

A summary of deferred tax assets and liabilities as of March 31, 2013 and 2012 are as follows:

	March 31,
	2013			2012
Deferred tax assets:
Accrued pension costs	$	5,500		$	4,200
Accrued post retirement medical plan					1,700
Accrued retirement plan		9,400			15,700
Allowance for loan losses		333,800			413,100
Directors’ benefit plans		125,000			119,400
FASB 158 – unrecognized transition costs		47,200			28,400
Net operating loss carryforward		726,200			438,700
Unrealized losses on securities available-for-sale		4,000
Non accrual interest		39,100			44,000
Total deferred tax assets	$	1,290,200		$	1,065,200
Deferred tax liabilities:
Accumulated depreciation	$	(61,800	)	$	(72,300	)
Unrealized gains on securities available-for-sale					(1,900	)
Total deferred tax liabilities		(61,800	)		(74,200	)
NET DEFERRED TAX ASSETS	$	1,228,400		$	991,000

F-30

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

14.  INCOME TAXES (Continued)

The Company accounts for uncertainties in income taxes in accordance with FASB 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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has determined that there are no significant uncertain tax positions requiring recognition in its financial statements.

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

The Company believes that it is more likely than not that the deferred tax assets will be realized through taxable earnings or alternative tax strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible; the Company believes the net deferred tax assets are more likely than not to be realized.

The Company has federal net operating loss carryforwards of approximately $1,368,000 and state net operating loss carryforwards of approximately $3,357,000 at March 31, 2013.

15.   EMPLOYEE BENEFITS

Cash/Deferred Profit Sharing Plan

The Bank maintains a cash/deferred profit sharing plan covering all full time employees with one year of service and who are at least twenty-one years of age. Participants enter the Plan on the 1st of January or 1st of July subsequent to meeting the above requirements.

The Bank may contribute up to 10% of the annual compensation of each eligible employee. The Bank’s contribution to the plan was $-0- for the years ended March 31, 2013 and 2012.

Retirement Incentive Plan

A retired officer of the Bank is covered by a Retirement Incentive Plan that pays him $1,416.67 per month for ten years from the date of retirement at age sixty-five.

To fund the above benefit, the Bank has purchased and is the sole beneficiary of a life insurance policy on the life of the officer. The cash surrender value of this policy was $153,588 and $147,508 as of March 31, 2013 and 2012, respectively, and is reflected on the consolidated statement of financial position as Bank-owned life insurance.

Delanco Bancorp, Inc. 2008 Equity Incentive Plan

On May 19, 2008, the Board of Directors adopted, and the stockholders approved on August 18, 2008, the Delanco Bancorp, Inc. 2008 Equity Incentive Plan.

The Board of Directors has reserved a total of 112,141 shares of common stock for issuance upon the grant or exercise of awards made pursuant to the 2008 Plan. All the Company’s employees, officers, and directors are eligible to participate in the 2008 Plan. As of March 31, 2013, no awards have been made under the 2008 Plan.

F-31

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

16.   BOARD OF DIRECTORS’ RETIREMENT PLAN

The Bank established a Defined Benefit Retirement Plan for the Bank’s Board of Directors on January 1, 2002. This plan provides a monthly retirement benefit equal to 4% of the board fees payable as of their retirement date, multiplied by their completed years of service, up to a maximum of 80% of the final fee amount. Directors must complete at least ten years of service in order to receive a retirement benefit under the plan. Director retirement benefits are payable in equal monthly installments during the director’s lifetime, unless the director elects to receive a life annuity with the first 129 months guaranteed or a life annuity with either 50% or 100% (joint and survivor benefits) continuing for the spouse’s lifetime after the Director dies. Under these other options, the retirement benefit is reduced to account for the value of the potential additional payments.

The estimated past service liability that will be amortized from accumulated other comprehensive income into net periodic pension costs over the next fiscal year is zero.

Net pension expense was $45,032 and $40,992 for years ended March 31, 2013 and 2012, respectively. The components of net pension cost are as follows:

	Years Ended March 31,
	2013		2012
Service cost	$	8,488	$	5,044
Interest cost		20,056		20,228
Return on assets		4,804		528
Net amortization and deferral		11,684		15,192
Net periodic pension cost	$	45,032	$	40,992

The following table presents a reconciliation of the funded status of the defined benefit pension plan at March 31, 2013 and 2012:

	March 31,
	2013		2012
Accumulated benefit obligation	$	423,368	$	408,263
Projected benefit obligation		438,352		416,352
Fair value of plan assets
Unfunded projected benefit obligation		438,352		416,352

The following table presents a reconciliation of benefit obligations and plan assets:

	March 31,
	2013			2012
Change in Benefit Obligation
Projected benefit obligation at beginning of year	$	416,352		$	349,374
Service cost		8,488			5,044
Interest cost		20,056			20,228
Actuarial (gain) loss		24,587			62,757
Benefits paid		(31,131	)		(21,051	)
Benefit obligation at end of year	$	438,352		$	416,352

F-32

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

16.   BOARD OF DIRECTORS’ RETIREMENT PLAN (Continued)

	March 31,
	2013			2012
Change in Plan Assets
Fair value of Plan assets at beginning of year	$			$
Actual return on Plan assets
Employer contributions		31,131			21,051
Benefits paid		(31,131	)		(21,051	)
Fair value of Plan assets at end of year	$			$

Actuarial assumptions used in determining pension amounts are as follows:

	Years Ended March 31,
	2013			2012
Discount rate for periodic pension cost		5.00	%		6.00	%
Discount rate for benefit obligation		4.50	%		5.00	%
Rate of increase in compensation levels and social security wage base		2.00	%		2.00	%
Expected long-term rate of return on plan assets	N/A			N/A

17.   EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

In March 2007, the Company established an Employee Stock Ownership Plan (“ESOP”) covering all eligible employees as defined by the ESOP. The ESOP is a tax-qualified plan, designed to invest in the Company’s common stock, which provides employees with the opportunity to receive a funded retirement benefit based primarily on the value of the Company’s common stock. The Company accounts for its ESOP in accordance with FASB ASC 718-40-50.

To purchase the Company’s common stock, the ESOP borrowed $640,810 from the Company to purchase 64,081 shares of the Company’s common stock in the Company’s initial public offering. The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP over a period of up to 20 years. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. Compensation expense is recognized in accordance with FASB ASC Topic 718 for Compensation – Stock Compensation. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the current and all remaining scheduled future principal and interest payments.

All shares that have not been released for allocation to participants are held in a suspense account by the ESOP for future allocation as the loan is repaid. Unallocated common stock purchased by the ESOP is recorded as a reduction of stockholders’ equity at cost. As of March 31, 2013, the Company had allocated a total of 19,224 shares from the suspense account to participants. The Company recognized compensation expense related to the ESOP of $12,336 and $16,020 for the years ended March 31, 2013 and 2012, respectively. 

F-33

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

18.   EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation for the years ended March 31, 2013 and 2012:

	2013			2012
Numerator:
Net loss	$	(324,151	)	$	(493,944	)
Denominator:
Basic number of shares		1,589,868			1,586,664
Dilutive effect of options
Diluted number of shares		1,589,868			1,586,664
Loss per share:
Basic loss per share	$	(0.20	)	$	(0.31	)
Diluted loss per share	$	(0.20	)	$	(0.31	)

As of March 31, 2013, the Company did not have any outstanding stock options.

19.   FAIR VALUE MEASUREMENT

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2013 and 2012, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 Generally accepted accounting principles used in the United States establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

The three broad levels of hierarchy are as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Those assets as of March 31, 2013 which are to be measured at fair value on a recurring basis are as follows:

	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Totals
Assets:
Securities available for sale:
Federal Home Loan Bank Bonds	$	-	$	1,496,380	$	-	$	1,496,380
Federal National Mortgage Association				488,438				488,438
Mutual Fund Shares		222,200						222,200
Totals	$	222,200	$	1,984,818	$	-	$	2,207,018

F-34

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

19.   FAIR VALUE MEASUREMENT (Continued)

Those assets as of March 31, 2012 which are to be measured at fair value on a recurring basis are as follows:

	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Totals
Assets:
Securities available for sale:
Mutual Fund Shares	$	241,826	$	-	$	-	$	241,826

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans and real estate owned at fair value on a non-recurring basis.

Impaired Loans

The Company considers loans to be impaired when it becomes more likely than not that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreements. Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses.

Real Estate Owned

Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to foreclosed real estate and repossessed assets. These assets are carried at the lower of cost or fair value of the collateral, based on independent appraisals, less cost to sell and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. Thus the evaluations are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement.

Summary of Non-Recurring Fair Value Measurements

	At March 31, 2013
	Level 1		Level 2		Level 3		Total
Impaired loans	$	-	$	6,345,635	$	-	$	6,345,635
Real estate owned				2,469,800				2,469,800
Total	$	-	$	8,815,435	$	-	$	8,815,435

	At March 31, 2012
	Level 1		Level 2		Level 3		Total
Impaired loans	$	-	$	8,630,741	$	-	$	8,630,741
Real estate owned				845,669				845,669
Total	$	-	$	9,476,410	$	-	$	9,476,410

F-35

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

19.   FAIR VALUE MEASUREMENT (Continued)

The fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value.

Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

					Fair Value Measurements at March 31, 2013
	Carrying Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and cash equivalents	$	6,722,766	$	6,722,766	$	6,722,766	$	-	$	-
Investment and mortgage-backed securities held to maturity		20,137,886		20,285,670				20,285,670
Investment and mortgage-backed securities available for sale		2,217,032		2,207,018				2,207,018
Loans receivable, net		88,419,084		91,300,000						91,300,000
Accrued interest receivable		427,736		427,736		427,736
Federal Home Loan Bank stock		202,500		202,500		202,500
Bank owned life insurance		153,588		153,588		153,588
Liabilities:
Deposits – non-interest bearing		6,872,713		6,872,713		6,872,713
Deposits – interest bearing		110,161,401		111,233,000				111,233,000
Accrued interest payable		9,025		9,025		9,025
Advances from borrowers for taxes and insurance		366,604		366,604		366,604

	March 31, 2012
	Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	6,649,685	$	6,649,685
Investment and mortgage-backed securities held to maturity		17,457,498		17,606,748
Investment and mortgage-backed securities available for sale		237,096		241,826
Loans receivable, net		99,431,618		103,700,000
Accrued interest receivable		417,102		417,102
Federal Home Loan Bank stock		219,100		219,100
Bank owned life insurance		147,508		147,508
Liabilities:
Deposits – non-interest bearing		4,673,349		4,673,349
Deposits – interest bearing		116,915,542		117,530,651
Accrued interest payable		15,912		15,912
Advances from borrowers for taxes and insurance		399,920		399,920

Cash and Cash Equivalents – For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

F-36

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

19.   FAIR VALUE MEASUREMENT (Continued)

Investments and Mortgage-Backed Securities – The fair value of investment securities and mortgage-backed securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Loans Receivable – The fair value of loans is estimated based on present value using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts. Due to the significant judgment involved in evaluating credit quality, loans are classified within level 3 of the fair value hierarchy.

Accrued Interest Receivable – For accrued interest receivable, the carrying amount is a reasonable estimate of fair value.

Federal Home Loan Bank (FHLB) Stock – Although FHLB stock is an equity interest in an FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.

Bank Owned Life Insurance – The fair value of bank owned life insurance is based on the cash surrender value obtained from an independent advisor that are derivable from observable market inputs.

Deposits – The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, and NOW and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Accrued Interest Payable – For accrued interest payable, the carrying amount is a reasonable estimate of fair value.

Advances from Borrowers for Taxes and Insurance – For advances from borrowers for taxes and insurance, the carrying amount is a reasonable estimate of fair value.

Commitments to Extend Credit and Letters of Credit – The majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower.

20.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet.

Financial instruments whose contract amount represents credit risk were as follows:

	March 31,
Commitments to Extend Credit	2013		2012
Home equity lines of credit	$	4,783,000	$	4,319,000
Commercial lines of credit		1,060,000		968,000
Standby letters of credit		50,000		50,000
	$	5,893,000	$	5,337,000

F-37

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

20.   FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Standby letters of credit are conditional lending commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

The Bank has not been required to perform on any financial guarantees during the past two years. The Bank did not incur any losses on its commitments in either 2013 or 2012. 

21.   COMMITMENTS AND CONTINGENT LIABILITIES

The Bank is subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company.

 The Bank had outstanding commitment to originate loans as of March 31, 2013 as follows:

	March 31, 2013
	Fixed- Rate		Variable- Rate		Total
Construction	$	42,435	$	-	$	42,435

22.   RELATED PARTY TRANSACTIONS

The Bank obtained legal services, insurance products and website services from other entities which were affiliated with Directors of the Bank. The aggregate payment for these products and services amounted to $127,366 and $130,551, for the years ended March 31, 2013 and 2012, respectively. The Bank also recognized management fee income from a related party of $16,200 and $ -0- for the years ended March 31, 2013 and 2012, respectively.

23.   REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of Currency (OCC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

F-38

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

23.   REGULATORY CAPITAL (Continued)

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined). Management believes that, as of March 31, 2013, the Bank met all capital adequacy requirements to which it was subject.

As of March 31, 2013, the Bank exceeded all regulatory capital requirements necessary to be considered a “well capitalized” bank, but was classified as “adequately capitalized” because it was subject to a written agreement with the OCC. To remain categorized as adequately capitalized, the Bank would have to maintain minimum total risk-based, Tier I risk-based, Tier I leverage and Tangible Capital to adjusted total assets ratios as disclosed in the table below.

The Bank’s actual and required capital amounts and ratios as of March 31, 2013 and 2012 are as follows:

	Actual					For Capital Adequacy Purposes and to Be Adequately Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
As of March 31, 2013:							��
Total Risk-Based Capital (to Risk-Weighted Assets)	$	10,941,000		14.67	%	≥$	5,968,320	≥	8.0	%
Tier I Capital (to Risk-Weighted Assets)		10,007,000		13.41	%	≥	2,984,160	≥	4.0	%
Tier I Capital (to Adjusted Total Assets)		10,007,000		7.79	%	≥	5,138,360	≥	4.0	%
Tangible Capital (to Adjusted Total Assets)		10,007,000		7.79	%	≥	1,926,885	≥	1.5	%

	Actual					For Capital Adequacy Purposes and to Be Adequately Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
As of March 31, 2012:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	11,615,000		14.13	%	≥$	6,576,160	≥	8.0	%
Tier I Capital (to Risk-Weighted Assets)		10,586,000		12.88	%	≥	3,288,080	≥	4.0	%
Tier I Capital (to Adjusted Total Assets)		10,586,000		7.93	%	≥	5,342,400	≥	4.0	%
Tangible Capital (to Adjusted Total Assets)		10,586,000		7.93	%	≥	2,003,400	≥	1.5	%

F-39

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

23.   REGULATORY CAPITAL (Continued)

Federal regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the earnings of the Bank year to date plus retained earnings for the prior two fiscal years, net of any prior capital distributions. In addition, dividends paid by the Bank to the Company would be prohibited if the distribution would cause the Bank’s capital to be reduced below the applicable minimum capital requirements.

24.  REGULATORY MATTERS

The Bank is party to 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 issued by the Office of Thrift Supervision on March 17, 2010.

The Agreement requires the Bank to take the following actions:

● prepare a three-year strategic plan that establishes objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, liability structure, reduction in the volume of nonperforming assets, and product line development;

● prepare a capital plan that includes specific proposals related to the maintenance of adequate capital, identifies strategies to strengthen capital if necessary and includes detailed quarterly financial projections. If the OCC determines that the Bank has failed to submit an acceptable capital plan or fails to implement or adhere to its capital plan, then the OCC may require the Bank to develop a contingency capital plan detailing the Bank’s proposal to sell, merge or liquidate the Bank;

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

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

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

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

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

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

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

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

The written agreement does not require the Bank to maintain any specific minimum regulatory capital ratios. However, by letter dated January 2, 2013, the OCC established higher individual minimum capital requirements for the Bank. Specifically, the Bank must maintain Tier 1 capital at least equal to 8% of adjusted total assets, Tier 1 capital at least equal to 12% of risk-weighted assets, and total capital at least equal to 13% of risk-weighted assets. At March 31, 2013, the Bank’s Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk based-capital ratio were 7.79%, 13.41% and 14.67%, respectively.

F-40

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

25.   CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES

The following presents the changes in the accumulated balances for each component of other comprehensive income (loss):

	Unrealized Gains (Loss) on Securities			Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Beginning balance	$	2,838		$	(42,537	)	$	(39,699	)
Current year other comprehensive loss		(8,847	)		(28,222	)		(37,069	)
Ending balance	$	(6,009	)	$	(70,759	)	$	(76,768	)

26.   SUBSEQUENT EVENT – CONVERSION AND STOCK OFFERING

On May 28, 2013, the Company, the Bank and Delanco MHC adopted a Plan of Conversion and Reorganization (the “Plan of Conversion”) pursuant to which the Bank will reorganize from the two-tier mutual holding company structure to the stock holding company structure. Pursuant to the Plan of Conversion, (i) Delanco MHC will merge with and into the Company with the Company as surviving entity (the “MHC Merger”), (ii) the Company will merge with and into new Delanco Bancorp, Inc. (the “Holding Company”), a newly formed New Jersey corporation, with the Holding Company as the surviving entity, (iii) the Bank will become a wholly-owned subsidiary of the Holding Company, (iv) the shares of common stock of the Company held by persons other than Delanco MHC will be converted into shares of common stock of the Holding Company pursuant to an exchange ratio designed to preserve the percentage ownership interests of such persons, (v) the Holding Company will offer and sell shares of common stock to certain depositors and borrowers of the Bank and others in the manner and subject to the priorities set forth in the Plan of Conversion.

In connection with the conversion and offering, shares of the Company’s common stock currently owned by Delanco MHC will be canceled and new shares of common stock, representing the 55.0% ownership interest of Delanco MHC, will be offered for sale by the Holding Company. Concurrent with the completion of the conversion and offering, the Company’s existing public shareholders will receive shares of the Holding Company’s common stock for each share of the Company’s common stock they own at that date, based on an exchange ratio to ensure that they will own approximately the same percentage of the Holding Company’s common stock as they owned of the Company’s common stock immediately prior to the conversion and offering.

At the time of conversion, liquidation accounts shall be established in an amount equal to the percentage of the outstanding shares of the Company owned by Delanco MHC before the MHC Merger, multiplied by the Company’s total stockholders’ equity as reflected in the latest statement of financial condition contained in the final offering prospectus for the conversion, plus the value of the net assets of Delanco MHC as reflected in the latest statement of financial condition of Delanco MHC before the effective date of the conversion. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders (collectively, “eligible depositors”) who continue to maintain their deposit accounts in the Bank after the conversion. In the event of a complete liquidation of the Bank or the Bank and the Holding Company (and only in such event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. Neither the Holding Company nor the Bank may declare or pay a cash dividend if the effect thereof would cause its equity to be reduced below either the amount required for the liquidation account or the regulatory capital requirements applicable to the Bank or the Holding Company.

F-41

Delanco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2013 and 2012

26.   SUBSEQUENT EVENT – CONVERSION AND STOCK OFFERING (Continued)

The transactions contemplated by the Plan of Conversion are subject to approval by the shareholders of the Company, the members of Delanco MHC and the Board of Governors of the Federal Reserve System. Meetings of the Company’s shareholders and Delanco MHC’s members are expected to be held to approve the Plan of Conversion in the third calendar quarter of 2013. If the conversion and offering are completed, eligible conversion and offering costs will be netted against the offering proceeds. If the conversion and offering are terminated, such costs will be expensed.

F-42