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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 2011
OR

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

For the transition period from ______________ to _____________
 
Commission file number:  0-52517
 

DELANCO BANCORP, INC.
(Exact name of small business issuer as specified in its charter)

United States
36-4519533
(State or other jurisdiction of incorporation
or organization)
(I.R.S. Employer Identification No.)

615 Burlington Avenue, Delanco, New Jersey 08075
(Address of principal executive offices)
(856) 461-0611
(Issuer’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    o                No  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      [    ]
Smaller reporting company
[X ]
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
No x

As of August 10, 2011 there were 1,634,725 shares of the registrant’s common stock outstanding.

 
 

 

DELANCO BANCORP, INC.

FORM 10-Q

Index

    Page No.
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements  
     
 
Consolidated Statements of Financial Condition at
 
 
June 30, 2011 (Unaudited) and March 31, 2011
1
     
 
Consolidated Statements of Operations for the three months
 
 
ended June 30, 2011 and 2010 (Unaudited)
2
     
 
Consolidated Statements of Stockholders’ Equity for the three months
 
 
ended June 30, 2011 (Unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three months ended
 
 
June 30, 2011 and 2010 (Unaudited)
4
     
 
Notes to Unaudited Consolidated Financial Statements
 
   
6
Item 2.
Management’s Discussion and Analysis of Financial Condition
 
 
and Results of Operations
23
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
     
Item 4.
Controls and Procedures
27
     
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
27
     
Item 1A. Risk Factors
 
27
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 3.
Defaults upon Senior Securities
27
     
Item 4.
[Removed and Reserved]
27
     
Item 5.
Other Information
27
     
Item 6.
Exhibits
28
     
Signatures
   
 
 
 

 
PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements

DELANCO BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition

 
   
June 30,
2011
   
March 31,
2011
 
   
(unaudited)
       
ASSETS
           
Cash and cash equivalents
           
Cash and amounts due from banks
  $ 644,940     $ 658,449  
Interest-bearing deposits
    4,388,669       5,004,180  
Total cash and cash equivalents
    5,033,609       5,662,629  
Investment securities:
               
Securities held-to-maturity (fair value $15,452,730 and $15,680,809 at June 30, 2011 and March 31,2011, respectively)
    15,265,702       15,696,063  
Securities available-for-sale (amortized cost of $247,494 and $249,295 at June 30, 2011 and March 31, 2011, respectively)
    250,726       248,062  
Total investment securities
    15,516,428       15,944,125  
Loans, net of allowance for loan losses of $1,366,262 at June 30, 2011 (unaudited), $1,286,301 at March 31, 2011
    105,510,844       103,867,330  
Accrued interest receivable
    484,580       458,524  
Premises and equipment, net
    7,315,632       7,398,015  
Federal Home Loan Bank, at cost
    264,100       274,700  
Deferred income taxes
    737,010       747,900  
Bank-owned life insurance
    147,508       141,703  
Real estate owned
    369,300       770,639  
Other assets
    757,176       906,834  
Total assets
  $ 136,136,187     $ 136,172,399  
                 
LIABILITIES
               
Deposits
               
Non-interest bearing deposits
    4,854,098       4,161,255  
Interest bearing deposits
    116,825,464       116,681,155  
Total deposits
    121,679,562       120,842,410  
                 
Line of credit from Atlantic Central Bankers Bank
 
      1,000,000  
Advances from Federal Home Loan Bank
    1,000,000       1,100,000  
Accrued interest payable
    23,106       22,658  
Advance payments by borrowers for taxes and insurance
    424,464       394,864  
Other liabilities
    677,378       599,146  
Total liabilities
    123,804,510       123,959,078  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.01 par value, 3,000,000 shares authorized; no shares issued
 
   
 
Common stock, $.01 par value, 7,000,000 shares authorized; 1,634,725 shares issued and outstanding
  $ 16,347     $ 16,347  
Additional paid-in capital
    6,606,577       6,606,577  
Retained earnings, substantially restricted
    6,261,999       6,150,811  
Unearned common stock held by employee stock ownership plan
    (512,648 )     (512,648 )
Accumulated other comprehensive (Loss)
    (40,598 )     (47,766 )
Total stockholder’s equity
    12,331,677       12,213,321  
Total liabilities and stockholders’ equity
  $ 136,136,187     $ 136,172,399  

See Notes to the Unaudited Consolidated Financial Statements.
 
1

 
DELANCO BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
June 30,
 
   
2011
   
2010
 
INTEREST INCOME
           
Loans
    1,408,375       1,518,180  
Investment securities
    137,177       178,316  
Total interest income
    1,545,552       1,696,496  
                 
INTEREST EXPENSE
               
Interest-bearing checking accounts
    14,861       23,330  
Passbook and money market accounts
    70,319       102,533  
Certificates of deposits
    290,670       424,106  
Federal Home Loan Bank Advances
    77    
 
Total interest expense
    375,927       549,969  
                 
Net interest income
    1,169,625       1,146,527  
Provision for loan losses
    75,000       150,000  
Net interest income after provision for loan losses
    1,094,625       996,527  
                 
NONINTEREST INCOME
               
Income from bank-owned life insurance
    5,805       5,699  
Gain (loss) on sale of real estate owned
    (56,018 )     -  
Service charges
    39,069       35,429  
Rental income
    2,850    
 
Other
    4,143       2,945  
Total noninterest income
    (4,151 )     44,073  
                 
                 
NONINTEREST EXPENSE
               
Salaries and employee benefits
    400,871       409,610  
Advertising
    5,008       4,852  
Office supplies, telephone and postage
    21,920       18,989  
Loan expense
    5,382       289  
Net occupancy expense
    168,478       165,749  
Federal insurance premiums
    98,924       72,684  
Data processing expenses
    52,651       32,119  
ATM expenses
    5,230       4,153  
Bank charges and fees
    17,778       24,746  
Insurance and surety bond premium
    20,928       14,112  
Dues and subscriptions
    6,623       7,596  
Professional fees
    59,227       62,167  
Real estate owned expense…
    8,982       4,453  
Other
    28,292       35,569  
Total noninterest expense
    900,294       857,088  
                 
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
    190,180       183,512  
                 
Income taxes
    78,992       51,736  
                 
NET INCOME (LOSS)
  $ 111,188     $ 131,776  
                 
                 
INCOME (LOSS) PER COMMON SHARE
  $ 0.07     $ 0.08  
 
See Notes to the Unaudited Consolidated Financial Statements.

 
2

 
DELANCO BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
 
   
Common Stock
   
Additional
         
Unearned
Employee Stock
   
Accumulated
Other-
   
Total
 
   
Shares
   
Amount
   
Paid-in
Capital
   
Retained
Earnings
   
Ownership
Plan
   
Comprehensive
Income (Loss)
   
Stockholders’
Equity
 
                                           
Balance at March 31, 2011
    1,634,725     $ 16,347     $ 6,606,577     $ 6,150,811     $ (512,648 )   $ (47,766 )   $ 12,213,321  
Comprehensive income
                                                       
Net loss
                                                       
Other comprehensive income, net of tax:
                            111,188                       111,188  
Change in unrealized gain on securities available-for-sale, net of deferred income taxes of $(1,292)
                                            7,168       7,168  
                                                         
Total comprehensive income
                            111,188                       118,356  
                                                         
Balance at June 30, 2011
    1,634,725     $ 16,347     $ 6,606,577     $ 6,261,999     $ (512,648 )   $ (40,598 )   $ 12,331,677  
 
See Notes to the Unaudited Consolidated Financial Statements.

 
3

 

DELANCO BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Cash flow from operating activities
           
Net Income (Loss)
  $ 111,188     $ 131,776  
Adjustments to reconcile net income (loss) to net cash provided by (uses in) operating activities:
               
Deferred income taxes
    13,593       51,346  
Depreciation
    85,983       85,977  
Discount accretion net of premium amortization
    (304 )     (3,645 )
Provision for loan losses
    75,000       150,000  
Income from bank owned life insurance
    (5,805 )     (5,699 )
Loss on sale of real estate owned
    56,018    
 
                 
Changes in operating assets and liabilities
               
(Increase) decrease in:
               
Accrued interest receivable
    (26,056 )     20,776  
Other assets
    149,658       114,318  
Prepaid income taxes
 
      (1,690 )
Increase (decrease) in:
               
Accrued interest payable
    449       (6,610 )
Other liabilities
    78,233       43,545  
Net cash provided by operating activities
  $ 537,957     $ 580,094  
                 
Cash flows from investing activities
               
(Purchases),sales of securities available-for-sale
    1,800       3,792  
Purchases of securities held-to-maturity
 
      (4,000,000 )
Proceeds from maturities and principal repayments of securities held-to-maturity
    430,665       5,610,705  
Sales (Purchase) of investment required by law – stock in Federal Home Loan Bank
    10,600       (18,500 )
Net increase in loans
    (1,718,515 )     1,097,586  
Purchases of premises and equipment
    (3,600 )  
 
Proceeds from sale of real estate owned
    345,321    
 
Net cash provided (used in) investing activities
  $ (933,729 )   $ 2,693,583  
                 
Cash flows from financing activities
               
Net increase (decrease) in deposits
    837,152       (2,034,309 )
Net increase in advance payments by borrowers for taxes and insurance
    29,600       (10,053 )
Increase (decrease) in advances
    (1,100,000 )  
 
                 
Net cash provided by (used in) financing activities
  $ (233,248 )   $ (2,044,362 )

(continued)

 
4

 
   
Three Months Ended
June 30,
 
   
2011
   
2010
 
             
Net increase (decrease) in cash and cash equivalents
    (629,020 )   $ 1,229,315  
                 
Cash and cash equivalents, beginning of the period
    5,662,629       4,883,669  
                 
Cash and cash equivalents, end of period
    5,033,609     $ 6,112,984  
                 
Supplemental Disclosures:
               
                 
Cash paid during the period for interest
  $ 375,478     $ 556,579  
                 
Cash paid during the period for income taxes
    1,750       2,080  
                 
Loans transferred to foreclosed real estate during the period
 
      187,253  
                 
Total increase in unrealized gain on securities available-for-sale
  $ 768     $ 948  
 
See Notes to the Unaudited Consolidated Financial Statements.

 
5

 
DELANCO BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements
June 30, 2011

  (1)           Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP).  However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included.  Such adjustments were of a normal recurring nature.  The results of operations for the three month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.  For additional information, refer to the consolidated financial statements and footnotes thereto of Delanco Bancorp, Inc. (the “Company”) included in the Company’s annual report on Form 10-K for the year ended March 31, 2011.

(2)           Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for losses on loans and the evaluation of deferred taxes.

(3)           Deferred Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.

The calculation of deferred taxes for GAAP capital differs from the calculation of deferred taxes for regulatory capital. For regulatory capital, deferred tax assets that are dependent upon future taxable income for realization are limited to the lesser of either the amount of deferred tax assets that the institution expects to realize within one year of the calendar quarter-end date, or 10% of Delanco Federal Savings Bank’s (the “Bank”) Tier I capital. As a result of this variance, our Tier I regulatory capital ratio is lower than our GAAP capital ratio by 30 basis points.
 
(4)          Income Taxes

The Bank adopted the provisions of Financial ASC Topic 740 “Accounting for Uncertainty in Income Taxes” on April 1, 2007. ASC Topic 740 prescribes a threshold and measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Bank has determined that there are no significant uncertain tax positions requiring recognition in its financial statements.   
 
 
6

 
Federal tax years 2007 through 2010 remain subject to examination as of June 30, 2011, while tax years 2007 through 2010 remain subject to examination by state taxing jurisdictions. In the event the Bank is assessed for interest and/or penalties by taxing authorities, such assessed amounts will be classified in the financial statements as income tax expense.

(5)           Earnings Per Share

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

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

The calculated basic and dilutive EPS are as follows:

   
Three Months Ended
June 30,
 
   
2011
   
2010
 
Numerator
  $ 111,188     $ 131,776  
Denominators:
               
Basic shares outstanding
    1,583,460       1,580,256  
Effect of dilutive securities
 
   
 
Dilutive shares outstanding
    1,583,460       1,580,256  
Earnings per share:
               
Basic
  $ .07     $ .08  
Dilutive
  $ .07     $ .08  
 
(6)Cease and Desist Order

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

The Order requires the Bank to take the following actions:

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

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

 
prepare a problem asset plan that will include strategies, targets and timeframes to reduce the Bank’s level of criticized assets and nonperforming loans;
 
 
7

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

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

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

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

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

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

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

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

The Bank continues to work with its borrowers where possible and is pursuing legal action where the ability to work with the borrower does not exist.  As of June 30, 2011, the Bank has entered into formal forbearance agreements with ten relationships totaling $4.1 million that require current payments while the borrowers restructure their finances.

At June 30, 2011, the Bank’s tier 1 (core) capital to adjusted total assets ratio was 8.76% and its total risk-based capital to risk-weighted assets ratio was 14.67%. At June 30, 2011, the Bank exceeded all of its regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

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

 
8

 
(7)           Recent Accounting Pronouncements

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

In July 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Codification Update for disclosures about the credit quality of financing receivables and the allowance for credit losses. This update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposure and evaluating the adequacy of its allowance for credit losses. This update requires an entity to disclose the nature of credit risk inherent in the entity’s portfolio of financing receivables and how that risk is analyzed and assessed in arriving at the allowance for credit losses. The changes and reason for the changes in the allowance for credit losses should also be disclosed. This update also requires an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. In addition, the amendments in this update require an entity to disclose credit quality indicators, past due information, and modifications of its financial receivables. These improvements will help financial statement users assess an entity’s credit risk exposures and its allowance for credit losses. This update is effective for interim and annual reporting periods ending December 15, 2010. The required disclosures have been adopted by the Company for the interim period beginning December 15, 2010.

In January 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Codification Update for improving disclosures about fair value measurements. This update requires an entity to disclose, and provide the reasons for, all transfers of assets and liabilities between the Level 1 and 2 fair value categories. It also clarifies that entities should provide fair value measurement disclosures for classes of assets and liabilities which are subsets of line items within the balance sheet, if necessary. In addition, the update clarifies an entity provide disclosures about the fair value techniques and inputs for assets and liabilities classified within Level 2 or 3 categories.  This update also requires entities to reconcile changes in Level 3 assets and liabilities by separately providing information about Level 3 purchases, sales, issuances and settlements on a gross basis. The majority of the new requirements are effective for interim and annual reporting periods for years beginning on or after December 15, 2009. The disclosures regarding reconciling changes in Level 3 assets and liabilities are effective for fiscal years beginning on or after December 15, 2010. The adoption of this update of this update did not materially impact the company’s current fair market value measurement disclosure.

(8)           Fair Value of Financial Instruments

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

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

 
Level 1
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets, quoted prices in markets that are not considered to be active, and observable inputs other than quoted prices such as interest rates.
 
 
Level 3
Level 3 inputs are unobservable inputs.

 
9

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

   
Fair Value Measurements at Reporting Date Using
   
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Other Unobservable Inputs
(Level 3)
June 30, 2011
           
Available-for-sale securities
  $ 251  
NONE
 
NONE
               
March 31, 2011
             
Available-for-sale securities
  $ 248  
NONE
 
NONE

Assets and Liabilities on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2011 and March 31, 2011 are as follows (dollars in thousands):

   
Fair Value Measurements at Reporting Date Using
 
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant Other
Unobservable
Inputs
(Level 3)
 
June 30, 2011
                 
Impaired loans
$       $ 5,777     $    
Real estate owned
          369          
Total
$
NONE
    $ 6,146     $
NONE
 
                       
March 31, 2011
                     
Impaired loans
$       $ 4,956     $    
Real estate owned
          771          
Total
$
NONE
    $ 5,727     $
NONE
 
 
The fair value of impaired loans and real estate owned with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Off-balance sheet instruments

Off-balance sheet instruments are primarily comprised of loan commitments and unfunded lines of credit which are generally priced at market rate at the time of funding.  Therefore, these instruments have nominal value prior to funding.

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

 
10

 
As required by ASC Topic 825-10-65, the estimated fair value of financial instruments at June 30, 2011 and March 31, 2011 was as follows:

   
June 30, 2011
   
March 31, 2011
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
(Dollars in Thousands)
                       
                         
Financial Assets:
                       
Cash and cash equivalents
  $ 5,034     $ 5,034     $ 5,663     $ 5,663  
Investment securities
    15,513       15,703       15,945       15,929  
Loans – net
    105,511       109,288       103,867       107,877  
FHLB stock
    264       264       275       275  
Accrued interest receivable
    485       485       459       459  
Real estate owned
    369       369       771       771  
Total financial assets
  $ 127,176     $ 131,143     $ 126,979     $ 130,973  
                                 
Financial Liabilities:
                               
Deposits
    121,680       122,065       120,842       122,053  
Line of credit from ACBB
    -       -       1,000       1,000  
Advances from FHLB
    1,000       1,000       1,100       1,100  
Advance payments by borrowers for taxes and insurance
    424       424       395       395  
Accrued interest payable
    23       23       23       23  
Total financial liabilities
  $ 123,127     $ 123,512     $ 123,360     $ 124,571  


   
June 30, 2011
   
March 31, 2011
 
   
Contract
Value
   
Estimated
Fair Value
   
Contract
Value
   
Estimated
Fair Value
 
Off-balance sheet instruments
                       
Commitments to extend credit
  $ 5,567     $ 5,567     $ 5,706     $ 5,706  

(9)
Loans
 
The Bank monitors and assesses the credit risk of its loan portfolio using the classes set forth below.  These classes also represent the segments by which the Bank monitors the performance of its loan portfolio and estimates its allowance for loan losses.

Residential real estate loans consist of loans secured by one to four family residences located in the Bank’s market area.  The Bank has originated one to four family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property without requiring mortgage insurance.  A mortgage loan originated by the Bank, for owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years.  Non-owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years.  Adjustable rate loan terms limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan based on the type of loan.

Commercial real estate loans are generally originated in amounts up to the lower of 80% of the appraised value or cost of the property and are secured by improved property such as multi-family dwelling units, office buildings, retail stores, warehouses, church buildings and other non-residential buildings, most of which are located in the Bank’s market area.  Commercial real estate loans are generally made with fixed interest rates which mature or reprice in 5 to 7 years with principal amortization of up to 25 years.

 
11

 
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 June 30, 2011 and March 31, 2011 are summarized as follows (dollars in thousands):

   
June 30,
   
March 31,
 
   
2011
   
2011
 
             
Residential (one-to four-family) real estate
  $ 64,870     $ 62,875  
Multi-family and commercial real estate
    21,763       21,866  
Commercial
    1,535       1,736  
Home equity
    17,441       17,347  
Consumer
    958       1,026  
Construction
    376       374  
Total loans
    106,943       105,224  
Net deferred loan origination fees
    (66 )     (71 )
Allowance for loan losses
    (1,366 )     (1,286 )
      (1,432 )     (1,357 )
Loans, net
  $ 105,511     $ 103,867  
 
The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds.  At June 30, 2011, the loans-to-one-borrower limitation was $1.81 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 June 30, 2011, 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:

 
12

 
 
a.
Loans that present an acceptable degree of risk associated with the financing being considered as measured against earnings and balance sheet trends, industry averages, etc.  Actual and projected indicators and market conditions provide satisfactory evidence that the credit will perform as agreed.

 
b.
Loans to borrowers that display acceptable financial conditions and operating results.  Debt service capacity is demonstrated and future prospects are considered good.

 
c.
Loans to borrowers where a comfort level is achieved by the strength of the cash flows from the business or project and the strength and quantity of the collateral or security position (i.e.; receivables, inventory and other readily marketable securities) as supported by a current valuation and/or the strong capabilities of a guarantor.
 
Special Mention – Loans on which the credit risk requires more than ordinary attention by the Loan Officer.  This may be the result of some erosion in the borrower’s financial condition, the economics of the industry, the capability of management, or changes in the original transaction.  Loans which are currently sound yet exhibit potentially unacceptable credit risk or deteriorating long term prospects, will receive this classification.  Loans which deviate from loan policy or regulations will not generally be classified in this category, but will be separately reported as an area of concern.

Classified – Classified loans include those considered by the Bank to be substandard, doubtful or loss.

An asset is considered “substandard” if it involves more than an acceptable level of risk due to a deteriorating financial condition, unfavorable history of the borrower, inadequate payment capacity, insufficient security or other negative factors within the industry, market or management.  Substandard loans have clearly defined weaknesses which can jeopardize the timely payment of the loan.

Assets classified as “doubtful” exhibit all of the weaknesses defined under the substandard category but with enough risk to present a high probability of some principal loss on the loan, although not yet fully ascertainable in amount.

Assets classified as “loss” are those considered uncollectible or of little value, even though a collection effort may continue after the classification and potential charge-off.

Non-Performing Loans

Non-performing loans consist of non-accrual loans (loans on which the accrual of interest has ceased), loans over ninety days delinquent and still accruing interest, renegotiated loans and impaired loans.  Loans are generally placed on non-accrual status if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more, unless the collateral is considered sufficient to cover principal and interest and the loan is in the process of collection.

 
13

 
The following table represents loans by credit quality indicator at June 30, 2011 (dollars in thousands):

   
Pass
   
Special
Mention Loans
   
Classified
Loans
   
Non-
Performing Loans
   
Total
 
Residential real estate
  $ 62,587     $ -     $ -     $ 2,283     $ 64,870  
Multi-family and commercial real estate
    14,129       2,023       3,012       2,599       21,763  
Commercial
    1,197       258       34       46       1,535  
Home equity
    16,013       -       -       1,428       17,441  
Consumer
    958       -       -       -       958  
Construction
    376       -       -       -       376  
    $ 95,260     $ 2,281     $ 3,046     $ 6,356     $ 106,943  
 
The following table represents past-due loans as of June 30, 2011 (dollars in thousands):

   
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
  $ 916     $ -     $ 916     $ 61,732   $ 2,222     $ 64,870  
Multi-family and commercial real estate
    1,765       -       1,765       17,327     2,598       21,690  
Commercial
    299       -       299       1,263     46       1,608  
Home Equity
    175       -       175       15,838     1,428       17,441  
Consumer
    11       -       11       947     -       958  
Construction
    -       -       -       376     -       376  
                                               
Total Loans
  $ 3,166     $ -     $ 3,166     $ 97,483   $ 6,294     $ 106,943  
                                               
Percentage of Total Loans
    2.96 %     N/A %     2.96 %     91.15 %   5.89 %     100.0 %
 
Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent.  The recognition of interest income on impaired loans is the same for non-accrual loans discussed above.  At June 30, 2011, the Bank had 26 loan relationships totaling $6.3 million in non-accrual loans as compared to 23 relationships totaling $5.5 million at March 31, 2011.  At June 30, 2011, the Bank had 26 impaired loan relationships totaling $6.2 million (included within the non-accrual loans discussed above) in which $2.9 million in impaired loans had a related allowance for credit losses of $579 thousand and $3.2 million in impaired loans in which there is no related allowance for credit losses.  The average balance of impaired loans totaled $6.4 million for the three months ended June 30, 2011 as compared to $5.4 million for the year ended March 31, 2011, and interest income recorded on impaired loans for the three months ended June 30, 2011 totaled $19 thousand as compared to $154 thousand for the year ended March 31, 2011.

 
14

 
 
The following table represents data on impaired loans at June 30, 2011 and March 31, 2011 (dollars in thousands):

   
June 30, 2011
   
March 31, 2011
 
Impaired loans for which a valuation allowance has been provided
  $ 2,948     $ 2,882  
Impaired loans for which no valuation allowance has been provided     3,408       2,576  
Total loans determined to be impaired
  $ 6,356     $ 5,458  
Allowance for loans losses related to impaired loans
  $ 579     $ 502  
Average recorded investment in impaired loans
  $ 6,355     $ 5,445  
Cash basis interest income recognized on impaired Loans
  $ 19     $ 154  

The following table presents impaired loans by portfolio class at June 30, 2011 (dollars in thousands):
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Valuation Allowance
   
Average Recorded Investment
   
Interest Income Recognized While On Impaired Status
 
Impaired loans with a valuation allowance:
                             
Residential real estate
  $ 1,060     $ 1,060     $ 211     $ 1,058     $ -  
Multi-family and commercial real estate
    1,439       1,439       294       1,439       -  
Commercial                                
    46       46       46       46       -  
Home equity                                
    403       403       28       403       -  
Consumer                                
    -       -       -       -       -  
Construction                                
    -       -       -       -       -  
                                         
Subtotal                                
  $ 2,948     $ 2,948     $ 579     $ 2,946     $ -  
 
 
15

 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Valuation Allowance
   
Average Recorded Investment
   
Interest Income Recognized While On Impaired Statues
 
Impaired loans with no valuation allowance:
                             
Residential real estate                                       
  $ 1,223     $ 1,223     $ -     $ 1,223     $ 5  
Multi-family and commercial real estate                           
    1,160       1,160       -       1,160       9  
Commercial                                       
    -       -       -       -       -  
Home equity                                       
    1,025       1,025       -       1,025       5  
Consumer                                       
    -       -       -       -       -  
Construction                                       
    -       -       -       -       -  
                                         
Subtotal                                       
  $ 3,408     $ 3,408     $ -     $ 3,408     $ 19  

   
June 30, 2011
   
March 31, 2011
 
Non-accrual loans:
           
Residential real estate
    2,283       1,779  
Multi-family and commercial real estate
    2,599       2,374  
Commercial
    46       46  
Consumer
    -       11  
Home Equity
    1,428       1,194  
Construction
    -       -  
Total non-accrual loans
    6,356       5,404  
                 
Impaired loans
    2,361       2,438  
Total non-performing loans
    8,717       7,842  
Real estate owned
    369       771  
Total non-performing assets
    9,086     $ 8,613  
                 
Non-performing loans as a percentage of loans
    8.12 %     7.24 %
Non-performing assets as a percentage of loans and real estate owned
    8.47 %     8.19 %
Non-performing assets as percentage of total assets
    6.67 %     6.33 %
 
During the three months ended June 30, 2011, the Bank experienced an $952 thousand net increase in non-accrual loans.  This change reflects the downgrading of five loan relationships to non-accrual status totaling $900 thousand during the three months ended June 30, 2011.  The downgraded loans consisted of four relationships representing residential mortgage and home equity loans totaling $720 thousand, two commercial relationships representing two loans totaling $225 thousand, partially offset by the return of one loan relationship consisting of one loan totaling $3 thousand to an accruing basis and by total charge offs of one loan relationship representing one loan in the amount of $8 thousand

 
16

 

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

   
June 30,
2011
   
March 31,
2011
 
             
Balance at beginning of period
  $ 1,286     $ 998  
Provision:
               
Commercial
    -       21  
Commercial real estate
    92       (2 )
Residential real estate
    (9 )     413  
Consumer
    (8 )     8  
                 
Total Provision
  $ 75     $ 440  

   
June 30,
2011
   
March 31,
2011
 
Charge-Offs:
           
Commercial
    -       143  
Residential real estate
    -       31  
Consumer
    8       32  
Recoveries
    (13 )     (54 )
Total Net Charge-Offs
    (5 )     152  
Balance at end of period
  $ 1,366     $ 1,286  
Period-end loans outstanding
  $ 106,943     $ 105,225  
Average loans outstanding
  $ 105,240     $ 105,400  
Allowance as a percentage of period-end loans
    1.28 %     1.22 %
Net charge-offs as a percentage of average loans
    0.0 %     0.15 %

Additional details for changes in the allowance for loan by loan portfolio as of June 30, 2011 are as follows (dollars in thousands):

 
Allowance for Loan Losses

   
Commercial
   
Commercial Real Estate
   
Residential Real Estate
   
Consumer
   
Total
 
Balance, beginning of year
  $ 70     $ 596     $ 508     $ 112     $ 1,286  
Loan charge-offs
                            (8 )     (8 )
Recoveries
    13                               13  
Provision for loan losses
            92       (9 )     (8 )     75  
                                         
Balance, end of year
  $ 83     $ 688     $ 499     $ 96     $ 1,366  
 
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 June 30, 2011, the Bank maintained an allowance for loan loss ratio of 1.28% to quarter end loans outstanding.  On a linked basis, non-performing assets have increased by $473 thousand over their stated levels at March 31, 2011 representing a non-performing asset to total asset ratio of 6.67% at June 30, 2011 as compared to a non-performing asset to total asset ratio of 6.33% at March 31, 2011.

 
17

 
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 quarter ending June 30, 2011, the Bank experienced one charge-off relating to one loan relationship totaling $8 thousand as compared to charge-offs of 11 loans representing 11 relationships totaling $206 thousand for the year ended March 31, 2011.
 
 
18

 
(10)           Investment Securities

Investment securities have been classified according to management’s intent.  The amortized cost of securities and their approximate fair values as of March 31, 2011 and 2011 are as follows:

    Held-to-Maturity
June 30, 2011
       
   
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
(Dollars in Thousands)
                       
                         
                         
Federal Home Loan Bank Bonds
  $ 4,746     $ 14     $ (61 )   $ 4,699  
Federal Farm Credit Bonds
    1,000       -       (3 )     997  
Federal Home Loan Mortgage
                               
Corporation Bonds
    1,000       -       (2 )     998  
Federal National Mortgage Association
    2,000       12       (9 )     2,003  
Municipal Bond
    144       -       (- )     144  
                                 
      8,890       26       (75 )     8,841  
Mortgage-Backed Securities:
                               
                                 
Federal Home Loan Mortgage Corporation
    1,931       100       (10 )     2,021  
Federal National Mortgage Association
    4,061       144       (10 )     4,195  
Government National Mortgage Corporation
    383       13       (- )     396  
                                 
      6,375       257       (20 )     6,612  
                                 
Total
  $ 15,265     $ 283     $ (95 )   $ 15,453  


   
    Held-to-Maturity
March 31, 2011
       
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
(Dollars in Thousands)
                       
                         
                         
Federal Home Loan Bank Bonds
  $ 4,747     $ -     $ (163 )   $ 4,584  
Federal Farm Credit Bonds
    1,000       -       (22 )     978  
Federal Home Loan Mortgage
                               
Corporation Bonds
    999       -       (14 )     985  
Federal National Mortgage Association
    2,000       3       (44 )     1,959  
Municipal Bond
    144       -       -       144  
                                 
      8,890       3       (243 )     8,650  
Mortgage-Backed Securities:                        
                         
Federal Home Loan Mortgage Corporation
    2,028       72       (- )     2,100  
Federal National Mortgage Association
    4,358       139       (- )     4,497  
Government National Mortgage Corporation
    420       14       (- )     434  
                                 
      6,806       225       (- )     7,031  
                                 
Total
  $ 15,696     $ 228     $ (243 )   $ 15,681  
 
 
19

 
    Available for Sale        
    June 30, 2011        
   
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Mutual Fund Shares
  $ 247     $ 4     $ (- )   $ 251  
 
 
    Available for Sale        
    March 31, 2011        
   
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Mutual Fund Shares
  $ 249     $ -     $ (1 )   $ 248  

The following is a summary of maturities of securities held-to-maturity and available-for-sale as of June 30, 2011 and March 31, 2011:

June 30, 2011
 
   
   
Held to Maturity
   
Available for Sale
 
(Dollars in Thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
Amounts maturing in:
                       
                         
One year or less
  $ 1,834     $ 1,834       -       -  
After one year through five years
    1,874       1,920       -       -  
After five years through ten years
    6,753       6,735       -       -  
After ten years
    4,804       4,964       -       -  
Equity securities
    -       -       247       251  
                                 
      15,265       15,453       247       251  
 
 
 
20

 
March 31, 2011
 
   
   
Held to Maturity
   
Available for Sale
 
(Dollars in Thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
Amounts maturing in:
                       
                         
One year or less
  $ 2,020     $ 2,035       -       -  
After one year through five years
    1,880       1,899       -       -  
After five years through ten years
    6,755       6,606       -       -  
After ten years
    5,041       5,141       -       -  
Equity securities
    -       -       249       248  
                                 
      15,696       15,681       249       248  

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.

Information pertaining to securities with gross unrealized losses at June 30, 2011 and March 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
    June 30, 2011              
                                     
     
Less Than 12 Months
     
12 Months or Greater
     
Total
 
   
Fair Value
   
Gross Unrealized Losses
   
Fair Value
   
Gross Unrealized Losses
   
Fair Value
   
Gross Unrealized Losses
 
                                     
(Dollars in Thousands)
                                   
                                     
Federal Home Loan Bank Bonds
  $ 2,685     $ (61 )     -       -     $ 2,685     $ (61 )
Federal Farm Credit Bonds
    497       (3 )     -       -       497       (3 )
Federal Home Loan Mortgage Corporation Bonds
    497       (2 )     -       -       497       (2 )
Federal National Mortgage Association
    991       (9 )     -       -       991       (9 )
                                                 
      4,670       (75 )     -       -       4,670       (75 )
                                                 
Mortgage-Backed Securities:
                                               
                                                 
Federal Home Loan Mortgage Corporation
    489       (10 )     -       -       489       (10 )
Federal National Mortgage Association
    2,117       (10 )     -       -       2,117       (10 )
                                                 
      2,606       (20 )     -       -       2,606       (20 )
                                                 
Total
  $ 7,276     $ ( 95 )   $ -     $ ( - )   $ 7,276     $ ( 95 )

 
21

 
 
    March 31, 2011              
                                     
   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
   
Fair Value
   
Gross Unrealized Losses
   
Fair Value
   
Gross Unrealized Losses
   
Fair Value
   
Gross Unrealized Losses
 
                                     
(Dollars in Thousands)
                                   
                                     
Federal Home Loan Bank Bonds
  $ 4,582     $ (163 )     -       -     $ 4,582     $ (163 )
Federal Farm Credit Bonds
    978       (22 )     -       -       978       (22 )
Federal Home Loan Mortgage Corporation Bonds
    985       (15 )     -       -       985       (15 )
Federal National Mortgage Association
    1,457       (43 )     -       -       1,457       (43 )
                                                 
      8,002       (243 )     -       -       8,002       (243 )
Mortgage-Backed Securities:
                                               
                                                 
Federal Home Loan Mortgage Corporation
    -       -       -       -       -       -  
Federal National Mortgage Association
    146       -       -       -       146       -  
Government National Mortgage Corporation
    -       -       -       -       -       -  
                                                 
      146       -       -       -       146       -  
                                                 
Mutual Fund Shares
    -       -       248     $ ( 1 )     248     $ ( 1 )
                                                 
Total
  $ 8,148     $ ( 243 )   $ 248     $ ( 1 )   $ 8,396     $ ( 244 )

 
22

 
Management evaluates securities for other-than-temporary impairment 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, 2011, the twenty debt securities with unrealized losses have depreciated 3.0% from the Bank’s amortized cost basis.  These unrealized losses relate principally to current 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.

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

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended June 30, 2011 and 2010 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

Forward-Looking Statements

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

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

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

General

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

 
23

 
Balance Sheet Analysis

Overview.  Total assets at June 30, 2011 were $136.1 million, a decrease of $36 thousand, or 0%, from total assets of $136.2 million at March 31, 2011.  Total liabilities decreased by $156 thousand or 0.1% from $124.0 million at March 31, 2011 to $123.8 million at June 30, 2011.  Total stockholders’ equity of $12.3 million reflected an increase of $118 thousand from $12.2 million at March 31, 2011.

Loans.  At June 30, 2011, total loans, net, were $105.5 million, or 77.5% of total assets.  Overall loans increased by $1.6 million due primarily to new residential mortgage originations.  Commercial and multi-family real estate loans decreased by $104 thousand, commercial loans decreased by $201 thousand and residential real estate loans increased by $2.0 million.

Non-performing Loans. Total nonperforming loans at June 30, 2011 increased $473 thousand from March 31, 2011 primarily due to an increase in non-performing residential loans.  The majority of the increase was related to one relationship with two loans that became past due as a result of the death of one of the borrowers.  It is expected that the loans will be brought current during the following quarter.

Securities.  The investment securities portfolio was $15.5 million, or 11.4 % of total assets, at June 30, 2011.  At that date, 41.8 % of the investment portfolio was invested in mortgage-backed securities, while the remainder was invested primarily in U.S. Government agency and other debt securities.  Investment securities decreased $400 thousand compared to March 31, 2011. The decrease was primarily due to mortgage backed securities pay down of principal.
 
Deposits.  Our deposit base is comprised of demand deposits, money market and passbook accounts and time deposits.  We consider demand deposits and money market and passbook accounts to be core deposits.  We do not have any brokered deposits. At June 30, 2011, core deposits were 48.6 % of total deposits.  Overall deposits increased by $800 thousand as the Bank made a conscious effort to attract core deposits and reduce its reliance of high costing time deposits.  Core deposits grew for the quarter by $2.3 million while time deposits decreased by $1.5 million.

Borrowings.  In recent periods, we have occasionally used short-term borrowings as an additional source of liquidity.  At June 30, 2011, we had $1,000,000 in advances outstanding.

Results of Operations for the Three Months Ended June 30, 2011 and 2010

Financial Highlights. Net income for the three months ended June 30, 2011, was $111 thousand compared to a net income of $132 thousand for the three months ended June 30, 2010. The decrease in net income was primarily the result of a loss on the sale of real estate owned and an increase in two expense categories, Federal Deposit insurance and data processing costs.  These were partially offset by a decrease in loan loss provision

Net Interest Income.

 Net interest income increased $23 thousand to $1,170,000 for the three months ended June 30, 2011 from $1,147,000 for the three months ended June 30, 2010 driven by the decline of interest paid on deposits. Both the 19 basis point increase in our interest rate spread and the 19 basis point increase in our net interest margin reflect the improvement the Bank has made in reducing its cost of funds.  The rates earned on assets declined, resulting in a 9% decrease in total interest income as compared to a 31.6% decrease in total interest expense.

Average loans in the three months ended June 30, 2011 decreased $ 1.8 million, or 1.65%, compared with the same period in 2010, driven by payoffs of higher yielding loans. Average investment securities in the three months ended June 30, 2011 decreased $800 thousand, or 4.9%, compared to the same period in 2010. The decrease in the investment portfolio was due to the pay down in mortgage-backed securities. Declining interest rates decreased the average yield on earning assets to 5% for the three months ended June 30, 2011, compared with 5.32% for the same period in 2010.

 
24

 
 Average interest-bearing deposits in the three months ended June 30, 2011 decreased $5.7 million, or 4.6 %, compared with the same period in 2010. Declining interest rates decreased the average cost of deposits to 1.29%, compared with 1.80% for the same period in 2010.

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 $75 thousand in the three months ended June 30, 2011 compared to $150 thousand in the three months ended June 30, 2010.  We had $8 thousand in charge-offs in the three months ended June 30, 2011, compared to $26 thousand in charge-offs in the same prior year period.

Non-Interest Income.  Noninterest income decreased in the three months ended June 30, 2011 compared to the same period in the prior year, due to the loss on sale of real estate owned partially offset by the increase in rental income.
 
Non-Interest Expenses.  Noninterest expenses increased in the three months ended June 30, 2011 by $43 thousand over the same period in the prior year due to increased FDIC premiums and data processing costs.
 
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 June 30, 2011, cash and cash equivalents totaled $5.0 million.  At June 30, 2011, we had $1.0 million in outstanding borrowings and had arrangements to borrow up to an additional $6.4 million from the Federal Home Loan Bank of New York and $1.0 million from Atlantic Central Bankers Bank.

           At June 30, 2011, substantially all of our investment securities were classified as held to maturity.  We have classified our investments in this manner, rather than as available for sale, because they were purchased primarily to provide a source of income and not to provide liquidity.   We anticipate that a portion of future investments will be classified as available for sale in order to give us greater flexibility in the management of our investment portfolio.

           A significant use of our liquidity is the funding of loan originations.  At June 30, 2011, we had $260 thousand in loan commitments outstanding.  In addition, we had $4.4 million in unused lines of credit.  Historically, many of the lines of credit expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements.  Another significant use of our liquidity is the funding of deposit withdrawals.  Certificates of deposit due within one year of June 30, 2011 totaled $39.1 million, or 62.3% of certificates of deposit.  The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2011.  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.

 
25

 
           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 and apart from the Bank and must provide for its own liquidity. As of June 30, 2011, the Company had $270 thousand in cash and cash equivalents compared to $260 thousand as of June 30, 2010.  Substantially all of the Company’s cash and cash equivalents were obtained from proceeds it retained from the Bank’s mutual-to-stock conversion completed in March 2007.  In addition to its operating expenses, 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. The Company believes that such restriction will not have an impact on the Company’s ability to meet its ongoing cash obligations.
 
           Capital Management.  We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At June 30, 2011, we exceeded all of our regulatory capital requirements.  We are considered “well capitalized” under regulatory guidelines.

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

           For the quarter ended June 30, 2011, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable as the Company is a smaller reporting company.

 
26

 
Item 4.  Controls and Procedures

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

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

Other than as set forth below, there are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011, which could materially and adversely affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

Not Applicable.

Item 3.  Defaults upon Senior Securities

Not Applicable.

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

[Removed and Reserved].

Item 5.  Other Information

None.

 
27

 
 
Item 6.  Exhibits
 
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 
32.0
Section 1350 Certification

 
 
28

 
SIGNATURES

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

 
  DELANCO BANCORP, INC.  
       
       
       
       
Dated: August 15, 2011
By:
/s/  James E. Igo   
    James E. Igo  
    Chairman, President and Chief Executive Officer  
       
       
Dated: August 15, 2011 
By:
/s/ Eva Modi   
    Eva Modi  
    Chief Financial Officer  
       
                                                                      
29