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 September 30, 2012

OR

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

For the transition period from  to 

Commission file number:  0-52517

DELANCO BANCORP, INC.

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

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

615 Burlington Avenue, Delanco, New Jersey 08075

(Address of principal executive offices)

(856) 461-0611

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 x            No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[    ]	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 November 9, 2012 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 September 30, 2012 (Unaudited) and March 31, 2012		1
	Consolidated Statements of Operations for the three and six months ended September 30, 2012 and 2011 (Unaudited)		2
	Consolidated Statements of Comprehensive Income for the six months ended September 30, 2012 and 2011(Unaudited)		3
	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended September 30, 2012 (Unaudited)		4
	Consolidated Statements of Cash Flows for the six months ended September 30, 2012 and 2011 (Unaudited)		5
	Notes to Unaudited Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		18
Item 1A.	Risk Factors		18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3.	Defaults upon Senior Securities		18
Item 4.	Mine Safety Disclosures		18
Item 5.	Other Information		18
Item 6.	Exhibits		19
Signatures

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

	September 30, 2012			March 31, 2012
	(unaudited)
ASSETS
Cash and cash equivalents
Cash and amounts due from banks	$	638,530		$	569,884
Interest-bearing deposits		6,151,631			6,079,801
Total cash and cash equivalents		6,790,161			6,649,685
Investment securities:
Securities held-to-maturity (fair value $21,786,178 and $17,606,748 at September 30, 2012 and March 31, 2012, respectively)		21,451,335			17,457,498
Securities available-for-sale (amortized cost of $228,427 and $237,096 at September 30, 2012 and March 31, 2012, respectively)		239,523			241,826
Total investment securities		21,690,858			17,699,324
Loans, net of allowance for loan losses of $1,038,078 at September 30, 2012 (unaudited), $1,160,535 at March 31, 2012		92,694,794			99,431,618
Accrued interest receivable		465,092			417,102
Premises and equipment, net		7,002,286			7,131,980
Federal Home Loan Bank, at cost		202,500			219,100
Deferred income taxes		1,051,900			991,000
Bank-owned life insurance		153,588			147,508
Prepaid and refundable income taxes		─			160,250
Real estate owned		2,357,738			845,669
Other assets		500,416			615,383
Total assets	$	132,909,333		$	134,308,619
LIABILITIES
Deposits
Non-interest bearing deposits	$	4,720,272		$	4,673,349
Interest bearing deposits		115,297,381			116,915,542
Total deposits		120,017,653			121,588,891
Accrued interest payable		11,467			15,912
Advance payments by borrowers for taxes and insurance		362,370			399,920
Other liabilities		805,649			560,432
Total liabilities		121,197,139			122,565,155
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		6,590,557			6,590,557
Retained earnings, substantially restricted		5,649,999			5,656,867
Unearned common stock held by employee stock ownership plan		(480,608	)		(480,608	)
Accumulated other comprehensive (Loss)		(64,101	)		(39,699	)
Total stockholder’s equity		11,712,194			11,743,464
Total liabilities and stockholders’ equity	$	132,909,333		$	134,308,619

See Notes to the Unaudited Consolidated Financial Statements.

1

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(Unaudited)

	Three Months Ended September 30,					Six Months Ended September 30,
	2012			2011		2012			2011
INTEREST INCOME
Loans	$	1,145,982		$	1,362,744	$	2,339,694		$	2,771,119
Investment securities		159,259			144,670		309,097			281,847
Total interest income		1,305,241			1,507,414		2,648,791			3,052,966
INTEREST EXPENSE
Interest-bearing checking accounts		8,826			14,048		17,872			28,909
Passbook and money market accounts		49,865			72,226		102,433			142,545
Certificates of deposits		222,725			283,538		464,239			574,208
Federal Home Loan Bank Advances		─			72		─			149
Total interest expense		281,416			369,884		584,544			745,811
Net interest income		1,023,825			1,137,530		2,064,247			2,307,155
Provision for loan losses		108,000			80,000		188,000			155,000
Net interest income after provision for loan losses		915,825			1,057,530		1,876,247			2,152,155
NON-INTEREST INCOME
Income from bank-owned life insurance		─		─			6,080			5,805
Gain (loss) on sale of real estate owned		─		─			869			(56,018	)
Service charges		33,379			36,429		64,067			75,498
Rental income		53,187			2,850		77,613			5,700
Other		3,832			2,896		8,763			7,039
Total non-interest income		90,398			42,175		157,392			38,024
NON-INTEREST EXPENSE
Salaries and employee benefits		386,740			394,492		801,434			795,363
Advertising		6,449			7,339		12,325			12,347
Office supplies, telephone and postage		31,268			32,416		53,800			54,336
Loan expenses		201,874			38,311		273,949			43,693
Net occupancy expense		160,664			163,516		333,831			331,994
Federal insurance premiums		54,125			75,504		108,045			174,428
Real estate owned loss reserve		─		─			25,000		─
Data processing expenses		52,637			53,867		106,268			106,518
ATM expenses		7,157			5,105		13,565			10,335
Bank charges and fees		16,997			19,180		34,670			36,958
Insurance and surety bond premiums		19,241			20,140		38,777			41,068
Dues and subscriptions		4,917			9,170		9,210			15,793
Professional fees		58,486			65,843		124,823			125,070
Real Estate Owned expense		71,522			2,633		86,862			11,615
Other		28,888			28,645		61,079			56,937
Total non-interest expense		1,100,965			916,161		2,083,638			1,816,455
INCOME (LOSS) BEFORE INCOME TAX EXPENSE		(94,742	)		183,544		(49,999	)		373,724
Income tax expense (benefit)		(38,335	)		73,380		(43,131	)		152,372
NET INCOME (LOSS)		(56,407	)		110,164		(6,868	)		221,352
INCOME (LOSS) PER COMMON SHARE	$	( 0.04	)	$	0.07	$	0.00		$	0.14

See Notes to the Unaudited Consolidated Financial Statements.

2

DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(Unaudited)

	Six Months Ended
	September 30, 2012			September 30, 2011
Net income	$	(6,868	)	$	221,352
Other Comprehensive income, net of tax unrealized income arising from available for sale securities during period		3,820			3,988
Postretirement benefit plan adjustment		(28,222	)		4,489
Comprehensive income, (loss)	$	(31,270	)	$	229,829

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	Common Stock				Additional Paid-in		Retained			Unearned Employee Stock Ownership			Accumulated Other-Comprehensive			Total Stockholders’			Comprehensive
	Shares		Amount		Capital		Earnings			Plan			Income (Loss)			Equity			Income (loss)
Balance at March 31, 2012		1,634,725	$	16,347	$	6,590,557	$	5,656,867		$	(480,608	)	$	(39,699	)	$	11,743,464
Comprehensive income
Net income								(6,868	)								(6,868	)		(6,868	)
Other comprehensive income, net of tax:
Change in unrealized gain on securities available-for-sale, net of deferred income taxes of $4,438														3,820			3,820			3,820
Post retirement benefit plan Adjustment Net of deferred tax of $18,815														(28,222	)		(28,222	)		(28,222	)
Total comprehensive income
Balance at September 30, 2012		1,634,725	$	16,347	$	6,590,557	$	5,649,999		$	(480,608	)	$	(64,101	)	$	11,712,194			(31,270	)

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended September 30,
	2012			2011
Cash flow from operating activities
Net Income (Loss)	$	(6,868	)	$	221,352
Adjustments to reconcile net income (loss) to net cash provided by (uses in) operating activities:
Deferred income taxes		(91,669	)		27,138
Depreciation		144,117			169,500
Discount accretion net of premium amortization		(721	)		(1,128	)
Provision for loan losses		188,000			155,000
Income from bank owned life insurance		(6,080	)		(5,805	)
(Gain)loss on sale of real estate		(869	)		56,018
Changes in operating assets and liabilities
(Increase) decrease in:
Accrued interest receivable		(47,990	)		2,396
Other assets		114,967			235,097
Prepaid income taxes		160,250		─
Increase (decrease) in:
Accrued interest payable		(4,445	)		1,110
Other liabilities		245,218			110,352
Net cash provided by operating activities	$	693,910		$	971,030
Cash flows from investing activities
Proceeds of securities available for sale		8,669			4,459
Purchases of securities held-to-maturity		(13,200,000	)		(6,500,000	)
Proceeds from maturities and principal repayments of securities held-to-maturity		9,206,884			3,997,207
Purchase of investment required by law – stock in Federal Home Loan Bank		16,600			(56,900	)
Proceeds from sale of real estate owned		116,436			345,321
Net decrease in loans		4,921,187			901,472
Purchases of premises and equipment		(14,423	)		(3,600	)
Net cash provided by(used in) investing activities	$	1,055,353		$	(1,312,041	)
Cash flows from financing activities
Net increase (decrease) in deposits		(1,571,237	)		8,059
Net (decrease) in advance payments by borrowers for taxes and insurance		(37,550	)		(44,022	)
Decrease in Federal home Loan Bank Advances		─			400,000
Net cash provided by (used in) financing activities	$	( 1,608,787	)	$	364,037

(continued)

5

	Six Months Ended September 30,
	2012		2011
Net increase in cash and cash equivalents		140,476		23,026
Cash and cash equivalents, beginning of the period		6,649,685		5,662,629
Cash and cash equivalents, end of period		6,790,161		5,685,655
Supplemental Disclosures:
Cash paid during the period for interest		584,544		745,134
Cash paid during the period for income taxes		1,000		2,250
Loans transferred to foreclosed real estate during the period		1,512,069		40,000
Total increase in unrealized gain on securities available-for-sale	$	3,820	$	5,414

See Notes to the Unaudited Consolidated Financial Statements.

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DELANCO BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

September 30, 2012

 (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 six month period ended September 30, 2012 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, 2012.

(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 54 basis points.

(4)            Income Taxes

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

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Federal tax years 2009 through 2011 remain subject to examination as of September 30, 2012, while tax years 2008 through 2011 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 September 30,					Six Months Ended September 30,
	2012			2011		2012			2011
Numerator	$	(56,407	)	$	110,164	$	(6,868	)	$	221,352
Denominators:
Basic shares outstanding		1,586,664			1,583,460		1,586,664			1,583,460
Effect of dilutive securities	─			─		─			─
Dilutive shares outstanding		1,586,664			1,583,460		1,586,664			1,583,460
Earnings per share:
Basic	$	(0.04	)	$	0.07	─			$	0.14
Dilutive	$	(0.04	)	$	0.07	─			$	0.14

(6)Cease and Desist Order

On March 17, 2011, the Bank entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the Office of Thrift Supervision (“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.  On July 21, 2011 the OTS was eliminated and merged into the Office of the Comptroller of the Currency (“OCC”).  As the Bank’s primary regulator, the Order is now enforced by the OCC.

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;

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

· within 30 days after the end of each quarter, beginning with the quarter ending June 30, 2011, 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 OCC;

· refrain from making, investing in or purchasing any new commercial loans without the prior non-objection of the OCC (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 OCC.

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 September 30, 2012, the Bank has entered into formal forbearance agreements with three relationships totaling $839 thousandthat require current payments while the borrowers restructure their finances.

At September 30, 2012, the Bank’s tier 1 (core) capital to adjusted total assets ratio was 8.03% and its total risk-based capital to risk-weighted assets ratio was 14.86%. At September 30, 2012, the Bank exceeded all of its regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

On July 23, 2011 the Bank received a non-objection from the OTS regarding the updated business plan that it submitted under the requirements of the Order. 

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(7)           Recent Accounting Pronouncements

Below is a discussion of recent accounting pronouncements.

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 Company adopted the provisions of this guidance in its first fiscal quarter ending June 30, 2012.

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

In December 2011, the FASB issued ASU 2011-10, Property, Plant and Equipment (Topic 360): The objective of this updateis 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 Company adopted the provisions of this guidance in its first fiscal quarter ending June 30, 2012.

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      In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to achieve Common FairValue 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 Company does not anticipate any material impact to the consolidated financial statements related to this guidance.

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 Company does not anticipate any material impact to the consolidated financial statements related to this guidance.

(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.

11

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

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
September 30, 2012
Available-for-sale securities	$	240		−		−
March 31, 2012
Available-for-sale securities	$	242		−		−

Assets and Liabilities on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2012 and March 31, 2012 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)
September 30, 2012
Impaired loans	$	─	$	7,089	$	─
Real estate owned	$	─	$	2,358	$	─
Total	$	─		9,447	$	─
March 31, 2012
Impaired loans	$	─	$	7,389	$	─
Real estate owned	$	─		846	$	─
Total	$	─	$	8,235	$	─

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.

12

As required by ASC Topic 825-10-65, the estimated fair value of financial instruments at September 30, 2012 and March 31, 2012 was as follows:

	September 30, 2012				March 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
(Dollars in Thousands)
Financial Assets:
Cash and cash equivalents	$	6,790,161	$	6,790,161	$	6,649,685	$	6,649,685
Investment securities		21,679,762		22,025,701		17,694,594		17,848,574
Loans – net		92,694,794		97,077,000		99,431,618		103,700,000
FHLB stock		202,500		202,500		219,100		219,100
Accrued interest receivable		465,092		465,092		417,102		417,102
Real estate owned		2,357,738		2,357,738		845,669		845,669
Total financial assets	$	124,190,047	$	128,918,192	$	125,257,768	$	129,680,130
Financial Liabilities:
Deposits	$	120,017,653	$	121,208,000	$	121,588,891	$	122,204,000
Advance payments by borrowers for taxes and insurance		362,370		362,370		399,920		399,920
Accrued interest payable		11,467		11,467		15,912		15,912
Total financial liabilities	$	120,391,490	$	121,581,837	$	122,004,723	$	122,619,832

	September 30, 2012				March 31, 2012
	Contract Value		Estimated Fair Value		Contract Value		Estimated Fair Value
Off-balance sheet instruments
Commitments to extend credit	$	5,888,167	$	5,888,167	$	5,337,000	$	5,337,000

(9)            Loans

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

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

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

13

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 September 30, 2012 and March 31, 2012 are summarized as follows (dollars in thousands):

	September 30,			March 31,
	2012			2012
Residential (one-to four-family) real estate	$	68,105		$	70,192
Multi-family and commercial real estate		13,345			17,130
Commercial		1,317			1,480
Home equity		9,341			9,986
Consumer		936			1,047
Construction		783			839
Total loans		93,827			100,674
Net deferred loan origination fees		(94	)		(82	)
Allowance for loan losses		(1,038	)		(1,160	)
Loans, net	$	92,695		$	99,432

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds.  At September 30, 2012, the loans-to-one-borrower limitation was $1.9 million; this excluded an additional 10% of adjusted capital funds or approximately $1.0 million, which may be loaned if collateralized by readily marketable securities.  At September 30, 2012, 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.

14

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.

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.

15

The following table represents loans by credit quality indicator at September 30, 2012 (dollars in thousands):

	Pass		Special Mention Loans		Classified Loans		Non-Performing Loans		Total
Residential real estate	$	65,345	$	481	$	200	$	2,079	$	68,105
Multi-family and commercial real estate		8,598		351		1,266		3,130		13,345
Commercial		769		256		35		257		1,317
Home equity		9,263	─		─			78		9,341
Consumer		897	─		─			39		936
Construction		730		53	─		─			783
	$	85,602	$	1,141	$	1,501	$	5,583	$	93,827

The following table represents past-due loans as of September 30, 2012 (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	$	1,826		$	─		$	1,826		$	64,200		$	2,079		$	68,105
Multi-family and commercial real estate		210			─			210			10,005			3,130			13,345
Commercial		49			─			49			1,011			257			1,317
Home Equity		234			─			234			9,029			78			9,341
Consumer		28			─			28			869			39			936
Construction	─				─		─				783		─				783
Total Loans	$	2,347		$	─		$	2,347		$	85,897		$	5,583		$	93,827
Percentage of Total Loans		2.50	%		0.00	%		2.50	%		91.55	%		5.95	%		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 September 30, 2012, the Bank had 28 loan relationships totaling $5.6 million in non-accrual loans as compared to 25 relationships totaling $7.2 million at March 31, 2012.  The average balance of impaired loans totaled $7.9 million for the six months ended September 30, 2012 as compared to $8.5 million for the year ended March 31, 2012, and interest income recorded on impaired loans for the six months ended September 30, 2012 totaled $89,589 as compared to $152,910for the year ended March 31, 2012.

16

The following table represents data on impaired loans at September 30, 2012 and March 31, 2012 (dollars in thousands):

	September 30, 2012		March 31, 2012
Impaired loans for which a valuation allowance has been provided	$	─	$	─
Impaired loans for which no valuation allowance has been provided		7,089		8,631
Total loans determined to be impaired		7,089		8,631
Allowance for loans losses related to impaired loans	─		─
Average recorded investment in impaired loans	$	7,934	$	8,546
Cash basis interest income recognized on impaired Loans	$	90	$	153

At March 31, 2012 the Bank no longer maintained specific valuation allowances against impaired loans as noted above.  In conjunction with the Bank’s change in regulators from the Office of Thrift Supervision to the Office of the Comptroller of the Currency, the specific valuation allowances have been net against the loan balances and are carried at fair market valuation.  Going forward any valuation adjustments will be charged against the loan balance at the time of valuation.

The following table presents impaired loans by portfolio class at September 30, 2012 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized While On Impaired Status
Impaired loans with no valuation allowance:
Residential real estate	$	2,712	$	2,687	$	─	$	3,125	$	45
Multi-family and commercial real estate		4,038		4,038		─		4,569		38
Commercial		141		141		─		140		5
Home equity		78		78		─		41	─
Consumer		39		39		─		6	─
Construction		53		53		─		53		2
Subtotal	$	7,061	$	7,036	$	─	$	7,934	$	90

17

The following table presents impaired loans by portfolio class at March 31, 2012 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized While On Impaired Statues
Impaired loans with no valuation allowance:
Residential real estate	$	3,357	$	3,344	$	─	$	3,443	$	66
Multi-family and commercial real estate		5,287		5,287		─		4,853		87
Commercial	─		─			─		19	─
Home equity	─		─			─		111	─
Consumer	─		─			─		120	─
Construction	─		─			─	─		─
Subtotal	$	8,644	$	8,631	$	─	$	8,546	$	153

	September 30, 2012			March 31, 2012
Non-accrual loans:
Residential real estate	$	2,079		$	2,989
Multi-family and commercial real estate		3,130			4,255
Commercial		257		─
Consumer		39		─
Home Equity		78		─
Construction	─			─
Total non-accrual loans		5,583			7,244
Impaired loans		1,506			1,387
Total non-performing loans		7,089			8,631
Real estate owned		2,358			846
Total non-performing assets	$	9,447		$	9,476
Non-performing loans as a percentage of loans		7.54	%		8.57	%
Non-performing assets as a percentage of loans and real estate owned		9.80	%		9.34	%
Non-performing assets as percentage of total assets		7.11	%		7.06	%

18

During the six months ended September 30, 2012, the Bank experienced a $1.7 million net decrease in non-accrual loans.  This change reflects the downgrading of 9 loan relationships to non-accrual status totaling $988 thousand during the six months ended September 30, 2012.  The downgraded loans consisted of six relationships representing residential mortgages totaling $825 thousand, one commercial real estate loan of $116 thousand, two commercial relationships totaling $46 thousand and one consumer loan of $39 thousand.  These loans were offset by one residential mortgage for $442 thousand that is no longer on non-accrual, the transfer of five residential mortgages for $984 thousand and two commercial mortgages totaling $606 thousand to real estate owned and one commercial real estate loan that was partially repaid by $423 thousand and partially written down by $47 thousand and a commercial loan that was partially written down by $13 thousand.

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

	September 30, 2012			March 31, 2012
Balance at beginning of period	$	1,161		$	1,286
Provision:
Commercial		19			(4	)
Commercial real estate		186			643
Residential real estate		8			581
Consumer		(25	)		382
Total Provision		188			1,602
Charge-Offs:
Commercial		272			816
Residential real estate		58			536
Consumer	─				401
Recoveries		(19	)		(26	)
Total Net Charge-Offs		311			1,727
Balance at end of period	$	1,038		$	1,161
Period-end loans outstanding	$	93,827		$	100,674
Average loans outstanding	$	96,510		$	102,606
Allowance as a percentage of period-end loans		1.11	%		1.15	%
Net charge-offs as a percentage of average loans		0.32	%		1.68	%

19

Additional details for changes in the allowance for loan by loan portfolio as of September 30, 2012 are as follows (dollars in thousands):

Allowance for Loan Losses

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Total
Balance, beginning of year	$	41		$	469		$	553		$	98		$	1,161
Loan charge-offs		(13	)		(259	)		(58	)	─				(330	)
Recoveries		1			4		─				14			19
Provision for loan losses		19			186			8			(25	)		188
Balance, end of period	$	48		$	400		$	503		$	87		$	1,038

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.

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.

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.

For the six months ending September 30, 2012, the Bank experienced seven partial charge-offs relating to seven loan relationships totaling $330 thousand as compared to the full charge-offs of eight loans representing seven relationships totaling $447 thousand and the partial charge-offs of 21 loans consisting of 19 relationships totaling $1.3 million for the year ended March 31, 2012.

At September 30, 2012, the Bank maintained an allowance for loan loss ratio of 1.11% to quarter end loans outstanding.  Non-performing assets have decreased by $29 thousand over their stated levels at March 31, 2012 representing a non-performing asset to total asset ratio of 7.11% at June 30, 2012 as compared to a non-performing asset to total asset ratio of 7.06% at March 31, 2012.

20

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.

21

(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 September 30, 2012 and March 31, 2012 are as follows:

	Held-to-Maturity September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
(Dollars in Thousands)
Federal Home Loan Bank Bonds	$	4,906	$	13	─		$	4,919
Federal Farm Credit Bonds		4,000		22	─			4,022
Federal Home Loan Mortgage Corporation Bonds		1,499		18	─			1,517
Federal National Mortgage Association		8,498		92	─			8,590
Municipal Bond		64	─		─			64
		18,967		145	─			19,112
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation		1,211		87		─		1,298
Federal National Mortgage Association		960		88		─		1,048
Government National Mortgage Corporation		313		15		─		328
		2,484		190		─		2,674
Total	$	21,451		335	─		$	21,786

	Held-to-Maturity March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Dollars in Thousands)
Federal Home Loan Bank Bonds	$	3,945	$	5	$	(8	)	$	3,942
Federal Farm Credit Bonds		3,000		2		(25	)		2,977
Federal Home Loan Mortgage
Corporation Bonds		1,499		─		(6	)		1,493
Federal National Mortgage Association		5,997		26		(34	)		5,989
Municipal Bond		104		─		─			104
		14,545		33		(73	)		14,505
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation		1,430		89		(2	)		1,517
Federal National Mortgage Association		1,146		90		─			1,236
Government National Mortgage Corporation		336		13		(1	)		348
		2,912		192		(3	)		3,101
Total	$	17,457	$	225	$	(76	)	$	17,606

22

	Available for Sale September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mutual Fund Shares		229		11		─		240

	Available for Sale March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mutual Fund Shares		237		5		─		242

The following is a summary of maturities of securities held-to-maturity and available-for-sale as of September 30, 2012 and March 31, 2012:

	September 30, 2012
	Held to Maturity				Available for Sale
(Dollars in Thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	64	$	64	─		─
After one year through five years		507		534	─		─
After five years through ten years		5,299		5,334	─		─
After ten years		15,581		15,854	─		─
Equity securities						229		240
	$	21,451	$	21786	$	229	$	240

23

	March 31, 2012
	Held to Maturity				Available for Sale
(Dollars in Thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	104	$	104	$ ─		$ ─
After one year through five years		510		532	─		─
After five years through ten years		3,444		3,449	─		─
After ten years		13,399		13,521	─		─
Equity securities						237		242
	$	17,457	$	17,606	$	237	$	242

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  March 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows. We had no such securities with gross unrealized losses at September 30, 2012.

	March 31,2012
	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	$	2,000	$	(8	)	$	─	$	─	$	2,000	$	( 8	)
Federal Farm Credit Bonds		2,500		(25	)		─	─			2,500		(25	)
Federal Home Loan Mortgage Corporation Bonds		1,499		(6	)		─	─			1,499		(6	)
Federal National Mortgage Association		4,497		(34	)		─	─			4,497		(34	)
		10,496		(73	)		─		─		10,496		(73	)
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation		374		(2	)	─		─			374		(2	)
Federal National Mortgage Association		346	─				─	─			346	─
Government National Mortgage Corporation		39		(1	)		─	─			39		(1	)
		759		(3	)		─	─			759		(3	)
Total	$	11,255	$	( 76	)	$	─	$	─	$	11,255	$	(76	)

24

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.

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 six months ended September 30, 2012 and 2011 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.

25

General

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

Balance Sheet Analysis

Overview.  Total assets at September 30, 2012 were $132.9 million, a decrease of $1.4 million from total assets of $134.3 million at March 31, 2012.  Total liabilities decreased by $1.4 million or 1.1% from $122.6million at March 31, 2012 to $121.2 million at September 30, 2012.  Total stockholders’ equity of $11.7 million reflected a decreaseof $31 thousand from $11.7 million at March 31, 2012.

Loans.  At September 30, 2012, total loans, net, were $92.7 million, or 69.7% of total assets.  Overall loans decreased by $6.7 million, primarily due to payoffs in the commercial real estate and residential real estate portfolios. Commercial and multi-family real estate loans decreased by $3.8 million, residential real estate loans decreased by $2.1 million, home equity loans decreased by $645 thousand and commercial loans decreased by $163 thousand.

Non-performing Loans. Total nonperforming loans at September 30, 2012 decreased $1.6 million from March 31, 2012 primarily due to one residential mortgage of $442 thousand that is no longer on non-accrual, the transfer of five residential mortgages totaling $984 thousand and two commercial mortgages  totaling $606 thousand to real estate owned, one commercial real estate loan that was partially repaid by $423 thousand and partially written down by $47 thousand and a commercial loan that was partially written down by $13 thousand.  This was offset by the downgrading of 9 loan relationships to non-accrual status totaling $988 thousand during the six months ended September 30, 2012.

Securities.  The investment securities portfolio was $21.7 million, or 16.3% of total assets, at September 30, 2012.  At that date, 11.5% of the investment portfolio was invested in mortgage-backed securities, while the remainder was invested primarily inU.S. Government agency and other debt securities. Investment securities increased $4.0 million compared to March 31, 2012. The increase was primarily due to purchases of debt securities.

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 September 30, 2012, core deposits were 50% of total deposits.  Overall deposits decreased by $1.6 million as the Bank made a conscious effort to reduce its reliance of high cost time deposits. Core deposits grew for the six months by $159 thousand while time deposits decreased by $2.7 million.

Borrowings.  In recent periods, we have occasionally used short-term borrowings as an additional source of liquidity.  At September 30, 2012, we had $0 in advances outstanding.

Results of Operations for the Three and Six Months Ended September 30, 2012 and 2011

Financial Highlights.  Net loss for the three and six months ended September 30, 2012 was $56 thousand and $7 thousand, respectively as compared to a net income of $110 thousand and $221 thousand for the same prior year periods. The decrease in net income for the three month period was primarily the result of lower net interest income and increased operating expenses, partially offset by an increase in non-interest income.

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Net Interest Income.   Net interest income decreased $114 thousand to $1.0 million for the three months and $243 thousand to $2.1 million for the six months ended September 30,  2012 . The Bank saw a decrease in both the interest rate spread (9 basis points) and net interest margin (24 basis points) for the six month period.  The rates earned on assets declined, resulting in a 13.4 % decrease in total interest income for the three months ending September 30, 2012 compared to the three months ended September 30, 2011. Total interest expense decreased by 23.9 % between the same periods.

Average loans in the six months ended September 30, 2012 decreased $9.4 million, or 8.9 %, compared with the same period in 2011, driven by payoffs of higher yielding loans. Average investment securities in the six months ended September 30, 2012 increased $4.9 million, or 29.0 %, compared to the same period in 2011. The increase in the investment portfolio was due to the purchases of debt securities. Declining interest rates decreased the average yield on earning assets to 4.32% for the six months ended September 30, 2012, compared with 4.91% for the same period in 2011.

 Average interest-bearing deposits in the six months ended September 30, 2012 decreased $246 thousand, or 0.2%, compared with the same period in 2011. Declining interest rates decreased the average cost of deposits to 1.10%, compared with 1.28% for the same period in 2011.

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 $108 thousand in the three months and $188 thousand in the six months ended September 30, 2012 compared to $80 thousand in the three months and $155 thousand in the six months ended September 30, 2011.  We had $317 thousand in charge-offs in the three months and $330 thousand in the six months ended September 30, 2012, compared to $108 thousand and $115 thousand in charge-offs in the same prior year periods.

Non-Interest Income.  Non-interest income increased $48 thousand in the three month period ending September 30, 2012 compared to the three month period ended September 30, 2011. Non-interest income increased $119 thousand in the six months ended September 30, 2012 compared to the same period in the prior year, due to the increase in rental income from both the rental units in our Cinnaminson office and properties now in real estate owned.

Non-Interest Expenses.  Non-interest expenses increased $185 thousand in the three months ending September 30, 2012 compared to the three months ended September 30, 2011 primarily due to higher loan expenses. Non-interest expense increased in the six months ended September 30, 2012 by $267 thousand over the same period in the prior year due to increased loan and real estate owned expenses.

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.

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           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 September 30, 2012, cash and cash equivalents totaled $6.8 million.  At September 30, 2012, we had no outstanding borrowings and had arrangements to borrow up to an additional $10.8 million from the Federal Home Loan Bank of New York and $1.0 million from Atlantic Central Bankers Bank.

           At September 30, 2012, 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 September 30, 2012, we had $113 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 September 30, 2012 totaled $36.3 million, or 60.4% 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 September 30, 2012.  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.

           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 September 30, 2012, the Company had $296 thousand in cash and cash equivalents compared to $280 thousand as of September 30, 2011.  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 September 30, 2012, we exceeded all of our regulatory capital requirements.  We are considered “well capitalized” under regulatory guidelines.

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           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 September 30, 2012, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Not applicable as the Company is a smaller reporting company.

Item 4.    Controls and Procedures

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

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, 2012, 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.

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

Not Applicable.

Item 3.     Defaults upon Senior Securities

Not Applicable.

Item 4.    Mine Safety Disclosures

Not Applicable.

Item 5.    Other Information

None.

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

101* The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, 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 Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

*   Furnished, not filed.

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SIGNATURES

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

DELANCO BANCORP, INC.    

Dated: November 14, 2012	By:	/s/ James E. Igo
		James E. Igo
		Chairman, President and Chief Executive Officer

Dated: November 14, 2012	By:	/s/ Eva Modi
		Eva Modi
		Chief Financial Officer

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