Citizens Community Bancorp Inc. - Quarter Report: 2011 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission file number 001-33003

CITIZENS COMMUNITY BANCORP, INC.

Maryland		20-5120010
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

(Address of principal executive offices)

 

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

JUNE 30, 2011

INDEX

				Page Number
Part I — FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and September 30, 2010			3
		Consolidated Statements of Operations (Unaudited) for the three and nine months ended June 30, 2011 and 2010			4
		Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Gain/(Loss) (Unaudited) for the nine months ended June 30, 2011			5
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended June 30, 2011 and 2010			6
		Condensed Notes to Consolidated Financial Statements (Unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			42
Item 4.		Controls and Procedures			44
Part II — OTHER INFORMATION					44
Item 1.		Legal Proceedings			44
Item 1A.		Risk Factors			45
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3.		Defaults Upon Senior Securities			45
Item 4.		[Removed and Reserved]			45
Item 5.		Other Information			45
Item 6.		Exhibits			45
SIGNATURES					46
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

ITEM 1. FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets
June 30, 2011 unaudited and September 30, 2010 derived from audited financial statements
(in thousands, except share data)

		June 30, 2011				September 30, 2010
Assets
Cash and cash equivalents		$	37,523			$	72,438
Other interest-bearing deposits			9,543				—
Securities available-for-sale (at fair value)			52,861				41,708
Federal Home Loan Bank stock			5,787				5,787
Loans receivable			431,457				456,232
Allowance for loan losses			(4,655	)			(4,145	)
Loans receivable — net			426,802				452,087
Office properties and equipment — net			6,888				7,216
Accrued interest receivable			1,644				1,977
Intangible assets			566				815
Foreclosed assets			1,413				448
Other assets			8,651				11,889
TOTAL ASSETS		$	551,678			$	594,365
Liabilities and Stockholders’ Equity
Liabilities:
Deposits		$	459,074			$	476,302
Federal Home Loan Bank advances			35,300				64,200
Other liabilities			4,364				3,986
Total liabilities			498,738				544,488
Stockholders’ equity:
Common stock — 5,123,414 and 5,113,258 shares, respectively			51				51
Additional paid-in capital			53,880				53,823
Retained earnings			1,147				1,130
Unearned deferred compensation			(55	)			(1	)
Accumulated other comprehensive loss			(2,083	)			(5,126	)
Total stockholders’ equity			52,940				49,877
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	551,678			$	594,365

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations — Unaudited
Three and Nine Months Ended June 30, 2011 and 2010
(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
		2011				2010				2011				2010
Interest and dividend income:
Interest and fees on loans		$	6,773			$	7,482			$	21,038			$	22,114
Interest on investments			431				781				1,646				2,416
Total interest and dividend income			7,204				8,263				22,684				24,530
Interest expense:
Interest on deposits			1,711				1,979				5,545				6,208
Interest on borrowed funds			433				771				1,494				2,480
Total interest expense			2,144				2,750				7,039				8,688
Net interest income			5,060				5,513				15,645				15,842
Provision for loan losses			1,364				1,331				4,614				3,493
Net interest income after provision for loan losses			3,696				4,182				11,031				12,349
Noninterest income:
Total other-than-temporary impairment (losses)/recoveries			126				(847	)			(1,288	)			(2,547	)
Portion of loss/(recoveries) recognized in other comprehensive loss (before tax)			(126	)			722				717				1,336
Net gains from sale of securities			281				—				516				—
Net gains / (losses) on available-for-sale securities recognized in earnings			281				(125	)			(55	)			(1,211	)
Service charges on deposit accounts			386				395				1,095				1,123
Insurance commissions			25				39				73				159
Loan fees and service charges			70				60				349				288
Other			4				4				8				9
Total noninterest income			766				373				1,470				368
Noninterest expense:
Salaries and related benefits			2,128				1,984				6,238				5,811
Occupancy — net			606				638				1,915				1,896
Office			311				363				1,019				1,057
Data processing			116				59				249				244
Amortization of core deposit			84				84				250				250
Advertising, marketing and public relations			26				53				94				124
FDIC premium assessment			279				225				822				689
Professional services			299				329				865				899
Other			310				539				990				1,286
Total noninterest expense			4,159				4,274				12,442				12,256
Income before provision for income tax			303				281				59				461
Provision for income taxes			127				119				42				203
Net income		$	176			$	162			$	17			$	258
Per share information:
Basic earnings		$	0.03			$	0.03			$	—			$	0.05
Diluted earnings		$	0.03			$	0.03			$	—			$	0.05
Dividends paid		$	—			$	—			$	—			$	—

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of
Changes in Stockholders’ Equity and Comprehensive
Gain/(Loss) — Unaudited
Nine Months Ended June 30, 2011
(in thousands, except Shares)

																						Accumulated
										Additional												Other
		Common Stock								Paid-in				Retained				Unearned				Comprehensive				Total
		Shares				Amount				Capital				Earnings				Compensation				Income (loss)				Equity
Balance, September 30, 2010			5,113,258			$	51			$	53,823			$	1,130			$	(1	)		$	(5,126	)		$	49,877
Comprehensive gain:
Net income															17												17
Amortization of unrecognized prior service costs and net gains/losses, net of tax																							—				—
Net unrealized gain on available for sale securities, net of tax																							2,391				2,391
Change in unrealized gain arising from sale of securities, net of tax																							310				310
Change for realized losses on securities available for sale for OTTI write-down, net of tax																							342				342
Total comprehensive gain																											3,060
Common stock awarded for recognition and retention plan - 10,156 shares			10,156								56								(56	)
Stock option expense											1																1
Amortization of restricted stock																			2								2
Balance, June 30, 2011			5,123,414			$	51			$	53,880			$	1,147			$	(55	)		$	(2,083	)		$	52,940

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows — Unaudited
Nine Months Ended June 30, 2011 and 2010
(in thousands, except per share data)

		Nine Months Ended
		June 30,				June 30,
		2011				2010
Cash flows from operating activities:
Net income attributable to common stockholders		$	17			$	258
Adjustments to reconcile net income to net cash provided by operating activities:
Net securities amortization			(20	)			(281	)
Depreciation			840				839
Provision for loan losses			4,614				3,493
Net realized gain on sale of securites			(516	)			0
Impairment on mortgage-backed securities			620				1,211
Amortization of core deposit intangible			250				250
Amortization of restricted stock			2				20
Provision for stock options			1				12
Provision for deferred income taxes			0				583
Decrease (increase) in accrued interest receivable and other assets			2,287				(3,794	)
Increase (decrease) in other liabilities			378				(89	)
Total adjustments			8,456				2,244
Net cash provided by operating activities			8,473				2,502
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits			(9,543	)			2,458
Proceeds from sale of securities available-for-sale			45,041				0
Principal payments on securities available for sale			9,791				10,328
Purchase of securities available-for-sale			(60,998	)			0
Net decrease (increase) in loans			18,959				(18,052	)
Net capital expenditures			(510	)			(215	)
Net cash provided by (used in) investing activities			2,740				(5,481	)
Cash flows from financing activities:
Net decrease in Federal Home Loan Bank advances			(28,900	)			(31,705	)
Net increase (decrease) in deposits			(17,228	)			31,705
Net cash provided by (used in) financing activities			(46,128	)			0
Net decrease in cash and cash equivalents			(34,915	)			(2,979	)
Cash and cash equivalents at beginning of period			72,438				43,191
Cash and cash equivalents at end of period		$	37,523			$	40,212
Supplemental cash flow information:
Cash paid during the year for:
Interest on deposits		$	5,558			$	6,207
Interest on borrowings		$	1,581			$	2,579
Income taxes		$	8			$	5
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties		$	1,750			$	394

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 — NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The financial statements of Citizens Community Federal (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Citizens Community Bancorp (“CCB”) was a successor to Citizens Community Federal as a result of a regulatory restructuring into the mutual holding company form, which was effective on March 29, 2004. Originally, Citizens Community Federal was a credit union. In December 2001, Citizens Community Federal converted to a federal mutual savings bank. In 2004, Citizens Community Federal reorganized into the mutual holding company form of organization. In 2006, Citizens Community Bancorp completed its second-step mutual to stock conversion.

     The consolidated income (loss) of the Company is principally derived from the Bank’s income (loss). The Bank originates residential and consumer loans and accepts deposits from customers, primarily in Wisconsin, Minnesota and Michigan. The Bank operates 26 full-service offices consisting of 7 stand-alone locations and 19 in-store branch locations.

     The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.

     In preparing these financial statements, we evaluated the events and transactions that occurred through August 15, 2011, the date on which the financial statements were available to be issued.

     The accompanying interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

     Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Citizens Community Federal. All significant inter-company accounts and transactions have been eliminated.

     Use of Estimates — Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, valuation of acquired intangible assets, useful lives for depreciation and amortization, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

     Securities — Securities are classified as available-for-sale when they might be sold before maturity. Although we generally intend to hold most of the securities in our investment portfolio until maturity, we may, from time to time, sell any of our investment securities as part of our overall management of our investment portfolio. As such, we classify all investment securities as available-for-sale. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses and losses deemed other-than-temporarily impaired

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due to non-credit issues being reported in other comprehensive income, net of tax. Unrealized losses deemed other-than-temporarily impaired due to credit issues are reported in current period operations.

     Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.

     Declines in the fair value of securities below their cost that are other than temporary due to credit issues are reflected as “Net impairment losses recognized in earnings” in the accompanying Consolidated Statement of Operations. In estimating other-than-temporary impairment, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the Bank’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the portion of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The portion of other-than-temporary impairment related to all other factors is included in other comprehensive income (loss), net of the related tax effect.

     Loans — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

     Interest income on mortgage and consumer loans is discontinued at the time the loan is over 91 days delinquent. Past due status is based on the contractual terms of the loan. Loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered unlikely. All interest accrued but not received for a loan placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account due date to less than 92 days delinquent. Interest on impaired loans considered troubled debt restructurings that are not more than 91 days delinquent is recognized as income as it accrues based on the revised terms of the loan.

     Real estate loans and open ended consumer loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes greater than 180 days past due. Closed end consumer loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes greater than 120 days past due.

     Allowance for Loan Losses — The allowance for loan losses is a valuation allowance for probable and inherent credit losses in the Bank’s loan portfolio. Loan losses are charged against the allowance for loan loss (“ALL”) when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the allowance balance required using past loan loss experience; the nature, volume and composition of the loan portfolio; known and inherent risks in the portfolio; information about specific borrowers’ ability to repay and estimated collateral values; current economic conditions; and other relevant factors. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off.

     A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructurings are individually evaluated to determine the need for a specific allowance. If a specific allowance is warranted, a specific allowance is established so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the underlying collateral of the loan. Large groups of smaller balance homogeneous loans, such as non-classified

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consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

     The Bank manages its loan portfolio in two segments; real estate loans and consumer loans. Real estate loans are secured by single family or 1-4 family real estate, and include first and second mortgage loans along with home equity lines of credit. Consumer loans consist mainly of loans secured by personal property as collateral. Approximately 80% of the Bank’s consumer loan portfolio consists of indirect paper loans. Indirect paper loans are secured consumer loans originated by the Bank where the borrowers are identified through the Bank’s relationships with various consumer product dealer networks mainly within the Bank’s market area. These loans are approved based on the Bank’s current underwriting standards. Management believes that bifurcation of the Bank’s loan portfolio into these two segments for credit quality, impairment and ALL disclosures provides the most meaningful presentation, consistent with how each portfolio is managed.

     Income Taxes — The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes”. Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. See Note 14 to the Company’s consolidated financial statements included in the Company’s Form 10-K/A filed with the Securities and Exchange Commission on January 11, 2011 for details on the Company’s income taxes.

     The Company includes in Other Assets the tax effect of differences in recorded bases of assets and liabilities for financial reporting and tax reporting purposes. At each measurement date, to the extent this tax effect represents a net benefit, the Company assesses the ability to realize that net benefit based on existing tax carryback opportunities, projected future taxable income, arid intended income tax strategies. As of June 30, 2011 and September 30, 2010, the Company believes it is more likely than not that the aggregate amount of these considerations will be sufficient to enable the Company to realize those benefits. Accordingly, the Company has not recorded any valuation allowance related to this net benefit at either date.

     Earnings (Loss) Per Share — Basic earnings (loss) per common share is calculated as net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plan.

     Reclassifications — Certain items previously reported were reclassified for consistency with the current presentation.

     Adoption of New Accounting Standards — In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU allows an entity the option to present the total of comprehensive income, the component 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. An entity is required to present each component of net income along with total net income, each component of 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 stockholders’ 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. The guidance in the ASU is effective for fiscal years, and interim periods within those years, beginning after The fair value of foreclosed assets is determined by obtaining market price

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December 15, 2011. The provisions of this guidance are not expected to have a significant impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In June 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU are intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance in the ASU is effective for the first interim or annual period beginning after December 15, 2011. The provisions of this guidance are not expected to have a significant impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In May 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective control for Repurchase Agreements. This 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 repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The provisions of this guidance are not expected to have a significant impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In April 2011, the FASB issued ASU No. 2011-02 Receivables (“Topic 310”): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. This ASU is intended to improve financial reporting by creating greater consistency in how GAAP is applied for various types of debt restructurings. It is intended to assist creditors in determining whether a modification of terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The provisions of this guidance are not expected to have a significant impact on our consolidated financial condition, results of operations or liquidity.

NOTE 2 — FAIR VALUE ACCOUNTING

     ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The statement describes three levels of inputs that may be used to measure fair value:

Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.

Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3- Significant unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

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     The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, we utilize independent third party valuation analyses to support our own estimates and judgments in determining fair value.

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Assets Measured on a Recurring Basis (000’s)

						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Fair				Instruments				Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
June 30, 2011:
Securities available for sale:
U.S. Agency mortgage-backed securities		$	11,574			$	—			$	11,574			$	—
U.S. Agency floating Rate Bonds			30,904				—				30,904				—
Non-agency mortgage-backed securities			10,383				—				—				10,383
Total		$	52,861			$	—			$	42,478			$	10,383
September 30, 2010:
Securities available for sale:
U.S. Agency securities		$	16,709			$	—			$	16,709			$	—
Non-agency mortgage-backed securities			24,999				—				—				24,999
Total		$	41,708			$	—			$	16,709			$	24,999

Assets Measured on a Nonrecurring Basis (000’s)

						Quoted Prices in				Significant
						Active Markets				Other				Significant
						for Identical				Observable				Unobservable
		Fair				Instruments				Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
June 30, 2011:
Foreclosed assets		$	1,413			$	—			$	—			$	1,413
Loans restructured in a troubled debt restructuring			6,294				—				—				6,294
Total		$	7,707			$	—			$	—			$	7,707
September 30, 2010:
Foreclosed assets		$	448			$	—			$	—			$	448
Loans restructured in a troubled debt restructuring			3,178				—				—				3,178
Total		$	3,626			$	—			$	—			$	3,626

     Level 3 assets measured on a recurring basis are certain investments for which little or no market activity exists or whose value of the underlying collateral is not market observable. Management’s valuation uses both observable as well as unobservable inputs to assist in the Level 3 valuation of mortgage backed securities held by the Bank, employing a methodology that considers future cash flows along with risk-adjusted returns. The inputs in this methodology are as follows: ability and intent to hold to maturities, mortgage underwriting rates, market prices/conditions, loan type, loan-to-value, strength of borrower, loan age, delinquencies, prepayment/cash flows, liquidity, expected future cash flows, rating agency actions, and a discount rate, which is assumed to be approximately equal to the coupon rate for each security. We had an independent valuation of all Level 3 securities in the current quarter. Based on this valuation, we recorded pre-tax other than temporary impairment of $620 during the nine months ended June 30, 2011.

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quotes from independent third parties wherever such quotes are available. Where such quotes are not available, we utilize independent third party appraisals to support our own estimates and judgments in determining fair value.

     The following table presents a reconciliation of residential mortgage-backed securities held by the Bank measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine month periods ended June 30, 2011 and 2010 (000’s):

		Nine Months Ended
		June 30,				June 30,
		2011				2010
Balance beginning of period		$	24,999			$	36,517
Total gains or losses (realized/unrealized):
Included in earnings			(620	)			(1,211	)
Included in other comprehensive loss			5,417				40
Sales			(13,633	)			—
Payments, accretion and amortization			(5,780	)			(7,848	)
Balance end of period		$	10,383			$	27,498

Fair Values of Financial Instruments

     ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments, require disclosures about fair value financial instruments and significant assumptions used to estimate fair value. The estimated fair values of financial instruments not previously disclosed are as follows:

Cash and Cash Equivalents

     Due to their short-term nature, the carrying amounts of cash and cash equivalents were considered to be a reasonable estimate of fair value.

Interest Bearing Deposits

     Fair value of interest bearing deposits is estimated based on their carrying amounts.

Loans Receivable

     Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification.

Federal Home Loan Bank (FHLB) Stock

     Federal Home Loan Bank Stock is carried at cost, which is its redeemable fair value since the market for the stock is restricted (See Note 8 to the Company’s consolidated financial statements included in the Company’s Form 10-K/A filed with the Securities and Exchange Commission on January 11, 2011 for additional information).

Accrued Interest Receivable and Payable

     Due to their short-term nature, the carrying amounts of accrued interest receivable and payable, respectively, were considered to be a reasonable estimate of fair value.

Deposits

     The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date. The fair value of certificate

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accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates.

Federal Home Loan Bank Advances

     The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowing approximates its fair value.

Off-Balance-Sheet Instruments

     The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company, no amounts for fair value are presented.

     The carrying amount and estimated fair value of financial instruments were as follows (000’s):

		June 30,								September 30,
		2011								2010
						Estimated								Estimated
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets:
Cash and cash equivalents		$	37,523			$	37,523			$	72,438			$	72,438
Interest-bearing deposits			9,543				9,543				—				—
Securities available for sale			52,861				52,861				41,708				41,708
Loans receivable			426,802				452,272				452,087				477,039
FHLB stock			5,787				5,787				5,787				5,787
Accrued interest receivable			1,644				1,644				1,977				1,977
Financial liabilities:
Deposits			459,074				465,306				476,302				482,337
FHLB advances			35,300				37,927				64,200				68,290
Accrued interest payable		$	4,364			$	4,364			$	232			$	232

NOTE 3 —LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

     The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset on our consolidated balance sheet. Loan losses are charged off against the ALL, while recoveries of amounts previously charged off are credited to the ALL. A provision for loan losses is charged to operations based on management’s periodic evaluation of the aforementioned specific factors as well as any other pertinent factors.

     The ALL consists of a specific component on impaired loans and a general component for non-impaired loans. The components of the ALL represent estimations pursuant to either ASC 450-10, Accounting for Contingencies, or ASC 310-10, Accounting by Creditors for Impairment of a Loan. The specific component of the ALL reflects estimated losses from analyses developed through review of individual loans deemed impaired. These analyses involve a high degree of judgment in estimating the amount of potential loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The general

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component of the ALL is based on the Company’s historical loss experience which is updated quarterly. The general component of the ALL also includes consideration for concentrations, changes in portfolio mix and volume, changes in underwriting standards and other qualitative factors.

     There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

     Changes in the ALL for the periods presented below were as follows (dollar amounts in thousands):

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		Real Estate				Consumer				Total
June 30, 2011 and Nine Months then Ended:
Allowance for Loan Losses:
Beginning balance, October 1, 2010		$	1,562			$	2,583			$	4,145
Charge-offs			(1,924	)			(2,359	)			(4,283	)
Recoveries			33				146				179
Provision (1)			2,106				2,508				4,614
Ending balance, June 30, 2011		$	1,777			$	2,878			$	4,655
Ending balance: individually evaluated for impairment			409			$	287			$	696
Ending balance: collectively evaluated for impairment		$	1,368			$	2,591			$	3,959
Loans Receivable:
Ending balance		$	266,913			$	164,544			$	431,457
Ending balance: individually evaluated for impairment		$	9,585			$	2,425			$	12,010
Ending balance: collectively evaluated for impairment		$	257,328			$	162,119			$	419,447
Sepember 30, 2010 and Twelve Months then Ended:
Allowance for Loan Losses:
Beginning balance, October 1, 2009		$	846			$	1,079			$	1,925
Charge-offs			(1,331	)			(3,445	)			(4,776	)
Recoveries			44				51				95
Provision (1)			2,003				4,898				6,901
Ending balance, September 30, 2010		$	1,562			$	2,583			$	4,145
Ending balance: individually evaluated for impairment		$	211			$	522			$	733
Ending balance: collectively evaluated for impairment		$	1,351			$	2,061			$	3,412
Loans Receivable:
Ending balance		$	261,357			$	194,875			$	456,232
Ending balance: individually evaluated for impairment		$	4,092			$	4,560			$	8,652
Ending balance: collectively evaluated for impairment		$	257,265			$	190,315			$	447,580

     The Bank has originated substantially all loans currently recorded on its balance sheet. The Bank has not acquired any loans since 2005.

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     As an integral part of their examination process, various regulatory agencies review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

     Loans receivable as of the end of the periods shown below are as follows (dollar amounts in thousands):

		Real Estate Loans								Consumer Loans								Total Loans
		June 30,				September 30,				June 30,				September 30,				June 30,				September 30,
		2011				2010				2011				2010				2011				2010
Performing loans
Performing TDR loans		$	3,863			$	2,714			$	1,058			$	559			$	4,921			$	3,273
Performing loans other			257,328				255,110				162,119				192,765				419,447				447,875
Total performing loans			261,191				257,824				163,177				193,324				424,368				451,148
Nonperforming loans (1)
Nonperforming TDR loans		$	1,751				—			$	257				—			$	2,008			$	—
Nonperforming loans other			3,971				3,533				1,110				1,551				5,081				5,084
Total nonperforming loans			5,722				3,533				1,367				1,551				7,089				5,084
Total loans		$	266,913			$	261,357			$	164,544			$	194,875			$	431,457			$	456,232

     Impaired loans with a valuation allowance based upon the fair value of the underlying collateral had a carrying amount of $2,938 at June 30, 2011 compared to $2,581 at September 30, 2010. The valuation allowance on impaired loans was $696 at June 30, 2011, compared to $733 at September 30, 2010.

     An aging analysis of the Bank’s real estate and consumer loans as of June 30, 2011 and September 30, 2010 is as follows (dollar amounts in thousands):

																										Recorded
										Greater																Investment >
		1 Month				2 Months				Than				Total								Total				90 Days and
		Past Due				Past Due				3 Months				Past Due				Current				Loans				Accruing
June 30, 2011:
Real estate loans		$	3,126			$	2,091			$	3,971			$	9,188			$	257,725			$	266,913			$	—
Consumer loans			2,949				880				1,110				4,939				159,605				164,544				22
Total		$	6,075			$	2,971			$	5,081			$	14,127			$	417,330			$	431,457			$	22
Sepember 30, 2010:
Real estate loans		$	5,144			$	1,054			$	3,322			$	9,520			$	251,837			$	261,357			$	—
Consumer loans			3,920				1,496				3,535				8,951				185,924				194,875				—
Total		$	9,064			$	2,550			$	6,857			$	18,471			$	437,761			$	456,232			$	—

     A summary of the Bank’s impaired loans as of June 30, 2011 and September 30, 2010 is as follows (dollar amounts in thousands):

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						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
June 30, 2011 and Nine Months then Ended:
With no related allowance recorded:
Real estate loans		$	3,685			$	3,685			$	—			$	2,296			$	61
Consumer loans			366				366				—			$	289				9
With an allowance recorded:
Real estate loans			1,929				1,929				353			$	1,613				17
Consumer loans			949				949				283			$	954				16
Total:
Real estate loans			5,614				5,614				353				3,909				78
Consumer loans		$	1,315			$	1,315			$	283			$	1,242			$	25
Sepember 30, 2010 and Twelve Months then Ended:
With no related allowance recorded:
Real estate loans		$	907			$	907			$	—			$	937			$	4
Consumer loans			211				211				—			$	869				5
With an allowance recorded:
Real estate loans			1,297				1,297				271			$	1,884				3
Consumer loans			958				958				294			$	2,418				18
Total:
Real estate loans		$	2,204			$	2,204			$	271			$	2,820			$	7
Consumer loans		$	1,169			$	1,169			$	294			$	3,286			$	23

Troubled Debt Restructuring — A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties. A TDR may be either accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. A summary of loans modified in a troubled debt restructuring as of June 30, 2011 and during the nine months then ended is as follows:

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		Real Estate				Consumer				Total
June 30, 2011 and Nine Months then Ended:
Accruing / Performing:
Beginning balance		$	1,402			$	415			$	1,817
Principal payments			58				104				162
Charge-offs			—				8				8
Advances			27				7				34
New restructured			962				369				1,331
Class Transfers			1,456				124				1,580
Transfers between accrual/non-accrual			(167	)			(4	)			(171	)
Ending balance		$	3,738			$	1,023			$	4,761
Non-accrual / Non-performing:
Beginning balance		$	1,312			$	144			$	1,456
Principal payments			27				24				51
Charge-offs			—				31				31
Advances			46				4				50
New restructured			—				—				—
Class Transfers			—				—				—
Transfers between accrual/non-accrual			491				88				579
Ending balance		$	1,876			$	291			$	2,167
Totals:
Beginning balance		$	2,714			$	559			$	3,273
Principal payments			85				128				213
Charge-offs			—				39				39
Advances			73				11				84
New restructured			962				369				1,331
Class Transfers			1,456				124				1,580
Transfers between accrual/non-accrual			324				84				408
Ending balance		$	5,614			$	1,314			$	6,928

NOTE 4 — INVESTMENT SECURITIES

     All of our investment securities are classified as available-for-sale and, as such are reported at fair value, determined by obtaining valuations from an independent source. If the fair value of a security is not available from a dealer or third-party pricing service, or if such data appears unreliable, we may estimate the fair value of the security using a variety of methods including other pricing services, discounted cash flow analysis, matrix pricing and other fundamental analyses of observable market factors. All non-agency mortgage-backed securities valuations were based on values provided by third-parties.

     The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale as of June 30, 2011 and September 30, 2010, respectively, are as follows (dollar amounts in thousands):

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						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
Description of Securities		Cost				Gains				Losses				Fair Value
June 30, 2011
U.S. Agency mortgage-backed securities		$	11,418			$	156			$	—			$	11,574
U.S. Agency Floating Rate Bonds			30,937				17				50				30,904
Non-agency mortgage-backed securities			13,739				—				3,356				10,383
Total investment securities		$	56,094			$	173			$	3,406			$	52,861
September 30, 2010
U.S. Agency securities		$	16,240			$	469			$	—			$	16,709
Non-agency mortgage-backed securities			33,772				—				8,773				24,999
Total investment securities		$	50,012			$	469			$	8,773			$	41,708

     We evaluate securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuers are assessed. Adjustments to market value that are considered temporary are recorded as separate components of equity, net of tax. If an impairment of a security is identified as other-than-temporary based on information available, such as the decline in the credit worthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Consolidated Statement of Operations. Losses other than credit will continue to be recognized in other comprehensive income (loss). Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that it is more likely than not, that the Bank will not be required to sell the debt securities before their anticipated recovery and therefore, there is no other-than-temporary impairment during the three months ended June 30, 2011. The non-agency mortgage backed securities with continuous unrealized losses for twelve months or more consist of six specific securities.

     A summary of the amount of other-than-temporary impairment related to credit losses on available-for-sale securities that have been recognized in earnings follows:

		Nine Months				Twelve Months
		Ended				Ended
		June 30,				September 30,
		2011				2010
Beginning balance of the amount of OTTI related to credit losses		$	9,497			$	7,236
Credit portion of OTTI on securities for which OTTI was not previously recognized			620				2,276
Cash payments received on a security in excess of the security’s book value adjusted for previously recognized credit portion of OTTI			(50	)			(15	)
Credit portion of OTTI previously recognized on securities sold during the period			(7,659	)			—
Ending balance of the amount of OTTI related to credit losses		$	2,408			$	9,497

     On June 8, 2011, the Bank sold seven agency mortgage-backed securities (“MBS”) with an aggregate book value of approximately $20,500, resulting in a net realized gain of approximately $250. The sale was executed in order to take advantage of current favorable market prices. The Bank intends to reinvest the proceeds in securities of similar yields and durations when market conditions warrant such purchases.

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     The Bank has pledged certain of its U.S. Agency securities as collateral against a borrowing line with the Federal Reserve Bank. However, as of June 30, 2011, there were no borrowings outstanding on the Federal Reserve line of credit.

NOTE 5 — STOCK-BASED COMPENSATION

     In February 2005, our stockholders approved the Company’s Recognition and Retention Plan. This plan provides for the grant of up to 113,910 shares of the Company’s common stock to eligible participants. As of June 30, 2011, 80,771 restricted shares were issued and outstanding under this plan. During the quarter ended June 30, 2011, 10,156 shares were granted to eligible participants under this plan; and 9,338 of previously awarded shares were forfeited. Restricted shares are awarded at no cost to the employee and have a five-year vesting period. The fair value of the restricted shares on the date of award was $7.04 per share for 63,783 shares, $6.18 for 6,832 shares, and $5.48 for 10,156 shares. Compensation expense related to these awards was $1 and $2 for the three and nine months ended June 30, 2011, respectively.

     In February 2005, our stockholders also approved the Company’s 2004 Stock Option and Incentive Plan. This plan provides for the grant of nonqualified and incentive stock options and stock appreciation rights to eligible participants. The plan provides for the grant of awards for up to 284,778 shares of the Company’s common stock. At June 30, 2011, 225,416 options had been granted under this plan to eligible participants at a weighted-average exercise price of $6.88 per share. Options granted vest over a five-year period. Unexercised, nonqualified stock options expire within 15 years of the grant date and unexercised incentive stock options expire within 10 years of the grant date. Through June 30, 2011, since the plan’s inception, options for 113,915 shares of the Company’s common stock were vested, options for 83,724 shares were forfeited and options for 4,558 shares were exercised. Of the 225,416 options granted, 137,134 remained outstanding as of June 30, 2011.

     We account for stock-based employee compensation related to our 2004 Stock Option and Incentive Plan using the fair-value-based method. Accordingly, we record compensation expense based on the value of the award as measured on the grant date and recognize that cost over the vesting period for the award. Compensation expense related to these awards was $1 and $1 for the three and nine month periods ended June 30, 2011.

     In February 2008, our stockholders approved the Company’s 2008 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2008 Equity Incentive Plan is 597,605 shares. Under the Plan, the Compensation Committee may grant stock options and stock appreciation rights that, upon exercise, result in the issuance of 426,860 shares of the Company’s common stock. The Committee may grant restricted stock and restricted stock units for an aggregate of 170,745 shares of Company common stock under this plan. In October 2008, the Compensation Committee suspended consideration of distributions or awards under this plan, and as of June 30, 2011, no grants or awards have been made to eligible participants under the 2008 Equity Incentive Plan.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

     Certain statements contained in this report are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “would.” Such forward-looking statements in this report are inherently subject to many uncertainties in the Company’s operations and business environment. These uncertainties include general economic conditions, in particular, relating to consumer demand for the Bank’s products and services; the Bank’s ability to maintain current deposit and loan levels at current interest rates; competitive and technological developments; deteriorating credit quality, including changes in the interest rate

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environment reducing interest margins; prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; the Bank’s ability to maintain required capital levels and adequate sources of funding and liquidity; maintaining capital requirements may limit the Bank’s operations and potential growth; changes and trends in capital markets; competitive pressures among depository institutions; effects of critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; further write-downs in the Bank’s mortgage-backed securities portfolio; the Bank’s ability to implement its cost-savings and revenue enhancement initiatives; legislative or regulatory changes or actions, or significant litigation, adversely affecting the Bank; fluctuation of the Company’s stock price; ability to attract and retain key personnel; ability to secure confidential information through the use of computer systems and telecommunications networks; and the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Such uncertainties and other risks that may affect the Company’s performance are discussed further in Part I, Item 1A, “Risk Factors,” in the Company’s Form 10-K, as amended, for the year ended September 30, 2010 originally filed with the Securities and Exchange Commission on December 23, 2010. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this report or to update them to reflect events or circumstances occurring after the date of this report.

GENERAL

     The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2011, and the consolidated results of operations for the nine months ended June 30, 2011, compared to the same period in the fiscal year ended September 30, 2010. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in the Company’s annual report on Form 10-K/A filed with the Securities and Exchange Commission on January 11, 2011 and originally filed on December 23, 2010.

PERFORMANCE SUMMARY

     The following table sets forth our results of operations and related summary information for the three and nine month periods ended June 30, 2011 and 2010:

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SUMMARY RESULTS OF OPERATIONS

(Dollar amounts in thousands, except for per share data)

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income (loss), as reported		$	176			$	162			$	17			$	258
EPS — basic, as reported		$	0.03			$	0.03			$	—			$	0.05
EBS — diluted, as reported		$	0.03			$	0.03			$	—			$	0.05
Cash dividends paid		$	—			$	—			$	—			$	—
Return on average assets (annualized)			0.12	%			0.11	%			0.00	%			0.06	%
Reteurn on average equity (annualized)			1.34	%			1.16	%			0.04	%			0.62	%
Efficiency ratio, as reported (1)			71.39	%			71.10	%			70.35	%			70.35	%

     The following is a brief summary of some of the factors that affected our operating results in the three and nine month periods ended June 30, 2011. See the remainder of this section for a more thorough discussion. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share and per share amounts, are stated in thousands.

     We reported net income of $176 for the three months ended June 30, 2011, compared to net income of $162 for the three months ended June 30, 2010. We reported net income of $17 and $258 for the nine month periods ended June 30, 2011 and 2010, respectively. Both basic and diluted earnings per share were $0.03 for the three months ended June 30, 2011 and June 30, 2010, respectively. Both basic and diluted earnings per share were $0.00 for the nine months ended June 30, 2011, compared to basic and diluted earnings per share of $0.05 for the nine months ended June 30, 2010.

     The return on average assets for the three months ended June 30, 2011 and 2010 was 0.12% and 0.11%, respectively. The return on average equity for the nine months ended June 30, 2011 and 2010 was 0.04% and 0.62%, respectively.

     No cash dividends were declared or paid in either of the three or nine month periods ended June 30, 2011 and 2010, respectively.

Key factors behind these results were:

	•		Net interest income and net interest margin decreased slightly during the three and nine months ended June 30, 2011 from the comparable periods last year. We continue to see both rate and volume related decreases in both interest income on loans and interest expense on deposits. Reductions in FHLB borrowings led to decreases in interest expense on borrowed funds of $338 and $986 for the three and nine month periods ended June 30, 2011.
	•		Net interest income was $5,060 for the three month period ended June 30, 2011, a decrease of $453 or 8.22% from the three month period ended June 30, 2010. Net interest income was $15,645 for the nine month period ended June 30, 2011, a decrease of $197 or 1.24% from the nine month period ended June 30, 2010.

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	•		The net interest margin of 3.66% for the three months ended June 30, 2011 represents a 35 bp decrease from a net interest margin of 4.01% for the three months ended June 30, 2010. Net interest margins were 3.72% and 3.88% for the nine month periods ended June 30, 2011 and 2010, respectively.
	•		Total loans were $431,457 at June 30, 2011, a decrease of $24,775, or 5.43% from September 30, 2010. Total deposits were $459,074 at June 30, 2011, a decrease of $17,228 or 3.62% from September 30, 2010.
	•		Net loan charge-offs increased from $775 for the three months ended June 30, 2010 to $1,214 for the three months ended June 30, 2011. Net loan charge-offs increased from $1,977 for the nine months ended June 30, 2010 to $4,104 for the nine months ended June 30, 2011. Continued higher levels of net loan charge-offs and non-performing loans led to increased provision for loan losses of $1,364 and $4,614 for the three and nine month periods ended June 30, 2011, respectively. Annualized net loan charge-offs as a percentage of average loans were 1.11% for the three months ended June 30, 2011, compared to 0.58% for the three months ended June 30, 2010. Our new credit policy and more proactive charge-off and collection practices have contributed to increased loan charge-offs. Our customers’ ability to repay their loans has also been adversely affected by sustained higher unemployment rates. Further, depressed home prices and other collateral values have increased incidences of collateral shortfalls and have contributed to an increase in impaired loans, charge-offs and the need for higher levels of allowance for loan loss.
	•		Non-interest income increased from $373 for the three months ended June 30, 2010 to $766 for the three months ended June 30, 2011. We also experienced an increase from the nine month period ended June 30, 2010 to the nine month period ended June 30, 2011 from $368 to $1,470. Contributors included other-than-temporary impairment (OTTI) losses on our non-agency mortgage-backed securities portfolio of $0 and $620 for the three and nine month periods ended June 30, 2011. We also experienced gains on sale of securities of $282 and $516 for the three and nine month periods ending June 30, 2011, respectively.
	•		Non-interest expense decreased 2.69%, from $4,274 to $4,159 for the three month period ending June 30, 2010 compared to the three month period ending June 30, 2011 due to modest decreases in occupancy, office and other expenses.

CRITICAL ACCOUNTING POLICIES

     We have established certain accounting policies, which require use of estimates and judgment. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit to our Form 10-K/A annual report for the fiscal year ending September 30, 2010, our critical accounting policies are as follows:

Allowance for Loan Losses.

     We maintain an allowance for loan losses to absorb probable incurred loss in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC). The Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory expectations. However, based on periodic examinations by regulators, the amount of allowance for loan losses recorded during a particular period may be adjusted.

     Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral; and (2) a general allowance on loans not

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specifically identified in (1) above, based on historical loss ratios which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

     Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

Available for Sale Securities.

     Securities are classified as available for sale and are carried at fair value, with unrealized gains and losses reported in other comprehensive income (loss). Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.

     We evaluate all investment securities on a quarterly basis, and more frequently when economic conditions warrant determining if other-than-temporary impairment exists. A debt security is considered impaired if the fair value is less than its amortized cost at the report date. If impaired, we then assess whether the impairment is other-than-temporary.

     Current authoritative guidance provides that some portion of an unrealized loss maybe other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component is recorded in earnings as a component of other-than-temporary impairment in the consolidated statements of operations, while the loss component related to other market factors is recognized in other comprehensive income (loss), provided the Bank does not intend to sell the underlying debt security and it is “more likely than not” that the Bank will not have to sell the debt security prior to recovery of the unrealized loss.

     We consider the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

	•		The length of time, and extent to which, the fair value has been less than the amortized cost.
	•		Adverse conditions specifically related to the security, industry or geographic area.
	•		The historical and implied volatility of the fair value of the security.
	•		The payment structure of the debt security and the likelihood of the issuer or underlying borrowers being able to make payments that may increase in the future.
	•		The failure of the issuer of the security or the underlying borrowers to make scheduled interest or principal payments.
	•		Any changes to the rating of the security by a rating agency.
	•		Recoveries or additional declines in fair value subsequent to the balance sheet date.

     Interest income on securities for which other-than-temporary impairment has been recognized in earnings is recognized at a rate commensurate with the expected future cash flows and amortized cost basis of the securities after the impairment.

     Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.

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     To determine if other-than-temporary impairment exists on a debt security, the Bank first determines if (1) it intends to sell the security or (2) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Bank will recognize other-than-temporary impairment in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Bank determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the amount of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security. The amount of the total impairment related to all other factors (excluding credit loss) is included in other comprehensive income (loss).

     We monitor our portfolio investments on an on-going basis and we obtain an independent valuation of our non-agency residential mortgage-backed securities. This analysis is utilized to ascertain whether any decline in market value is other-than-temporary. In determining whether an impairment is other-than-temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer including investment downgrades by rating agencies and economic conditions within the issuer’s industry, whether it is more likely than not that we will be required to sell the security before there would be a recovery in value, and credit performance of the underlying collateral backing the securities, including delinquency rates, cumulative losses to date, and prepayment speed.

     The independent valuation process included:

•

Obtaining individual loan level data directly from servicers and trustees, and making assumptions regarding the frequency of foreclosure, loss severity and conditional prepayment rate (both the entire pool and the loan group pertaining to the bond we hold).

•

Projecting cash flows based on these assumptions and stressing the cash flows under different time periods and requirements based on the class structure and credit enhancement features of the bond we hold.

•

Identifying various price/yield scenarios based on the Bank’s book value and valuations based on both hold-to-maturity and current free market trade scenarios. Discount rates were determined based on the volatility and complexity of the security and the yields demanded by buyers in the market at the time of the valuation.

     For non-agency residential mortgage-backed securities that are considered other-than-temporarily impaired and for which we have the ability and intent to hold these securities until the recovery of our amortized cost basis, we recognize other-than-temporary impairment in accordance with accounting principles generally accepted in the United States. Under these principles, we separate the amount of the other-than-temporary impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of expected future cash flows. The amount due to other factors is recognized in other comprehensive income (loss).

Income Taxes.

     The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings. We believe that the tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As of June 30, 2011, management does not believe a valuation allowance is necessary.

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STATEMENT OF OPERATIONS ANALYSIS

     Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.

     Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average earning assets. Net interest margin exceeds interest rate spread because non-interest bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest income earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine month periods ended June 30, 2011.

     Net interest income was $5,060 for the three months ended June 30, 2011, compared to $5,513 for the three months ended June 30, 2010. Net interest income was $15,645 for the nine months ended June 30, 2011, compared to $15,842 for the nine months ended June 30, 2010. The net interest margin for the three months ended June 30, 2011 was 3.66% compared to 4.01% for the three months ended June 30, 2010. The net interest margin for the nine months ended June 30, 2011 was 3.72% compared to 3.88% for the nine months ended June 30, 2010. The decreases in interest margin are attributable to corresponding decreases in interest rate spread. Contributing factors include rate-related decreases in interest earning assets including loans and available-for-sale securities. We also continue to pay interest at higher rates on FHLB borrowings compared to our other funding sources such as customer deposits. These FHLB borrowings were originally obtained to fund the purchase of higher rate non-agency mortgage-backed securities, most of which we subsequently sold or on which we have stopped accruing interest. As the FHLB borrowings mature, we anticipate that they will be replaced with lower rate customer deposits as a source of funding as needed.

     As shown in the rate/volume analysis in the following pages, volume changes resulted in increases of $176 and $205 in net interest income for the three and nine months ended June 30, 2011, respectively, compared to the comparable prior year periods. The decrease and changes in the composition of interest earning assets resulted in a $150 decrease in interest income for the three months ended June 30, 2011 and a $389 decrease in interest income for the nine months ended June 30, 2011 compared to comparable prior year periods. Rate changes on interest earning assets decreased interest income by $909 and $1,457 for the three and nine month periods ended June 30, 2011. These decreases were partially offset by rate changes on interest-bearing liabilities that decreased interest expense by $280 and $1,055 over the same periods, for a net impact of $629 and $402 decreases in net interest income due to changes in interest rates during the three and nine month periods ended June 30, 2011. The changes in balances of CDs (increase) and FHLB Advances (decrease), discussed above, are the primary factors affecting volume changes. Rate decreases on loans and all deposit categories are reflective of the current overall lower market interest rate environment versus the same period last year.

     For the nine months ended June 30, 2011, the yield on earning assets was 5.39%, compared to 6.00% for the nine months ended June 30, 2010 which was the combined effect of a decrease of 23 bp in the loan yield and a decrease in interest income on securities available for sale. The average loan yield was 6.33% for the nine months ended June 30, 2011 and 6.56% in the nine months ended June 30, 2010. Competitive pricing on new and refinanced loans, tightened credit underwriting standards, as well as increased prepayments due to the current low rate environment, all contributed to reduced loan yields during the three and nine month periods ended June 30, 2011 compared to the comparable prior year periods.

     For the nine months ended June 30, 2011, the cost of interest-bearing liabilities decreased 46 bps from 2.26% during in the nine months ended June 30, 2010, to 1.80%, resulting, in part, from a continuing decrease in interest rates, generally, in 2010. The combined average cost of interest-bearing deposits was 1.55% for the nine months ended June 30, 2011, down 43 bp from the nine months ended June 30, 2010, primarily resulting from the continued low short-term interest rate environment.

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Throughout the second half of fiscal 2010, the Bank sought increases in customer deposits at competitively low interest rates, in part to replace FHLB Advances, which represent a higher interest rate source of funds.

     We have remained liability sensitive in the short term during the most recent two fiscal years, in which interest rates have declined to historically low levels. Continued low interest rates will enable us to experience a favorable interest rate margin.

     Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net Interest Income Analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at June 30 for each of the fiscal years shown below. No tax equivalent adjustments were made. Non-accruing loans have been included in the table as loans carrying a zero yield.

     Average interest earning assets were $553,904 and $562,588 for the three and nine month periods ending June 30, 2011, compared to $551,097 and $546,510 for comparable prior year periods. Interest income on earning assets was $7,204 and $22,684 for the three and nine month periods ending June 30, 2011 compared to $8,263 and $24,530 for comparable prior year periods. Interest income is comprised primarily of interest income on loans and interest income on available-for-sale securities. Interest income on loans was $6,773 and $21,038 for the three and nine month periods ending June 30, 2011, compared to $7,482 and $22,114 for comparable prior year periods. Interest income on available-for-sale securities was $386 and $1,519 for the three and nine month periods ended June 30, 2011 compared to $779 and $2,400 for the comparable prior year periods. Decreases in loan interest income are due to decreased loan volumes and a continued lower interest rate environment. Decreases in interest income on available-for-sale securities are due to two factors. First, we apply interest payments to principal on specific securities on which we had previously recorded other-than-temporary impairment. Also, we sold several higher risk non-agency mortgage backed securities and reinvested the proceeds in lower risk and lower yielding agency and floating rate bonds.

     Average interest bearing liabilities were $511,534 and $522,739 for the three and nine month periods ended June 30, 2011, compared to $518,296 and $513,504 for comparable prior year periods. Interest expense on interest bearing liabilities was $2,144 and $7,039 for the three and nine month periods ending June 30, 2011 compared to $2,750 and $8,688 for comparable prior year periods. Interest expense is comprised primarily of interest expense on money market accounts, certificates of deposit and FHLB advances. Decreases were due to decreased balances of FHLB advances which carry higher interest rates than deposits, and lower rates paid on money market accounts and certificate of deposit.

     For the three months ended June 30, 2011, interest expense on interest-bearing deposits increased $222 from the volume and mix changes and decreased $490 from the impact of the rate environment, resulting in an aggregate decrease of $268 in interest expense on interest-bearing deposits. For the nine months ended June 30, 2011, interest expense on interest-bearing deposits increased $969 from the volume and mix changes and decreased $1,632 from the impact of the rate environment, resulting in an aggregate decrease of $663 in interest expense on interest-bearing deposits. Average FHLB Advances decreased $51,850 and $49,601 for the three and nine months ended June 30, 2011 compared to the nine months ended June 30, 2010. Interest expense on FHLB advances was $433 and $1,494 for the three and nine month periods ended June 30, 2011, compared to $771 and $2,480 for the comparable prior year periods. The decreases were due to scheduled payments on certain FHLB advances in 2010 and 2011. As noted above, throughout 2010, the Bank sought increases in customer deposits at competitively low interest rates, in part to replace FHLB Advances, which represent a higher interest rate source of funds.

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NET INTEREST INCOME ANALYSIS
(Dollar amounts in thousands)

Three months ended June 30, 2011 compared to the three months ended June 30, 2010

		Three months ended June 30, 2011												Three months ended June 30, 2010
						Interest				Average								Interest				Average
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
Average interest-earning assets:
Cash and cash equivalents		$	44,068			$	27				0.25	%		$	40,795			$	2				0.02	%
Loans			434,586				6,773				6.25	%			457,685				7,482				6.56	%
Interest-bearing deposits			8,438				17				0.81	%			—				—				0.00	%
Securities available for sale			61,025				386				2.54	%			46,577				779				6.71	%
FHLB stock			5,787				1				0.07	%			6,040				—				0.00	%
Total interest earning assets		$	553,904			$	7,204				5.22	%		$	551,097			$	8,263				6.01	%
Average interest-bearing liabilities:
Savings Accounts		$	25,194			$	7				0.11	%		$	26,415			$	44				0.67	%
Demand deposits			23,488				1				0.02	%			22,763				8				0.14	%
Money Market			167,929				406				0.97	%			153,323				615				1.61	%
CD’s			231,849				1,184				2.05	%			205,874				1,193				2.32	%
IRA’s			23,911				113				1.90	%			18,909				119				2.52	%
Total deposits			472,371				1,711				1.45	%			427,284				1,979				1.85	%
FHLB Advances			39,163				433				4.43	%			91,013				771				3.40	%
Total interest bearing deposits		$	511,534			$	2,144				1.68	%		$	518,296			$	2,750				2.13	%
Net interest income						$	5,060											$	5,513
Interest rate spread											3.54	%											3.89	%
Net interest margin											3.66	%											4.01	%
Average interest-earning assets to average interest-bearing liabilities											1.08												1.06