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.

 

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices)

(Registrant’s telephone number, including area code)

(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 and 15(d) of the Securities Exchange Act of 1934 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-Accelerated filer o (do not check if a smaller reporting company)		Smaller reporting company þ

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

At May 16, 2011 there were 5,113,258 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

MARCH 31, 2011

INDEX

Page Number

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and September 30, 2010			3
Consolidated Statements of Operations (Unaudited) for the three and six months ended March 31, 2011 and 2010			4
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Gain/(Loss) (Unaudited) for the six months ended March 31, 2011			5
Consolidated Statements of Cash Flows (Unaudited) for the six months ended March 31, 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

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ITEM 1. FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

March 31, 2011 unaudited and September 30, 2010 derived from audited financial statements
(in thousands, except share data)

		March 31, 2011				September 30, 2010
Assets
Cash and cash equivalents		$	51,030			$	72,438
Other interest-bearing deposits			6,991				—
Securities available-for-sale (at fair value)			63,626				41,708
Federal Home Loan Bank stock			5,787				5,787
Loans receivable			439,842				456,232
Allowance for loan losses			(4,504	)			(4,145	)
Loans receivable — net			435,338				452,087
Office properties and equipment — net			7,209				7,216
Accrued interest receivable			1,717				1,977
Intangible assets			649				815
Other assets			9,677				12,337
TOTAL ASSETS		$	582,024			$	594,365
Liabilities and Stockholders’ Equity
Liabilities:
Deposits		$	482,566			$	476,302
Federal Home Loan Bank advances			42,800				64,200
Other liabilities			4,116				3,986
Total liabilities			529,482				544,488
Stockholders’ equity:
Common stock - 5,113,258 and 5,113,258 shares, respectively			51				51
Additional paid-in capital			53,823				53,823
Retained earnings			971				1,130
Unearned deferred compensation			—				(1	)
Accumulated other comprehensive loss			(2,303	)			(5,126	)
Total stockholders’ equity			52,542				49,877
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	582,024			$	594,365

See accompanying condensed notes to unaudited consolidated financial statements.

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CITIZENS COMMUNITY BANCORP, INC.

(in thousands, except per share data)

		Three Months Ended								Six Months Ended
		March 31,				March 31,				March 31,				March 31,
		2011				2010				2011				2010
Interest and dividend income:
Interest and fees on loans		$	6,996			$	7,284			$	14,265			$	14,632
Interest on investments			525				811				1,215				1,635
Total interest and dividend income			7,521				8,095				15,480				16,267
Interest expense:
Interest on deposits			1,845				1,957				3,834				4,229
Interest on borrowed funds			454				788				1,061				1,709
Total interest expense			2,299				2,745				4,895				5,938
Net interest income			5,222				5,350				10,585				10,329
Provision for loan losses			1,650				1,402				3,250				2,162
Net interest income after provision for loan losses			3,572				3,948				7,335				8,167
Noninterest income:
Total other-than-temporary impairment (losses)/recoveries			566				(1,094	)			(1,414	)			(1,700	)
Portion of loss/(recoveries) recognized in other comprehensive loss (before tax)			(566	)			592				844				614
Net gains from sale of securities			234				—				234				—
Net gains / (losses) on available-for-sale securities recognized in earnings			234				(502	)			(336	)			(1,086	)
Service charges on deposit accounts			335				339				709				728
Insurance commissions			24				68				48				120
Loan fees and service charges			68				68				279				228
Other			2				3				4				5
Total noninterest income			663				(24	)			704				(5	)
Noninterest expense:
Salaries and related benefits			2,093				1,942				4,110				3,827
Occupancy — net			666				646				1,309				1,258
Office			334				345				708				694
Data processing			74				87				133				185
Amortization of core deposit			83				83				166				166
Advertising, marketing and public relations			20				38				68				71
FDIC premium assessment			273				221				543				464
Professional services			279				265				566				570
Other			270				418				680				747
Total noninterest expense			4,092				4,045				8,283				7,982
Income (loss) before provision for income tax			143				(121	)			(244	)			180
Provision (benefit) for income taxes			63				(42	)			(85	)			84
Net income (loss)		$	80			$	(79	)		$	(159	)		$	96
Per share information:
Basic earnings (loss)		$	0.02			$	(0.02	)		$	(0.03	)		$	0.02
Diluted earnings (loss)		$	0.02			$	(0.02	)		$	(0.03	)		$	0.02
Dividends paid		$	—			$	—			$	—			$	—

See accompanying condensed notes to unaudited consolidated financial statements.

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(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 (loss):
Net income loss															(159	)											(159	)
Amortization of unrecognized prior service costs and net gains/losses, net of tax																							1				1
Net unrealized gain on available for sale securities, net of tax																							2,340				2,340
Change in unrealized gain arising from sale of securities, net of tax																							140				140
Change for realized losses on securities available for sale for OTTI write-down, net of tax																							342				342
Total comprehensive gain																											2,664
Amortization of restricted stock																			1								1
Balance, March 31, 2011			5,113,258			$	51			$	53,823			$	971			$	—			$	(2,303	)		$	52,542

See accompanying condensed notes to unaudited consolidated financial statements.

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CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows — Unaudited

Six Months Ended March 31, 2011 and 2010
(in thousands, except per share data)

		Six Months Ended
		March 31,				March 31,
		2011				2010
Cash flows from operating activities:
Net income (loss) attributable to common stockholders		$	(159	)		$	96
Adjustments to reconcile net loss to net cash provided by operating activities:
Net securities amortization			(97	)			(173	)
Depreciation			666				558
Provision for loan losses			3,250				2,162
Net realized gain on sale of securites			(234	)			0
Impairment on mortgage-backed securities			620				1,086
Amortization of core deposit intangible			166				166
Amortization of restricted stock			1				18
Provision for stock options			0				12
Provision for deferred income taxes			0				379
Increase (decrease) in accrued interest receivable and other assets			1,650				(4,197	)
Increase in other liabilities			130				89
Total adjustments			6,152				100
Net cash provided by operating activities			5,993				196
Cash flows from investing activities:
Net decrease (increase) in interest–bearing deposits			(6,991	)			2,458
Proceeds from sale of securities available–for–sale			24,711				0
Principal payments on securities available for sale			7,363				6,550
Purchase of securities available–for–sale			(49,577	)			0
Net decrease (increase) in loans			12,887				(13,259	)
Net capital expenditures			(658	)			(168	)
Net cash used in investing activities			(12,265	)			(4,419	)
Cash flows from financing activities:
Net decrease in Federal Home Loan Bank advances			(21,400	)			(7,105	)
Net increase in deposits			6,264				8,104
Net cash provided by (used in) financing activities			(15,136	)			999
Net decrease in cash and cash equivalents			(21,408	)			(3,224	)
Cash and cash equivalents at beginning of period			72,438				43,191
Cash and cash equivalents at end of period		$	51,030			$	39,967
Supplemental cash flow information:
Cash paid during the year for:
Interest on deposits		$	3,846			$	4,230
Interest on borrowings		$	1,130			$	1,785
Income taxes		$	5			$	3
Supplemental noncash disclosure:
Transfers from loans to foreclosed properties		$	637			$	265

See accompanying condensed notes to unaudited consolidated financial statements.

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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 May 16, 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 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. 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 regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.

     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 May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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.

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     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.

     July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosure about Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The objective of this guidance is for an entity to provide disclosures that facilitate the evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving at the allowance for doubtful accounts; and the changes and reasons for those changes in the allowance for credit losses. To achieve those objectives, disclosures on a disaggregated basis shall be provided on two defined levels: (1) portfolio segment; and (2) class of financing receivable. This guidance makes changes to existing disclosure requirements and includes additional disclosure requirements relating to financing receivables. All provisions of this guidance are currently effective.

     The provisions of this guidance did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

     In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements and Disclosures; Improving Disclosures about Fair Value Measurements”, which provided updated guidance on fair value measurements and disclosures as set forth in ASC 820-10. The guidance requires companies to disclose transfers in and out of levels 1 and 2, and to expand the reconciliation of level 3 fair value measurements by presenting separately information about purchases, sales, issuances and settlements. The updated guidance also clarifies existing disclosure requirements on the level of disaggregation (provide fair value measurement disclosures for each class of assets and liabilities) and inputs and valuation techniques (required disclosure for fair value measurements that fall in either level 2 or level 3). This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the reconciliation of level 3 fair value measurements. Those disclosures regarding the reconciliation of level 3 fair value measurements became effective for periods beginning after December 15, 2010. The provisions of this guidance did not have a material impact on the Company’s 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.

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     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.

     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)
March 31, 2011:
Securities available for sale:
U.S. Agency mortgage-backed securities		$	20,958			$	—			$	20,958			$	—
U.S. Agency floating Rate Bonds			31,646				—				31,646				—
Non-agency mortgage-backed securities			11,022				—				—				11,022
Total		$	63,626			$	—			$	52,604			$	11,022
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)
March 31, 2011:
Foreclosed assets		$	649			$	—			$	—			$	649
Loans restructured in a troubled debt restructuring			6,376				—				—				6,376
Total		$	7,025			$	—			$	—			$	7,025
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 six months ended March 31, 2011.

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     The fair value of foreclosed assets is determined by obtaining market price 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 six month periods ended March 31, 2011 and 2010 (000’s):

		Six Months Ended
		March 31,				March 31,
		2011				2010
Balance beginning of period		$	24,999			$	36,517
Total gains or losses (realized/unrealized):
Included in earnings			(620	)			(1,086	)
Included in other comprehensive loss			5,058				3
Sales			(13,633	)			—
Payments, accretion and amortization			(4,782	)			(5,782	)
Balance end of period		$	11,022			$	29,652

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).

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.

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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 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):

		March 31,								September 30,
		2011								2010
						Estimated								Estimated
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets:
Cash and cash equivalents		$	51,030			$	51,030			$	72,438			$	72,438
Interest-bearing deposits			6,991				6,991				—				—
Securities available for sale			63,626				63,626				41,708				41,708
Loans receivable			435,338				461,521				452,087				477,039
FHLB stock			5,787				5,787				5,787				5,787
Accrued interest receivable			1,717				1,717				1,977				1,977
Financial liabilities:
Deposits			482,566				488,731				476,302				482,337
FHLB advances			42,800				45,527				64,200				68,290
Accrued interest payable		$	159			$	159			$	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.

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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 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.

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

		Real Estate				Consumer				Total
March 31, 2011 and Six Months then Ended:
Allowance for Loan Losses:
Beginning balance		$	1,562			$	2,583			$	4,145
Charge-offs			(1,195	)			(1,825	)			(3,020	)
Recoveries			30				99				129
Provision (1)			1,290				1,960				3,250
Ending balance		$	1,687			$	2,817			$	4,504
Ending balance: individually evaluated for impairment		$	406			$	301			$	707
Ending balance: collectively evaluated for impairment		$	1,281			$	2,516			$	3,797
Loans Receivable:
Ending balance		$	265,691			$	174,151			$	439,842
Ending balance: individually evaluated for impairment		$	10,496			$	2,808			$	13,304
Ending balance: collectively evaluated for impairment		$	255,195			$	171,343			$	426,538
Sepember 30, 2010 and Twelve Months then Ended:
Allowance for Loan Losses:
Beginning balance		$	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		$	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 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
		March 31,				September 30,				March 31,				September 30,
		2011				2010				2011				2010
Performing loans
Performing TDR loans		$	4,092			$	2,714			$	1,078			$	559
Performing loans other			255,195				255,110				171,342				192,765
Total performing loans			259,287				257,824				172,420				193,324
Nonperforming loans (1)
Nonperforming TDR loans			1,596				—				260				—
Nonperforming loans other			4,808				3,533				1,471				1,551
Total nonperforming loans			6,404				3,533				1,731				1,551
Total loans		$	265,691			$	261,357			$	174,151			$	194,875

     Impaired loans with a valuation allowance based upon the fair value of the underlying collateral had a carrying amount of $3,170 at March 31, 2011 compared to $2,581 at September 30, 2010. The valuation allowance on impaired loans was $707 at March 31, 2011, compared to $733 at September 30, 2010.

     An aging analysis of the Bank’s real estate and consumer loans as of March 31, 2011 and September 30, 2010 is as follows (dollar amounts in thousands):

																										Recorded
										Greater																Investment >
		31-60 Days				61-90 Days				Than				Total								Total				90 Days and
		Past Due				Past Due				90 Days				Past Due				Current				Loans				Accruing
March 31, 2011:
Real estate loans		$	2,964			$	1,437			$	4,384			$	8,785			$	256,906			$	265,691			$	—
Consumer loans			3,327				699				1,471				5,497				168,654				174,151				—
Total		$	6,291			$	2,136			$	5,855			$	14,282			$	425,560			$	439,842			$	—
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			$	—

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     A summary of the Bank’s impaired loans as of March 31, 2011 and September 30, 2010 is as follows (dollar amounts in thousands):

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
March 31, 2011 and Six Months then Ended:
With no related allowance recorded:
Real estate loans		$	3,568			$	3,568			$	—			$	2,238			$	51
Consumer loans			345				345				—			$	278				6
With an allowance recorded:
Real estate loans			2,120				2,120				366			$	1,709				11
Consumer loans			993				993				284			$	976				15
Total:
Real estate loans			5,688				5,688				366				3,946				62
Consumer loans		$	1,338			$	1,338			$	284			$	1,254			$	21
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

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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 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 March 31, 2011 and during the six months then ended is as follows:

		Real Estate				Consumer				Total
March 31, 2011 and Six Months then Ended:
Accruing / Performing:
Beginning balance		$	1,402			$	415			$	1,817
Principal payments			42				72				114
Charge-offs			—				—				—
Advances			21				4				25
New restructured			962				342				1,304
Class Transfers			1,487				207				1,694
Transfers between accrual/non-accrual			—				—				—
Ending balance		$	3,914			$	1,040			$	4,954
Non-accrual / Non-performing:
Beginning balance		$	1,312			$	144			$	1,456
Principal payments			13				14				27
Charge-offs			—				30				30
Advances			39				4				43
New restructured			—				—				—
Class Transfers			—				—				—
Transfers between accrual/non-accrual			232				67				299
Ending balance		$	1,596			$	259			$	1,855
Totals:
Beginning balance		$	2,714			$	559			$	3,273
Principal payments			55				86				141
Charge-offs			—				30				30
Advances			60				8				68
New restructured			962				342				1,304
Class Transfers			1,487				207				1,694
Transfers between accrual/non-accrual			232				67				299
Ending balance		$	5,510			$	1,299			$	6,809

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 of securities available for sale as of March 31, 2011 and September 30, 2010, respectively, are as follows (dollar amounts in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
Description of Securities		Cost				Gains				Losses				Fair Value
March 31, 2011
U.S. Agency mortgage-backed securities		$	20,738			$	220			$	—			$	20,958
U.S. Agency Floating Rate Bonds			31,750				—				104				31,646
Non-agency mortgage-backed securities			14,737				—				3,715				11,022
Total investment securities		$	67,225			$	220			$	3,819			$	63,626
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 security before its anticipated recovery and therefore, there is no other-than-temporary impairment during the three months ended March 31, 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:

		Six Months				Twelve Months
		Ended				Ended
		March 31,				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	)
Ending balance of the amount of OTTI related to credit losses		$	10,067			$	9,497

     On February 2, 2011, the Bank sold four agency and 10 non-agency mortgage-backed securities (“MBS”) with an aggregate book value of $24,711, resulting in a net realized gain of $234. The sale was executed in order to (a) take advantage of current favorable market prices to minimize realized losses on certain non-agency MBS, (b) reduce the Bank’s exposure to credit risk within its non-agency MBS portfolio, and (c) improve the Bank’s risk-based capital position by eliminating certain MBS securities which represented higher risk-weighted assets for regulatory capital computation purposes. To date, prior to the sale, the Bank had

recognized $4,861 of other-than-temporary impairment in earnings on the aforementioned 10 non-agency mortgage-backed securities.

     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 March 31, 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 March 31, 2011, 70,615 restricted shares were issued and outstanding under this plan. During the quarter ended March 31, 2011 no 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 and $6.18 for 6,832 shares. Compensation expense related to these awards was $0 and $1 for the three and six months ended March 31, 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 March 31, 2011, 202,197 options had been granted under this plan to eligible participants at a weighted-average exercise price of $7.04 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 March 31, 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 202,197 options granted, 113,915 remained outstanding as of March 31, 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. No compensation expense was recorded for the three or six month periods ended March 31, 2011 as all options have vested.

     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 March 31, 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 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 March 31, 2011, and the consolidated results of operations for the six months ended March 31, 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 six month periods ended March 31, 2011 and 2010:

SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except for per share data)

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net income (loss), as reported		$	80			$	(79	)		$	(159	)		$	96
EPS — basic, as reported		$	0.02			$	(0.02	)		$	(0.03	)		$	0.02
EBS — diluted, as reported		$	0.02			$	(0.02	)		$	(0.03	)		$	0.02
Cash dividends paid		$	—			$	—			$	—			$	—
Return on average assets (annualized)			0.06	%			(0.06	%)			(0.05	%)			0.03	%
Reteurn on average equity (annualized)			0.62	%			(0.58	%)			(0.62	%)			0.35	%
Efficiency ratio, as reported (1)			69.53	%			69.41	%			69.85	%			69.96	%

     The following is a brief summary of some of the factors that affected our operating results in the three and six month periods ended March 31, 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 $80 for the three months ended March 31, 2011, compared to net loss of ($79) for the three months ended March 31, 2010. We reported a net loss of ($159) and net income of $96 for the six month periods ended March 31, 2011 and 2010, respectively. Both basic and diluted earnings per share were $0.02 for the three months ended March 31, 2011, compared to basic and diluted losses per share of ($0.02) for the three months ended March 31, 2010. Both basic and diluted losses per share were ($0.03) for the six months ended March 31, 2011, compared to basic and diluted earnings per share of $0.02 for the six months ended March 31, 2010.

     The return on average assets for the three months ended March 31, 2011 and 2010 was 0.06% and (0.06%), respectively. The return on average equity for the six months ended March 31, 2011 and 2010 was (0.05%) and 0.03%, respectively.

     No cash dividends were declared or paid in either of the three or six month periods ended March 31, 2011 and 2010, respectively.

Key factors behind these results were:

	•		Net interest income and net interest margin increased slightly during the six months ended March 31, 2011 from the comparable period last year. However, net interest income decreased slightly during the three month period ended March 31, 2011 from the comparable prior period. We continue to see rate-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 $334 and $648 for the three and six month periods ending March 31, 2011.
	•		Net interest income was $5,222 for the three month period ended March 31, 2011, a decrease of $128 or 2.39% from the three month period ended March 31, 2010. Net interest income was $10,585 for the six month period ended March 31, 2011, an increase of $256 or 2.48% from the three month period ended March 31, 2010.

	•		The net interest margin of 3.75% for the three months ended March 31, 2011 represents a 26 bp decrease from a net interest margin of 4.01% for the three months ended March 31, 2010. Net interest margins were 3.74% and 3.81% for the six month periods ended March 31, 2011 and 2010, respectively.
	•		Total loans were $439,842 at March 31, 2011, a decrease of $16,390, or 3.59% from September 30, 2010. Total deposits were $482,566 at March 31, 2011, an increase of $6,264 or 1.32% from September 30, 2010.
	•		Net loan charge-offs increased from $804 for the three months ended March 31, 2010 to $1,558 for the three months ended March 31, 2011. Net loan charge-offs increased from $1,202 for the six months ended March 31, 2010 to $2,891 for the six months ended March 31, 2011. Continued higher levels of net loan charge-offs and non-performing loans led to significantly increased provision for loan losses of $1,650 and $3,250 for the three and six month periods ended March 31, 2011, respectively. Annualized net loan charge-offs as a percentage of average loans were 1.29% for the three months ended March 31, 2011, compared to 0.53% for the three months ended March 31, 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 (loss) increased from a loss of ($24) for the three months ended March 31, 2010 to income of $663 for the three months ended March 31, 2011. We experienced a comparable increase for the six month period ended March 31, 2011 from ($5) to $704. The main contributors were $0 of other-than-temporary impairment (OTTI) losses on our non-agency mortgage-backed securities portfolio and a gain on sale of securities of $234 in the current quarter.
	•		Non-interest expense increased 1.16%, from $4,045 to $4,092 for the three month period ending March 31, 2010 compared to the three month period ending March 31, 2011 due to modest increases in compensation costs and FDIC premium assessments.

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 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.

     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 consolidated financial statements. As of March 31, 2011, management does not believe a valuation allowance is necessary.

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 six month periods ended March 31, 2011.

     Net interest income was $5,222 for the three months ended March 31, 2011, compared to $5,350 for the three months ended March 31, 2010. Net interest income was $10,585 for the six months ended March 31, 2011, compared to $10,329 for the six months ended March 31, 2010. The net interest margin for the three months ended March 31, 2011 was 3.75% compared to 4.01% for the three months ended March 31, 2010. The net interest margin for the six months ended March 31, 2011 was 3.74% compared to 3.81% for the six months ended March 31, 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.

     As shown in the rate/volume analysis in the following pages, volume changes resulted in increases of $55 and $50 in net interest income for the three and six months ended March 31, 2011, respectively, compared to the comparable prior year periods. The decrease and changes in the composition of interest earning assets resulted in a $183 decrease in interest income for the three months ended March 31, 2011 and a $206 increase in interest income for the six months ended March 31, 2011 compared to comparable prior year periods. Rate changes on interest earning assets decreased interest income by $433 and $581 for the three and six month periods ended March 31, 2011. These decreases were offset by rate changes on interest-bearing liabilities that decreased interest expense by $250 and $787 over the same periods, for a net impact of $183 decrease and $206 increase due to changes in interest rates during the three and six month periods ended March 31, 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 overall lower market interest rate environment currently versus the same period last year.

     For the six months ended March 31, 2011, the yield on earning assets was 5.46%, compared to 5.99% for the six months ended March 31, 2010 which was the combined effect of a decrease of 19 bp in the loan yield and a decrease in interest income on securities available for sale. The average loan yield was 6.37% for the six months ended March 31, 2011 and 6.56% in the six months ended March 31, 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 six month periods ended March 31, 2011 compared to the comparable prior year periods.

     For the six months ended March 31, 2011, the cost of interest-bearing liabilities decreased 48 bps from 2.33% in the six months ended March 31, 2010, to 1.85%, resulting, in part, from a continuing decrease in interest rates, generally, in 2010. The combined average cost of interest-bearing deposits was 1.60% for the six months ended March 31, 2011, down 45 bp from the six months ended March 31, 2010, primarily resulting from the continued low short-term interest rate environment. 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 March 31 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 $564,169 and $568,120 for the three and six month periods ending March 31, 2011, compared to $541,559 and $544,201 for comparable prior year periods. Interest income on earning assets was $7,521 and $15,480 for the three and six month periods ending March 31, 2011 compared to $8,095 and $16,267 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 $6,996 and $14,265 for the three and six month periods ending March 31, 2011, compared to $7,284 and $14,632 for comparable prior year periods. Interest income on available-for-sale securities was $484 and $1,133 for the three and six month periods ended March 31, 2011 compared to $808 and $1,621 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 resulted primarily from our policy of applying interest payments to principal on specific securities on which we had previously recorded other-than-temporary impairment.

     Average interest bearing liabilities were $523,872 and $529,517 for the three and six month periods ending March 31, 2011, compared to $510,329 and $511,281 for comparable prior year periods. Interest expense on interest bearing liabilities was $2,299 and $4,895 for the three and six month periods ending March 31, 2011 compared to $2,745 and $5,938 for comparable prior year periods. Interest expense is comprised primarily of interest expense on certificates of deposit and FHLB advances.

     For the three months ended March 31, 2011, interest expense on interest-bearing deposits increased $367 from the volume and mix changes and decreased $479 from the impact of the rate environment, resulting in an aggregate decrease of $112 in interest expense on interest-bearing deposits. For the six months ended March 31, 2011, interest expense on interest-bearing deposits increased $775 from the volume and mix changes and decreased $1,170 from the impact of the rate environment, resulting in an aggregate decrease of $395 in interest expense on interest-bearing deposits. Average FHLB Advances decreased $55,900 and $49,358 for the three and six months ending March 31, 2011 compared to the six months ended March 31, 2010. Interest expense on FHLB advances was $454 and $1,061 for the three and six month periods ended March 31, 2011, compared to $788 and $1,709 for the comparable prior year periods. The decreases are 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.

NET INTEREST INCOME ANALYSIS
(Dollar amounts in thousands)

Three months ended March 31, 2011 compared to the three months ended March 31, 2010

		Three months ended March 31, 2011												Three months ended March 31, 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		$	64,369			$	31				0.20	%		$	35,518			$	1				0.01	%
Loans			445,785				6,996				6.36	%			450,022				7,284				6.56	%
Interest-bearing deposits			4,498				9				0.81	%			623				2				1.30	%
Securities available for sale			43,730				484				4.49	%			49,356				808				6.64	%
FHLB stock			5,787				1				0.07	%			6,040				—				0.00	%
Total interest earning assets		$	564,169			$	7,521				5.41	%		$	541,559			$	8,095				6.06	%
Average interest-bearing liabilities:
Savings accounts		$	24,965			$	8				0.13	%		$	25,336			$	41				0.66	%
Demand deposits			22,896				2				0.04	%			22,162				7				0.13	%
Money market			160,888				426				1.07	%			149,333				550				1.49	%
CD’s			247,914				1,288				2.11	%			196,652				1,239				2.56	%
IRA’s			24,409				121				2.01	%			18,146				120				2.68	%
Total deposits			481,072				1,845				1.56	%			411,629				1,957				1.90	%
FHLB Advances			42,800				454				4.30	%			98,700				788				3.24	%
Total interest bearing deposits		$	523,872			$	2,299				1.78	%		$	510,329			$	2,745				2.18	%
Net interest income						$	5,222											$	5,350
Interest rate spread											3.63	%											3.88	%
Net interest margin											3.75	%											4.01	%
Average interest-earning assets to average interest-bearing liabilities											1.08												1.06