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EX-32 - EXHIBIT 32 - Peoples Federal Bancshares, Inc.ex32.htm
EX-31.2 - EXHIBIT 31.2 - Peoples Federal Bancshares, Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Peoples Federal Bancshares, Inc.ex31_1.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-34801

Peoples Federal Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Maryland
 
27-2814821
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)

435 Market Street, Brighton, Massachusetts
 
02135
(Address of Principal Executive Offices)
 
Zip Code

(617) 254-0707
(Registrant’s telephone number)

 
N/A
 
 
(Former name or former address, if changed since last report)
 

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

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES   o   NO   ¨.

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

 
Large accelerated filer    ¨
 
Accelerated filer                    ¨
 
 
Non-accelerated filer      ¨
 
Smaller reporting company  x
 
 
(Do not check if smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
YES   ¨   NO   x

7,141,500 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of August 5, 2011.

 
 

 

Peoples Federal Bancshares, Inc.
 
FORM 10-Q
 
Index
 
     
Page
   
Part I.  Financial Information
 
       
Item 1.
 
Consolidated Financial Statements
 
       
   
1
       
   
2
       
   
3
       
   
4
       
   
6
       
Item 2.
 
20
Item 3.
 
29
Item 4.
 
29
       
   
Part II.  Other Information
 
       
Item 1.
 
29
Item 1A.
 
29
Item 2.
 
29
Item 3.
 
29
Item 4.
 
30
Item 5.
 
30
Item 6.
 
30
   
31
 
 
 

 

Part I.  Financial Information
 
Item 1.
Consolidated Financial Statements
 
PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

   
June 30, 2011
   
September 30, 2010
 
   
(Unaudited)
       
   
(In thousands, except share data)
 
ASSETS
           
Cash and due from banks
  $ 9,849     $ 9,154  
Interest-bearing demand deposits with other banks and
money market mutual funds
    45,713       66,888  
Federal funds sold
    3,041       12,505  
Federal Home Loan Bank - overnight deposit
    8,003       25,316  
Total cash and cash equivalents
    66,606       113,863  
Investments in available-for-sale securities (at fair value)
    25,541       23,596  
Investments in held-to-maturity securities (at cost)
    6,775       ---  
Federal Home Loan Bank stock (at cost)
    4,339       4,339  
Loans, net of allowance for loan losses of $3,376 as of June 30,
2011 (unaudited) and $3,203 as of September 30, 2010
    401,904       377,664  
Loans held-for-sale
    ---       260  
Other real estate owned
    ---       795  
Premises and equipment
    3,680       3,257  
Accrued interest receivable
    1,524       1,589  
Cash surrender value of life insurance policies
    18,567       11,670  
Deferred income tax asset, net
    5,431       5,647  
Other assets
    3,496       3,257  
Total assets
  $ 537,863     $ 545,937  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits:
               
Noninterest-bearing
  $ 37,818     $ 35,359  
Interest-bearing
    352,271       355,480  
Total deposits
    390,089       390,839  
Federal Home Loan Bank advances
    23,000       33,000  
Other liabilities
    7,393       7,738  
Total liabilities
    420,482       431,577  
                 
Stockholders’ Equity:
               
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
    ---       ---  
Common stock, $.01 par value, 100,000,000 shares authorized, 7,141,500
shares issued and outstanding
    71       71  
Additional paid-in-capital
    69,409       69,331  
Retained earnings
    53,118       50,606  
Accumulated other comprehensive income
    68       65  
Unearned ESOP shares
    (5,285 )     (5,713 )
Total stockholders’ equity
    117,381       114,360  
Total liabilities and stockholders’ equity
  $ 537,863     $ 545,937  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
1


PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME
 

   
Three Months
Ended June 30,
   
Nine Months
Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands, except share data)
 
                         
Interest and dividend income:
                       
Interest and fees on loans
  $ 4,981     $ 5,113     $ 15,116     $ 15,730  
Interest on debt securities:
                               
Taxable
    93       30       236       100  
Other interest
    25       36       99       71  
Dividends on Federal Home Loan Bank stock
    4       ---       7       ---  
Total interest and dividend income
    5,103       5,179       15,458       15,901  
Interest expense:
                               
Interest on deposits
    875       1,097       2,601       3,566  
Interest on Federal Home Loan Bank advances
    183       443       611       1,335  
Total interest expense
    1,058       1,540       3,212       4,901  
Net interest and dividend income
    4,045       3,639       12,246       11,000  
Provision for loan losses
    120       ---       340       300  
                                 
Net interest and dividend income
after provision for loan losses
    3,925       3,639       11,906       10,700  
Noninterest income:
                               
Customer service fees
    204       208       605       614  
Loan servicing fees
    25       24       77       75  
Net gain on sales of mortgage loans
    13       91       136       171  
Net gain on sales of available-for-sale securities
    ---       ---       ---       210  
Income on cash surrender value of life insurance
    157       102       397       318  
Other income
    46       5       206       64  
Total noninterest income
    445       430       1,421       1,452  
Noninterest expense:
                               
Salaries and employee benefits
    2,103       1,818       6,071       5,215  
Occupancy expense
    187       192       626       596  
Equipment expense
    107       102       320       308  
Professional fees
    114       129       444       313  
Advertising expense
    83       35       146       109  
Data processing expense
    172       120       548       468  
Deposit insurance expense
    96       165       338       358  
Other expense
    304       251       933       715  
Total noninterest expense
    3,166       2,812       9,426       8,082  
Income before income taxes
    1,204       1,257       3,901       4,070  
Income tax expense
    493       478       1,389       1,572  
Net income
  $ 711     $ 779     $ 2,512     $ 2,498  
                                 
Earnings per common share:
                               
Basic
  $ 0.11       N/A     $ 0.38       N/A  
Diluted
  $ 0.11       N/A     $ 0.38       N/A  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
2


PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Nine Months Ended June 30, 2011 and 2010 (Unaudited)
(In thousands)
 
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Unearned
ESOP
Shares
   
Accumulated
Other
Comprehensive
Income
   
Total
 
Balance, September 30, 2009
  $ ---     $ ---     $ 50,770     $ ---     $ 173     $ 50,943  
Comprehensive income:
                                               
Net income
    ---       ---       2,498       ---       ---       ---  
Net change in unrealized
holding gain on available-for-sale
securities, net of tax effect
    ---       ---       ---       ---       (112 )     ---  
Comprehensive income
    ---       ---       ---       ---       ---       2,386  
Balance, June 30, 2010
  $ ---     $ ---     $ 53,268     $ ---     $ 61     $ 53,329  
                                                 
Balance, September 30, 2010
  $ 71     $ 69,331     $ 50,606     $ (5,713 )   $ 65     $ 114,360  
Comprehensive income:
                                               
Net income
    ---       ---       2,512       ---       ---       ---  
Net change in unrealized holding
gain on available-for-sale
securities, net of tax effect
    ---       ---       ---       ---       3       ---  
Comprehensive income
    ---       ---       ---       ---       ---       2,515  
ESOP shares committed to be released
    ---       78       ---       428       ---       506  
Balance, June 30, 2011
  $ 71     $ 69,409     $ 53,118     $ (5,285 )   $ 68     $ 117,381  

The accompanying notes are an integral part of these consolidated financial statements.

 
3


PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Nine Months
Ended June 30,
 
   
2011
   
2010
 
 
  Unaudited  
Cash flows from operating activities:
  (In thousands)  
Net income
  $ 2,512     $ 2,498  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Change in loans held for sale
    260       ---  
Amortization of securities, net
    (170 )     12  
Net gain on sales of available-for-sale securities
    ---       (210 )
Provision for loan losses
    340       300  
Change in net deferred loan fees
    (134 )     (181 )
Depreciation and amortization
    268       291  
Loss on sale of other real estate owned
    30       ---  
Write down of other real estate owned
    101       ---  
Unearned Compensation ESOP
    281       ---  
Decrease (increase) in accrued interest receivable
    65       (1 )
Income on cash surrender value of life insurance
    (397 )     (318 )
Increase in other assets
    (65 )     (2,567 )
(Decrease) increase in accrued expenses and other liabilities
    (120 )     48  
Increase in prepaid income taxes
    (174 )     (144 )
Deferred income tax expense
    215       75  
                 
Net cash provided by (used in) operating activities
    3,012       (197 )
                 
Cash flows from investing activities:
               
Purchases of available-for-sale securities
    (27,000 )     (13,000 )
Purchases of held-to-maturity securities
    (6,775 )     ---  
Proceeds from sales of available-for-sale securities
    ---       4,829  
Proceeds from maturities, payments and calls of
               
available-for-sale securities
    25,229       895  
Loan originations and principal collections, net
    (2,392 )     20,636  
Loans purchased
    (22,293 )     (30,830 )
Investments in life insurance policies
    (6,500 )     ---  
Recoveries of loans previously charged off
    8       139  
Capital expenditures
    (691 )     (153 )
Proceeds from sale of other real estate owned
    895       ---  
                 
Net cash used in investing activities
    (39,519 )     (17,484 )

 
4


PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

   
Nine Months
Ended June 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
   
(In thousands)
 
             
Cash flows from financing activities:
           
             
Net (decrease) increase in demand deposits, NOW and
savings accounts
    (3,810 )     89,601  
Net increase in time deposits
    3,060       11,232  
Proceeds from Federal Home Loan Bank advances
    ---       8,000  
Repayment of Federal Home Loan Bank advances
    (10,000 )     (19,000 )
                 
Net cash (used in) provided by financing activities
    (10,750 )     89,833  
                 
Net (decrease) increase in cash and cash equivalents
    (47,257 )     72,152  
Cash and cash equivalents at beginning of period
    113,863       88,634  
Cash and cash equivalents at end of period
  $ 66,606     $ 160,786  
                 
Supplemental disclosures:
               
Interest paid
  $ 3,212     $ 4,933  
Income taxes paid
    1,348       1,641  
                 
Transfer from loans to other
real estate owned
    231       ---  

The accompanying notes are an integral part of these consolidated financial statements.

 
5


PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY
 
Notes to Consolidated Financial Statements

NOTE 1 - NATURE OF OPERATIONS

Peoples Federal Savings Bank (Bank) was organized in 1888, and in 2005 reorganized into a mutual holding company structure.  The Bank is headquartered in Brighton, Massachusetts.  The Bank operates its business from seven banking offices located in Brighton, Allston, West Roxbury, Jamaica Plain, Brookline, Norwood and West Newton, Massachusetts.  The Bank is engaged principally in the business of providing a variety of financial services to individuals and small businesses primarily in the form of various deposit products and residential and commercial mortgage lending products.

On July 6, 2010, in accordance with a Plan of Conversion (Conversion), Peoples Federal MHC, the Bank’s former federally chartered mutual holding company completed a mutual-to-stock conversion pursuant to which the Bank became the wholly owned subsidiary of Peoples Federal Bancshares, Inc. (Company), a stock holding company.  In connection with the Conversion, the Company sold 6,612,500 shares of common stock, at an offering price of $10 per share, and issued an additional 529,000 shares of its common stock to the Peoples Federal Savings Bank Charitable Foundation, resulting in an aggregate issuance of 7,141,500 shares of common stock.  The Company’s stock began trading on July 7, 2010 on the NASDAQ Stock Market LLC, under the symbol “PEOP.”

The net proceeds from the stock offering, net of offering costs of $2,012,000, amounted to $64,112,000.

As set forth above, in connection with the Conversion, the Bank established and funded the Peoples Federal Savings Bank Charitable Foundation (Foundation) with 529,000 shares of the Company’s common stock, which was equal to 8% of the shares issued in the stock offering.  This contribution resulted in recognition of expense in the quarter ended September 30, 2010, based on the $10 per share offering price.  The Foundation supports charitable causes and community development activities in the Bank’s areas of operations.

Also, in connection with the Conversion, the Bank established an employee stock ownership plan (ESOP), which purchased 571,320 shares of the Company’s common stock at a price of $10 per share.

In accordance with Office of Thrift Supervision (OTS) regulations, at the time of the Conversion from a mutual holding company to a stock holding company, the Company will substantially restrict retained earnings by establishing a liquidation account and the Bank will establish a parallel liquidation account.  The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion.  The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.  In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.  The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

NOTE 2 - BASIS OF PRESENTATION
 
The consolidated financial statements include the accounts of Peoples Federal Bancshares, Inc., and its wholly owned subsidiary, Peoples Federal Savings Bank as of June 30, 2011(unaudited) and September 30, 2010.  All significant intercompany accounts and transactions have been eliminated in the consolidation.

In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company and the statements of income and changes in equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with generally accepted accounting principles.  In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the

 
6


determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted.  Operating results for the nine month period ended June 30, 2011 (unaudited) are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011.  The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Peoples Federal Bancshares, Inc.’s Form 10-K for the fiscal year ended September 30, 2010 filed with the SEC on December 29, 2010.

The allowance for loan losses is a significant accounting policy and is presented in Peoples Federal Bancshares, Inc.’s Form 10-K for the fiscal year ended September 30, 2010 which provides information on how significant assets are valued in the financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

NOTE 3 - RECENT PRONOUNCEMENTS
 
In December 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-28, “Intangibles – Goodwill and Other.”   This ASU address when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.   For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010 and did not have an impact on the Company’s results of operations or financial position.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”   This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earning disclosure requirements for business combinations.    The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and did not have an impact on the Company’s results of operations or financial position.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011.  Additional disclosures are also required under this ASU.  The Company is currently evaluating the impact of this ASU.  The ASU is expected to cause more loan modifications to be classified as Troubled Debt Restructurings and the Company is evaluating its modification programs and practices in light of the new ASU.

 In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption is not permitted.   The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.”  The amendments in this ASU explain how to measure fair value.  They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.  The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during

 
7


interim and annual periods beginning after December 15, 2011.  The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.”  The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income.  An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

NOTE 4 - INVESTMENTS IN SECURITIES

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.  The amortized cost of investment securities and their approximate fair values are as follows:
 
   
Amortized
Cost
Basis
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In thousands)
 
Available-for-Sale Securities:
                       
June 30, 2011 (unaudited):
                       
Debt securities issued by U.S. Government corporations
and agencies
  $ 24,999     $ 72     $ 4     $ 25,067  
Mortgage-backed securities
    428       46       ---       474  
    $ 25,427     $ 118     $ 4     $ 25,541  
                                 
September 30, 2010:
                               
Debt securities issued by U.S. Government corporations
and agencies
  $ 23,000     $ 66     $ ---     $ 23,066  
Mortgage-backed securities
    486       44       ---       530  
    $ 23,486     $ 110     $ ---     $ 23,596  
                                 
Held-to-Maturity Securities:
                               
June 30, 2011 (unaudited):
                               
                                 
Mortgage-backed securities
  $ 6,775       ---       23       6,752  
    $ 6,775     $ ---     $ 23     $ 6,752  

The scheduled maturities of debt securities were as follows as of June 30, 2011(Unaudited).  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available-for-Sale
   
Held-to-Maturity
 
   
Fair
Value
   
Cost
Basis
   
Fair
Value
 
   
(In thousands)
 
Over one through five years
  $ 25,067     $ ---     $ ---  
Mortgage-backed securities
    474       6,775       6,752  
    $ 25,541     $ 6,775     $ 6,752  

During the nine months ended June 30, 2011, there were no sales of available-for-sale or held-to-maturity securities.   During the nine months ended June 30, 2010, proceeds from sales of securities available-for-sale amounted to

 
8


$4,829,000.  Gross realized gains on those sales amounted to $210,000 with no realized losses.  The income tax expense related to the gross realized gains amounted to $85,000.
 
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows:
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
 
   (In thousands)  
June 30, 2011 (unaudited):
                                   
Debt securities issued by U.S. Government
corporations and agencies
  $ 1,996     $ 4     $ ---     $ ---     $ 1,996     $ 4  
Mortgage-backed securities
    6,752       23       ---       ---       6,752       23  
Total temporarily impaired securities
  $ 8,748     $ 27     $ ---     $ ---     $ 8,748     $ 27  
 
Unrealized losses on debt securities as June 30, 2011 (unaudited) are due to changes in market interest rates and are deemed to be temporary.  The Company has the intent and ability to hold the securities until cost recovery occurs.

The Company did not have any impaired investments at September 30, 2010.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS:

Loans receivable that management has the intent and ability to hold until maturity or pay off are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

Interest on loans is recognized on a simple interest basis.

Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan’s yield.  The Company is amortizing these amounts over the contractual life of the related loans.

Residential real estate loans are generally placed on nonaccrual when reaching 90 days past due or in process of foreclosure.  All closed-end consumer loans 90 days or more past due and any equity line reaching 90 days past due or in the process of foreclosure are placed on nonaccrual status.  Secured consumer loans are written down to realizable value and unsecured consumer loans are charged off upon reaching 120 or 180 days past due depending on the type of loan.  Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash.  When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans.  A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally nine months.

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan.  Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible.  When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate.  Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

 
9


ALLOWANCE FOR LOAN LOSSES:
 
We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology.  All loan losses are charged to the allowance for loan losses and all recoveries are credited to it.  Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.  We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP.  The allowance for loan losses consists primarily of two components:
 
(1)           Specific allowances established for impaired loans (as defined by GAAP).  The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the fair value of the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and
 
(2)           General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans.  The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group.  The loss rates applied are based upon our loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:
 
 
·
changes in any concentration of credit (including, but not limited to, concentrations by geography, industry or collateral type);
 
 
·
changes in the number and amount of non-accrual loans, watch list loans and past due loans;
 
 
·
changes in national, state and local economic trends;
 
 
·
changes in the types of loans in the loan portfolio;
 
 
·
changes in the experience and ability of personnel and management in the mortgage loan origination and loan servicing departments;
 
 
·
changes in the value of underlying collateral for collateral dependent loans;
 
 
·
changes in lending strategies; and
 
 
·
changes in lending policies and procedures.
 
Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate and multi-family real estate loans – All loans in this segment are collateralized by owner-occupied and non-owner-occupied residential and multifamily real estate.   Repayment is dependent on the credit quality of the individual borrower and/or cash flow derived from the property.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Multi-family loans generally present a higher level of risk than our loans which are secured by one to four family loans.

Commercial real estate – Loans in this segment are primarily income-producing properties throughout the greater Boston area.   Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property.    Management obtains rent rolls annually and continually monitors the cash flows on these loans.

Construction loans – Loans in this segment primarily include speculative residential, multi-family, and commercial mixed use real estate development loans for which payment is derived from sale of the property.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 
10


Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans – Loans in this segment are both secured and unsecured and repayment is dependent on the credit quality of the individual borrower.
 
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
 
Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
 
In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.
 
We evaluate the allowance for loan losses based upon the combined total of the specific and general components.  Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase.  Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
 
Loans consisted of the following as of June 30, 2011 (unaudited) and September 30, 2010:

   
June 30, 2011
   
September 30, 2010
 
      (In thousands)  
Mortgage loans:
           
Residential loans:
           
One-to-four family
  $ 248,381     $ 239,257  
Multi-family
    64,824       47,880  
Commercial real estate
    68,394       67,901  
Construction loans
    16,960       19,384  
Total mortgage loans
    398,559       374,422  
Consumer loans
    1,871       2,113  
Commercial loans
    4,836       4,452  
      405,266       380,987  
Deferred loan origination costs (fees), net
    14       (120 )
Allowance for loan losses
    (3,376 )     (3,203 )
Loans, net
  $ 401,904     $ 377,664  

 
11


Changes in the allowance for loan losses were as follows for the three and nine months ended June 30, 2011 (unaudited) and June 30, 2010 (unaudited):

     At or For The Periods Ended June 30,  
   
Three Months Ended
   
Nine Months Ended
 
   
2011
   
2010
   
2011
   
2010
 
  (In thousands)
Balance at beginning of period
  $ 3,318     $ 3,084     $ 3,203     $ 3,204  
Provision for loan losses
    120             340       300  
Charge-offs:
                               
Mortgage loans:
                               
One- to four-family residential
    28             69       78  
Multi-family
                      269  
Commercial real estate
    11       8       46       53  
Construction
                       
Consumer loans
    29       12       47       20  
Commercial loans
                13       26  
Total charge-offs
    68       20       175       446  
                                 
Recoveries:
                               
Mortgage loans:
                               
One- to four-family residential
                       
Multi-family
          138             138  
Commercial real estate
    3             3        
Construction
                       
Consumer loans
    2       4       4       10  
Commercial loans
    1             1        
Total recoveries
    6       142       8       148  
Net charge-offs (recoveries)
    62       (122 )     167       298  
                                 
Balance at end of period
  $ 3,376     $ 3,206     $ 3,376     $ 3,206  

 
12


Further information pertaining to the allowance for loan losses at June 30, 2011 follows:
 
   
Residential Loans
                               
   
One to Four
Family
   
Multi
Family
Loans
   
Commercial
Real Estate
   
Construction
Loans
   
Consumer
   
Commercial
   
Total
 
   
(Unaudited)
(In thousands)
 
Amount of allowance
for loan losses for
loans deemed to be
impaired
  $     $     $     $     $     $     $  
Amount of allowance
for loans not deemed
to be impaired
  $ 1,391     $ 698     $ 725     $ 480     $ 32     $ 50     $ 3,376  
Loans deemed to be
impaired as of
June 30, 2011
  $     $     $ 2,614     $ 1,866     $     $     $ 4,480  
Loans not deemed to
be impaired as of June
30, 2011
    248,381       64,824       65,780       15,094       1,871       4,836       400,786  
Total Loans
  $ 248,381     $ 64,824     $ 68,394     $ 16,960     $ 1,871     $ 4,836     $ 405,266  
 
The following is a summary of past due and non accrual loans at June 30, 2011:
 
   
Age Analysis of Past Due Loans
 
   
As of June 30, 2011
 
                 
   
30 to 59
Days
   
60 to 89
Days
   
Greater
than 90
Days
   
Total Past
Due
   
Total
Current
   
Total Loans
   
Non-Accrual
Loans
 
   
(Unaudited)
(In thousands)
 
One to four family
  $ 117     $ 788     $ 2,227     $ 3,132     $ 245,249     $ 248,381     $ 2,227  
Multi-family
                            64,824       64,824        
Commercial real estate
    844                   844       67,550       68,394        
Construction loans
                            16,960       16,960        
Total mortgage loans
    961       788       2,227       3,976       394,583       398,559       2,227  
Consumer loans
    25       32             57       1,814       1,871        
Commercial loans
                            4,836       4,836        
Total
  $ 986     $ 820     $ 2,227     $ 4,033     $ 401,233     $ 405,266     $ 2,227  

At June 30, 2011 (unaudited), the Company had no loans that were 90 days or more delinquent and which were accruing interest.

 
13


Information about loans that meet the definition of an impaired loan in ASC 310-10-35 follows:

   
Impaired Loans
 
       
   
As of June 30, 2011
   
Nine Months Ended June 30, 2011
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest Income
Recognized
 
   
(Unaudited)
(In thousands)
 
With no related allowance
recorded:
                             
Mortgage loans:
                             
One to four family
  $     $     $     $ 729     $ 44  
Multi family
                             
Commercial real estate
    2,614       2,614             2,431       105  
Construction loans
    1,866       1,866             1,866       68  
Total mortgage loans
    4,480       4,480             5,026       217  
`Consumer loans
 
`
                         
Commercial loans
                             
Total impaired with no
related allowance:
    4,480       4,480             5,026       217  
                                         
With a related allowance
recorded:
                                       
Mortgage loans:
                                       
One to four family
                             
Multi family
                             
Commercial real estate
                             
Construction loans
                             
Total mortgage loans
                             
Consumer loans
                             
Commercial loans
                             
Total impaired with
related allowance:
                             
                                         
Total impaired loans:
  $ 4,480     $ 4,480     $     $ 5,026     $ 217  
 
 
14


   
At or for the year ended September 30, 2010
 
             
   
Recorded
Investment
In Impaired
Loans
   
Related
Allowance
For Credit
Losses
 
             
   
(In thousands)
 
Loans for which there is a
related allowance for credit
losses
  $     $  
                 
Loans for which there is
no related allowance for
credit losses
    4,022        
                 
Totals
  $ 4,022     $  
                 
Average reported investment
in impaired loans during the year
ended September 30, 2010
  $ 4,990          

CREDIT QUALITY INFORMATION:

The Company utilizes an eight grade internal loan rating system for loans as follows:

Loans rated 1-4:  Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 5:  Loans in this category are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 6:  Loans in this category are considered “substandard.”   Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged.   There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 7:  Loans in this category are considered “doubtful.”  Loans classified as doubtful have all the weakness inherent in those classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 8:  Loans in this category are considered uncollectible “loss” and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the rating on all loans.   Semi-annually, the Company engages an independent third-party to review a significant portion of loans within the loan segments.   Management uses the results of these reviews as part of its annual review process.

 
15


The following table presents the Company’s loans by risk rating at June 30, 2011:
 
   
Credit Risk Profile by Credit Worthiness Category
 
   
As of June 30, 2011
 
   
One to Four Family
   
Multi Family Loans
   
Commercial Real Estate
   
Construction Loans
   
Consumer
   
Commercial
   
Total Loans
 
   
(Unaudited)
(In thousands)
 
                                           
Pass
  $ 244,505     $ 58,175     $ 65,071     $ 13,315     $ 1,871     $ 4,836     $ 387,773  
Special Mention
    993                   3,645                   4,638  
Substandard
    2,883       6,649       3,323                         12,855  
Doubtful
                                         
Loss
                                         
Total
  $ 248,381     $ 64,824     $ 68,394     $ 16,960     $ 1,871     $ 4,836     $ 405,266  
 
NOTE 6 - FAIR VALUE MEASUREMENTS

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under generally accepted accounting principles.  This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.  Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions.  Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for June 30, 2011 (unaudited) and September 30, 2010.

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s investment in securities available-for-sale is generally classified within level 2 of the fair value hierarchy.  For these securities, we obtain fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S.

 
16


Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence.  In the absence of such evidence, management’s best estimate is used.  Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party.

The Company’s other real owned values are estimated using level 3 inputs based on management estimates.

The following summarizes assets measured at fair value at June 30, 2011 (unaudited) and September 30, 2010.

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

   
Fair Value Measurements at Reporting Date Using:
 
   
June 30, 2011
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
   
(Unaudited)
(In thousands)
 
Trading securities
  $ 808     $ 808     $     $  
Securities available-for-sale
    25,541             25,541        
Totals
  $ 26,349     $ 808     $ 25,541     $  

   
Fair Value Measurements at Reporting Date Using:
 
   
September 30, 2010
   
Quoted Prices in
Active Markets for
Identical Assets
Level 1
   
Significant
Other Observable
Inputs
Level 2
   
Significant
Unobservable
Inputs
Level 3
 
 
  (In thousands)  
Trading securities
  $ 712     $ 712     $     $  
Securities available-for-sale
    23,596             23,596        
Totals
  $ 24,308     $ 712     $ 23,596     $  

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.  There were no financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at June 30, 2011 (unaudited) and September 30, 2010, for which a nonrecurring change in fair value has been recorded.

There were no significant transfers in and out of Level 1 and 2 during the nine months ended June 30, 2011 (unaudited).

 
17


The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:
   
June 30, 2011
   
September 30, 2010
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
 
 
(Unaudited)
 
   
(In thousands)
 
Financial assets:
                       
Cash and cash equivalents
  $ 66,606     $ 66,606     $ 113,863     $ 113,863  
Trading securities
    808       808       712       712  
Available-for-sale securities
    25,541       25,541       23,596       23,596  
Held-to-maturity securities
    6,775       6,752       -       -  
Federal Home Loan Bank stock
    4,339       4,339       4,339       4,339  
Loans, net
    401,904       404,822       377,664       373,202  
Loans held for sale
                260       263  
Accrued interest receivable
    1,524       1,524       1,589       1,589  
                                 
Financial liabilities:
                               
Deposits
    390,089       390,902       390,839       391,707  
Federal Home Loan Bank advances
    23,000       23,667       33,000       33,987  
 
NOTE 7 – EARNINGS PER SHARE
 
Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. The Company has no dilutive potential common shares for the three month or nine month period ended June 30, 2011.   The mutual to stock conversion was completed on July 6, 2010, therefore, per share earnings data are not presented for the three or nine months ended June 30, 2010.
 
   
Three Months
Ended
June 30,
2011
   
Nine Months
Ended
June 30,
2011
 
   
(Unaudited)
 
   
(In thousands, except share data)
 
             
Basic:
           
Net Income
  $ 711     $ 2,512  
                 
Weighted average common shares:
    6,610,650       6,597,953  
                 
Earnings per common share - basic
  $ 0.11     $ 0.38  

NOTE 8 – EMPLOYEE STOCK OWNERSHIP PLAN
 
Effective January 1, 2010, the Company adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $5.7 million from the Company and used those funds to acquire 571,320 shares, or 8% of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.
 
The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Peoples Federal Savings Bank’s contributions to the ESOP and dividends payable on stock, if any. The interest rate on the ESOP loan is an adjustable rate equal to the lowest prime rate, as published in The Wall Street Journal. The interest rate will adjust annually and will be the prime rate on the first business day of the calendar year.   The Bank has committed to make contributions to the ESOP sufficient to support debt service of the loan.

 
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Shares purchased by the ESOP will be held by a trustee in an unallocated suspense account, and shares will be released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, Peoples Federal Savings Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders’ equity. Compensation expense recognized for the nine months ended June 30, 2011 (unaudited) amounted to $281,000.
 
Shares held by the ESOP trust at June 30, 2011 (unaudited) were as follows:

     Amount  
Allocated
    28,566  
Shares committed to be released
    14,284  
Unallocated shares
    528,470  
Total Employee Stock Ownership Plan Shares
    571,320  
         
Fair value of unallocated shares, in thousands
  $ 7,473  

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for three and nine months ended June 30, 2011 and 2010 (unaudited) is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.
 
Overview of Income and Expense

Income

The Company has two primary sources of pre-tax income.  The first is net interest income.  Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.

The second source of pre-tax income is non-interest income, the compensation received from providing products and services.  The majority of non-interest income comes from service charges on deposit accounts, bank owned life insurance income and loan servicing fees.  The Company also earns income from the sale of residential mortgage loans and other fees and charges.

The Company recognizes gains and losses as a result of sales of investments securities, foreclosed property, and premise and equipment.  In addition the Company recognized losses on its investments securities that are considered other-than-temporarily impaired.  Gains and losses are not a regular part of the Company's primary source of income.

Expenses

In addition to the interest expense we pay on our deposits and borrowings, the expenses the Company incurs in operating its business consist of salaries and employee benefits, occupancy, equipment expense, external processing fees, FDIC assessments, director fees and other non-interest expense.

Salaries and employee benefits consist primarily of the salaries and wages paid to employees, payroll taxes, and expenses for health care, retirement and other employee benefits.

Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and cost of utilities.

Equipment expenses include expenses and depreciation charges related to office and banking equipment.

External processing fees are paid to third parties mainly for data processing services.

Other expenses include expenses for attorneys, accountants and consultants, advertising and marketing, franchise taxes, charitable contributions, insurance, office supplies, postage, telephone and other miscellaneous operating expenses.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:
 
 
·
statements of our goals, intentions and expectations;
 
 
·
statements regarding our business plans, prospects, growth and operating strategies;
 
 
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·
statements regarding the asset quality of our loan and investment portfolios; and
 
 
·
estimates of our risks and future costs and benefits.
 
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this document.
 
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
 
 
·
general economic conditions, either nationally or in our market areas, that are worse than expected;
 
 
·
competition among depository and other financial institutions;
 
 
·
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
 
 
·
adverse changes in the securities markets;
 
 
·
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
 
 
·
our ability to enter new markets successfully and capitalize on growth opportunities;
 
 
·
our ability to successfully integrate acquired entities, if any;
 
 
·
changes in consumer spending, borrowing and savings habits;
 
 
·
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
 
 
·
changes in our organization, compensation and benefit plans;
 
 
·
changes in our financial condition or results of operations that reduce capital available to pay dividends; and
 
 
·
changes in the financial condition or future prospects of issuers of securities that we own.
 
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
 
Critical Accounting Policies
 
Critical accounting policies are those which involve significant judgments and assessments by management and which could potentially result in materially different results under different assumptions and conditions.  As discussed in the Company’s 2010 Annual Report on Form 10-K, the Company considers the allowance for loan losses and income taxes to be our critical accounting policies.  The Company’s critical accounting policies have not changed from September 30, 2010.
 
 
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Comparison of Financial Condition at June 30, 2011 (unaudited) and September 30, 2010

At June 30, 2011, our total assets were $537.9 million, a decrease of $8.0 million, or 1.47%, from our total assets of $545.9 million at September 30, 2010. Loans, net increased $24.2 million, or 6.41%, to $401.9 million at June 30, 2011 from $377.7 million at September 30, 2010.   Investments in available-for-sale securities increased to $25.5 million at June 30, 2011 from $23.6 million at September 30, 2010, due primarily to the purchase of short term U.S. government and agency securities and mortgage backed securities.  At June 30, 2011, cash and due from banks totaled $66.6 million as compared to $113.9 million at September 30, 2010, representing a $47.3 million, or 41.5% decrease.   The decrease was mainly due to the funding of loan originations, the purchases of securities and bank-owned life insurance and for the repayment of long-term FHLB borrowings during the period.

Deposits decreased by $750,000, or 0.19%, to $390.1 million at June 30, 2011 from $390.8 million at September 30, 2010.  The decrease resulted in part from a decrease in money market deposit accounts to $143.2 million at June 30, 2011, from $154.5 million at September 30, 2010, offset partially by an increase in our certificates of deposit to $127.1 million at June 30, 2011 from $124.0 million at September 30, 2010.  In addition, both savings and NOW accounts increased to $47.6 and $34.4 million respectively, at June 30, 2011 as compared to $45.3 and $31.7 million respectively, at September 30, 2010.

Borrowings, consisting of FHLB advances, decreased $10.0 million to $23.0 million at June 30, 2011 from $33.0 million at September 30, 2010 as we used loan repayments and other liquidity to pay down these borrowings.

Total equity increased to $117.4 million at June 30, 2011 from $114.4 million at September 30, 2010.  The increase resulted primarily from net income of $2.5 million for the nine months ended June 30, 2011.  Other comprehensive income consisted of an increase in net unrealized gains, net of tax, on available-for-sale securities. The change in net unrealized gains or losses on securities classified as available-for-sale is affected by market interest rates and other conditions and, therefore, can fluctuate daily.  Other comprehensive income or loss does not include changes in fair value of other financial instruments reflected on the balance sheet.

Comparison of Operating Results for the Nine Months Ended June 30, 2011 and June 30, 2010 (unaudited)
 
General.  We recorded net income of $2.5 million for the nine months ended June 30, 2011 compared to net income of $2.5 million for the nine months ended June 30, 2010 as net interest and dividend income increased period over period to $12.2 million from $11.0 million.   Noninterest income decreased to $1.4 million for 2011 from $1.5 million for 2010.  Noninterest expense increased to $9.4 million for the nine months ended June 30, 2011 from $8.1 million for the nine months ended June 30, 2010.

Interest and Dividend Income. Total interest and dividend income decreased $443,000 to $15.5 million for the nine months ended June 30, 2011 from $15.9 million for the nine months ended June 30, 2010. Average interest-earning assets increased to $489.4 million for the 2011 period from $460.1 million for the 2010 period; however, the average yield on interest-earning assets decreased 40 basis points to 4.21% from 4.61% during the periods.  The decrease in market interest rates contributed to the downward re-pricing of a portion of our existing assets and to lower rates for new assets.