Pulaski Financial (PULB) 10-Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended  December 31, 2008

OR

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

For the transition period from ___________________ to ______________________

0-24571

Commission File Number

Pulaski Financial Corp.

(Exact name of registrant as specified in its charter)

Missouri	43-1816913
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
12300 Olive Boulevard
St. Louis, Missouri	63141-6434
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (314) 878-2210

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 filing requirements for the past 90 days.

Yes x 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.

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

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

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

Class	Outstanding at February 3, 2009
Common Stock, par value $.01 per share	10,241,645 shares

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

FORM 10-Q

DECEMBER 31, 2008

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at December 31, 2008 and September 30, 2008 (Unaudited)	1
	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended December 31, 2008 and 2007 (Unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2008 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2008 and 2007 (Unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures

 

PART I - FINANCIAL INFORMATION

 

PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND SEPTEMBER 30, 2008 (UNAUDITED)
	December 31,			September 30,
	2008			2008
ASSETS
Cash and amounts due from depository institutions	$	22,789,675		$	28,430,409
Federal funds sold and overnight deposits		1,128,185			647,453
Total cash and cash equivalents		23,917,860			29,077,862
Equity securities available for sale, at fair value		589,000			733,000
Debt securities available for sale, at fair value		4,016,819			-
Mortgage-backed and related securities held to maturity, at amortized cost (fair value, $15,158,931 and $15,607,652 at December 31, 2008 and September 30, 2008, respectively)		15,130,639			15,744,497
Mortgage-backed securities available for sale, at fair value		11,936,775			10,180,666
Capital stock of Federal Home Loan Bank, at cost		9,860,900			10,896,100
Loans held for sale, at lower of cost or market		79,301,875			71,966,443
Loans receivable, net of allowance for loan losses of $15,663,958 and $12,761,532 at December 31, 2008 and September 30, 2008, respectively		1,141,328,720			1,088,736,516
Real estate acquired in settlement of loans, net of allowance for losses of $141,800 and $417,773 at December 31, 2008 and September 30, 2008, respectively		2,609,331			3,518,806
Premises and equipment, net		19,716,832			19,853,426
Bank-owned life insurance		27,885,195			27,591,986
Accrued interest receivable		5,295,601			5,614,887
Goodwill		3,938,524			3,938,524
Core deposit intangible		329,932			361,591
Deferred tax asset		8,031,681			8,062,641
Prepaid expenses, accounts receivable and other assets		9,268,512			7,873,515
Total assets	$	1,363,158,196		$	1,304,150,460
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,001,934,509		$	915,311,365
Advances from Federal Home Loan Bank of Des Moines		96,400,000			210,600,000
Borrowings from the Federal Reserve Bank of St. Louis		143,000,000			40,000,000
Note payable		7,640,000			7,640,000
Subordinated debentures		19,589,000			19,589,000
Advance payments by borrowers for taxes and insurance		1,791,972			3,667,014
Accrued interest payable		673,604			1,505,949
Due to other banks		-			14,377,831
Other liabilities		9,676,204			9,098,795
Total liabilities		1,280,705,289			1,221,789,954
Stockholders' Equity:
Preferred stock - $.01 par value per share, authorized 1,000,000 shares; none issued or outstanding		-			-
Common stock - $.01 par value per share, authorized 18,000,000 shares; 13,068,618 shares issued at December 31, 2008 and September 30, 2008		130,687			130,687
Treasury stock - at cost; 2,830,873 and 2,853,078 shares at December 31, 2008 and  September 30, 2008, respectively		(16,202,110	)		(16,278,615	)
Treasury stock - equity trust - at cost; 231,068 and 226,992 shares at December 31, 2008 and September 30, 2008, respectively		(2,681,791	)		(2,771,883	)
Additional paid-in capital		52,207,535			51,987,198
Accumulated other comprehensive income (loss)		14,802			(97,394	)
Retained earnings		48,983,784			49,390,513
Total stockholders’ equity		82,452,907			82,360,506
Total liabilities and stockholders’ equity	$	1,363,158,196		$	1,304,150,460
See accompanying notes to the unaudited consolidated financial statements.

- 1 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007 (UNAUDITED)
	Three Months Ended
	December 31,
	2008		2007
Interest and Dividend Income:
Loans receivable	$	16,350,922	$	18,941,655
Debt and equity securities		106,856		218,553
Mortgage-backed securities		313,123		35,417
Capital stock of the Federal Home Loan Bank of Des Moines		59,867		130,701
Other		3,944		43,821
Total interest and dividend income		16,834,712		19,370,147
Interest Expense:
Deposits		6,123,294		8,201,737
Advances from Federal Home Loan Bank of Des Moines		1,170,653		2,525,367
Borrowings from the Federal Reserve Bank of St. Louis		79,767		137
Subordinated debentures		246,423		393,560
Notes payable		101,120		47,853
Total interest expense		7,721,257		11,168,654
Net interest income		9,113,455		8,201,493
Provision for loan losses		4,691,578		1,032,551
Net interest income after provision for loan losses		4,421,877		7,168,942
Non-Interest Income:
Mortgage revenues		1,549,630		1,107,536
Retail banking fees		967,034		1,028,498
Investment brokerage revenues		261,464		215,011
Gain on the sales of securities		243,386		53,924
Other		292,022		573,556
Total non-interest income		3,313,536		2,978,525
Non-Interest Expense:
Salaries and employee benefits		3,342,002		3,020,556
Occupancy, equipment and data processing expense		1,781,391		1,596,924
Advertising		285,999		340,167
Professional services		261,470		283,217
FDIC deposit insurance premuim expense		199,219		232,751
Gain on derivative instruments		-		(122,247	)
Real estate foreclosure losses and expense, net		341,564		228,560
Other		661,055		700,087
Total non-interest expense		6,872,700		6,280,015
Income before income taxes		862,713		3,867,452
Income tax expense		296,856		1,135,300
Net income	$	565,857	$	2,732,152
Other comprehensive income		112,196		104,767
Comprehensive income	$	678,053	$	2,836,919
Per Share Amounts:
Basic earnings per share	$	0.06	$	0.28
Weighted average common shares outstanding - basic		10,114,506		9,780,132
Diluted earnings per share	$	0.06	$	0.27
Weighted average common shares outstanding - diluted		10,274,626		10,186,789

See accompanying notes to the unaudited consolidated financial statements.

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PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED DECEMBER 31, 2008 (UNAUDITED)
									Accumulated
						Additional			Other
	Common		Treasury			Paid-In			Comprehensive			Retained
	Stock		Stock			Capital			Income (Loss)			Earnings			Total
Balance, September 30, 2008	$	130,687	$	(19,050,498	)	$	51,987,198		$	(97,394	)	$	49,390,513		$	82,360,506
Comprehensive income:
Net income		-		-			-			-			565,857			565,857
Change in unrealized gain (loss) on investment securities, net of tax		-		-			-			263,096			-			263,096
Realized gain on sales of investment securities included in net income, net of tax		-		-			-			(150,900	)		-			(150,900	)
Comprehensive income		-		-			-			112,196			565,857			678,053
Dividends  ($0.095 per share)		-		-			-			-			(972,586	)		(972,586	)
Stock option and award expense		-		-			132,505			-			-			132,505
Stock issued under dividend reinvestment plan (25,652 shares)		-		104,686			58,430			-			-			163,116
Shares surrendered to satisfy tax withholding obligations of stock-based compensation		-		(28,181	)		-			-			-			(28,181	)
Purchase of equity trust shares (6,950 shares)		-		(44,200	)		-			-			-			(44,200	)
Distribution of equity trust shares (9,504 shares)		-		134,292			(134,292	)		-			-			-
Amortization of equity trust expense		-		-			163,694			-			-			163,694
Balance, December 31, 2008	$	130,687	$	(18,883,901	)	$	52,207,535		$	14,802		$	48,983,784		$	82,452,907

See accompanying  notes to the unaudited consolidated financial statements.

- 3 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS
ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007 (UNAUDITED)
	Three Months Ended
	December 31,
	2008			2007
Cash Flows From Operating Activities:
Net income	$	565,857		$	2,732,152
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion:
Premises and equipment		451,830			425,219
Net deferred loan costs		596,425			681,891
Net amortization of debt and equity securities premiums and discounts		54,603			(125,316	)
Broker fees financed under interest-rate swap agreements		-			143,916
Equity trust expense, net		163,694			287,186
Stock option and award expense		132,505			129,389
Provision for loan losses		4,691,578			1,032,551
Provision for losses on real estate acquired in settlement of loans		56,500			34,000
Losses on sales of real estate acquired in settlement of loans		129,270			63,104
Originations of loans held for sale		(262,834,432	)		(313,036,235	)
Proceeds from sales of loans held for sale		256,800,138			284,988,902
Gain on sales of loans held for sale		(1,301,138	)		(997,902	)
Loss on equity securities available for sale		155,500			-
Gain on sales of debt securities available for sale		(398,886	)		(53,924	)
Gain on sale of investment in joint venture		-			(30,755	)
Gain on derivative instruments		-			(122,247	)
Increase in cash value of  bank-owned life insurance		(293,209	)		(265,390	)
Decrease in accrued expenses		(721,987	)		(254,535	)
Excess tax benefit from stock-based compensation		-			(50,099	)
Increase in current income taxes payable		133,662			267,610
Changes in other assets and liabilities		(748,469	)		(2,232,745	)
Net adjustments		(2,932,416	)		(29,115,380	)
Net cash used in operating activities		(2,366,559	)		(26,383,228	)
Cash Flows From Investing Activities:
Proceeds from sales of debt securities available for sale		51,050,500			5,199,840
Proceeds from maturities of debt securities available for sale		-			5,000,000
Proceeds from maturities of debt securities held to maturity		-			10,000,000
Proceeds from redemption of FHLB stock		4,571,500			1,921,000
Purchases of debt securities available for sale		(54,714,020	)		(10,169,930	)
Purchases of equity securities available for sale		-			(6,528,544	)
Purchases of debt securities held to maturity		-			(13,876,653	)
Purchases of mortgage-backed securities available for sale		(1,831,568	)		-
Purchases of FHLB stock		(3,536,300	)		(6,104,400	)
Principal payments received on mortgage-backed securities		849,764			114,547
Net increase in loans receivable		(59,107,153	)		(78,937,005	)
Proceeds from sales of real estate acquired in settlement of loans receivable		1,950,650			773,000
Proceeds from sale of investment in joint venture		-			49,375
Cash paid for equity in joint venture		-			(233,691	)
Purchases of premises and equipment		(315,236	)		(186,555	)
Net cash used in investing activities	$	(61,081,863	)	$	(92,979,016	)

See accompanying notes to the unaudited consolidated financial statements.

- 4 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS
ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007 (UNAUDITED)
	Three Months Ended
	December 31,
	2008			2007
Cash Flows From Financing Activities:
Net increase in deposits	$	86,623,144		$	33,533,511
Proceeds from (repayment of) Federal Home Loan Bank advances, net		(114,200,000	)		93,900,000
Proceeds from Federal Reserve Bank borrowings, net		103,000,000			-
Payment on notes payable		-			(85,000	)
Net decrease in due to other banks		(14,377,831	)		(5,874,373	)
Net decrease in advance payments by borrowers for taxes and insurance		(1,875,042	)		(1,966,023	)
Treasury stock issued for purchase of equity in joint venture		-			191,835
Proceeds from cash received in dividend reinvestment plan		163,116			219,305
Purchase of equity trust shares		(44,200	)		-
Excess tax benefit for stock based compensation		-			50,099
Treasury stock issued for stock options exercised		-			348,216
Dividends paid on common stock		(972,586	)		(901,570	)
Stock repurchases		(28,181	)		(394,064	)
Net cash provided by financing activities		58,288,420			119,021,936
Net decrease in cash and cash equivalents		(5,160,002	)		(340,308	)
Cash and cash equivalents at beginning of period		29,077,862			23,674,743
Cash and cash equivalents at end of period	$	23,917,860		$	23,334,435
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest on deposits	$	6,912,177		$	9,396,102
Interest on advances from FHLB and other borrowings		1,194,530			2,463,920
Interest on other borrowings		94,521			-
Interest on subordinated debentures		251,319			393,770
Interest on notes payable		101,254			47,510
Cash paid during the period for interest		8,553,801			12,301,302
Income taxes, net		201,000			839,640
Noncash Investing Activities:
Real estate acquired in settlement of loans receivable	$	1,226,945		$	1,425,710

See accompanying notes to the unaudited consolidated financial statements.

- 5 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of Pulaski Financial Corp. (the “Company”) and its wholly owned subsidiary, Pulaski Bank (the “Bank”), and the Bank’s wholly owned subsidiary, Pulaski Service Corporation.  All significant intercompany accounts and transactions have been eliminated.  The assets of the Company consist primarily of the investment in the outstanding shares of the Bank and its liabilities consist principally of subordinated debentures and notes payable.  Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank.  The Company, through the Bank, operates as a single business segment, providing traditional community banking services through its full service branch network.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of December 31, 2008 and September 30, 2008 and its results of operations for the three-month periods ended December 31, 2008 and 2007.  The results of operations for the three-month period ended December 31, 2008 are not necessarily indicative of the operating results that may be expected for the entire fiscal year.  These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2008 contained in the Company’s 2008 Annual Report to Stockholders, which was filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended September 30, 2008.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements that affect the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates.  The allowance for loan losses and fair values of financial instruments are significant estimates reported within the consolidated financial statements.

Certain reclassifications have been made to fiscal 2008 amounts to conform to the fiscal 2009 presentation.

2. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of common shares outstanding.  The dilutive effect of potential common shares outstanding is included in diluted earnings per share.  The computations of basic and diluted earnings per share are presented in the following table.

- 6 - -

	Three Months Ended
	December 31,
	2008		2007
Net income	$	565,857	$	2,732,152
Weighted average shares outstanding - basic		10,114,506		9,780,132
Treasury stock - equity trust		101,863		177,563
Equivalent shares - employee stock options and awards		58,257		229,094
Weighted average shares outstanding - diluted		10,274,626		10,186,789
Net income per share - basic	$	0.06	$	0.28
Net income per share - diluted	$	0.06	$	0.27

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the option price during a period.  In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the three-month periods ended December 31, 2008 and 2007 were not included in the respective computations of diluted earnings per share because the exercise price of the options, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.  These options expire in various periods from 2013 through 2018, respectively.

	Three Months Ended
	December 31,
	2008		2007
Number of option shares		654,771		339,691
Equivalent anti-dilutive shares		1,260,975		132,119

3.  STOCK-BASED COMPENSATION

The Company’s shareholder-approved, stock-based incentive plans permit the grant of awards in the form of options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code, options that do not so qualify (non-statutory stock options,) and grants of restricted shares of common stock.  All employees, non-employee directors and consultants of the Company and its affiliates are eligible to receive awards under the plans.  Except as described below, all stock option awards issued during the three months ended December 31, 2008 were granted with an exercise price equal to the market value of the Company’s shares at the date of grant and vest over a period of two to five years.  In November 2008, options for 32,000 shares of the Company’s common stock were awarded to directors with terms providing for immediate vesting and exercise prices equal to the market value of the Company’s shares at the date of grant. The exercise period for stock options generally may not exceed 10 years from the date of grant.  Option and share awards provide for accelerated vesting if there is a change in control (as defined in the plans).

- 7 - -

A summary of the Company’s stock option program as of December 31, 2008 and changes during the three-month period then ended, is presented below:

							Weighted-
			Weighted		Aggregate		Average
			Average		Intrinsic		Remaining
	Number		Exercise		Value		Contractual
	Of Shares		Price		(in millions)		Life (years)
Outstanding at October 1, 2008		788,233	$	10.38
Granted		130,350		7.58
Exercised		—		—
Expired		—		—
Forfeited		—		—
Outstanding at December 31, 2008		918,583	$	9.99	$	464,527		6.7
Exercisable at December  31, 2008		451,791	$	8.51	$	457,733		4.5

The weighted average grant-date fair value of options granted during the three months ended December 31, 2008 was $1.90 per share.  As of December 31, 2008, the total unrecognized compensation expense related to non-vested stock options and awards was $1.2 million and the related weighted average period over which it is expected to be recognized is 3.2 years.

The fair value of stock options granted during the three-month periods ended December 31, 2008 and 2007 is estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

	Three Months Ended
	December 31,
	2008			2007
Risk free interest rate		4.30	%		4.22	%
Expected volatility		35.53	%		27.83	%
Expected life in years		5.4			5.5
Dividend yield		4.27	%		2.62	%
Expected forfeiture rate		3.37	%		1.28	%

The Company maintains an Equity Trust Plan for the benefit of key loan officers and sales staff.  The plan is designed to recruit, retain and motivate top-performing loan officers and other key revenue-producing employees who are instrumental to the Company’s success.  The plan allows the recipients to defer a percentage of commissions earned, which might be partially matched by the Company and paid into a rabbi trust for the benefit of the participants.  The assets of the trust are limited to the purchase of Company shares in the open market and cash.  Should the participants voluntarily leave the Company, they forego any unvested accrued benefits.  At December 31, 2008, there were 231,068 shares in the plan totaling $2.7 million, which were classified as treasury stock – equity trust in the Company’s consolidated financial statements, of which 92,860 were not yet vested.  Vested shares in the plan are treated as issued and outstanding when computing basic and diluted earnings per share, whereas unvested shares are treated as issued and outstanding only when computing diluted earnings per share.  There were no excess tax benefits associated with share based payments during the three months ended December 31, 2008.

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4.  INCOME TAXES

The Company has adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“Interpretation No. 48”).  At December 31, 2008, the Company had $180,000 of unrecognized tax benefits, $139,000 of which would affect the effective tax rate if recognized.  The Company recognizes interest related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for unrecognized tax benefits.  As of December 31, 2008, the Company had approximately $41,000 accrued for the payment of interest and penalties.  The tax years ended September 30, 2005 through 2008 remain open to examination by the taxing jurisdictions to which the Company is subject.

5.  DEBT SECURITIES

Debt securities available for sale at December 31, 2008 consisted of two Federal Home Loan Bank bonds totaling $4.0 million with a weighted average interest rate of 2.49% and a weighted average maturity of 5 months.  Gross unrealized gains and gross unrealized losses at December 31, 2008 totaled $8,000 and $12,000, respectively.

6.  MORTGAGE-BACKED SECURITIES

Mortgage-backed securities held to maturity and available for sale at December 31, 2008 and September 30, 2008 are summarized as follows:

	December 31, 2008
				Gross		Gross			Estimated
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
Held to Maturity:
Mortgage-backed securities:
Freddie Mac	$	2,802		$	307	$	-		$	3,109
Ginnie Mae		241,345			20,282		(89	)		261,538
Fannie Mae		14,863,511			96,778		(88,634	)		14,871,655
Total		15,107,658			117,367		(88,723	)		15,136,302
Collateralized mortgage obligations - Freddie Mac		22,981			-		(352	)		22,629
Total	$	15,130,639		$	117,367	$	(89,075	)	$	15,158,931
Weighted average rate at end of period		4.80	%
Available for Sale:
Mortgage-backed securities:
Ginnie Mae	$	572,450		$	15,859	$	(1,992	)	$	586,317
Fannie Mae		1,872,309			-		(11,136	)		1,861,173
Total		2,444,759			15,859		(13,128	)		2,447,490
Collateralized mortgage obligations:
Ginnie Mae		7,950,129			21,980		-			7,972,109
Freddie Mac		1,514,063			3,113		-			1,517,176
Total		9,464,192			25,093		-			9,489,285
Total	$	11,908,951		$	40,952	$	(13,128	)	$	11,936,775
Weighted average rate at end of period		4.17	%

- 9 - -

	September 30, 2008
				Gross		Gross			Estimated
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
Held to Maturity:
Mortgage-backed securities:
Freddie Mac	$	3,556		$	376	$	(3	)	$	3,929
Ginnie Mae		282,820			29,312		(308	)		311,824
Fannie Mae		15,434,529			48,119		(214,043	)		15,268,605
Total		15,720,905			77,807		(214,354	)		15,584,358
Collateralized mortgage obligations - Freddie Mac		23,592			-		(298	)		23,294
Total	$	15,744,497		$	77,807	$	(214,652	)	$	15,607,652
Weighted average rate at end of period		4.91	%
Available for Sale:
Mortgage-backed securities:
Ginnie Mae	$	263,833		$	15,657	$	-		$	279,490
Fannie Mae		1,957,014			-		(14,006	)		1,943,008
Total		2,220,847			15,657		(14,006	)		2,222,498
Collateralized mortgage obligations - Ginnie Mae		8,105,406			-		(147,238	)		7,958,168
Total	$	10,326,253		$	15,657	$	(161,244	)	$	10,180,666
Weighted average rate at end of period		4.16	%

- 10 - -

The summary below displays the length of time mortgage-backed securities held to maturity and available for sale were in a continuous unrealized loss position as of December 31, 2008 and September 30, 2008.  The Company has the ability and intent to hold these securities until such time as the values recover or the securities repay or mature.  Further, the Company believes the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuers.

	Length of Time in Continuous Unrealized Loss Position at December 31, 2008
	Less than 12 months				12 months or more				Total
	Amortized		Unrealized		Amortized		Unrealized		Amortized		Unrealized
	Cost		Losses		Cost		Losses		Cost		Losses
Held to Maturity:
Mortgage-backed securities		5,460,161		88,723		-		-		5,460,161		88,723
Collateralized mortgage obligations		22,629		352		-		-		22,629		352
		5,482,790		89,075		-		-		5,482,790		89,075

	Estimated			Unrealized			Estimated		Unrealized		Estimated			Unrealized
	Fair Value			Losses			Fair Value		Losses		Fair Value			Losses
Available for Sale:
Mortgage-backed securities	$	2,176,333		$	13,128		$	-	$	-	$	2,176,333		$	13,128
Collateralized mortgage obligations		-			-			-		-		-			-
		2,176,333			13,128			-		-		2,176,333			13,128
Total	$	7,659,123		$	102,203		$	-	$	-	$	7,659,123		$	102,203
Percent of total		100.0	%		100.0	%		-		-		100.0	%		100.0	%

- 11 - -

	Length of Time in Continuous Unrealized Loss Position at September 30, 2008
	Less than 12 months				12 months or more				Total
	Amortized		Unrealized		Amortized		Unrealized		Amortized		Unrealized
	Cost		Losses		Cost		Losses		Cost		Losses
Held to Maturity:
Mortgage-backed securities		10,201,656		214,354		-		-		10,201,656		214,354
Collateralized mortgage obligations		23,592		298		-		-		23,592		298
		10,225,248		214,652		-		-		10,225,248		214,652

	Estimated			Unrealized			Estimated		Unrealized		Estimated			Unrealized
	Fair Value			Losses			Fair Value		Losses		Fair Value			Losses
Available for Sale:
Mortgage-backed securities	$	1,943,008		$	14,006		$	-	$	-	$	1,943,008		$	14,006
Collateralized  mortgage obligations		7,958,168			147,238			-		-		7,958,168			147,238
		9,901,176			161,244			-		-		9,901,176			161,244
Total	$	20,126,424		$	375,896		$	-	$	-	$	20,126,424		$	375,896
Percent of total		100.0	%		100.0	%		-		-		100.0	%		100.0	%

- 12 - -

7.  LOANS RECEIVABLE

Loans receivable at December 31, 2008 and September 30, 2008 are summarized as follows:

	December 31,			September 30,
	2008			2008
Real estate mortgage:
Residential first mortgage	$	265,875,451		$	253,132,315
Residential second mortgage		82,439,264			86,348,973
Home equity lines of credit		229,461,356			225,357,406
Multi-family residential		31,631,164			32,546,370
Commercial real estate		281,216,604			261,166,327
Real estate construction and development:
Residential		32,081,925			34,511,026
Multi-family		9,788,821			9,607,101
Commercial		62,308,801			55,263,607
Commercial and industrial		154,581,490			137,688,076
Consumer and installment		6,711,794			6,895,479
		1,156,096,670			1,102,516,680
Add (less):
Deferred loan costs		5,241,679			5,204,730
Loans in process		(4,345,671	)		(6,223,362	)
Allowance for loan losses		(15,663,958	)		(12,761,532	)
Total	$	1,141,328,720		$	1,088,736,516
Weighted average interest rate at end of period		5.34	%		6.02	%

8. DEPOSITS

Deposits at December 31, 2008 and September 30, 2008 are summarized as follows:

	December 31, 2008					September 30, 2008
			Weighted					Weighted
			Average					Average
			Interest					Interest
	Amount		Rate			Amount		Rate
Transaction accounts:
Non-interest-bearing checking	$	106,928,752		-		$	76,404,474		-
Interest-bearing checking		206,143,419		1.71	%		178,697,883		2.51	%
Passbook savings accounts		24,962,999		0.19	%		25,828,504		0.32	%
Money market		127,855,680		0.92	%		149,141,121		2.12	%
Total transaction accounts		465,890,850		1.02	%		430,071,982		1.80	%
Certificates of deposit:
Retail		236,536,506		3.33	%		232,369,917		3.50	%
CDARS		146,877,537		2.41	%		123,932,466		2.79	%
Brokered		152,629,616		3.53	%		128,937,000		3.85	%
Total certificates of deposit		536,043,659		3.13	%		485,239,383		3.41	%
Total deposits	$	1,001,934,509		2.15	%	$	915,311,365		2.65	%

- 13 - -

9. FAIR VALUES OF ASSETS AND LIABILITIES

Effective October 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting standards, and expands disclosures about fair value measurements.  Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Under SFAS 157, a fair value measurement should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

SFAS 157 specifies a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value.  This hierarchy is based on whether the valuation inputs are observable or unobservable. Financial instrument valuations are considered Level 1 when they are based on quoted prices in active markets for identical assets or liabilities.  Level 2 financial instrument valuations use 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 of substantially the full term of the assets or liabilities.  Financial instrument valuations are considered Level 3 when they are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

The following disclosures exclude certain non-financial assets and liabilities, which are deferred under the provisions of Financial Accounting Standards Board (“FASB”) Staff Position No. FAS 157-2, “Effective Date of FASB Staff Position No. 157” (“FSP No. 157-2”).  Such non-financial assets include foreclosed real estate, long-lived assets, goodwill, and core deposit intangible assets, which are written down to fair value if considered impaired.  The deferral of these disclosures is intended to allow additional time to consider the effect of various implementation issues relating to these non-financial assets and liabilities, and defers disclosures required by SFAS No. 157 until the Company’s fiscal year beginning October 1, 2009.  The Company does not expect the adoption of the remaining provisions of this statement to have a material effect on its financial statements.  In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. 157-3”). This position clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  This position was effective when issued.  The adoption of this position did not have an effect on our financial statements.

The Company records securities available for sale and derivative financial instruments at their fair values on a recurring basis.  Additionally, the Company records other assets at their fair values on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets.  These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or impairment write-downs of individual assets.  The following is a general description of the methods used to value such assets.

Equity Securities Available for Sale.  The fair values of equity securities available for sale are generally based on quoted market prices or market prices for similar assets.  However, nonpublic investments are initially valued at transaction price and subsequently adjusted when evidence is available to support such adjustments.

Debt and Mortgage-Backed Securities Available for Sale.  The fair values of debt and mortgage-backed securities available for sale are generally based on quoted market prices or market prices for similar assets.

Interest Rate Swap Assets and Liabilities.  The fair values of interest rate swap assets and liabilities are generally based on the income approach to value using observable Level II market expectations at measurement date and standard quantitative valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact.  Level II inputs for the swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates, LIBOR basis spreads, volatilities, and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements.

- 14 - -

Loans Held for Sale.  The fair values of loans held for sale are generally based on quoted market prices or market prices for similar assets.

Impaired Loans.  The fair values of impaired loans are generally based on market prices for similar assets.

Assets and liabilities that were recorded at fair value on a recurring basis at December 31, 2008 and the level of inputs used to determine their fair values are summarized below:

	Carrying Value at December 31, 2008
			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Equity securities available for sale	$	589	$	-	$	589	$	-
Debt securities available for sale		4,017		-		4,017		-
Mortage-backed securities available for sale		11,937		-		11,937		-
Interest-rate swap		1,536		-		1,536		-
Total assets	$	18,079	$	-	$	18,079	$	-
Liabilities:
Interest-rate swap		1,536		-		1,536		-
Total liabilities	$	1,536	$	-	$	1,536	$	-

Assets that were recorded at fair value on a non-recurring basis at December 31, 2008 and the level of inputs used to determine their fair values are summarized below:

									Total Losses
									Recognized in
	Carrying Value at December 31, 2008								Quarter Ended
			Fair Value Measurements Using						December 31,
	Total		Level 1		Level 2		Level 3		2008
	(In thousands)
Assets:
Loans held for sale, at lower of cost or market	$	79,302	$	-	$	79,302	$	-	$	-
Impaired loans		36,467		-		36,467		-		2,015
Total assets	$	115,769	$	-	$	115,769	$	-	$	2,015

10. GOODWILL

Goodwill totaled $3.9 million at December 31, 2008 and September 30, 2008, respectively.  Goodwill represents the amount of acquisition cost over the fair value of net assets acquired in the purchase of another financial institution.  The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired.  Impairment is determined by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  Any such adjustments are reflected in the results of operations in the periods in which they become known.  After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill becomes its new accounting basis.  Because of the decline in the market value of the Company’s common stock during the three months ended December 31, 2008, the Company reviewed goodwill for impairment as of December 31, 2008 in addition to its annual review at September 30, 2008.  No impairment losses were recognized during fiscal year 2008 or the three months ended December 31, 2008.

- 15 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the federal securities laws, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  These statements are not historical facts; rather they are statements based on Pulaski Financial Corp.’s (the “Company”) current expectations regarding its business strategies, intended results and future performance.  Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain.  Factors which could affect actual results include interest rate trends, the general economic climate in the market area in which Pulaski Financial Corp. operates, as well as nationwide, Pulaski Financial Corp.’s ability to control costs and expenses, competitive products and pricing, loan demand, loan delinquency rates and changes in federal and state legislation and regulation.  The Company provides greater detail regarding some of these factors in its Form 10-K for the year ended September 30, 2008, including the Risk Factors section of that report.  The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this report or in its other filings with the SEC.  These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.  Pulaski Financial Corp. assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

Pulaski Financial Corp. is a community-based, financial institution holding company headquartered in St. Louis, Missouri.  It conducts operations primarily through Pulaski Bank (the “Bank”), a federally chartered savings bank with $1.36 billion in assets at December 31, 2008.  Pulaski Bank provides an array of financial products and services for businesses and consumers primarily through its twelve full-service offices in the St. Louis metropolitan area and three loan production offices in the St. Louis and Kansas City metropolitan areas.

The Company has primarily grown its assets and deposits internally by building its residential and commercial lending operations, by opening de novo branches, and by hiring experienced bankers with existing customer relationships in its market.  The Company’s goal is to continue to deliver value to its shareholders and enhance its franchise value and earnings through controlled growth in its banking operations, while maintaining the personal, community-oriented customer service that has characterized its success to date.

COMMUNITY BANKING STRATEGY PRODUCES MEANINGFUL GROWTH IN KEY BUSINESS LINES

The Company experienced a 79.3% decrease in net income for the three months ended December 31, 2008 compared with the same quarter last year largely as the result of an increased provision for loan losses.  However, execution of its community banking strategy produced strong performance in each of its three primary business lines, commercial banking services, retail mortgage lending and retail banking services, resulting in meaningful growth in loans receivable, core deposits, total assets, net interest income and mortgage revenues.  The Company’s community banking strategy emphasizes high-quality, responsive, and personalized customer service.  The Company has been successful in distinguishing itself from the larger regional banks operating in its market areas by offering quicker decision making in the delivery of banking products and services, offering customized products where needed, and providing customers access to senior decision makers.

- 16 - -

Commercial Banking Services

The Company’s commercial banking services are centered on serving small- to medium-sized businesses and its growth in the St. Louis market continues to be fueled by these commercial banking relationships.  Total assets grew $59.0 million, or 4.5%, from $1.30 billion at September 30, 2008 to $1.36 billion at December 31, 2008, primarily as the result of a $52.6 million increase in loans receivable to $1.41 billion at December 31, 2008.  The growth in loans receivable was largely due to growth in commercial loans, as mortgage loans secured by commercial real estate increased $20.1 million to $281.2 million, commercial and industrial loans increased $16.9 million to $154.6 million and commercial real estate construction and development loans increased $7.0 million to $62.3 million at December 31, 2008, respectively.  Commercial loan originations totaled $143.4 million during the three months ended December 31, 2008 compared with $162.4 million during the same period last year.  Because commercial loans generally carry the highest yields in the Company’s loan portfolio, growth in these loans enhanced the Company’s net interest margin during the current-year quarter.

The Company’s commercial loan customers are also among the best sources of core deposit accounts.  Commercial checking account balances increased $18.0 million to $286.8 million at December 31, 2008 compared with $168.8 million at September 30, 2008.

Retail Mortgage Lending

The Company is a conforming, residential mortgage lender that originates loans directly through commission-based sales staff in the St. Louis and Kansas City metropolitan areas.  It does not engage in sub-prime lending.  The majority of loans originated in the retail mortgage division are one- to four-family residential loans, which are sold to investors on a servicing-released basis, generating mortgage revenue, which is the Company’s largest source of non-interest income.

The Company is a leading mortgage originator in its two markets, originating $307.7 million and $343.4 million in residential loans during the three months ended December 31, 2008 and 2007, respectively.  Residential loans sold to investors for the three months ended December 31, 2008 totaled $255.5 million, which generated mortgage revenues totaling $1.5 million, compared with $284.0 million of loans sold and $1.1 million in revenues for the three months ended December 31, 2007, respectively.  The lower loan origination and sales activity in the 2008 period was the result of weakened loan demand during the first half of the quarter caused by an overall shrinkage in the number of qualified, credit-worthy borrowers in the market as many potential borrowers were impacted by the national credit crisis.  While the volume of loans sold was lower in the December 2008 quarter compared with the same period last year, the Company realized higher gross revenue margins during the current-year quarter due to a shift in the mix of the types of loans originated to products with higher sales margins, such as loans guaranteed by the FHA, and also due to reduced market competition and lower direct origination costs, primarily personnel costs.

As the result of the Federal Reserve’s actions taken in November 2008, which resulted in lower market interest rates, the Company experienced a sharp increase in mortgage loan refinance activity in late November 2008.  Mortgage loan originations totaled $157 million in December 2008, representing a 146% increase in the origination volume experienced in November 2008.  However, because it can take up to approximately 30 days from the date of origination for the investors to fund their purchases of these loans, the Company did not fully realize the mortgage revenues associated with this increased activity in the December 2008 quarter.  At December 31, 2008, mortgage loan applications in process totaled $304.7 million compared with $152.4 million at September 30, 2008 and $131.7 million at December 31, 2007.

Retail Banking Services

Core deposits, which consist of checking, money market and passbook savings accounts, have been critical to support profitable asset growth and their growth is a primary focus of the Company’s strategic plan.  Primarily as the result of increased commercial relationships, successful marketing efforts and branch locations opened in 2007, core deposits increased 8.33%, or $35.8 million, to $465.9 million at December 31, 2008 from $430.1 million at September 30, 2008.  Checking accounts represent the cornerstone product in a customer relationship and generate valuable fee income through service charges.  The balance of checking accounts increased $58.0 million during the quarter to $313.1 million at December 31, 2008 from $255.1 million at September 30, 2008.  Contributing to the increase was a $27.4 million increase in interest-bearing checking accounts resulting from a marketing campaign focused on attracting this type of deposit.  In addition, during the quarter ended December 31, 2008, the Bank began clearing its own official checks that are drawn on itself, which contributed to a $30.5 million increase in noninterest-bearing checking accounts.  At December 31, 2008, the weighted-average cost of interest-bearing checking accounts was 1.71% compared with 2.51% at September 30, 2008.

- 17 - -

Management also considers money market deposits to be a core deposit product.  However, during the quarter ended December 31, 2008, marketing focus was shifted away from these products to concentrate on interest-bearing checking accounts.  The balance of money market accounts decreased $21.3 million to $127.9 million at December 31, 2008 from $149.1 million at September 30, 2008.  At December 31, 2008, the weighted-average cost of money market deposits decreased to 0.92% from 2.12% at September 30, 2008 as the result of declining market interest rates.  Money market and interest-bearing checking accounts carry adjustable interest rates that make them an ideal funding source for the Company’s prime-adjusting commercial and home equity loans.

Certificates of deposit increased $50.8 million during the quarter to $536.0 million at December 31, 2008, primarily as the result of a $23.7 million increase in brokered certificates of deposit to $152.6 million, which management actively manages as a wholesale funding source, and a $22.9 million increase in CDARS time deposits to $146.9 million.  CDARS deposits, which are generally offered to in-market retail and commercial customers, offer the bank’s customers the ability to receive FDIC insurance on deposits up to $50 million.  Total deposits increased $86.6 million, or 9.5%, to $1.00 billion at December 31, 2008 from $915.3 million at September 30, 2008.

Retail banking fees, which include fees charged to customers who have overdrawn their checking accounts, decreased 6.0% to $967,000 for the three months ended December 31, 2008 compared with $1.0 million for the same 2007 period.  Primarily as the result of tightened consumer spending in the current difficult economic environment, the Bank experienced a reduction in the volume of overdrawn checking accounts during the three months ended December 31, 2008 compared with the same period last year.

- 18 - -

AVERAGE BALANCE SHEETS

The following table sets forth information regarding average daily balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities for the periods indicated.

	Three Months Ended
	December 31, 2008								December 31, 2007
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Cost			Balance			Dividends		Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable:  (1)
Real estate and commercial	$	891,328		$	12,931		5.80	%	$	769,685		$	13,967		7.29	%
Home equity lines of credit		226,781			2,701		4.76	%		220,379			4,192		7.61	%
Consumer		3,729			53		5.71	%		4,359			56		5.09	%
Total loans receivable		1,121,838			15,685		5.59	%		994,423			18,215		7.33	%
Loans held for sale		50,739			666		5.25	%		51,511			727		5.64	%
Debt securities, net		16,484			99		2.41	%		15,868			180		4.54	%
Equity securities, net		1,224			7		2.42	%		5,485			39		2.81	%
Mortgage-backed securities		26,084			313		4.80	%		2,980			35		4.75	%
FHLB stock		11,601			60		2.06	%		10,992			131		4.76	%
Other		1,830			4		0.86	%		3,988			43		4.40	%
Total interest-earning assets		1,229,800			16,834		5.48	%		1,085,247			19,370		7.14	%
Non-interest-earning assets		83,458								76,327
Total assets	$	1,313,258							$	1,161,574
Interest-bearing liabilities:
Interest-bearing checking	$	188,156		$	1,058		2.25	%	$	62,130		$	251		1.62	%
Passbook savings		25,810			13		0.20	%		28,783			26		0.37	%
Money market		140,106			567		1.62	%		182,037			1,804		3.96	%
Certificate of deposit		518,897			4,485		3.46	%		489,498			6,121		5.00	%
Total interest-bearing deposits		872,969			6,123		2.81	%		762,448			8,202		4.30	%
FHLB advances		200,156			1,171		2.34	%		210,992			2,525		4.79	%
Federal Reserve borrowings		27,207			80		1.17	%		11			-		5.04	%
Note payable		7,640			101		5.29	%		2,980			48		6.43	%
Subordinated debentures		19,589			246		5.03	%		19,589			394		8.05	%
Total interest-bearing liabilities		1,127,561			7,721		2.74	%		996,020			11,169		4.49	%
Non-interest bearing liabilities:
Non-interest bearing deposits		87,028								59,688
Other non-interest bearing liabilities		13,520								21,018
Total non-interest-bearing liabilities		100,548								80,706
Stockholders' equity		85,149								84,848
Total liabilities and stockholders' equity	$	1,313,258							$	1,161,574
Net interest income				$	9,113							$	8,201
Interest rate spread (2)							2.74	%							2.65	%
Net interest margin (3)							2.96	%							3.02	%
Ratio of average interest-earning assets to average interest-bearing liabilities		109.07	%							108.96	%

(1)	Includes non-accrual loans with an average balance of $11.1 million and $6.6 million for the three months ended December 31, 2008 and 2007, respectively.
(2)	Yield on interest-earning assets less cost of interest-bearing  liabilities.
(3)	Net interest income divided by average interest-earning assets.

- 19 - -

RATE VOLUME ANALYSIS

The following table sets forth the effects of changing rates and volumes on net interest income for the periods indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to variations in volume (change in volume multiplied by prior period rate) and the change attributable to variations in interest rates (changes in rates multiplied by prior period volume).  Changes in interest income and expense attributed to both changes in volume and changes in rate are allocated proportionately to rate and volume.

	Three Months Ended
	December 31, 2008 vs 2007
	Volume			Rate			Net
	(In thousands)
Interest-earning assets:
Loans receivable:
Real estate and commercial	$	8,512		$	(9,548	)	$	(1,036	)
Home equity lines of credit		797			(2,288	)		(1,491	)
Consumer		(31	)		28			(3	)
Total loans receivable		9,278			(11,808	)		(2,530	)
Loans held for sale		(11	)		(50	)		(61	)
Debt securities, net		46			(127	)		(81	)
Equity securities, net		(27	)		(5	)		(32	)
Mortgage-backed securities		278			-			278
FHLB stock		47			(118	)		(71	)
Other		(16	)		(23	)		(39	)
Net change in income on
interest earning assets		9,595			(12,131	)		(2,536	)
Interest-bearing liabilities:
Interest-bearing checking		677			130			807
Passbook savings		(2	)		(11	)		(13	)
Money market		(347	)		(890	)		(1,237	)
Certificate of deposit		2,193			(3,829	)		(1,636	)
Total interest-bearing deposits		2,521			(4,600	)		(2,079	)
FHLB advances		(124	)		(1,230	)		(1,354	)
Federal Reserve borrowings		80			-			80
Note payable		109			(56	)		53
Subordinated debentures		-			(148	)		(148	)
Net change in expense on
interest bearing liabilities		2,586			(6,034	)		(3,448	)
Change in net interest income	$	7,009		$	(6,097	)	$	912

- 20 - -

RESULTS OF OPERATIONS

Net income for the three months ended December 31, 2008 was $566,000, or $0.06 per diluted share on 10.3 million average diluted shares outstanding, compared with net income of $2.7 million, or $0.27 per diluted share on 10.2 million average diluted shares outstanding, during the same period last year.  Results for the current-year period were negatively impacted by a $4.7 million provision for loan losses, which included $1.4 million in specific reserves related to two commercial real estate loans.

Net Interest Income

Net interest income rose 11.1%, or $912,000, to $9.1 million for the quarter ended December 31, 2008 compared with $8.2 million for the same period last quarter. The increase was fueled by strong growth in the average balances of loans receivable, which increased to $1.12 billion during the quarter ended December 31, 2008 compared with $994.4 million during the quarter ended December 31, 2007, partially offset by a decline in the net interest margin.  The net interest margin declined to 2.96% during the quarter ended December 31, 2008 from 3.02% for the quarter ended December 31, 2007.  The Company’s net interest margin was negatively impacted during the quarter by the rapid decline in market interest rates.  While the Company saw a decline in interest rates on its prime adjusting commercial and home equity loans and on its short-term wholesale borrowings, interest rates paid on its retail deposits did not fall as quickly due to strong competition for deposits.

Total interest and dividend income decreased $2.5 million, or 13.1%, to $16.8 million for the quarter ended December 31, 2008 compared with $19.4 million for the comparable 2007 quarter.  The decrease was primarily due to a decrease in the average yield on loans receivable from 7.33% during the quarter ended December 31, 2007 to 5.59% during the quarter ended December 31, 2008, partially offset by an increase in the average balance of loans receivable from $994.4 million during the quarter ended December 31, 2007 to $1.12 billion during the quarter ended December 31, 2008.  The decrease in the average loan yield was due to lower market interest rates during the 2008 period, while the increase in the average balance was primarily due to growth in commercial loans.

Total interest expense decreased $3.4 million, or 30.9%, to $7.7 million for the quarter ended December 31, 2008 compared with $11.2 million for the quarter ended December 31, 2007.  The lower expense was the result of a decrease in the average cost of funds partially offset by an increase in the average balance of interest-bearing liabilities.  The average cost of funds decreased from 4.49% for the quarter ended December 31, 2007 to 2.74% for the quarter ended December 31, 2008 while the average balance of interest-bearing liabilities increased from $996.0 million to $1.13 billion during the same periods, respectively.  The increased average balance in interest-bearing liabilities, which was used to fund asset growth during the period, resulted primarily from increases in the average balances of deposits (mainly checking accounts and certificates of deposit) and, to a lesser extent, an increase in borrowings from the Federal Reserve Bank of St. Louis (“Federal Reserve Bank”), partially offset by a decrease in the average balance of advances from the Federal Home Loan Bank of Des Moines (“FHLB”).  The decreased average costs were the result of lower market interest rates during the period, growth in core deposits and a shift in the mix of wholesale funding sources.  The Company primarily funds its assets with savings deposits from its retail and commercial customers, which are typically its lowest-cost funding source.  This funding source is supplemented with wholesale funds consisting primarily of borrowings from the FHLB, short-term borrowings from the Federal Reserve Bank and time deposits from national brokers.  Management actively chooses among these wholesale funding sources depending on their relative costs and the Company’s overall borrowing capacity at the FHLB and the Federal Reserve Bank.

Interest expense on deposits decreased $2.1 million, or 25.3%, to $6.1 million during the quarter ended December 31, 2008 compared with $8.2 million for the quarter ended December 31, 2007 as the result of a decrease in the average cost partially offset by an increase in the average balance.  The average balance of interest-bearing deposits increased to $873.0 million for the quarter ended December 31, 2008 from $762.4 million for the quarter ended December 31, 2007 while the average cost of deposits decreased from 4.30% to 2.81% during the same periods, respectively.  Growth in average total deposits during the 2008 period was the result of growth in core deposits, CDARS time deposits and brokered time deposits.  The growth of core deposits combined with lower market interest rates resulted in lower average costs during the 2008 period.

- 21 - -

Interest expense on advances from the Federal Home Loan Bank decreased $1.4 million, or 53.6%, to $1.2 million during the quarter ended December 31, 2008 compared with $2.5 million for the quarter ended December 31, 2007 as the result of decreases in the average cost and the average balance.  The average balance decreased to $200.2 million for the quarter ended December 31, 2008 from $211.0 million for the quarter ended December 31, 2007 and the average cost decreased from 4.79% to 2.34% during the same periods, respectively.  The decreased average balances resulted from management’s decision to shift a portion of these short-term borrowings to less costly short-term borrowings at the Federal Reserve Bank.  The decreased average cost was the result of lower market interest rates during the 2008 period.

Interest expense on borrowings from the Federal Reserve Bank increased to $80,000 during the quarter ended December 31, 2008 compared with $137 for the quarter ended December 31, 2007 as the result of an increase in the average balance to $27.2 million for the quarter ended December 31, 2008 from $11,000 for the quarter ended December 31, 2007.  The average cost of these borrowings during the three months ended December 31, 2008 and 2007 was 1.17% and 5.04%, respectively.  During the 2008 period, the Company shifted borrowings from the FHLB into less-costly, short-term borrowings from the Discount Window of the Federal Reserve Bank.

Provision for Loan Losses

The provision for loan losses for the three months ended December 31, 2008 was $4.7 million compared with $1.0 million for the same period a year ago.  See Non-Performing Assets and Allowance for Loan Losses.

Non-Interest Income

Total non-interest income increased 11.2% to $3.3 million for the quarter ended December 31, 2008 compared with $3.0 million for the same period last year primarily due to the strong growth in mortgage revenues, gain on the sales of securities and higher investment brokerage revenues, partially offset by a decrease in retail banking fees.

Investment brokerage revenuestotaled $261,000 for the three months ended December 31, 2008 compared with $215,000 for the same period a year ago.  The Company operates an investment brokerage division whose operations consist principally of brokering bonds from wholesale brokerage houses to bank, municipal and individual investors.  Revenues are generated on trading spreads and fluctuate with changes in trading volumes and market interest rates.  The increased revenues in the 2008 period were the result of successful sales efforts to new customers combined with an improved bond sales environment caused by the steepened interest-rate yield curve.

Gain on sales of securities totaled $243,000 for the three months ended December 31, 2008 on sales of $51.1 million of debt securities classified as available for sale compared with $54,000 for the three months ended December 31, 2007 on sales of $5.2 million of available-for-sale debt securities.   Such securities are primarily held as collateral to secure large commercial and municipal deposits.  The total balance held in these securities is adjusted to reflect fluctuations in the balances of the deposits they are securing.

Non-Interest Expense

Total non-interest expense increased $593,000 to $6.9 million for the quarter ended December 31, 2008 compared with $6.3 million for the same period a year ago.  The increase was primarily due to increases in salaries and employee benefits expense, occupancy, equipment and data processing expense and real estate foreclosure expense and losses, and a decrease in gain on derivative financial instruments, partially offset by a decrease in advertising expense.

Salaries and employee benefits expenseincreased $321,000 to $3.3 million for the quarter ended December 31, 2008 compared with $3.0 million for the quarter ended December 31, 2007.  The increase was mainly the result of a decrease in the volume of loans originated for sale during the current-year quarter resulting in a lower level of direct compensation expense that was capitalized as loan origination costs.

Occupancy, equipment and data processing expense increased $184,000 to $1.8 million for the three-month period ended December 31, 2008 compared with $1.6 million for the three-month period ended December 31, 2007.  The increase was largely related to an increase in outside contract services expense related to the hiring of an independent security company to provide security guards at certain of the Bank’s branch offices, increased expenses related to the temporary relocation of one of the Bank’s branch offices due to water damage, and increased expenses related to the increased level of loan and deposit activity.

- 22 - -

Advertising expense decreased $54,000 to $286,000 for the three-month period ended December 31, 2008 compared with $340,000 for the three-month period ended December 31, 2007.  The decrease was generally due to a reduction in the overall level of advertising during the 2008 period and a more focused effort to control such expenses.

Gain on derivative instrumentswas $0 for the quarter ended December 31, 2008 compared with a gain of $122,000 for the quarter ended December 31, 2007.  During November 2004, the Company entered into interest rate swap agreements with notional values totaling $80 million, which were designed to convert the fixed rates paid on certain brokered certificates of deposits into variable, LIBOR-based rates.  The Company used long-haul, fair-value, hedge accounting.  Under this method, any hedge ineffectiveness was deemed not material and the impact was recognized as a charge or credit to earnings during the period in which the ineffectiveness occurred.  All of these interest-rate swap agreements were called by the counterparties during the year ended September 30, 2008 due to the declining interest-rate environment.

Real estate foreclosure losses and expense, netinclude realized losses on the final disposition of foreclosed properties, additional write-downs for declines in the fair market values of properties which occur subsequent to foreclosure and expenses incurred in connection with maintaining the properties until they are sold.  Real estate foreclosure losses and expense, net increased $113,000 to $342,000 for the quarter ended December 31, 2008 compared with $229,000 for the same quarter last year. The increases were generally due to the overall increased foreclosure activity and the related realized losses on sales.  See Non-Performing Assets and Allowance for Loan Losses.

Income Taxes

The provision for income taxes was $297,000 for the three months ended December 31, 2008 compared with $1.1 million for the three months ended December 31, 2007.  The effective tax rate for the three months ended December 31, 2008 was 34.4% compared with 29.4% for the same 2007 period.  The lower effective tax rate in the 2007 period was primarily the result of a higher percentage of non-taxable income to total pre-tax income related to bank-owned life insurance and non-taxable interest income.

- 23 - -

NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Non-performing assets at December 31, 2008 and September 30, 2008 are summarized as follows:

	December 31,			September 30,
	2008			2008
Non-accrual loans:
Residential real estate:
First mortgage	$	4,330,175		$	5,903,709
Second mortgage		628,127			752,245
Home equity		3,027,561			1,695,073
Commercial and multi-family real estate		1,513,516			1,125,117
Real estate construction and development		1,089,027			133,108
Commercial and industrial		3,119,410			341,250
Consumer and other		223,022			159,727
Total non-accrual loans		13,930,838			10,110,229
Accruing loans past due 90 days or more:
Residential real estate:
First mortgage		4,909,005			2,542,770
Home equity		435,579			1,467,606
Commercial and multi-family real estate		-			230,845
Real estate construction and development		557,435			-
Consumer and other		-			7,349
Total accruing loans past due 90 days or more		5,902,019			4,248,570
Troubled-debt restructured:
Current under restructured terms:
Residential real estate:
First mortgage		9,480,307			3,800,747
Second mortgage		1,156,601			659,033
Home equity		902,739			-
Commercial and multi-family real estate		7,896,715			-
Commercial and industrial		1,361,080			537,422
Total current troubled debt restructured		20,797,442			4,997,202
Past due under restructured terms:
Residential real estate:
First mortgage		652,114			1,183,967
Second mortgage		11,591			11,371
Home equity		55,122			112,081
Commercial and industrial		1,020,252			-
Total past due troubled debt restructured		1,739,079			1,307,419
Total troubled debt restructured		22,536,521			6,304,621
Total non-performing loans		42,369,378			20,663,420
Real estate acquired in settlement of loans:
Residential real estate		2,505,831			3,518,806
Commercial real estate		103,500			-
Total real estate acquired in settlement of loans		2,609,331			3,518,806
Other nonperforming assets		91,792			236,690
Total non-performing assets	$	45,070,501		$	24,418,916
Ratio of non-performing loans to total loans receivable		3.66	%		1.88	%
Ratio of non-performing assets to totals assets		3.31	%		1.87	%
Ratio of allowance for loan losses to non-performing loans		36.97	%		61.76	%

- 24 - -

Non-performing loans increased $21.7 million during the quarter to $42.4 million at December 31, 2008, primarily as the result of a $16.2 million increase in troubled debt restructurings.  The increase in troubled debt restructurings was due to management’s decision to proactively modify loan repayment terms with borrowers who were experiencing financial difficulties in the current economic climate with the belief that these actions would maximize the Bank’s recoveries on these loans.  The restructured terms of the loans generally included a reduction of the interest rates and, if the underlying collateral values supported the resulting carrying values of the loans, the addition of past due interest to the principal balance of the loans.  Many of these borrowers were current at the time of the modification and showed strong intent and ability to repay their obligations under the modified terms.  At December 31, 2008, $20.8 million, or 92%, of the total restructured loans were performing as agreed under the modified terms of the loans.

While these modifications were generally targeted at residential mortgage loan customers, the Company also restructured a $7.8 million commercial real estate loan made to a St. Louis-based customer, which was collateralized by a strip shopping center in Naples, Florida.  The Company’s lending practices generally limit lending outside of its two primary market areas, St. Louis and Kansas City.  However, management has had a long, successful relationship with this borrower.  While the loan had been current under the previous loan terms and remains current under the restructured terms, management determined it was necessary to temporarily reduce the interest rate and defer principal payments while the borrower attempts to secure additional tenants in the property.  However, after considering the values of the borrower’s personal guarantees and the underlying collateral, the Company recorded a $1.2 million provision for loan loss related to this loan during the December 2008 quarter.

A loan is classified as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.  A loan classified as a troubled debt restructuring will retain such classification until the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally one year.  Interest income on restructured loans is accrued at the reduced rate once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally three months for loans that were less than 30 days past due at the time of restructuring and six months for loans that were 30 days or more past due at the time of restructuring.

Also contributing to the rise in non-performing assets was a $5.5 million increase in loans past due 90 days or more.  The balance of such loans at December 31, 2008 included $9.2 million in first mortgage loans past due, $4.1 million in second mortgage and home equity loans past due and $6.3 million in commercial loans past due.  Loans are placed on non-accrual status when, in the opinion of management, there is reasonable doubt as to the collectability of interest or principal.  Management considers many factors before placing a loan on non-accrual, including the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral.

The ratio of the allowance for loan losses to loans receivable increased to 1.35% at December 31, 2008 compared with 1.16% at September 30, 2008 as the result of the significant increase in the allowance during the quarter.  However, the ratio of the allowance for loan losses to non-performing loans declined to 36.97% at December 31, 2008 compared with 61.76% at September 30, 2008 as the result of the significant increase in non-performing loans.  Management believes the decline in this coverage ratio is reasonable due to a change in the mix of non-performing loans during the quarter, specifically increased troubled debt restructurings that were performing under their restructured terms and residential first mortgage loans.  At December 31, 2008, 46% of total non-performing loans were residential first mortgage loans, which carry a lower level of inherent risk than other types of loans in the Company’s portfolio, especially compared to second mortgage loans and home equity lines of credit where the Company often does not own or service the first mortgage loan.

Real estate acquired in settlement of loans declined to $2.6 million at December 31, 2008 compared with $3.5 million at September 30, 2008.  The balance at December 31, 2008 consisted of 43 residential real estate properties and one commercial real estate property in the Company’s two primary market areas of St. Louis and Kansas City.

- 25 - -

The following table is a summary of the activity in the allowance for loan losses for the periods indicated:

	Three Months Ended
	December 31,
	2008		2007
Balance, beginning of year	$	12,761,532	$	10,421,304
Provision charged to expense		4,691,578		1,032,551
Charge-offs:
Residential real estate first mortgage		667,104		101,450
Residential real estate second mortgage		470,859		133,782
Home equity lines of credit		610,327		127,589
Real estate construction & development		8,303		-
Commercial & industrial		23,577		-
Consumer and other		43,483		47,771
Total charge-offs		1,823,653		410,592
Recoveries:
Residential real estate first mortgage		1,281		-
Residential real estate second mortgage		323		-
Home equity lines of credit		12,662		106,218
Commercial and multi-family real estate		14,283		-
Consumer and other		5,952		2,002
Total recoveries		34,501		108,220
Balance, end of year	$	15,663,958	$	11,151,483

	December 31,			September 30,
	2008			2008
Specific loan loss allowance related to non-performing loans	$	2,652,713		$	807,629
Balance of non-performing loans with no specific loan loss allowance		27,805,731			17,704,652
Ratio of allowance to total loans outstanding		1.35	%		1.16	%

The provision for loan losses for the three months ended December 31, 2008 was $4.7 million compared with $2.8 million for the quarter ended September 30, 2008 and $1.0 million for the same quarter a year ago. The provision in the December 2008 quarter included the addition of $1.4 million in specific allowance related to two loans collateralized by commercial real estate.  The increased provision was due to the increase in the level of non-performing loans, net charge-offs and growth in performing commercial loans, which have historically carried a higher level of inherent risk than residential loans.

Net charge-offs for the quarter ended December 31, 2008 totaled $1.8 million, or 0.64% of average loans on an annualized basis, compared with $2.0 million, or 0.73% of average loans on an annualized basis, for the quarter ended September 30, 2008 and $302,000, or 0.12% of average loans on an annualized basis, for the December 2007 quarter.  Management adheres to specific loan underwriting guidelines focusing primarily on residential and commercial real estate and home equity loans secured by one- to four-family and commercial properties within its primary market areas.  Because the Company’s loan portfolio is typically collateralized by real estate, losses occur more frequently when property values are declining and borrowers are losing equity in the underlying collateral.  Recent declines in residential real estate values in the Company’s market areas, as well as nationally, contributed to the increased charge-offs in the three months ended December 31, 2008.  The Company has not engaged in sub-prime lending activities.

The Company maintains the allowance for loan losses to absorb probable losses in the Company’s loan portfolio.   Loan losses are charged against and recoveries are credited to the allowance.  Provisions for loan losses are charged to income and credited to the allowance in an amount necessary to maintain an appropriate allowance given risks identified in the portfolio.  The allowance is based upon management’s quarterly estimates of probable losses inherent in the loan portfolio.  Management’s estimates are determined through a method of quantifying certain risks in the portfolio that are affected primarily by changes in the nature and volume of the portfolio combined with an analysis of past-due and classified loans, and can also be affected by the following factors:  changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, changes in national and local economic conditions and developments, assessment of collateral values based on independent appraisals, and changes in the experience, ability, and depth of lending management staff.

- 26 - -

The following assessments are performed quarterly in accordance with the Company’s allowance for loan losses methodology:

Homogeneous residential mortgage loans are given one of five standard risk ratings at the time of origination.  The risk ratings are assigned through the use of a credit scoring model, which assesses credit risk determinants from the borrower’s credit history, the loan-to-value, debt-to-income ratios or other personal history.  The Company’s historical loss rates and industry data for each credit rating, adjusted as described below, are used to determine the appropriate allocation percentage for each loan grade.  Commercial real estate, consumer and home equity loans are assigned standard risk weightings that determine the allocation percentage.

When commercial real estate loans are over 30 days delinquent or residential, consumer and home equity loans are over 90 days past due, they are evaluated individually for impairment.  Additionally, loans that demonstrate credit weaknesses that may impact the borrower’s ability to repay or the value of the collateral are also reviewed individually for impairment.  The Company considers a loan to be impaired when management believes it will be unable to collect all principal and interest due according to the contractual terms of the loan.  If a loan is determined to be impaired, the Company establishes an allowance for loan losses equal to the excess of the loan’s carrying value over the present value of estimated future cash flows or the fair value of collateral if the loan is collateral dependent.

The Company’s methodology includes factors that allow the Company to adjust its estimates of losses based on the most recent information available.  Historical loss rates used to determine allowance provisions are adjusted to reflect the impact of current conditions, including actual collection and charge-off experience. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses.  Such agencies may require the Company to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination.

Management believes that the amount maintained in the allowance will be adequate to absorb probable losses inherent in the portfolio.  Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.  While management believes it has established the allowance for loan losses in accordance with U.S. generally accepted accounting principles, there can be no assurance that the Bank’s regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to significantly increase its allowance for loan losses.  In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that a substantial increase will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.  Any material increase in the allowance for loan losses could adversely affect the Company’s financial condition and results of operations.

FINANCIAL CONDITION

Cash and cash equivalents decreased $5.2 million to $23.9 million at December 31, 2008 from $29.1 million at September 30, 2008.  Cash balances included overnight investments in federal funds of $1.1 million at December 31, 2008 compared with $647,000 at September 30, 2008.

Debt securities available for sale increased to $4.0 million at December 31, 2008 compared with $0 at September 30, 2008.  Mortgage-backed securities available for sale increased to $11.9 million at December 31, 2008 from $10.2 million at September 30, 2008, while mortgage-backed securities held to maturity decreased to $15.1 million at December 31, 2008 from $15.7 million at September 30, 2008.  Such securities are primarily held as collateral to secure large commercial and municipal deposits.  The total balance held in these securities is adjusted as individual securities mature to reflect fluctuations in the balances of the deposits they are securing.

- 27 - -

Stock in the Federal Home Loan Bank of Des Moines decreased $1.0 million to $9.9 million at December 31, 2008 from $10.9 million at September 30, 2008.  The decrease was the result of the decrease in the amount of FHLB borrowings during the quarter as the Bank is generally required to hold stock equal to 5% of its total FHLB borrowings.

Prepaid expenses, accounts receivable and other assets increased $1.4 million to $9.2 million at December 31, 2008 from $7.9 million at September 30, 2008.  The increase was primarily the result of an increase in the fair value of an interest-rate swap agreement with a notional value of $14 million.  See Quantitative and Qualitative Disclosures about Market Risk.

Advance payments by borrowers for taxes and insurance decreased $1.9 million to $1.8 million at December 31, 2008 from $3.7 million at September 30, 2008.  The decrease was due to the payment by the Bank of borrowers’ real estate taxes prior to their due date on December 31, 2008.

Due to other banks decreased from $14.4 million at September 30, 2008 to $0 million at December 31, 2008.  Due to other banks represents checks drawn on a correspondent bank’s checking account.  On a daily basis, the Company settles with the correspondent bank.  The balance at September 30, 2008 primarily represented the checks issued to fund loans on the final business day of the month.  Subsequent to September 30, 2008, the Company began to perform this clearing process internally, resulting in the decrease in the liability.

Total stockholders’ equity at December 31, 2008 was $82.5 million, an increase of $92,000 from $82.4 million at September 30, 2008.  The increase was primarily attributable to net income totaling $566,000, common stock issued under the Company’s dividend reinvestment plan totaling $163,000, the amortization of equity trust expense of $164,000 and an increase in accumulated other comprehensive income of $112,000, partially offset by dividend payments of $973,000.

RECENT DEVELOPMENTS

On January 16, 2009, as part of the U.S. Department of Treasury’s Capital Purchase Program, the Company issued 32,538 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 per share liquidation preference, and a warrant to purchase up to 778,421 shares of the Company’s common stock at an exercise price of $6.27 per share in exchange for $32.5 million in cash from the U.S. Department of Treasury.  The preferred stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter.  After three years, the Company may, at its option, redeem the preferred stock at its liquidation preference plus accrued and unpaid dividends.  Proceeds from the sale of the preferred stock that are injected into the Bank will qualify as Tier 1 capital.  The securities purchase agreement between the Company and the U.S. Treasury limits the rate of dividend payments on the Company’s common stock to the amount of its last quarterly cash dividend of $0.095 per share for three years unless an increase is approved by the Treasury, limits the Company’s ability to repurchase its common stock for three years, and subjects the Company to certain executive compensation limitations included in the Emergency Economic Stabilization Act of 2008.

In addition, the Bank elected to participate in the FDIC’s Transaction Account Guarantee Program.  This program provides full FDIC insurance coverage for non interest-bearing transaction accounts and qualifying NOW accounts, regardless of the dollar amount, and is in addition to the standard FDIC insurance that was temporarily increased to $250,000 per depositor.  Both FDIC limits will be in effect through December 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2008, the Bank had outstanding commitments to originate loans totaling $149.1 million and commitments to sell loans totaling $181.7 million.  Certificates of deposit totaling $446.1 million at December 31, 2008 were scheduled to mature in one year or less.  Based on past experience, management believes the majority of certificates of deposit maturing in one year or less will remain with the Bank.

If the Bank or the Company require funds beyond their ability to generate them internally, the Bank has the ability to borrow funds from the FHLB and the Federal Reserve Bank and to raise certificates of deposit on a national level through broker relationships.  The borrowings from the FHLB are obtained under a blanket agreement, which assigns all investments in FHLB stock, qualifying first residential mortgage loans, residential loans held for sale and home equity loans with a 90% or less loan-to-value ratio as collateral to secure the amounts borrowed.  Total borrowings from the FHLB are subject to limitations based upon a risk assessment of the Bank.  At December 31, 2008, the Bank had approximately $201.6 million in additional borrowing authority under the arrangement with the FHLB in addition to the $96.4 million in advances outstanding at that date.

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The borrowings from the Federal Reserve Bank consist of short-term borrowings (generally maturing overnight or within 28 days) borrowed under the Bank’s primary credit line at the Federal Reserve’s Discount Window.  The Bank had approximately $13.8 million in additional borrowing authority at December 31, 2008 under this arrangement in addition to the $143.0 million in borrowings outstanding at that date and had approximately $209.0 million of commercial loans pledged as collateral under this agreement.

SOURCES AND USES OF CASH

The Company is a large originator of residential mortgage loans with substantially all of such loans sold in the secondary residential mortgage market.  Consequently, the primary source and use of cash in operations is the origination and subsequent sale of loans held for sale.  During the three months ended December 31, 2008, the origination of loans held for sale used $262.8 million of cash and the sales of such loans provided cash totaling $256.8 million compared with originations and sales totaling $313.0 million and $285.0 million, respectively, during the three months ended December 31, 2007.

The primary use of cash frominvesting activities is the origination of loans receivable which are held in portfolio.  During the three months ended December 31, 2008, the Company had a net increase in loans receivable of $59.1 million compared with an increase of $78.9 million for the three months ended December 31, 2007.  In addition, the Company purchased $54.7 million in debt securities during the three months ended December 31, 2008 compared with purchases of $24.0 million in debt securities and $6.5 million in equity securities during the three months ended December 31, 2007.  Sources of cash from investing activities also included sales of debt securities totaling $51.1 million, during the three months ended December 31, 2008 compared with sales and maturities of debt securities totaling $5.2 million and $15.0 million, respectively, during the three months ended December 31, 2007.

The Company’s primary sources and uses of funds from financing activities during the three months ended December 31, 2008 included a $86.6 million increase in deposits compared with a $33.5 million increase for the three months ended December 31, 2007, a $103.0 million increase in borrowings from the Federal Reserve Bank for the three months ended December 31, 2008 compared with no increase during the same period last year, and a $114.2 million decrease in advances from the Federal Home Loan Bank compared with a $93.9 million increase during the same period last year.

The following table presents the maturity structure of time deposits and other maturing liabilities at December 31, 2008:

	December 31, 2008
	Certificates		FHLB		Federal Reserve		Note		Subordinated
	of Deposit		Borrowings		Borrowings		Payable		Debentures
	(In thousands)
Maturing in:
Three months or less	$	179,475	$	10,300	$	143,000	$	7,640	$	-
Over three months through six months		146,425		20,000		-		-		-
Over six months through twelve months		120,154		5,100		-		-		-
Over twelve months		89,990		61,000		-		-		19,589
Total	$	536,044	$	96,400	$	143,000	$	7,640	$	19,589

CONTRACTUAL OBLIGATIONS

In addition to its owned banking facilities, the Company has entered into long-term operating leases to support ongoing activities.  The required payments under such commitments at December 31, 2008 are as follows:

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Less than one year	$	595,356
Over 1 year through 3 years		1,042,320
Over 3 years through 5 years		946,219
Over 5 years		1,384,537
Total	$	3,968,432

REGULATORY CAPITAL

The Bank is required to maintain specific amounts of capital pursuant to Office of Thrift Supervision (“OTS”) regulations on minimum capital standards.  The OTS’ minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the Tier I (core) capital requirement and the risk-based capital requirement.  The tangible capital requirement provides for minimum tangible capital (defined as stockholders’ equity less all intangible assets) equal to 1.5% of adjusted total assets.  The Tier I capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 4.0% of adjusted total assets.  The risk-based capital requirement provides for the maintenance of core capital plus a portion of unallocated loss allowances equal to 8.0% of risk-weighted assets.  In computing risk-weighted assets, the Bank multiplies the value of each asset on its balance sheet by a defined risk-weighting factor (e.g., one-to four-family conventional residential loans carry a risk-weighting factor of 50%).

The following table illustrates the Bank’s actual regulatory capital levels compared with its regulatory capital requirements at December 31, 2008 and September 30, 2008.

						Regulatory Capital Requirements
											To be Categorized as
											"Well Capitalized"
											Under Prompt
						For Capital					Corrective Action
	Actual					Adequacy Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of December 31, 2008:
Tangible capital (to total assets)	$	103,854		7.65	%	$	20,357		1.50	%		N/A		N/A
Total risk-based capital (to risk- weighted assets)		116,865		10.26			91,092		8.00		$	113,865		10.00	%
Tier I risk-based capital (to risk- weighted assets)		103,854		9.12			N/A		N/A			68,319		6.00
Tier I leverage capital (to average assets)		103,854		7.65			54,284		4.00			67,855		5.00
As of September 30, 2008:
Tangible capital (to total assets)	$	102,884		7.93	%	$	19,471		1.50	%		N/A		N/A
Total risk-based capital (to risk- weighted assets)		114,838		10.59			86,769		8.00		$	108,462		10.00	%
Tier I risk-based capital (to risk- weighted assets)		102,884		9.49			N/A		N/A			65,077		6.00
Tier I leverage capital (to average assets)		102,884		7.93			51,923		4.00			64,904		5.00

EFFECTS OF INFLATION

Changes in interest rates may have a significant impact on a bank’s performance because virtually all assets and liabilities of banks are monetary in nature.  Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.  Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity to asset ratio.  The Company’s operations are not currently impacted by inflation.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

AND OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes in the Company's quantitative or qualitative aspects of market risk during the quarter ended December 31, 2008 from that disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2008.

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in its financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.  Additionally, the Company engages in certain hedging activities, which are described in greater detail below.

For the three months ended December 31, 2008, the Company did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

The Company originates and purchases derivative financial instruments, including interest rate lock commitments, forward contracts to sell mortgage-backed securities and interest rate swaps.  Derivative financial instruments originated by the Company consist of interest rate lock commitments to originate residential loans.  Commitments to originate loans consist primarily of residential real estate loans.  At December 31, 2008, the Company had issued $149.1 million of unexpired interest rate lock commitments to loan customers compared with $137.4 million of unexpired commitments at September 30, 2008.

The Company entered into two $14 million notional value interest-rate swap contracts during 2008.  These contracts supported a $14 million, variable-rate, commercial loan relationship and were used to allow the commercial loan customer to pay a fixed interest rate to the Bank, while the Bank, in turn, charged the customer a floating interest rate on the loan.  Under the terms of the swap contract between the Bank and the loan customer, the customer pays the Bank a fixed interest rate of 6.58%, while the Bank pays the customer a variable interest rate of one-month LIBOR plus 2.30%.  Under the terms of a similar but separate swap contract between the Bank and a major securities broker, the Bank pays the broker a fixed interest rate of 6.58%, while the broker pays the Bank a variable interest rate of one-month LIBOR plus 2.30%.  The two contracts have identical terms except for the interest rates and interest does not begin to accrue until May 2009.  The contracts are scheduled to mature on May 15, 2015.  While these two swap derivatives generally work together as an interest-rate hedge, the Company has not designated them for hedge treatment under SFAS No. 133.  Consequently, both derivatives are marked to fair value through either a charge or credit to current earnings, the net effect of which offset one another during the quarter ended December 31, 2008.  The fair values of these derivative instruments recorded in other assets and other liabilities in the Company’s financial statements at December 31, 2008 and September 30, 2008 were $1.5 million and $70,000, respectively.

CONTROLS AND PROCEDURES

Pulaski Financial maintains “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that the information required to be disclosed in the reports that Pulaski Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to Pulaski Financial’s management including its principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended December 31, 2008, Pulaski Financial’s management, including Pulaski Financial’s principal executive officer and principal financial officer, evaluated the effectiveness of Pulaski Financial’s disclosure controls and procedures as of December 31, 2008, and concluded that Pulaski Financial’s disclosure controls and procedures were effective as of such date.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December  31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the Financial Accounting Standards Board issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting standards, and expands disclosures about fair value measurements. SFAS No. 157 was effective for the Company beginning October 1, 2008.  In March 2008, the FASB issued Staff Position No. FAS 157-2 (“FSP No. 157-2”), which delays the effective date of SFAS No. 157 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to the Company’s fiscal year beginning October 1, 2009.  The adoption of SFAS No. 157 did not have a material effect on the Company’s financial condition or results of operations.

In September 2006, the FASB issued Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), which requires balance sheet recognition of the funded status of pension and other postretirement benefits with the offset to accumulated other comprehensive income. Employers will recognize actuarial gains and losses, prior service cost, and any remaining transition amounts when recognizing a plan’s funded status. SFAS No. 158 was effective for the Company beginning October 1, 2007.  The adoption of SFAS No. 158 did not have a material effect on the Company’s financial condition or results of operations.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities that own trading and available-for-sale securities.  The fair value option created by SFAS No. 159 permits an entity to measure eligible items at fair value as of specified election dates.  The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument.  SFAS No. 159 was effective for the Company beginning October 1, 2008.  The adoption of SFAS No. 159 did not have a material effect on the Company’s financial condition or results of operations.

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations - A Replacement of FASB Statement No. 141” (“SFAS 141(R)”) and Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS 160”).  SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures certain items in a business combination, as well as disclosures about the nature and financial effects of a business combination.  SFAS 160 establishes accounting and reporting standards surrounding noncontrolling interests, or minority interests, which are the portions of equity in a subsidiary not attributable, directly or indirectly, to a parent.  The pronouncements are effective for fiscal years beginning on or after December 15, 2008 and apply prospectively to business combinations.  Presentation and disclosure requirements related to noncontrolling interests must be retrospectively applied.  Management is currently evaluating the impact of SFAS 141(R) on its accounting for future acquisitions and the impact of SFAS 160 on the Company’s consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  Management has evaluated the requirements of SFAS 161 and believes it will not have a material effect on the Company’s financial condition or results of operations.

In September 2006, the Emerging Issues Task Force Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” was ratified.  This EITF Issue addresses accounting for separate agreements that split life insurance policy benefits between an employer and employee.  The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements.  The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods.   The consensus in this Issue is effective for fiscal years beginning after December 15, 2007, with earlier application permitted.  Management has evaluated the requirements of the Issue and believes it will not have a material effect on the Company’s financial condition or results of operations.

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In November 2007, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB No. 109”).  SAB No. 109 provides revised guidance on the valuation of written loan commitments accounted for at fair value through earnings.  Former guidance under SAB No. 105, “Application of Accounting Principles to Loan Commitments,” indicated that the expected net future cash flows related to the associated servicing of the loan should not be incorporated into the measurement of the fair value of a derivative loan commitment.  The new guidance under SAB No. 109 requires these cash flows to be included in the fair value measurement.  The SAB requires this view to be applied on a prospective basis to derivative loan commitments issued or modified in the first quarter of 2008.  The Company’s application of SAB No. 109 in 2008 did not have a material effect on its consolidated financial statements.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings:

Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business.  Neither the Bank nor the Company is a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.

Item 1A.   Risk Factors:

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

The following table provides information regarding the Company’s purchases of its equity securities during the three months ended December 31, 2008.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total  Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as  Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units)  That May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2008 through October 31, 2008		3,447	$	8.18		3,447		380,619
November 1, 2008 through November 30, 2008		-		-		-		380,619
December 1, 2008 through December 31, 2008		-		-		-		380,619
Total		3,447	$	8.18		3,447

(1)   In February 2007, the Company announced a repurchase program under which it would repurchase up to 497,000 shares of the Company’s common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors.  However, as part of the Company’s participation in the Capital Repurchase Program of the U.S. Department of Treasury’s Troubled Asset Repurchase Program, prior to the earlier of January 16, 2012 or the date on which the preferred stock issued in that transaction has been redeemed in full or the Treasury has transferred its shares to non-affiliates, the Company cannot increase its quarterly cash dividend above $0.095 per share or repurchase any shares of its common stock, without the prior approval of the Treasury.

Item 3.  Defaults Upon Senior Securities: Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders: None

Item 5.  Other Information: Not applicable

Item 6.  Exhibits:

3.1 Articles of Incorporation of Pulaski Financial Corp. (1)

3.2 Certificate of Amendment to Articles of Incorporation of Pulaski Financial Corp. (2)

3.3 Certificate of Designations establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Pulaski Financial Corp. (3)

3.4 Bylaws of Pulaski Financial Corp. (4)

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4.1 Form of Certificate for Common Stock(5)

4.2  Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A(3)

4.3  Warrant to Purchase 778,421 Shares of Common Stock of Pulaski Financial Corp.(3)

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

32.1 Section 1350 Certification of Chief Executive Officer

32.2 Section 1350 Certification of Chief Financial Officer

(1) Incorporated by reference into this document from the Exhibits to the 2003 proxy statement as filed with the Securities and Exchange Commission on December 27, 2002.

(2) Incorporated by reference into this document from the Form 10-Q, as filed with the Securities and Exchange Commission on February 17, 2004.

(3) Incorporated herein by reference into this document from the Form 8-K, as filed with the Securities and Exchange Commission on January 16, 2009.

(4) Incorporated herein by reference from the Form 8-K, as filed with the Securities and Exchange Commission on December 21, 2007.

(5)  Incorporated by reference from the Form S-1 (Registration No. 333-56465), as amended, as filed with the Securities and Exchange Commission on June 9, 1998.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PULASKI FINANCIAL CORP.
Date: February 6, 2009	/s/Gary W. Douglass
	Gary W. Douglass
	President and Chief Executive Officer
Date: February 6, 2009	/s/Ramsey K. Hamadi
	Ramsey K. Hamadi
	Chief Financial Officer

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