Pulaski Financial (PULB) 10-Q 2010 Q2 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                                        March 31,2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨    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	¨
Non-accelerated filer	¨	Smaller reporting company	x
(Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes o   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 June 21, 2010
Common Stock, par value $.01 per share	10,762,114 shares

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

FORM 10-Q

MARCH 31, 2010

TABLE OF CONTENTS

		Page
PART I             FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2010 and September 30, 2009 (Unaudited)	1
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended March 31, 2010 and 2009 (Unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31, 2010 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009 (Unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
PART II           OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	[Reserved]	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
	Signatures	46

PART I - FINANCIAL INFORMATION

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2010 AND SEPTEMBER 30, 2009 (UNAUDITED)

	March 31,			September 30,
ASSETS	2010			2009
Cash and amounts due from depository institutions	$	7,335,329		$	3,911,448
Federal funds sold and overnight interest-bearing deposits		47,368,939			33,539,216
Total cash and cash equivalents		54,704,268			37,450,664
Equity securities available for sale, at fair value		589,000			589,000
Debt securities available for sale, at fair value		3,508,113			1,997,396
Mortgage-backed securities held to maturity, at amortized cost (fair value of  $11,731,610 and $12,374,966 at March 31, 2010 and September 30, 2009, respectively)		11,366,099			12,077,794
Mortgage-backed securities available for sale, at fair value		13,389,101			16,087,148
Capital stock of Federal Home Loan Bank - at cost		4,331,600			11,649,800
Mortgage loans held for sale, at lower of cost or market		96,600,151			109,129,721
Loans receivable (net of allowance for loan losses of $26,493,763 and $20,579,170 at March 31, 2010 and September 30, 2009, respectively)		1,086,377,450			1,132,094,844
Real estate acquired in settlement of loans (net of allowance for losses of $1,029,400 and $274,076 at March 31, 2010 and September 30, 2009, respectively)		13,899,544			8,454,610
Premises and equipment, net		18,365,894			18,962,001
Goodwill		3,938,524			3,938,524
Core deposit intangible		192,442			243,100
Accrued interest receivable		4,667,667			4,906,919
Bank-owned life insurance		29,226,713			28,678,679
Deferred tax asset		11,628,824			9,296,234
Prepaid expenses, accounts receivable and other assets		15,907,374			10,869,438
Total assets	$	1,368,692,764		$	1,406,425,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,164,173,899		$	1,191,629,239
Advances from Federal Home Loan Bank		59,500,000			61,000,000
Subordinated debentures		19,589,000			19,589,000
Advance payments by borrowers for taxes and insurance		2,213,307			4,655,867
Accrued interest payable		1,101,459			1,034,896
Other liabilities		10,098,421			11,555,500
Total liabilities		1,256,676,086			1,289,464,502
Stockholders' Equity:
Preferred stock - $.01 par value per share, 1,000,000 shares authorized; 32,538 shares issued at March 31, 2010 and September 30, 2009, $1,000 per share liquidation value, net of discount		30,870,801			30,655,060
Common stock - $.01 par value per share, 18,000,000 shares authorized; 13,068,618 shares issued at March 31, 2010 and September 30, 2009		130,687			130,687
Treasury stock-at cost; (2,795,494 and 2,963,817 shares at March 31, 2010 and September 30, 2009, respectively)		(17,777,926	)		(18,544,173	)
Additional paid-in capital from common stock		55,514,811			55,247,464
Accumulated other comprehensive income, net		97,915			192,773
Retained earnings		43,180,390			49,279,559
Total stockholders’ equity		112,016,678			116,961,370
Total liabilities and stockholders’ equity	$	1,368,692,764		$	1,406,425,872

See accompanying notes to the unaudited consolidated financial statements.

- 1 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)

	Three Months Ended March 31,					Six Months Ended March 31,
	2010			2009		2010			2009
Interest and Dividend Income:
Loans receivable	$	14,653,620		$	14,552,939	$	29,512,430		$	30,238,170
Mortgage loans held for sale		1,093,852			1,757,531		2,713,860			2,423,222
Securities and other		306,847			346,558		668,917			830,348
Total interest and dividend income		16,054,319			16,657,028		32,895,207			33,491,740
Interest Expense:
Deposits		4,339,331			5,312,328		8,966,100			11,435,622
Advances from Federal Home Loan Bank		506,125			915,395		1,063,367			2,086,048
Borrowings from the Federal Reserve Bank		193			135,165		257			214,932
Subordinated debentures		123,021			200,190		250,512			446,613
Note payable		-			12,233		-			113,353
Total interest expense		4,968,670			6,575,311		10,280,236			14,296,568
Net interest income		11,085,649			10,081,717		22,614,971			19,195,172
Provision for loan losses		11,240,000			5,664,407		17,314,000			10,355,985
Net interest income (loss) after provision for loan losses		(154,351	)		4,417,310		5,300,971			8,839,187
Non-Interest Income:
Mortgage revenues		1,676,561			4,313,013		4,378,047			5,862,643
Retail banking fees		869,997			935,598		1,802,158			1,902,632
Investment brokerage revenues		347,654			379,227		771,698			640,691
Gain on the sales of securities		-			-		-			243,386
Bank-owned life insurance		272,411			263,854		548,033			557,063
Other		217,045			48,620		327,366			115,258
Total non-interest income		3,383,668			5,940,312		7,827,302			9,321,673
Non-Interest Expense:
Salaries and employee benefits		3,653,845			3,593,274		7,550,423			6,935,276
Occupancy, equipment and data processing expense		2,014,696			2,053,152		4,019,609			3,933,441
Advertising		94,918			209,286		241,776			495,285
Professional services		548,407			370,947		1,065,856			632,417
FDIC deposit insurance premuim expense		493,752			410,593		985,611			609,812
Real estate foreclosure losses and expense, net		905,486			409,437		1,341,689			751,001
Other		709,770			776,020		1,398,310			1,406,002
Total non-interest expense		8,420,874			7,822,709		16,603,274			14,763,234
(Loss) income before income taxes		(5,191,557	)		2,534,913		(3,475,001	)		3,397,626
Income tax (benefit) expense		(869,669	)		761,910		(403,548	)		1,058,766
Net (loss) income	$	(4,321,888	)	$	1,773,003	$	(3,071,453	)	$	2,338,860
Other comprehensive (loss) income		(46,557	)		58,944		(94,858	)		171,140
Comprehensive (loss) income	$	(4,368,445	)	$	1,831,947	$	(3,166,311	)	$	2,510,000
(Loss) income available to common shares	$	(4,836,673	)	$	1,535,393	$	(4,100,644	)	$	2,101,250
Per Common Share Amounts:
Basic (loss) earnings per common share	$	(0.47	)	$	0.15	$	(0.40	)	$	0.21
Weighted average common shares outstanding - basic		10,364,565			10,153,221		10,318,818			10,133,651
Diluted (loss) earnings per common share	$	(0.47	)	$	0.15	$	(0.40	)	$	0.20
Weighted average common shares outstanding - diluted		10,364,565			10,283,324		10,318,818			10,324,389

See accompanying notes to the unaudited consolidated financial statements.

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PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED MARCH 31, 2010 (UNAUDITED)

	Preferred							Additional			Accumulated
	Stock,							Paid-In			Other
	Net of		Common		Treasury			Capital From			Comprehensive			Retained
	Discount		Stock		Stock			Common Stock			Income (Loss), Net			Earnings			Total
Balance, September 30, 2009	$	30,655,060	$	130,687	$	(18,544,173	)	$	55,247,464		$	192,773		$	49,279,559		$	116,961,370
Comprehensive income:
Net loss		-		-		-			-			-			(3,071,453	)		(3,071,453	)
Change in unrealized loss on investment securities, net of tax		-		-		-			-			(94,858	)		-			(94,858	)
Comprehensive income		-		-		-			-			(94,858	)		(3,071,453	)		(3,166,311	)
Common stock dividends ($0.095 per share)		-		-		-			-			-			(1,998,525	)		(1,998,525	)
Preferred stock dividends		-		-		-			-			-			(813,450	)		(813,450	)
Accretion of discount on preferred stock		215,741		-		-			-			-			(215,741	)		-
Stock options excercised		-		-		297,504			(100,675	)		-			-			196,829
Stock option and award expense		-		-		-			305,043			-			-			305,043
Commmon stock issued under dividend reinvestment plan (67,585 shares)		-		-		275,816			163,701			-			-			439,517
Restricted stock awards issued, net (48,400 shares)		-		-		197,520			(197,520	)		-			-			-
Common stock surrendered to satisfy tax withholding obligations of stock-based compensation (5,705 shares)		-		-		(38,568	)		-			-			-			(38,568	)
Purchase of equity trust shares		-		-		(152,285	)		-			-			-			(152,285	)
Distribution of equity trust shares (15,406 shares)		-		-		186,260			(186,260	)		-			-			-
Amortization of equity trust expense		-		-		-			311,373			-			-			311,373
Tax expense from release of equity shares		-		-		-			(31,037	)		-			-			(31,037	)
Excess tax benefit from stock-based compensation		-		-		-			2,722			-			-			2,722
Balance, March 31, 2010	$	30,870,801	$	130,687	$	(17,777,926	)	$	55,514,811		$	97,915		$	43,180,390		$	112,016,678

See accompanying  notes to the unaudited consolidated financial statements.

- 3 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR SIX MONTHS

ENDED MARCH 31, 2010 AND MARCH 31, 2009 (UNAUDITED)

	Six Months Ended
	March 31,
	2010			2009
Cash Flows From Operating Activities:
Net (loss) income	$	(3,071,453	)	$	2,338,860
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation, amortization and accretion:
Premises and equipment		927,318			927,688
Net deferred loan costs		1,077,169			1,388,296
Debt and equity securities premiums and discounts, net		55,653			79,593
Equity trust expense, net		311,373			296,913
Stock option and award expense		305,043			232,185
Provision for loan losses		17,314,000			10,355,985
Provision for losses on real estate acquired in settlement of loans		1,201,900			196,956
(Gains) losses on sales of real estate acquired in settlement of loans		(28,995	)		239,229
Originations of mortgage loans held for sale		(781,817,430	)		(899,539,005	)
Proceeds from sales of mortgage loans held for sale		798,475,993			866,710,228
Gain on sales of mortgage loans held for sale		(4,128,993	)		(5,406,228	)
Loss on equity securities available for sale		-			155,500
Gain on sales of debt securities available for sale		-			(398,886	)
Increase in cash value of bank-owned life insurance		(548,034	)		(557,063	)
(Increase) decrease in deferred tax asset		(2,332,590	)		2,048,755
Excess tax benefit from stock-based compensation		(2,722	)		(11,380	)
Tax expense for release of equity trust shares		31,037			-
(Decrease) increase in accrued expenses		(634,611	)		108,141
Decrease in current income taxes payable		(1,699,781	)		(261,869	)
Changes in other assets and liabilities		(3,774,328	)		441,233
Net adjustments		24,732,002			(22,993,729	)
Net cash provided by (used in) operating activities		21,660,549			(20,654,869	)
Cash Flows From Investing Activities:
Proceeds from:
Maturities of time deposits in other banks		-			99,000
Maturities of debt securities available for sale		12,000,000			1,000,000
Sales of debt securities available for sale		-			51,050,500
Principal payments on mortgage-backed securities		3,200,507			1,892,020
Redemption of Federal Home Loan Bank stock		9,858,100			4,571,500
Sales of real estate acquired in settlement of loans receivable		2,829,975			3,248,200
Purchases of:
Debt securities available for sale		(13,510,130	)		(56,715,014	)
Mortgage-backed securities available for sale		-			(7,003,443	)
Federal Home Loan Bank stock		(2,539,900	)		(5,325,200	)
Premises and equipment		(331,211	)		(623,255	)
Net decrease (increase) in loans receivable		17,878,411			(99,958,911	)
Net cash provided by (used in) investing activities	$	29,385,752		$	(107,764,603	)

Continued on next page.

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PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR SIX MONTHS

ENDED MARCH 31, 2010 AND MARCH 31, 2009, CONTINUED (UNAUDITED)

	Six Months Ended
	March 31,
	2010			2009
Cash Flows From Financing Activities:
Net (decrease) increase in deposits	$	(27,455,340	)	$	179,561,557
Proceeds from (repayment of) Federal Home Loan Bank advances, net		(1,500,000	)		(124,500,000	)
Proceeds from Federal Reserve Bank borrowings, net		-			90,000,000
Proceeds from notes payable		-			(7,640,000	)
Net decrease in due to other banks		-			(14,377,831	)
Net decrease in advance payments by borrowers for taxes and insurance		(2,442,560	)		(904,623	)
Proceeds from cash received in dividend reinvestment plan		439,517			341,405
Proceeds from issuance of preferred stock and common stock warrants		-			32,501,768
Proceeds from stock options excercised		196,829			-
Purchase of equity trust shares		(152,285	)		(68,200	)
Excess tax benefit for stock based compensation		2,722			11,380
Tax expense for release of equity trust shares		(31,037	)		-
Dividends paid on common stock		(1,998,525	)		(1,951,442	)
Dividends paid on preferred stock		(813,450	)		(131,056	)
Common stock surrendered to satisfy tax withholding obligations of stock-based compensation		(38,568	)		(28,181	)
Net cash (used in) provided by financing activities		(33,792,697	)		152,814,777
Net increase in cash and cash equivalents		17,253,604			24,395,305
Cash and cash equivalents at beginning of period		37,450,664			29,077,862
Cash and cash equivalents at end of period	$	54,704,268		$	53,473,167
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest on deposits	$	8,902,312		$	11,696,714
Interest on advances from FHLB		1,063,367			2,110,196
Interest on other borrowings		258			227,754
Interest on subordinated debentures		270,118			457,860
Interest on note payable		-			114,323
Cash paid during the period for interest		10,236,055			14,606,847
Income taxes, net		3,599,000			(659,000	)
Noncash Investing Activities:
Real estate acquired in settlement of loans receivable		9,447,814			4,165,257

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. 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 March 31, 2010 and September 30, 2009 and its results of operations for the three- and six-month periods ended March 31, 2010 and 2009. The results of operations for the three- and six-month periods ended March 31, 2010 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, 2009 contained in the Company’s 2009 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, 2009.

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 2009 amounts to conform to the fiscal 2010 presentation.

The Company has evaluated all subsequent events through the filing date of this document to ensure that the accompanying financial statements include the effects of any subsequent events that should be recognized in such financial statements as of March 31, 2010, and the appropriate disclosure of any subsequent events that were not recognized in the financial statements.

2. PREFERRED STOCK

In January 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 for a period of ten years 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 proceeds, net of issuance costs consisting primarily of legal fees, were allocated between the preferred stock and the warrant on a pro rata basis, based upon the estimated market values of the preferred stock and the warrant. As a result, $2.2 million of the proceeds were allocated to the warrant, which increased additional paid in capital from common stock. The amount allocated to the warrant is considered a discount on the preferred stock and is being accreted using the level yield method over a five-year period through a charge to retained earnings. Such accretion does not reduce net income, but reduces income available for common shares.

The fair value of the preferred stock was estimated on the date of issuance by computing the present value of expected future cash flows using a risk-adjusted rate of return for similar securities of 12%. The fair value of the warrant was estimated on the date of grant using the Black-Scholes option pricing model assuming a risk-free interest rate of 4.30%, expected volatility of 35.53% and a dividend yield of 4.27%.

- 6 - -

The preferred stock pays cumulative dividends of 5% per year for the first five years and 9% per year thereafter. The Company may, at its option, redeem the preferred stock at its liquidation preference plus accrued and unpaid dividends. The securities purchase agreement between the Company and the U.S. Treasury limits, for three years, the rate of dividend payments on the Company’s common stock to the amount of its last quarterly cash dividend prior to participation in the program, which as was of $0.095 per share, 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, as amended by the American Recovery and Reinvestment Act of 2009.

3. EARNINGS PER SHARE

Basic earnings per common 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.

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Net (loss) income	$	(4,321,888	)	$	1,773,003		$	(3,071,453	)	$	2,338,860
Less:
Preferred dividends declared		(406,725	)		(131,056	)		(813,450	)		(131,056	)
Accretion of discount on preferred stock		(108,060	)		(106,554	)		(215,741	)		(106,554	)
(Loss) income available for common shares	$	(4,836,673	)	$	1,535,393		$	(4,100,644	)	$	2,101,250
Weighted average common shares outstanding - basic		10,364,565			10,153,221			10,318,818			10,133,651
Effect of dilutive securities:
Treasury stock held in equity trust - unvested shares		-			87,987			-			95,001
Equivalent shares - employee stock options and awards		-			42,116			-			50,275
Equivalent shares - common stock warrant		-			-			-			45,462
Weighted average common shares outstanding - diluted		10,364,565			10,283,324			10,318,818			10,324,389
(Loss) earnings per common share:
Basic	$	(0.47	)	$	0.15		$	(0.40	)	$	0.21
Diluted	$	(0.47	)	$	0.15		$	(0.40	)	$	0.20

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. Similarly, outstanding warrants are dilutive when the average market price of the Company’s common stock exceeds the exercise price during a period. Proceeds from the assumed exercise of dilutive warrants are assumed to be used to repurchase common shares at the average market price of such stock during the period.

- 7 - -

The following options and warrants to purchase common shares during the three- and six-month period ended March 31, 2010 and 2009 were not included in the respective computations of diluted earnings per share since they were considered anti-dilutive because there was either a net loss for the period or the exercise price of the options, when combined with the effect of the unamortized compensation expense, and the exercise price of the warrants were greater than the average market price of the common shares. The options expire in various periods from 2013 through 2020, respectively, and the warrant expires in 2019.

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
Number of option shares excluded		952,214		747,245		1,001,667		696,873
Equivalent anti-dilutive shares		513,579		812,231		507,814		696,917
Number of warrant shares excluded		778,421		-		778,421		-
Equivalent anti-dilutive shares		35,544		-		65,910		-

4. 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 six months ended March 31, 2010 were granted with an exercise price equal to the market value of the Company’s shares at the date of grant and all stock option and stock grant awards vest over a period of two to five years. In October 2009, stock grants for 11,016 shares of the Company’s common stock were awarded to directors with terms providing for vesting of 5,508 shares immediately and 5,508 shares in twelve months. 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). As a participant in the U.S. Department of Treasury’s Capital Purchase Program, certain employees are prohibited from receiving golden parachute payments while the Company has any outstanding funds related to the program. Under the Treasury’s guidelines, golden parachute payments are defined to include any payment due to a change in control of the Company, which includes the acceleration of vesting in stock-based incentive plans due to the departure or change in control. Accordingly, the affected employees have signed agreements to forfeit the right to accelerated vesting while any funds related to the Treasury’s program are outstanding.

A summary of the Company’s stock option program as of March 31, 2010 and changes during the six-month period then ended, is presented below:

								Weighted-
				Weighted				Average
				Average		Aggregate		Remaining
	Number			Exercise		Intrinsic		Contractual
	Of Shares			Price		Value		Life (years)
Outstanding at October 1, 2009		930,306		$	9.82
Granted		15,000			7.25
Exercised		(72,900	)		2.70
Forfeited		(12,475	)		8.69
Outstanding at March 31, 2010		859,931		$	10.39	$	135,921		6.4
Exercisable at March 31, 2010		515,709		$	10.33	$	122,200		5.3

- 8 - -

The weighted-average grant-date fair value of options granted during the six months ended March 31, 2010 was $2.72 per share. As of March 31, 2010, the total unrecognized compensation expense related to non-vested stock options and awards was $1.0 million and the related weighted average period over which it is expected to be recognized is 2.3 years.

The fair value of stock options granted during the six-month periods ended March 31, 2010 and 2009 is estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

	Six Months Ended
	March 31,
	2010			2009
Risk free interest rate		2.44	%		4.30	%
Expected volatility		38.59	%		35.53	%
Expected life in years		5.6			5.4
Dividend yield		4.37	%		4.27	%
Expected forfeiture rate		3.37	%		3.37	%

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 Company shares purchased in the open market and cash. Should the participants voluntarily leave the Company, they forego any unvested accrued benefits.

At March 31, 2010, there were 299,015 shares in the plan with an aggregate value of $3.5 million, which were included in treasury stock in the Company’s consolidated financial statements, including 82,920 shares that 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.

5.    INCOME TAXES

Deferred tax assets totaled $11.6 million and $9.3 million at March 31, 2010 and September 30, 2009, respectively, and resulted primarily from the temporary differences related to the allowance for loan losses. Deferred tax assets are recognized only to the extent that they are expected to be used to reduce amounts that have been paid or will be paid to tax authorities. Management believes, based on all positive and negative evidence, that the realization of the deferred tax asset at March 31, 2010 is more likely than not, and accordingly, no valuation allowance has been recorded. The ultimate outcome of future facts and circumstances could require a valuation allowance and any charges to establish such valuation allowance could have a material adverse effect on the Company’s results of operations and financial position.

At March 31, 2010, the Company had $167,000 of unrecognized tax benefits, $134,000 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 March 31, 2010, the Company had approximately $33,000 accrued for the payment of interest and penalties. The tax years ended September 30, 2006 through 2009 remain open to examination by the taxing jurisdictions to which the Company is subject.

- 9 - -

6.    DEBT AND EQUITY SECURITIES

The amortized cost and estimated fair value of debt and equity securities available for sale at March 31, 2010 and September 30, 2009 are summarized as follows:

				Gross		Gross			Estimated
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
March 31, 2010:
Available for Sale:
Equity securities	$	589,000		$	-	$	-		$	589,000
Debt securities		3,509,703			-		(1,590	)		3,508,113
Total	$	4,098,703		$	-	$	(1,590	)	$	4,097,113
Weighted average rate at end of period		0.25	%
September 30, 2009:
Available for Sale:
Equity securities	$	589,000		$	-	$	-		$	589,000
Debt securities		1,999,590			-		(2,194	)		1,997,396
Total	$	2,588,590		$	-	$	(2,194	)	$	2,586,396
Weighted average rate at end of period		0.16	%

The summary below displays the length of time the securities available for sale were in a continuous unrealized loss position as of March 31, 2010 and September 30, 2009. The unrealized losses were not deemed to be other-than-temporary. The Company does not have the intent to dispose of these investments and it is not more likely than not that the Company will be required to sell these investments prior to recovery of the unrealized losses. Further, the Company believes the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer.

	Length of Time in Continuous Unrealized Loss Position at March 31, 2010
	Less than 12 months						12 months or more				Total
	Fair			Unrealized			Fair		Unrealized		Fair			Unrealized
	Value			Losses			Value		Losses		Value			Losses
Available for Sale:
Debt obligations of government-sponsored entities	$	3,508,113		$	1,590		$	-	$	-	$	3,508,113		$	1,590
Percent of total		100.0	%		100.0	%	$	-	$	-		100.0	%		100.0	%

	Length of Time in Continuous Unrealized Position at September 30, 2009
	Less than 12 months						12 months or more				Total
	Fair			Unrealized			Fair		Unrealized		Fair			Unrealized
	Value			Losses			Value		Losses		Value			Losses
Available for Sale:
Debt obligations of government-sponsored entities	$	1,997,396		$	2,194		$	-	$	-	$	1,997,396		$	2,194
Percent of total		100.0	%		100.0	%	$	-	$	-		100.0	%		100.0	%

- 10 - -

7.    MORTGAGE-BACKED SECURITIES

Mortgage-backed securities held to maturity and available for sale at March 31, 2010 and September 30, 2009 are summarized as follows:

	March 31, 2010
				Gross		Gross
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
Held to Maturity:
Mortgage-backed securities:
Freddie Mac	$	60		$	-	$	(3	)	$	57
Ginnie Mae		206,778			24,521		-			231,299
Fannie Mae		11,144,413			340,990		-			11,485,403
Total mortgage-backed securities		11,351,251			365,511		(3	)		11,716,759
Collateralized mortgage obligations:
Freddie Mac		14,848			3		-			14,851
Total held to maturity	$	11,366,099		$	365,514	$	(3	)	$	11,731,610
Weighted average rate at end of period		4.24	%
Available for Sale:
Mortgage-backed securities:
Ginnie Mae	$	478,982		$	38,440	$	-		$	517,422
Fannie Mae		967,813			6,664		-			974,477
Total mortgage-backed securities		1,446,795			45,104		-			1,491,899
Collateralized mortgage obligations:
Freddie Mac		1,228,828			30,071		-			1,258,899
Ginnie Mae		5,404,778			43,475		-			5,448,253
Fannie Mae		5,149,182			40,868		-			5,190,050
Total collateralized mortgage obligations		11,782,788			114,414		-			11,897,202
Total available for sale	$	13,229,583		$	159,518	$	-		$	13,389,101
Weighted average rate at end of period		4.14	%

- 11 - -

	September 30, 2009
				Gross		Gross
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
Held To Maturity:
Mortgage-backed securities:
Freddie Mac	$	231		$	6	$	-		$	237
Ginnie Mae		219,247			24,025		-			243,272
Fannie Mae		11,839,470			276,050		(2,856	)		12,112,664
Total		12,058,948			300,081		(2,856	)		12,356,173
Collateralized mortgage obligations:
Freddie Mac		18,846			-		(53	)		18,793
Total		18,846			-		(53	)		18,793
Total held to maturity	$	12,077,794		$	300,081	$	(2,909	)	$	12,374,966
Weighted average rate at end of period		4.39	%
Available For Sale:
Mortgage-backed securities:
Ginnie Mae	$	514,944		$	28,716	$	-		$	543,660
Fannie Mae		1,292,870			9,659		-			1,302,529
Total		1,807,814			38,375		-			1,846,189
Collateralized mortgage obligations:
Freddie Mac		1,503,822			52,233		-			1,556,055
Ginnie Mae		7,303,502			158,052		-			7,461,554
Fannie Mae		5,158,890			64,460		-			5,223,350
Total		13,966,214			274,745		-			14,240,959
Total available for sale	$	15,774,028		$	313,120	$	-		$	16,087,148
Weighted average rate at end of period		4.14	%

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 March 31, 2010 and September 30, 2009. The unrealized losses were not deemed to be other-than-temporary. The Company does not have the intent to dispose of these investments and it is not more likely than not that the Company will be required to sell these investments prior to recovery of the unrealized losses. Further, the Company believes the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer.

- 12 - -

	Length of Time in Continuous Unrealized Loss Position at March 31, 2010
	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	$	23		$	3		$	-	$	-	$	23		$	3
Percent of total		100.0	%		100.0	%		-		-		100.0	%		100.0	%

	Length of Time in Continuous Unrealized Loss Position at September 30, 2009
	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	$	1,580,173		$	2,856		$	-	$	-	$	1,580,173		$	2,856
Collateralized mortgage obligations		18,846			53			-		-		18,846			53
Total held to maturity	$	1,599,019		$	2,909		$	-	$	-	$	1,599,019		$	2,909
Percent of total		100.0	%		100.0	%		-		-		100.0	%		100.0	%

- 13 - -

8.      LOANS RECEIVABLE

Loans receivable at March 31, 2010 and September 30, 2009 are summarized as follows:

	March 31,			September 30,
	2010			2009
Real estate mortgage:
Residential first mortgage	$	252,027,255		$	248,798,923
Residential second mortgage		67,163,501			72,083,535
Home equity lines of credit		217,249,152			227,141,590
Multi-family residential		44,461,304			44,462,990
Commercial real estate		255,923,074			231,270,107
Land acquisition and development		82,361,057			80,258,931
Real estate construction and development:
Residential		12,543,255			19,664,258
Multi-family		5,238,127			6,864,072
Commercial		26,915,233			59,429,776
Commercial and industrial		141,743,010			154,972,793
Consumer and installment		4,073,085			4,170,863
		1,109,698,053			1,149,117,838
Add (less):
Deferred loan costs		4,088,391			4,369,122
Loans in process		(915,231	)		(812,946	)
Allowance for loan losses		(26,493,763	)		(20,579,170	)
Total	$	1,086,377,450		$	1,132,094,844
Weighted average interest rate at end of period		5.38	%		5.33	%
Specific loan loss allowance on impaired loans determined in accordance with SFAS 114	$	5,487,753		$	6,822,942
Balance of impaired loans with specific allowance		18,270,829			19,753,191
Balance of impaired loans with no specific allowance		44,678,148			39,198,182
Ratio of allowance to total outstanding loans		2.39	%		1.79	%

The following table summarizes the activity in the allowance for loan losses for the six months ended March 31, 2010 and 2009:

	2010			2009
Balance, beginning of period	$	20,579,170		$	12,761,532
Provision charged to expense		17,314,000			10,355,985
Charge-offs		(11,528,062	)		(4,695,220	)
Recoveries		128,655			45,238
Net charge-offs		(11,399,407	)		(4,649,982	)
Balance, end of period	$	26,493,763		$	18,467,535

Included in non-performing assets at March 31, 2010 and September 30, 2009 were $37.0 million and $35.0 million, respectively, of loans that were modified in troubled debt restructurings because of the borrowers’ financial difficulties. The restructured terms of the loans generally included a reduction of the interest rates and the addition of past due interest to the principal balance of the loans. At March 31, 2010, $23.5 million, or 63.4%, of these loans were performing as agreed under the modified terms of the loans compared with $22.6 million, or 64.7%, at September 30, 2009. A loan modified in a troubled debt restructuring will remain on non-accrual and will be included in non-performing assets 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 six months. Accordingly, excluded from non-performing assets at March 31, 2010 and December 31, 2009 were $6.2 million and $1.7 million, respectively, of loans that were modified in troubled debt restructurings but were no longer classified as non-performing because of the borrowers’ favorable performance histories.

- 14 - -

9. DEPOSITS

Deposits at March 31, 2010 and September 30, 2009 are summarized as follows:

	March 31, 2010					September 30, 2009
			Weighted					Weighted
			Average					Average
			Interest					Interest
	Amount		Rate			Amount		Rate
Transaction accounts:
Non-interest-bearing checking	$	104,586,133		-		$	103,398,563		-
Interest-bearing checking		341,587,396		1.20	%		263,019,571		1.25	%
Passbook savings accounts		29,577,323		0.17	%		28,874,588		0.24	%
Money market		246,154,986		0.55	%		253,995,786		0.76	%
Total transaction accounts		721,905,838		0.76	%		649,288,508		0.81	%
Certificates of deposit:
Retail		349,700,282		2.49	%		348,622,361		2.63	%
CDARS		84,129,779		0.81	%		110,240,370		1.54	%
Brokered		8,438,000		5.23	%		83,478,000		2.67	%
Total certificates of deposit		442,268,061		2.22	%		542,340,731		2.42	%
Total deposits	$	1,164,173,899		1.32	%	$	1,191,629,239		1.54	%

10. FAIR VALUE MEASUREMENTS

Effective October 1, 2008, the Company adopted the provisions of Accounting Standards Codification TM (“ASC”) Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Fair value is defined 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. 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 non-performance.

A three-level hierarchy for valuation techniques is 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. 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. ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability has significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

- 15 - -

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 mortgage 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, non-public investments are initially valued at transaction price and subsequently adjusted when evidence is available to support such adjustments.

Mortgage-Backed Securities Held to Maturity. The fair values of mortgage-backed securities held to maturity are generally based on quoted market prices or market prices for similar assets.

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 are based on quoted market prices by an independent valuation service.

Mortgage Loans Held for Sale. The fair values of mortgage loans held for sale are generally based on commitment sales prices obtained from the Company’s investors.

Impaired Loans. The fair values of impaired loans are generally based on market prices for similar assets determined through independent appraisals (Level 2 valuations) or discounted values of independent appraisals or brokers’ opinions of value (Level 3 valuations).

Real Estate Acquired in Settlement of Loans consists of loan collateral which has been repossessed through foreclosure or obtained by deed in lieu of foreclosure. This collateral is comprised of commercial and residential real estate. Such assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. Fair values are generally obtained through external appraisals and assessment of property values by the Company’s internal staff. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

Intangible Assets and Goodwill are reviewed annually in the fourth fiscal quarter and/or when circumstances or other events indicate that impairment may have occurred. Because of the decline in the market value of the Company’s common stock during the six months ended March 31, 2010, the Company reviewed goodwill for impairment as of March 31, 2010 in addition to its annual review at September 30, 2009. No impairment losses were recognized during fiscal year 2009 or the six months ended March 31, 2010.

- 16 - -

Assets and liabilities that were recorded at fair value on a recurring basis at March 31, 2010 and the level of inputs used to determine their fair values are summarized below:

	Carrying Value at March 31, 2010
			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		3,508		-		3,508		-
Mortgage-backed securities available for sale		13,389		-		13,389		-
Interest-rate swap		1,104		-		1,104		-
Total assets	$	18,590	$	-	$	18,590	$	-
Liabilities:
Interest-rate swap	$	1,104	$	-	$	1,104	$	-
Total liabilities	$	1,104	$	-	$	1,104	$	-

Assets that were recorded at fair value on a non-recurring basis at March 31, 2010 and the level of inputs used to determine their fair values are summarized below:

									Total
									Gains (Losses)
									Recognized in
	Carrying Value at March 31, 2010								the Quarter Ended
			Fair Value Measurements Using						March 31,
	Total		Level 1		Level 2		Level 3		2010
	(In thousands)
Assets:
Mortgage loans held for sale	$	-	$	-	$	-	$	-	$	-
Impaired loans, net		51,264		-		17,741		33,523		2,981
Real estate acquired in settlement of loans		13,900		-		-		13,900		(1,798	)
Total assets	$	65,164	$	-	$	17,741	$	47,423	$	1,183

11.     DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following fair values of financial instruments have been estimated by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company might realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2010 and September 30, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.

- 17 - -

Carrying values and estimated fair values at March 31, 2010 and September 30, 2009 are summarized as follows:

	March 31, 2010				September 30, 2009
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(In Thousands)
ASSETS:
Cash and cash equivalents	$	54,704	$	54,704	$	37,451	$	37,451
Debt securities - AFS		3,508		3,508		1,997		1,997
Equity securities - AFS		589		589		589		589
Capital stock of FHLB		4,332		4,332		11,650		11,650
Mortgage-backed securities - HTM		11,366		11,732		12,078		12,375
Mortgage-backed securities - AFS		13,389		13,389		16,087		16,087
Loans receivable held for sale		96,600		98,506		109,130		111,247
Loans receivable		1,086,377		1,124,357		1,132,095		1,158,721
Accrued interest receivable		4,668		4,668		4,907		4,907
Interest-rate swap assets		1,104		1,104		1,170		1,170
LIABILITIES:
Deposit transaction accounts		721,906		721,906		649,289		649,289
Certificate of deposits		442,268		448,398		542,341		550,175
Advances from the FHLB		59,500		60,472		61,000		62,759
Subordinated debentures		19,589		19,583		19,589		19,591
Accrued interest payable		1,101		1,101		1,035		1,035
Interest-rate swap liabilities		1,104		1,104		1,170		1,170

	March 31, 2010				September 30, 2009
	Contract		Estimated		Contract		Estimated
	or Notional		Fair		or Notional		Fair
	Amount		Value		Amount		Value
	(In Thousands)
OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to originate first and second mortgage loans	$	100,285	$	-	$	105,157	$	-
Commitments to originate commercial mortgage loans		14,952		-		41,027		-
Commitments to originate non-mortgage loans		27,512		-		1,600		-
Unused lines of credit		227,782		-		258,249		-

In addition to the methods described in Note 10 above, the following methods and assumptions were used to estimate the fair value of the financial instruments that were recorded at historical cost in the Company’s financial statements at March 31, 2010 and September 30, 2009.

Cash and Cash Equivalents - The carrying amount approximates fair value.

Equity securities - Estimated fair values are based on stock market prices for publicly quoted stocks.

Capital Stock of the Federal Home Loan Bank - The carrying amount represents redemption value, which approximates fair value.

Loans Receivable - The fair value of loans receivable is estimated based on present values using applicable risk-adjusted spreads to the U. S. Treasury curve to approximate current interest rates applicable to each category of such financial instruments. No adjustment was made to the interest rates for changes in credit risk of performing loans where there are no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses applicable to the performing loan portfolio results in a fair valuation of such loans. The fair values of impaired loans are generally based on market prices for similar assets determined through independent appraisals or discounted values of independent appraisals and brokers’ opinions of value. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

- 18 - -

Accrued Interest Receivable - The carrying value approximates fair value.

Interest-Rate Swap Assets - The fair value is based on quoted market prices by an independent valuation service.

Deposits - The estimated fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The estimated fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows of existing deposits using rates currently available on advances from the Federal Home Loan Bank having similar characteristics.

Advances from Federal Home Loan Bank - - The estimated fair value of advances from Federal Home Loan Bank is determined by discounting the future cash flows of existing advances using rates currently available on advances from Federal Home Loan Bank having similar characteristics.

Subordinated Debentures-The estimated fair values of subordinated debentures are determined by discounting the estimated future cash flows using rates currently available on debentures having similar characteristics.

Accrued Interest Payable - The carrying value approximates fair value.

Interest-Rate Swap Liabilities - The fair value is based on quoted market prices by an independent valuation service.

Off-Balance-Sheet Items-The estimated fair value of commitments to originate or purchase loans is based on the fees currently charged to enter into similar agreements and the difference between current levels of interest rates and the committed rates. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates; however, no premium or discount is offered thereon, and accordingly, the Company has not assigned a value to such instruments for purposes of this disclosure.

12. INTEREST-RATE SWAPS

The Company entered into two $14 million notional value interest-rate swap contracts during 2008 totaling $28 million notional value.  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 and 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 accounting treatment.  Consequently, both derivatives are marked to fair value through either a charge or credit to current earnings.

- 19 - -

The fair values of these contracts recorded in the consolidated balance sheets are summarized as follows:

	March 31,		September 30,
	2010		2009
Fair value recorded in other assets	$	1,104,000	$	1,170,000
Fair value recorded in other liabilities		1,104,000		1,170,000

The gross gains and losses on these contracts recorded in non-interest expense in the consolidated statements of income and comprehensive income for the three- and six-month period ended March 31, 2010 and 2009 are summarized as follows:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(in thousands)
Gross (gains) losses on derivative financial assets	$	(179,000	)	$	(25,000	)	$	66,000		$	(1,491,000	)
Gross (gains) losses on derivative financial liabilities		179,000			25,000			(66,000	)		1,491,000
Net loss (gain)	$	-		$	-		$	-		$	-

13. GOODWILL

Goodwill totaled $3.9 million at March 31, 2010 and September 30, 2009, 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 six months ended March 31, 2010, the Company reviewed goodwill for impairment as of March 31, 2010 in addition to its annual review at September 30, 2009.  No impairment losses were recognized during fiscal year 2009 or the six months ended March 31, 2010.

- 20 - -

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 that could affect actual results include interest rate trends, the economy 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, changes in accounting policies 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, 2009, 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., operating in its eighty-eighth year, 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 $1.4 billion in assets at March 31, 2010.  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 five 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.

RESULTS OF COMMUNITY BANKING STRATEGY

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.  Crucial to this strategy is growth in the Company’s three primary business lines:  commercial banking services, retail mortgage lending and retail banking services.

- 21 - -

Commercial Banking Services

The Company’s commercial banking services are centered on serving small- to medium-sized businesses and the Company’s operations in the St. Louis market continue to be driven by its staff of experienced commercial bankers and the commercial banking relationships they generate.  Commercial loan originations totaled $88.2 million and $184.9 million during the three and six months ended March 31, 2010, respectively, compared with $91.4 million and $234.8 million during the same periods last year.  Although origination activity slowed during the 2010 periods compared with the prior-year as the result of the distressed local and national economic climate, the Company continued to originate commercial loans to its most credit-worthy customers under tightened credit standards.  However, as the result of the weakened market demand for the Company’s loan products and the Company’s tightened underwriting standards, the commercial loan portfolio decreased $27.7 million during the six-month period to $569.2 million at March 31, 2010.  Commercial and multi-family construction and development loans decreased $34.1 million while commercial real estate loans increased $24.7 million primarily as the result of the conversion of certain maturing construction loans to permanent financing.  Commercial and industrial loans decreased $13.2 million.

The Company’s commercial loan customers are also among the best sources of core deposit accounts.  Commercial checking account balances increased $6.2 million to $311.4 million at March 31, 2010 compared with $305.2 million at September 30, 2009.

Retail Mortgage Lending

The Company is a conforming, residential mortgage lender that originates loans directly through commission-based sales staffs in the St. Louis and Kansas City metropolitan areas.  The Company is a leading mortgage originator in these two markets, as it has successfully leveraged its reputation for strength and quality customer service with its staff of experienced mortgage loan officers who have strong community relationships.  Substantially all of the loans originated in the retail mortgage division are one- to four-family residential loans that are sold to investors on a servicing-released basis.  Such sales generate mortgage revenues, which is the Company’s largest source of non-interest income.  In addition, loans that are closed and are held pending their sale to investors provide a valuable source of interest income until they are delivered to such investors.

Residential mortgage loans originated for sale to investors totaled $320.9 million and $793.1 during the three and six months ended March 31, 2010 compared with $647.0 million and $926.8 million during the same 2009 periods, respectively.  The origination activity the Company experienced in the 2009 periods represented historically-high levels driven by consumer demand for mortgage refinancings that resulted from the low interest rate environment existing during most of 2009.  The reduced activity during the 2010 periods reflected softening market demand.  Mortgage loan refinancing activity represented approximately 45% of total loan originations during the six months ended March 31, 2010 compared with 70% during the same 2009 period.

Residential loans sold to investors for the three months ended March 31, 2010 totaled $380.6 million, which generated mortgage revenues totaling $1.7 million, compared with $620.4 million of loans sold and $4.3 million in revenues for the three months ended March 31, 2009.  Residential loans sold to investors for the six months ended March 31, 2010 totaled $794.3 million, which generated mortgage revenues totaling $4.4 million, compared with $861.3 million of loans sold and $5.9 million in revenues for the six months ended March 31, 2009.  The net profit margin on loans sold decreased to 0.44% and 0.55% for the three and six months ended March 31, 2010, respectively, compared with 0.70% and 0.68% for the same 2009 periods, respectively.  The Company was able to absorb the increased loan origination and sales volumes that it experienced in the 2009 periods without significantly adding direct, fixed costs to its infrastructure resulting in higher profit margins.  Accordingly, such fixed costs did not decline in proportion to the decreased activity in the 2010 periods, resulting in lower net profit margins.  Loans sold during the six months ended March 31, 2010 exceeded loans originated for sale, resulting in a $12.5 million, or 12%, decrease in mortgage loans held for sale to $96.6 million at March 31, 2010 from $109.1 million at September 30, 2009.

- 22 - -

Retail Banking Services

Core deposits, which include checking, money market and passbook accounts, provide a stable funding source for the Company’s asset growth and produce valuable fee income.  Their growth continues to be one of the Company’s primary strategic objectives, resulting in an increase of $72.6 million, or 11%, to $721.9 million at March 31, 2010 from $649.3 million at September 30, 2009.  Checking accounts, which represent the cornerstone product in a customer relationship, increased $79.8 million to $446.2 million at March 31, 2010 from $366.4 million at September 30, 2009 primarily as the result of growth in deposits from commercial and retail customers, and movement of money market accounts and maturing CDARS time deposits into checking accounts.  Also enhancing its ability to attract core deposits, the Bank elected to participate in the FDIC’s Transaction Account Guarantee Program, which 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, 2013.  Money market accounts decreased $7.8 million to $246.2 million at March 31, 2010 from $254.0 million at September 30, 2009 primarily as the result of a shift in such deposits into interest-bearing checking accounts.  Primarily as the result of declining market interest rates, the weighted-average costs of interest-bearing checking accounts and money market accounts decreased to 1.20% and 0.55%, respectively, at March 31, 2010 compared with 1.25% and 0.76% at September 30, 2009.

Certificates of deposit decreased $100.1 million to $442.3 million at March 31, 2010 from $542.3 million at September 30, 2009, primarily as the result of a $75.0 million decrease in brokered time deposits to $8.4 million, and a $26.1 million decrease in CDARS time deposits to $84.1 million.  CDARS deposits, which are generally offered to in-market retail and commercial customers and to public entities, offer the Bank’s customers the ability to receive FDIC insurance on deposits up to $50 million.  Higher-cost, maturing brokered deposits were repaid with proceeds from the increase in core deposits.  Total deposits decreased $27.5 million, or 2.30%, to $1.16 billion at March 31, 2010 from $1.19 billion at September 30, 2009.

Retail banking fees, which include fees charged to customers who have overdrawn their checking accounts and service charges on other retail banking products, were $870,000 and $1.8 million for the three and six months ended March 31, 2010, respectively, compared with $936,000 and $1.9 million for the same 2009 periods, respectively.  While the Bank’s checking accounts grew significantly during the three and six months ended March 31, 2010, the volume of overdrawn checking accounts did not increase proportionately, primarily as the result of tightened consumer spending in the current difficult economic environment.

- 23 - -

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
	March 31, 2010								March 31, 2009
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Cost			Balance			Dividends		Cost
Interest-earning assets:	(Dollars in thousands)
Loans receivable:(1)
Real estate	$	300,038		$	4,604		6.14	%	$	335,981		$	5,317		6.33	%
Commercial		609,922			7,825		5.13	%		594,094			7,013		4.72	%
Home equity lines of credit		220,210			2,184		3.97	%		231,975			2,169		3.74	%
Consumer		3,615			41		4.56	%		3,599			54		5.94	%
Total loans receivable		1,133,785			14,654		5.17	%		1,165,649			14,553		4.99	%
Mortgage loans held for sale		94,844			1,094		4.61	%		153,190			1,758		4.59	%
Securities and other		84,796			307		1.45	%		59,869			346		2.31	%
Total interest-earning assets		1,313,425			16,055		4.89	%		1,378,708			16,657		4.83	%
Non-interest-earning assets		76,447								66,950
Total assets	$	1,389,872							$	1,445,658
Interest-bearing liabilities:
Interest-bearing checking	$	331,357			995		1.20	%	$	207,412			809		1.56	%
Passbook savings		28,814			15		0.22	%		25,440			12		0.19	%
Money market		245,206			633		1.03	%		135,634			266		0.78	%
Certificates of deposit		462,349			2,696		2.33	%		586,746			4,225		2.88	%
Total interest-bearing deposits		1,067,726			4,339		1.63	%		955,232			5,312		2.22	%
FHLB advances		69,891			506		2.90	%		109,399			915		3.35	%
Federal Reserve borrowings		157			-		0.49	%		122,922			135		0.44	%
Note payable		-			-		-			1,613			13		3.03	%
Subordinated debentures		19,589			124		2.51	%		19,589			200		4.09	%
Total interest-bearing liabilities		1,157,363			4,969		1.72	%		1,208,755			6,575		2.18	%
Non-interest bearing liabilities:
Non-interest bearing deposits		102,367								109,302
Other non-interest bearing liabilities		10,967								14,775
Total non-interest-bearing liabilities		113,334								124,077
Stockholders' equity		119,175								112,826
Total liabilities and stockholders' equity	$	1,389,872							$	1,445,658
Net interest income				$	11,086							$	10,082
Interest rate spread (2)							3.17	%							2.65	%
Net interest margin (3)							3.38	%							2.93	%
Ratio of average interest-earning assets to average interest-bearing liabilities		113.48	%							114.06	%

(1) Includes non-accrual loans with an average balance of $18.5 million and $14.9 million for the three months ended March 31, 2010 and 2009, respectively.

(2) Yield on interest-earning assets less cost of interest-bearing liabilities.

(3) Net interest income divided by average interest-earning assets.

- 24 - -

	Six Months Ended
	March 31, 2010								March 31, 2009
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Cost			Balance			Dividends		Cost
Interest-earning assets:	(Dollars in thousands)
Loans receivable: (1)
Real estate	$	301,863		$	9,376		6.21	%	$	340,055		$	11,074		6.51	%
Commercial		613,505			15,616		5.09	%		570,434			14,188		4.97	%
Home equity lines of credit		222,414			4,437		3.99	%		229,350			4,870		4.25	%
Consumer		3,596			83		4.61	%		3,664			106		5.82	%
Total loans receivable		1,141,378			29,512		5.17	%		1,143,503			30,238		5.29	%
Mortgage loans held for sale		115,014			2,714		4.72	%		101,402			2,423		4.78	%
Securities and other		74,381			669		1.80	%		60,117			831		2.76	%
Total interest-earning assets		1,330,773			32,895		4.94	%		1,305,022			33,492		5.13	%
Non-interest-earning assets		71,138								73,709
Total assets	$	1,401,911							$	1,378,731
Interest-bearing liabilities:
Interest-bearing checking	$	311,199			1,914		1.23	%	$	197,678			1,868		1.89	%
Passbook savings		28,769			34		0.23	%		25,627			25		0.19	%
Money market		248,852			1,337		1.07	%		137,895			834		1.21	%
Certificates of deposit		475,665			5,681		2.39	%		552,448			8,709		3.15	%
Total interest-bearing deposits		1,064,485			8,966		1.68	%		913,648			11,436		2.50	%
FHLB advances		84,748			1,063		2.51	%		155,277			2,086		2.69	%
Federal Reserve borrowings		103			-		0.50	%		74,538			215		0.58	%
Note payable		-			-		-			4,660			113		4.87	%
Subordinated debentures		19,589			251		2.56	%		19,589			447		4.56	%
Total interest-bearing liabilities		1,168,925			10,280		1.76	%		1,167,712			14,297		2.45	%
Non-interest bearing liabilities:
Non-interest bearing deposits		99,926								98,043
Other non-interest bearing liabilities		13,739								14,141
Total non-interest-bearing liabilities		113,665								112,184
Stockholders' equity		119,321								98,835
Total liabilities and stockholders' equity	$	1,401,911							$	1,378,731
Net interest income				$	22,615							$	19,195
Interest rate spread (2)							3.18	%							2.68	%
Net interest margin (3)							3.40	%							2.94	%
Ratio of average interest-earning assets to
average interest-bearing liabilities		113.85	%							111.76	%

(1) Includes non-accrual loans with an average balance of $20.9 million and $12.8 million for the six months ended March 31, 2010 and 2009, respectively.

(2) Yield on interest-earning assets less cost of interest-bearing  liabilities.

(3) Net interest income divided by average interest-earning assets.

- 25 - -

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									Six Months Ended
	March 31, 2010 vs 2009									March 31, 2010 vs 2009
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Interest-earning assets:
Loans receivable:
Real estate	$	(557	)	$	(156	)	$	(713	)	$	(1,204	)	$	(494	)	$	(1,698	)
Commercial		190			622			812			1,082			346			1,428
Home equity lines of credit		(476	)		491			15			(143	)		(290	)		(433	)
Consumer		2			(15	)		(13	)		(2	)		(21	)		(23	)
Total loans receivable		(841	)		942			101			(267	)		(459	)		(726	)
Mortgage loans held for sale		(718	)		54			(664	)		378			(87	)		291
Securities and other		(24	)		(15	)		(39	)		(80	)		(82	)		(162	)
Net change in income on interest earning assets		(1,583	)		981			(602	)		31			(628	)		(597	)
Interest-bearing liabilities:
Interest-bearing checking		1,212			(1,026	)		186			1,651			(1,605	)		46
Passbook savings		1			2			3			3			6			9
Money market		263			104			367			777			(274	)		503
Certificates of deposit		(805	)		(724	)		(1,529	)		(1,107	)		(1,921	)		(3,028	)
Total interest-bearing deposits		671			(1,644	)		(973	)		1,324			(3,794	)		(2,470	)
FHLB advances		(298	)		(111	)		(409	)		(892	)		(131	)		(1,023	)
Federal Reserve borrowings		(231	)		96			(135	)		(189	)		(26	)		(215	)
Note payable		(7	)		(6	)		(13	)		(56	)		(57	)		(113	)
Subordinated debentures		-			(76	)		(76	)		-			(196	)		(196	)
Net change in expense on interest bearing liabilities		135			(1,741	)		(1,606	)		187			(4,204	)		(4,017	)
Change in net interest income	$	(1,718	)	$	2,722		$	1,004		$	(156	)	$	3,576		$	3,420

- 26 - -

RESULTS OF OPERATIONS

The Company reported a net loss for the quarter ended March 31, 2010 of $4.3 million compared with net income of $1.8 million during the same quarter last year.  For the six months ended March 31, 2010, the Company reported a net loss of $3.1 million compared with net income of $2.3 million during the same period last year.  The Company reported a net loss available to common shares for the quarter ended March 31, 2010 of $4.8 million, or $0.47 per diluted common share on 10.4 million average diluted shares outstanding, compared with net income available to common shares of $1.5 million, or $0.15 per diluted common share on 10.3 million average diluted shares outstanding, during the same quarter last year. For the six months ended March 31, 2010, the Company reported a net loss available to common shares of $4.1 million, or $0.40 per diluted common share on 10.3 million average diluted shares outstanding, compared with net income available to common shares of $2.1 million, or $0.20 per diluted common share on a 10.3 million average diluted shares outstanding, for the same period a year ago. Results for the three- and six-months ended March 31, 2010 were negatively impacted by an $11.2 million and $17.3 million provision for loan losses compared with $5.7 million and $10.4 million provision for the same periods in 2009.  Also reducing income available to common shares for the three and six months ended March 31, 2010 were dividends and discount accretion on the Company’s preferred stock, issued during January 2009 as part of the U.S. Treasury’s TARP Capital Purchase Plan, totaling $515,000, or $0.05 per diluted common share, and $1.0 million, or $0.10 per diluted common share, respectively, compared with $238,000, or $0.02 per diluted common share, and $238,000 or $0.02 per diluted common share, in the comparable 2009 periods, respectively.

Net interest income rose 10.0%, or $1.0 million, to $11.1 million for the quarter ended March 31, 2010 compared with $10.1 million for the same period last year primarily as the result of an increase in the net interest margin, partially offset by a decrease in the average balance of interest-earning assets.  The net interest margin increased to 3.38% for the quarter ended March 31, 2010 compared with 2.93% for the quarter ended March 31, 2009.  The net interest margin benefited from a market-driven decline in the cost of deposits and wholesale borrowings and a decrease in brokered deposits and wholesale borrowings, which was funded by an increase in lower-cost core deposits.  The average balance of interest-earning assets decreased to $1.31 billion for the quarter ended March 31, 2010 compared with $1.38 billion for the quarter ended March 31, 2009 primarily at the result of declines in the average balances of loans receivable and mortgage loans held for sale, partially offset by an increase in the average balance of other interest-earning assets.

For the six months ended March 31, 2010, net interest income rose to $22.6 million compared with $19.2 million for the same six-month period last year primarily as the result of an increase in the net interest margin to 3.40% for the six months ended March 31, 2010 compared with 2.94% for the 2009 period.  The net interest margin benefited from a market-driven decline in the cost of deposits and wholesale borrowings and a decrease in brokered deposits and wholesale borrowings, which was funded with an increase in lower-cost core deposits.

Total interest and dividend income decreased 3.6% to $16.1 million for the quarter ended March 31, 2010, compared with $16.7 million for the same quarter last year primarily as the result of a decrease in interest income on mortgage loans held for sale partially offset by an increase in interest income on loans receivable.  For the six months ended March 31, 2010, total interest and dividend income decreased 1.8% to $32.9 million compared with $33.5 million for the same period a year ago primarily as the result of a decrease in interest income on loans receivable partially offset by an increase in interest income on mortgage loans held for sale.

Interest income on loans receivable increased 0.7% to $14.7 million for the quarter ended March 31, 2010, compared with $14.6 million for the same quarter last year as the result of an increase in the average yield partially offset by a decrease in the average balance.  The average balance of loans receivable decreased to $1.13 billion during the three months ended March 31, 2010, compared with $1.17 billion during the same 2009 period primarily as the result of softened market demand for the Company’s residential first mortgage and home equity loans.  The average yield on loans receivable increased to 5.17% during the three months ended March 31, 2010 compared with 4.99% during the same 2009 period primarily as the result of a market-driven increase in the average yield on home equity loans and an increase in the average yield on commercial loans, partially offset by a decrease in the average yield on residential first mortgages.  The yield on commercial loans benefitted from the implementation of interest-rate floors on new and renewing loans.

For the six-month periods, interest income on loans receivabledecreased 2.4% to $29.5 million for the 2010 period, compared with $30.2 million for the 2009 period.  The average balance of loans receivable was $1.14 billion for each of the six month periods ended March 31, 2010 and 2009 while the average yield on loans receivable decreased to 5.17% during the six months ended March 31, 2010 from 5.29% for the same period a year ago primarily as the result of market-driven declines in the average yields on residential mortgage and home equity loans.

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Interest income on mortgage loans held for sale decreased 37.8% to $1.1 million for the quarter ended March 31, 2010, compared with $1.8 million for the same quarter last year as the result of a decrease in the average balance, partially offset by a slight increase in the average yield.  The average balance of mortgage loans held for sale decreased to $94.8 million during the three months ended March 31, 2010 compared with $153.2 million during the same 2009 period as the result of decreased origination activity.  The average yield on mortgage loans held for sale was 4.61% during the three months ended March 31, 2010 compared with 4.59% during the same 2009 period.

For the six month periods, interest income on mortgage loans held for sale increased 12.0% to $2.7 million for the 2010 period, compared with $2.4 million for the same period last year as the result of an increase in the average balance partially offset by a market-driven decrease in the average yield.  The average balance of mortgage loans held for sale increased to $115.0 million during the six months ended March 31, 2010 compared with $101.4 million during the same 2009 period as the result of increased origination activity.  The average yield on mortgage loans held for sale decreased from 4.78% during the six months ended March 31, 2009 to 4.72% during the six months ended March 31, 2010.  See Results of Community Banking Strategy – Retail Mortgage Lending.

Total interest expense decreased $1.6 million, or 24.4%, to $5.0 million for the quarter ended March 31, 2010 compared with $6.6 million for the quarter ended March 31, 2009 and decreased $4.0 million, or 28.1%, to $10.3 million for the six months ended March 31, 2010 compared with $14.3 million for the same six-month period last year. The lower expense was primarily the result of a decrease in the average cost of funds.  The average cost of funds decreased from 2.18% for the quarter ended March 31, 2009 to 1.72% for the quarter ended March 31, 2010 and the average balance of interest-bearing liabilities decreased from $1.21 billion to $1.16 billion during the same periods, respectively.  The decrease in the average balance of interest-bearing liabilities resulted primarily from a decrease in the average balance of borrowings from the Federal Reserve Bank of St. Louis (“Federal Reserve Bank”) and advances from the Federal Home Loan Bank of Des Moines (“FHLB”) partially offset by an increase in the average balance of deposits.  For the six months ended March 31, 2010, the average cost of funds decreased to 1.76% from 2.45% for the same six-month period last year and the average balance of interest-bearing liabilities remained the same at $1.17 billion for the same periods, respectively.  The decreased average cost during the three- and six-month periods was the result of lower market interest rates, 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.  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, the Company’s overall interest rate risk exposure and the Company’s overall borrowing capacity at the FHLB and the Federal Reserve Bank.

Interest expense on deposits decreased $973,000, or 18.3%, to $4.3 million during the quarter ended March 31, 2010 compared with $5.3 million for the quarter ended March 31, 2009.  For the six months ended March 31, 2010, interest expense on deposits was $9.0 million compared with $11.4 million for the same period a year ago.  The decreases were primarily the result of decreases in the average cost partially offset by increases in the average balance.  The average balance of interest-bearing deposits increased to $1.07 billion for the quarter ended March 31, 2010 from $955.2 million for the quarter ended March 31, 2009 while the average cost decreased from 2.22% to 1.63% during the same periods, respectively.  For the six-month periods, the average balance of interest-bearing deposits increased to $1.06 billion from $913.6 million while the average cost of deposits decreased from 2.50% to 1.68% during the same periods, respectively.  Growth in average total deposits during the 2010 periods was the result of growth in core deposits.  The growth in core deposits combined with lower market interest rates resulted in lower average costs during the fiscal 2010 periods.  See Results of Community Banking Strategy – Retail Banking Services.

Interest expense on advances from the Federal Home Loan Bank decreased $409,000, or 44.7%, to $506,000 during the quarter ended March 31, 2010 compared with $915,000 for the quarter ended March 31, 2009 and decreased to $1.1 million during the six months ended March 31, 2010 compared with $2.1 million for the same six-month period last year primarily as the result of decreases in the average balance.  The average balance decreased to $69.9 million for the quarter ended March 31, 2010 from $109.4 million for the quarter ended March 31, 2009 and the average cost decreased from 3.35% to 2.90% during the same periods, respectively.  For the six-month periods, the average balance decreased to $84.7 million during 2010 from $155.3 million during 2009 and the average cost decreased from 2.69% to 2.51% during the same periods, respectively.  The decreased average balance resulted from the repayment of such borrowings with proceeds from growth in deposits and sales of mortgage loans held for sale.  The decrease in the average cost was the result of lower market interest rates during the 2010 period.

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Provision for Loan Losses

The provision for loan losses for the three and six months ended March 31, 2010 was $11.2 million and $17.3 million respectively, compared with $5.7 million and $10.4 million, respectively, for the same periods a year ago.  The increase in the provision was primarily due to an increase in the levels of net charge-offs reflecting the impact of the adverse economic climate on the Company’s borrowers.  See Non-Performing Assets and Allowance for Loan Losses.

Non-Interest Income

Total non-interest income decreased 43.0% to $3.4 million for the quarter ended March 31, 2010 compared with $5.9 million for the same period last year.  For the six months ended March 31, 2010, total non-interest income decreased $1.5 million to $7.8 million compared with $9.3 million for the same six-month period last year.  The decreases were primarily the result of lower mortgage revenues.  See Results of Community Banking Strategy – Retail Mortgage Lending.

Gain on sales of securities totaled $244,000 for the six months ended March 31, 2009 on sales of $51.1 million of debt securities classified as available for sale.  There were no such sales during the six months ended March 31, 2010. Debt 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.

Investment brokerage revenuestotaled $348,000 and $772,000 for the three and six months ended March 31, 2010 compared with $379,000 and $641,000, respectively, 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 other banks, municipalities and individual investors.  Revenues are generated on trading spreads and fluctuate with changes in customer demand, trading volumes and market interest rates.  The Company saw an increase in sales volumes during the December 2009 quarter compared with the prior-year quarter as many of its customers shifted funds from loan originations to lower-risk bonds because of the current economic environment, but experienced a softened demand during the March 2010 quarter.

Other non-interest income totaled $217,000 and $327,000 for the three and six months ended March 31, 2010, respectively, compared with $49,000 and $115,000 for the same 2009 periods.  The increase was primarily the result of a gain on the sale of the Company’s equity interest in a small-bank fund during January 2010.

Non-Interest Expense

Total non-interest expense increased $598,000 to $8.4 million for the quarter ended March 31, 2010 compared with $7.8 million for the same period a year ago.  For the six months ended March 31, 2010, total non-interest expense increased $1.8 million to $16.6 million compared with $14.8 million for the same six-month period last year.

Salaries and employee benefits expense increased $61,000 to $3.7 million for the quarter ended March 31, 2010 compared with $3.6 million for the quarter ended March 31, 2009 and increased $615,000 to $7.6 million for the six months ended March 31, 2010 compared with $6.9 million for the six months ended March 31, 2009.  The increase was primarily the result of additional expense for temporary employees and the payment of incentives related to the increased mortgage lending volumes, which did not qualify as capitalized loan origination expenses, and the addition of other key personnel to support the Company’s expanded operations.

Advertising expense decreased $114,000 to $95,000 for the three months ended March 31, 2010 compared with $209,000 for the three months ended March 31, 2009 and decreased $254,000 to $242,000 for the six months ended March 31, 2010 compared with $495,000 for the six months ended March 31, 2009.  The decreases were generally due to a reduction in the overall level of advertising during the 2010 periods and a more focused effort to control such expenses.

- 29 - -

Professional fees increased $177,000 to $548,000 for the quarter ended March 31, 2010 compared with $371,000 for the quarter ended March 31, 2009.  For the six months ended March 31, 2010, professional fees increased $433,000 to $1.1 million compared with $632,000 for the same six-month period last year.  The increases were generally due to increased expenses related to regulatory compliance and increased loan collection activity resulting from the depressed economic environment.

FDIC deposit insurance premium expenseincreased $83,000 to $494,000 for the three months ended March 31, 2010 compared with $411,000 for the same period in 2009 and increased $376,000 to $986,000 for the six months ended March 31, 2010 compared with $610,000 for the six months ended March 31, 2009.  The increase was the result of higher average deposit balances and an industry-wide increase in FDIC deposit insurance premiums, which initially became effective in April 2009.

Real estate foreclosure losses and expense, netincludes realized losses on the final disposition of foreclosed properties, additional write-downs for declines in the fair market values of properties that 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 $496,000 to $905,000 for the quarter ended March 31, 2010 compared with $409,000 for the same period last year and increased $591,000 to $1.3 million for the six-month period ended March 31, 2010 compared to $751,000 for the same period a year ago.  The increase was primarily due to an $826,000 write-down of a parcel of raw ground, which was acquired through foreclosure in a prior period, due to an estimated decline in its fair market value based on a new appraisal.  See Non-Performing Assets and Allowance for Loan Losses.

Income Taxes

The provision for income taxes decreased $1.6 million to a benefit of $870,000, or an effective rate of 16.75%, for the quarter ended March 31, 2010, compared with expense of $762,000, or an effective rate of 30.06%, for the three months ended March 31, 2009.  For the six months ended March 31, 2010, the provision for income taxes decreased $1.5 million to a benefit of $404,000, or an effective rate of 11.61%, compared with $1.1 million, or an effective rate of 31.16%, for the same six-month period last year.  The lower effective tax rates in the 2010 periods was primarily the result of a higher ratio of tax-exempt income on bank owned life insurance and tax-exempt interest on loans to total pre-tax income that resulted from the lower level of pre-tax income.

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NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Non-performing assets at March 31, 2010, December 31, 2009 and September 30, 2009 are summarized as follows:

	March 31,			December 31,			September 30,
	2010			2009			2009
Non-accrual loans:
Residential real estate:
First mortgage	$	5,662,202		$	6,715,585		$	7,093,095
Second mortgage		777,938			1,171,605			629,183
Home equity		2,761,159			3,608,166			3,086,013
Commercial and multi-family real estate		3,108,588			1,885,970			2,594,526
Land acquisition and development		3,106,038			1,315,004			2,193,457
Real estate construction and development		1,465,644			1,760,288			7,454,604
Commercial and industrial		2,735,634			1,502,896			702,999
Consumer and other		98,476			148,902			219,849
Total non-accrual loans		19,715,679			18,108,416			23,973,726
Accruing loans past due 90 days or more:
Residential real estate:
First mortgage		-			-			1,394
Second mortgage		-			-			27,531
Home equity		-			95,765			42,720
Land acquisition and development		-			-			315,589
Real estate construction and development		-			76,180			-
Consumer and other		-			21,424			-
Total accruing loans past due 90 days or more		-			193,369			387,234
Troubled debt restructurings:
Current under restructured terms:
Residential real estate:
First mortgage		15,169,737			21,884,237			17,785,408
Second mortgage		1,639,419			1,811,827			2,062,096
Home equity		1,631,132			2,199,455			1,694,670
Commercial and multi-family real estate		164,564			164,564			-
Land acquisition and development		-			107,041			107,041
Real estate construction and development		4,674,305			4,469,367			100,404
Commercial and industrial		119,186			157,900			787,485
Consumer and other		87,345			89,667			91,967
Total current troubled debt restructurings		23,485,688			30,884,058			22,629,071
Past due under restructured terms:
Residential real estate:
First mortgage		8,125,665			4,006,536			2,787,514
Second mortgage		1,468,413			1,274,969			745,704
Home equity		321,189			176,325			150,153
Commercial and multi-family real estate		3,234,950			7,499,951			7,830,991
Land acquisition and development		121,718			57,112			57,277
Real estate construction and development		100,404			100,404			-
Commercial and industrial		177,958			1,019,026			776,938
Total past due troubled debt restructurings		13,550,297			14,134,323			12,348,577
Total troubled debt restructurings		37,035,985			45,018,381			34,977,648
Total non-performing loans		56,751,664			63,320,166			59,338,608
Real estate acquired in settlement of loans:
Residential real estate		3,133,915			3,405,871			3,386,106
Commercial real estate		10,765,629			12,312,262			5,068,504
Total real estate acquired in settlement of loans		13,899,544			15,718,133			8,454,610
Other nonperforming assets		-			2,900			-
Total non-performing assets	$	70,651,208		$	79,041,199		$	67,793,218
Ratio of non-performing loans to total loans receivable		5.11	%		5.53	%		5.16	%
Ratio of non-performing assets to totals assets		5.16	%		5.51	%		4.82	%
Ratio of allowance for loan losses to non-performing loans		46.68	%		36.20	%		34.68	%
Excluding troubled debt restructurings that are current under
restructured terms and related allowance for loan losses:
Ratio of non-performing loans to total loans receivable		3.00	%		2.83	%		3.19	%
Ratio of non-performing assets to totals assets		3.45	%		3.36	%		3.21	%
Ratio of allowance for loan losses to non-performing loans		79.59	%		70.48	%		55.94	%

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Non-performing assets decreased $8.4 million to $70.7 million at March 31, 2010 compared with $79.0 million at December 31, 2009 primarily the result of an $8.0 million decrease in troubled debt restructurings and a $1.8 million decrease in real estate acquired through in settlement of loans, partially offset by a $1.6 million increase in non-accrual loans.  For the six-month period, non-performing assets increased $2.9 million from $67.8 million at September 30, 2009, primarily as the result of a $5.4 million increase in real estate acquired in settlement of loans and a $2.1 million increase in troubled debt restructurings, partially offset by a $4.3 million decrease in non-accrual loans.

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 be included in non-performing assets until the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance.  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.

Restructured residential loans totaled $28.4 million at March 31, 2010 compared with $31.4 million at December 31, 2009 and $25.2 million at September 30, 2009. Management continued its efforts to proactively modify loan repayment terms with residential borrowers who were experiencing financial difficulties in the current economic climate with the belief that these actions would maximize the Bank’s ultimate recoveries on these loans.  The restructured terms of the loans generally included a reduction of the interest rates and the addition of past due interest to the principal balance of the loans.  Many of these borrowers were current at the time of their modifications and showed strong intent and ability to repay their obligations under the modified terms.  During the three and six months ended March 31, 2010, the Company restructured approximately $4.2 million and $13.9 million, respectively, of loans to troubled residential borrowers and returned approximately $6.2 million and $7.9 million, respectively, of previously restructured residential loans to performing status as the result of the borrowers’ favorable performance history since restructuring.  At March 31, 2010, $28.4 million, or 77% of total restructured loans, related to residential borrowers compared with $31.4 million, or 70% of total restructured loans, at December 31, 2009 and $25.2 million, or 72% of total restructured loans, at September 30, 2009.  At March 31, 2010, 65% of these residential borrowers were performing as agreed under the modified terms of the loans compared with 83% at December 31, 2009 and 85% at September 30, 2009.  The decline in the percentage of restructured residential loans that were performing under their modified terms was primarily the result of returning a portion of such loans to performing status during the three- and six-months ended March 31, 2010.

Restructured commercial loans totaled $8.6 million at March 31, 2010 compared with $13.6 million at December 31, 2009 and $9.7 million at September 30, 2009.  Contributing to the decrease in commercial troubled debt restructurings during the March 2010 quarter was a $3.8 million partial charge-off of the Company’s largest non-performing asset, a commercial real estate loan secured by a strip shopping center in Naples, Florida.  Although the Company’s lending practices generally limit lending outside of its two primary market areas, St. Louis and Kansas City, the loan was made to one of the Company’s St. Louis-based customers who had historically demonstrated successful performance.  The charge-off was determined to be necessary as the Company acquired the property in settlement of the debt and subsequently sold the property for cash during May 2010.

Also contributing to the fluctuations in troubled debt restructurings and non-accrual loans during the six-month period was the restructuring of a commercial relationship secured by a high-rise, residential condominium development in the St. Louis metropolitan area.  The loan was restructured during the December 2009 quarter because of the borrower’s weakened financial condition.  The terms of the restructuring primarily included an extension of the maturity date of the loan.  The balance of the loan at September 30, 2009 was $5.4 million, which was included in non-accrual loans.  The balance of the loan had paid down to $4.7 million and $4.5 million at March 31, 2010 and December 31, 2009, respectively, and was included in troubled debt restructurings on a non-accrual basis.

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.

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Non-accrual loans totaled $19.7 million at March 31, 2010 compared with $18.1 million at December 31, 2009 and $24.0 million at September 30, 2009.  The increase during the three-month period was primarily due a $4.0 million increase in non-accrual commercial loans partially offset by a $2.3 million decrease in non-accrual residential loans resulting primarily from the restructuring, foreclosure or charge-off of such loans, as appropriate.  The decrease during the six-month period was primarily the result of the restructuring of the commercial loan discussed above that was secured by a high-rise, residential condominium development.  The restructuring resulted in a decrease in non-accrual loans and a corresponding increase in troubled debt restructurings.

Real estate acquired in settlement of loans increased to $13.9 million at March 31, 2010 compared with $8.5 million at September 30, 2009, but decreased from $15.7 million at December 31, 2009.  The increase during the six-month period was the result of the foreclosure, during the December 2009 quarter, on a commercial loan secured by a retail strip shopping center in the St. Louis metropolitan area resulting in a $1.8 million charge-off and a $6.8 million increase in real estate acquired in settlement of loans.  The decrease during the three months ended March 31, 2010 was the result of sales activity and the $826,000 write-down during March 2010 of a parcel of raw ground, which was acquired through foreclosure in a prior period, due to an estimated decline in its fair market value based on a new appraisal.

Real estate foreclosure losses and expense was $905,000 and $1.3 million for the three and six months ended March 31, 2010, respectively, compared with $409,000 and $751,000 for the same 2009 periods, respectively.  Real estate foreclosure losses and expense includes realized losses on the final disposition of foreclosed properties, additional write-downs for declines in the fair market values of properties subsequent to foreclosure, and expenses incurred in connection with maintaining the properties until they are sold.  The increased expense for the 2010 periods was primarily the result of an $826,000 write-down of a parcel of raw ground discussed above.

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The following table summarizes the activity in the allowance for loan losses for the period indicated.

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
Balance, beginning of period	$	22,922,608	$	15,663,958	$	20,579,170	$	12,761,532
Provision charged to expense		11,240,000		5,664,407		17,314,000		10,355,985
Charge-offs:
Residential real estate first mortgage		328,498		1,288,669		1,259,411		2,322,210
Residential real estate second mortgage		304,867		206,909		490,804		462,479
Home equity lines of credit		668,629		778,673		1,394,278		1,237,853
Land acquisition and development		-		-		326,590		-
Real estate construction & development		444,529		458,400		1,880,842		466,703
Commercial & multi-family real estate		3,938,315		-		3,938,315		-
Commercial & industrial		2,057,042		107,394		2,130,264		130,971
Consumer and other		32,100		31,522		107,558		75,004
Total charge-offs		7,773,980		2,871,567		11,528,062		4,695,220
Recoveries:
Residential real estate first mortgage		52,743		3,591		53,728		9,472
Residential real estate second mortgage		28,773		185		29,865		508
Home equity lines of credit		3,308		3,482		6,814		11,544
Real estate construction & development		5,000		-		5,000		-
Commercial and multi-family real estate		5,000		-		10,253		14,283
Commercial & industrial		5,234		-		15,805		-
Consumer and other		5,077		3,479		7,190		9,431
Total recoveries		105,135		10,737		128,655		45,238
Net charge-offs		7,668,845		2,860,830		11,399,407		4,649,982
Balance, end of period	$	26,493,763	$	18,467,535	$	26,493,763	$	18,467,535

The provision for loan losses for the three and six months ended March 31, 2010 was $11.2 million and $17.3 million, respectively, compared with $5.7 million and $10.4 million in the same 2009 periods, respectively.  The increased provisions over the prior-year amounts were primarily due to increased charge-offs, reflecting the impact of the adverse economic climate on the Company’s borrowers, and the increase in certain loss factors in the Company’s general valuation allowance model, reflecting the risks in the Company’s loan portfolio resulting from decreases in real estate values in certain geographic regions where the Bank has originated loans, the continued elevated level of unemployment, the level of non-performing loans and the increase in loan charge-offs.

Net charge-offs for the three- and six-month periods ended March 31, 2010 totaled $7.7 million, or 2.71% of average loans on an annualized basis, and $11.4 million, or 2.00% of average loans on an annualized basis, respectively, compared with $2.9 million, or 0.98% of average loans on an annualized basis, and $4.6 million, or 0.81% of average loans on an annualized basis, for the same periods a year ago, respectively.  Net charge-offs in the March 2010 quarter included $6.4 million of charge-offs on commercial loans, including the $3.7 million charge-off related to the commercial real estate loan secured by a strip shopping center discussed above, $552,000 of charge-offs on first and second mortgage residential loans and $665,000 of charge-offs on home equity lines of credit.  Commercial loan charge-offs also included a $1.2 million total charge-off of a loan secured by a partnership interest in a mixed use real estate construction project due to the weak financial condition of the borrower and the project’s slow sales activity.  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 a large portion of the Company’s loan portfolio is 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 2010 period.

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The ratio of the allowance for loan losses to loans receivable was 2.39% at March 31, 2010 compared with 2.00% at December 31, 2009 and 1.79% at September 30, 2009.  The ratio of the allowance for loan losses to non-performing loans was 46.68% at March 31, 2010 compared with 36.20% at December 31, 2009 and 34.68% at September 30, 2009.  Excluding restructured loans that were performing under their restructured terms and the related allowance for loan losses, the ratio of the allowance for loan losses to the remaining non-performing loans was 79.59% at March 31, 2010 compared with 70.48% at December 31, 2009 and 55.94% at September 30, 2009.  Management believes the changes in this coverage ratio are appropriate due to a change in the mix of non-performing loans during the period, specifically increased troubled debt restructurings that were performing under their restructured terms.

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 composition and size 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.

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 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 the allowance are adjusted to reflect the impact of current conditions, including actual collection and charge-off experience.

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 increase its allowance for loan losses or downgrade the risk classifications of additional loans, which could result in a higher provision for loan losses for such loans.  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.

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FINANCIAL CONDITION

Cash and cash equivalents increased to $54.7 million at March 31, 2010 from $37.5 million at September 30, 2009.  Federal funds sold and overnight interest-bearing deposit accounts increased to $47.4 million at March 31, 2010 compared with $33.5 million at September 30, 2009.  A portion of the funds received from the proceeds of the sale of mortgage loans held for sale were held on a short-term basis in Federal funds sold pending their investment in new loan originations.

Debt securities available for sale increased to $3.5 million at March 31, 2010 from $2.0 million at September 30, 2009.  Mortgage-backed securities available for sale decreased to $13.4 million at March 31, 2010 from $16.1 million at September 30, 2009, while mortgage-backed and related securities held to maturity decreased to $11.4 million at March 31, 2010 from $12.1 million at September 30, 2009.  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.

Stock in the Federal Home Loan Bank of Des Moines decreased $7.3 million to $4.3 million at March 31, 2010 from $11.6 million at September 30, 2009.  The Bank is generally required to hold stock equal to 5% of its total FHLB borrowings.  However, effective in December 2008, the FHLB temporarily suspended redemptions of its stock when members reduced their outstanding borrowings.  The FHLB subsequently resumed the redemptions of excess stock in December 2009.

Prepaid expenses, accounts receivable and other assets increased $6.5 million to $17.4 million at March 31, 2010 from $10.9 million at September 30, 2009 primarily as the result of the prepayment of FDIC deposit insurance premiums.  On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012, on December 30, 2009, along with each institution's risk-based deposit insurance assessment for the third quarter of 2009.  The amount paid on December 30, which totaled $7.3 million, was recorded as a prepaid asset and will be charged to expense during the future periods to which it relates.

Advances from the Federal Home Loan Bank of Des Moines decreased to $59.5 million at March 31, 2010 from $61.0 million at September 30, 2009.  The Company supplements its primary funding source, retail deposits, with wholesale funding sources consisting of borrowings from the FHLB, short-term borrowings from the Federal Reserve Bank of St. Louis and brokered certificates of deposit acquired on a national level.  Management chooses between these wholesale funding sources depending on their relative costs.  See Liquidity and Capital Resources.

Advance payments by borrowers for taxes and insurance represent insurance and real estate tax payments collected from borrowers on loans serviced by the Bank.  The balance decreased $2.4 million to $2.2 million at March 31, 2010 compared with $4.7 million at September 30, 2009 due to the payment of real estate taxes in December 2009.

Total stockholders’ equity decreased $4.9 million to $112.0 million at March 31, 2010 from $116.7 million at September 30, 2009 primarily as the result of the net loss for the period.  Also decreasing stockholders’ equity were common stock dividend payments of $2.0 million and preferred stock dividends of $813,000, partially offset by increases in stockholders’ equity resulting from common stock issued under the Company’s dividend reinvestment plan totaling $440,000, the amortization of equity trust expense of $311,000 and the amortization of stock option and award expense of $305,000.

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LIQUIDITY AND CAPITAL RESOURCES

The Company primarily funds its assets with deposits from its retail and commercial customers.  If the Bank or the Company requires 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.  Management chooses among these wholesale funding sources depending on their relative costs, the Company’s overall interest rate risk exposure and the Company’s overall borrowing capacity at the FHLB and the Federal Reserve Bank.  At March 31, 2010, the combined balance of borrowings from the FHLB, borrowings from the Federal Reserve Bank and brokered deposits totaled $67.9 million, had a weighted-average interest rate of 3.54%, a weighted average maturity of approximately 33 months and represented 5% of total assets.  At September 30, 2009, these combined balances totaled $144.5 million, had a weighted-average interest rate of 2.97%, a weighted average maturity of approximately 20 months and represented 10% of total assets.  Use of these funds has given the Company an alternative source to support its asset growth while avoiding, when necessary, aggressive deposit pricing strategies used from time to time by some of its competitors in its market.  In addition, because approximately two-thirds of the Company’s assets are scheduled to mature or reprice within one year, the use of these wholesale funds has given management a low-cost means to maximize net interest income and manage interest-rate risk by providing the Company greater flexibility to control the interest rates and maturities of these funds, as compared to deposits.  This increased flexibility has allowed the Company to better respond to fluctuations in the interest rate environment and demand for its loan products, especially mortgage loans held for sale that are awaiting final settlement (generally within 30 days) with Company’s investors.  While the Company effectively utilized wholesale funding to support its asset growth in recent years, controlled growth in core deposits and retail certificates of deposit during the six months ended March 31, 2010 allowed the Company to reduce its use of such wholesale funding from a high during fiscal year 2009 of approximately 27% of total assets.

The borrowings from the FHLB are obtained under a blanket agreement, which assigns all investments in FHLB stock, qualifying first residential mortgage loans, residential mortgage 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 March 31, 2010, the Bank had approximately $194.1 million in additional borrowing authority under the arrangement with the FHLB in addition to the $59.5 million in advances outstanding at that date.

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 and its Term Auction Facility.  At March 31, 2010, the Company had approximately $98.1 million in total borrowing authority under this arrangement with no borrowings outstanding and had approximately $153.3 million of commercial loans pledged as collateral under this agreement.

At March 31, 2010, the Bank had outstanding commitments to originate loans totaling $143.3 million and commitments to sell loans totaling $196.2 million.  Certificates of deposit totaling $314.9 million at March 31, 2010 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.

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs.  In addition to funding its operating expenses, the Company pays cash dividends to its common and preferred shareholders and interest and principal on outstanding debt.  A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends.  OTS regulations impose limitations upon payment of capital distributions from the Bank to the Company.  Under the regulations, the prior approval of the OTS is required prior to any capital distribution if the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years or if the Bank would be undercapitalized following the distribution.

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 mortgage loans held for sale.  During the six months ended March 31, 2010, the origination of mortgage loans held for sale used $781.8 million of cash and the sales of such loans provided cash totaling $798.5 million compared with originations and sales totaling $899.5 million and $866.7 million, respectively, during the six months ended March 31, 2009.

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The primary use of cash frominvesting activities is the origination of loans receivable which are held in portfolio.  During the six months ended March 31, 2010, the Company had a net decrease in loans receivable of $17.9 million compared with an increase of $100.0 million for the six months ended March 31, 2009.  In addition, the Company purchased $13.5 million in debt securities during the six months ended March 31, 2010 compared with purchases of $56.7 million in debt securities and $7.0 million in mortgage-backed securities during the six months ended March 31, 2009.  Sources of cash from investing activities also included maturities of debt securities totaling $12.0 million during the six months ended March 31, 2010 compared with maturities and sales of debt securities of $1.0 million and $51.1 million, respectively, during the six months ended March 31, 2009.

The Company’s primary sources and uses of funds from financing activities during the six months ended March 31, 2010 included a $27.5 million decrease in deposits compared with a $179.6 million increase for the six months ended March 31, 2009, and a $1.5 million decrease in advances from the Federal Home Loan Bank during the six months ended March 31, 2010 compared with a $124.5 million decrease during the same period last year.  Other significant sources and uses of cash from financing activities for the six months ended March 31, 2009 included a $90.0 million increase in borrowings from the Federal Reserve, a $7.6 million decrease in notes payable, and a $14.4 million decrease in due to other banks.  A significant source of funds from financing activities for the six months ended March 31, 2009 were proceeds from the issuance of preferred stock totaling $32.5 million.

The following table presents the maturity structure of time deposits and other maturing liabilities at March 31, 2010:

	March 31, 2010
					Federal
	Certificates		FHLB		Reserve		Subordinated
	of Deposit		Borrowings		Borrowings		Debentures
	(In thousands)
Maturing in:
Three months or less	$	124,616	$	30,500	$	-	$	-
Over three months through six months		80,734		-		-		-
Over six months through twelve months		109,526		-		-		-
Over twelve months		127,392		29,000		-		19,589
Total	$	442,268	$	59,500	$	-	$	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 March 31, 2010 are as follows:

Less than one year	$	595,751
Over 1 year through 3 years		1,174,956
Over 3 years through 5 years		1,163,268
Over 5 years		1,772,927
Total	$	4,706,902

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’s 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%).

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The following table illustrates the Bank’s actual regulatory capital levels compared with its regulatory capital requirements at March 31, 2010 and September 30, 2009.

											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 March 31, 2010:
Tangible capital (to total assets)	$	125,682		9.22	%	$	20,442		1.50	%		N/A		N/A
Total risk-based capital (to risk-
weighted assets)		139,909		12.37	%		90,487		8.00	%	$	113,109		10.00	%
Tier I risk-based capital (to risk-
weighted assets)		125,682		11.11	%		N/A		N/A			67,865		6.00	%
Tier I leverage capital (to average
assets)		125,682		9.22	%		54,513		4.00	%		68,141		5.00	%
As of September 30, 2009:
Tangible capital (to total assets)	$	128,750		9.19	%	$	21,004		1.50	%		N/A		N/A
Total risk-based capital (to risk-
weighted assets)		143,297		12.33	%		92,943		8.00	%	$	116,179		10.00	%
Tier I risk-based capital (to risk-
weighted assets)		128,750		11.08	%		N/A		N/A			69,707		6.00	%
Tier I leverage capital (to average
assets)		128,750		9.19	%		56,010		4.00	%		70,012		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.

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 March 31, 2010 from those disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2009.

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 and six months ended March 31, 2010, 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 and, in prior periods, interest rate swaps.  Derivative financial instruments originated by the Company consist of interest rate lock commitments to originate residential real estate loans.  At March 31, 2010, the Company had issued $143.3 million of unexpired interest rate lock commitments to loan customers compared with $147.8 million of unexpired commitments at September 30, 2009.

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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 and 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 accounting treatment.  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 six months ended March 31, 2010.  The fair values of these derivative instruments recorded in other assets and other liabilities in the Company’s financial statements at March 31, 2010 and September 30, 2009 were $1.1 million and $1.2 million, respectively.

CONTROLS AND PROCEDURES

The Company 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 the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management including its principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended March 31, 2010, the Company’s management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2010, and concluded that the Company ’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 March 31, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations, which was subsequently incorporated into Accounting Standards Codification TM (“ASC”) Topic 805, Business Combinations, significantly changing how entities apply the acquisition method to business combinations. The most significant changes affecting how entities account for business combinations under ASC Topic 805 include: (a) the acquisition date is the date the acquirer obtains control; (b) all (and only) identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree are stated at fair value on the acquisition date; (c) assets or liabilities arising from non-contractual contingencies are measured at their acquisition date fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; (d) adjustments subsequently made to the provisional amounts recorded on the acquisition date are made retroactively during a measurement period not to exceed one year; (e) acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which was subsequently incorporated into ASC Topic 420, Exit or Disposal Cost Obligations, are expensed as incurred; (f) transaction costs are expensed as incurred; (g) reversals of deferred income tax valuation allowances and income tax contingencies are recognized in earnings subsequent to the measurement period; and (h) the allowance for loan losses of an acquiree is not permitted to be recognized by the acquirer. Additionally, ASC Topic 805 requires new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, non-controlling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. ASC Topic 805 is effective for all business combinations completed on or after January 1, 2009. For business combinations in which the acquisition date was before the effective date, the provisions of ASC Topic 805 apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. The adoption of ASC Topic 805 did not have a material impact on the Company’s financial condition, results of operations or the disclosures that are presented in its consolidated financial statements.

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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51, which was subsequently incorporated into ASC Topic 810, Consolidation. ASC Topic 810 establishes new accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. ASC Topic 810 requires entities to classify noncontrolling interests as a component of stockholders’ equity and requires subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, ASC Topic 810 requires entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. ASC Topic 810 also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC Topic 810 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. The implementation of ASC Topic 810 did not have a material impact on the Company’s financial condition or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which was subsequently incorporated into ASC Topic 815, Derivatives and Hedging. ASC Topic 815 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC Topic 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, ASC Topic 815 requires (1) qualitative disclosures about objectives for using derivatives by primary underlying risk exposure and by purpose or strategy (fair value hedge, cash flow hedge, and non-hedges), (2) information about the volume of derivative activity in a flexible format that the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments, income statement and other comprehensive income location of gain and loss amounts on derivative instruments by type of contract, and (4) disclosures about credit-risk related contingent features in derivative agreements. ASC Topic 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The implementation of ASC Topic 815 did not have a material impact on the Company’s financial condition or results of operations.

In April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which was subsequently incorporated into ASC Topic 820, Fair Value Measurements and Disclosures. ASC Topic 820 affirms that the definition of fair value, when the market for an asset is not active, is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. ASC Topic 820 also amended existing accounting guidance to expand certain disclosure requirements. ASC Topic 820 is effective for interim and annual periods ending after June 15, 2009 and is applied prospectively. The adoption of the provisions of ASC Topic 820 during the quarter ended June 30, 2009 did not have a material impact on the Company’s financial condition or results of operations.

In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which was subsequently incorporated into ASC Topic 320, Investments – Debt and Equity Securities. This ASC Topic (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The provisions of ASC Topic 320 are effective for interim and annual periods ending after June 15, 2009 and are applied prospectively. The adoption of the provisions of ASC Topic 320 did not have a material impact on the Company’s financial condition or results of operations.

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In April 2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments, which were subsequently incorporated into ASC Topic 825, Financial Instruments. This ASC Topic amends the existing guidance to require an entity to provide disclosures about fair value of financial instruments in interim financial information and to require those disclosures in summarized financial information at interim reporting periods. Under ASC Topic 825, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by ASC Topic 825. ASC Topic 825 is effective for interim periods ending after June 15, 2009 and is applied prospectively. The adoption of the provisions of ASC Topic 825 did not have a material impact on the Company’s financial condition or results of operations.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was subsequently incorporated into ASC Topic 855, Subsequent Events. ASC Topic 855 incorporates accounting and disclosure requirements related to subsequent events into U.S. generally accepted accounting principles (“GAAP”) making management directly responsible for subsequent-events accounting and disclosure. The requirements for subsequent-events accounting and disclosure are not significantly different from those in auditing standards. ASC Topic 855 is effective for interim and annual periods ending after June 15, 2009. The adoption of the provisions of ASC Topic 855 did not have a material impact on the Company’s financial condition or results of operations.

In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, as an amendment to ASC Topic 855.  As a result of ASU 2010-09, SEC registrants will not disclose the date through which management evaluated subsequent events in financial statements.  ASU 2010-09 is effective immediately for all financial statements that have not yet been issued or have not yet become available to be issued, or March 31, 2010 for the Company.  The adoption of ASU 2010-09 is for disclosure purposes only and did not have any effect on the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of SFAS No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was subsequently incorporated into ASC Topic 860, Transfers and Servicing. SFAS No. 166 amends ASC Topic 860 and requires more information about transfers of financial assets, including securitization transactions and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS No. 166 is effective for the annual period beginning after November 15, 2009 and for interim periods within the first annual reporting period, and must be applied to transfers occurring on or after the effective date. The adoption of the provisions of this Topic are not expected to have a material impact on the Company’s financial condition or results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends FIN 46(R), Consolidation of Variable Interest Entities, which was subsequently incorporated into ASC Topic 810, Consolidation, to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated, and requires additional disclosures about involvement with variable interest entities, any significant changes in risk exposure due to that involvement and how that involvement affects the company’s financial statements. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The provisions of this Topic are effective for the annual period beginning after November 15, 2009 and for interim periods within the first annual reporting period. Management is currently evaluating the requirements of this Topic, which are not expected to have a material impact on the Company’s financial condition or results of operations.

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In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of SFAS No. 162 – The Hierarchy of Generally Accepted Accounting Principles, which was subsequently incorporated into ASC Topic 105, Generally Accepted Accounting Principles. The ASC establishes the source of authoritative GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission (“SEC”) under authority of federal securities laws, are also sources of authoritative GAAP for SEC registrants. The ASC supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the ASC will become non-authoritative. ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of the ASC did not have a material impact on the Company’s financial condition or results of operations.

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, 2009, 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 March 31, 2010.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased (1)		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs (2)
January 1, 2010 through January 31, 2010		253	$	6.70		-		372,488
February 1, 2010 through February 28, 2010		-		-		-		372,488
March 1, 2010 through March 31, 2010		1,000		6.28		-		371,488
Total		1,253	$	6.36		-

(1) Total number of shares purchased represents shares surrendered by employees to satisfy tax withholding requirements upon vesting of stock awards.

(2) 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 and that the repurchase program would continue until it is completed or terminated by the Board of Directors.  However, as part of the Company’s participation in the Capital Purchase Program of the U.S. Department of Treasury’s Troubled Asset Relief 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.  Accordingly, no shares of common stock were repurchased under this program during the three months ended March 31, 2010.

Item 3. Defaults Upon Senior Securities: Not applicable

Item 4. Submission of Matters to a Vote of Security Holders: Not applicable

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)

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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)

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:	June 22, 2010	/s/Gary W. Douglass
		Gary W. Douglass
		President and Chief Executive Officer
Date:	June 22, 2010	/s/Paul J. Milano
		Paul J. Milano
		Chief Financial Officer

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