Pulaski Financial (PULB) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 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 o     No o

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 ¨   No  x

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

Class	Outstanding at February 11, 2011
Common Stock, par value $.01 per share	10,958,322 shares

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

FORM 10-Q

DECEMBER 31, 2010

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at December 31, 2010 and September 30, 2010 (Unaudited)	1
	Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended December 31, 2010 and 2009 (Unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2010 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Three Months Ended December 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	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	[Removed and Reserved]	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
	Signatures

PART I - FINANCIAL INFORMATION

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2010 AND SEPTEMBER 30, 2010 (UNAUDITED)

	December 31,			September 30,
	2010			2010
ASSETS
Cash and amounts due from depository institutions	$	10,838,655		$	11,641,550
Federal funds sold and overnight interest-bearing deposits		5,162,164			3,961,254
Total cash and cash equivalents		16,000,819			15,602,804
Debt securities available for sale, at fair value		13,593,571			8,001,092
Mortgage-backed securities held to maturity, at amortized cost (fair value of $9,636,364 and $10,788,459 at Decembr 31, 2010 and September 30, 2010, respectively)		9,242,819			10,296,891
Mortgage-backed securities available for sale, at fair value		6,916,074			8,845,526
Capital stock of Federal Home Loan Bank - at cost		10,184,000			9,773,600
Mortgage loans held for sale, at lower of cost or market		271,151,534			253,578,202
Loans receivable (net of allowance for loan losses of $27,275,405 and $26,975,717 at December 31, 2010 and September 30, 2010, respectively)		1,041,168,963			1,046,273,232
Real estate acquired in settlement of loans (net of allowance for losses of $2,125,500 and $1,651,100 at December 31, 2010 and September 30, 2010, respectively)		13,009,722			14,900,312
Premises and equipment, net		18,494,831			18,764,098
Goodwill		3,938,524			3,938,524
Core deposit intangible		128,242			148,003
Accrued interest receivable		4,323,014			4,432,361
Bank-owned life insurance		30,036,202			29,770,828
Deferred tax asset		13,222,247			13,157,300
Prepaid expenses, accounts receivable and other assets		15,513,432			15,333,827
Total assets	$	1,466,923,994		$	1,452,816,600
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,151,151,888		$	1,115,203,120
Advances from Federal Home Loan Bank		161,800,000			181,000,000
Subordinated debentures		19,589,000			19,589,000
Advance payments by borrowers for taxes and insurance		2,717,432			7,098,432
Accrued interest payable		656,260			945,374
Other liabilities		12,338,956			12,627,393
Total liabilities		1,348,253,536			1,336,463,319
Stockholders' Equity:
Preferred stock - $.01 par value per share, 1,000,000 shares authorized; 32,538 shares issued at December 31, 2010 and September 30, 2010, $1,000 per share liquidation value,  net of discount		31,197,262			31,088,060
Common stock - $.01 par value per share, 18,000,000 shares authorized; 13,068,618 shares issued at December 31, 2010 and September 30, 2010		130,687			130,687
Treasury stock-at cost; 2,622,210 and 2,753,799 shares at December 31, 2010 and September 30, 2010, respectively		(17,423,842	)		(18,064,582	)
Additional paid-in capital from common stock		56,727,815			56,702,495
Accumulated other comprehensive income, net		20,447			37,834
Retained earnings		48,018,089			46,458,787
Total stockholders’ equity		118,670,458			116,353,281
Total liabilities and stockholders’ equity	$	1,466,923,994		$	1,452,816,600

See accompanying notes to the unaudited consolidated financial statements.

- 1 - -

PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009 (UNAUDITED)

	Three Months Ended
	December 31,
	2010			2009
Interest and Dividend Income:
Loans receivable	$	13,584,849		$	14,858,809
Mortgage loans held for sale		3,229,108			1,620,008
Securities and other		310,464			358,238
Total interest and dividend income		17,124,421			16,837,055
Interest Expense:
Deposits		3,197,528			4,626,768
Advances from Federal Home Loan Bank		382,959			557,242
Borrowings from the Federal Reserve Bank		-			64
Subordinated debentures		127,739			127,492
Total interest expense		3,708,226			5,311,566
Net interest income		13,416,195			11,525,489
Provision for loan losses		4,300,000			6,074,000
Net interest income after provision for loan losses		9,116,195			5,451,489
Non-Interest Income:
Mortgage revenues		1,846,807			2,701,486
Retail banking fees		1,026,070			932,161
Investment brokerage revenues		446,485			424,044
Bank-owned life insurance		265,374			275,622
Other		63,435			114,154
Total non-interest income		3,648,171			4,447,467
Non-Interest Expense:
Salaries and employee benefits		3,402,002			3,896,579
Occupancy, equipment and data processing expense		2,072,319			2,004,913
Advertising		100,391			146,858
Professional services		444,710			517,449
FDIC deposit insurance premuim expense		623,236			491,858
Real estate foreclosure losses and expense, net		1,085,125			436,203
Other		573,291			688,540
Total non-interest expense		8,301,074			8,182,400
Income before income taxes		4,463,292			1,716,556
Income tax expense		1,345,940			466,121
Net income	$	3,117,352		$	1,250,435
Other comprehensive loss		(17,387	)		(48,301	)
Comprehensive income	$	3,099,965		$	1,202,134
Income available to common shares	$	2,601,425		$	736,029
Per Common Share Amounts:
Basic earnings per common share	$	0.25		$	0.07
Weighted average common shares outstanding – basic		10,507,158			10,274,066
Diluted earnings per common share	$	0.24		$	0.07
Weighted average common shares outstanding – diluted		10,925,023			10,483,880

See accompanying notes to the unaudited consolidated financial statements.

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PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED DECEMBER 31, 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, 2010	$	31,088,060	$	130,687	$	(18,064,582	)	$	56,702,495		$	37,834		$	46,458,787		$	116,353,281
Comprehensive income:
Net income		-		-		-			-			-			3,117,352			3,117,352
Change in unrealized loss on investment securities, net of tax		-		-		-			-			(17,387	)		-			(17,387	)
Comprehensive income		-		-		-			-			(17,387	)		3,117,352			3,099,965
Common stock dividends ($0.095 per share)		-		-		-			(1,024	)		-			(1,042,123	)		(1,043,147	)
Preferred stock dividends		-		-		-			-			-			(406,725	)		(406,725	)
Accretion of discount on preferred stock		109,202		-		-			-			-			(109,202	)		-
Stock options excercised		-		-		41,873			32,632			-			-			74,505
Stock option and award expense		-		-		-			183,141			-			-			183,141
Commmon stock purchased under dividend reinvestment plan		-		-		-			(13,425	)		-			-			(13,425	)
Common stock issued under employee  compensation plans (94,317 shares)		-		-		29,695			(89,117	)		-			-			(59,422	)
Purchase of equity trust shares (37,315 shares)		-		-		-			271,208			-			-			271,208
Distribution of equity trust shares (62,722 shares)		-		-		569,172			(569,172	)		-			-			-
Amortization of equity trust expense		-		-		-			97,776			-			-			97,776
Excess tax benefit from stock-based compensation		-		-		-			113,301			-			-			113,301
Balance, December 31, 2010	$	31,197,262	$	130,687	$	(17,423,842	)	$	56,727,815		$	20,447		$	48,018,089		$	118,670,458

See accompanying  notes to the unaudited consolidated financial statements.

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PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS

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

	Three Months Ended
	December 31,
	2010			2009
Cash Flows From Operating Activities:
Net income	$	3,117,352		$	1,250,435
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion:
Premises and equipment		490,177			471,743
Net deferred loan costs		454,789			554,924
Debt and equity securities premiums and discounts, net		51,203			16,950
Equity trust expense, net		97,776			147,238
Stock option and award expense		183,141			179,227
Provision for loan losses		4,300,000			6,074,000
Provision for losses on real estate acquired in settlement of loans		725,300			278,600
(Gains) losses on sales of real estate acquired in settlement of loans		(3,608	)		43,203
Originations of mortgage loans held for sale		(629,454,332	)		(455,782,621	)
Proceeds from sales of mortgage loans held for sale		614,894,261			416,191,188
Gain on sales of mortgage loans held for sale		(3,013,261	)		(2,474,188	)
Increase in cash value of bank-owned life insurance		(265,374	)		(275,622	)
Increase in deferred tax asset		(64,947	)		(76,670	)
Excess tax benefit from stock-based compensation		(113,301	)		(2,722	)
Tax expense for release of equity trust shares		-			25,667
Decrease in accrued expenses		(172,835	)		(1,072,253	)
Increase in current income taxes payable		100,608			309,134
Changes in other assets and liabilities		(431,862	)		(5,659,292	)
Net adjustments		(12,222,265	)		(41,051,494	)
Net cash used in operating activities		(9,104,913	)		(39,801,059	)
Cash Flows From Investing Activities:
Proceeds from:
Maturities of debt securities available for sale		13,000,000			5,000,000
Principal payments on mortgage-backed securities		2,902,760			1,032,058
Redemption of Federal Home Loan Bank stock		3,910,700			6,601,800
Sales of real estate acquired in settlement of loans receivable		1,924,002			882,201
Purchases of:
Debt securities available for sale		(18,590,962	)		(7,998,695	)
Federal Home Loan Bank stock		(4,321,100	)		(2,406,400	)
Premises and equipment		(220,910	)		(158,064	)
Net increase in loans receivable		(405,625	)		(9,376,407	)
Net cash used in investing activities	$	(1,801,135	)	$	(6,423,507	)

Continued on next page.

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PULASKI FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS

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

	Three Months Ended
	December 31,
	2010			2009
Cash Flows From Financing Activities:
Net increase (decrease) in deposits	$	35,948,768		$	(36,048,976	)
Proceeds from (repayment of) Federal Home Loan Bank advances, net		(19,200,000	)		62,800,000
Proceeds from Federal Reserve Bank borrowings, net		-			4,700,000
Net decrease in advance payments by borrowers for taxes and insurance		(4,381,000	)		(2,631,120	)
Proceeds from cash received in dividend reinvestment plan		-			206,456
Proceeds from stock options excercised		74,505			-
Purchase of equity trust shares		271,208			(70,635	)
Excess tax benefit for stock based compensation		113,301			2,722
Tax expense for release of equity trust shares		-			(25,667	)
Dividends paid on common stock		(1,043,147	)		(994,171	)
Dividends paid on preferred stock		(406,725	)		(406,725	)
Common stock issued under employee compensation plan		5,004			-
Common stock purchased under dividend reinvestment plan		(13,425	)		-
Common stock surrendered to satisfy tax withholding obligations of stock-based compensation		(64,426	)		(30,593	)
Net cash provided by financing activities		11,304,063			27,501,291
Net increase (decrease)  in cash and cash equivalents		398,015			(18,723,275	)
Cash and cash equivalents at beginning of period		15,602,804			37,450,664
Cash and cash equivalents at end of period	$	16,000,819		$	18,727,389
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest on deposits	$	3,490,935		$	4,942,917
Interest on advances from FHLB		378,962			556,719
Interest on subordinated debentures		148,424			147,127
Cash paid during the period for interest		4,018,321			5,646,763
Income taxes, net		1,186,000			227,000
Noncash Investing Activities:
Real estate acquired in settlement of loans receivable		755,105			8,467,527

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 obligations on its 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 December 31, 2010 and September 30, 2010 and its results of operations for the three month periods ended December 31, 2010 and 2009.  The results of operations for the three month period ended December 31, 2010 are not necessarily indicative of the operating results that may be expected for the entire fiscal year or for any other period.  These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2010 contained in the Company’s 2010 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, 2010.

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 is a significant estimate reported within the consolidated financial statements.

Certain reclassifications have been made to fiscal 2010 amounts to conform to the fiscal 2011 presentation.

The Company has evaluated all subsequent events to ensure that the accompanying financial statements include the effects of any subsequent events that should be recognized in such financial statements as of December 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 to 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: (1) 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 was $0.095 per share, unless an increase is approved by the Treasury; (2) limits the Company’s ability to repurchase its common stock for three years; and (3)  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
	December 31,
	2010			2009
Net income	$	3,117,352		$	1,250,435
Less:
Preferred dividends declared		(406,725	)	��	(406,725	)
Accretion of discount on preferred stock		(109,202	)		(107,681	)
Income available to common shares	$	2,601,425		$	736,029
Weighted average common shares outstanding - basic		10,507,158			10,274,066
Effect of dilutive securities:
Treasury stock held in equity trust - unvested shares		291,609			98,263
Equivalent shares - employee stock options and awards		13,688			19,586
Equivalent shares - common stock warrant		112,568			91,965
Weighted average common shares outstanding - diluted		10,925,023			10,483,880
Earnings per common share:
Basic	$	0.25		$	0.07
Diluted	$	0.24		$	0.07

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 month periods ended December 31, 2010 and 2009 were not included in the respective computations of diluted earnings per share since they were considered anti-dilutive because 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
	December 31,
	2010		2009
Number of option shares excluded		659,077		671,195
Equivalent anti-dilutive shares		1,049,781		1,216,365
Number of warrant shares excluded		-		-
Equivalent anti-dilutive shares		-		-

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 as follows, all restricted stock awards granted during the three months ended December 31, 2010 vest over a period of two to five years.  In December 2010, restricted stock awards for 12,960 shares of the Company’s common stock with terms providing for vesting of 6,480 shares immediately and 6,480 shares in twelve months were granted to directors.  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 resulting from a change in control of the Company, which includes the acceleration of vesting in stock-based incentive plans.  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 December 31, 2010 and changes during the three-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, 2010		849,840		$	10.40
Granted		-			-
Exercised		(11,875	)		6.27
Forfeited		(2,834	)		7.70
Outstanding at December 31, 2010		835,131		$	10.46	$	292,790		5.7
Exercisable at December 31, 2010		604,727		$	10.47	$	247,089		5.0

As of December 31, 2010, the total unrecognized compensation expense related to non-vested stock options and awards was $979,500 and the related weighted average period over which it is expected to be recognized is 1.88 years.

- 8 - -

There were no stock options granted during the three-month period ended December 31, 2010.  The fair value of stock options granted during the three-month period ended December 31, 2009 was estimated on the date of grant using the Black-Scholes option pricing model with the following average assumptions:

Risk free interest rate	2.44	%
Expected volatility	38.59	%
Expected life in years	5.6
Dividend yield	4.37	%
Expected forfeiture rate	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 December 31, 2010, there were 497,333 shares in the plan with an aggregate value of $4.5 million, which were included in treasury stock in the Company’s consolidated financial statements, including 302,887 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 $13.2 million at December 31, 2010 and September 30, 2010, 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 December 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 December 31, 2010, the Company had $197,000 of unrecognized tax benefits, $129,000 of which would affect the effective tax rate if recognized.  The Company recognizes interest related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for unrecognized tax benefits.  As of December 31, 2010, the Company had approximately $68,000 accrued for the payment of interest and penalties.  The tax years ended September 30, 2007 through 2010 remain open to examination by the taxing jurisdictions to which the Company is subject.

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6. DEBT AND EQUITY SECURITIES

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

				Gross		Gross			Estimated
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
December 31, 2010:
Debt obligations of government-sponsored entities	$	13,595,490		$	-	$	(1,919	)	$	13,593,571
Weighted average yield at end of period		0.16	%
September 30, 2010:
Debt obligations of government-sponsored entities	$	8,000,836			706	$	(450	)	$	8,001,092
Weighted average yield at end of period		0.25	%

As of December 31, 2010 and September 30, 2010, the Company did not have any debt and equity securities held to maturity or available for sale that were in a continuous position for twelve months or more.

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7.  MORTGAGE-BACKED SECURITIES

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

	December 31, 2010
				Gross		Gross
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
Held to Maturity:
Mortgage-backed securities:
Freddie Mac	$	24		$	-	$	-		$	24
Ginnie Mae		154,509			13,781		-			168,290
Fannie Mae		9,081,130			382,797		(3,036	)		9,460,891
Total mortgage-backed securities		9,235,663			396,578		(3,036	)		9,629,205
Collateralized mortgage obligations:
Freddie Mac		7,156			3		-			7,159
Total collateralized mortgage obligations		7,156			3		-			7,159
Total held to maturity	$	9,242,819		$	396,581	$	(3,036	)	$	9,636,364
Weighted average yield at end of period		4.02	%
Available for Sale:
Mortgage-backed securities:
Ginnie Mae	$	392,683		$	34,210	$	-		$	426,893
Total mortgage-backed securities		392,683			34,210		-			426,893
Collateralized mortgage obligations:
Freddie Mac		585,928			7,316		-			593,244
Ginnie Mae		2,508,740			-		(5,667	)		2,503,073
Fannie Mae		3,393,824			-		(960	)		3,392,864
Total collateralized mortgage obligations		6,488,492			7,316		(6,627	)		6,489,181
Total available for sale	$	6,881,175		$	41,526	$	(6,627	)	$	6,916,074
Weighted average yield at end of period		4.17	%

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	September 30, 2010
				Gross		Gross
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
HELD TO MATURITY:
Mortgage-backed securities:
Freddie Mac	$	24		$	-	$	-		$	24
Ginnie Mae		160,044			13,944		-			173,988
Fannie Mae		10,128,927			477,620		-			10,606,547
Total		10,288,995			491,564		-			10,780,559
Collateralized mortgage obligations:
Freddie Mac		7,896			4		-			7,900
Total		7,896			4		-			7,900
Total held to maturity	$	10,296,891		$	491,568	$	-		$	10,788,459
Weighted average yield at end of year		4.02	%
AVAILABLE FOR SALE:
Mortgage-backed securities:
Ginnie Mae	$	433,843		$	37,163	$	-		$	471,006
Fannie Mae		27,433			40		-			27,473
Total		461,276			37,203		-			498,479
Collateralized mortgage obligations:
Freddie Mac		794,329			13,610		-			807,939
Ginnie Mae		3,479,613			-		(2,353	)		3,477,260
Fannie Mae		4,049,540			12,308		-			4,061,848
Total		8,323,482			25,918		(2,353	)		8,347,047
Total available for sale	$	8,784,758		$	63,121	$	(2,353	)	$	8,845,526
Weighted average yield at end of year		4.16	%

As of December 31, 2010 and September 30, 2010, the Company did not have any mortgage-backed securities held to maturity or available for sale that were in a continuous loss position for twelve months or more.

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8.  LOANS RECEIVABLE

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

	December 31,			September 30,
	2010			2010
Real estate mortgage:
Residential first mortgage	$	237,930,151		$	243,648,954
Residential second mortgage		57,764,812			60,281,107
Home equity lines of credit		193,015,834			201,922,359
Multi-family residential		42,282,167			43,735,853
Commercial real estate		282,506,080			256,224,250
Land acquisition and development		68,511,350			74,461,741
Real estate construction and development:
Residential		6,797,934			8,126,735
Multi-family		3,417,663			3,876,594
Commercial		7,072,270			19,067,773
Commercial and industrial		162,140,974			155,622,170
Consumer and installment		3,698,673			3,512,266
		1,065,137,908			1,070,479,802
Add (less):
Deferred loan costs		3,802,939			3,884,483
Loans in process		(496,479	)		(1,115,336	)
Allowance for loan losses		(27,275,405	)		(26,975,717	)
Total	$	1,041,168,963		$	1,046,273,232
Weighted average interest rate at end of period		5.37	%		5.34	%
Ratio of allowance to total outstanding loans		2.56	%		2.52	%

The following is a summary of the Company’s significant accounting policies related to loans receivable.

Allowance for Loan Losses - The Company maintains an 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 volume of the portfolio combined with an analysis of past-due and classified loans, and can also be affected by the following factors:  changes in national and local economic conditions and developments, assessment of collateral values based on independent appraisals, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, and changes in the experience, ability, and depth of lending management staff.  Loans are charged off when circumstances indicate that a loss is probable and there is no longer a reasonable expectation that a change in such circumstances will result in collection of the amount charged off.

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

Loans considered for individual impairment analysis include loans that are past due, loans that have been placed on nonaccrual status, troubled debt restructurings, loans with internally assigned credit risk ratings that indicate an elevated level of risk, or loans that management has knowledge of or concerns about the borrower’s ability to pay under the contractual terms of the note.  Residential loans to be evaluated for impairment are generally identified through a review of loan delinquency reports, internally-developed risk classification reports, and discussions with the Bank’s loan collectors.  Commercial loans evaluated for impairment are generally identified through a review of loan delinquency reports, internally-developed risk classification reports, discussions with loan officers, discussions with borrowers, periodic individual loan reviews and local media reports indicating problems with a particular project or borrower.  Commercial loans are individually reviewed and assigned a credit risk rating periodically by the internal loan committee.

- 13 - -

All loans that are not evaluated individually for impairment and any individually evaluated loans determined not to be impaired are segmented into groups based on similar risk characteristics or internally assigned credit risk ratings.  Our methodology includes factors that allow us to adjust our estimates of losses based on the most recent information available.  Historical loss rates for each risk group are used as the starting point to determine allowance provisions.  These rates are then adjusted to reflect actual changes and anticipated changes in national and local economic conditions and developments, assessment of collateral values based on independent appraisals, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, and changes in the experience, ability, and depth of lending management staff.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses.  Such agencies may require the Company to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination.

Accrued Interest -The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the ultimate collectibility 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. Previously accrued but unpaid interest is charged to current income at the time a loan is placed on non-accrual status. Subsequent collections of cash may be applied as reductions to the principal balance, interest in arrears, or recorded as income depending on management’s assessment of the ultimate collectibility of the loan. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal.

Impaired Loans - A loan is considered to be impaired when, based on current information and events, management determines that the Company will be unable to collect all amounts due according to the loan contract, including scheduled interest payments.  When a loan is identified as impaired, the amount of impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the operation or liquidation of the collateral.  In these cases, observable market prices or the current fair value of the collateral, less selling costs when foreclosure is probable, are used instead of discounted cash flows.  If the value of the impaired loan is determined to be less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), an impairment charge is recognized through a provision for loan losses.

Troubled Debt Restructurings - 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.  This usually includes a modification of loan terms (such as a reduction of the rate to below-market terms, adding past-due interest to the loan balance or extending the maturity date) and possibly a partial forgiveness of debt.  A loan classified as a troubled debt restructuring will generally retain such classification until the loan is paid in full.  However, a restructured one-to-four family residential mortgage loan that yields a market rate and demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally one year, is removed from the troubled debt restructuring classification.  Interest income on restructured loans is accrued at the reduced rate and the loan is returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months.

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

	Three Months Ended
	December 31,
	2010		2009
Balance, beginning of period	$	26,975,717	$	20,579,170
Provision charged to expense		4,300,000		6,074,000
Charge-offs:
Residential real estate first mortgage		173,980		930,913
Residential real estate second mortgage		331,312		185,937
Home equity lines of credit		530,529		725,649
Land acquisition and development		2,117,352		326,590
Real estate construction & development		178		1,436,313
Commercial & multi-family real estate		722,239		-
Commercial & industrial		161,251		73,222
Consumer and other		36,553		75,459
Total charge-offs		4,073,394		3,754,083
Recoveries:
Residential real estate first mortgage		8,208		986
Residential real estate second mortgage		28,870		1,092
Home equity lines of credit		9,649		3,506
Real estate construction & development		143		-
Commercial and multi-family real estate		1,050		5,253
Commercial & industrial		20,038		10,571
Consumer and other		5,124		2,113
Total recoveries		73,082		23,521
Net charge-offs		4,000,312		3,730,562
Balance, end of period	$	27,275,405	$	22,922,608

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The following table summarizes the allocation of the allowance for loan losses at December 31, 2010 and September 30, 2010:

	December 31, 2010						September 30, 2010
	General		Specific				General		Specific
	Allowance On		Allowance On				Allowance On		Allowance On
	Nonimpaired		Impaired				Nonimpaired		Impaired
	Loans		Loans		Total		Loans		Loans		Total
Residential real estate first mortgage	$	2,644,510	$	2,380,281	$	5,024,791	$	1,949,118	$	1,708,815	$	3,657,933
Residential real estate second mortgage		1,610,022		818,819		2,428,841		2,269,182		899,050		3,168,232
Home equity lines of credit		2,789,287		1,749,699		4,538,986		3,294,174		1,071,757		4,365,931
Land acquisition and development		3,860,182		995,188		4,855,370		4,467,237		3,156,482		7,623,719
Real estate construction & development		77,436		150,437		227,873		207,888		88,037		295,925
Commercial & multi-family real estate		4,997,013		1,005,314		6,002,327		3,958,350		815,459		4,773,809
Commercial & industrial		2,151,014		1,002,049		3,153,063		2,266,756		573,707		2,840,463
Consumer and other		221,168		249,886		471,054		86,925		62,652		149,577
Unallocated		573,100		-		573,100		100,128		-		100,128
Total	$	18,923,732	$	8,351,673	$	27,275,405	$	18,599,758	$	8,375,959	$	26,975,717

The following table summarizes the unpaid principal balances of nonimpaired and impaired loans at December 31, 2010 and September 30, 2010:

	December 31, 2010						September 30, 2010
			Impaired		Impaired				Impaired		Impaired
			Loans with		Loans with				Loans with		Loans with
	Nonimpaired		Specific		No Specific		Nonimpaired		Specific		No Specific
	Loans		Allowance		Allowance		Loans		Allowance		Allowance
Residential real estate first mortgage	$	204,775,774	$	9,108,005	$	24,046,372	$	213,578,082	$	7,805,475	$	22,265,397
Residential real estate second mortgage		53,859,975		1,050,705		2,854,132		56,233,360		1,075,800		2,971,947
Home equity lines of credit		188,035,857		2,975,397		2,004,580		197,938,843		1,720,474		2,263,042
Land acquisition and development		61,610,475		4,155,763		2,745,112		65,503,326		8,796,057		162,358
Real estate construction & development		13,167,860		398,992		3,721,015		26,576,489		126,992		4,367,621
Commercial & multi-family real estate		315,113,238		5,383,598		4,291,411		294,237,924		4,439,491		1,282,688
Commercial & industrial		160,226,472		1,820,491		94,011		153,521,430		2,062,052		38,688
Consumer and other		3,353,810		284,671		60,192		3,328,210		97,423		86,633
Total	$	1,000,143,461	$	25,177,622	$	39,816,825	$	1,010,917,664	$	26,123,764	$	33,438,374

Troubled Debt Restructurings.  Included in impaired loans at December 31, 2010 and September 30, 2010 were $33.3 million and $33.1 million, respectively, of loans that were modified and are classified as 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 December 31, 2010, $22.6 million, or 68.0%, of these loans were performing as agreed under the modified terms of the loans compared with $24.7 million, or 74.7%, at September 30, 2010.  Excluded from non-performing assets at December 31, 2010 and September 30, 2010 were $9.0 million and $9.9 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.  Specific loan loss allowances related to troubled debt restructurings at December 31, 2010 and September 30, 2010 were $2.5 million and $1.5 million, respectively.

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9. DEPOSITS

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

	December 31, 2010					September 30, 2010
			Weighted					Weighted
			Average					Average
			Interest					Interest
	Amount		Rate			Amount		Rate
Transaction accounts:
Non-interest-bearing checking	$	121,101,134		-		$	149,186,009		-
Interest-bearing checking		376,232,430		0.71	%		345,012,929		0.90	%
Passbook savings accounts		29,008,837		0.14	%		30,296,199		0.18	%
Money market		205,068,263		0.48	%		189,851,005		0.52	%
Total transaction accounts		731,410,664		0.51	%		714,346,142		0.58	%
Certificates of deposit:
Retail		332,846,588		2.01	%		328,394,523		2.20	%
CDARS		78,476,741		0.57	%		64,050,592		0.65	%
Brokered		8,417,895		5.23	%		8,411,863		5.23	%
Total certificates of deposit		419,741,224		1.81	%		400,856,978		2.02	%
Total deposits	$	1,151,151,888		0.98	%	$	1,115,203,120		1.09	%

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.

- 17 - -

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.

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 three months ended December 31, 2010, the Company reviewed goodwill for impairment as of December 31, 2010 in addition to its annual review at September 30, 2010.  No impairment losses were recognized during fiscal year 2010 or the three months ended December 31, 2010.

- 18 - -

Assets and liabilities that were recorded at fair value on a recurring basis at December 31, 2010 and September 30, 2010 and the level of inputs used to determine their fair values are summarized below:

	Carrying Value at December 31, 2010
			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Debt securities available for sale	$	13,594	$	-	$	13,594	$	-
Mortgage-backed securities available for sale		6,916		-		6,916		-
Interest-rate swap		1,419		-		1,419		-
Total assets	$	21,929	$	-	$	21,929	$	-
Liabilities:
Interest-rate swap	$	1,419	$	-	$	1,419	$	-
Total liabilities	$	1,419	$	-	$	1,419	$	-

	Carrying Value at September 30, 2010
			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Debt securities available for sale	$	8,001	$	-	$	8,001	$	-
Mortgage-backed securities available for sale		8,846		-		8,846		-
Interest-rate swap		1,860		-		1,860		-
Total assets	$	18,707	$	-	$	18,707	$	-
Liabilities:
Interest-rate swap	$	1,860	$	-	$	1,860	$	-
Total liabilities	$	1,860	$	-	$	1,860	$	-

- 19 - -

Assets that were recorded at fair value on a non-recurring basis at December 31, 2010 and September 30, 2010 and the level of inputs used to determine their fair values are summarized below:

									Total (Gains)/
									Losses
									Recognized in
	Carrying Value at December 31, 2010								the Year Ended
			Fair Value Measurements Using						December 31,
	Total		Level 1		Level 2		Level 3		2010
	(In thousands)
Assets:
Loans held for sale	$	91,229	$	-	$	91,229	$	-	$	(598	)
Impaired loans, net		16,826				8,327		8,499		(24	)
Real estate acquired in settlement of loans		13,010		-		-		13,010		1,090
Total assets	$	121,065	$	-	$	99,556	$	21,509	$	468
									Total Losses
									Recognized in
	Carrying Value at September 30, 2010								the Year Ended
			Fair Value Measurements Using						September 30,
	Total		Level 1		Level 2		Level 3		2010
	(In thousands)
Assets:
Loans held for sale	$	113	$	-	$	113	$	-	$	-
Impaired loans, net		17,748				10,826		6,922		4,335
Real estate acquired in settlement of loans		14,900		-		-		14,900		8,373
Total assets	$	32,761	$	-	$	10,939	$	21,822	$	12,708

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 December 31, 2010 and September 30, 2010.  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.

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

	December 31, 2010				September 30, 2010
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(In Thousands)
ASSETS:
Cash and cash equivalents	$	16,001	$	16,001	$	15,603	$	15,603
Debt securities - AFS		13,594		13,594		8,001		8,001
Capital stock of FHLB		10,184		10,184		9,774		9,774
Mortgage-backed  securities - HTM		9,243		9,636		10,297		10,788
Mortgage-backed  securities - AFS		6,916		6,916		8,846		8,846
Loans receivable held for sale		271,152		276,924		253,578		258,414
Loans receivable		1,041,169		1,090,986		1,046,273		1,094,190
Accrued interest receivable		4,323		4,323		4,432		4,432
Interest-rate swap assets		1,419		1,419		1,860		1,860
LIABILITIES:
Deposit transaction accounts		731,411		731,411		714,346		714,346
Certificate of deposits		419,741		424,160		400,857		406,095
Advances from the FHLB		161,800		164,023		181,000		183,139
Subordinated debentures		19,589		19,583		19,589		19,583
Accrued interest payable		656		656		945		945
Interest-rate swap liabilities		1,419		1,419		1,860		1,860
	December 31, 2010				September 30, 2010
	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	$	32,922	$	33,623	$	80,944	$	82,490
Commitments to originate commercial mortgage loans		26,940	$	27,853		22,901		23,737
Commitments to originate non-mortgage loans		18,723	$	18,347		11,378		10,918
Unused lines of credit		195,788	$	198,999		206,451		204,985

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 December 31, 2010 and September 30, 2010.

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

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.

- 21 - -

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.

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

	December 31,		September 30,
	2010		2010
Fair value recorded in other assets	$	1,419,000	$	1,860,000
Fair value recorded in other liabilities		1,419,000		1,860,000

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-month period ended December 31, 2010 and 2009 are summarized as follows:

	Three Months Ended
	December 31,
	2010			2009
	(in thousands)
Gross (gains) losses on derivative financial assets	$	440,000		$	245,000
Gross (gains) losses on derivative financial liabilities		(440,000	)		(245,000	)
Net loss (gain)	$	-		$	-

13. GOODWILL

Goodwill totaled $3.9 million at December 31, 2010 and September 30, 2010, respectively.  Goodwill represents the amount of acquisition cost over the fair value of net assets acquired in the purchase of another financial institution.  The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired.  Impairment is determined by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  Any such adjustments are reflected in the results of operations in the periods in which they become known.  After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill becomes its new accounting basis.  Because of the decline in the market value of the Company’s common stock during the three months ended December 31, 2010, the Company reviewed goodwill for impairment as of December 31, 2010 in addition to its annual review at September 30, 2010.  No impairment losses were recognized during fiscal year 2010 or the three months ended December 31, 2010.

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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, 2010, 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-ninth 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 $1.47 billion in assets at December 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 six loan production offices in the St. Louis and Kansas City metropolitan areas and Wichita, Kansas.

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.

- 24 - -

Commercial Banking Services

The Company’s commercial banking services are centered on serving small- to medium-sized businesses primarily in the St. Louis metropolitan area and the Company’s operations continue to be driven by its staff of experienced commercial bankers and the commercial banking relationships they generate.  Commercial loan originations totaled $89.2 million during the three months ended December 31, 2010 compared with $96.6 million during the same period last year.  Although origination activity slowed during the fiscal 2011 period 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.  The commercial loan portfolio increased $11.6 million during the three-month period to $572.7 million at December 31, 2010 compared with $561.1 million at September 30, 2010.  Commercial real estate loans increased $26.3 million as the result of new originations and the conversion of certain maturing construction loans to permanent financing, and commercial and industrial loans increased $6.8 million.  Commercial and multi-family construction and development loans decreased $12.5 million and land acquisition and development loans decreased $6.3 million as management decided to decrease the Company’s exposure to construction and development lending because of the weakened national and local economic conditions.

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 and, recently, in Wichita, Kansas.  The Company is a leading mortgage originator in the St. Louis and Kansas City 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 $629.5 million during the three months ended December 31, 2010 compared with $455.8 million during the same period last year.  The increased activity during the fiscal 2011 period reflected an increased market demand for mortgage refinancings as a result of the low interest rate environment that existed during the December 2010 quarter.  Mortgage loan refinancing activity represented approximately 72% of total loan originations during the three months ended December 31, 2010 compared with 45% during the same period last year.

Residential loans sold to investors for the three months ended December 31, 2010 totaled $611.9 million, which generated mortgage revenues totaling $1.8 million, compared with $413.7 million of loans sold and $2.7 million in revenues for the three months ended December 31, 2009.  The Company realized lower profit margins on loans sold during the December 2010 quarter compared with the prior year quarter as the result of: a higher percentage of loan activity related to mortgage refinancings, which generally result in lower profit margins than home purchase activity; a lower percentage of FHA and VA loan originations, which generally produce higher sales margins than conventional mortgages; extended commitment periods for delivery of loans to the Company’s mortgage loan investors due to increased origination volumes, tightening underwriting criteria required by such investors and increasing regulatory compliance requirements, resulting in lower sales margins; and increased variable costs on loans originated.  In addition, the Company increased its reserve for amounts potentially due to the Company’s loan investors under guarantees related to loans that were previously sold and became delinquent or defaulted.  Expense related to such guarantees totaled $677,000 during the three months ended December 31, 2010 compared with $54,000 during the same period last year and, at December 31, 2010, the related reserve totaled $787,000.

Another important source of revenue generated by the Company’s mortgage banking operation is interest income on mortgage loans that are held for sale pending delivery to the Company’s loan investors.  Because such loans are generally held for short periods of time pending delivery to such investors, the Company is able to fund them with short-term, low cost-funding sources, which results in higher interest-rate spreads than other interest-earning assets held by the Company.  Interest income on loans held for sale increased 99.3% to $3.2 million for the quarter ended December 31, 2010 compared with $1.6 million for the same period last year, primarily due to a $171.2 million increase in the average balance resulting from the increased origination activity and extended delivery times to the Company’s loan investors.  Loans originated for sale during the three months ended December 31, 2010 exceeded loans sold, resulting in a $17.6 million, or 7%, increase in mortgage loans held for sale to $271.2 million at December 31, 2010 from $253.6 million at September 30, 2010.

- 25 - -

Looking forward to the March 2010 quarter compared with the December 2010 quarter, the Company anticipates noticeable declines in mortgage revenues and net interest income related to its mortgage banking operation based on an expectation of seasonally lower loan origination volumes, lower refinancing activity and a decline in loans held for sale as loan sales are likely to exceed originations.  These mortgage-related declines are expected to be partially offset by growth in interest income from selective commercial loan growth and modestly lower expense related to loan credit quality.

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 $17.1 million, or 2.4%, to $731.4 million at December 31, 2010 from $714.3 million at September 30, 2010.  Checking accounts, which represent the cornerstone product in a customer relationship, increased $3.1 million to $497.3 million at December 31, 2010 from $494.2 million at September 30, 2010 as the result of growth in deposits from municipal and retail customers, partially offset by a decrease in deposits from commercial customers.  Also enhancing its ability to attract core deposits, the Bank participates 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 increased $15.2 million to $205.1 million at December 31, 2010 from $189.9 million at September 30, 2010 primarily as the result of growth in deposits from commercial and retail customers.  The weighted-average costs of interest-bearing checking accounts and money market accounts decreased to 0.51% at December 31, 2010 compared with 0.58% at September 30, 2010 primarily due to declining market interest rates.

Certificates of deposit increased $18.9 million to $419.7 million at December 31, 2010 from $400.9 million at September 30, 2010, primarily as the result of a $14.4 million increase in CDARS time deposits to $78.5 million and a $4.5 million increase in retail time deposits to $332.8 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.  Total deposits increased $35.9 million, or 3.2%, to $1.15 billion at December 31, 2010 from $1.12 billion at September 30, 2010.

Retail banking fees, which include fees charged to customers who have overdrawn their checking accounts and service charges on other retail banking products, were $1.0 million for the three months ended December 31, 2010, compared with $932,000 for the same period last year, respectively.  The increase in retail banking fees during the December 2010 quarter resulted from a change in deposit fee structure.

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AVERAGE BALANCE SHEETS

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

	Three Months Ended
	December 31, 2010								December 31, 2009
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
	Balance			Dividends		Cost			Balance			Dividends		Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable: (1)
Real estate	$	274,743		$	3,981		5.80	%	$	303,648		$	4,772		6.29	%
Commercial		588,626			7,716		5.24	%		617,011			7,791		5.05	%
Home equity lines of credit		197,560			1,860		3.77	%		224,570			2,253		4.01	%
Consumer		3,241			28		3.30	%		3,578			43		4.77	%
Total loans receivable		1,064,170			13,585		5.11	%		1,148,807			14,859		5.17	%
Mortgage loans held for sale		305,905			3,229		4.22	%		134,745			1,620		4.81	%
Securities and other		49,650			310		2.50	%		63,603			358		2.25	%
Total interest-earning assets		1,419,725			17,124		4.82	%		1,347,155			16,837		5.00	%
Non-interest-earning assets		85,062								66,533
Total assets	$	1,504,787							$	1,413,688
Interest-bearing liabilities:
Interest-bearing checking	$	349,761			791		0.91	%	$	291,480			920		1.26	%
Passbook savings		29,668			12		0.16	%		28,724			18		0.25	%
Money market		196,208			372		0.76	%		252,419			755		1.20	%
Certificates of deposit		407,003			2,023		1.99	%		488,691			2,934		2.40	%
Total interest-bearing deposits		982,640			3,198		1.30	%		1,061,314			4,627		1.74	%
FHLB advances		222,698			382		0.69	%		99,282			558		2.25	%
Federal Reserve borrowings		-			-		-			51			-		0.50	%
Subordinated debentures		19,589			128		2.61	%		19,589			127		2.60	%
Total interest-bearing liabilities		1,224,927			3,708		1.21	%		1,180,236			5,312		1.80	%
Non-interest bearing liabilities:
Non-interest bearing deposits		141,331								97,538
Other non-interest bearing liabilities		18,533								16,450
Total non-interest-bearing liabilities		159,864								113,988
Stockholders' equity		119,996								119,464
Total liabilities and stockholders' equity	$	1,504,787							$	1,413,688
Net interest income				$	13,416							$	11,525
Interest rate spread (2)							3.61	%							3.20	%
Net interest margin (3)							3.78	%							3.42	%
Ratio of average interest-earning assets to average interest-bearing liabilities		115.90	%							114.14	%

(1) Include non-accrual loans with an average balance of $29.4 million and $22.5 million for the three months ended December 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.

- 27 - -

RATE VOLUME ANALYSIS

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

	Three Months Ended
	December 31, 2010 vs 2009
	Volume			Rate			Net
				(In thousands)
Interest-earning assets:
Loans receivable:
Real estate	$	(435	)	$	(356	)	$	(791	)
Commercial		(1,331	)		1,256			(75	)
Home equity lines of credit		(262	)		(131	)		(393	)
Consumer		(3	)		(12	)		(15	)
Total loans receivable		(2,031	)		757			(1,274	)
Mortgage loans held for sale		2,917			(1,308	)		1,609
Securities and other		(86	)		38			(48	)
Net change in income on interest earning assets		800			(513	)		287
Interest-bearing liabilities:
Interest-bearing checking		799			(928	)		(129	)
Passbook savings		3			(9	)		(6	)
Money market		(145	)		(238	)		(383	)
Certificates of deposit		(450	)		(461	)		(911	)
Total interest-bearing deposits		207			(1,636	)		(1,429	)
FHLB advances		1,875			(2,051	)		(176	)
Subordinated debentures		1			-			1
Net change in expense on interest bearing liabilities		2,083			(3,687	)		(1,604	)
Change in net interest income	$	(1,283	)	$	3,174		$	1,891

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RESULTS OF OPERATIONS

The Company reported net income for the quarter ended December 31, 2010 of $3.1 million compared with net income of $1.3 million during the same quarter last year.  The Company reported net income available to common shares for the quarter ended December 31, 2010 of $2.6 million, or $0.24 per diluted common share on 10.9 million average diluted shares outstanding, compared with net income available to common shares of $736,000, or $0.07 per diluted common share on 10.5 million average diluted shares outstanding, during the same quarter last year.  Reducing income available to common shares for the three months ended December 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 $516,000, or $0.05 per diluted common share compared with $514,000, or $0.05 per diluted common share in the comparable 2009 period.

Net interest income rose 16%, or $1.9 million, to $13.4 million for the quarter ended December 31, 2010 compared with $11.5 million for the same period last year primarily as the result of a 36 basis point increase in the net interest margin.  The net interest margin increased to 3.78% for the quarter ended December 31, 2010 compared with 3.42% for the quarter ended December 31, 2009 primarily as the result of an increase in the average balance of loans held for sale, which typically produce higher interest-rate spreads than other interest-earning assets held by the Company, combined with a market-driven decline in the cost of deposits and wholesale borrowings.  The average balance of interest-earning assets increased to $1.42 billion for the quarter ended December 31, 2010 compared with $1.35 billion for the quarter ended December 31, 2009 primarily as the result of the increase in the average balance of mortgage loans held for sale.

Total interest and dividend income increased 2.0% to $17.1 million for the quarter ended December 31, 2010, compared with $16.8 million for the same quarter last year primarily as the result of the increase in interest income on mortgage loans held for sale partially offset by a decrease in interest income on loans receivable.

Interest income on loans receivable decreased 8.6% to $13.6 million for the quarter ended December 31, 2010, compared with $14.9 million for the same quarter last year as the result of a decrease in the average balance and the average yield.  The average balance of loans receivable decreased to $1.06 billion during the three months ended December 31, 2010, compared with $1.15 billion during the same period last year primarily as the result of weakened market demand for the Company’s loan products and the Company’s tightened underwriting standards.  The average yield on loans receivable decreased to 5.11% during the three months ended December 31, 2010 compared with 5.17% during the same period last year primarily as the result of a market driven decrease in the average yield on residential real estate and home equity loans partially offset by an increase in the average yield on commercial loans.  The yield on commercial loans continued to benefit from the implementation of interest-rate floors on new and renewing loans.

Interest income on mortgage loans held for sale increased 99.3% to $3.2 million for the quarter ended December 31, 2010, compared with $1.6 million for the same quarter 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 $305.9 million during the three months ended December 31, 2010 compared with $134.7 million during the same period last year as the result of increased origination activity and extended delivery times to the Company’s loan investors.  The average yield on mortgage loans held for sale was 4.22% during the three months ended December 31, 2010 compared with 4.81% during the same period last year. See Results of Community Banking Strategy – Retail Mortgage Lending.

Total interest expense decreased $1.6 million, or 30.2%, to $3.7 million for the quarter ended December 31, 2010 compared with $5.3 million for the quarter ended December 31, 2009.  The lower expense was primarily the result of a decrease in the average cost of funds partially offset by an increase in the average balance.  The average cost of funds decreased from 1.80% for the quarter ended December 31, 2009 to 1.21% for the quarter ended December 31, 2010 and the average balance of interest-bearing liabilities increased from $1.18 billion to $1.22 billion during the same period, respectively.  The increase in the average balance of interest-bearing liabilities resulted primarily from an increase in the average balance of advances from the Federal Home Loan Bank of Des Moines (“FHLB”), which was used to fund asset growth and the decrease in time deposits.  The decreased average cost during the three-month period was the result of lower market interest rates, a decrease in time 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.

- 29 - -

Interest expense on deposits decreased $1.4 million, or 30.9%, to $3.2 million during the quarter ended December 31, 2010 compared with $4.6 million for the quarter ended December 31, 2009.  The decrease was primarily the result of a decrease in the average cost to 1.30% for the quarter ended December 31, 2010 from 1.74% for the comparable quarter in the prior year.  The lower average cost resulted from decreases in market interest rates and the average balance of higher-cost time deposits. See Results of Community Banking Strategy – Retail Banking Services.

Interest expense on advances from the Federal Home Loan Bank decreased $174,000, or 31.3%, to $383,000 during the quarter ended December 31, 2010 compared with $557,000 for the quarter ended December 31, 2009 primarily as the result of a decrease in the average cost partially offset by an increase in the average balance.  The average balance increased to $222.7 million for the quarter ended December 31, 2010 from $99.3 million for the quarter ended December 31, 2009 and the average cost decreased from 2.25% to 0.69% during the same period, respectively.  The increased average balance was used to fund asset growth and the decrease in higher-cost time deposits.  The decrease in the average cost was the result of lower market interest rates during the 2010 period.

Provision for Loan Losses

The provision for loan losses for the three months ended December 31, 2010 was $4.3 million compared with $6.1 million for the same period a year ago.  The change in the provision for the three month period was primarily due to changes in the levels of net charge-offs and the balance of non-performing loans.  See Non-Performing Assets and Allowance for Loan Losses.

Non-Interest Income

Total non-interest income decreased 18.0% to $3.6 million for the quarter ended December 31, 2010 compared with $4.4 million for the same period last year.  The decrease was primarily the result of lower mortgage revenues partially offset by an increase in retail banking fees.  See Results of Community Banking Strategy – Retail Mortgage Lending and Results of Community Banking Strategy – Retail Banking Services.

Investment brokerage revenuestotaled $446,000 for the three months ended December 31, 2010 compared with $424,000 for the same period a year ago. The Company operates an investment brokerage division whose operations consist principally of brokering bonds from wholesale brokerage houses to 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 2010 period compared with the prior-year period as a result of stronger market demand for fixed-income investment products in the midst of a favorable interest rate environment and weakened loan demand by the Company’s investment customers.

Non-Interest Expense

Total non-interest expense increased $119,000 to $8.3 million for the quarter ended December 31, 2010 compared with $8.2 million for the same period a year ago.

Salaries and employee benefits expense decreased $495,000 to $3.4 million for the quarter ended December 31, 2010 compared with $3.9 million for the quarter ended December 31, 2009.  The decrease was primarily due to a higher level of direct, fixed compensation costs deferred against mortgage loans originated as the result of increased activity.

Advertising expense decreased $47,000 to $100,000 for the three months ended December 31, 2010 compared with $147,000 for the three months ended December 31, 2009.  The decrease was generally due to a reduction in the overall level of advertising during the December 2010 quarter resulting from a more focused effort to control such expenses.

- 30 - -

Professional fees decreased $73,000 to $445,000 for the quarter ended December 31, 2010 compared with $517,000 for the quarter ended December 31, 2009.  The decrease was primarily the result of lower expenses associated with credit collections and regulatory compliance.

FDIC deposit insurance premium expenseincreased $131,000 to $623,000 for the three months ended December 31, 2010 compared with $492,000 for the same period in 2009.  The increase was the primarily the result of an increase in the rate paid for deposit insurance partially offset by a decrease in the average balance.

Real estate foreclosure expense and losses was $1.1 million for the three months ended December 31, 2010 compared with $436,000 for the same period in 2009.  See Non-Performing Assets and Allowance for Loan Losses.

Income Taxes

The provision for income taxes increased $880,000 to $1.3 million, or an effective rate of 30.16%, for the quarter ended December 31, 2010, compared with $466,000, or an effective rate of 27.15%, for the three months ended December 31, 2009.  The higher effective tax rate in the December 2010 quarter was primarily the result of a lower 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 higher level of pre-tax income in the period.

- 31 - -

NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

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

	December 31,				September 30,
	2010				2010
Non-accrual loans:
Residential real estate:
First mortgage	$	8,857,882			$	6,726,710
Second mortgage		1,492,344				1,522,066
Home equity		3,266,298				2,205,504
Commercial and multi-family real estate		9,512,796				5,538,651
Land acquisition and development		6,738,763				8,796,057
Real estate construction and development		1,135,663				1,188,743
Commercial and industrial		414,351				417,171
Consumer and other		285,735				101,425
Total non-accrual loans		31,703,832				26,496,327
Troubled debt restructurings:
Current under restructured terms:
Residential real estate:
First mortgage		15,759,806				16,093,071
Second mortgage		1,929,394				2,186,284
Home equity		1,039,387				1,050,152
Commercial and multi-family real estate		162,213				183,528
Land acquisition and development  Land acquisition and development		120,890				97,501
Real estate construction and development		2,933,531				3,305,869
Commercial and industrial		618,220				1,683,568
Consumer and other		59,127				82,631
Total current troubled debt restructurings		22,622,568				24,682,604
Past due under restructured terms:
Residential real estate:
First mortgage		8,536,690				7,251,091
Second mortgage		483,100				339,397
Home equity		674,293				727,859
Land acquisition and development Land acquisition and development		41,222				64,857
Real estate construction and development		50,812				-
Commercial and industrial		881,930				-
Total past due troubled debt restructurings		10,668,047				8,383,204
Total troubled debt restructurings		33,290,615				33,065,808
Total non-performing loans		64,994,447				59,562,135
Real estate acquired in settlement of loans:
Residential real estate		2,614,801				3,632,598
Commercial real estate		10,394,921		��		11,267,714
Total real estate acquired in settlement of loans		13,009,722				14,900,312
Other nonperforming assets		11,705				-
Total non-performing assets	$	78,015,874			$	74,462,447
Ratio of non-performing loans to total loans receivable		6.10	%			5.56	%
Ratio of non-performing assets to totals assets		5.32	%			5.13	%
Ratio of allowance for loan losses to non-performing loans		41.97	%			45.29	%
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		2.56	%			2.52	%
Ratio of non-performing assets to totals assets		3.78	%			3.43	%
Ratio of allowance for loan losses to non-performing loans		63.80	%			75.47	%

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Non-performing assets increased $3.6 million to $78.0 million at December 31, 2010 compared with $74.5 million at September 30, 2010 primarily the result of a $5.2 million increase in non-accrual loans partially offset by a $1.9 million decrease in real estate acquired in settlement of loans.  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. Non-accrual loans totaled $31.7 million at December 31, 2010 compared with $26.5 million at September 30, 2010.  The increase during the three-month period was primarily due to a $3.2 million increase in non-accrual residential real estate loans and $1.9 million increase in non-accrual commercial loans primarily related to the continued adverse economic environment.

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 generally retain such classification until the loan is paid in full.  However, a restructured one- to four-family residential mortgage loan that yields a market rate and demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally one year, is removed from the troubled debt restructuring classification.  Interest income on restructured loans is accrued at the reduced rate and the loan is returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months.

Restructured residential loans totaled $28.4 million at December 31, 2010 compared with $27.6 million at September 30, 2010.  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.  During the three months ended December 31, 2010, the Company restructured approximately $834,000 of loans to troubled residential borrowers and returned approximately $2.2 million of previously restructured residential loans to performing status as the result of the borrowers’ favorable performance history since restructuring, compared with $8.2 million and $1.7 million, respectively, during the comparable period last  year.  At December 31, 2010, $28.4 million, or 85% of total restructured loans, related to residential borrowers compared with $27.6 million, or 84% of total restructured loans, at September 30, 2010.  At December 31, 2010, 66% of these residential borrowers were performing as agreed under the modified terms of the loans compared with 70% at September 30, 2010.  The fluctuation 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 months ended December 31, 2010 and migration of certain other restructured residential loans to the past due status.

Real estate acquired in settlement of loans decreased to $13.0 million at December 31, 2010 compared with $14.9 million at September 30, 2010 due to the sale of several residential real estate properties and the write down of a large commercial property.  Real estate foreclosure losses and expense was $1.1 million for the three months ended December 31, 2010 compared with $436,000 for the same period last year.  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.  Expense during the December 2010 quarter included an additional $717,000 write-down of an existing commercial real estate property due to a decline in its estimated value since its acquisition in a prior period.

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

	Three Months Ended
	December 31,
	2010		2009
Balance, beginning of period	$	26,975,717	$	20,579,170
Provision charged to expense		4,300,000		6,074,000
Net charge-offs:
Residential real estate first mortgage		165,772		929,927
Residential real estate second mortgage		302,442		184,845
Home equity lines of credit		520,880		722,143
Land acquisition and development		2,117,352		326,590
Real estate construction & development		35		1,436,313
Commercial & multi-family real estate		721,189		(5,253	)
Commercial & industrial		141,213		62,651
Consumer and other		31,429		73,346
Total charge-offs, net		4,000,312		3,730,562
Balance, end of period	$	27,275,405	$	22,922,608

The provision for loan losses for the three months ended December 31, 2010 was $4.3 million compared with $6.1 million in the same period last year.  The larger three-month provision recorded in the December 2009 quarter was primarily due to a 17% increase in non-performing assets during that quarter compared with a 5% increase during the December 2010 quarter.

Net charge-offs for the three-months ended December 31, 2010 totaled $4.0 million, or 1.51% of average loans on an annualized basis compared with $3.7 million, or 1.30% of average loans on an annualized basis for the same period a year ago.  Net charge-offs in the December 2010 quarter included $3.0 million of charge-offs on commercial loans and $989,000 of charge-offs on residential mortgage loans compared with $1.8 million and $1.8 million, respectively, in the same period last year.  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.  Approximately 70%, or $2.8 million, of net charge-offs in the December 2010 quarter related to a relationship with one commercial borrower.  In addition, declines in residential real estate values in the Company’s market areas, as well as nationally, contributed to the high levels of charge-offs in the December 2010 and 2009 quarters.

The ratio of the allowance for loan losses to loans receivable was 2.56% at December 31, 2010 compared with 2.52% at September 30, 2010.  The ratio of the allowance for loan losses to non-performing loans was 41.97% at December 31, 2010 compared with 45.29% at September 30, 2010.  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 63.80% at December 31, 2010 compared with 75.47% at September 30, 2010.  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 troubled debt restructurings that were performing under their restructured terms.

The Company maintains an 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 volume of the portfolio combined with an analysis of past-due and classified loans, and can also be affected by the following factors: changes in national and local economic conditions and developments, assessment of collateral values based on independent appraisals, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, and changes in the experience, ability, and depth of lending management staff.

- 34 - -

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

Loans considered for individual impairment analysis include loans that are past due, loans that have been placed on nonaccrual status, troubled debt restructurings, loans with internally assigned credit risk ratings that indicate an elevated level of risk, or loans that management has knowledge of or concerns about the borrower’s ability to pay under the contractual terms of the note. Residential loans to be evaluated for impairment are generally identified through a review of loan delinquency reports, internally-developed risk classification reports, and discussions with the Bank’s loan collectors. Commercial loans evaluated for impairment are generally identified through a review of loan delinquency reports, internally-developed risk classification reports, discussions with loan officers, discussions with borrowers, periodic individual loan reviews and local media reports indicating problems with a particular project or borrower. Commercial loans are individually reviewed and assigned a credit risk rating periodically by the internal loan committee.

All loans that are not evaluated individually for impairment and any individually evaluated loans determined not to be impaired are segmented into groups based on similar risk characteristics or internally assigned credit risk ratings. Our methodology includes factors that allow us to adjust our estimates of losses based on the most recent information available. Historical loss rates for each risk group are used as the starting point to determine allowance provisions. These rates are then adjusted to reflect actual changes and anticipated changes in national and local economic conditions and developments, assessment of collateral values based on independent appraisals, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, and changes in the experience, ability, and depth of lending management staff.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination.

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

- 35 - -

FINANCIAL CONDITION

Cash and cash equivalents increased to $16.0 million at December 31, 2010 from $15.6 million at September 30, 2010.  Federal funds sold and overnight interest-bearing deposit accounts increased to $5.2 million at December 31, 2010 compared with $4.0 million at September 30, 2010 primarily as the result of an increase in overnight deposits.

Debt securities available for sale increased to $13.6 million at December 31, 2010 from $8.0 million at September 30, 2010.  Mortgage-backed securities available for sale decreased to $6.9 million at December 31, 2010 from $8.8 million at September 30, 2010 and mortgage-backed and related securities held to maturity decreased to $9.2 million at December 31, 2010 from $10.3 million at September 30, 2010.  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 increased $410,000 to $10.2 million at December 31, 2010 from $9.8 million at September 30, 2010.  The Bank is generally required to hold stock equal to 5% of its total FHLB borrowings.

Advances from the Federal Home Loan Bank of Des Moines decreased to $161.8 million at December 31, 2010 from $181.0 million at September 30, 2010.  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 $4.4 million to $2.7 million at December 31, 2010 compared with $7.1 million at September 30, 2010 due to the payment of borrowers’ real estate taxes in December 2010.

Total stockholders’ equity increased $2.3 million to $118.7 million at December 31, 2010 from $116.4 million at September 30, 2010 primarily as the result of net income of $3.1 million, the amortization of equity trust expense of $98,000 and the amortization of stock option and award expense of $183,000 partially offset by common stock dividend payments of $1.0 million and preferred stock dividends of $407,000.

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, subject to regulatory restrictions discussed below, 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 December 31, 2010, the combined balance of borrowings from the FHLB, borrowings from the Federal Reserve Bank and brokered deposits totaled $170.2 million, had a weighted-average interest rate of 0.96%, a weighted average maturity of approximately 11 months and represented 12% of total assets.  At September 30, 2010, these combined balances totaled $189.4 million, had a weighted-average interest rate of 0.92%, a weighted average maturity of approximately 10 months and represented 13% of total assets.  Use of these funds has given the Company alternative sources 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 the 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 three months ended December 31, 2010 allowed the Company to reduce its use of such wholesale funding.

- 36 - -

During July 2010, the Company agreed to comply with a request from its primary regulator, the Office of Thrift Supervision (“OTS”), not to increase the aggregate level of national brokered certificates of deposit, CDARS time deposits and certain other similar reciprocal deposits above the level that existed at July 2, 2010, which was $178.5 million.  Prior to that time, the Company had already begun reducing the level of these types deposits with funds received from the increased levels of core deposits and retail certificates of deposit.  Management does not anticipate that this restriction will have a significant impact on the Company’s financial condition, results of operations or liquidity position.

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 December 31, 2010, the Bank had approximately $146.2 million in additional borrowing authority under the arrangement with the FHLB in addition to the $161.8 million in advances outstanding at that date.

The Company has the ability to borrow funds on a short-term basis under the Bank’s primary credit line at the Federal Reserve’s Discount Window.  At December 31, 2010, the Company had approximately $89.9 million in total borrowing authority under this arrangement with no borrowings outstanding and had approximately $147.3 million of commercial loans pledged as collateral under this agreement.

At December 31, 2010, the Bank had outstanding commitments to originate loans totaling $78.6 million and commitments to sell loans totaling $309.1 million.  Certificates of deposit totaling $301.0 million at December 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.

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 as currently applied to the Bank, the approval of the OTS is required prior to any capital distribution.  To the extent that any such capital distributions are not approved by the OTS in future periods, the Company could find it necessary to reduce or eliminate the payment of common dividends to its shareholders.  In addition, the Company could find it necessary to temporarily suspend the payment of dividends on its preferred stock and interest on its subordinated debentures.  At December 31, 2010 and September 30, 2010, the Company had cash and cash equivalents totaling $255,000 and $109,000, respectively, and a demand loan extended to the Bank totaling $2.2 million and $1.9 million, respectively, that could be used to fulfill its liquidity needs.

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 three months ended December 31, 2010, the origination of mortgage loans held for sale used $629.5 million of cash and the sales of such loans provided cash totaling $614.9 million.

The primary use of cash frominvesting activities is the origination of loans receivable which are held in portfolio.  During the three months ended December 31, 2010, the Company had a net increase in loans receivable of $406,000 compared with an increase of $9.4 million for the three months ended December 31, 2009.  In addition, the Company purchased $18.6 million and $4.3 million in debt securities available for sale and FHLB stock during the three months ended December 31, 2010 compared with purchases of $8.0 million and $2.4 million respectively, in debt securities available for sale and FHLB stock during the three months ended December 31, 2009.  Sources of cash from investing activities also included maturities of debt securities available for sale and proceeds from FHLB stock redemptions totaling $13.0 million and $3.9 million during the three months ended December 31, 2010 compared with maturities of debt securities available for sale and proceeds from FHLB stock redemptions of $5.0 million and $6.6 million respectively, during the three months ended December 31, 2009.

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The Company’s primary sources and uses of funds from financing activities during the three months ended December 31, 2010 included a $35.9 million increase in deposits compared with a $36.0 million decrease for the three months ended December 31, 2009, and a $19.2 million decrease in advances from the Federal Home Loan Bank during the three months ended December 31, 2010 compared with a $62.8 million increase during the same period last year.  Other significant sources and uses of cash from financing activities for the three months ended December 31, 2009 included a $4.7 million increase in notes payable.  There was no such activity during the three months ended December 31, 2010.

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

	December 31, 2010
					Federal
	Certificates		FHLB		Reserve		Subordinated
	of Deposit		Borrowings		Borrowings		Debentures
	(In thousands)
Maturing in:
Three months or less	$	92,865	$	132,800	$	-	$	-
Over three months through six months		82,964		-		-		-
Over six months through twelve months		125,218		-		-		-
Over twelve months		118,694		29,000		-		19,589
Total	$	419,741	$	161,800	$	-	$	19,589

CONTRACTUAL OBLIGATIONS

In addition to its owned banking facilities, the Company has entered into long-term operating leases to support ongoing activities.  The required payments under such commitments at December 31, 2010 are as follows:

Less than one year	$	701,968
Over 1 year through 3 years		1,504,814
Over 3 years through 5 years		1,453,538
Over 5 years		1,373,021
Total	$	5,033,341

REGULATORY CAPITAL

The Bank is required to maintain specific amounts of capital pursuant to 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%).

The Bank is also subject to prompt corrective action capital requirement regulations set forth by the OTS.  As defined in the regulations, the OTS requires the Bank to maintain minimum total and Tier I capital to risk-weighted assets and Tier I capital to average assets. The Bank met all capital adequacy requirements to which it was subject at December 31, 2010.

As of December 31, 2010, the most recent notification from the OTS categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

											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 Decenber 31, 2010:
Tangible capital (to total assets)	$	132,281		9.05	%	$	21,936		1.50	%		N/A		N/A
Total risk-based capital (to risk- weighted assets)		147,214		12.36	%		95,249		8.00	%	$	119,061		10.00	%
Tier I risk-based capital (to risk- weighted assets)		132,281		11.11	%		N/A		N/A			71,437		6.00	%
Tier I leverage capital (to average assets)		132,281		9.05	%		58,496		4.00	%		73,121		5.00	%
As of September 30, 2010:
Tangible capital (to total assets)	$	130,571		9.02	%	$	21,708		1.50	%		N/A		N/A
Total risk-based capital (to risk- weighted assets)		145,268		12.40	%		93,750		8.00	%	$	117,188		10.00	%
Tier I risk-based capital (to risk- weighted assets)		130,571		11.14	%		N/A		N/A			70,313		6.00	%
Tier I leverage capital (to average assets)		130,571		9.02	%		57,887		4.00	%		72,359		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 December 31, 2010 from those disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2010.

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

For the three months ended December 31, 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 December 31, 2010, the Company had issued $78.6 million of unexpired interest rate lock commitments to loan customers compared with $115.2 million of unexpired commitments at September 30, 2010.

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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 three months ended December 31, 2010.  The fair values of these derivative instruments recorded in other assets and other liabilities in the Company’s financial statements at December 31, 2010 and September 30, 2010 were $1.4 million and $1.9 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 December 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 December 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 December 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 February 2010, the FASB issued Accounting Standards Update (“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 did not 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. 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. The adoption of the provisions of this Topic did not have a material impact on the Company’s financial condition or results of operations.

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.

In January 2010, the FASB issued ASU No. 2010-06 which amends ASC Topic 820, Fair Value Measurements and Disclosures. This update will provide more robust disclosures about (a) the different classes of assets and liabilities measured at fair value, (b) the valuation techniques and inputs used, (c) the activity in Level 3 fair value measurements, and (d) the transfers between Levels 1, 2, and 3. This is effective for financial statements issued for interim and annual periods ending after December 15, 2009.  The interim disclosures required by this update are reported in the notes to the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires expanded credit risk disclosures intended to provide investors with greater transparency regarding the allowance for credit losses and the credit quality of financing receivables. Under this ASU, companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information, credit quality indicators, changes in the allowance for credit losses, and the nature and extent of troubled debt restructurings and their effect on the allowance for credit losses. Both new and existing disclosures must be disaggregated by portfolio segment or class based on the level of disaggregation that management uses when assessing its allowance for credit losses and managing its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of the provisions of this Topic did not have a material impact on the Company’s financial condition or results of operations.

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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, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

The following table provides information regarding the Company’s purchases of its equity securities during the three months ended December 31, 2010.

ISSUER PURCHASES OF EQUITY SECURITIES

							(d)
					(c)		Maximum Number
			(b)		Total Number of		(or Approximate
	(a)		Average		Shares (or Units)		Dollar Value) of
	Total Number		Price		Purchased as		Shares (or Units)
	of Shares		Paid per		Part of Publicly		That May Yet Be
	(or Units)		Share		Announced Plans		Purchased Under the
Period	Purchased (1)		(or Unit)		or Programs (2)		Plans or Programs (2)
October 1, 2010 through October 31, 2010		8,626	$	6.89		-		356,912
November 1, 2010 through November 30, 2010		419	$	7.55		-		356,493
December 1, 2010 through December 31, 2010		242	$	7.57		-		356,251
Total		9,287	$	6.94		-

(1) Total number of shares purchased represents shares surrendered by employees to satisfy tax withholding requirements upon vesting of stock awards.  These shares are not included in the total number of shares purchased as part of publicly announced plans.

(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 December 31, 2010.

Item 3.   Defaults Upon Senior Securities: Not applicable

Item 4.   [Removed and reserved]

Item 5.   Other Information: Not applicable

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Item 6.  Exhibits:

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

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

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

3.4 Bylaws of Pulaski Financial Corp. (4)

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 17, 2010.

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

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SIGNATURES

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

		PULASKI FINANCIAL CORP.
Date:	February 11, 2011	/s/ Gary W. Douglass
		Gary W. Douglass
		President and Chief Executive Officer
Date:	February 11, 2011	/s/ Paul J. Milano
		Paul J. Milano
		Chief Financial Officer