St. Joseph Bancorp (SJBA) 10-Q 2011 Q3 Quarterly report

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2011

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ______________________

Commission File Number: 000-53573

	St. Joseph Bancorp, Inc.
(Exact name of registrant as specified in its charter)

	Maryland		26-3616144
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1901 Frederick Avenue, St. Joseph, Missouri		64501
(Address of Principal Executive Offices)	Zip Code

	(816) 233-5148
(Registrant’s telephone number, including area code)

None

(Former Name, Former Address and Former Fiscal Year,

If Changed Since Last Report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 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 xNO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorted period that the registrant was required to submit and post such files).

YES x  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.  (Check one):

Large accelerated filer  o     Accelerated filer  o     Non-accelerated filer  o     Smaller reporting company  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b2 of the Act).

YES o   NO x

As of November 1, 2011, there were issued and outstanding 376,918 shares of the Registrant’s Common Stock.

St. Joseph Bancorp, Inc.

Quarterly Report on Form 10-Q

For The Three and Nine Months Ended

September 30, 2011

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2011 (Unaudited) and December 31, 2010	3
	Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity - For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II - OTHER INFORMATION
	Items 1 through 6	26
	Signatures	27

2

St. Joseph Bancorp, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

	September 30, 2011		December 31, 2010
	(unaudited)
Assets
Cash and due from banks	$	1,891,684	$	1,736,072
Interest-earning deposits in other institutions		11,520,304		11,915,446
Available-for-sale securities		4,709,718		3,475,406
Loans, net of allowance for loan losses of $123,000 at September 30, 2011 and $103,000 at December 31, 2010		17,283,885		15,377,650
Premises and equipment, net		1,029,317		1,057,746
Federal Home Loan Bank Stock, at cost		39,600		26,700
Interest receivable		118,503		100,803
Other assets		47,159		93,620
Total assets	$	36,640,170	$	33,783,443
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Savings, NOW and money market	$	15,288,334	$	13,569,249
Time		14,071,262		12,738,747
Total deposits		29,359,596		26,307,996
Advances from borrowers for taxes and insurance		138,921		21,232
Interest payable		951		520
Deferred income taxes		16,803		3,889
Other liabilities		66,702		44,273
Total liabilities		29,582,973		26,377,910
Temporary Equity
ESOP shares subject to mandatory redemption		27,630		21,105
Commitments and Contingencies		-		-
Stockholders’ Equity
Common stock, $.01 par value, 4,000,000 shares authorized, 376,918 shares issued and outstanding		3,739		3,739
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued or outstanding		-		-
Additional paid-in capital		2,660,524		2,660,524
Retained earnings		4,246,853		4,663,575
Accumulated other comprehensive income:
Unrealized gain on available-for-sale securities, net of income taxes		118,451		56,590
Total stockholders’ equity		7,029,567		7,384,428
Total liabilities and stockholders’ equity	$	36,640,170	$	33,783,443

See accompanying notes to condensed consolidated financial statements.

3

St. Joseph Bancorp, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2011 and 2010

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Interest Income
Interest and fees on loans	$	240,094		$	208,304		$	679,718		$	603,585
Available-for-sale securities		39,966			40,971			126,502			117,052
Interest-earning deposits		32,699			10,288			98,547			60,916
Federal Home Loan Bank dividends		269			133			668			394
Total interest income		313,028			259,696			905,435			781,947
Interest Expense
Deposits		116,832			101,649			357,056			288,398
Net Interest Income		196,196			158,047			548,379			493,549
Provision for Loan Losses		1,000			-			20,000			35,500
Net Interest Income After Provision for Loan Losses		195,196			158,047			528,379			458,049
Non-interest Income
Other		10,897			1,863			25,442			5,899
Gain (loss) on disposal of equipment		-			-			(6,735	)		100
Total non-interest income		10,897			1,863			18,707			5,999
Non-interest Expense
Salaries and employee benefits		163,198			147,897			499,579			401,388
Net occupancy expense		41,480			25,427			123,544			71,557
Depreciation		13,634			19,853			40,321			25,340
Legal expense		4,359			1,246			20,979			28,878
Audit fees and exams		37,427			21,320			125,865			114,594
Franchise and special taxes		-			8,290			2,040			21,110
Marketing expense		8,859			21,037			30,587			41,424
Other		50,083			34,181			125,378			94,163
Total non-interest expense		319,040			279,251			968,293			798,454
Loss Before Income Taxes		(112,947	)		(119,341	)		(421,207	)		(334,406	)
Provision (Credit) for Income Taxes		180			(10,502	)		(3,480	)		(18,322	)
Net Loss	$	(113,127	)	$	(108,839	)	$	(417,727	)	$	(316,084	)
Basic Loss Per Share	$	(0.32	)	$	(0.31	)	$	(1.20	)	$	(0.91	)
Basic Weighted Average Shares Outstanding		349,403			348,398			349,152			348,147

See accompanying notes to condensed consolidated financial statements.

4

St. Joseph Bancorp, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30, 2011 and 2010

(unaudited)

											Accumulated
	Comprehensive					Additional					Other		Total
	Income					Paid-in					Comprehensive		Stockholders’
	(Loss)			Common Stock		Capital		Retained Earnings			Income		Equity
Balance, January 1, 2010				$	3,739	$	2,660,021	$	5,131,632		$	72,753	$	7,868,145
Net loss	$	(316,084	)		-		-		(316,084	)		-		(316,084	)
Change in unrealized appreciation of available-for-sale securities, net of income taxes of $5,362		20,234			-		-		-			20,234		20,234
Total comprehensive loss	$	(295,850	)
Change in redemption value of ESOP shares subject to mandatory redemption					-		-		(879	)		-		(879	)
ESOP shares committed for release					-		377		-			-		377
Balance, September 30, 2010				$	3,739	$	2,660,398	$	4,814,669		$	92,987	$	7,571,793
Balance, January 1, 2011				$	3,739	$	2,660,524	$	4,663,575		$	56,590	$	7,384,428
Net loss	$	(417,727	)		-		-		(417,727	)		-		(417,727	)
Change in unrealized appreciation of available- for-sale securities, net of income taxes of $16,394		61,861			-		-		-			61,861		61,861
Total comprehensive loss	$	(355,866	)
Change in redemption value of ESOP shares subject to mandatory redemption					-		-		1,005			-		1,005
Balance, September 30, 2011				$	3,739	$	2,660,524	$	4,246,853		$	118,451	$	7,029,567

See accompanying notes to condensed consolidated financial statements.

5

St. Joseph Bancorp, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2011 and 2010

(unaudited)

	September 30, 2011			September 30, 2010
Operating Activities
Net loss	$	(417,727	)	$	(316,084	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		40,321			24,651
Amortization and accretion of securities		9,539			7,552
Provision for loan losses		20,000			35,500
Loss (gain) on disposal of equipment		6,735			(100	)
Deferred income taxes		(3,480	)		(6,141	)
Compensation cost on allocated ESOP shares		7,530			7,907
Changes in:
Interest receivable		(17,700	)		(23,576	)
Prepaid income taxes		-			(12,181	)
Other assets		46,461			45,423
Other liabilities and interest payable		22,860			31,759
Net cash used in operating activities		(285,461	)		(205,290	)
Investing Activities
Net redemption (purchases) of interest-earning deposits		395,142			(3,848,244	)
Net increase in loans		(1,926,235	)		(1,790,726	)
Purchases of available-for-sale securities		(4,600,000	)		(1,217,435	)
Proceeds from maturities and calls of available-for-sale securities		4,000,000			1,095,000
Purchases of mortgage backed securities		(1,020,521	)		-
Principal reductions of mortgage backed securities		454,925			705,458
Proceeds from disposal of equipment		-			100
Purchases of Federal Home Loan Bank stock		(12,900	)		(500	)
Purchases of property and equipment		(18,627	)		(668,834	)
Net cash used in investing activities		(2,728,216	)		(5,725,181	)
Financing Activities
Net increase in savings, NOW
and money market accounts		1,719,085			5,191,241
Net increase in time deposits		1,332,515			1,137,674
Net increase in advances from borrowers
for taxes and insurance		117,689			77,763
Net cash provided by financing activities		3,169,289			6,406,678
Increase in Cash and Cash Equivalents		155,612			476,207
Cash and Cash Equivalents, Beginning of Period		1,736,072			1,311,198
Cash and Cash Equivalents, End of Period	$	1,891,684		$	1,787,405
Supplemental Cash Flows Information
Interest paid	$	356,625		$	288,746
Income taxes paid	$	-		$	-

See accompanying notes to condensed consolidated financial statements.

6

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of  St. Joseph Bancorp, Inc.’s (“the Company”) management, necessary to fairly present the financial position, results of operations and cash flows for the Company.  These adjustments consist only of normal recurring adjustments.  The condensed consolidated balance sheet of the Company, as of December 31, 2010, has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted.  The Company’s Annual Report to stockholders, for the year ended December 31, 2010, contains consolidated financial statements and related footnote disclosures which should be read in conjunction with the accompanying condensed consolidated financial statements.  The results of operations for the period ended September 30, 2011 are not necessarily indicative of the operating results for the full year.

The condensed consolidated financial statements include the accounts of St. Joseph Bancorp, as well as its wholly owned subsidiaries, Midwest Federal Savings and Loan Association (“the Association”) and MFS Financial Services, Inc., an insurance agency, which is currently inactive.  All significant intercompany balances and transactions have been eliminated in consolidation.  The condensed consolidated financial statements have been prepared without audit.  In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and changes in cash flows have been made.

The Company operates in a highly regulated environment and is subject to extensive regulation, supervision and examination.  Applicable laws and regulations may change, and there is no assurance that such changes will not adversely affect the Company’s business.  Such regulation and supervision govern the activities in which an institution may engage and are intended primarily for the protection of the Association, its depositors and the FDIC.  Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the operation of an institution, the classification of assets held by the institution and the adequacy of an institution’s allowance for loan losses.  Any change in such regulation and oversight, whether in the form of restrictions on activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations governing banks, could have a material impact on the Company’s operations.  In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act was recently signed into law by the President.  The effect of this new law on the banking industry and on the Company is uncertain at the present time given that many of the changes will be implemented through regulatory rules that have yet to be proposed or adopted.

NOTE 2 – EMPLOYEE STOCK OWNERSHIP PLAN

The Association has an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 21).  The ESOP borrowed funds from the Company in an amount sufficient to purchase 30,153 shares.  The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Association and dividends received by the ESOP.  Contributions will be applied to repay interest on the loan first, then the remainder will be applied to principal.  The loan is expected to be repaid over a period of up to 30 years.  The debt of the ESOP is eliminated in consolidation.  Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid.  Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants.  Participants will vest in their accrued benefits under the employee stock ownership plan at the rate of 20 percent per year.  Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Association.  Forfeitures will be reallocated to remaining plan participants.  Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.

7

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 2 – EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement.  As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations.  Dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.  ESOP compensation expense was $7,530 and $7,907 for the nine months ended September 30, 2011 and 2010, respectively.

A summary of ESOP shares at September 30 are as follows:

	2011		2010
Released shares		2,010		1,005
Shares committed for release		753		753
Unreleased shares		27,390		28,395
Total		30,153		30,153
Fair value of unreleased shares		273,900		298,148

The Company is obligated, at the option of each beneficiary, to repurchase shares of the ESOP at its current fair market value, upon the beneficiary’s termination or after retirement (“put right”).  The put right feature makes the stock mandatorily redeemable.  Since the redemption feature is not within the sole control of the Company, this obligation has been classified outside of permanent equity, and included within the caption temporary equity on the balance sheet.  The Company accounts for this obligation based on the maximum cash obligation, which is based on the fair value of the underlying equity securities.  At September 30, 2010, the fair value as estimated by an independent third party of the 1,758 shares released and committed for release, held by the ESOP, was $18,459.  At September 30, 2011, the fair value as estimated by an independent third party of the 2,763 shares released and committed for release, held by the ESOP, is $27,630.

NOTE 3 – CURRENT ACCOUNTING DEVELOPMENTS

In April 2011, the Financial Accounting Standards Board (FASB) issued guidance which modifies certain aspects contained in the Receivables topic of FASB ASC 310.  The standard clarifies the guidance on evaluating whether a restructuring constitutes a troubled debt restructuring.  The amendments in this Accounting Standards Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The adoption did not have a material impact on the condensed consolidated financial statements.

In June 2011, the FASB issued guidance on comprehensive income to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.  The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.  The guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

8

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 3 – CURRENT ACCOUNTING DEVELOPMENTS (CONTINUED)

In May 2011, the FASB issued guidance to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  This guidance clarifies the application of existing fair value measurement requirements, changes certain principles and requires additional fair value disclosures.  The adoption of this guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

NOTE 4 – LOSS PER SHARE

Loss per share amount is based on the weighted average number of shares outstanding for the period and the net income (loss) applicable to common stockholders.  ESOP shares are excluded from shares outstanding until they have been committed to be released.

The following table presents a reconciliation of basic loss per share to diluted loss per share for the periods indicated.

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	9/30/11			9/30/10			9/30/11			9/30/10
Net loss	$	(113,127	)	$	(108,839	)	$	(417,727	)	$	(316,084	)
Average common shares outstanding		349,403			348,398			349,152			348,147
Average common share stock options outstanding		-			-			-			-
Average diluted common shares		349,403			348,398			349,152			348,147
Loss per share:
Basic	$	(.32	)	$	(0.31	)	$	(1.20	)	$	(0.91	)
Diluted		(.32	)		(0.31	)		(1.20	)		(0.91	)

NOTE 5 – AVAILABLE-FOR-SALE SECURITIES

The amortized cost of available-for-sale securities and their estimated fair values are summarized below:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2011:
U.S. Government agencies	$	2,817,038	$	87,715	$	-	$	2,904,753
Mortgage-backed securities		1,742,861		62,104		-		1,804,965
	$	4,559,899	$	149,819	$	-	$	4,709,718

9

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 5 – AVAILABLE-FOR-SALE SECURITIES (CONTINUED)

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2010:
U.S. Government agencies	$	2,223,477	$	30,700	$	11,201	$	2,242,976
Mortgage-backed securities		1,180,364		52,066		-		1,232,430
	$	3,403,841	$	82,766	$	11,201	$	3,475,406

All mortgage-backed securities at September 30, 2011 and December 31, 2010 relate to residential mortgages, and were issued by government-sponsored enterprises.

The amortized cost and fair value of available-for-sale securities at September 30, 2011, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
Within one year	$	254,386	$	257,092
One to five years		1,212,652		1,268,050
Six to ten years		1,350,000		1,379,611
Mortgage-backed securities		1,742,861		1,804,965
Totals	$	4,559,899	$	4,709,718

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010.  There were no unrealized losses at September 30, 2011.

December 31, 2010

Less Than 12 Months

12 Months or More

Total

Description of

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Securities

Value

Losses

Value

Losses

Value

Losses

U.S. Government agencies

$

688,799

$

11,201

$

-

$

-

$

688,799

$

11,201

The unrealized losses on the Company’s investments in direct obligations of U.S. Government agencies were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporary impaired at December 31, 2010.

10

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  There are three levels of inputs that may be used to measure fair value:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.  A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurements.  Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following table presents the balances of assets measured at fair value on a recurring basis by level at September 30, 2011 and December 31, 2010:

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			For Identical		Observable		Unobservable
Description	Total		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
September 30, 2011
U.S. Government agencies	$	2,904,753	$	-	$	2,904,753	$	-
Mortgage-backed securities		1,804,965		-		1,804,965		-
Total	$	4,709,718	$	-	$	4,709,718	$	-

December 31, 2010
U.S. Government agencies	$	2,242,976	$	-	$	2,242,976	$	-
Mortgage-backed securities		1,232,430		-		1,232,430		-
Total	$	3,475,406	$	-	$	3,475,406	$	-

11

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securities credit rating, prepaying assumptions and other factors such as credit loss assumptions.  Level 2 securities include U.S. government agency securities and mortgage-backed securities (including pools and collateralized mortgage obligations).  There were no transfers between level one and two classifications.  The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

The Company had no significant assets measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value:

Cash and Due From Banks, Interest-earning Deposits and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Loans and Interest Receivable

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans with similar characteristics were aggregated for purposes of the calculations.  The carrying amount of accrued interest approximates its fair value.

Deposits and Interest Payable

Deposits include savings accounts, NOW accounts and certain money market deposits.  The carrying amount approximates fair value.  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.  The carrying amount of interest payable approximates its fair value.

Advances From Borrowers for Taxes and Insurance

The carrying amount approximates fair value.

12

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The following table presents estimated fair values of the Company’s financial instruments (excluding available-for-sale securities which were previously presented):

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and due from banks	$	1,891,684	$	1,891,684	$	1,736,072	$	1,736,072
Interest-earning deposits		11,520,304		11,520,304		11,915,446		11,915,446
Loans, net of allowance for loan losses		17,283,885		17,670,174		15,377,650		15,476,510
Federal Home Loan Bank Stock		39,600		39,600		26,700		26,700
Interest receivable		118,503		118,503		100,803		100,803
Financial liabilities
Deposits		29,359,596		29,798,621		26,307,996		26,811,591
Advances from borrowers for taxes and insurance		138,921		138,921		21,232		21,232
Interest payable		951		951		520		520

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES

One-to Four-Family Residential Mortgage Lending.  One-to four-family residential mortgage loans represent amounts ranging from 75% - 90% of the Company’s loans and are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals.  The Company offers fixed-rate and Adjustable Rate Mortgage (ARM) loans for both permanent structures and those under construction.  The Company’s one- to four-family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.

The Company originates one- to four-family residential mortgage loans with terms up to a maximum of 30-years.  The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan-to-value level, unless the loan is insured by the Federal Housing Administration, guaranteed by Veterans Affairs or guaranteed by the Rural Housing Administration.  Residential loans generally do not include prepayment penalties.

In underwriting one- to four-family residential real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Most properties securing real estate loans made by the Company are appraised by independent fee appraisers approved by the Board of Directors.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage originations.

13

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Activity in the allowance for loan losses was as follows:

	2011		2010
Balance, January 1	$	103,000	$	63,500
Provision charged to expense		20,000		35,500
Balance, September 30	$	123,000	$	99,000

Summary of the allowance for loan losses for the three and nine months ended September 30, 2011 and the recorded investment in loans for September 30, 2011:

			1-4 Family
			Residential
	1-4 Family		Real Estate		Construction
	Residential		Lines-of-		Residential		Nonresidential
	Real Estate		Credit		Real Estate		Real Estate		Commercial		Consumer		Total
Allowance for loan losses:
Balance, beginning July 1, 2011	$	52,000	$	2,000	$	15,000	$	28,000	$	22,000	$	3,000	$	122,000
Provision charged to expense		-		-		-		1,000		-		-		1,000
Balance, ending September 30, 2011	$	52,000	$	2,000	$	15,000	$	29,000	$	22,000	$	3,000	$	123,000
Allowance for loan losses:
Balance, beginning January 1, 2011	$	52,000	$	2,000	$	15,000	$	9,000	$	22,000	$	3,000	$	103,000
Provision charged to expense		-		-		-		20,000		-		-		20,000
Balance, ending September 30, 2011	$	52,000	$	2,000	$	15,000	$	29,000	$	22,000	$	3,000	$	123,000
Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: General allowance for loan losses	$	52,000	$	2,000	$	15,000	$	29,000	$	22,000	$	3,000	$	123,000
Loans:
Ending balance: Total	$	13,391,343	$	99,066	$	54,294	$	3,110,021	$	576,834	$	175,327	$	17,406,885
Ending balance: Impaired loans with a valuation allowance	$	-	$	-	$	-	$	-	$	-	$	-	$	-

14

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Summary of the recorded investment in loans for December 31, 2010:

			1-4 Family
			Residential
			Real Estate
			Home
	1-4 Family		Equity		Construction
	Residential		Lines-of-		Residential		Nonresidential
	Real Estate		Credit		Real Estate		Real Estate		Commercial		Consumer		Total
Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:
General allowance for loan losses	$	52,000	$	2,000	$	15,000	$	9,000	$	22,000	$	3,000	$	103,000
Loans:
Ending balance:
Total	$	13,596,957	$	117,849	$	138,000	$	913,589	$	579,352	$	134,903	$	15,480,650
Ending balance:
Impaired loans with a valuation allowance	$	-	$	-	$	-	$	-	$	-	$	-	$	-

In connection with the filing of periodic reports with the OTS and in accordance with the Company’s asset classification policy, management regularly reviews the problem loans in the Company’s portfolio to determine whether any assets require classifications in accordance with applicable regulations.  The following tables set forth the balance of loans at September 30, 2011 and December 31, 2010 by loan class.  Special mention loans are performing loans on which information about the collateral pledged, or the possible credit problems of the borrowers, have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing loan categories.  Special mention loans are included with loans 30 to 89 days delinquent in the general valuation of the collateral pledged, if any.  Substandard loans include those characterized by the distinct possibility the Company will sustain some loss if the deficiencies are not corrected.  Loans classified as substandard-impaired have all the weaknesses inherent as those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values, highly questionable and improbable.  All other loans are classified as Pass.

The Company considers the following factors when determining the estimated allowance for loan losses:  historical loan losses by segment incurred by the Company, if any, economic and industry factors affecting each segment, valuation on collateral pledged to secure loans, and an analysis of past due loans and problem loans, if any.  Loan losses would be charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, would be credited to the allowance.  The Company used the same methodology in calculating the allowance for loan losses during each of the reporting periods presented.

15

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Balance of loans at September 30, 2011 by loan class:

			1-4 Family
			Residential
			Real Estate
			Home
	1-4 Family		Equity		Construction
	Residential		Lines-of-		Residential		Nonresidential
	Real Estate		Credit		Real Estate		Real Estate		Commercial		Consumer		Total
Pass	$	13,391,343	$	99,066	$	54,294	$	3,110,021	$	576,834	$	175,327	$	17,406,885
Special Mention		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-
Substandard-Impaired		-		-		-		-		-		-		-
	$	13,391,343	$	99,066	$	54,294	$	3,110,021	$	576,834	$	175,327	$	17,406,885

Balance of loans at December 31, 2010 by loan class:

			1-4 Family
			Residential
			Real Estate
			Home
	1-4 Family		Equity		Construction
	Residential		Lines-of-		Residential		Nonresidential
	Real Estate		Credit		Real Estate		Real Estate		Commercial		Consumer		Total
Pass	$	13,596,957	$	117,849	$	138,000	$	913,589	$	579,352	$	134,903	$	15,480,650
Special Mention		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-
Substandard-Impaired		-		-		-		-		-		-		-
	$	13,596,957	$	117,849	$	138,000	$	913,589	$	579,352	$	134,903	$	15,480,650

Credit profile based on payment activity at September 30, 2011 is as follows:

			1-4 Family
			Residential
			Real Estate
			Home
	1-4 Family		Equity		Construction
	Residential		Lines-of-		Residential		Nonresidential
	Real Estate		Credit		Real Estate		Real Estate		Commercial		Consumer		Total
Performing	$	13,391,343	$	99,066	$	54,294	$	3,110,021	$	576,834	$	175,327	$	17,406,885
Non-performing		-		-		-		-		-		-		-
	$	13,391,343	$	99,066	$	54,294	$	3,110,021	$	576,834	$	175,327	$	17,406,885

16

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Credit profile based on payment activity at December 31, 2010 is as follows:

			1-4 Family
			Residential
			Real Estate
			Home
	1-4 Family		Equity		Construction
	Residential		Lines-of-		Residential		Nonresidential
	Real Estate		Credit		Real Estate		Real Estate		Commercial		Consumer		Total
Performing	$	13,596,957	$	117,849	$	138,000	$	913,589	$	579,352	$	134,903	$	15,480,650
Non-performing		-		-		-		-		-		-		-
	$	13,596,957	$	117,849	$	138,000	$	913,589	$	579,352	$	134,903	$	15,480,650

The Company had no impaired or trouble debt restructured loans at September 30, 2011 or December 31, 2010.

A schedule of past due loans as of September 30, 2011 is as follows:

											Greater
			Greater								Than
	30 - 89		Than		Total						90 Days
	Past Due		90 Days		Past Due		Current		Total		Accruing
Residential real estate - 1 to 4 family	$	142,923	$	-	$	-	$	13,248,420	$	13,391,343	$	-
Residential real estate - 1 to 4 family home equity lines-of-credit		-		-		-		99,066		99,066		-
Residential real estate - construction		-		-		-		54,294		54,294		-
Nonresidential real estate		-		-		-		3,110,021		3,110,021		-
Commercial		-		-		-		576,834		576,834		-
Consumer and other		-		-		-		175,327		175,327		-
	$	142,923	$	-	$	-	$	17,263,962	$	17,406,885	$	-

17

ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(Unaudited)

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

A schedule of past due loans as of December 31, 2010 is as follows:

											Greater
			Greater								Than
	30 - 89		Than		Total						90 Days
	Past Due		90 Days		Past Due		Current		Total		Accruing
Residential real estate - 1 to 4 family	$	-	$	-	$	-	$	13,596,957	$	13,596,957	$	-
Residential real estate - 1 to 4 family home equity lines-of-credit		-		-		-		117,849		117,849		-
Residential real estate - construction		-		-		-		138,000		138,000		-
Nonresidential real estate		-		-		-		913,589		913,589		-
Commercial		-		-		-		579,352		579,352		-
Consumer and other		-		-		-		134,903		134,903		-
	$	-	$	-	$	-	$	15,480,650	$	15,480,650	$	-

There are no other known problem loans that cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

18

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provision, growth opportunities, interest rates and deposit growth. Words such as “may,” “could,” “should,” “would,” “will,” “will likely result,” “believe,”  “expect,” “plan,” “will continue,” “is anticipated,” “estimate,” “intend,” “project,” and similar expressions are intended to identify these forward-looking statements.  We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings than those presently anticipated or projected.

Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements.  The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented.  The following accounting policy comprises those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results.  This policy requires numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations, which may significantly affect our reported results and financial condition for the period or in future periods.

The Company’s critical accounting policies involving the more significant judgments and assumptions used in the preparation of the condensed consolidated financial statements as of September 30, 2011 have remained unchanged from December 31, 2010.  This policy relates to the allowance for loan losses.  This critical accounting policy is incorporated by reference under Item 8 “Financial Statements and Supplementary Data” in the Annual Report on From 10-K for the year ended December 31, 2010.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Total assets increased $2.8 million, or 8.5%, to $36.6 million at September 30, 2011 from $33.8 million at December 31, 2010.  The increase was primarily the result of a $1.2 million increase in available-for-sale securities and a $1.9 million increase in loans offset by a $395,000 decrease in interest-earning deposits in other institutions. The net increase of total assets was primarily due to our deposit growth.

Net loans receivable increased by $1.9 million, or 12.4%, to $17.3 million at September 30, 2011 from $15.4 million at December 31, 2010. One- to four-family residential real estate loans (excluding home equity lines-of-credit) decreased $206,000, or 1.5%, to $13.4 million at September 30, 2011 from $13.6 million at December 31, 2010.  Home equity lines-of-credit decreased $19,000, or 15.9% to $99,000 at September 30, 2011 from $118,000 at December 31, 2010.  Residential real estate construction loans decreased $84,000, or 60.7%, to $54,000 at September 30, 2011 from $138,000 at December 31, 2010.  Nonresidential real estate loans increased $2.2 million, or 240.4%, to $3.1 million at September 30, 2011 from $914,000 at December 31, 2010.  The increase in nonresidential real estate loans is primarily due to originating nine loans during the nine months ended September 30, 2011 that totaled $2.6 million.  There were twelve nonresidential real estate loans totaling $3.1 million at September 30, 2011.  Commercial loans decreased $2,000 or 0.4%, to $577,000 at September 30, 2011 from $579,000 at December 31, 2010.  Consumer loans increased $40,000, or 30.0%, to $175,000 at September 30, 2011 from $135,000 at December 31, 2010.

19

Our allowance for loan losses totaled $123,000 at September 30, 2011 and $103,000 at December 31, 2010.  At September 30, 2011, our allowance for loan losses totaled 0.71% of total loans.  Management will continue to monitor the allowance for loan losses as economic conditions and our performance dictate.  Although we maintain our allowance for loan losses at a level which we consider to be adequate to provide for potential losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods.

Available-for-sale securities increased $1.2 million, or 35.5% to $4.7 million at September 30, 2011 from $3.5 million at December 31, 2010.  The increase was the result of purchases of securities in the amount of $4.6 million, purchases of mortgage backed securities in the amount of $1.0 million, and an increase of $78,000 in fair value offset by $455,000 in principal reductions on mortgage back securities, $4.0 million in maturities and amortization of $10,000.

Deposits increased $3.1 million, or 11.6%, to $29.4 million at September 30, 2011 from $26.3 million at December 31, 2010.  Savings, NOW, and money market deposits increased $1.7 million, or 12.7%, to $15.3 million at September 30, 2011 from $13.6 million at December 31, 2010 and time deposits increased $1.4 million, or 10.5%, to $14.1 million at September 30, 2011 from $12.7 million at December 31, 2010.  The overall increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, the opening of an additional full service office, and from calls to existing and potential clients requesting their business.

Total stockholders’ equity decreased $355,000 to $7.0 million at September 30, 2011 from $7.4 million at December 31, 2010.  This decrease was due to a net loss of $418,000 for the nine months ended September 30, 2011, offset by a net change in unrealized appreciation of available-for-sale securities of $62,000 and a change in redemption value of ESOP shares subject to mandatory redemption of $1,000.

Comparison of Operating Results for the Nine Months Ended September 30, 2011 and September 30, 2010

General. Net loss increased $102,000 to $(418,000) for the nine months ended September 30, 2011 from $(316,000) for the nine months ended September 30, 2010.  The increase in the net loss resulted primarily from a $170,000 increase in non-interest expense, a decrease in the credit for income taxes of $15,000, a $69,000 increase in interest expense and a loss on disposal of equipment of $7,000 during the nine months ended September 30, 2011, offset by an increase in interest income of $123,000, a decrease in provision for loan losses of $16,000, and additional fees of $18,000 generated by loans sold in the secondary market, and a $2,000 increase in miscellaneous operating income.

Interest Income. Interest income increased $123,000, or 15.8%, to $905,000 for the nine months ended September 30, 2011 from $782,000 for the nine months ended September 30, 2010.  The increase in interest income resulted primarily from a $76,000 increase in interest income and fees on loans, and a $37,000 increase in interest income on interest-earning deposits, and a $10,000 increase in interest income on available-for-sale securities.

Interest income and fees on loans increased $76,000, or 12.6%, to $680,000 for the nine months ended September 30, 2011 from $604,000 for the nine months ended September 30, 2010.  The average balance of loans increased $2.7 million, or 19.5% to $16.4 million for the nine months ended September 30, 2011 from $13.7 million for the nine months ended September 30, 2010.  In addition, the average yield decreased to 5.41% for the nine months ended September 30, 2011 from 5.74% for the nine months ended September 30, 2010.  The increase in the average balance of loans resulted primarily from increases in nonresidential real estate loans.

20

Interest income on available-for-sale securities increased $10,000, or 8.0%, to $127,000 for the nine months ended September 30, 2011 from $117,000 for the nine months ended September 30, 2010.  This increase was due to an increase in the average balance of investment securities of $2.7 million to $6.5 million for the nine months ended September 30, 2011 from $3.8 million for the nine months ended September 30, 2010.  In addition, there was a decrease in the average yield on the securities portfolio to 2.59% for the nine months ended September 30, 2011 from 3.86% for the nine months ended September 30, 2010.

Interest income on interest-earning deposits increased $37,000, or 61.8%, to $98,000 for the nine months ended September 30, 2011 from $61,000 for the nine months ended September 30, 2010.  The average balance of interest-earning deposits increased $4.7 million, or 72.8%, to $11.0 million for the nine months ended September 30, 2011 from $6.3 million for the nine months ended September 30, 2010.  In addition, the average yield on interest-earning deposits decreased to 1.05% for the nine months ended September 30, 2011 from 1.56% for the nine months ended September 30, 2010.

Interest Expense. Interest expense increased $69,000, or 23.8%, to $357,000 for the nine months ended September 30, 2011 from $288,000 for the nine months ended September 30, 2010.  The increase in interest expense on interest-bearing deposits was due to an increase in the average balances.  We experienced increases in the average balances of certificates of deposits and in the savings accounts and NOW account categories.  There was a $10.6 million, or 61.1%, increase in the average balance of interest-bearing deposits to $27.9 million for the nine months ended September 30, 2011 from $17.3 million for the nine months ended September 30, 2010.  The average rate paid on interest-bearing deposits decreased 51 basis points to 1.71% for the nine months ended September 30, 2011 from 2.22% for the nine months ended September 30, 2010.  The increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business.

Provision for Loan Losses.  The provision for loan losses is evaluated on a regular basis by our management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  The provision for loan losses was $20,000 for the nine months ended September 30, 2011 and $36,000 for the nine months ended September 30, 2010. There were no non-performing loans, loans delinquent 60 days or more, charge-offs or recoveries during the nine months ended September 30, 2011 or 2010.

Recent weakness in economic conditions have had a severe impact on nationwide housing and financial markets, and the financial services industry in general.  Continuation of these trends could adversely affect the local housing, construction and banking industries, and weaken the local economy.  If borrowers are negatively affected by future adverse economic conditions, our non-performing assets may increase.  The allowance for loan losses as a percentage of total loans was 0.71% and 0.66% at September 30, 2011 and December 31, 2010, respectively.  When developing our estimate for the allowance for loan losses, we considered loans issued in the current period on an individual basis.  We used the same methodology in calculating the provision for loan losses during each of the nine months ended September 30, 2011 and September 30, 2010.

Non-interest Income (Loss).  Non-interest income (loss) increased $13,000, or 211.8%, to $19,000 for the nine months ended September 30, 2011 as compared to $6,000 for the nine months ended September 30, 2010.  The increase was primarily the result of additional fees of $18,000 generated by loans sold in the secondary market and a $2,000 increase in miscellaneous operating income, offset by the loss of disposal of equipment of $7,000.

21

Non-interest Expense.  Non-interest expense increased $170,000, or 21.3%, to $968,000 for the nine months ended September 30, 2011 from $798,000 for the nine months ended September 30, 2010.  Salaries and employee benefits expense increased $99,000 to $500,000 for the nine months ended September 30, 2011 from $401,000 for the nine months ended September 30, 2010 due to increased staffing and ESOP expense.  Net occupancy expense increased $52,000 to $124,000 for the nine months ended September 30, 2011 from $72,000 for the nine months ended September 30, 2010 due to increased expenses resulting from the purchase of an additional branch office.  Depreciation expense increased $15,000 to $40,000 for the nine months ended September 30, 2011 from $25,000 for the nine months ended September 30, 2010 due to the purchase of an additional branch office.  Legal expense decreased $8,000 to $21,000 for the nine months ended September 30, 2011 from $29,000 for the nine months ended September 30, 2010 primarily due to a reduction in fees related to our public filings.  Audit fees and exams increased $11,000 to $126,000 for the nine months ended September 30, 2011 from $115,000 for the nine months ended September 30, 2010.  Franchise and special taxes decreased $19,000 to $2,000 for the nine months ended September 30, 2011 from $21,000 for the nine months ended September 30, 2010 due to decreased FICA and unemployment taxes.  Other expense increased $31,000 to $125,000 for the nine months ended September 30, 2011 from $94,000 for the nine months ended September 30, 2010 primarily due to increased FDIC assessments and increased miscellaneous operating expenses during the same period.

Income Tax Expense (Benefit).  The credit for income taxes decreased by $15,000 to $(3,000) for the nine months ended September 30, 2011 from $(18,000) for the nine months ended September 30, 2010.

Comparison of Operating Results for the Three Months Ended September 30, 2011 and September 30, 2010

General.  Net loss increased $4,000 to $(113,000) for the three months ended September 30, 2011 from $(109,000) for the three months ended September 30, 2010.  The increase in the net loss resulted primarily from a $40,000 increase in non-interest expense, a $10,000 decrease in the credit for income taxes, a $15,000 increase in interest expense and an increase in provision for loan losses of $1,000 offset by an increase in interest income of $53,000, a $9,000 increase in non-interest income.

Interest Income.  Interest income increased $53,000, or 20.5%, to $313,000 for the three months ended September 30, 2011 from $260,000 for the three months ended September 30, 2010.  The increase in interest income resulted from a $32,000 increase in interest income and fees on loans and a $22,000 increase in interest income on interest-earning deposits offset by a $1,000 decrease in interest income on available-for-sale securities.

Interest income and fees on loans increased $32,000, or 15.3%, to $240,000 for the three months ended September 30, 2011 from $208,000 for the three months ended September 30, 2010.  The average balance of loans increased $3.0 million, or 20.8%, to $17.3 million for the three months ended September 30, 2011 from $14.3 million for the three months ended September 30, 2010.  In addition, the average yield decreased to 5.43% for the three months ended September 30, 2011 from 5.64% for the three months ended September 30, 2010.  The increase in the average balance of loans resulted primarily from increases in one- to four-family residential loans and increases in nonresidential real estate loans.

Interest income on available-for-sale securities decreased $1,000, or 2.5%, to $40,000 for the three months ended September 30, 2011 from $41,000 for the three months ended September 30, 2010.  The average balance of investment securities increased $2.7 million, or 78.0%, to $6.1 million for the three months ended September 30, 2011 from $3.4 million for the three months ended September 30, 2010.  In addition, the average yield on the available-for-sale securities portfolio decreased to 2.61% for the three months ended September 30, 2011 from 3.49% for the three months ended September 30, 2010.

Interest income on interest-earning deposits increased $22,000, or 217.8%, to $32,000 for the three months ended September 30, 2011 from $10,000 for the three months ended September 30, 2010.  The average balance of interest-earning deposits increased $3.7 million, or 48.5%, to $11.3 million for the three months ended September 30, 2011 from $7.6 million for the three months ended September 30, 2010.  In addition, the average yield on interest-earning deposits decreased to 1.03% for the three months ended September 30, 2011 from 1.26% for the three months ended September 30, 2010.

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Interest Expense.  Interest expense increased $15,000, or 14.9%, to $117,000 for the three months ended September 30, 2011 from $102,000 for the three months ended September 30, 2010.  The average rate paid on interest-bearing deposits decreased 50 basis points to 1.62% for the three months ended September 30, 2011 from 2.12% for the three months ended September 30, 2010.  We experienced increases in the average balances of savings accounts, NOW accounts and certificates of deposit.  There was a $9.6 million, or 49.9%, increase in the average balance of interest-bearing deposits to $28.8 million for the three months ended September 30, 2011 from $19.2 million for the three months ended September 30, 2010.  The increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business.

Provision for Loan Losses.  The provision for loan losses was $1,000 for the three months ended September 30, 2011 and $-0- for the three months ended September 30, 2010.  The provision for loan losses was made primarily due to increases in nonresidential real estate loans outstanding.  There were no non-performing loans, loans delinquent 60 days or more, charge-offs or recoveries during the three months ended September 30, 2011 or 2010.

Non-interest Expense.  Non-interest expense increased $40,000, or 14.2%, to $319,000 for the three months ended September 30, 2011 from $279,000 for the three months ended September 30, 2010.  Compensation and benefits expense increased $15,000 to $163,000 for the three months ended September 30, 2011 from $148,000 for the three months ended September 30, 2010 due to increased staffing and ESOP expense.  Net occupancy expense increased $16,000 to $41,000 for the three months ended September 30, 2011 from $25,000 for the three months ended September 30, 2010 due to increased expenses resulting from the purchase of an additional branch office.  Depreciation expense decreased $6,000 to $14,000 for the three months ended September 30, 2011 from $20,000 for the three months ended September 30, 2010 due to limited purchases of property and equipment during 2011.  Legal expense increased $3,000 to $4,000 for the three months ended September 30, 2011 from $1,000 for the three months ended September 30, 2010.  Audit fees and exams increased $16,000 to $37,000 for the three months ended September 30, 2011 from $21,000 for the three months ended September 30, 2010.  Franchise and special taxes decreased $8,000 to $-0- for the three months ended September 30, 2011 from $8,000 for the three months ended September 30, 2010 due to decreased FICA and unemployment taxes.  Marketing expense decreased $12,000 to $9,000 for the three months ended September 30, 2011 from $21,000 for the three months ended September 30, 2010.  Other expense increased $16,000 to $50,000 for the three months ended September 30, 2011 from $34,000 for the three months ended September 30, 2010 primarily due to increased FDIC assessments and increased miscellaneous operating expenses during the same period.

Income Tax Expense (Benefit).  The credit for income taxes decreased by $10,000 to $-0- for the three months ended September 30, 2011 from $(10,000) for the three months ended September 30, 2010.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature.  Our primary sources of funds consist of deposit inflows, loan repayments and maturities of securities.  In addition, we have the ability to borrow funds from the Federal Home Loan Bank of Des Moines.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

Our Board of Directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers, as well as unanticipated contingencies.  We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2011.

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We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program.  Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents and interest-earning deposits in other institutions.  The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.  At September 30, 2011, cash and cash equivalents totaled $1.9 million and interest-earning deposits in other institutions totaled $11.5 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $4.7 million at September 30, 2011.  On September 30, 2011, we had no outstanding borrowings from the Federal Home Loan Bank of Des Moines.  We have the ability to borrow from the Federal Home Loan Bank of Des Moines, although we have not currently established any credit lines.

At September 30, 2011 and December 31, 2010, we had no loan commitments outstanding.  In addition, at September 30, 2011 we had unused lines-of-credit to borrowers totaling $312,000.  At December 31, 2010, we had unused lines-of-credit to borrowers of $239,000.  Certificates of deposit due within one year of September 30, 2011 totaled $6.2 million, or 21.3% of total deposits.  If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances.  Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay on the certificates of deposit due on or before September 30, 2012.  We believe, however, based on past experience that a significant portion of such deposits will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are originating loans and purchasing interest-earning deposits and securities.  During the nine months ended September 30, 2011 and 2010, we originated $4.9 million and $4.0 million, respectively, of loans.  During the nine months ended September 30, 2011 and 2010, we had net (purchases) redemptions of interest-earning deposits in other institution totaling $395,000 and $(3.8) million, respectively.  During those periods, we had net increases in available-for-sale securities of $1.2 million and net decreases in securities of $565,000, respectively.

Financing activities consist primarily of activity in deposit accounts.  We experienced a net increase in total deposits of $3.1 million for the nine months ended September 30, 2011, and a net increase in total deposits of $6.3 million for the nine months ended September 30, 2010.  The increases in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business.

The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.  On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+.  On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt.  Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank.  These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available.  We cannot predict if, when or how these changes to the credit rating will affect economic conditions.  These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject.

The Company and the Association are subject to various regulatory capital requirements, including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At September 30, 2011 and December 31, 2010, the Company and the Association exceeded all regulatory capital requirements.  The Company and the Association are considered “well capitalized” under regulatory guidelines.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	There have been no material changes in the quantitative and qualitative information about market risk from the information provided in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Item 4.	Controls and Procedures
(a)	Evaluation of disclosure controls and procedures.
	Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b)	Changes in internal control over financial reporting.
	There were no changes made in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
Item 1.	Legal Proceedings
	St. Joseph Bancorp and Midwest Federal Savings are subject to various legal actions arising in the normal course of business.  At September 30, 2011, we were not involved in any legal proceedings, the outcome of which we believe to be material to our financial condition or results of operations.
Item 1A.	Risk Factors
	Not applicable to a smaller reporting company.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	None
Item 3.	Defaults Upon Senior Securities
	None
Item 4.	[Reserved]
Item 5.	Other Information
	None
Item 6.	Exhibits
Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Exhibit 101	The following financial statements for the quarter ended September 30, 2011, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

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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.

	ST. JOSEPH BANCORP, INC. Registrant
Date: November 14, 2011	By:  /s/ Ralph E. Schank
	President and Chief Executive Officer
	(Principal Executive and Financial Officer)

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