Peoples Federal Bancshares 10-Q 2011 Q1 Quarterly report

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 December 31, 2010

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 No. 333-165525

Peoples Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Maryland	27-2814821
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
435 Market Street, Brighton, Massachusetts	02135
(Address of Principal Executive Offices)	Zip Code

(617) 254-0707

(Registrant’s telephone number)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x  NO 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 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.  (Check one)

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

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

7,141,500 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of December 31, 2010.

Peoples Federal Bancshares, Inc.

FORM 10-Q

	Index	Page
	Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of December 31, 2010 (unaudited) and September 30, 2010	1
	Consolidated Statements of Income for the Three Months Ended December 31, 2010 and 2009 (unaudited)	2
	Consolidated Statements of Changes in Equity for the Three Months Ended December 31, 2010 and 2009 (unaudited)	3
	Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 and 2009 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
	Part II. Other Information
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults upon Senior Securities	25
Item 4.	[Reserved]	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
	Signature Page	26

Part I.     Financial Information

Item 1.    Consolidated Financial Statements

PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	December 31, 2010			September 30, 2010
	(unaudited)
	(In Thousands, except share data)
ASSETS
Cash and due from banks	$	9,135		$	9,154
Interest-bearing demand deposits with other banks and money market mutual funds		38,527			66,888
Federal funds sold		8,999			12,505
Federal Home Loan Bank - overnight deposit		23,420			25,316
Total cash and cash equivalents		80,081			113,863
Investments in available-for-sale securities (at fair value)		25,492			23,596
Federal Home Loan Bank stock, at cost		4,339			4,339
Loans, net of allowance for loan losses of $3,213 as of December 31,
2010 (unaudited) and $3,203 as of September 30, 2010		394,497			377,664
Loans held for sale		—			260
Other real estate owned		353			795
Premises and equipment		3,234			3,257
Accrued interest receivable		1,415			1,589
Cash surrender value of life insurance policies		11,786			11,670
Deferred income tax asset, net		5,462			5,647
Other assets		3,538			3,257
Total assets	$	530,197		$	545,937
LIABILITIES AND STOCKHOLDER’S EQUITY
Deposits:
Noninterest-bearing	$	33,260		$	35,359
Interest-bearing		350,044			355,480
Total deposits		383,304			390,839
Federal Home Loan Bank advances		24,000			33,000
Other liabilities		7,293			7,738
Total liabilities		414,597			431,577
Stockholder’s Equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued		—			—
Common Stock, $.01, par value, 100,000,000 shares authorized, 7,141,500
shares issued and outstanding		71			71
Additional paid-in-capital		69,343			69,331
Retained earnings		51,583			50,606
Accumulated other comprehensive income		20			65
Unearned ESOP shares		(5,417	)		(5,713	)
Total stockholder’s equity		115,600			114,360
Total liabilities and stockholder’s equity	$	530,197		$	545,937

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

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PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	December 31
	2010		2009
	(In Thousands) (unaudited)
Interest and dividend income:
Interest and fees on loans	$	5,076	$	5,131
Interest on debt securities:
Taxable		75		59
Other interest		44		17
Total interest and dividend income		5,195		5,207
Interest expense:
Interest on deposits		890		1,320
Interest on Federal Home Loan Bank advances		245		473
Total interest expense		1,135		1,793
Net interest and dividend income		4,060		3,414
Provision for loan losses		60		—
Net interest and dividend income after provision for loan losses		4,000		3,414
Noninterest income:
Customer service fees		209		209
Loan servicing fees		26		26
Net gain on sales of mortgage loans		99		73
Net gain on sales of available-for-sale securities		—		210
Income on cash surrender value of life insurance		117		100
Other income		88		33
Total noninterest income		539		651
Noninterest expense
Salaries and employee benefits		2,004		1,746
Occupancy expense		208		192
Equipment expense		109		105
Professional fees		113		125
Advertising expense		33		42
Data processing expense		186		118
Deposit insurance expense		123		115
Other expense		324		208
Total noninterest expense		3,100		2,651
Income before income taxes		1,439		1,414
Income tax expense		462		556
Net income	$	977	$	858
Earnings per common share:
Basic	$	0.15		N/A
Diluted	$	0.15		N/A

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

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PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 For the Three Months Ended December 31, 2010 and 2009 (unaudited)

(In Thousands)

	Common Stock		Additional Paid-in Capital		Retained Earnings		Unearned ESOP Shares		Accumulated other Comprehensive (Loss) Income			Total
Balance, September 30, 2009	$	—	$	—	$	50,770	$	—	$	173		$	50,943
Comprehensive income:
Net income		—		—		858		—		—			—
Net change in unrealized holding gain on available-for-sale securities, net of tax effect		—		—		—		—		(149	)
Comprehensive income		—		—		—		—		—			709
Balance, December 31, 2009	$	—	$	—	$	51,628	$	—	$	24		$	51,652

Balance, September 30, 2010	$	71	$	69,331	$	50,606	$	(5,713	)	$	65		$	114,360
Comprehensive income:
Net income		—		—		977		—			—			—
Net change in unrealized holding gain on available-for-sale securities, net of tax effect		—		—		—		—			(45	)		—
Comprehensive income		—		—		—		—			—			932
ESOP shares committed to be released		—		12		—		296			—			308
Balance, December 31, 2010	$	71	$	69,343	$	51,583	$	(5,417	)	$	20		$	115,600

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

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PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended December 31,
	2010			2009
	(In Thousands) (unaudited)
Cash flows from operating activities:
Net income	$	977		$	858
Adjustments to reconcile net income to net cash provided by operating activities:
Change in loans held-for-sale		260			—
Amortization of securities, net		(5	)		1
Net gain on sales of available-for-sale securities		—			(210	)
Provision for loan losses		60			—
Change in net deferred loan fees		67			(234	)
Depreciation and amortization		90			99
Writedown of real estate owned		28			—
Unearned compensation ESOP		308			—
Decrease (increase) in accrued interest receivable		174			(1	)
Income on cash surrender value of life insurance		(116	)		(100	)
Increase in other assets		(528	)		(2,237	)
Decrease in accrued expenses and other liabilities		(443	)		(1,027	)
Decrease in prepaid income taxes		247			84
Increase in taxes payable		—			204
Deferred income tax expense		215			75
Net cash provided by (used in) operating activities		1,334			(2,488	)
Cash flows from investing activities:
Purchases of available-for-sale securities		(9,000	)		—
Proceeds from sales of available-for-sale securities		—			4,839
Proceeds from maturities, payments and calls of available-for-sale securities		7,033			493
Loan originations and principal collections, net		(6,927	)		9,316
Loans purchased		(10,033	)		(20,587	)
Proceeds from the sale of real estate owned		414			—
Capital expenditures		(67	)		(64	)
Net cash used in investing activities		(18,580	)		(6,003	)

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

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PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

	Three Months
	Ended December 31,
	2010			2009
	(In Thousands) (unaudited)
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW and savings accounts		(6,839	)		7,104
Net decrease in time deposits		(697	)		(3,060	)
Proceeds from Federal Home Loan Bank advances		—			2,000
Repayment of Federal Home Loan Bank advances		(9,000	)		(6,000	)
Net cash (used in) provided by financing activities		(16,536	)		44
Net decrease in cash and cash equivalents		(33,782	)		(8,447	)
Cash and cash equivalents at beginning of period		113,863			88,634
Cash and cash equivalents at end of period	$	80,081		$	80,187
Supplemental disclosures:
Interest paid	$	1,139		$	1,823
Income taxes paid		1			193

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

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PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - NATURE OF OPERATIONS

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

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

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

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

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

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

NOTE 2 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Peoples Federal Bancshares, Inc., and its wholly owned subsidiary, Peoples Federal Savings Bank as of December 31, 2010 and September 30, 2010.  For the three months ended December 31, 2009, the consolidated financial statements include the accounts of Peoples Federal MHC and its wholly-owned subsidiary, Peoples Federal Bancorp, Inc. and its wholly-owned subsidiary, Peoples Federal Savings Bank.  All significant intercompany accounts and transactions have been eliminated in the consolidation.

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

The financial statements have been prepared in accordance with generally accepted accounting principles.  In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly

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susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted.  Operating results for the three month period ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011.  The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Peoples Federal Bancshares, Inc.’s form 10-K dated September 30, 2010.

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

NOTE 3 - RECENT PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166, “Accounting for Transfers of Financial Assets”, and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”  These standards are effective for the first interim reporting period of 2010.  SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10.  Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approa ch, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE.  The adoption had no impact on the Company’s financial statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements.”  The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers.  The disclosures are effective for reporting periods beginning after December 15, 2009.  The Company adopted ASU 2010-06 as of January 1, 2010.  The required disclosures are included in Note 6.  Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy will be required for fiscal years beginning after December 15, 2010.

In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.”  The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting.  The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition.  At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading.  The new rules are effective July 1, 2010.  The Company is currently analyzing the impact of the changes to d etermine the population of instruments that may be reclassified to trading upon adoption.

In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.” As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early a pplication is permitted.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is created to provide financial statement users with greater

7

transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The amendments in this ASU are effective as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The required disclosures are included in Note 5.

In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other.”   This ASU address when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.   For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”   This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earning disclosure requirements for business combinations.    The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.

NOTE 4 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.  The amortized cost of investment securities and their approximate fair values are as follows:

	Amortized		Gross				Gross
	Cost		Unrealized		Unrealized		Fair
	Basis		Gains		Losses		Value
	(In Thousands)
December 31, 2010 (unaudited):
Debt securities issued by U.S. government corporations and agencies	$	24,993	$	34	$	44	$	24,983
Mortgage-backed securities		465		44		—		509
	$	25,458	$	78	$	44	$	25,492

September 30, 2010:
Debt securities issued by U.S. government corporations and agencies	$	23,000	$	66	$	—	$	23,066
Mortgage-backed securities		486		44		—		530
	$	23,486	$	110	$	—	$	23,596

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows:

	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
December 31, 2010 (unaudited):
Debt securities issued by U.S. government corporations and agencies	$	9,956	$	44	$	—	$	—	$	9,956	$	44
Total temporarily impaired securities	$	9,956	$	44	$	—	$	—	$	9,956	$	44

Unrealized losses on debt securities as December 31, 2010 are due to changes in market interest rates and are deemed to be temporary.  The Company has the intent and ability to hold the securities until cost recovery occurs.

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

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS:

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

Interest on loans is recognized on a simple interest basis.

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

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

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

ALLOWANCE FOR LOAN LOSSES:

We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology.  All loan losses are charged to the allowance for loan losses and all recoveries are credited to it.  Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.  We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP.  The allowance for loan losses consists primarily of two components:

(1)           Specific allowances established for impaired loans (as defined by GAAP).  The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the fair value of the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and

(2)           General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans.  The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group.  The loss rates applied are based upon our loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

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The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:

· changes in any concentration of credit (including, but not limited to, concentrations by geography, industry or collateral type);

· changes in the number and amount of non-accrual loans, watch list loans and past due loans;

· changes in national, state and local economic trends;

· changes in the types of loans in the loan portfolio;

· changes in the experience and ability of personnel and management in the mortgage loan origination and loan servicing departments;

· changes in the value of underlying collateral for collateral dependent loans;

· changes in lending strategies; and

· changes in lending policies and procedures.

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

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

Consumer loans – Loans in this segment are both secured and unsecured and repayment is dependent on the credit quality of the individual borrower.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrow er’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures

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Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components.  Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase.  Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

Loans consisted of the following as of December 31, 2010 (unaudited) and September 30, 2010:

	December 31, 2010			September 30, 2010
	(In Thousands)
Mortgage loans:
Residential loans:
One-to-four family	$	246,394		$	239,257
Multi-family		58,328			47,880
Commercial real estate		66,502			67,901
Construction loans		19,984			19,384
Total mortgage loans		391,208			374,422
Consumer loans		1,966			2,113
Commercial loans		4,589			4,452
		397,763			380,987
Deferred loan origination fees, net		(53	)		(120	)
Allowance for loan losses		(3,213	)		(3,203	)
Loans, net	$	394,497		$	377,664

Changes in the allowance for loan losses were as follows for the three months ended December 31, 2010 (unaudited) and December 31, 2009:

	December 31, 2010			December 31, 2009
	(In Thousands)
Balance at beginning of period	$	3,203		$	3,204
Loans charged off		(50	)		(54	)
Recoveries of loans previously charged off		–			–
Provision for loan losses		60			–
Balance at end of period	$	3,213		$	3,150

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Further information pertaining to the allowance for loan losses at December 31, 2010 follows:

	Residential Loans
	One to Four Family		Multi Family Loans		Commercial Real Estate		Construction Loans		Consumer		Commercial		Total
Amount of allowance for loan losses for loans deemed to be impaired	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for loans not deemed to be impaired		1,648		491		715		229		26		104		3,213
Loans deemed to be impaired as of December 31, 2010		1,093		—		2,929		1,868		—		—		5,890
Loans not deemed to be impaired as of December 31, 2010		245,301	$	58,328	$	63,573	$	18,116	$	1,966	$	4,589	$	391,873

The following is a summary of past due and non accrual loans at December 31, 2010:

	Age Analysis of Past Due Loans
	As of December 31, 2010
	30 to 59 Days		60 to 89 Days		Greater  than 90  Days		Total Past Due		Total Current		Total Loans		Non-Accrual Loans
	(In Thousands) (Unaudited)
One to four family	$	—	$	1,622	$	2,016	$	3,638	$	242,756	$	246,394	$	2,016
Multi family		—		202		—		202		58,126		58,328		—
Commercial real estate		—		—		225		225		66,277		66,502		225
Construction loans		—		—		—		—		19,984		19,984		—
Total Mortgage loans		—		1,824		2,241		4,065		387,143		391,208		—
Consumer loans		6		9		—		15		1,951		1,966		—
Commercial loans		—		13		—		13		4,576		4,589		—
Total	$	6	$	1,846	$	2,241	$	4,093	$	393,670	$	397,763	$	2,241

At December 31, 2010, the Company had no loans that were 90 days or more delinquent and which were accruing interest.

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Information about loans that meet the definition of an impaired loan in ASC 310-10-35 as of December 31, 2010:

	Impaired Loans
	As of December 31, 2010						Three months ended December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Mortgage loans:
One to four family	$	1,093		1,093		—		1,093		32
Multi family		—		—		—		—		—
Commercial real estate		2,929		2,929		—		2,908		95
Construction loans		1,868		1,868		—		1,930		24
Total mortgage loans		5,890		5,890		—		5,931		151
Consumer loans		—		—		—		—		—
Commercial loans		—		—		—		—		—
Total impaired with no related allowance:	$	5,890		5,890		—		5,931		151
With a related allowance recorded:
Mortgage loans:
One to four family	$	—		—		—		—		—
Multi family		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Construction loans		—		—		—		—		—
Total mortgage loans		—		—		—		—		—
Consumer loans		—		—		—		—		—
Commercial loans		—		—		—		—		—
Total impaired with related allowance:	$	—		—		—		—		—
Total impaired loans:	$	5,890	$	5,890		—	$	5,931	$	151

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 At or for the year ended September 30, 2010   

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

CREDIT QUALITY INFORMATION:

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

Loans rated 1, 2, 3a and 3b:  Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4:  Loans in this category are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 5:  Loans in this category are considered “substandard.”   Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged.   There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6:  Loans in this category are considered “doubtful.”  Loans classified as doubtful have all the weakness inherent in those classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 7:  Loans in this category are considered uncollectible “loss” and of such little value that their continuance as loans is not warranted.

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

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The following table presents the Company’s loans by risk rating at December 31, 2010.

	Credit Risk Profile by Credit Worthiness Category
	As of December 31, 2010
	One to  Four  Family		Multi  Family  Loans		Commercial Real Estate		Construction Loans		Consumer		Commercial		Total
	(Dollars in thousands)
							(Unaudited)
Pass	$	242,972	$	55,805	$	62,889	$	15,516	$	1,966	$	4,589	$	383,737
Special Mention		993		2,321		—		4,468		—		—		7,782
Substandard		2,429		202		3,613		—		—		—		6,244
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	246,394	$	58,328	$	66,502	$	19,984	$	1,966	$	4,589	$	397,763

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NOTE 6 - FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for December 31, 2010 (unaudited) and September 30, 2010.

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

The Company’s investment in securities available-for-sale is generally classified within level 2 of the fair value hierarchy.  For these securities, we obtain fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

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

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

The following summarizes assets measured at fair value for the period ending December 31, 2010 (unaudited) and September 30, 2010.

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ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

	Fair Value Measurements at Reporting Date Using:
	December 31, 2010		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
(In Thousands)
(unaudited)
Trading securities	$	715	$	715	$	−	$	−
Securities available-for-sale		25,458		−		25,458		−
Totals	$	26,173	$	715	$	25,458	$	−
	Fair Value Measurements at Reporting Date Using:
	September 30, 2010		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
(In Thousands)
Trading securities	$	712	$	712	$	—	$	—
Securities available-for-sale		23,596		—		23,596		—
Totals	$	24,308	$	712	$	23,596	$	—

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.  The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at December 31, 2010 (unaudited) and September 30, 2010, for which a nonrecurring change in fair value has been recorded:

	Fair Value Measurements at Reporting Date Using:
	December 31, 2010		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
(In Thousands)
(unaudited)
Impaired loans	$	—	$	—	$	—	$	—
Totals	$	—	$	—	$	—	$	—
	Fair Value Measurements at Reporting Date Using:
	September 30, 2010		Quoted Prices in  Active Markets for  Identical Assets Level 1		Significant  Other Observable  Inputs Level 2		Significant Unobservable Inputs Level 3
(In Thousands)
Impaired loans	$	—	$	—	$	—	$	—
Totals	$	—	$	—	$	—	$	—

There were no significant transfers in and out of Level 1 and 2 during the three months ended December 31, 2010.

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The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:

	December 31, 2010				September 30, 2010
	Carrying  Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
	(unaudited)
Financial assets:
Cash and cash equivalents	$	80,081	$	80,081	$	113,863	$	113,863
Trading securities		715		715		712		712
Available-for-sale securities		25,492		25,492		23,596		23,596
Federal Home Loan Bank stock		4,339		4,339		4,339		4,339
Loans, net		394,497		399,207		377,664		373,202
Loans held for sale		—		—		260		263
Accrued interest receivable		1,415		1,415		1,589		1,589
Financial liabilities:
Deposits		383,304		382,879		390,839		391,707
Federal Home Loan Bank advances		24,000		24,708		33,000		33,987

NOTE 7 – EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. The Company has no dilutive potential common shares for the three month period ended December 31, 2010.   The mutual to stock conversion was completed on  July 6, 2010, therefore, per share earnings data are not presented for the three months ended December 31, 2009.

(Dollars in thousands, except per share data)	Three Months Ended December 31, 2010
Basic
Net income	$	977
Shares:
Weighted average common shares outstanding		6,579,702
Income per common share, basic	$	0.15

NOTE 8 – EMPLOYEE STOCK OWNERSHIP PLAN

Effective January 1, 2010, the Company adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $5.7 million from the Company and used those funds to acquire 571,300 shares or 8% of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Peoples Federal Savings Bank’s contributions to the ESOP and dividends payable on stock, if any. The interest rate on the ESOP loan is an adjustable rate equal to the lowest prime rate, as published in The Wall Street Journal. The interest rate will adjust annually and will be the prime rate on the first business day of the calendar year.

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Shares purchased by the ESOP will be held by a trustee in an unallocated suspense account, and shares will be released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, Peoples Federal Savings Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders’ equity. Compensation expense recognized for the three months ended December 31, 2010 amounted to $83,000.

Shares held by the ESOP trust at December 31, 2010 (unaudited) were as follows:

Shares committed to be released		28,566
Unearned shares		542,754
Total Employee Stock Ownership Plan Shares		571,320
Fair value of unearned shares, in thousands	$	7,061

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended December 31, 2010 and 2009 is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Overview of Income and Expense

Income

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

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

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

Expenses

The Company’s largest expense is our interest expense which is the interest expense we pay on our deposits and borrowings.  The expenses the Company incurs in operating its business consist of salaries and employee benefits, occupancy, equipment expense, external processing fees, FDIC assessments, director fees and other non-interest expense.

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

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

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

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:

· statements of our goals, intentions and expectations;

20

· statements regarding our business plans, prospects, growth and operating strategies;

· statements regarding the asset quality of our loan and investment portfolios; and

· estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

· general economic conditions, either nationally or in our market areas, that are worse than expected;

· competition among depository and other financial institutions;

· inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

· adverse changes in the securities markets;

· changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

· our ability to enter new markets successfully and capitalize on growth opportunities;

· our ability to successfully integrate acquired entities, if any;

· changes in consumer spending, borrowing and savings habits;

· changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

· changes in our organization, compensation and benefit plans;

· changes in our financial condition or results of operations that reduce capital available to pay dividends; and

· changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

Critical accounting policies are those which involve significant judgments and assessments by management and which could potentially result in materially different results under different assumptions and conditions.  As discussed in the Company’s 2010 Annual Report on Form 10-K, the Company considers allowance for loan losses and income taxes to be our critical accounting policies.  The Company’s critical accounting policies have not changed from September 30, 2010.

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

At December 31, 2010, our total assets were $530.2 million, a decrease of $15.7 million, or 2.9%, from total assets of $545.9 million at September 30, 2010. Loans, net increased $16.8 million, or 4.5%, to $394.5 million at December 31, 2010 from $377.7 million at September 30, 2010.   Investments in available-for-sale securities increased to $25.5 million at December 31, 2010 from $23.6 million at September 30, 2010, due primarily to the purchase of available for sale securities and principal repayments of these securities.  At December 31, 2010, cash and due from banks totaled $80.1 million as compared to $113.9 million at September 30, 2010, representing a $33.8 million, or 29.7% decrease, as the Company used available liquidity to invest in loans and securities and to repay advances from the FHLB of Boston.

Deposits decreased by $7.5 million, or 1.9%, to $383.3 million at December 31, 2010 from $390.8 million at September 30, 2010.  During the period, the decrease resulted in part from a decrease in demand deposit accounts to $33.3 million from $35.4 million, a decrease in our certificates of deposit to $123.3 million from $124.0 million, a decrease in our money market deposit accounts to $145.8 from $154.5 million, a increase in NOW accounts to $34.2 million from $31.7 million, offset partially by a increase in savings accounts to $46.7 million from $45.3 million.

Borrowings, consisting entirely of FHLB advances, decreased $9.0 million to $24.0 million at December 31, 2010 from $33.0 million at September 30, 2010,  the Company used liquidity to pay down these borrowings.

Total equity totaled $115.6 million at December 31, 2010 from $114.4 million at September 30, 2010.  The increase resulted primarily from net income of $977,000 for the three months ended December 31, 2010.  Total equity was negatively impacted by $45,000 in other comprehensive loss, consisting of a decrease in net unrealized gains, net of tax, on available-for-sale securities. The change in net unrealized gains or losses on securities classified as available-for-sale is affected by market interest rates and other conditions and, therefore, can fluctuate daily.  Other comprehensive income or loss does not include changes in fair value of other financial instruments reflected on the balance sheet.

Comparison of Operating Results for the Three Months Ended December 31, 2010 and 2009

General.  We recorded net income of $977,000 for the three months ended December 31, 2010 compared to net income of $858,000 for the three months ended December 31, 2009. Net interest and dividend income increased period over period to $4.1 million from $3.4 million which was partially offset by an increase in noninterest expense to $3.1 million for the three months ended December 31, 2010 from $2.7 million for the year earlier period and by a decrease in noninterest income to $539,000 for the 2010 quarter from $651,000 for the 2009 quarter.

Interest and Dividend Income.  Interest and dividend income remained unchanged at $5.2 million for the three months ended December 31, 2010 and 2009. Average interest-earning assets increased to $485.3 million for the 2010 period compared to $448.2 million for the 2009 period while the average yield on interest-earning assets decreased to 4.28% from 4.65% during the periods.  The decrease in market interest rates contributed to the downward re-pricing of a portion of our existing assets and to lower rates for new assets.

Interest income on loans remained unchanged at $5.1 million for both the three months ended December 31, 2010 and December 31, 2009.   The average balance of our loans increased for the three month period ended December 31, 2010 to $383.9 million from $362.3 million for the period ended  December 31, 2009.   The average yield on loans decreased to 5.29% from 5.66%, reflecting the impact of decreases in interest rates on our adjustable-rate loan products, as well as decreased rates on newly originated loans based on lower market interest rates.  Interest income on taxable investment securities increased to $75,000 for the three months ended December 31, 2010 from $59,000 for the three months ended December 31, 2009, reflecting the increase in the average balance of such securities to $26.0 million from $5.4 million.   The average yield on such securities decreased to 1.15% for the quarter ended December 31, 2010 from 4.38% for the quarter ended December 31, 2009, as newer investments carried a lower yield.

Interest Expense.  Interest expense decreased $658,000, or 36.7%, to $1.1 million for the three months ended December 31, 2010 from $1.8 million for the three months ended December 31, 2009.  The decrease reflected a decrease in the average rate paid on deposits and borrowings in the 2010 period to 1.18%, compared to an average rate paid of 1.81% in the 2009 period, which more than offset an increase of $12.0 million in the average balance of such deposits and borrowings to $383.9 million for the 2010 quarter versus $395.9 million during the 2009 quarter.

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Interest expense on money market accounts decreased to $323,000 for the quarter ended December 31, 2010 from $603,000 for the quarter ended December 31, 2009, a decrease of $280,000, or 46.4%, reflecting a $4.1 million decrease in the average balance of these accounts during the December 31, 2010 quarter to $150.8 million, from an average balance of $154.9 million during the quarter ended December 31, 2009. The average cost of these accounts decreased to 0.86% for the quarter ended December 31, 2010 from 1.56% for the 2009 quarter reflecting lower market rates.  Interest expense on certificates of deposit decreased to $495,000 for the three months ended December 31, 2010 from $590,000 for the three months ended December 31, 2009, as the average balance of such certificates increas ed to $124.0 million from $110.5 million, and the average rate paid on these certificates decreased to 1.60% for the quarter ended December 31, 2010 from 2.14% for the quarter ended December 31, 2009.  The increase in the average balance of our certificates of deposit resulted primarily from our customers seeking higher returns in our money market accounts which we competitively priced, while the decrease in the average cost of such certificates and other deposits reflected lower market interest rates.

Interest expense on borrowings, which were solely advances from the Federal Home Loan Bank of Boston, was $245,000 for the quarter ended December 31, 2010 versus $473,000 for the year earlier period, reflecting a lower average balance of borrowings during the 2010 period.

Net Interest and Dividend Income.  Net interest and dividend income increased to $4.1 million for the three months ended December 31, 2010 from $3.4 million for the three months ended  December 31, 2009. The increase in net interest and dividend income in the quarter ended December 31, 2010 was positively impacted by lower market interest rates on our deposit portfolio, offset in part by the impact of lower market interest rates on our loan portfolio and the change in the overall mix of our interest-earning assets.  Our interest rate spread and net interest margin both increased period to period. The interest rate spread and net interest margin were 3.10% and 3.35%, respectively, during the quarter ended December 31, 2010, compared to 2.84% and 3.05%, respectively, for the 2009 quarter.  Additionally, the ratio of our average interest-earning assets to average interest-bearing liabilities increased to 126.39% during the quarter ended December 31, 2010 from 113.22% during the quarter ended December 31, 2009.  The increase in our average interest-earning assets to average interest-bearing liabilities ratio reflects our application of the net proceeds from the stock offering into interest-earnings assets and our paydown of advances from the Federal Home Loan Bank of Boston.

Provision for Loan Losses. We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming loans.  The amount of the allowance is based on estimates and the ultimate losses may var y from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change or as more information becomes available. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as required in order to maintain the allowance.

Based on the above factors, we recorded a $60,000 provision for loan losses for the three months ended December 31, 2010 as compared to no provision for loan losses for the three months ended December 31, 2009.  The allowance for loan losses was $3.2 million, or 0.81%, of total loans for December 31, 2010 as compared to 0.85% for December 31, 2009.  Total non-performing assets were $2.2 million at December 31, 2010 compared to $5.3 million at December 31, 2009.   While we used the same methodology in assessing the allowance for both periods, we increased the impact of qualitative factors in the first quarter of fiscal 2010 to reflect further deterioration in the economy.  To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three mon ths ended December 31, 2010 and 2009.

Noninterest Income.  Noninterest income decreased to $539,000 for the three months ended December 31, 2010 from $651,000 for the three months ended December 31, 2009.  The decrease in noninterest income was due to a reduction in the gain on the sale on securities to $0 for the three months ended December 31, 2010 from $210,000 for the three months ended December 31, 2009.  The decline was partially offset by an increase in other income of $55,000 to $88,000 for the three months ended December 31, 2010 from $33,000 for the three months ended December 31, 2009.  In addition, income derived from life insurance policies increased to $117,000 for the quarter ending December 31, 201 0 from $100,000 for the three months ended December 31, 2009.  The net gain from the sale of mortgage loans increased to $99,000 for the three months ended December 31, 2010 from $73,000 for the three months ended December 31, 2009.

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Noninterest Expense.  Noninterest expense increased $449,000, or 16.9%, to $3.1 million for the three month period ended December 31, 2010 from $2.7 million for the three month period ended December 31, 2009.

The increase in noninterest expense was attributable to increases in salaries and employee benefits (which increased to $2.0 million from $1.7 million), FDIC insurance premiums (which increased to $123,000 from $115,000, occupancy expense (which increased to $208,000 from $192,000), equipment expense (which increased to $109,000 from $105,000) and other expense (which increased to $324,000 from $208,000), and data processing fees (which increased to $186,000 from $118,000). These decreases were partially offset by professional fees expense (which decreased to $113,000 from $125,000, and advertising expense (which decreased slightly to $33,000 from $42,000).

Income Tax Expense.  The provision for income taxes was $462,000 for the three months ended December 31, 2010 compared to $556,000 for the three months ended December 31, 2009, reflecting slightly higher pre-tax income in the 2010 quarter of $1.44 million versus pre-tax income of $1.41 million for the 2009 quarter.  Our effective tax rate was 32.1% for the three months ended December 31, 2010 compared to 39.3% for the three months ended  December 31, 2009.

Liquidity Management .   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, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Boston.  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.

We regularly 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 policy.

Our most liquid assets are cash and cash equivalents and interest-bearing deposits.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At December 31, 2010, cash and cash equivalents totaled $80.1 million.  Securities classified as available for sale provide additional sources of liquidity.  On December 31, 2010, we had $24.0 million of borrowings outstanding with the Federal Home Loan Bank of Boston and we had the ability to borrow an additional $79.6 million from the Federal Home Loan Bank of Boston.

At December 31, 2010, we had $35.9 million in loan commitments outstanding, which consisted of $3.8 million of real estate loan commitments, $17.4 million in unused home equity lines of credit, $4.2 million in construction loan commitments, $4.8 million in commercial lines of credit commitments and $635,000 in consumer loan commitments.  Certificates of deposit due within one year of December 31, 2010 totaled $95.8 million, or 77.7% of certificates of deposit.  This percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent interest rate environment.  If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. &# 160;Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2011.  We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management.   The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision, 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 December 31, 2010, we exceeded all of our regulatory capital requirements.  We are considered “well-capitalized” under regulatory guidelines.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Registrant is a smaller reporting company.

ITEM 4.  Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)

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 promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2010. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended December 31, 2010, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.    Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A. Risk Factors

There have been no material changes to the risk factors which were presented in the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2010.

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

(a) There were no sales of unregistered securities during the period covered by this Report.

(b) Not applicable.

(c) There were no issuer repurchases of securities during the period covered by this Report.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    [Reserved]

Item 5.    Other Information

None.

Item 6.    Exhibits

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.

		PEOPLES FEDERAL BANCSHARES, INC.
Date:	February 14, 2011	/s/ Maurice H. Sullivan, Jr.
.		Maurice H. Sullivan, Jr
		Chief Executive Officer
Date:	February 14, 2011	/s/ Christopher Lake
		Christopher Lake
		Chief Financial Officer

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