Exhibit
13.0
 
 Annual
Report





Pulaski
      Financial Corp.
                          2010
      Annual
Report





Business
of the Company




Pulaski
Financial Corp. (the “Company”) is a diversified, community-based, financial
institution holding company headquartered in St. Louis, Missouri. We conduct
operations primarily through Pulaski Bank, a federally chartered savings bank
(“Pulaski” or the “Bank”).  Pulaski Bank provides an array of
financial products and services for businesses and consumers primarily through
its twelve full-service offices in the St. Louis metropolitan area and six loan
production offices in the St. Louis and Kansas City metropolitan
areas.




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


- 1
-


Selected
Consolidated Financial Information





At or for the Years Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(In thousands, except per share amounts)FINANCIAL
      CONDITION DATATotal
      assets
                  
                  $
                  1,452,817
                  
                  
                  $
                  1,406,426
                  
                  
                  $
                  1,304,150
                  
                  
                  $
                  1,131,465
                  
                  
                  $
                  962,467Loans
      receivable, net
                  
                  
                  1,046,273
                  
                  
                  
                  1,132,095
                  
                  
                  
                  1,088,737
                  
                  
                  
                  949,826
                  
                  
                  
                  785,199Mortgage
      loans held for sale
                  
                  
                  253,578
                  
                  
                  
                  109,130
                  
                  
                  
                  71,966
                  
                  
                  
                  58,536
                  
                  
                  
                  60,452Debt
      and equity securities
                  
                  
                  8,001
                  
                  
                  
                  1,997
                  
                  
                  
                  144
                  
                  
                  
                  16,399
                  
                  
                  
                  16,860Capital
      stock of Federal Home Loan Bank
                  
                  
                  9,774
                  
                  
                  
                  11,650
                  
                  
                  
                  10,896
                  
                  
                  
                  8,306
                  
                  
                  
                  9,524Mortgage-backed
      securities
                  
                  
                  19,142
                  
                  
                  
                  28,165
                  
                  
                  
                  25,925
                  
                  
                  
                  3,027
                  
                  
                  
                  3,631Cash
      and cash equivalents
                  
                  
                  15,603
                  
                  
                  
                  37,451
                  
                  
                  
                  29,078
                  
                  
                  
                  23,774
                  
                  
                  
                  22,123Deposits
                  
                  
                  1,115,203
                  
                  
                  
                  1,191,629
                  
                  
                  
                  915,311
                  
                  
                  
                  835,489
                  
                  
                  
                  655,577Advances
      from the Federal Home Loan Bank
                  
                  
                  181,000
                  
                  
                  
                  61,000
                  
                  
                  
                  210,600
                  
                  
                  
                  158,400
                  
                  
                  
                  172,800Borrowings
      from the Federal Reserve
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  40,000
                  
                  
                  
                  —
                  
                  
                  
                  —Subordinated
      debentures
                  
                  
                  19,589
                  
                  
                  
                  19,589
                  
                  
                  
                  19,589
                  
                  
                  
                  19,589
                  
                  
                  
                  19,589Stockholders’
      equity – preferred
                  
                  
                  31,088
                  
                  
                  
                  30,655
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Stockholders’
      equity – common
                  
                  
                  85,625
                  
                  
                  
                  86,306
                  
                  
                  
                  82,361
                  
                  
                  
                  80,804
                  
                  
                  
                  75,827OPERATING
      DATAInterest
      and dividend income
                  
                  $
                  65,104
                  
                  
                  $
                  67,823
                  
                  
                  $
                  73,266
                  
                  
                  $
                  70,925
                  
                  
                  $
                  53,843Interest
      expense
                  
                  
                  18,392
                  
                  
                  
                  26,215
                  
                  
                  
                  37,653
                  
                  
                  
                  41,834
                  
                  
                  
                  29,027Net
      interest income
                  
                  
                  46,712
                  
                  
                  
                  41,608
                  
                  
                  
                  35,613
                  
                  
                  
                  29,091
                  
                  
                  
                  24,816Provision
      for loan losses
                  
                  
                  26,064
                  
                  
                  
                  23,031
                  
                  
                  
                  7,735
                  
                  
                  
                  3,855
                  
                  
                  
                  1,501Net
      interest income after provision for loan losses
                  
                  
                  20,648
                  
                  
                  
                  18,577
                  
                  
                  
                  27,878
                  
                  
                  
                  25,236
                  
                  
                  
                  23,315Securities
      gains (losses)
                  
                  
                  —
                  
                  
                  
                  303
                  
                  
                  
                  (7,774
                  )
                  
                  
                  273
                  
                  
                  
                  123Gain
      on branch sale
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,474Other
      non-interest income
                  
                  
                  14,840
                  
                  
                  
                  19,264
                  
                  
                  
                  12,785
                  
                  
                  
                  10,748
                  
                  
                  
                  9,862Total
      non-interest expense
                  
                  
                  31,936
                  
                  
                  
                  31,437
                  
                  
                  
                  29,316
                  
                  
                  
                  22,773
                  
                  
                  
                  20,511Income
      before income taxes
                  
                  
                  3,552
                  
                  
                  
                  6,707
                  
                  
                  
                  3,573
                  
                  
                  
                  13,484
                  
                  
                  
                  15,263Income
      taxes
                  
                  
                  259
                  
                  
                  
                  1,630
                  
                  
                  
                  684
                  
                  
                  
                  4,501
                  
                  
                  
                  5,425Net
      income
                  
                  
                  3,293
                  
                  
                  
                  5,077
                  
                  
                  
                  2,889
                  
                  
                  
                  8,983
                  
                  
                  
                  9,838Preferred
      stock dividends declared and discount accretion
                  
                  
                  2,060
                  
                  
                  
                  1,265
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Income
      available to common shares.
                  
                  $
                  1,233
                  
                  
                  $
                  3,812
                  
                  
                  $
                  2,889
                  
                  
                  $
                  8,983
                  
                  
                  $
                  9,838COMMON
      SHARE DATABasic
      earnings per common share
                  
                  $
                  0.12
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.29
                  
                  
                  $
                  0.92
                  
                  
                  $
                  1.07Diluted
      earnings per common share
                  
                  $
                  0.12
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.28
                  
                  
                  $
                  0.88
                  
                  
                  $
                  1.01Dividends
      declared per common share
                  
                  $
                  0.38
                  
                  
                  $
                  0.38
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.35
                  
                  
                  $
                  0.33Book
      value per common share
                  
                  $
                  7.87
                  
                  
                  $
                  8.31
                  
                  
                  $
                  8.06
                  
                  
                  $
                  8.13
                  
                  
                  $
                  7.62Weighted
      average common shares – basic
                  
                  
                  10,381
                  
                  
                  
                  10,179
                  
                  
                  
                  9,914
                  
                  
                  
                  9,814
                  
                  
                  
                  9,206Weighted
      average common shares – diluted
                  
                  
                  10,627
                  
                  
                  
                  10,402
                  
                  
                  
                  10,239
                  
                  
                  
                  10,256
                  
                  
                  
                  9,718Common
      shares outstanding at end of period
                  
                  
                  10,838
                  
                  
                  
                  10,389
                  
                  
                  
                  10,216
                  
                  
                  
                  9,935
                  
                  
                  
                  9,946


- 2
-





At or for the Years Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006KEY
      OPERATING RATIOSReturn
      on average assets
                  
                  
                  0.24
                  %
                  
                  
                  0.36
                  %
                  
                  
                  0.23
                  %
                  
                  
                  0.85
                  %
                  
                  
                  1.14
                  %Return
      on average total equity
                  
                  
                  2.80
                  
                  
                  
                  4.64
                  
                  
                  
                  3.34
                  
                  
                  
                  11.07
                  
                  
                  
                  14.98Return
      on average common equity
                  
                  
                  1.42
                  
                  
                  
                  4.36
                  
                  
                  
                  3.34
                  
                  
                  
                  11.07
                  
                  
                  
                  14.98Interest
      rate spread
                  
                  
                  3.34
                  
                  
                  
                  2.85
                  
                  
                  
                  2.81
                  
                  
                  
                  2.63
                  
                  
                  
                  2.87Net
      interest margin
                  
                  
                  3.54
                  
                  
                  
                  3.10
                  
                  
                  
                  3.08
                  
                  
                  
                  2.97
                  
                  
                  
                  3.12Efficiency
      ratio
                  
                  
                  52.12
                  
                  
                  
                  51.24
                  
                  
                  
                  61.19
                  
                  
                  
                  58.63
                  
                  
                  
                  58.59Dividend
      payout ratio
                  
                  
                  316.67
                  
                  
                  
                  102.70
                  
                  
                  
                  130.36
                  
                  
                  
                  39.20
                  
                  
                  
                  32.67Non-interest
      expense to average assets
                  
                  
                  2.30
                  
                  
                  
                  2.21
                  
                  
                  
                  2.40
                  
                  
                  
                  2.22
                  
                  
                  
                  2.36Average
      interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  114.41
                  
                  
                  
                  112.77
                  
                  
                  
                  108.29
                  
                  
                  
                  107.79
                  
                  
                  
                  106.96Allowance
      for loan losses to total loans receivable at end of period
                  
                  
                  2.52
                  
                  
                  
                  1.79
                  
                  
                  
                  1.16
                  
                  
                  
                  1.09
                  
                  
                  
                  0.99Allowance
      for loan losses to non-performing loans
                  
                  
                  45.29
                  
                  
                  
                  34.68
                  
                  
                  
                  61.76
                  
                  
                  
                  99.44
                  
                  
                  
                  115.89Net
      charge-offs to average outstanding loans receivable during the
      period
                  
                  
                  1.76
                  
                  
                  
                  1.31
                  
                  
                  
                  0.52
                  
                  
                  
                  0.14
                  
                  
                  
                  0.10Non-performing
      assets to total assets
                  
                  
                  5.13
                  
                  
                  
                  4.82
                  
                  
                  
                  1.87
                  
                  
                  
                  1.20
                  
                  
                  
                  0.99OTHER
      DATANumber
      of:Full-time
      equivalent employees
                  
                  
                  457
                  
                  
                  
                  465
                  
                  
                  
                  427
                  
                  
                  
                  421
                  
                  
                  
                  361Full-service
      offices
                  
                  
                  12
                  
                  
                  
                  12
                  
                  
                  
                  12
                  
                  
                  
                  11
                  
                  
                  
                  9Residential
      mortgage loan production offices
                  
                  
                  6
                  
                  
                  
                  5
                  
                  
                  
                  3
                  
                  
                  
                  3
                  
                  
                  
                  2REGULATORY
      CAPITAL RATIOS (1)Tangible
      capital
                  
                  
                  9.02
                  %
                  
                  
                  9.19
                  %
                  
                  
                  7.93
                  %
                  
                  
                  8.79
                  %
                  
                  
                  9.30
                  %Core
      capital
                  
                  
                  9.02
                  
                  
                  
                  9.19
                  
                  
                  
                  7.93
                  
                  
                  
                  8.79
                  
                  
                  
                  9.30Total
      risk-based capital
                  
                  
                  12.40
                  
                  
                  
                  12.33
                  
                  
                  
                  10.59
                  
                  
                  
                  11.18
                  
                  
                  
                  11.99





(1)
            Capital
      ratios are for Pulaski Bank.




- 3
-


Management’s
Discussion and Analysis of


Financial
Condition and Results of Operations





General





Management’s
discussion and analysis of financial condition and results of operations is
intended to assist in understanding our financial condition and results of
operations. The information contained in this section should be read in
conjunction with the consolidated financial statements and accompanying notes
contained elsewhere in this annual report.




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





Management's
ability to predict results or the effect of future plans or strategies is
inherently uncertain.  Factors that could affect actual results
include interest rate trends, the general economic climate in the market area in
which we operate, as well as nationwide, our ability to control costs and
expenses, products and pricing offered by competitors, loan delinquency rates,
demand for loans and deposits, changes in the quality or composition of our loan
portfolio, changes in accounting principles and changes in federal and state
legislation and regulation.  Additional factors that may affect our
results are discussed in the section titled “Risk Factors” in our annual report
on Form 10-K and in other reports filed with the Securities and Exchange
Commission.  These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such
statements.  We assume no obligation to update any forward-looking
statements.





Pulaski’s
Community Banking Strategy





Pulaski
Bank is one of the top residential lenders in its market areas, with $1.81
billion of new residential mortgage loans originated during the year ended
September 30, 2010.  In addition, we originated $330.0 million of
commercial loans during the year.  Despite a challenging economic
environment, we were able to leverage these customer relationships, which helped
us grow our core deposits by 10% and increase our net interest income by
12%.  Our community banking strategy is centered on building long-term
relationships with small- to medium-sized businesses and retail customers and
emphasizes high-quality, responsive and personalized customer
service.  Pulaski has an 89-year history of serving many St. Louis
neighborhoods and has positioned itself to be a “True Community Bank” to
metropolitan St. Louis.





We
believe there is a significant opportunity for a locally managed,
community-focused bank to provide a full range of financial services to retail
customers and small- and middle-market businesses.  A large amount of
local deposits have been acquired by regional and national banks during the past
decade, which has created larger banks that are perceived by many customers as
impersonal or unresponsive.  By offering quicker decision making in
the delivery of banking products and services, offering customized products
where needed, and providing our customers access to our senior decision makers,
we distinguish ourselves from the larger regional and national banks operating
in our market areas.  Conversely, our larger capital base and product
mix enable us to compete effectively against smaller banks with limited services
and capabilities.




- 4
-





Locally
based community banks, like Pulaski, have also gained market share by recruiting
experienced bankers who have been displaced by mergers with larger, out-of-area
banks.  These bankers have generally developed strong relationships
with customers who are willing to follow them to another financial
institution.  We believe that St. Louisans strongly favor doing
business with companies that are locally managed, creating opportunities for
Pulaski.





In
addition to attracting and retaining veteran bankers who are St. Louis natives,
the Company’s strategic plan is focused on providing convenient bank locations
in the St. Louis commercial districts.  Many of the Bank’s
full-service locations are located in the central corridor of St. Louis and are
convenient to the metropolitan St. Louis commercial and financial
centers.





Primarily
as the result of deteriorating local and national economic conditions and their
negative impact on the real estate market, we experienced a 13% increase in the
provision for loan losses and a 29% increase in loan charge-offs during fiscal
2010 compared to fiscal 2009.  In addition, we experienced a 2%
decline in our loans receivable, excluding loans held for sale, as we saw
weakened demand from qualified borrowers and we tightened our underwriting
standards in response to the deteriorating economic
conditions.  However, execution of the Company’s community banking
strategy produced strong performance in many of its key indicators over the past
five years, thereby positioning the Company for improved earnings in future
periods.  Specifically, during the five years ended September 30,
2010, we have:





•
            Increased
      our net interest income from $24.8 million to $46.7 million, representing
      a 14% compound annual growth rate
(“CAGR”).





•
            Increased
      our mortgage revenues from $4.6 million to $7.8 million, representing
      an 11% CAGR.





•
            Increased
      our retail banking fees from $2.5 million to $3.8 million,
      representing an 8% CAGR.





•
            Increased
      our total assets from $789.9 million to $1.45 billion, representing a
      13% CAGR.





•
            Increased
      our total loan portfolio from $633.2 million to $1.05 billion,
      representing an 11% CAGR.





•
            Increased
      our total deposits from $496.2 million to $1.12 billion, representing
      an 18% CAGR.





•
            Reduced
      our ratio of non-interest expense to average assets from 2.36% to
      2.30%.





•
            Expanded
      the number of residential and commercial loan officers from 55 to
      107.





•
            Expanded
      our St. Louis bank network from eight to twelve full-service
      locations.





At
September 30, 2005, we were principally a residential lender, with 70% of our
loan portfolio consisting of residential and home equity loans.  Over
the past five years, the commercial lending division has been a significant
contributor to our growth, with $371.1 million of net loan growth since
September 30, 2005.  The commercial loan portfolio grew to
$561.1 million, or 54% of total loans receivable, at September 30, 2010
compared to $190.0 million, or 30% of total loans receivable, at September 30,
2005.





Our
strategy has enabled us to capture a 1.62% share of the $71 billion St.
Louis deposit market at June 30, 2010.  Ranked according to total
deposits at June 30, 2010, as reported by the Federal Deposit Insurance
Corporation, Pulaski Bank is the twelfth largest bank in the St. Louis
metropolitan area. We continue to grow our core deposit accounts, which we
define as checking, money market and savings accounts.  Core deposit
accounts increased to $714.3 million at September 30, 2010 compared to
$171.1 million at September 30, 2005.  Money market accounts and
interest-bearing checking accounts increased to $189.9 million and
$345.0 million, respectively, at September 30, 2010 compared to $82.6
million and $29.0 million, respectively, at September 30,
2005.  Non-interest-bearing checking accounts increased to $149.2
million at September 30, 2010 compared to $29.2 million at September 30,
2005.  The increases stem primarily from growth in commercial
relationships, expanded products and additional banking
locations.  Fueled by this deposit growth, retail banking fees
increased 53.1% from $2.5 million in fiscal 2005 to $3.8 million in
fiscal 2010.


- 5
-


Primary
Business Lines





Crucial
to our community banking strategy is growth in the Company’s three primary
business lines:  commercial banking services, retail mortgage lending
and retail banking services.  We believe the marketplace is more
competitive than ever and, to achieve successful results, these products must be
delivered with superior and efficient customer service.





Commercial Banking
Services.  Our commercial banking services are centered on
serving small- to medium-sized businesses, and the Company’s operation in the
St. Louis market continues to be driven by its staff of experienced commercial
bankers and the commercial banking relationships they generate.  Since
beginning our commercial banking operations in 2003, approximately 70% of the
growth in the Bank’s retained loan portfolio has come from commercial
lending.  In 2003, the Bank had just two employees dedicated to
commercial banking.  Over the past several years, the Company has been
successful in hiring some of the top commercial bankers in St.
Louis.  Today, the commercial division has 24 employees, many of whom
have brought us new business from their existing customer
relationships.





Commercial
loan originations totaled $330.0 million during the year ended September 30,
2010 compared with $432.9 million in 2009.  Although origination
activity slowed during 2010 compared with the prior year as the result of the
distressed local and national economic climate, we continued to originate
commercial loans to our most credit-worthy customers under tightened credit
standards.  However, as the result of the weakened market demand for
our loan products and our tightened underwriting standards, the commercial loan
portfolio decreased $35.8 million during the year to $561.1 million at
September 30, 2010.  In addition, during the year ended September
30, 2010, management decided to decrease the Company’s exposure to construction
lending because of the weakened national and local economic
conditions.  Commercial and multi-family construction and development
loans decreased $43.3 million to $22.9 million at September 30, 2010 while
commercial real estate loans increased $25.0 million to $256.2 million,
primarily as the result of the conversion of certain maturing construction loans
to permanent financing.  In addition, construction and development
loans secured by residential properties decreased $11.5 million to $8.1 million
at September 30, 2010, land acquisition and development loans decreased $5.5
million to $74.8 million and commercial and industrial loans increased $321,000
to $155.3 million.





Our
commercial loan customers are also among the best sources of core deposit
accounts.  During the past year, commercial checking account balances
increased $53.9 million to $127.0 million at September 30, 2010 compared to
$73.0 million at September 30, 2009.





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





The
Federal Reserve’s actions taken in late 2008 to lower market interest rates and
stimulate mortgage lending activity resulted in a dramatic increase in mortgage
refinancing volume beginning in November 2008 and continuing throughout fiscal
2009.  Loan origination volumes grew steadily through the first three
quarters of fiscal year 2009 reaching record levels during the quarter ended
June 30, 2009.  This strong demand continued into 2010 and, although
below the historically high 2009 levels, resulted in origination volumes that
were above the levels typically experienced in periods prior to
2009.  Mortgage loan refinancing activity represented approximately
50% of total loan originations during the year ended September 30, 2010 compared
with 61% during 2009.  The following is a quarterly summary of
residential loans originated for sale for the years ended September 30, 2010 and
2009.


- 6
-





2010
                                  
                                  
                                  2009(In
      Thousands)First
      quarter
                                  
                                  $
                                  455,783
                                  
                                  
                                  $
                                  262,834Second
      quarter
                                  
                                  
                                  326,034
                                  
                                  
                                  
                                  651,273Third
      quarter
                                  
                                  
                                  446,668
                                  
                                  
                                  
                                  723,827Fourth
      quarter
                                  
                                  
                                  581,004
                                  
                                  
                                  
                                  403,965Total
                                  
                                  $
                                  1,809,489
                                  
                                  
                                  $
                                  2,041,899





For the
year ended September 30, 2010, we sold $1.67 billion of residential loans to
investors, which generated mortgage revenues totaling $7.8 million,
compared to $2.02 billion of loans sold and $12.7 million in revenues for
the year ended September 30, 2009.  The net profit margins on loans
sold decreased to 0.47% during 2010 compared with 0.63% during
2009.  We saw lower gross profit margins on loans sold during 2010 as
the result of lower prices offered by the Company’s mortgage loan
investors.  In addition, net profit margins in 2010 were reduced as
the result of extended commitment periods for delivery of loans to the Company’s
investors and increased variable costs on loans originated.  Also
reducing mortgage revenues were charges to earnings totaling $663,000 and
$526,000 in 2010 and 2009, respectively, for amounts potentially due to the
Company’s loan investors under guarantees related to loans that were previously
sold and became delinquent or defaulted.  Loans held for sale
increased $144.4 million to $253.6 million at September 30, 2010 from
$109.1 million at September 30, 2009.





Although
we primarily originate conforming mortgage loans that qualify for sale in the
secondary market, we historically retained a certain number of loans in
portfolio that had characteristics which made them appealing for the Bank’s
portfolio even though they did not qualify for sale as conforming
“agency-eligible” loans.  These loans were underwritten using an
internal credit-scoring model, which assessed credit risk and assigned one of
five risk-based ratings to the loan at the time of inception.  Loans
with higher risk ratings were originated with higher interest
rates.  In the last 24 months, however, we have repeatedly tightened
our internal credit underwriting standards in response to the national economic
crisis and have de-emphasized this type of lending.  During the year
ended September 30, 2010, residential first and second mortgage loans retained
in our portfolio decreased $17.0 million to $303.9 million from $320.9
million at September 30, 2009.





Home
equity lines of credit balances decreased to $201.9 million at September
30, 2010 compared to $227.1 million at September 30, 2009.  These
loans consist primarily of revolving lines of credit secured by residential real
estate.  We also significantly de-emphasized growth in this portfolio
during late 2009 and 2010 as we tightened credit standards following the
downturn in the economy and have generally continued to offer home equity loans
only to our most credit-worthy borrowers. These loans are generally approved in
conjunction with high-quality first mortgage loan applications.  The
interest rates on these loans are tied to the prime rate, which results in low
interest-rate risk characteristics, attractive interest-rate spreads over their
funding sources and added stability to our net interest margin.  The
weighted average interest rate on home equity lines of credit was 3.79% at
September 30, 2010 compared to 3.98% at September 30, 2009.  The
decline in the average interest rate was due to the decline in market interest
rates during 2010.





- 7
-




Retail Banking
Services.  Growth in core deposits, which include checking,
money market and passbook accounts, is critical to support profitable asset
growth and is among our top strategic objectives.  Our approach to
attracting deposits involves three key components:  providing
excellence in customer service, offering customers best-in-class products, and
providing customers with convenient banking locations.  Checking
accounts represent the cornerstone product in a customer relationship and are
the Bank’s most valuable source of low-cost deposits.  Checking
account balances not only provide one of the lowest-cost funding sources, but
also generate valuable fee income through service charges.  The
balance of checking accounts increased $127.8 million during the year to $494.2
million at September 30, 2010 from $366.4 million at September 30, 2009,
fueled by an $85.1 million increase in retail checking accounts and a $53.9
million increase in commercial checking accounts.  Also enhancing our
ability to attract core deposits, we elected to participate in the FDIC’s
Transaction Account Guarantee Program.  This program provides full
FDIC insurance coverage for non-interest-bearing transaction accounts and
qualifying NOW accounts regardless of the dollar amount through December 31,
2010, and is in addition to the standard FDIC insurance on deposits up to
$250,000 per depositor.  At September 30, 2010, the weighted-average
cost of interest-bearing checking accounts decreased to 0.90% compared to 1.25%
at September 30, 2009 primarily as the result of declining market interest rates
during 2010.  Competition for these products remains intense, but the
accounts are generally less interest-rate sensitive and more stable than
certificates of deposit.





The
balance of money market accounts decreased $64.1 million to $189.9 million
at September 30, 2010 from $254.0 million at September 30, 2009
primarily due to a decrease in municipal deposits as we deemphasized growth in
these types of deposits during the year.  At September 30, 2010, the
weighted average cost of money market deposits decreased to 0.52% compared to
0.76% at September 30, 2009 as the result of declining market interest rates
during 2010.  Money market and interest-bearing checking accounts
carry adjustable interest rates that make them an ideal funding source for our
prime-adjusting commercial and home equity loans.





Certificates
of deposit decreased $141.5 million to $400.9 million at September 30, 2010
from $542.3 million at September 30, 2009 as the result of a $75.0 million
decrease in brokered time deposits to $8.4 million, a $46.7 million
decrease in time deposits offered through Promontory Interfinancial Network’s
Certificate of Deposit Account Registry Service (“CDARS”) to $64.1 million
and a $26.4 million decrease in retail certificates of deposit to $278.5
million.  Maturing brokered time deposits were repaid during the year
with lower-cost borrowings from the Federal Home Loan Bank.  In
addition, core deposit growth allowed us to more effectively price our CDARS and
retail time deposits, resulting in the decreased balances.  Total
deposits decreased $76.4 million, or 6%, to $1.12 billion at September
30, 2010 from $1.19 billion at September 30, 2009, primarily as the result of
the decrease in brokered time deposits.





Retail
banking fees, which include fees charged to customers who have overdrawn their
checking accounts and service charges on other retail banking products,
decreased 3% to $3.8 million for the year ended September 30, 2010 compared to
$3.9 million for the year ended September 30, 2009.  While checking
accounts grew significantly during the year ended September 30, 2010, the volume
of overdrawn checking accounts did not increase proportionately, primarily as
the result of tightened consumer spending in the current difficult economic
environment.  On November 12, 2009, the Federal Reserve Board
announced final rules that prohibit financial institutions from charging
consumers fees for paying overdrafts on automated teller machines and one-time
debit card transactions, unless a consumer consents, or opts in, to the
overdraft service for those types of transactions.  These rules are
expected to ultimately result in a reduction of the amount of fee income we
realize from these sources in future periods.





Critical
Accounting Policies





We have
established various accounting policies that govern the application of U.S.
generally accepted accounting principles in the preparation of our consolidated
financial statements. Our significant accounting policies are described in the
footnotes to the consolidated financial statements that appear in this report.
Certain accounting policies involve significant judgments and assumptions by
management that have a material impact on the carrying value of certain assets
and liabilities.  We consider the accounting for the allowance for
loan losses to be a critical accounting policy.  The judgments and
assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the
circumstances.  Because of the nature of the judgments and assumptions
made by management, actual results could differ from these judgments and
estimates that could have a material impact on the carrying values of assets and
liabilities and our results of operations.




- 8
-





We
maintain an allowance for loan losses to absorb probable losses in our loan
portfolio.  Determining the amount of the allowance involves a high
degree of judgment.  The balance in the allowance is based upon
management’s quarterly estimates of expected losses inherent in the loan
portfolio.  Management’s estimates are determined by quantifying
certain risks in the portfolio that are affected primarily by changes in the
composition and volume of the portfolio combined with an analysis of past-due
and adversely classified loans.  These estimates can also be affected
by the following factors:  changes in lending policies and procedures,
including underwriting standards and collections; charge-off and recovery
practices; changes in national and local economic conditions and developments;
assessment of collateral values by obtaining independent appraisals; and changes
in the experience, ability, and depth of lending management
staff.  Refer to Note1of Notes to the Consolidated
Financial Statements for a detailed description of our risk assessment
process.


- 9
-





AVERAGE
BALANCE SHEETS





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





Years Ended September 30,2010
                                
                                
                                2009
                                
                                
                                2008Interest
                                
                                
                                
                                
                                
                                
                                
                                
                                Interest
                                
                                
                                
                                
                                
                                
                                
                                
                                InterestAverage
                                
                                
                                and
                                
                                
                                Yield/
                                
                                
                                Average
                                
                                
                                and
                                
                                
                                Yield/
                                
                                
                                Average
                                
                                
                                and
                                
                                
                                Yield/Balance
                                
                                
                                Dividends
                                
                                
                                Cost
                                
                                
                                Balance
                                
                                
                                Dividends
                                
                                
                                Cost
                                
                                
                                Balance
                                
                                
                                Dividends
                                
                                
                                Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable: (1)Residential
      real estate
                                
                                $
                                296,516
                                
                                
                                $
                                17,977
                                
                                
                                
                                6.06
                                %
                                
                                $
                                328,108
                                
                                
                                $
                                20,952
                                
                                
                                
                                6.39
                                %
                                
                                $
                                336,918
                                
                                
                                $
                                23,257
                                
                                
                                
                                6.90
                                %Commercial
                                
                                
                                601,234
                                
                                
                                
                                31,083
                                
                                
                                
                                5.17
                                %
                                
                                
                                598,179
                                
                                
                                
                                29,987
                                
                                
                                
                                5.01
                                %
                                
                                
                                479,997
                                
                                
                                
                                30,123
                                
                                
                                
                                6.28
                                %Home
      equity lines of credit
                                
                                
                                216,004
                                
                                
                                
                                8,476
                                
                                
                                
                                3.92
                                %
                                
                                
                                230,237
                                
                                
                                
                                9,346
                                
                                
                                
                                4.06
                                %
                                
                                
                                223,146
                                
                                
                                
                                13,983
                                
                                
                                
                                6.27
                                %Consumer
                                
                                
                                3,519
                                
                                
                                
                                154
                                
                                
                                
                                4.37
                                %
                                
                                
                                3,613
                                
                                
                                
                                196
                                
                                
                                
                                5.44
                                %
                                
                                
                                4,156
                                
                                
                                
                                245
                                
                                
                                
                                5.88
                                %Total
      loans receivable
                                
                                
                                1,117,273
                                
                                
                                
                                57,690
                                
                                
                                
                                5.16
                                %
                                
                                
                                1,160,137
                                
                                
                                
                                60,481
                                
                                
                                
                                5.21
                                %
                                
                                
                                1,044,217
                                
                                
                                
                                67,608
                                
                                
                                
                                6.47
                                %Mortgage
      loans held for sale
                                
                                
                                136,919
                                
                                
                                
                                6,259
                                
                                
                                
                                4.57
                                %
                                
                                
                                119,770
                                
                                
                                
                                5,768
                                
                                
                                
                                4.82
                                %
                                
                                
                                64,446
                                
                                
                                
                                3,562
                                
                                
                                
                                5.53
                                %Securities
      and other
                                
                                
                                64,637
                                
                                
                                
                                1,155
                                
                                
                                
                                1.71
                                %
                                
                                
                                62,729
                                
                                
                                
                                1,574
                                
                                
                                
                                2.51
                                %
                                
                                
                                46,522
                                
                                
                                
                                2,096
                                
                                
                                
                                4.51
                                %Total
      interest-earning assets
                                
                                
                                1,318,829
                                
                                
                                
                                65,104
                                
                                
                                
                                4.94
                                %
                                
                                
                                1,342,636
                                
                                
                                
                                67,823
                                
                                
                                
                                5.05
                                %
                                
                                
                                1,155,185
                                
                                
                                
                                73,266
                                
                                
                                
                                6.34
                                %Non-interest-earning
      assets
                                
                                
                                73,592
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                70,829
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                80,543Total
      assets
                                
                                $
                                1,392,421
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                1,413,465
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                1,235,728Interest-bearing
      liabilities:Interest-bearing
      checking
                                
                                $
                                330,815
                                
                                
                                $
                                3,667
                                
                                
                                
                                1.11
                                %
                                
                                $
                                221,164
                                
                                
                                $
                                3,504
                                
                                
                                
                                1.58
                                %
                                
                                $
                                106,009
                                
                                
                                $
                                2,093
                                
                                
                                
                                1.97
                                %Passbook
      savings
                                
                                
                                29,714
                                
                                
                                
                                59
                                
                                
                                
                                0.20
                                %
                                
                                
                                26,845
                                
                                
                                
                                57
                                
                                
                                
                                0.21
                                %
                                
                                
                                27,727
                                
                                
                                
                                91
                                
                                
                                
                                0.33
                                %Money
      market
                                
                                
                                230,634
                                
                                
                                
                                2,146
                                
                                
                                
                                0.93
                                %
                                
                                
                                159,196
                                
                                
                                
                                1,676
                                
                                
                                
                                1.05
                                %
                                
                                
                                183,957
                                
                                
                                
                                5,294
                                
                                
                                
                                2.88
                                %Certificates
      of deposit
                                
                                
                                444,925
                                
                                
                                
                                10,262
                                
                                
                                
                                2.31
                                %
                                
                                
                                569,530
                                
                                
                                
                                16,279
                                
                                
                                
                                2.86
                                %
                                
                                
                                466,094
                                
                                
                                
                                19,963
                                
                                
                                
                                4.28
                                %Total
      interest-bearing deposits
                                
                                
                                1,036,088
                                
                                
                                
                                16,134
                                
                                
                                
                                1.56
                                %
                                
                                
                                976,735
                                
                                
                                
                                21,516
                                
                                
                                
                                2.20
                                %
                                
                                
                                783,787
                                
                                
                                
                                27,441
                                
                                
                                
                                3.50
                                %FHLB
      advances
                                
                                
                                96,948
                                
                                
                                
                                1,743
                                
                                
                                
                                1.80
                                %
                                
                                
                                120,288
                                
                                
                                
                                3,507
                                
                                
                                
                                2.92
                                %
                                
                                
                                224,460
                                
                                
                                
                                7,956
                                
                                
                                
                                3.54
                                %Borrowings
      from the Federal Reserve Bank
                                
                                
                                82
                                
                                
                                
                                -
                                
                                
                                
                                0.59
                                %
                                
                                
                                71,690
                                
                                
                                
                                320
                                
                                
                                
                                0.45
                                %
                                
                                
                                34,093
                                
                                
                                
                                776
                                
                                
                                
                                2.28
                                %Note
      payable
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2,324
                                
                                
                                
                                113
                                
                                
                                
                                4.88
                                %
                                
                                
                                4,868
                                
                                
                                
                                242
                                
                                
                                
                                4.97
                                %Subordinated
      debentures
                                
                                
                                19,589
                                
                                
                                
                                515
                                
                                
                                
                                2.63
                                %
                                
                                
                                19,589
                                
                                
                                
                                759
                                
                                
                                
                                3.88
                                %
                                
                                
                                19,589
                                
                                
                                
                                1,238
                                
                                
                                
                                6.32
                                %Total
      interest-bearing liabilities
                                
                                
                                1,152,707
                                
                                
                                
                                18,392
                                
                                
                                
                                1.60
                                %
                                
                                
                                1,190,626
                                
                                
                                
                                26,215
                                
                                
                                
                                2.20
                                %
                                
                                
                                1,066,797
                                
                                
                                
                                37,653
                                
                                
                                
                                3.53
                                %Non-interest-bearing
      liabilities:Non-interest-bearing
      deposits
                                
                                
                                108,188
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                99,127
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                63,325Other
      non-interest-bearing liabilities
                                
                                
                                13,767
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                14,286
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                19,184Total
      non-interest-bearing liabilities
                                
                                
                                121,955
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                113,413
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                82,509Stockholders'
      equity
                                
                                
                                117,759
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                109,426
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                86,422Total liabilities and stockholders' equity
                                
                                $
                                1,392,421
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                1,413,465
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                1,235,728Net
      interest income
                                
                                
                                
                                
                                
                                $
                                46,712
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                41,608
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                35,613Interest
      rate spread (2)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.34
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2.85
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2.81
                                %Net
      interest margin (3)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.54
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.10
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3.08
                                %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                                
                                
                                114.41
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                112.77
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                108.29
                                %





(1)
            Include
      non-accrual loans with an average balance of $20.2 million, $18.0 million
      and $6.3 million for the fiscal years ended September 30, 2010, 2009 and
      2008, respectively.


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


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


- 10
-


Rate
Volume Analysis




The
following table allocates the period-to-period changes in the Company's various
categories of interest income and expense between changes due to changes in
volume (calculated by multiplying the change in average volumes of the related
interest-earning asset or interest-bearing liability category by the prior
year's rate) and changes due to changes in rate (change in rate multiplied by
the prior year's volume).  Changes due to changes in rate/volume
(changes in rate multiplied by changes in volume) have been allocated
proportionately between changes in volume and changes in rate.




2010 Compared to 2009
                    
                    
                    2009 Compared to 2008Increase(Decrease)Dueto
                    
                    
                    Increase(Decrease)DuetoRate
                    
                    
                    Volume
                    
                    
                    Net
                    
                    
                    Rate
                    
                    
                    Volume
                    
                    
                    Net(In thousands)Interest-earning
      assets:Loans
      receivable:Residential
      real estate
                    
                    $
                    (1,038
                    )
                    
                    $
                    (1,937
                    )
                    
                    $
                    (2,975
                    )
                    
                    $
                    (1,702
                    )
                    
                    $
                    (603
                    )
                    
                    $
                    (2,305
                    )Commercial
                    
                    
                    945
                    
                    
                    
                    151
                    
                    
                    
                    1,096
                    
                    
                    
                    (6,755
                    )
                    
                    
                    6,619
                    
                    
                    
                    (136
                    )Home
      equity lines of credit
                    
                    
                    (312
                    )
                    
                    
                    (558
                    )
                    
                    
                    (870
                    )
                    
                    
                    (5,070
                    )
                    
                    
                    433
                    
                    
                    
                    (4,637
                    )Consumer
                    
                    
                    (37
                    )
                    
                    
                    (5
                    )
                    
                    
                    (42
                    )
                    
                    
                    (17
                    )
                    
                    
                    (32
                    )
                    
                    
                    (49
                    )Total
      loans receivable
                    
                    
                    (442
                    )
                    
                    
                    (2,349
                    )
                    
                    
                    (2,791
                    )
                    
                    
                    (13,544
                    )
                    
                    
                    6,417
                    
                    
                    
                    (7,127
                    )Mortgage
      loans held for sale
                    
                    
                    (309
                    )
                    
                    
                    800
                    
                    
                    
                    491
                    
                    
                    
                    (509
                    )
                    
                    
                    2,715
                    
                    
                    
                    2,206Securities
      and other
                    
                    
                    (164
                    )
                    
                    
                    (255
                    )
                    
                    
                    (419
                    )
                    
                    
                    (937
                    )
                    
                    
                    415
                    
                    
                    
                    (522
                    )Total
      net change in income on interest-earning assets
                    
                    
                    (915
                    )
                    
                    
                    (1,804
                    )
                    
                    
                    (2,719
                    )
                    
                    
                    (14,990
                    )
                    
                    
                    9,547
                    
                    
                    
                    (5,443
                    )Interest-bearing
      liabilities:Interest-bearing
      checking
                    
                    
                    (1,238
                    )
                    
                    
                    1,401
                    
                    
                    
                    163
                    
                    
                    
                    (481
                    )
                    
                    
                    1,892
                    
                    
                    
                    1,411Passbook
      savings
                    
                    
                    (4
                    )
                    
                    
                    6
                    
                    
                    
                    2
                    
                    
                    
                    (31
                    )
                    
                    
                    (3
                    )
                    
                    
                    (34
                    )Money
      market
                    
                    
                    (209
                    )
                    
                    
                    679
                    
                    
                    
                    470
                    
                    
                    
                    (2,986
                    )
                    
                    
                    (632
                    )
                    
                    
                    (3,618
                    )Certificates
      of deposit
                    
                    
                    (2,814
                    )
                    
                    
                    (3,203
                    )
                    
                    
                    (6,017
                    )
                    
                    
                    (7,513
                    )
                    
                    
                    3,829
                    
                    
                    
                    (3,684
                    )Total
      interest-bearing deposits
                    
                    
                    (4,265
                    )
                    
                    
                    (1,117
                    )
                    
                    
                    (5,382
                    )
                    
                    
                    (11,011
                    )
                    
                    
                    5,086
                    
                    
                    
                    (5,925
                    )FHLB
      advances
                    
                    
                    (1,171
                    )
                    
                    
                    (593
                    )
                    
                    
                    (1,764
                    )
                    
                    
                    (1,219
                    )
                    
                    
                    (3,230
                    )
                    
                    
                    (4,449
                    )Borrowings
      from the Federal Reserve Bank
                    
                    
                    76
                    
                    
                    
                    (396
                    )
                    
                    
                    (320
                    )
                    
                    
                    (915
                    )
                    
                    
                    459
                    
                    
                    
                    (456
                    )Note
      payable
                    
                    
                    (56
                    )
                    
                    
                    (57
                    )
                    
                    
                    (113
                    )
                    
                    
                    (4
                    )
                    
                    
                    (125
                    )
                    
                    
                    (129
                    )Subordinated
      debentures
                    
                    
                    (244
                    )
                    
                    
                    -
                    
                    
                    
                    (244
                    )
                    
                    
                    (479
                    )
                    
                    
                    -
                    
                    
                    
                    (479
                    )Total
      net change in expense on interest-bearing liabilities
                    
                    
                    (5,660
                    )
                    
                    
                    (2,163
                    )
                    
                    
                    (7,823
                    )
                    
                    
                    (13,628
                    )
                    
                    
                    2,190
                    
                    
                    
                    (11,438
                    )Net
      change in net interest income
                    
                    $
                    4,745
                    
                    
                    $
                    359
                    
                    
                    $
                    5,104
                    
                    
                    $
                    (1,362
                    )
                    
                    $
                    7,357
                    
                    
                    $
                    5,995


- 11
-


Comparison
of Operating Results for the


Years
Ended September 30, 2010 and 2009





Overview




Net income
for the year ended September 30, 2010 decreased 35.1% to $3.3 million, or $0.12
per diluted common share, compared to $5.1 million, or $0.37 per diluted common
share, for the year ended September 30, 2009.  Reducing income
available to common shares for the year ended September 30, 2010 were dividends
and discount accretion on the Company’s preferred stock, issued as part of the
U.S. Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program,
totaling $2.1 million, or $0.19 per diluted common share compared to $1.3
million, or $0.12 per diluted common share for the year ended September 30,
2009.




Net
Interest Income




Net
interest income is the difference between interest and dividend income on
interest-earning assets, such as loans and securities, and the interest expense
on interest-bearing liabilities used to fund those assets, including deposits,
advances from the Federal Home Loan Bank of Des Moines (“FHLB”), borrowings from
the Federal Reserve Bank of St. Louis (“Federal Reserve”) and other
borrowings.  The amount of net interest income is affected by both
changes in the level of interest rates and the amount and composition of
interest-earning assets and interest-bearing liabilities.




Net interest
income increased $5.1 million to $46.7 million for the year ended
September 30, 2010 compared to $41.6 million for the year ended September 30,
2009.  The increase was primarily the result of expansion in the net
interest margin, which increased to 3.54% in 2010 compared with 3.10% in
2009.  The net interest margin benefited from market-driven declines
in the cost of deposits and wholesale borrowings and growth in the average
balance of mortgage loans held for sale, which typically produce higher
interest-rate spreads than other interest-earning assets held by the
Company.




Total interest
and dividend income decreased $2.7 million to $65.1 million for the year
ended September 30, 2010 compared to $67.8 million for the year ended
September 30, 2009 due to declines in the average balance and average yield
of interest-earning assets.  The average yield decreased from
5.05% for 2009 to 4.94% for 2010 and the average balance decreased from
$1.34 billion to $1.32 billion during the same periods,
respectively.




The
decrease in the average balance was primarily due to a $42.9 million
decline in the average balance of loans receivable to $1.12 billion for 2010,
partially offset by a $17.1 million increase in the average balance of loans
held for sale to $136.9 million for 2010.  The average balances of
residential real estate loans and home equity lines of credit declined $31.6
million and $14.2 million, respectively, while the average balance of commercial
loans increased $3.1 million.  The decrease in the average yield was
primarily due to the market driven declines in the average yields on loans
receivable and loans held for sale.  See Primary Business
Lines.




Total interest
expense decreased $7.8 million to $18.4 million for fiscal 2010 compared
to $26.2 million for fiscal 2009 due to a decline in the average cost of funds
and the average balance of interest-bearing liabilities.  The average
cost of funds decreased from 2.20% for 2009 to 1.60% for 2010 and the
average balance of interest-bearing liabilities decreased from $1.19 billion to
$1.15 billion during the same periods, respectively.




The lower
average balance of interest-bearing liabilities resulted from decreases in the
average balances of borrowings from the Federal Reserve and the FHLB, partially
offset by an increase in the average balance of deposits.  The
decreased average cost was the result of lower market interest rates during the
period, growth in core deposits and a shift in the mix of wholesale funding
sources.  The Company primarily funds its assets with savings deposits
from its retail and commercial customers, which typically carry a lower cost
than most of the Company’s wholesale funding sources.  This funding
source is supplemented with wholesale funds consisting primarily of advances
from the FHLB, short-term borrowings from the Federal Reserve and time
deposits from national brokers.  Management actively chooses among
these wholesale funding sources depending on their relative costs and the
Company’s overall borrowing capacity at the FHLB and the Federal
Reserve.  See Liquidity
Risk.


- 12
-


Interest expense
on depositsdecreased $5.4 million, or 25.0%, to $16.1 million during the
year ended September 30, 2010 compared to $21.5 million for the year ended
September 30, 2009 as the result of a decrease in the average cost partially
offset by an increase in the average balance.  The average balance of
interest-bearing deposits increased to $1.04 billion for the year ended
September 30, 2010 from $976.7 million for the year ended September 30, 2009
while the average cost of deposits decreased from 2.20% to 1.56% during the
same periods, respectively.  Growth in average total deposits during
2010 was used to repay certain wholesale borrowings.  See Primary Business
Lines.




Interest expense
on advances from the Federal Home Loan Bank decreased $1.8 million,
or 50.3%, to $1.7 million during the year ended September 30, 2010 compared
to $3.5 million for the year ended September 30, 2009 as the result of
decreases in the average cost and average balance.  The average
balance decreased to $96.9 million for the year ended September 30,
2010 from $120.3 million for the year ended September 30, 2009 and the
average cost decreased from 2.92% to 1.80% during the same period,
respectively.  The lower average balance resulted from the repayment
of short-term advances with the increase in deposits and decrease in total
interest-earning assets.  The decreased average cost was the result of
lower market interest rates during the 2010 period.




Interest expense
on borrowings from the Federal ReserveBank
decreased $319,000 or 99.8% to $500 during the year ended September 30,
2010.  During 2010, the Company repaid all of the borrowings from the
Federal Reserve with lower-cost borrowings from the FHLB.




Provision
for Loan Losses




The provision for
loan losses for the year ended September 30, 2010 was $26.1 million
compared to $23.0 million for the same period a year ago.  The
provision for loan losses in 2010 related primarily to increased charge-offs and
an increase in the level of non-performing loans.  See Non-Performing Assetsand Allowance for Loan
Losses.




Non-Interest
Income




Total
non-interest income decreased $4.7 million to $14.8 million for the
year ended September 30, 2010 compared to $19.6 million for the year ended
September 30, 2009 primarily as the result of decreases in mortgage revenues,
gains on sales of securities and retail banking fees, partially offset by an
increase in investment brokerage revenues.




Mortgage
revenues decreased 38.2% to $7.8 million during the year ended
September 30, 2010 on loan sales of $1.67 billion, compared to mortgage
revenues of $12.7 million during the year ended September 30, 2009 on loan sales
of $2.02 billion.  See Primary Business
Lines.





Retail banking
fees decreased 3.0% to $3.8 million in 2010 compared to $3.9 million
for 2009 primarily as a result of tightened consumer spending in the current
difficult economic environment.  See Primary Business
Lines.




Investment
brokerage revenuesincreased 34.5% to $1.8
million for the year September 30, 2010 compared to $1.3 million for the same
period a year ago.  The Company operates an investment brokerage
division whose operations consist principally of brokering bonds from wholesale
brokerage houses to bank, municipal and individual
investors.  Revenues are generated on trading spreads and fluctuate
with changes in trading volumes and market interest rates.  The
increase in revenues during 2010 was the result of an increase in sales volume
as many of the Bank’s customers shifted funds from loan originations to
lower-risk bonds because of the current economic environment.




- 13
-




Gain (loss) on
sales of securities was a net gain of $303,000 for the year ended
September 30, 2009, related primarily to the sale of $50 million in Federal Home
Loan Bank bonds that were classified as available for sale.  There
were no such sales in 2010.




Non-Interest
Expense




Total
non-interest expense increased $499,000, or 1.6%, to $31.9 million
for the year ended September 30, 2010 compared to $31.4 million for the year
ended September 30, 2009.  Significant fluctuations are discussed
below.




Salaries and
employee benefits expense decreased $305,000, or 2.1%, to $14.0 million
for the year ended September 30, 2010 from $14.3 million for the year ended
September 30, 2009.  The decrease in salaries and employee benefits
expense in 2010 was primarily due to lower expense related to the
Bank-sponsored 401(k) Plan resulting from the suspension of the employer match
beginning in calendar year 2010.




Occupancy,
equipment and data processing expense increased $207,000 to $8.3
million for the year ended September 30, 2010 from $8.1 million for the year
ended September 30, 2009.  The increase was largely related to an
increase in expense related to the enhancement of certain capabilities of the
Bank’s data processing systems, an increase in expense related to the use of an
independent security company to provide security guards at certain of the Bank’s
branch offices and increased data processing and other expenses related to the
elevated level of loan and deposit activity.




Advertisingexpense decreased
$485,000 to $566,000 for the year ended September 30, 2010 compared to
$1.1 million for the year ended September 30, 2009 primarily due to a
reduction in the overall level of advertising during fiscal 2010 in connection
with a more focused effort to control such expenses.




Professional
servicesincreased $230,000 to $1.7 million for the year ended September
30, 2010 compared to $1.5 million for the year ended September 30,
2009.  The increase was the result of an increase in expenses related
to regulatory compliance and increased loan collection activity resulting from
the depressed economic environment.





FDIC deposit
insurance premium expensedecreased $275,000 to
$2.0 million for the year ended September 30, 2010 compared to $2.3 million for
the year ended September 30, 2009.  In 2009, the Bank paid $700,000 as
its share of an industry-wide FDIC special assessment.  The lower
expense in 2010 was the result of the absence of such special assessment,
partially offset by the industry-wide increases in FDIC deposit insurance rates
and increased premiums due to deposit growth.





Real estate
foreclosure losses and expense was $2.8 million for the year ended
September 30, 2010 compared with $1.3 million for the year ended
September 30, 2009.  See Non-Performing Assets and Allowance
for Loan Losses.





Other
non-interest expense decreased $362,000, or 18.5%, to $1.6 million for
the year ended September 30, 2010 compared to $2.0 million for the year ended
September 30, 2009.  The decrease was primarily due to a $246,000 loss
related to the impairment of the Company’s equity interest in a small-bank fund
during 2009.  The equity interest was sold during 2010 resulting in a
gain of $179,000.


- 14
-


Income
Taxes




The provision for
income taxes decreased from $1.6 million for the year ended September 30,
2009 to $259,000 for the year ended September 30, 2010.  The effective
tax rate was 7.30% in 2010 compared with 24.3% in 2009.  The effective
tax rates differed from the Federal statutory rate of 34% primarily as the
result of non-taxable income related to bank-owned life insurance and tax-exempt
interest on loans.  The lower effective rate in 2010 compared to 2009
was due to the decrease in total pre-tax income resulting in a higher ratio of
non-taxable income to such pre-tax income.  See Note 14ofNotes totheConsolidated Financial
Statements.




- 15
-




Non-Performing
Assets and Allowance for Loan Losses




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




September 30.
                                
                                
                                September 30,2010
                                
                                
                                2009(Dollars
      in thousands)Non-accrual
      loans:Residential
      real estate:First
      mortgage
                                
                                $
                                6,727
                                
                                
                                $
                                7,093Second
      mortgage
                                
                                
                                1,522
                                
                                
                                
                                629Home
      equity lines of credit
                                
                                
                                2,206
                                
                                
                                
                                3,086Commercial
      & multi-family real estate
                                
                                
                                5,539
                                
                                
                                
                                2,595Land
      acquisition & development
                                
                                
                                8,796
                                
                                
                                
                                2,193Real
      estate construction & development
                                
                                
                                1,189
                                
                                
                                
                                7,455Commercial
      & industrial
                                
                                
                                417
                                
                                
                                
                                703Consumer
      & other
                                
                                
                                100
                                
                                
                                
                                220Total
      non-accrual loans
                                
                                
                                26,496
                                
                                
                                
                                23,974Accruing
      loans past due 90 days or more:Residential
      real estate
                                
                                
                                -
                                
                                
                                
                                71Land
      acquisition & development
                                
                                
                                -
                                
                                
                                
                                316Total
      accruing loans past due 90 days or more
                                
                                
                                -
                                
                                
                                
                                387Troubled debt restructurings:(1)Current
      under restructured terms:Residential
      real estate:First
      mortgage
                                
                                
                                16,093
                                
                                
                                
                                17,785Second
      mortgage
                                
                                
                                2,186
                                
                                
                                
                                2,062Home
      equity lines of credit
                                
                                
                                1,050
                                
                                
                                
                                1,695Commercial
      & multi-family real estate
                                
                                
                                184
                                
                                
                                
                                -Land
      acquisition & development
                                
                                
                                426
                                
                                
                                
                                107Real
      estate construction & development
                                
                                
                                3,306
                                
                                
                                
                                100Commercial
      & industrial
                                
                                
                                1,355
                                
                                
                                
                                787Consumer
      & other
                                
                                
                                83
                                
                                
                                
                                93Total
      current troubled debt restructurings
                                
                                
                                24,683
                                
                                
                                
                                22,629Past
      due under restructured terms:Residential
      real estate:First
      mortgage
                                
                                
                                7,251
                                
                                
                                
                                2,788Second
      mortgage
                                
                                
                                339
                                
                                
                                
                                746Home
      equity lines of credit
                                
                                
                                728
                                
                                
                                
                                150Commercial
      & multi-family real estate
                                
                                
                                -
                                
                                
                                
                                7,831Land
      acquisition & development
                                
                                
                                65
                                
                                
                                
                                57Commercial
      & industrial
                                
                                
                                -
                                
                                
                                
                                777Total
      past due troubled debt restructurings
                                
                                
                                8,383
                                
                                
                                
                                12,349Total
      troubled debt restructurings
                                
                                
                                33,066
                                
                                
                                
                                34,978Total
      non-performing loans
                                
                                
                                59,562
                                
                                
                                
                                59,339Real
      estate acquired in settlement of loans:Residential
      real estate
                                
                                
                                3,632
                                
                                
                                
                                3,386Commercial
      real estate
                                
                                
                                11,268
                                
                                
                                
                                5,068Total
      real estate acquired in settlement of loans
                                
                                
                                14,900
                                
                                
                                
                                8,454Total
      non-performing assets
                                
                                $
                                74,462
                                
                                
                                $
                                67,793Ratio
      of non-performing loans to total loans receivable
                                
                                
                                5.56
                                %
                                
                                
                                5.16
                                %Ratio
      of non-performing assets to total assets
                                
                                
                                5.13
                                %
                                
                                
                                4.82
                                %Ratio
      of non-performing loans excluding current troubled debt restructurings as
      a percent of total loans
                                
                                
                                3.26
                                %
                                
                                
                                3.19
                                %Ratio
      of non-performing assets excluding current troubled debt restructurings as
      a percent of total assets
                                
                                
                                3.43
                                %
                                
                                
                                3.21
                                %Ratio
      of allowance for loan losses as a percent of total loans
                                
                                
                                2.52
                                %
                                
                                
                                1.79
                                %Ratio
      of allowance for loan losses to non-performing loans
                                
                                
                                45.29
                                %
                                
                                
                                34.68
                                %Ratio
      of allowance for loan losses as a percent of non-performing loans
      excluding current troubled debt restructurings and related allowance for
      loan losses
                                
                                
                                75.47
                                %
                                
                                
                                55.94
                                %





(1)




Non-performing
assets increased $6.7 million to $74.5 million at September 30, 2010 compared
with $67.8 million at September 30, 2009 primarily as a result of a
$2.5 million increase in non-accrual loans and a $6.4 million increase in
real estate acquired through foreclosure, partially offset by a $1.9 million
decrease in troubled debt restructurings.


- 16
-




Loans are
placed on non-accrual status when, in the opinion of management, there is
reasonable doubt as to the collectability of interest or principal. Management
considers many factors before placing a loan on non-accrual, including the
overall financial condition of the borrower, the progress of management’s
collection efforts and the value of the underlying collateral.




Excluding
non-accrual troubled debt restructurings, non-accrual loans totaled $26.5
million at September 30, 2010 compared with $24.0 million at September 30, 2009.
The increase was primarily the result of a $3.0 million increase in non-accruing
commercial loans partially offset by a $353,000 decrease in non-accruing
residential loans. During the September 2010 quarter, the Company placed loans
to one of its largest commercial customers on non-accrual status because of the
borrower’s weakened financial condition. At September 30, 2010, the balances of
such loans included in non-accrual loans were $8.7 million in land acquisition
and development loans, $4.2 million in commercial and multi-family real estate
loans and $998,000 in residential real estate loans.




Also
contributing to the fluctuations in non-accrual loans and troubled debt
restructurings during 2010 was the restructuring of a commercial relationship
secured by a high-rise, residential condominium development in the St. Louis
metropolitan area. The loan was restructured during the December 2009 quarter
because of the borrower’s weakened financial condition. The terms of the
restructuring primarily included an extension of the maturity date of the loan.
The balance of the loan at September 30, 2009 was $5.4 million, which was
included in non-accrual real estate construction and development loans. The
balance of the loan had paid down to $3.3 million at September 30, 2010 and was
included in troubled debt restructurings on a non-accrual basis. The balance of
non-accrual loans was also reduced by the charge-off during 2010 of $1.5 million
of land acquisition and development loans and $1.2 million of real estate
construction and development loans to one borrower that were classified as
non-accrual at September 30, 2009.




A loan is
classified as a troubled debt restructuring if the Company, for economic or
legal reasons related to the borrower’s financial difficulties, grants a
concession to the borrower that it would not otherwise consider. A loan
classified as a troubled debt restructuring will generally retain such
classification until the loan is paid in full. However, a restructured
one-to-four-family residential mortgage loan that yields a market rate and
demonstrates the ability to pay under the terms of the restructured note through
a sustained period of repayment performance, which is generally one year, is
removed from the troubled debt restructuring classification. Interest income on
restructured loans is accrued at the reduced rate and the loan is returned to
performing status once the borrower demonstrates the ability to pay under the
terms of the restructured note through a sustained period of repayment
performance, which is generally six months.




Restructured
residential loans totaled $27.6 million at September 30, 2010 compared with
$25.2 million at September 30, 2009. Management continued its efforts to
proactively modify loan repayment terms with residential borrowers who were
experiencing financial difficulties in the current economic climate with the
belief that these actions would maximize the Bank’s ultimate recoveries on these
loans. The restructured terms of the loans generally included a reduction of the
interest rates and the addition of past-due interest to the principal balance of
the loans. Many of these borrowers were current at the time of their
modifications and showed strong intent and ability to repay their obligations
under the modified terms. During the years ended September 30, 2010 and 2009,
the Company restructured approximately $15 million and $22 million,
respectively, of loans to troubled residential borrowers and returned
approximately $8 million and $1 million, respectively, of previously
restructured residential loans to performing status as the result of the
borrowers’ favorable performance history since restructuring. At September 30,
2010, $27.6 million, or 84% of total restructured loans, related to residential
borrowers compared with $25.2 million, or 72% of total restructured loans, at
September 30, 2009. At September 30, 2010, 70% of these residential borrowers
were performing as agreed under the modified terms of the loans compared with
85% at September 30, 2009. The decrease in the percentage of restructured
residential loans that were performing under their modified terms was primarily
the result of returning a portion of such loans to performing status during the
year ended September 30, 2010.


- 17
-




Restructured
commercial loans totaled $5.3 million at September 30, 2010 compared with $9.7
million at September 30, 2009. Contributing to the decrease in commercial
troubled debt restructurings during 2010 was the foreclosure on and sale of the
property securing the Company’s largest non-performing asset at September 30,
2009, which was a commercial real estate loan secured by a strip shopping center
in Naples, Florida. Although the Company’s lending practices generally limit
lending outside of its two primary market areas, St. Louis and Kansas City, the
loan was made to one of the Company’s St. Louis-based customers who had
historically demonstrated successful performance. The carrying value of the
loan, which was included in past-due troubled debt restructurings, was $7.8
million at September 30, 2009. The Company recorded a $3.2 million partial
charge-off during the March 2010 quarter and subsequently sold the property for
cash at no additional loss during May 2010.




Real
estate acquired in settlement of loans increased to $14.9 million at September
30, 2010 compared with $8.5 million at September 30, 2009. Contributing to the
increase during the year was the foreclosure, during the December 2009 quarter,
on a commercial loan secured by a retail strip shopping center in the St. Louis
metropolitan area resulting in a $1.8 million charge-off and a $6.8 million
increase in real estate acquired in settlement of loans. The Company also
recorded a $400,000 write down during the September 2010 quarter as the result
of an additional decline in the property’s fair market value. The balance of
real estate acquired in settlement of loans at September 30, 2010 also included
33 residential and eight commercial properties.




Real
estate foreclosure losses and expense was $2.8 million for the year ended
September 30, 2010 compared with $1.3 million for the year ended September 30,
2009. Real estate foreclosure losses and expense includes realized losses on the
final disposition of foreclosed properties, additional write-downs for declines
in the fair market values of properties subsequent to foreclosure, and expenses
incurred in connection with maintaining the properties until they are sold. The
increased expense for 2010 was primarily the result of an $826,000 write-down in
the March 2010 quarter of a parcel of raw ground, which was acquired through
foreclosure in a prior period, due to an estimated decline in its fair market
value based upon a new appraisal and the $400,000 write-down of the retail strip
shopping center discussed above.




The total
balance of impaired loans at September 30, 2010 and 2009 was $69.5 million and
$59.0 million, respectively. See Note 6 of Notes to the Consolidated
Financial Statements.




The
following table is a summary of the activity in the allowance for loan losses
for the years ended September 30, 2010 and 2009:




2010
                  
                  
                  2009Balance,
      beginning of year
                  
                  $
                  20,579,170
                  
                  
                  $
                  12,761,532Provision
      charged to expense
                  
                  
                  26,064,000
                  
                  
                  
                  23,030,685Charge-offs,
      net of recoveries:Residential
      real estate:First
      mortgage
                  
                  
                  3,390,091
                  
                  
                  
                  3,762,176Second
      mortgage
                  
                  
                  2,023,832
                  
                  
                  
                  1,431,336Home
      equity lines of credit
                  
                  
                  4,141,887
                  
                  
                  
                  2,653,411Commercial:Commercial
      & multi-family real estate
                  
                  
                  4,235,565
                  
                  
                  
                  36,343Land
      acquisition & development
                  
                  
                  1,144,690
                  
                  
                  
                  4,231,118Real
      estate construction & development
                  
                  
                  2,249,473
                  
                  
                  
                  2,424,848Commercial
      & industrial
                  
                  
                  2,316,172
                  
                  
                  
                  530,342Consumer
      & other
                  
                  
                  165,743
                  
                  
                  
                  143,473Total
      charge-offs, net
                  
                  
                  19,667,453
                  
                  
                  
                  15,213,047Balance,
      end of year
                  
                  $
                  26,975,717
                  
                  
                  $
                  20,579,170




The
following table contains a breakdown of the principal balance of loans
receivable at September 30, 2010 by major category and the ratio of net
charge-offs to the average balance of each major category for the years ended
September 30, 2010 and 2009, and the average annual charge-offs for the five
years ended September 30, 2010 and 2009.


- 18
-




Net Charge-Offs as aPercent of Average Loan CategoryPrincipal
                      
                      
                      
                      
                      
                      
                      
                      
                      AnnualizedBalance at
                      
                      
                      Year Ended
                      
                      Five Years EndedSeptember 30,
                      
                      
                      September 30,
                      
                      September 30,2010
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009(Dollars
      In Thousands)Residential
      real estate:First
      mortgage
                      
                      $
                      243,649
                      
                      
                      
                      1.26
                      %
                      
                      
                      1.52
                      %
                      
                      
                      0.73
                      %
                      
                      
                      0.50
                      %Second
      mortgage
                      
                      
                      60,281
                      
                      
                      
                      3.35
                      %
                      
                      
                      1.88
                      %
                      
                      
                      1.45
                      %
                      
                      
                      1.00
                      %Home
      equity lines of credit
                      
                      
                      201,922
                      
                      
                      
                      1.92
                      %
                      
                      
                      1.15
                      %
                      
                      
                      0.79
                      %
                      
                      
                      0.42
                      %Commercial
      (1)
                      
                      
                      561,115
                      
                      
                      
                      1.72
                      %
                      
                      
                      1.20
                      %
                      
                      
                      0.84
                      %
                      
                      
                      0.47
                      %Consumer
      and other
                      
                      
                      3,513
                      
                      
                      
                      0.15
                      %
                      
                      
                      0.10
                      %
                      
                      
                      0.13
                      %
                      
                      
                      0.14
                      %Total
      loans receivable
                      
                      $
                      1,070,480
                      
                      
                      
                      1.76
                      %
                      
                      
                      1.31
                      %
                      
                      
                      0.85
                      %
                      
                      
                      0.51
                      %




(1)
                Commercial
      includes real estate construction & development, commercial &
      multi-family real estate, and commercial & industrial
      loans.




The
provision for loan losses for the year ended September 30, 2010 was $26.1
million compared with $23.0 million in 2009. The increased provision over the
prior-year amount was primarily due to increased charge-offs, reflecting the
impact of the adverse economic climate on the Company’s borrowers, and the
increase in certain loss factors in the Company’s general valuation allowance
model, reflecting the risks in the Company’s loan portfolio resulting from
decreases in real estate values in certain geographic regions where the Bank has
originated loans, the continued elevated level of unemployment and the level of
non-performing loans.




Net
charge-offs for the year ended September 30, 2010 were $19.7 million, or 1.76%
of average loans, compared with $15.2 million, or 1.31% of average loans, for
fiscal 2009. Because the Company’s loan portfolio is typically collateralized by
real estate, losses occur more frequently when property values are declining and
borrowers are losing equity in the underlying collateral. Recent declines in
real estate values in the Company’s market areas, as well as nationally,
contributed to the increased charge-offs in 2010. Approximately 27%, or $5.6
million, of fiscal 2010 charge-offs related to relationships with two commercial
borrowers that were secured by retail strip shopping centers.




The ratio
of the allowance for loan losses to loans receivable increased to 2.52% at
September 30, 2010 compared to 1.79% at September 30, 2009. The ratio of the
allowance for loan losses to non-performing loans was 45.29% at September 30,
2010 compared to 34.68% at September 30, 2009. Excluding restructured loans that
were performing under their restructured terms and the related allowance for
loan losses, the ratio of the allowance for loan losses to the remaining
non-performing loans was 75.4% at September 30, 2010 compared to 55.9% at
September 30, 2009. Management believes the changes in these coverage ratios are
appropriate due to the change in the mix of non-performing loans during the
period, specifically increased troubled debt restructurings that were performing
under their restructured terms and residential first mortgage loans. At
September 30, 2010 and 2009, 50% and 47%, respectively, of total non-performing
loans were residential first mortgage loans, which carry a lower level of
inherent risk than other types of loans in the Company’s portfolio, especially
compared to second mortgage loans and home equity lines of credit where the
Company often does not own or service the first mortgage loan.


- 19
-


Management
believes that the amount maintained in the allowance will be adequate to absorb
probable losses inherent in the portfolio. Although management believes that it
uses the best information available to make such determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances differ
substantially from the assumptions used in making the determinations. While
management believes it has established the allowance for loan losses in
accordance with U.S. generally accepted accounting principles, there can be no
assurance that the Bank’s regulators, in reviewing the Bank’s loan portfolio,
will not request the Bank to significantly increase its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that a substantial increase will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses will
adversely affect the Company’s financial condition and results of operations.
See Note 1 of Notes to the
Consolidated Financial Statementsfor a description of management’s
allowance for loan losses methodology.




Financial
Condition





Cash and cash
equivalents decreased $21.8 million to $15.6 million at September 30,
2010 from $37.5 million at September 30, 2009. Federal funds sold and overnight
interest-bearing deposit accounts decreased to $4.0 million at September 30,
2010 compared to $23.1 million at September 30, 2009. Cash and amount due from
depository institutions decreased to $11.6 million at September 30, 2010
compared to $14.3 million at September 30, 2009. The decreases were primarily
used to fund the increase in loans held for sale.




Debt securities
available for sale increased to $8.0 million at September 30, 2010 from
$2.0 million at September 30, 2009. Mortgage-backed
securities available for saledecreased to $8.8 million at
September 30, 2010 from $16.1 million at September 30, 2009 while mortgage-backed
securities held to maturity decreased to $10.3 million at September 30,
2010 from $12.1 million at September 30, 2009. Such securities are primarily
held as collateral to secure large commercial and municipal deposits. The total
balance held in these securities is adjusted, as individual securities mature or
repay, to reflect fluctuations in the balances of the deposits they are
securing.




Capital Stock of
the Federal Home Loan Bank decreased $1.9 million to $9.8 million at
September 30, 2010 from $11.6 million at September 30, 2009. The Bank is
generally required to hold a specific amount of stock based upon its total FHLB
borrowings outstanding. However, effective in December 2008, the FHLB
temporarily suspended redemptions of its stock when members reduced their
outstanding borrowings. This resulted in holdings of such stock at September 30,
2009 that were in excess of amounts that would have ordinarily been required
based on the level of outstanding borrowings. The FHLB subsequently resumed the
redemptions of excess stock in December 2009, resulting in a decrease in the
amount of stock held.




Mortgage loans
held for sale increased $144.4 million to $253.6 million at September 30,
2010 from $109.1 million at September 30, 2009. These balances represent loans
closed in the name of the Bank, which are committed in advance of closing to be
sold to investors. Since these loans are pre-sold, primarily at a pre-determined
price on a best-efforts basis, they are not subject to changes in market value
as a result of changes in market interest rates. The Bank typically receives
proceeds from the sale of these loans to investors within 30 to 60 days of loan
closing and benefits from interest income while awaiting sales delivery. The
increase was due to an increase in the level of market demand for the Company’s
loan products resulting from decreased market interest rates and an extension of
delivery times to investors during the latter part of fiscal 2010. See Primary Business
Lines.




Loans
receivable decreased $85.8 million to $1.05 billion at September 30, 2010
from $1.13 billion at September 30, 2009 due to decreases in residential and
commercial loans. See Primary
Business Lines.




Bank-owned life
insurance increased $1.1 million to $29.8 million at September 30, 2010
from $28.7 million at September 30, 2009. The increase was attributable to
appreciation of the cash surrender values of existing policies. Increases in
cash surrender values are treated as other income and are tax
exempt.




Deferred tax
assetsincreased $3.9 million to $13.2 million at September 30, 2010 from
$9.3 million at September 30, 2009 primarily as the result of an increase
related to allowance for loan losses. A valuation allowance is provided on
deferred tax assets when it is more likely than not that some portion of the
assets will not be realized. The Company has not established a valuation
allowance at September 30, 2010 or 2009 because management believes that all
criteria for recognition have been met, including the existence of a history of
taxes paid or qualifying tax planning strategies that are sufficient to support
the realization of deferred tax assets. See Note 14 of Notesto theConsolidated Financial
Statements.


- 20
-


Advances from
the Federal Home Loan
Bankincreased $120.0 million to $181.0 million at September 30, 2010
from $61.0 million at September 30, 2009. The Company supplements its primary
funding source, retail deposits, with wholesale funding sources consisting of
borrowings from the FHLB, brokered certificates of deposit acquired on a
national level and short-term borrowings from the discount window of the Federal
Reserve Bank. Management actively chooses among these wholesale funding sources
depending on their relative costs. The increased borrowings in 2010 were
primarily used to fund the increase in loans held for sale. See Liquidity Risk.




Total
stockholders’ equity decreased $608,000 to $116.4 million at September
30, 2010 from $117.0 million at September 30, 2009.Decreasing stockholders’
equity were common stock dividend payments of $4.1 million, preferred stock
dividends of $1.6 million, and a decrease in accumulated other comprehensive
income of $155,000. These decreases were partially offset by net income totaling
$3.3 million, common stock issued under the Company’s dividend reinvestment plan
totaling $707,000 and the amortization of equity trust expense of
$800,000.





Comparison
of Operating Results for the


Years
Ended September 30, 2009 and 2008





Overview




Net income
for the year ended September 30, 2009 increased 75.7% to $5.1 million, or $0.37
per diluted common share, compared to $2.9 million, or $0.28 per diluted common
share, for the year ended September 30, 2008. Net income for year ended
September 30, 2009 was negatively impacted by a $23.0 million provision for loan
losses compared to $7.7 million in 2008, by a $700,000 pretax charge to earnings
for an industry-wide FDIC special deposit insurance assessment, and by an
industry-wide increase in rates paid on deposit insurance. Also reducing income
available to common shares for the year ended September 30, 2009 were dividends
and discount accretion on the Company’s preferred stock, issued as part of the
U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program, totaling
$1.3 million, or $0.12 per diluted common share. Net income for the year ended
September 30, 2008 was negatively impacted by investment securities losses
totaling $5.2 million after tax, or $0.50 per diluted share, which primarily
included previously recorded losses realized on the sale of the Company’s entire
portfolio of Fannie Mae preferred stock and an after-tax charge of $989,000, or
$0.10 per diluted share, for a separation payment and other expenses related to
the resignation of the Company’s former chief executive officer on May 1,
2008.




Net
Interest Income




Net interest
income increased $6.0 million to $41.6 million for the year ended
September 30, 2009 compared to $35.6 million for the year ended September 30,
2008 due to an increase in net interest-earning assets and improvement in the
net interest margin. The average balance of interest-earning assets increased
$187.5 million to $1.34 billion during fiscal 2009, compared to $1.16 billion
during fiscal 2008 due primarily to commercial loan growth. The net interest
margin increased 2 basis points to 3.10% in fiscal 2009 from 3.08% in fiscal
2008, resulting primarily from an increase in demand deposits, which are
typically among the Company’s lowest cost of funds, combined with lower
wholesale funding costs.




Total interest
and dividend income decreased $5.4 million to $67.8 million for the year
ended September 30, 2009 compared to $73.3 million for the year ended September
30, 2008. The decrease was primarily due to a decline in the average yield on
loans receivable to 5.21% in fiscal 2009 from 6.47% in fiscal 2008 resulting
from lower market interest rates. The decrease was partially offset by a rise in
the average balance of loans receivable, which increased $115.9 million to $1.16
billion for fiscal 2009, and a rise in the average balance of loans held for
sale, which increased $55.3 million to $119.8 million for fiscal 2009.
Commercial loans accounted for substantially all of the growth in the average
balance of loans receivable during 2009.


- 21
-


Total interest
expense decreased $11.4 million to $26.2 million for fiscal 2009 compared
to $37.7 million for fiscal 2008 due to a decline in the average cost of funds
partially offset by an increase in the average balance of interest-bearing
liabilities. The average cost of funds decreased from 3.53% for 2008 to 2.20%
for 2009 while the average balance of interest-bearing liabilities increased
from $1.07 billion to $1.19 billion during the same periods,
respectively.




The
increased average balance of interest-bearing liabilities resulted from
increases in the average balances of deposits and borrowings from the Federal
Reserve, which were used to fund asset growth during the period and to repay
FHLB advances. The decreased average cost was the result of lower market
interest rates during the period, growth in core deposits and a shift in the mix
of wholesale funding sources.




Interest expense
on depositsdecreased $5.9 million, or 21.6%, to $21.5 million during the
year ended September 30, 2009 compared to $27.4 million for the year ended
September 30, 2008 as the result of a decrease in the average cost partially
offset by an increase in the average balance. The average balance of
interest-bearing deposits increased to $976.7 million for the year ended
September 30, 2009 from $783.8 million for the year ended September 30, 2008
while the average cost of deposits decreased from 3.50% to 2.20% during the same
periods, respectively. Growth in average total deposits during 2009 was used to
fund asset growth and repay certain wholesale borrowings.




Interest expense
on advances from the Federal Home Loan Bank decreased $4.4 million, or
56.0%, to $3.5 million during the year ended September 30, 2009 compared to $8.0
million for the year ended September 30, 2008 as the result of decreases in the
average cost and average balance. The average balance decreased to $120.3
million for the year ended September 30, 2009 from $224.5 million for the year
ended September 30, 2008 and the average cost decreased from 3.54% to 2.92%
during the same period, respectively. The decreased average balance resulted
from the repayment of short-term advances with increases in deposits and
lower-cost borrowings from the Federal Reserve. The decreased average cost was
the result of lower market interest rates during the 2009 period.




Interest expense
on borrowings from the Federal Reserve Bank decreased to $320,000 during
the year ended September 30, 2009 compared to $776,000 for the year ended
September 30, 2008 as the result of a decrease in the average cost partially
offset by an increase in the average balance. The average balance increased to
$71.7 million for the year ended September 30, 2009 from $34.1 million for the
year ended September 30, 2008, while the average cost decreased to 0.45% for the
year ended September 30, 2009 compared to 2.28% for the year ended September 30,
2008. During 2009, the Company supplemented its wholesale borrowing needs with
lower-cost, short-term borrowings from the discount window of the Federal
Reserve. The proceeds of these borrowings were used to fund increases in loans
held for sale and repay higher-cost borrowings from the FHLB. The decrease in
the average cost was the result of lower market interest rates during
2009.




Provision
for Loan Losses




The provision for
loan losses for the year ended September 30, 2009 was $23.0 million
compared to $7.7 million for the same period a year ago. The provision for loan
losses in 2009 related primarily to increased charge-offs, an increase in the
level of non-performing loans, and growth in performing commercial loans, which
carry a higher level of inherent risk than residential loans.




Non-Interest
Income




Total
non-interest income increased $14.6 million to $19.6 million for the year
ended September 30, 2009 compared to $5.0 million for the year ended September
30, 2008 primarily as the result of increases in mortgage revenues and
investment brokerage revenues and also due to the $7.8 million loss on the sale
of securities recorded in fiscal 2008.


- 22
-


Gain (loss) on
sales of securities increased $8.1 million to a net gain of $303,000 for
the year ended September 30, 2009 compared to a net loss of $7.8 million for the
year ended September 30, 2008. The net loss in 2008 was primarily the result of
the $7.9 million loss on the sale of the Company’s entire portfolio of Fannie
Mae preferred stock, consisting of 350,000 shares of 8.25% Series S fixed-rate
preferred stock, which was classified as available for sale, following the
announcement that the Treasury Department was placing Fannie Mae into
conservatorship and eliminating dividends on its common and preferred
securities. The net gains in 2009 primarily related to the sale of $50 million
in Federal Home Loan Bank bonds that were classified as available for
sale.




Mortgage
revenues increased 117.5% to $12.7 million during the year ended
September 30, 2009 on loan sales of $2.02 billion, compared to mortgage revenues
of $5.8 million during the year ended September 30, 2008 on loan sales of $1.32 billion.





Retail banking
fees decreased 1.8% to $3.9 million in 2009 compared to $4.0 million for
2008 primarily as a result of tightened consumer spending in the current
difficult economic environment.





Investment
brokerage revenuesincreased 30.5% to $1.3 million for the year September 30, 2009 compared
to $1.0 million for the same period a year ago. The Company operates an
investment brokerage division whose operations consist principally of brokering
bonds from wholesale brokerage houses to bank, municipal and individual
investors. Revenues are generated on trading spreads and fluctuate with changes
in trading volumes and market interest rates. The increased revenues in 2009
were the result of an increase in sales volume as many of the Bank’s customers
shifted funds from loan originations to lower-risk bonds because of the current
economic environment.




Other
non-interest income decreased $669,000 to $263,000 for the year ended
September 30, 2009 from $932,000 for the year ended September 30, 2008 primarily
as the result of a decrease in fees received from a correspondent bank related
to the Bank’s official check clearing process and a decrease in commission
income received for annuities due to decreased sales activity. Subsequent to
September 30, 2008, the Bank began clearing its official checks internally,
allowing the Bank the use of the float related to these outstanding checks. This
process was previously performed by a correspondent bank that paid the Bank fees
for the use of the float.




Non-Interest
Expense




Total
non-interest expense increased $2.1 million, or 7.2%, to $31.4 million
for the year ended September 30, 2009 compared to $29.3 million for the year
ended September 30, 2008. Significant fluctuations are discussed
below.




Salaries and
employee benefits expense increased $214,000, or 1.5%, to $14.3 million
for the year ended September 30, 2009 from $14.1 million for the year ended
September 30, 2008. Included in salaries and employee benefits expense for the
year ended September 30, 2008 was $1.5 million of expense associated with the
separation payment made to the Company’s former chief executive officer.
Excluding this amount, salaries and employee benefits expense increased $1.7
million in fiscal 2009 compared with fiscal 2008. The increase was primarily the
result of the payment of incentives related to the increased mortgage and
commercial lending volumes, which did not qualify as capitalized loan
origination expenses, and also to the reversal in fiscal 2008 of $364,000 in
previously accrued performance-based incentives related to the separation of
several employees, which reduced fiscal 2008 expense.




Occupancy,
equipment and data processing expense increased $424,000 to $8.1 million
for the year ended September 30, 2009 from $7.7 million for the year ended
September 30, 2008. The increase was largely related to an increase in expense
related to the use of an independent security company to provide security guards
at certain of the Bank’s branch offices, enhancement of certain capabilities of
the Bank’s data processing systems and increased data processing and other
expenses related to the increased level of loan and deposit activity.




Advertising
expense decreased $205,000 to $1.1 million for the year ended September
30, 2009 compared to $1.3 million for the year ended September 30, 2008
primarily due to a reduction in the overall level of advertising during fiscal
2009 in connection with a more focused effort to control such
expenses.


- 23
-


Gain on
derivative instrumentstotaled $396,000 for the year ended September 30, 2008 compared with no
net gains or losses for the year ended September 30, 2009. Such gains in fiscal
2008 related to interest-rate swap agreements with notional values totaling $80
million, which were designed to convert the fixed rates paid on certain brokered
certificates of deposits into variable, LIBOR-based rates. The Company used
long-haul, fair-value, hedge accounting. Under this method, any hedge
ineffectiveness was deemed not material and the impact was recognized as a
charge or credit to earnings during the period in which the ineffectiveness
occurred. All of such interest-rate swap agreements were called by the
counterparties during the year ended September 30, 2008 due to the declining
interest rate environment. In addition, the Company entered into two $14 million
notional value interest-rate swap agreements during fiscal 2008 that placed the
Company in equal, but opposite, positions with the counterparties resulting in
no net effect on non-interest expense. Such agreements were still outstanding at
September 30, 2009.





Recovery of data
processing termination expensetotaled $180,000 for the year
ended September 30, 2008. The amount represents the recovery of expenses that
were incurred in a prior period as the result of the termination of a contract
to convert the Company’s core data processing system. There was no such activity
in fiscal 2009.




FDIC deposit
insurance premium expenseincreased $806,000 to $1.6
million for the year ended September 30, 2009 compared to $749,000 for the year
ended September 30, 2008. The increase was the result of deposit growth and an
industry-wide increase in FDIC insurance rates and the final utilization, during
the quarter ended December 31, 2007, of the one-time assessment credit that was
provided to eligible insured depository institutions under the Federal Deposit
Insurance Reform Act of 2005. On November 12, 2009, the FDIC adopted a final
rule requiring insured depository institutions to prepay their estimated
quarterly risk-based assessments for the fourth quarter of 2009, and for all of
2010, 2011 and 2012, on December 30, 2009, along with each institution's
risk-based deposit insurance assessment for the third quarter of 2009. The
amount paid on December 30 was substantially higher than typical quarterly
deposit insurance assessments. The amount of the assessment related to future
periods was initially recorded as a prepaid asset and will be charged to expense
during the periods to which it relates.





FDIC special
deposit insurance assessment expense for the year ended September 30,
2009 totaled $700,000. The FDIC adopted a final rule imposing a five basis point
special assessment on each insured depository institution’s assets minus Tier 1
capital as of June 30, 2009, which was paid on September 30, 2009.





Income
Taxes




The provision for
income taxes increased from $684,000 for the year ended September 30,
2008 to $1.6 million for the year ended September 30, 2009. The effective tax
rate was 24.3% in 2009 and differed from the Federal statutory rate of 34%
primarily as the result of non-taxable income related to bank-owned life
insurance and non-taxable interest income. The effective tax rate in 2008 was
19.2% and differed from the Federal statutory rate of 34% primarily as the
result of a reduction in income tax expense related to the loss on the sale of
Fannie Mae preferred stock and the impact of non-taxable income related to
bank-owned life insurance and non-taxable interest income.


- 24
-




Market
Risk Analysis





Market
risk is the risk of loss arising from adverse changes in the fair values of
financial instruments or other assets caused by changes in interest rates,
currency exchange rates, or equity prices. Interest rate risk is the Company’s
primary market risk and results from timing differences in the repricing of
assets and liabilities, changes in relationships between rate indices, and the
potential exercise of explicit or embedded options. The Company uses several
measurement tools provided by a national asset liability management consultant
to help manage these risks. Management provides key assumptions to the
consultant, which are used as inputs into the measurement tools. Following is a
summary of two different tools management uses on a quarterly basis to monitor
and manage interest rate risk.





Earnings Simulation Modeling.
Net income is affected by changes in the level of interest rates, the shape of
the yield curve and the general market pressures affecting current market
interest rates at the time of simulation. Many interest rate indices do not move
uniformly, creating certain disunities between them. For example, the spread
between a thirty-day, prime-based asset and a thirty-day, FHLB advance may not
be uniform over time. The earnings simulation model projects changes in net
interest income caused by the effect of changes in interest rates on
interest-earning assets and interest-bearing liabilities. Simulation results are
measured as a percentage change in net interest income compared to the
static-rate or “base case” scenario. The model considers increases and decreases
in asset and liability volumes using prepayment assumptions as well as rate
changes. Rate changes are modeled gradually over a twelve-month period, referred
to as a “rate ramp.” The model projects only changes in interest income and
expense and does not project changes in non-interest income, non-interest
expense, provision for loan losses, the impact of changing tax rates, or any
actions that the Company might take to counter the effect of market interest
rate movements. At September 30, 2010, net interest income simulation showed a
negative 290 basis point change from the base case in a 200 basis point ramped
rising rate environment and a negative 90 basis point change from the base case
in a 100 basis point ramped declining rate environment. The projected decrease
in net interest income is within the Asset/Liability Committee’s guidelines in a
200 basis point increasing or 100 basis point decreasing interest rate
environment. However, management continually monitors signs of elevated risks
and takes certain actions to limit these risks.




The
following table summarizes the results of the Company’s income simulation model
as of September 30, 2010 and 2009.




Change
      in Net Interest Income2010
                          
                          
                          2009Year
      1
                          
                          
                          Year
      2
                          
                          
                          Year
      1
                          
                          
                          Year
      2Change
      in Market Interest Rates:200
      basis point ramped increase
                          
                          
                          (2.9
                          )%
                          
                          
                          (2.2
                          )%
                          
                          
                          0.3
                          %
                          
                          
                          2.9
                          %Base
      case - no change
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          0.3
                          %100
      basis point ramped decrease
                          
                          
                          (0.9
                          )%
                          
                          
                          (1.3
                          )%
                          
                          
                          0.4
                          %
                          
                          
                          2.3
                          %




Net Portfolio Value Analysis.Net portfolio value (“NPV”) represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 to 200 basis point increase or decrease in market
interest rates with no effect given to any actions management might take to
counter the effect of that interest rate movement. The following is a summary of
the results of the report compiled by the Company’s outside consultant using
data and assumptions management provided as of September 30, 2010 and
2009.


- 25
-


Estimated
      Change in Net Portfolio Value2010
                          
                          
                          2009Amount
                          
                          
                          
                          
                          
                          Amount(in
      thousands)
                          
                          
                          Percent
                          
                          
                          (in
      thousands)
                          
                          
                          PercentChange
      in Market Interest Rates:200
      basis point increase
                          
                          $
                          6,271
                          
                          
                          
                          3.8
                          %
                          
                          $
                          11,146
                          
                          
                          
                          8.6
                          %Base
      case - no change
                          
                          $
                          -
                          
                          
                          
                          —
                          
                          
                          $
                          -
                          
                          
                          
                          —100
      basis point decrease
                          
                          $
                          (581
                          )
                          
                          
                          (0.4
                          )%
                          
                          $
                          (8,201
                          )
                          
                          
                          (6.3
                          )%




The preceding table indicates that, at
September 30, 2010, in the event of a 200 basis point increase in prevailing
market interest rates, NPV would be expected to increase by $6.3 million, or
3.8% ofthe base case
scenario valueof $163.2
million.  In the event of a decrease in prevailing market rates of 100
basis points, NPV would be expected to decline by $581,000, or 0.4%, of the base
case scenario value.The projected decrease in NPV is within
the Asset Liability Committee’s guidelines in a 200 basis point increasing or
100 basis point decreasing interest rate environment.  However,
management continually monitors signs of elevated risks and takes certain
actions to limit these risks.


- 26
-


The
following table presents the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and the
instruments' estimated fair values and weighted average interest rates at
September 30, 2010.  Expected maturities use certain assumptions based
on historical experience and other data available to management.





Weighted
                      
                      
                      
                      
                      
                      One Year
                      
                      
                      After Three
                      
                      
                      After Five
                      
                      
                      
                      
                      
                      Carrying
                      
                      
                      EstimatedAverage
                      
                      
                      Within One
                      
                      
                      to
                      
                      
                      Years to Five
                      
                      
                      Years to
                      
                      
                      Beyond
                      
                      
                      Value
                      
                      
                      FairRate
                      
                      
                      Year
                      
                      
                      Three Years
                      
                      
                      Years
                      
                      
                      Ten Years
                      
                      
                      Ten Years
                      
                      
                      Total
                      
                      
                      Value(Dollars
      in Thousands)Interest-Sensitive
      AssetsLoans
      receivable - net (1)
                      
                      
                      5.34
                      %
                      
                      $
                      655,813
                      
                      
                      $
                      209,070
                      
                      
                      $
                      46,243
                      
                      
                      $
                      81,802
                      
                      
                      $
                      53,345
                      
                      
                      $
                      1,046,273
                      
                      
                      $
                      1,094,190Mortgage
      loans held for sale - net (2)
                      
                      
                      4.28
                      %
                      
                      
                      253,578
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      253,578
                      
                      
                      
                      258,414Debt
      securities - AFS
                      
                      
                      0.25
                      %
                      
                      
                      6,999
                      
                      
                      
                      1,002
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      8,001
                      
                      
                      
                      8,001Mortgage-backed
      securities - HTM
                      
                      
                      4.02
                      %
                      
                      
                      4,278
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,019
                      
                      
                      
                      5,000
                      
                      
                      
                      10,297
                      
                      
                      
                      10,788Mortgage-backed
      securities - AFS
                      
                      
                      4.16
                      %
                      
                      
                      27
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,121
                      
                      
                      
                      3,698
                      
                      
                      
                      8,846
                      
                      
                      
                      8,846FHLB
      stock
                      
                      
                      2.00
                      %
                      
                      
                      9,774
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,774
                      
                      
                      
                      9,774Other
                      
                      
                      2.96
                      %
                      
                      
                      27,144
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      27,144
                      
                      
                      
                      27,144Total
      interest-sensitive assets
                      
                      
                      
                      
                      
                      $
                      957,613
                      
                      
                      $
                      210,072
                      
                      
                      $
                      46,243
                      
                      
                      $
                      87,942
                      
                      
                      $
                      62,043
                      
                      
                      $
                      1,363,913
                      
                      
                      $
                      1,417,157Interest-Sensitive
      LiabilitiesPassbook
      savings accounts
                      
                      
                      0.18
                      %
                      
                      $
                      30,296
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      30,296
                      
                      
                      $
                      30,296Checking
      accounts (3)
                      
                      
                      0.90
                      %
                      
                      
                      345,013
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      345,013
                      
                      
                      
                      345,013Money
      market accounts
                      
                      
                      0.52
                      %
                      
                      
                      189,851
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      189,851
                      
                      
                      
                      189,851Certificate
      of deposit accounts
                      
                      
                      2.02
                      %
                      
                      
                      276,165
                      
                      
                      
                      122,930
                      
                      
                      
                      1,762
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      400,857
                      
                      
                      
                      406,095FHLB
      advances
                      
                      
                      0.72
                      %
                      
                      
                      152,000
                      
                      
                      
                      -
                      
                      
                      
                      25,000
                      
                      
                      
                      -
                      
                      
                      
                      4,000
                      
                      
                      
                      181,000
                      
                      
                      
                      183,139Subordinated
      debentures
                      
                      
                      2.67
                      %
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      19,589
                      
                      
                      
                      19,589
                      
                      
                      
                      19,583Total
      interest-sensitive liabilities
                      
                      
                      
                      
                      
                      $
                      993,325
                      
                      
                      $
                      122,930
                      
                      
                      $
                      26,762
                      
                      
                      $
                      -
                      
                      
                      $
                      23,589
                      
                      
                      $
                      1,166,606
                      
                      
                      $
                      1,173,977Off-Balance-Sheet
      ItemsOperating
      leases
                      
                      
                      
                      
                      
                      $
                      588
                      
                      
                      $
                      1,189
                      
                      
                      $
                      1,176
                      
                      
                      $
                      1,511
                      
                      
                      $
                      -
                      
                      
                      $
                      4,464
                      
                      
                      $
                      4,464Commitments
      to extend credit
                      
                      
                      4.84
                      %
                      
                      
                      115,223
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      117,145Unused
      lines of credit - residential
                      
                      
                      
                      
                      
                      
                      145,162
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      141,460Unused
      lines of credit - commercial
                      
                      
                      
                      
                      
                      
                      61,257
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      63,493Unused
      lines of credit - consumer
                      
                      
                      
                      
                      
                      
                      32
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      32





(1)
Includes non-accrual loans.


(2)
Maturity reflects expected committed sales to investors.


(3)
Excludes non-interest-bearing checking accounts of $149.2
million.


- 27
-




Liquidity
Risk




Liquidity
risk arises from the possibility that the Company might not be able to satisfy
current or future financial commitments, or may become unduly reliant on
alternative funding sources. The objective of liquidity risk management is to
ensure that the cash flow requirements of the Bank’s depositors and borrowers,
as well as the Company’s operating cash needs, are met. The Asset/Liability
Committee meets regularly to consider the operating needs of the
organization.





The
Company primarily funds its assets with deposits from its retail and commercial
customers. If the Bank or the Company requires funds beyond their ability to
generate them internally, the Bank has the ability to borrow funds from the FHLB
and the Federal Reserve and, subject to regulatory restrictions discussed below,
to raise certificates of deposit on a national level through broker
relationships. Management chooses among these wholesale funding sources
depending on their relative costs, the Company’s overall interest rate risk
exposure and the Company’s overall borrowing capacity at the FHLB and the
Federal Reserve. At September 30, 2010, the combined balance of borrowings from
the FHLB and brokered deposits totaled $189.4 million, had a weighted-average
interest rate of 0.92%, a weighted average maturity of approximately 10 months
and represented 13% of total assets. At September 30, 2009, these combined
balances totaled $144.5 million, had a weighted-average interest rate of 2.97%,
a weighted average maturity of approximately 20 months and represented 10% of
total assets. Use of these funds has given the Company alternative sources to
support its asset growth while avoiding, when necessary, aggressive deposit
pricing strategies used from time to time by some of its competitors in its
market. In addition, because approximately two-thirds of the Company’s assets
are scheduled to mature or reprice within one year, the use of these wholesale
funds has given management a low-cost means to maximize net interest income and
manage interest rate risk by providing the Company greater flexibility to
control the interest rates and maturities of these funds, as compared to
deposits. This increased flexibility has allowed the Company to better respond
to changes in the interest rate environment and demand for its loan products,
especially loans held for sale that are awaiting final settlement (generally
within 30 to 60 days) with the Company’s investors. While the Company
effectively utilized wholesale funding to support its asset growth in recent
years, growth in core deposits during the year ended September 30, 2010 allowed
the Company to reduce its use of such wholesale funding from a high during
fiscal year 2009 of approximately 27% of total assets to the reduced level at
September 30, 2010.





During
July 2010, the Company agreed to comply with a request from its primary
regulator, the Office of Thrift Supervision (“OTS”), not to increase the
aggregate level of national brokered certificates of deposit, CDARS time
deposits and certain other similar reciprocal deposits above the level that
existed at July 2, 2010, which was $178.5 million. The Company had already begun
reducing the level of these types of deposits earlier in the fiscal year with
funds received from the increased levels of core deposits resulting in a
four-year low of such deposits to $150.1 million at September 30, 2010.
Management does not anticipate that this restriction will have a significant
impact on the Company’s financial condition, results of operations or liquidity
position.





The
borrowings from the FHLB are obtained under a blanket agreement, which assigns
all investments in FHLB stock, qualifying first residential mortgage loans,
residential loans held for sale and home equity loans with a 90% or less
loan-to-value ratio as collateral to secure the amounts borrowed. Total
borrowings from the FHLB are subject to limitations based upon a risk assessment
of the Bank. At September 30, 2010, the Bank had approximately $175.0 million in
additional borrowing authority under the arrangement with the FHLB in addition
to the $181.0 million in advances outstanding at that date.





The Bank
has the ability to borrow funds on a short-term basis under the Bank’s primary
credit line at the Federal Reserve’s Discount Window. At September 30, 2010, the
Bank had approximately $93.3 million in borrowing authority under this
arrangement with no borrowings outstanding and had approximately $153.0 million
of commercial loans pledged as collateral under this agreement.





At
September 30, 2010, the Company had outstanding firm commitments to originate
loans of $115.2 million, all of which were on a best-efforts basis and to
fulfill commitments under unused lines of credit of $206.5 million. Certificates
of deposit scheduled to mature in one year or less totaled $276.2 million, which
included no brokered deposits. Based upon historical experience, management
believes the majority of maturing retail certificates of deposit will remain
with the Bank. However, if these deposits do not remain with the Bank, the Bank
will need to rely on wholesale funding sources, which might only be available at
higher interest rates.


- 28
-





The
Company is a large originator of residential mortgage loans, with substantially
all of these loans sold to the secondary residential mortgage investment
community. Consequently, the primarysource and use of
cash in operations is to originate loans for sale, which used $1.81
billion in cash during the twelve months ended September 30, 2010 and provided
proceeds of $1.67 billion from loan sales.




The
primaryuse of cash from
investing activities is the origination of loans receivable that are held
in portfolio. Loans originated for portfolio decreased $37.9 million for the
year ended September 30, 2010 compared to an increase of $82.4 million for the
year ended September 30, 2009. Other significant uses of cash from investing
activities included $26.0 million for the purchase of debt securities available
for sale, $11.1 million for the purchase of FHLB stock, and $1.7 million for the
purchase or improvement of premises and equipment. Sources of cash
from investing activities included proceeds from maturities of debt
securities available for sale totaling $20.0 million, proceeds from FHLB stock
redemptions of $13.0 million, principal repayments on mortgage-backed securities
totaling $8.6 million and proceeds from sale of real estate acquired in
settlement of loans of $11.3 million.




The
Company’s primarysources of cash
fromfinancing
activities included a $120.0 million increase in FHLB advances and a $2.4
million increase in advance payments by borrowers for taxes and insurance.
Primary uses of cash from
financing activities included a $76.4 million decrease in deposits,
dividends paid on common stock of $4.1 million and dividends paid on preferred
stock of $1.6 million.




The
Company is a legal entity, separate and distinct from the Bank, which must
provide its own liquidity to meet its operating needs. On January 16, 2009, as
part of the U.S. Department of Treasury’s Capital Purchase Program, the Company
issued 32,538 shares of Fixed Rate Cumulative Perpetual Preferred Stock and a
warrant to purchase up to 778,421 shares of the Company’s common stock in
exchange for $32.5 million in cash from the U.S. Department of Treasury. See
Note 15of Notes totheConsolidated Financial
Statements.The
Company contributed $20.0 million of the proceeds to the Bank in the form of
additional paid-in capital, repaid a $7.6 million note payable to a
correspondent bank and retained the remainder of the proceeds to fund the
Company’s future cash needs. The Company’s ongoing liquidity needs primarily
include funding its operating expenses, paying cash dividends to its common and
preferred shareholders and paying interest and principal on outstanding debt.
During the years ended September 30, 2010 and 2009, the Company paid cash
dividends to its common and preferred shareholders totaling $5.7 million and
$4.9 million, respectively, repaid principal on outstanding debt totaling $0 and
$7.6 million, respectively, and paid interest on outstanding debt totaling
$515,000 and $873,000, respectively.





A large
portion of the Company’s liquidity is obtained from the Bank in the form of
dividends. OTS regulations impose limitations upon payment of capital
distributions from the Bank to the Company. Under the regulations as currently
applied to the Bank, the approval of the OTS is required prior to any capital
distribution. To the extent that any such capital distributions are not approved
by the OTS in future periods, the Company could find it necessary to reduce or
eliminate the payment of common dividends to its shareholders. In addition, the
Company could find it necessary to temporarily suspend the payment of dividends
on its preferred stock and interest on its subordinated debentures. At September
30, 2010 and 2009, the Company had cash and cash equivalents totaling $109,000
and $97,000, respectively, and a demand loan extended to the Bank totaling $1.9
million and $2.8 million, respectively, that could be used to fulfill its
liquidity needs.





DERIVATIVES,
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE-SHEET ARRANGEMENTS




The
Company has various financial obligations, including obligations that may
require future cash payments. The table below presents, as of September 30,
2010, significant fixed and determinable contractual obligations to third
parties, excluding interest payable, by payment due date. Further discussion of
each obligation is included in the notes to the consolidated financial
statements.


- 29
-





Payments Due by PeriodTotal
                  
                  
                  Less than 1
                    Year
                  
                  
                  1 to Less Than
                    3 Years
                  
                  
                  3 to 5 Years
                  
                  
                  More than 5
                    years(In
      thousands)Time
      deposits
                  
                  $
                  400,857
                  
                  
                  $
                  276,165
                  
                  
                  $
                  122,930
                  
                  
                  $
                  1,762
                  
                  
                  $
                  -Advances
      from FHLB
                  
                  
                  181,000
                  
                  
                  
                  152,000
                  
                  
                  
                  -
                  
                  
                  
                  25,000
                  
                  
                  
                  4,000Subordinated
      debentures
                  
                  
                  19,589
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,589Operating
      lease obligations
                  
                  
                  4,464
                  
                  
                  
                  588
                  
                  
                  
                  1,189
                  
                  
                  
                  1,176
                  
                  
                  
                  1,511Total
                  
                  $
                  605,910
                  
                  
                  $
                  428,753
                  
                  
                  $
                  124,119
                  
                  
                  $
                  27,938
                  
                  
                  $
                  25,100





In the
normal course of operations, the Company engages in a variety of financial
transactions that, in accordance with U.S. generally accepted accounting
principles, are not recorded in its financial statements. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity
risk. Such transactions are used for general corporate purposes or to manage
customers’ requests for funding. Corporate purpose transactions are used to help
manage credit, interest rate, and liquidity risk or to optimize capital.
Customer transactions are used to manage customers’ requests for
funding.




Stock
Performance




The
following graph compares the cumulative total stockholder return on the
Company’s common stock with the cumulative total return on the Nasdaq Index
(U.S. companies) and with the SNL Bank and Thrift Index.  The total
return assumes reinvestment of all dividends.  The graph assumes $100
was invested at the close of business on September 30, 2005.










Period
      EndingIndex
                              
                              09/30/05
                              
                              
                              09/30/06
                              
                              
                              09/30/07
                              
                              
                              09/30/08
                              
                              
                              09/30/09
                              
                              
                              09/30/10Pulaski
      Financial Corp.
                              
                              
                              100.00
                              
                              
                              
                              95.19
                              
                              
                              
                              75.94
                              
                              
                              
                              53.37
                              
                              
                              
                              48.97
                              
                              
                              
                              47.81NASDAQ
      Composite
                              
                              
                              100.00
                              
                              
                              
                              105.84
                              
                              
                              
                              127.56
                              
                              
                              
                              99.60
                              
                              
                              
                              102.13
                              
                              
                              
                              115.14SNL
      Bank and Thrift Index
                              
                              
                              100.00
                              
                              
                              
                              119.71
                              
                              
                              
                              116.01
                              
                              
                              
                              82.64
                              
                              
                              
                              58.42
                              
                              
                              
                              53.31
  - 30
-




Capital
Resources




The Company is not subject to any
separate capital requirements from those of the Bank. The Bank is required to
maintain specific minimum amounts of capital pursuant to Office of Thrift
Supervision regulations. These minimum capital standards generally require the
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement and risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as stockholders’ equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted assets. The risk-based capital requirement provides for the
maintenance of core capital plus a portion of unallocated loss allowances equal
to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Bank
multiplies the value of each asset on its balance sheet by a risk-weighting
factor that is defined by federal regulations (e.g., one- to four-family
conventional residential loans carry a risk-weighted factor of 50%). SeeNote
16ofNotes to the Consolidated Financial Statementsfor a summary of the Bank’s regulatory
capital amounts and ratios at September 30, 2010and 2009.




Effect
of Inflation and Changing Prices




The
consolidated financial statements and related financial data presented herein
have been prepared in accordance with U.S. generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company’s operations. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.





Impact
of Recently Issued Accounting Standards




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





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





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


- 31
-





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





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





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





In July
2010, the FASB issued ASU No. 2010-20, Receivables (ASC Topic 310):
Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses. This ASU requires expanded credit risk disclosures
intended to provide investors with greater transparency regarding the allowance
for credit losses and the credit quality of financing receivables. Under this
ASU, companies will be required to provide more information about the credit
quality of their financing receivables in the disclosures to financial
statements, such as aging information, credit quality indicators, changes in the
allowance for credit losses, and the nature and extent of troubled debt
restructurings and their effect on the allowance for credit losses. Both new and
existing disclosures must be disaggregated by portfolio segment or class based
on the level of disaggregation that management uses when assessing its allowance
for credit losses and managing its credit exposure. The disclosures as of the
end of a reporting period will be effective for interim and annual periods
ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period will be effective for interim and annual reporting
periods beginning on or after December 15, 2010. Management is currently
evaluating the disclosure requirements under this ASU and the impact on the
Company’s consolidated financial statements and the disclosures presented in the
consolidated financial statements.


- 32
-





Management’s
Report on


Internal
Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of our financial reporting and of the preparation of our
consolidated financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.





A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the consolidated financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our
management assessed the effectiveness of our internal control over financial
reporting as of September 30, 2010, using the criteria established in
Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).  Based on this
assessment, management has concluded that, as of September 30, 2010, the
Company’s internal control over financial reporting was effective based on those
criteria.





Our
independent registered public accountants, KPMG LLP, have audited and issued a
report on our internal control over financial reporting, which appears in this
Annual Report.


- 33
-


Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders of


Pulaski
Financial Corp.:




We have
audited the accompanying consolidated balance sheets of Pulaski Financial Corp.
and subsidiaries (the Company) as of September 30, 2010 and 2009, and
the related consolidated statements of income and comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year
period ended September 30, 2010. We also have audited the Company’s
internal control over financial reporting as of September 30, 2010, based
on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
management’s report on internal control over financial reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company’s internal control over financial
reporting based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Pulaski Financial Corp. and
subsidiaries as of September 30, 2010 and 2009, and the results of its
operations and its cash flows for each of the years in the three-year period
ended September 30, 2010, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
September 30, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.




/s/ KPMG LLP




St.
Louis, Missouri


December 17,
2010


- 34
-




PULASKI
      FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSSEPTEMBER
      30, 2010 and 2009





2010
                              
                              
                              2009ASSETSCash
      and amounts due from depository institutions
                              
                              $
                              11,641,550
                              
                              
                              $
                              14,317,839Federal
      funds sold and overnight interest-bearing deposits
                              
                              
                              3,961,254
                              
                              
                              
                              23,132,825Total
      cash and cash equivalents
                              
                              
                              15,602,804
                              
                              
                              
                              37,450,664Debt
      securities available for sale, at fair value
                              
                              
                              8,001,092
                              
                              
                              
                              1,997,396Mortgage-backed
      securities held to maturity, at amortized cost (fair value of $10,788,459
      and $12,374,966 at September 30, 2010 and 2009,
    respectively)
                              
                              
                              10,296,891
                              
                              
                              
                              12,077,794Mortgage-backed
      securities available for sale, at fair value
                              
                              
                              8,845,526
                              
                              
                              
                              16,087,148Capital
      stock of Federal Home Loan Bank, at cost
                              
                              
                              9,773,600
                              
                              
                              
                              11,649,800Mortgage
      loans held for sale, at lower of cost or market
                              
                              
                              253,578,202
                              
                              
                              
                              109,129,721Loans
      receivable (net of allowance for loan losses of $26,975,717 and
      $20,579,170 at September 30, 2010 and 2009, respectively)
                              
                              
                              1,046,273,232
                              
                              
                              
                              1,132,094,844Real
      estate acquired in settlement of loans (net of allowance for losses of
      $1,651,100 and $274,076 at September 30, 2010 and 2009,
      respectively)
                              
                              
                              14,900,312
                              
                              
                              
                              8,454,610Premises
      and equipment, net
                              
                              
                              18,764,098
                              
                              
                              
                              18,962,001Goodwill
                              
                              
                              3,938,524
                              
                              
                              
                              3,938,524Core
      deposit intangible
                              
                              
                              148,003
                              
                              
                              
                              243,100Accrued
      interest receivable
                              
                              
                              4,432,361
                              
                              
                              
                              4,906,919Bank-owned
      life insurance
                              
                              
                              29,770,828
                              
                              
                              
                              28,678,679Deferred
      tax assets
                              
                              
                              13,157,300
                              
                              
                              
                              9,296,234Prepaid
      expenses, accounts receivable and other assets
                              
                              
                              15,333,827
                              
                              
                              
                              11,458,438Total
      assets
                              
                              $
                              1,452,816,600
                              
                              
                              $
                              1,406,425,872LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIES:Deposits
                              
                              $
                              1,115,203,120
                              
                              
                              $
                              1,191,629,239Advances
      from the Federal Home Loan Bank
                              
                              
                              181,000,000
                              
                              
                              
                              61,000,000Subordinated
      debentures
                              
                              
                              19,589,000
                              
                              
                              
                              19,589,000Advance
      payments by borrowers for taxes and insurance
                              
                              
                              7,098,432
                              
                              
                              
                              4,655,867Accrued
      interest payable
                              
                              
                              945,374
                              
                              
                              
                              1,034,896Other
      liabilities
                              
                              
                              12,627,393
                              
                              
                              
                              11,555,500Total
      liabilities
                              
                              
                              1,336,463,319
                              
                              
                              
                              1,289,464,502STOCKHOLDERS’
      EQUITY :Preferred
      stock - $0.01 par value per share, 1,000,000 shares authorized; 32,538
      shares issued at September 30, 2010, $1,000 per share liquidation value,
      net of discount
                              
                              
                              31,088,060
                              
                              
                              
                              30,655,060Common
      stock - $0.01 par value per share, 18,000,000 shares authorized;
      13,068,618  shares issued at September 30, 2010 and 2009,
      respectively
                              
                              
                              130,687
                              
                              
                              
                              130,687Treasury
      stock - at cost (2,753,799 and 2,963,817 shares at September 30, 2010 and
      2009, respectively)
                              
                              
                              (18,064,582
                              )
                              
                              
                              (18,544,173
                              )Additional
      paid-in capital from common stock
                              
                              
                              56,702,495
                              
                              
                              
                              55,247,464Accumulated
      other comprehensive income, net
                              
                              
                              37,834
                              
                              
                              
                              192,773Retained
      earnings
                              
                              
                              46,458,787
                              
                              
                              
                              49,279,559Total
      stockholders’ equity
                              
                              
                              116,353,281
                              
                              
                              
                              116,961,370Total
      liabilities and stockholders’ equity
                              
                              $
                              1,452,816,600
                              
                              
                              $
                              1,406,425,872





See
accompanying notes to the consolidated financial statements.


- 35
-





PULASKI
      FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEYEARS
      ENDED SEPTEMBER 30, 2010, 2009 AND
2008





2010
                          
                          
                          2009
                          
                          
                          2008INTEREST
      AND DIVIDEND INCOME:Loans
      receivable
                          
                          $
                          57,689,759
                          
                          
                          $
                          60,481,030
                          
                          
                          $
                          67,608,236Mortgage
      loans held for sale
                          
                          
                          6,259,177
                          
                          
                          
                          5,768,338
                          
                          
                          
                          3,561,984Securities
      and other
                          
                          
                          1,155,254
                          
                          
                          
                          1,573,931
                          
                          
                          
                          2,095,327Total
      interest and dividend income
                          
                          
                          65,104,190
                          
                          
                          
                          67,823,299
                          
                          
                          
                          73,265,547INTEREST
      EXPENSE:Deposits
                          
                          
                          16,134,364
                          
                          
                          
                          21,515,584
                          
                          
                          
                          27,441,443Advances
      from Federal Home Loan Bank
                          
                          
                          1,742,237
                          
                          
                          
                          3,507,381
                          
                          
                          
                          7,955,576Borrowings
      from the Federal Reserve Bank
                          
                          
                          484
                          
                          
                          
                          319,548
                          
                          
                          
                          776,048Subordinated
      debentures
                          
                          
                          515,308
                          
                          
                          
                          759,492
                          
                          
                          
                          1,238,106Note
      payable
                          
                          
                          -
                          
                          
                          
                          113,354
                          
                          
                          
                          241,786Total
      interest expense
                          
                          
                          18,392,393
                          
                          
                          
                          26,215,359
                          
                          
                          
                          37,652,959NET
      INTEREST INCOME
                          
                          
                          46,711,797
                          
                          
                          
                          41,607,940
                          
                          
                          
                          35,612,588PROVISION
      FOR LOAN LOSSES
                          
                          
                          26,064,000
                          
                          
                          
                          23,030,685
                          
                          
                          
                          7,734,641NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                          
                          
                          20,647,797
                          
                          
                          
                          18,577,255
                          
                          
                          
                          27,877,947NON-INTEREST
      INCOME:Mortgage
      revenues
                          
                          
                          7,840,478
                          
                          
                          
                          12,684,367
                          
                          
                          
                          5,832,583Retail
      banking fees
                          
                          
                          3,777,468
                          
                          
                          
                          3,893,265
                          
                          
                          
                          3,963,420Investment
      brokerage revenues
                          
                          
                          1,797,876
                          
                          
                          
                          1,336,857
                          
                          
                          
                          1,024,291Gain
      (loss) on sales of securities
                          
                          
                          -
                          
                          
                          
                          302,714
                          
                          
                          
                          (7,774,284
                          )Bank-owned
      life insurance income
                          
                          
                          1,092,149
                          
                          
                          
                          1,086,693
                          
                          
                          
                          1,032,477Other
                          
                          
                          332,507
                          
                          
                          
                          262,734
                          
                          
                          
                          932,106Total
      non-interest income
                          
                          
                          14,840,478
                          
                          
                          
                          19,566,630
                          
                          
                          
                          5,010,593NON-INTEREST
      EXPENSE:Salaries
      and employee benefits
                          
                          
                          13,965,409
                          
                          
                          
                          14,270,156
                          
                          
                          
                          14,056,359Occupancy,
      equipment and data processing expense
                          
                          
                          8,288,918
                          
                          
                          
                          8,082,272
                          
                          
                          
                          7,658,314Advertising
                          
                          
                          566,111
                          
                          
                          
                          1,051,338
                          
                          
                          
                          1,256,538Professional
      services
                          
                          
                          1,747,584
                          
                          
                          
                          1,517,781
                          
                          
                          
                          1,496,040FDIC
      deposit insurance premium expense
                          
                          
                          1,980,105
                          
                          
                          
                          1,555,200
                          
                          
                          
                          748,994FDIC
      special deposit insurance assessment
                          
                          
                          -
                          
                          
                          
                          700,000
                          
                          
                          
                          -Gain
      on derivative instruments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (395,885
                          )Recovery
      of data processing termination expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (180,000
                          )Real
      estate foreclosure losses and expense, net
                          
                          
                          2,810,765
                          
                          
                          
                          1,317,809
                          
                          
                          
                          1,930,841Postage,
      document delivery and office supplies expense
                          
                          
                          978,703
                          
                          
                          
                          982,254
                          
                          
                          
                          1,043,190Other
                          
                          
                          1,598,516
                          
                          
                          
                          1,960,368
                          
                          
                          
                          1,700,960Total
      non-interest expense
                          
                          
                          31,936,111
                          
                          
                          
                          31,437,178
                          
                          
                          
                          29,315,351INCOME
      BEFORE INCOME TAXES
                          
                          
                          3,552,164
                          
                          
                          
                          6,706,707
                          
                          
                          
                          3,573,189INCOME
      TAX EXPENSE
                          
                          
                          259,377
                          
                          
                          
                          1,629,745
                          
                          
                          
                          684,445NET
      INCOME
                          
                          $
                          3,292,787
                          
                          
                          $
                          5,076,962
                          
                          
                          $
                          2,888,744OTHER
      COMPREHENSIVE INCOME:Unrealized
      (loss) gain on investment and mortgage-backed securities available for
      sale (net of income taxes in 2010, 2009 and 2008 of $94,962, ($177,844)
      and $22,409, respectively)
                          
                          
                          (154,939
                          )
                          
                          
                          290,167
                          
                          
                          
                          (31,111
                          )COMPREHENSIVE
      INCOME
                          
                          $
                          3,137,848
                          
                          
                          $
                          5,367,129
                          
                          
                          $
                          2,857,633Income
      available to common shares
                          
                          $
                          1,232,887
                          
                          
                          $
                          3,811,669
                          
                          
                          $
                          2,888,744Per-share
      amounts:Basic
      earnings per common share
                          
                          $
                          0.12
                          
                          
                          $
                          0.37
                          
                          
                          $
                          0.29Weighted
      average common shares outstanding - basic
                          
                          
                          10,380,822
                          
                          
                          
                          10,178,681
                          
                          
                          
                          9,914,220Diluted
      earnings per common share
                          
                          $
                          0.12
                          
                          
                          $
                          0.37
                          
                          
                          $
                          0.28Weighted
      average common shares outstanding - diluted
                          
                          
                          10,626,919
                          
                          
                          
                          10,402,165
                          
                          
                          
                          10,239,301





See
accompanying notes to the consolidated financial statements.


- 36
-





PULASKI
      FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITYYEARS
      ENDED SEPTEMBER 30, 2009 AND 2008





AccumulatedPreferred
                              
                              
                              
                              
                              
                              
                              
                              
                              Additional
                              
                              
                              OtherStock,
                              
                              
                              
                              
                              
                              
                              
                              
                              Paid-In
                              
                              
                              ComprehensiveNet of
                              
                              
                              Common
                              
                              
                              Treasury
                              
                              
                              Capital From
                              
                              
                              Income
                              
                              
                              RetainedDiscount
                              
                              
                              Stock
                              
                              
                              Stock
                              
                              
                              Common Stock
                              
                              
                              (Loss), Net
                              
                              
                              Earnings
                              
                              
                              TotalBALANCE,  SEPTEMBER
      30, 2007
                              
                              $
                              -
                              
                              
                              $
                              130,687
                              
                              
                              $
                              (20,070,647
                              )
                              
                              $
                              50,560,264
                              
                              
                              $
                              (66,283
                              )
                              
                              $
                              50,250,470
                              
                              
                              $
                              80,804,491Comprehensive
      income:Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,888,744
                              
                              
                              
                              2,888,744Change
      in unrealized gain (loss) on investment securities, net of
    tax
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,910,677
                              )
                              
                              
                              -
                              
                              
                              
                              (4,910,677
                              )Realized
      loss on sales of investment securities included in net income, net of
      tax
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4,879,566
                              
                              
                              
                              -
                              
                              
                              
                              4,879,566Comprehensive
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (31,111
                              )
                              
                              
                              2,888,744
                              
                              
                              
                              2,857,633Common
      stock dividends ($0.37 per share)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (3,748,701
                              )
                              
                              
                              (3,748,701
                              )Stock
      options exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,002,056
                              
                              
                              
                              151,567
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,153,623Stock
      option and award expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              464,754
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              464,754Common
      stock issued under dividend reinvestment plan (72,695
    shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              296,667
                              
                              
                              
                              398,722
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              695,389Stock
      repurchased (51,898 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (593,253
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (593,253
                              )Purchase
      of equity trust shares (11,605 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (120,000
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (120,000
                              )Distribution
      of equity trust shares (26,413 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              378,316
                              
                              
                              
                              (378,316
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Forfeiture
      of equity trust shares (63,610 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (366,835
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (366,835
                              )Amortization
      of equity trust expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              951,647
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              951,647Treasury
      stock issued (13,811 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              56,363
                              
                              
                              
                              135,472
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              191,835Excess
      tax benefit from stock-based compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              69,923
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              69,923BALANCE,  SEPTEMBER
      30, 2008
                              
                              $
                              -
                              
                              
                              $
                              130,687
                              
                              
                              $
                              (19,050,498
                              )
                              
                              $
                              51,987,198
                              
                              
                              $
                              (97,394
                              )
                              
                              $
                              49,390,513
                              
                              
                              $
                              82,360,506Comprehensive
      income:Net
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,076,962
                              
                              
                              
                              5,076,962Change
      in unrealized gain (loss) on investment securities, net of
    tax
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              477,849
                              
                              
                              
                              -
                              
                              
                              
                              477,849Realized
      gain on sales of investment securities included in net income, net of
      tax
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (187,682
                              )
                              
                              
                              -
                              
                              
                              
                              (187,682
                              )Comprehensive
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              290,167
                              
                              
                              
                              5,076,962
                              
                              
                              
                              5,367,129Preferred
      stock and common stock warrant issued
                              
                              
                              30,334,273
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,167,495
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              32,501,768Common
      stock dividends ($0.38 per share)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (3,922,623
                              )
                              
                              
                              (3,922,623
                              )Preferred
      stock dividend
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (944,506
                              )
                              
                              
                              (944,506
                              )Accretion
      of discount on preferred stock
                              
                              
                              320,787
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (320,787
                              )
                              
                              
                              -Stock
      options exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              97,238
                              
                              
                              
                              8,711
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              105,949Stock
      option and award expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              491,124
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              491,124Common
      stock issued under dividend reinvestment plan (132,138
    shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              539,255
                              
                              
                              
                              246,414
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              785,669Restricted
      common stock issued (24,327 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              99,278
                              
                              
                              
                              (99,278
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Common
      stock surrendered to satisfy tax withholding obligations of stock-based
      compensation (6,873 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (54,972
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (54,972
                              )Purchase
      of equity trust shares (77,084 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (441,753
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (441,753
                              )Distribution
      of equity trust shares (19,918 shares)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              267,279
                              
                              
                              
                              (267,279
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Amortization
      of equity trust expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              740,879
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              740,879Tax
      benefit from release of equity shares
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (41,315
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (41,315
                              )Excess
      tax benefit from stock-based compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              13,515
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              13,515BALANCE,  SEPTEMBER
      30, 2009
                              
                              $
                              30,655,060
                              
                              
                              $
                              130,687
                              
                              
                              $
                              (18,544,173
                              )
                              
                              $
                              55,247,464
                              
                              
                              $
                              192,773
                              
                              
                              $
                              49,279,559
                              
                              
                              $
                              116,961,370





See
accompanying notes to the consolidated financial statements.


- 37
-





PULASKI
      FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITYYEAR ENDED SEPTEMBER 30,
    2010





AccumulatedPreferred
                        
                        
                        
                        
                        
                        
                        
                        
                        Additional
                        
                        
                        OtherStock,
                        
                        
                        
                        
                        
                        
                        
                        
                        Paid-In
                        
                        
                        ComprehensiveNet of
                        
                        
                        Common
                        
                        
                        Treasury
                        
                        
                        Capital From
                        
                        
                        Income
                        
                        
                        RetainedDiscount
                        
                        
                        Stock
                        
                        
                        Stock
                        
                        
                        Common Stock
                        
                        
                        (Loss), Net
                        
                        
                        Earnings
                        
                        
                        TotalBALANCE,  SEPTEMBER
      30, 2009
                        
                        $
                        30,655,060
                        
                        
                        $
                        130,687
                        
                        
                        $
                        (18,544,173
                        )
                        
                        $
                        55,247,464
                        
                        
                        $
                        192,773
                        
                        
                        $
                        49,279,559
                        
                        
                        $
                        116,961,370Comprehensive
      Income:Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,292,787
                        
                        
                        
                        3,292,787Change
      in unrealized gain (loss) on investment securities, net of
    tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (154,939
                        )
                        
                        
                        -
                        
                        
                        
                        (154,939
                        )Comprehensive
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (154,939
                        )
                        
                        
                        3,292,787
                        
                        
                        
                        3,137,848Preferred
      stock and common stock warrant issued
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Common
      stock dividends ($0.38 per share)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,053,659
                        )
                        
                        
                        (4,053,659
                        )Preferred
      stock dividends
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,626,900
                        )
                        
                        
                        (1,626,900
                        )Accretion
      of discount on preferred stock
                        
                        
                        433,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (433,000
                        )
                        
                        
                        -Stock
      options exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        297,504
                        
                        
                        
                        (100,675
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        196,829Stock
      option and award expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        555,086
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        555,086Common
      stock issued under dividend reinvestment plan (110,184
    shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        429,901
                        
                        
                        
                        277,132
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        707,033Common
      stock issued under equity trust plan (228,761 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (548,699
                        )
                        
                        
                        548,699
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Restricted
      common stock issued (48,400 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        197,520
                        
                        
                        
                        (197,520
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Common
      stock surrendered to satisfy tax withholding obligations of stock-based
      compensation (11,655 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (78,374
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (78,374
                        )Purchase
      of equity trust shares (43,553 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (219,785
                        )
                        
                        
                        38,233
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (181,552
                        )Distribution
      of equity trust shares (33,742 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        401,524
                        
                        
                        
                        (401,524
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of equity trust expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        800,434
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        800,434Tax
      benefit from release of equity shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (66,224
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (66,224
                        )Excess
      tax benefit from stock-based compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,390
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,390BALANCE,  SEPTEMBER
      30, 2010
                        
                        $
                        31,088,060
                        
                        
                        $
                        130,687
                        
                        
                        $
                        (18,064,582
                        )
                        
                        $
                        56,702,495
                        
                        
                        $
                        37,834
                        
                        
                        $
                        46,458,787
                        
                        
                        $
                        116,353,281





See
accompanying notes to the consolidated financial statements.


- 38
-





PULASKI
      FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS ENDED SEPTEMBER 30, 2010, 2009 AND
      2008





2010
                      
                      
                      2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      3,292,787
                      
                      
                      $
                      5,076,962
                      
                      
                      $
                      2,888,744Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation,
      amortization and accretion:Premises
      and equipment
                      
                      
                      1,855,879
                      
                      
                      
                      1,885,341
                      
                      
                      
                      1,746,134Net
      deferred loan costs
                      
                      
                      2,253,359
                      
                      
                      
                      2,678,732
                      
                      
                      
                      2,703,126Debt
      and equity securities premiums and discounts, net
                      
                      
                      148,461
                      
                      
                      
                      156,364
                      
                      
                      
                      (283,611
                      )Broker
      fees financed under interest-rate swap agreements
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      522,015Equity
      trust expense, net
                      
                      
                      800,434
                      
                      
                      
                      740,879
                      
                      
                      
                      584,812Stock
      option and award expense
                      
                      
                      555,086
                      
                      
                      
                      491,124
                      
                      
                      
                      464,754Provision
      for loan losses
                      
                      
                      26,064,000
                      
                      
                      
                      23,030,685
                      
                      
                      
                      7,734,641Provision
      for losses on real estate acquired in settlement of loans
                      
                      
                      2,181,900
                      
                      
                      
                      758,602
                      
                      
                      
                      755,773(Gains)/losses
      on sale of real estate acquired in settlement of loans
                      
                      
                      (300,683
                      )
                      
                      
                      98,129
                      
                      
                      
                      800,578Originations
      of mortgage loans held for sale
                      
                      
                      (1,809,489,481
                      )
                      
                      
                      (2,041,899,278
                      )
                      
                      
                      (1,324,428,979
                      )Proceeds
      from sales of mortgage loans held for sale
                      
                      
                      1,672,542,651
                      
                      
                      
                      2,016,612,091
                      
                      
                      
                      1,316,528,832Gain
      on sale of loans held for sale
                      
                      
                      (7,501,651
                      )
                      
                      
                      (11,876,091
                      )
                      
                      
                      (5,530,016
                      )Loss
      on sale of equity securities available for sale
                      
                      
                      -
                      
                      
                      
                      97,141
                      
                      
                      
                      8,031,796Gain
      on sale of debt securities available for sale
                      
                      
                      -
                      
                      
                      
                      (399,855
                      )
                      
                      
                      (257,512
                      )Gain
      on sale of investment in joint venture
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (30,755
                      )Gain
      on derivative instruments
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (395,885
                      )Increase
      in cash value of bank-owned life insurance
                      
                      
                      (1,092,149
                      )
                      
                      
                      (1,086,693
                      )
                      
                      
                      (1,032,477
                      )Increase
      in deferred tax asset
                      
                      
                      (3,861,066
                      )
                      
                      
                      (1,233,593
                      )
                      
                      
                      (3,011,846
                      )Excess
      tax benefit from stock-based compensation
                      
                      
                      (1,390
                      )
                      
                      
                      (13,515
                      )
                      
                      
                      (69,923
                      )Tax
      expense for release of equity trust shares
                      
                      
                      66,224
                      
                      
                      
                      41,315
                      
                      
                      
                      -(Increase)
      decrease in accrued expenses
                      
                      
                      (736,607
                      )
                      
                      
                      773,738
                      
                      
                      
                      710,861Increase
      (decrease) in current income taxes payable
                      
                      
                      15,771
                      
                      
                      
                      1,553,768
                      
                      
                      
                      (2,402,440
                      )Changes
      in other assets and liabilities
                      
                      
                      (1,559,899
                      )
                      
                      
                      (3,037,668
                      )
                      
                      
                      (1,357,047
                      )Net
      adjustments
                      
                      
                      (118,059,161
                      )
                      
                      
                      (10,628,784
                      )
                      
                      
                      1,782,831Net
      cash (used in) provided by operating activities
                      
                      
                      (114,766,374
                      )
                      
                      
                      (5,551,822
                      )
                      
                      
                      4,671,575CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from:Maturities
      of time deposits in other banks
                      
                      
                      -
                      
                      
                      
                      99,000
                      
                      
                      
                      -Maturities
      of debt securities held to maturity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      45,100,000Maturities
      of debt securities available for sale
                      
                      
                      20,000,000
                      
                      
                      
                      6,000,000
                      
                      
                      
                      7,000,000Sales
      of debt securities available for sale
                      
                      
                      -
                      
                      
                      
                      56,049,239
                      
                      
                      
                      53,634,131Sales
      of equity securities available for sale
                      
                      
                      -
                      
                      
                      
                      280,419
                      
                      
                      
                      3,826,876Principal
      payments on mortgage-backed securities
                      
                      
                      8,624,939
                      
                      
                      
                      5,123,662
                      
                      
                      
                      1,612,303Redemption
      of Federal Home Loan Bank stock
                      
                      
                      12,990,100
                      
                      
                      
                      4,571,500
                      
                      
                      
                      12,751,600Sales
      of real estate acquired in settlement of loans receivable
                      
                      
                      11,295,944
                      
                      
                      
                      7,535,450
                      
                      
                      
                      6,593,149Sales
      of equipment
                      
                      
                      34,811
                      
                      
                      
                      88,360
                      
                      
                      
                      12,973Sale
      of investment joint venture
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      49,375Purchases
      of:Debt
      securities held to maturity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (38,861,190
                      )Debt
      securities available for sale
                      
                      
                      (26,004,472
                      )
                      
                      
                      (63,706,985
                      )
                      
                      
                      (53,280,870
                      )Mortgage-backed
      securities available for sale
                      
                      
                      -
                      
                      
                      
                      (7,003,443
                      )
                      
                      
                      (8,105,406
                      )Equity
      securities available for sale
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (9,092,573
                      )Federal
      Home Loan Bank stock
                      
                      
                      (11,113,900
                      )
                      
                      
                      (5,325,200
                      )
                      
                      
                      (15,342,200
                      )Bank-owned
      life insurance
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,500,000
                      )Premises
      and equipment
                      
                      
                      (1,692,787
                      )
                      
                      
                      (1,082,276
                      )
                      
                      
                      (1,223,088
                      )Net
      decrease (increase) in loans receivable
                      
                      
                      37,881,390
                      
                      
                      
                      (82,395,730
                      )
                      
                      
                      (174,296,330
                      )Cash
      paid for equity in joint venture
                      
                      
                      (12,500
                      )
                      
                      
                      -
                      
                      
                      
                      (233,691
                      )Net
      cash provided by (used in) investing activities
                      
                      $
                      52,003,525
                      
                      
                      $
                      (79,766,004
                      )
                      
                      $
                      (171,354,941
                      )


- 39
-





PULASKI
      FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS,  CONTINUEDYEARS ENDED SEPTEMBER 30, 2010, 2009 AND
      2008





2010
                      
                      
                      2009
                      
                      
                      2008CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      (decrease) increase in deposits
                      
                      $
                      (76,426,119
                      )
                      
                      $
                      276,317,874
                      
                      
                      $
                      79,876,358Proceeds
      from (repayment of) Federal Home Loan Bank advances, net
                      
                      
                      120,000,000
                      
                      
                      
                      (149,600,000
                      )
                      
                      
                      52,200,000Proceeds
      from (repayment of) Federal Reserve Bank borrowings, net
                      
                      
                      -
                      
                      
                      
                      (40,000,000
                      )
                      
                      
                      40,000,000Proceeds
      from notes payable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,000,000Payment
      on notes payable
                      
                      
                      -
                      
                      
                      
                      (7,640,000
                      )
                      
                      
                      (340,000
                      )Net
      decrease in due to other banks
                      
                      
                      -
                      
                      
                      
                      (14,377,831
                      )
                      
                      
                      (3,106,910
                      )Net
      increase in advance payments by borrowers for taxes and
      insurance
                      
                      
                      2,442,565
                      
                      
                      
                      988,853
                      
                      
                      
                      709,221Treasury
      stock issued for purchase of equity in joint venture
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      191,835Proceeds
      from cash received in dividend reinvestment plan
                      
                      
                      707,033
                      
                      
                      
                      785,669
                      
                      
                      
                      695,389Proceeds
      from issuance of preferred stock and common stock warrants
                      
                      
                      -
                      
                      
                      
                      32,501,768
                      
                      
                      
                      -Proceeds
      from stock options exercised
                      
                      
                      196,829
                      
                      
                      
                      105,949
                      
                      
                      
                      1,153,623Purchase
      of equity trust shares
                      
                      
                      (181,552
                      )
                      
                      
                      (441,753
                      )
                      
                      
                      (120,000
                      )Excess
      tax benefit from stock-based compensation
                      
                      
                      1,390
                      
                      
                      
                      13,515
                      
                      
                      
                      69,923Tax
      expense for release of equity trust shares
                      
                      
                      (66,224
                      )
                      
                      
                      (41,315
                      )
                      
                      
                      -Dividends
      paid on common stock
                      
                      
                      (4,053,659
                      )
                      
                      
                      (3,922,623
                      )
                      
                      
                      (3,748,701
                      )Dividends
      paid on preferred stock
                      
                      
                      (1,626,900
                      )
                      
                      
                      (944,506
                      )
                      
                      
                      -Common
      stock surrendered to satisfy tax withholding obligations of stock-based
      compensation
                      
                      
                      (78,374
                      )
                      
                      
                      (54,972
                      )
                      
                      
                      (204,503
                      )Common
      stock repurchased
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (388,750
                      )Net
      cash provided by financing activities
                      
                      
                      40,914,989
                      
                      
                      
                      93,690,628
                      
                      
                      
                      171,987,485NET
      (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      (21,847,860
                      )
                      
                      
                      8,372,802
                      
                      
                      
                      5,304,119CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                      
                      
                      37,450,664
                      
                      
                      
                      29,077,862
                      
                      
                      
                      23,773,743CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                      
                      $
                      15,602,804
                      
                      
                      $
                      37,450,664
                      
                      
                      $
                      29,077,862SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
      on deposits
                      
                      $
                      16,227,448
                      
                      
                      $
                      21,955,907
                      
                      
                      $
                      28,445,903Interest
      on advances from FHLB
                      
                      
                      1,738,241
                      
                      
                      
                      3,531,530
                      
                      
                      
                      7,990,888Interest
      on other borrowings
                      
                      
                      484
                      
                      
                      
                      351,603
                      
                      
                      
                      743,993Interest
      on subordinated debentures
                      
                      
                      535,993
                      
                      
                      
                      780,141
                      
                      
                      
                      1,256,135Interest
      on note payable
                      
                      
                      -
                      
                      
                      
                      114,323
                      
                      
                      
                      240,813Cash
      paid during the year for interest
                      
                      
                      18,502,166
                      
                      
                      
                      26,733,504
                      
                      
                      
                      38,677,732Income
      taxes, net
                      
                      
                      3,517,009
                      
                      
                      
                      1,449,507
                      
                      
                      
                      5,766,568NON-CASH
      INVESTING ACTIVITIES:Real
      estate acquired in settlement of loans receivable
                      
                      
                      19,622,863
                      
                      
                      
                      13,327,985
                      
                      
                      
                      8,581,958Loans
      securitized into mortgage-backed securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,264,184




See
accompanying notes to the consolidated financial
statements.


- 40
-


PULASKI
FINANCIAL CORP. AND SUBSIDIARIES




NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED SEPTEMBER 30, 2010, 2009 AND 2008


1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




Pulaski
Financial Corp. (the “Company”) is the holding company for Pulaski Bank (the
“Bank”). The Company’s primary assets are its investment in the Bank and
cash.  The Company also maintains two special-purpose subsidiary trusts
that issue preferred securities. Management of the Company and the Bank are
substantially similar and the Company neither owns nor leases any property, but
instead uses the premises, equipment and furniture of the Bank. Accordingly, the
information in the consolidated financial statements relates primarily to the
Bank.




The
Company, through the Bank, operates in a single business segment, which is a
community-oriented financial institution providing traditional financial
services through the operation of twelve full-service bank locations in the
St. Louis metropolitan area and six loan production offices in the
St. Louis and Kansas City metropolitan areas at September 30, 2010. 
The Bank is engaged primarily in the business of attracting deposits from the
general public and using these and other funds to originate a variety of
residential, commercial and consumer loans within the Bank’s lending market
areas. The Bank is an approved lender/servicer for the Federal Housing
Administration (“FHA”) and the Veterans Administration (“VA”), as well as for
the Missouri Housing Development Commission (a government agency established to
provide home-buying opportunities for low-income first-time
homebuyers).




The
accounting and reporting policies and practices of the Company and its
subsidiaries conform to U.S. generally accepted accounting principles and to
prevailing practices within the banking industry. A summary of the Company’s
significant accounting policies follows.




Principles of
Consolidation - The consolidated financial statements include the
accounts of Pulaski Financial Corp. and its wholly-owned subsidiary, Pulaski
Bank, and its wholly-owned subsidiary, Pulaski Service Corporation. All
significant intercompany transactions have been eliminated in
consolidation.




Use of Estimates- The preparation of these consolidated financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and that affect the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. The amount of the allowance for loan losses is a
significant estimate reported within the consolidated financial
statements.




Cash and Cash
Equivalents- For purposes of
reporting cash flows, cash and cash equivalents include cash and amounts due
from depository institutions, cash in transit, cash in the process of
collection, federal funds sold, and overnight deposits at the Federal Home Loan
Bank and Federal Reserve Bank. Generally, federal funds sold mature within one
day.




Securities and
Mortgage-Backed Securities Available for Sale- Securities and
mortgage-backed securities available for sale are recorded at their fair values,
adjusted for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income over the life of the securities
using the level-yield method. Unrealized gains or losses on securities and
mortgage-backed securities available for sale are included in a separate
component of stockholders’ equity, net of deferred income taxes. Gains or losses
on the disposition of securities and mortgage-backed securities available for
sale are recognized using the specific -identification method. Estimated fair
values of securities and mortgage-backed securities available for sale are based
on quoted market prices when available.  If quoted market prices are not
available, fair values are estimated using quoted market prices for similar
instruments.


- 41
-


Securities and
Mortgage-Backed Securities Held to Maturity - Securities and
mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, since the Company has both
the ability and intent to hold the securities to maturity.  Premium
amortization and discount accretion are recognized as adjustments to interest
income over the life of the securities using the level-yield
method.




Other-Than-Temporary
Impairment of Debt Securities -When determining whether a debt security
is other-than-temporarily impaired, management assesses whether (a) it has the
intent to sell the security and (b) it is more likely than not that it will be
required to sell the security prior to its anticipated recovery.  In
instances when a determination is made that an other-than-temporary impairment
exists but management does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated repayment or maturity, the other-than-temporary impairment is
separated into (a) the amount of the total other-than-temporary impairment
related to a decrease in cash flows expected to be collected from the debt
security (the credit loss) and (b) the amount of the total other-than-temporary
impairment related to all other factors.  The amount of the total
other-than-temporary impairment related to the credit loss is recognized in
earnings.  The amount of the total other-than-temporary impairment related
to all other factors is recognized in other comprehensive income.




Capital Stock of
the Federal Home Loan Bank-Capital
stock of the Federal Home Loan Bank of Des Moines is required for
membership in the FHLB and is carried at cost.  The Bank must maintain a
specified level of investment in FHLB stock based upon the amount of its
outstanding FHLB borrowings.  The stock of the FHLB is viewed as a
long-term asset and its value is based upon the ultimate recoverability of the
par value.  In determining the recoverability of this investment, the
Company considered the structure of the entire FHLB system, which enables the
regulator of the FHLBs to reallocate debt among the members, so each individual
FHLB has a potential obligation to repay the consolidated obligations issued by
other FHLB members.  In addition, regulatory changes during 2008
established a new regulator for the FHLB system that continues to oversee
changes to management, management practices and balance sheet management at the
FHLB.  Finally, the liquidity position of the FHLB was strengthened with
the support of the U.S. Treasury, which established a lending facility designed
to provide secured funding on an as-needed basis to government-sponsored
enterprises, such as the FHLB.  The Company continues to monitor this
investment for recoverability, but as of September 30, 2010 believed that
it would ultimately recover the par value of the FHLB stock.




Mortgage Loans
Held for Sale– Mortgage loans held
for sale consist of loans that management does not intend to hold until maturity
and are reflected at the lower of cost or fair value.  Such loans are
generally committed to be sold to investors on a best-efforts basis with
servicing released. Accordingly, fair values for such loans are based on
commitment prices. Gains or losses on loan sales are recognized at the time of
sale and are determined by the difference between net sales proceeds and the
principal balance of the loans sold, adjusted for net deferred loan fees or
costs. Loan origination and commitment fees, net of certain direct loan
origination costs, are deferred as an adjustment to the carrying value of the
loan until it is sold.




Loans Receivable-Loans
receivable are stated at the principal amounts outstanding adjusted for
premiums, discounts, deferred loan costs, loans in process and the allowance for
loan losses.  Loan origination and commitment fees on originated loans, net
of certain direct loan origination costs, are deferred and amortized to interest
income using the level-yield method over the estimated lives of the related
loans. Interest on loans is accrued based upon the principal amounts
outstanding. The Company’s policy is to discontinue the accrual of interest
income on any loan when, in the opinion of management, there is reasonable doubt
as to the ultimate collectibility of interest or principal. Management considers
many factors before placing a loan on non-accrual, including the overall
financial condition of the borrower, the progress of management’s collection
efforts and the value of the underlying collateral. Previously accrued but
unpaid interest is charged to current income at the time a loan is placed on
non-accrual status. Subsequent collections of cash may be applied as reductions
to the principal balance, interest in arrears, or recorded as income depending
on management’s assessment of the ultimate collectibility of the loan.
Non-accrual loans are returned to accrual status when, in the opinion of
management, the financial position of the borrower indicates there is no longer
any reasonable doubt as to the timely collectibility of interest or
principal.


- 42
-


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




Troubled Debt
Restructurings -A loan is classified as a troubled debt restructuring if
the Company, for economic or legal reasons related to the borrower’s financial
difficulties, grants a concession to the borrower that it would not otherwise
consider.  This usually includes a modification of loan terms (such as a
reduction of the rate to below-market terms, adding past-due interest to the
loan balance or extending the maturity date) and possibly a partial forgiveness
of debt.  A loan classified as a troubled debt restructuring will generally
retain such classification until the loan is paid in full.  However, a
restructured one-to-four family residential mortgage loan that yields a market
rate and demonstrates the ability to pay under the terms of the restructured
note through a sustained period of repayment performance, which is generally one
year, is removed from the troubled debt restructuring classification. 
Interest income on restructured loans is accrued at the reduced rate and the
loan is returned to performing status once the borrower demonstrates the ability
to pay under the terms of the restructured note through a sustained period of
repayment performance, which is generally six months.





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




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




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


- 43
-


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




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




Real Estate
Acquired in Settlement of Loans -Real estate acquired as a result of
foreclosure or by deed-in-lieu of foreclosure is initially recorded at the lower
of its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair value less estimated selling costs.  Fair value
is generally determined through a new appraisal or market analysis.  Any
write-down to fair value at the time the property is acquired is recorded as a
charge-off to the allowance for loan losses.  Any decline in the fair value
of the property subsequent to acquisition is recorded as a charge to
non-interest expense.




Derivative
Financial Instruments -The Company originates and purchases derivative
financial instruments, including interest rate swaps, interest rate lock
commitments and forward contracts to sell mortgage-backed securities. 
These instruments have certain interest rate risk characteristics that change in
value based upon changes in the capital markets.




Interest Rate Swaps: The
Company periodically uses derivative financial instruments (primarily interest
rate swaps) to assist in its interest rate risk management. All derivatives are
measured and reported at fair value on the Company's consolidated balance sheets
as either an asset or a liability. For derivatives that are designated and
qualify as a fair value hedge, the gain or loss on the derivative, as well as
the offsetting gain or loss on the hedged item attributable to the hedged risk,
are reported as other assets or other liabilities, as appropriate, in the
consolidated balance sheet. For all hedging relationships, derivative gains and
losses that are not effective in hedging the changes in fair value of the hedged
item are recognized immediately in current earnings during the period of the
change. Similarly, the changes in the fair value of derivatives that do not
qualify for hedge accounting are also reported in non-interest income when they
occur.




The net
cash settlements on derivatives that qualify for hedge accounting are recorded
in interest income or interest expense, based on the item being hedged. The net
cash settlements on derivatives that do not qualify for hedge accounting are
reported in non-interest income.




At the inception of the hedge and
quarterly thereafter, a formal assessment is performed to determine whether
changes in the fair values of the derivatives have been highly effective in
offsetting the changes in the fair values of the hedged item and whether they
are expected to be highly effective in the future. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking the hedge.
This process includes identification of the hedging instrument, hedged item,
risk being hedged and the method for assessing effectiveness and measuring
ineffectiveness. In addition, on a quarterly basis, the Company assesses whether
the derivative used in the hedging transaction is highly effective in offsetting
changes in fair value of the hedged item, and measures and records any
ineffectiveness as a credit or charge to earnings. The Company discontinues
hedge accounting prospectively when it is determined that the derivative is or
will no longer be effective in offsetting changes in the fair value of the
hedged item, the derivative expires, is sold or terminated, or management
determines that designation of the derivative as a hedging instrument is no
longer appropriate.


- 44
-




The
estimates of fair values of the Company's derivatives and related liabilities
are calculated by an independent third party using proprietary valuation models.
The fair values produced by these valuation models are, in part, theoretical and
reflect assumptions, which must be made in using the valuation models. Small
changes in assumptions could result in significant changes in valuation. The
risks inherent in the determination of the fair value of a derivative may result
in income statement volatility.




The
Company uses derivatives to modify the repricing characteristics of certain
assets and liabilities so that changes in interest rates do not have a
significant adverse effect on net interest income and cash flows and to better
match the repricing profile of its interest-bearing assets and liabilities. As a
result of interest rate fluctuations, certain interest-sensitive assets and
liabilities will gain or lose market value. In an effective fair value hedging
strategy, the effect of this change in value will generally be offset by a
corresponding change in value of the derivatives linked to the hedged assets and
liabilities.




Interest Rate Lock
Commitments:Commitments
to originate loans (interest rate lock commitments), which primarily consist of
commitments to originate fixed-rate residential mortgage loans, are recorded at
fair value.  Changes in the fair value of interest rate lock commitments
are recognized in non-interest income on a quarterly basis.




Forward Commitments to Sell
Mortgage-Backed Securities:Forward
commitments to sell mortgage-backed securities are recorded at fair value. 
Changes in the fair value of forward contracts to sell mortgage-backed
securities are recognized in non-interest income on a quarterly
basis.




Premises and
Equipment-
Premises and equipment are stated at cost, less accumulated depreciation. 
Depreciation charged to operations is primarily computed utilizing the
straight-line method over the estimated useful lives of the related assets.
Estimated lives range from three to forty years for buildings and improvements
and three to ten years for furniture and equipment. Maintenance and repairs are
charged to expense when incurred. Major renewals and improvements are
capitalized. Gains and losses on dispositions are credited or charged to
earnings as incurred.




Goodwill- Goodwill represents
the amount of acquisition cost over the fair value of net assets acquired in the
purchase of another financial institution.  The Company reviews goodwill
for impairment at least annually or more frequently if events or changes in
circumstances indicate the carrying value of the asset might be impaired. 
Impairment is determined by comparing the implied fair value of the reporting
unit goodwill with the carrying amount of that goodwill.  If the carrying
amount of the reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that
excess.  Any such adjustments are reflected in the results of operations in
the periods in which they become known.  After a goodwill impairment loss
is recognized, the adjusted carrying amount of goodwill becomes its new
accounting basis.  No such impairment losses were recognized during the
three years ended September 30, 2010.




Intangible
Assets-
Intangible assets include core deposit premiums related to the purchase of other
financial institutions or branch locations.  Core deposit premiums are
amortized using the level-yield method.  The Company reviews intangible
assets for impairment periodically to determine whether there have been any
events or circumstances to indicate the recorded amount is not recoverable from
projected undiscounted net operating cash flows. If the projected undiscounted
net operating cash flows are less than the carrying amount, an impairment loss
is recognized to reduce the carrying amount to fair value, and when appropriate,
the amortization period is also reduced.  Any such adjustments are
reflected in the results of operations in the periods in which they become
known.  No such impairment losses were recognized during the three years
ended September 30, 2010.




Stock-Based
Compensation -The Company maintains a number of stock-based incentive
programs, which are discussed in more detail in Note 17.  All stock-based
compensation is recognized as an expense in the financial statements based on
the fair value of the award.


- 45
-


Income
Taxes–
Current income tax expense approximates taxes to be paid or refunded for the
current period. Deferred income tax expense is computed using the balance sheet
method. Under this method, the net deferred tax asset or liability is based on
the tax effects of the differences between the book and tax bases of assets and
liabilities, and recognizes enacted changes in tax rates and laws in the period
in which they occur. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax assets are
recognized subject to management’s judgment that realization is more likely than
not. A tax position that meets the “more likely than not” recognition threshold
is measured to determine the amount of benefit to recognize. The tax position is
measured at the largest amount of benefit that is greater than 50% likely of
being realized upon settlement. Interest and penalties are recognized as a
component of income tax expense.




Reclassifications- Certain amounts
included in the 2009 and 2008 consolidated financial statements have been
reclassified to conform to the 2010 presentation.




2.
            EARNINGS
      PER SHARE




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




Years Ended September 30,2010
                      
                      
                      2009
                      
                      
                      2008Net
      income
                      
                      $
                      3,292,787
                      
                      
                      $
                      5,076,962
                      
                      
                      $
                      2,888,744Less:Preferred
      dividends declared
                      
                      
                      (1,626,900
                      )
                      
                      
                      (944,506
                      )
                      
                      
                      -Accretion
      of discount on preferred stock
                      
                      
                      (433,000
                      )
                      
                      
                      (320,787
                      )
                      
                      
                      -Income
      available for common shares
                      
                      $
                      1,232,887
                      
                      
                      $
                      3,811,669
                      
                      
                      $
                      2,888,744Weighted
      average common shares outstanding - basic
                      
                      
                      10,380,822
                      
                      
                      
                      10,178,681
                      
                      
                      
                      9,914,220Effect
      of dilutive securities:Treasury
      stock held in equity trust-unvested shares
                      
                      
                      154,789
                      
                      
                      
                      95,490
                      
                      
                      
                      171,470Equivalent
      shares-employee stock options and awards
                      
                      
                      33,818
                      
                      
                      
                      56,122
                      
                      
                      
                      153,611Equivalent
      shares-common stock warrant
                      
                      
                      57,490
                      
                      
                      
                      71,872
                      
                      
                      
                      -Weighted
      average common shares outstanding - diluted
                      
                      
                      10,626,919
                      
                      
                      
                      10,402,165
                      
                      
                      
                      10,239,301Earnings
      per share:Basic
                      
                      $
                      0.12
                      
                      
                      $
                      0.37
                      
                      
                      $
                      0.29Diluted
                      
                      
                      0.12
                      
                      
                      
                      0.37
                      
                      
                      
                      0.28





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




The
following options to purchase common shares were excluded from the respective
computations of diluted earnings per share during the years ended September 30,
2010, 2009 and 2008 because the exercise price of the options, when combined
with the effect of the unamortized compensation expense, were greater than the
average market price of the common shares and were considered
anti-dilutive.  The options expire in various periods from 2013
through 2020.  In addition, the warrant to purchase common shares
issued to the U.S. Treasury Department was excluded from the respective
computations of diluted earnings per share during the fiscal years ended 2010
and 2009 because the exercise price of the warrant was greater than the average
market price of the common shares and was considered
anti-dilutive.  The warrant expires in 2019.


- 46
-





2010
                  
                  
                  2009
                  
                  
                  2008Number
      of option shares excluded
                  
                  
                  691,080
                  
                  
                  
                  697,866
                  
                  
                  
                  432,563Equivalent
      anti-dilutive shares
                  
                  
                  1,199,255
                  
                  
                  
                  1,324,273
                  
                  
                  
                  615,246Number
      of warrant shares excluded
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Equivalent
      anti-dilutive shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -




3.
            DEBT
      SECURITIES




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




Gross
                  
                  
                  Gross
                  
                  
                  EstimatedAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueSeptember
      30, 2010Debt
      obligations of government-sponsored entities
                  
                  $
                  8,000,836
                  
                  
                  $
                  706
                  
                  
                  $
                  (450
                  )
                  
                  $
                  8,001,092Weighted
      average yield at the end of the year
                  
                  
                  0.25
                  %September
      30, 2009Debt
      obligations of government-sponsored entities
                  
                  $
                  1,999,590
                  
                  
                  $
                  -
                  
                  
                  $
                  (2,194
                  )
                  
                  $
                  1,997,396Weighted
      average yield at the end of the year
                  
                  
                  0.16
                  %




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




LengthofTimeinContinuousUnrealizedLossPositionatSeptember30,2010Lessthan12months
                  
                  
                  12monthsormore
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  LossesDebt
      obligations of government-sponsored entities
                  
                  $
                  6,998,692
                  
                  
                  $
                  450
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,998,692
                  
                  
                  $
                  450





Length of Time in Continuous Unrealized Loss Position at September 30, 2009Less than 12 months
                  
                  
                  12 months or more
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  LossesDebt
      obligations of government-sponsored entities
                  
                  $
                  1,997,396
                  
                  
                  $
                  2,194
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,997,396
                  
                  
                  $
                  2,194





Proceeds
from sales of available-for-sale securities were $56.3 million and $57.5 million
for the years ended September 30, 2009 and 2008, respectively.  There
were no such sales during the year ended September 30, 2010.  Gross
gains of $458,000 and $392,000 were realized on these sales during the years
ended September 30, 2009 and 2008, respectively.  Gross losses of
$156,000 and $8.2 million were realized on these sales during the years ended
September 30, 2009 and 2008, respectively.


- 47
-




The
amortized cost and fair values of available-for-sale debt securities at
September 30, 2010, by contractual maturity, are shown below.




Amortized
                      
                      
                      FairCost
                      
                      
                      ValueTerm
      to Maturity:One
      year or less
                      
                      $
                      6,999,142
                      
                      
                      $
                      6,998,692Over
      one through five years
                      
                      
                      1,001,694
                      
                      
                      
                      1,002,400$
                      8,000,836
                      
                      
                      $
                      8,001,092




Debt
securities with carrying values totaling approximately $7.0 million at
September 30, 2010 were pledged to secure deposits of public entities,
trust funds, and for other purposes as required by law.




4.
            MORTGAGE-BACKED
      SECURITIES




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




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




- 48
-




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




There
were no proceeds from sales of available-for-sale mortgage-backed securities
during the years ended September 30, 2010, 2009 or 2008.




As of
September 30, 2010, the Company did not have any mortgage-backed securities held
to maturity or available for sale that were in a continuous loss
position.  The following summary displays the length of time
mortgage-backed securities held to maturity were in a continuous unrealized loss
position as of September 30, 2009.  The Company did not have the
intent to dispose of these investments and it was not more likely than not that
the Company would be required to sell these investments prior to recovery of the
unrealized losses.  Further, the Company believed the deterioration in
value is attributable to changes in market interest rates and not the credit
quality of the issuer.




- 49
-




Length of Time in Continuous Unrealized Loss Position at September 30, 2009Less than 12 months
                    
                    
                    12 months or more
                    
                    
                    TotalAmortized
                    
                    
                    Unrealized
                    
                    
                    Amortized
                    
                    
                    Unrealized
                    
                    
                    Amortized
                    
                    
                    UnrealizedCost
                    
                    
                    Losses
                    
                    
                    Cost
                    
                    
                    Losses
                    
                    
                    Cost
                    
                    
                    LossesHELD
      TO MATURITY:Mortgage-backed
      securities
                    
                    $
                    1,580,173
                    
                    
                    $
                    2,856
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,580,173
                    
                    
                    $
                    2,856Collateralized mortgage
      obligations
                    
                    
                    18,846
                    
                    
                    
                    53
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    18,846
                    
                    
                    
                    53Total
      held to maturity
                    
                    $
                    1,599,019
                    
                    
                    $
                    2,909
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,599,019
                    
                    
                    $
                    2,909Percent
      of total
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %




The
amortized cost and estimated market values of held-to-maturity and
available-for-sale mortgage-backed securities at September 30, 2010, by
contractual maturity, are shown below.




Held to Maturity
                  
                  
                  Available for SaleAmortized
                  
                  
                  Fair
                  
                  
                  Amortized
                  
                  
                  FairCost
                  
                  
                  Value
                  
                  
                  Cost
                  
                  
                  ValueTerm
      to Maturity:One
      year or less
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  27,433
                  
                  
                  $
                  27,473Over
      one through five years
                  
                  
                  24
                  
                  
                  
                  24
                  
                  
                  
                  -
                  
                  
                  
                  -Over
      five through ten years
                  
                  
                  1,043,339
                  
                  
                  
                  1,100,714
                  
                  
                  
                  5,085,205
                  
                  
                  
                  5,120,862Over
      ten years
                  
                  
                  9,253,528
                  
                  
                  
                  9,687,721
                  
                  
                  
                  3,672,120
                  
                  
                  
                  3,697,191Tota1
                  
                  $
                  10,296,891
                  
                  
                  $
                  10,788,459
                  
                  
                  $
                  8,784,758
                  
                  
                  $
                  8,845,526




Actual
maturities of mortgage-backed securities may differ from scheduled maturities
depending on the repayment characteristics and experience of the underlying
financial instruments.




Mortgage-backed
securities with carrying values totaling approximately $18.8 million at
September 30, 2010 were pledged to secure deposits of public entities,
trust funds, and for other purposes as required by law.




- 50
-




5.
            LOANS
      RECEIVABLE




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




2010
                  
                  
                  2009Real
      estate mortgage:Residential
      first mortgage
                  
                  $
                  243,648,954
                  
                  
                  $
                  248,798,923Residential
      second mortgage
                  
                  
                  60,281,107
                  
                  
                  
                  72,083,535Equity
      lines Home equity lines of credit
                  
                  
                  201,922,359
                  
                  
                  
                  227,141,590Multi-family
      residential
                  
                  
                  43,735,853
                  
                  
                  
                  44,462,990Commercial
      real estate
                  
                  
                  256,224,250
                  
                  
                  
                  231,270,107Land
      acquisition and development
                  
                  
                  74,790,024
                  
                  
                  
                  80,258,931Real
      estate construction and development:Residential
                  
                  
                  8,126,735
                  
                  
                  
                  19,664,258Multi-family
                  
                  
                  3,876,594
                  
                  
                  
                  6,864,072Commercial
                  
                  
                  19,067,773
                  
                  
                  
                  59,429,777Commercial
      and industrial
                  
                  
                  155,293,887
                  
                  
                  
                  154,972,793Consumer
      and installment
                  
                  
                  3,512,266
                  
                  
                  
                  4,170,8621,070,479,802
                  
                  
                  
                  1,149,117,838Add
      (less):Deferred
      loan costs
                  
                  
                  3,884,483
                  
                  
                  
                  4,369,122Loans
      in process
                  
                  
                  (1,115,336
                  )
                  
                  
                  (812,946
                  )Allowance
      for loan losses
                  
                  
                  (26,975,717
                  )
                  
                  
                  (20,579,170
                  )Total
                  
                  $
                  1,046,273,232
                  
                  
                  $
                  1,132,094,844Weighted
      average rate at end of year
                  
                  
                  5.34
                  %
                  
                  
                  5.33
                  %




The Bank
has made loans to officers and directors in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing for comparable transactions with other customers
and did not, in the opinion of management, involve more than normal credit
risk.




Changes
in loans to senior officers and directors for the years ended September 30, 2010
and 2009 are summarized as follows:




Balance,
      September 30, 2008
                  
                  $
                  10,721,308Additions
                  
                  
                  2,814,032Repayments
      and reclassifications
                  
                  
                  (3,875,743
                  )Balance,
      September 30, 2009
                  
                  
                  9,659,597Additions
                  
                  
                  4,325,555Repayments
      and reclassifications
                  
                  
                  (1,627,425
                  )Balance,
      September 30, 2010
                  
                  $
                  12,357,727




Home
equity lines of credit to senior officers and directors totaled $896,000, of
which $231,000 had been disbursed as of September 30, 2010.  Two
standby letters of credit in favor of a director in the amount of
$2.6 million were outstanding as of September 30, 2010.




- 51
-




At
September 30, 2010, 2009 and 2008, the Bank was servicing loans for others
totaling approximately $18.6 million, $22.3 million and $29.1 million,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income is recorded on the accrual
basis and includes servicing fees received from investors and certain charges
collected from borrowers.




6.
            ALLOWANCE
      FOR LOAN LOSSES




The
following table represents activity in the allowance for loan losses for the
years ended September 30, 2010, 2009 and 2008:




2010
                  
                  
                  2009
                  
                  
                  2008Balance,
      beginning of year
                  
                  $
                  20,579,170
                  
                  
                  $
                  12,761,532
                  
                  
                  $
                  10,421,304Provision
      charged to expense
                  
                  
                  26,064,000
                  
                  
                  
                  23,030,685
                  
                  
                  
                  7,734,641Charge-offs:Residential
      real estate first mortgage
                  
                  
                  3,773,665
                  
                  
                  
                  3,808,695
                  
                  
                  
                  939,946Residential
      real estate second mortgage
                  
                  
                  2,099,401
                  
                  
                  
                  1,433,970
                  
                  
                  
                  1,600,479Home
      equity lines of credit
                  
                  
                  4,164,730
                  
                  
                  
                  2,723,661
                  
                  
                  
                  1,674,075Commercial
      & multi-family real estate
                  
                  
                  4,323,493
                  
                  
                  
                  68,626
                  
                  
                  
                  374,000Land
      acquisition & development
                  
                  
                  1,144,690
                  
                  
                  
                  4,231,118
                  
                  
                  
                  -Real
      estate construction & development
                  
                  
                  2,254,473
                  
                  
                  
                  2,424,848
                  
                  
                  
                  454,688Commercial
      & industrial
                  
                  
                  2,539,604
                  
                  
                  
                  532,842
                  
                  
                  
                  355,529Consumer
      and other
                  
                  
                  174,425
                  
                  
                  
                  160,533
                  
                  
                  
                  232,670Total
      charge-offs
                  
                  
                  20,474,481
                  
                  
                  
                  15,384,293
                  
                  
                  
                  5,631,387RecoveriesResidential
      real estate first mortgage
                  
                  
                  383,573
                  
                  
                  
                  46,519
                  
                  
                  
                  1,940Residential
      real estate second mortgage
                  
                  
                  75,569
                  
                  
                  
                  2,634
                  
                  
                  
                  669Home
      equity lines of credit
                  
                  
                  22,843
                  
                  
                  
                  70,250
                  
                  
                  
                  223,874Commercial
      & multi-family real estate
                  
                  
                  87,928
                  
                  
                  
                  32,283
                  
                  
                  
                  -Land
      acquisition & development
                  
                  
                  5,000
                  
                  
                  
                  -
                  
                  
                  
                  -Commercial
      & industrial
                  
                  
                  223,432
                  
                  
                  
                  2,500
                  
                  
                  
                  -Consumer
      and other
                  
                  
                  8,683
                  
                  
                  
                  17,060
                  
                  
                  
                  10,491Total
      recoveries
                  
                  
                  807,028
                  
                  
                  
                  171,246
                  
                  
                  
                  236,974Net
      charge-offs
                  
                  
                  19,667,453
                  
                  
                  
                  15,213,047
                  
                  
                  
                  5,394,413Balance,
      end of year
                  
                  $
                  26,975,717
                  
                  
                  $
                  20,579,170
                  
                  
                  $
                  12,761,532




A summary
of impaired loans at September 30, 2010, 2009 and 2008 is as
follows:




2010
                  
                  
                  2009
                  
                  
                  2008Non-accrual
      loans
                  
                  $
                  59,562,135
                  
                  
                  $
                  51,630,259
                  
                  
                  $
                  10,351,668Impaired
      loans continuing to accrue interest
                  
                  
                  -
                  
                  
                  
                  7,321,114
                  
                  
                  
                  6,301,376Total
      impaired loans
                  
                  $
                  59,562,135
                  
                  
                  $
                  58,951,373
                  
                  
                  $
                  16,653,044Specific
      loan loss allowance on impaired loans
                  
                  $
                  8,375,959
                  
                  
                  $
                  6,822,942
                  
                  
                  $
                  807,630Balance
      of impaired loans with specific allowance
                  
                  
                  26,123,763
                  
                  
                  
                  19,753,191
                  
                  
                  
                  2,958,768Balance
      of impaired loans with no specific allowance
                  
                  
                  33,438,372
                  
                  
                  
                  39,198,182
                  
                  
                  
                  13,694,276Balance
      of troubled debt restructurings included in impaired loans
                  
                  
                  33,065,809
                  
                  
                  
                  34,977,648
                  
                  
                  
                  6,304,621Specific
      loan loss allowance on troubled debt restructurings
                  
                  
                  1,514,504
                  
                  
                  
                  2,915,296
                  
                  
                  
                  173,139




The
average balance of impaired loans during the years ended September 30, 2010,
2009 and 2008 was $62.3 million, $37.8 million and $11.7 million,
respectively.




- 52
-


Interest
income recognized on non-accrual loans was approximately $2.6 million, $2.3
million and $369,000 for the years ended September 30, 2010, 2009 and 2008,
respectively.  The gross amount of interest that would have been
recognized under the original terms of non-accrual and renegotiated loans and
interest actually recognized on such loans was $3.5 million, $3.4 million and
$814,000 for 2010, 2009 and 2008, respectively. Impaired loans continuing
to accrue interest are loans that are more than 90 days past due; however, the
loans are well secured and remain in process of collection.




7.
            REAL
      ESTATE ACQUIRED IN SETTLEMENT OF
LOANS




Real
estate acquired in settlement of loans at September 30, 2010 and 2009 is
summarized as follows:




2010
                  
                  
                  2009Residential
      real estate
                  
                  $
                  3,857,898
                  
                  
                  $
                  3,599,982Commercial
      real estate
                  
                  
                  12,693,514
                  
                  
                  
                  5,128,70416,551,412
                  
                  
                  
                  8,728,686Less
      allowance for losses
                  
                  
                  (1,651,100
                  )
                  
                  
                  (274,076
                  )Total
                  
                  $
                  14,900,312
                  
                  
                  $
                  8,454,610




Activity
in the allowance for losses on real estate acquired in settlement of loans for
the years ended September
30, 2010, 2009 and 2008 is summarized as follows:





2010
                  
                  
                  2009
                  
                  
                  2008Balance,
      beginning of year
                  
                  $
                  274,076
                  
                  
                  $
                  417,773
                  
                  
                  $
                  74,035Provision
      charged to non-interest expense
                  
                  
                  2,181,900
                  
                  
                  
                  758,602
                  
                  
                  
                  755,773Charge-offs
                  
                  
                  (804,876
                  )
                  
                  
                  (902,299
                  )
                  
                  
                  (412,035
                  )Balance,
      end of year
                  
                  $
                  1,651,100
                  
                  
                  $
                  274,076
                  
                  
                  $
                  417,773




8.
            PREMISES
      AND EQUIPMENT




Premises
and equipment at September 30, 2010 and 2009 are summarized as
follows:




2010
                  
                  
                  2009Land
                  
                  $
                  5,609,693
                  
                  
                  $
                  5,566,967Office
      buildings and improvements
                  
                  
                  15,426,039
                  
                  
                  
                  15,340,501Furniture
      and equipment
                  
                  
                  11,547,579
                  
                  
                  
                  10,231,10832,583,311
                  
                  
                  
                  31,138,576Less
      accumulated depreciation
                  
                  
                  (13,819,213
                  )
                  
                  
                  (12,176,575
                  )Total
                  
                  $
                  18,764,098
                  
                  
                  $
                  18,962,001




Depreciation
expense on premises and equipment totaled $1.9 million, $1.9 million and $1.7
million for the years ended September 30, 2010, 2009 and 2008,
respectively.




- 53
-




Certain
facilities of the Company are leased under various operating
leases.  Amounts paid for rent expense for the fiscal years ended
September 30, 2010, 2009 and 2008 were approximately $690,000, $689,000 and
$514,000, respectively. At September 30, 2010, future minimum rental commitments
under non-cancelable leases are as follows:




Due
      in years ending September 30,2011
                    
                    $
                    587,7132012
                    
                    
                    600,2292013
                    
                    
                    588,8792014
                    
                    
                    600,6722015
                    
                    
                    575,196Thereafter
                    
                    
                    1,511,156Total
                    
                    $
                    4,463,845




Rentalincome received from the
Company’s office building located at 415 DeBaliviere in St. Louis, Missouri, for
the years ended September 30, 2010, 2009 and 2008 was $1,000, $19,000 and
$83,000, respectively.




9.
            DEPOSITS




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




2010
                                  
                                  
                                  2009Weighted
                                  
                                  
                                  
                                  
                                  
                                  WeightedAverage
                                  
                                  
                                  
                                  
                                  
                                  AverageInterest
                                  
                                  
                                  
                                  
                                  
                                  InterestAmount
                                  
                                  
                                  Rate
                                  
                                  
                                  Amount
                                  
                                  
                                  RateTransaction
      accounts:Non-interest-bearing
      checking
                                  
                                  $
                                  149,186,009
                                  
                                  
                                  
                                  -
                                  %
                                  
                                  $
                                  103,398,563
                                  
                                  
                                  
                                  -
                                  %Interest-bearing
      checking
                                  
                                  
                                  345,012,929
                                  
                                  
                                  
                                  0.90
                                  
                                  
                                  
                                  263,019,571
                                  
                                  
                                  
                                  1.25Passbook
      savings accounts
                                  
                                  
                                  30,296,199
                                  
                                  
                                  
                                  0.18
                                  
                                  
                                  
                                  28,874,588
                                  
                                  
                                  
                                  0.24Money
      market
                                  
                                  
                                  189,851,005
                                  
                                  
                                  
                                  0.52
                                  
                                  
                                  
                                  253,995,786
                                  
                                  
                                  
                                  0.76Total
      transaction accounts
                                  
                                  
                                  714,346,142
                                  
                                  
                                  
                                  0.58
                                  
                                  
                                  
                                  649,288,508
                                  
                                  
                                  
                                  0.81Certificates
      of deposit:0.00%
      to  0.99%
                                  
                                  
                                  119,274,303
                                  
                                  
                                  
                                  0.61
                                  
                                  
                                  
                                  64,633,081
                                  
                                  
                                  
                                  0.731.00%
      to 1.99%
                                  
                                  
                                  95,540,118
                                  
                                  
                                  
                                  1.56
                                  
                                  
                                  
                                  183,958,422
                                  
                                  
                                  
                                  1.602.00%
      to 2.99%
                                  
                                  
                                  89,282,166
                                  
                                  
                                  
                                  2.70
                                  
                                  
                                  
                                  128,240,641
                                  
                                  
                                  
                                  2.693.00%
      to 3.99%
                                  
                                  
                                  80,637,382
                                  
                                  
                                  
                                  3.35
                                  
                                  
                                  
                                  135,165,983
                                  
                                  
                                  
                                  3.494.00%
      to 4.99%
                                  
                                  
                                  7,581,100
                                  
                                  
                                  
                                  4.14
                                  
                                  
                                  
                                  11,189,819
                                  
                                  
                                  
                                  4.295.00%
      to 5.99%
                                  
                                  
                                  8,541,909
                                  
                                  
                                  
                                  5.23
                                  
                                  
                                  
                                  18,667,094
                                  
                                  
                                  
                                  5.3210.00%
      to 10.99%
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  485,691
                                  
                                  
                                  
                                  10.00Total
      certificates of deposit
                                  
                                  
                                  400,856,978
                                  
                                  
                                  
                                  2.02
                                  
                                  
                                  
                                  542,340,731
                                  
                                  
                                  
                                  2.42Total
                                  
                                  $
                                  1,115,203,120
                                  
                                  
                                  
                                  1.09
                                  %
                                  
                                  $
                                  1,191,629,239
                                  
                                  
                                  
                                  1.54
                                  %




The
aggregate amounts of certificates of deposit with a minimum principal amount of
$100,000 were $218.8 million and $317.7 million at September 30, 2010 and
2009, respectively. Certificates of deposit at September 30, 2010 and 2009
include time deposits obtained from national brokers totaling $8.4 million and
$83.4 million, respectively, with weighted-average interest rates of 5.23% and
2.67%, respectively.




- 54
-




At
September 30, 2010, the scheduled maturities of certificates of deposit were as
follows:




Maturing
      within:Three
      months ending:December
      31, 2010
                  
                  $
                  104,463,053March
      31, 2011
                  
                  
                  71,545,233June
      30, 2011
                  
                  
                  51,453,806September
      30, 2011
                  
                  
                  48,703,523Year
      ending:September
      30, 2012
                  
                  
                  105,100,446September
      30, 2013
                  
                  
                  17,829,186September
      30, 2014
                  
                  
                  1,048,640September
      30, 2015
                  
                  
                  713,091Thereafter
                  
                  
                  -Total
                  
                  $
                  400,856,978




A summary
of interest expense on deposits for the years ended September 30, 2010, 2009 and
2008 is as follows:




2010
                  
                  
                  2009
                  
                  
                  2008Interest-bearing
      checking
                  
                  $
                  3,667,002
                  
                  
                  $
                  3,504,122
                  
                  
                  $
                  2,092,618Passbook
      savings
                  
                  
                  59,133
                  
                  
                  
                  55,804
                  
                  
                  
                  91,819Money
      market
                  
                  
                  2,146,037
                  
                  
                  
                  1,676,266
                  
                  
                  
                  5,293,977Certificates
      of deposit
                  
                  
                  10,262,192
                  
                  
                  
                  16,279,392
                  
                  
                  
                  19,963,029Total
                  
                  $
                  16,134,364
                  
                  
                  $
                  21,515,584
                  
                  
                  $
                  27,441,443




10.
            ADVANCES
      FROM THE FEDERAL HOME LOAN BANK




Advances
from the Federal Home Loan Bank of Des Moines at September 30, 2010 and 2009 are
summarized as follows:




2010
                  
                  
                  2009Weighted
                  
                  
                  
                  
                  
                  WeightedAverage
                  
                  
                  
                  
                  
                  AverageInterest
                  
                  
                  
                  
                  
                  InterestAmount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  RateMaturing
      within the year ending September 30,2010
      (Overnight)
                  
                  $
                  152,000,000
                  
                  
                  
                  0.27
                  %
                  
                  $
                  32,000,000
                  
                  
                  
                  3.63
                  %2015($25.0 million
      callable only in fiscal 2011)
                  
                  
                  25,000,000
                  
                  
                  
                  2.70
                  
                  
                  
                  25,000,000
                  
                  
                  
                  2.70Thereafter
                  
                  
                  4,000,000
                  
                  
                  
                  5.48
                  
                  
                  
                  4,000,000
                  
                  
                  
                  5.48Total
                  
                  $
                  181,000,000
                  
                  
                  
                  0.72
                  %
                  
                  $
                  61,000,000
                  
                  
                  
                  3.37
                  %




The
average balances of advances from the Federal Home Loan Bank were $96.9 million
and $120.3 million, respectively, and the maximum month-end balances were $181.0
million and $245.0 million, respectively, for the years ended September 30, 2010
and 2009.  The average rates paid during the years ended September 30,
2010 and 2009 were 1.80% and 2.92%, respectively.




The Bank
has the ability to borrow funds from the FHLB equal to 35% of the Bank’s total
assets under a blanket agreement that assigns all investments in FHLB stock as
well as qualifying first mortgage loans as collateral to secure the amounts
borrowed. In addition to the $181.0 million in advances outstanding at September
30, 2010, the Bank had approximately $175.0 million in additional borrowing
capacity available to it under this arrangement.  The assets
underlying the FHLB borrowings are under the Bank’s physical
control.




- 55
-




11.
            BORROWINGS
      FROM THE FEDERAL RESERVE BANK




Borrowings
from the Federal Reserve Bank represent short-term borrowings from the discount
window at the Federal Reserve Bank of St. Louis and are typically extended
for periods of 28 days or less.  There were no outstanding borrowings
at September 30, 2010 or 2009.  The average balances of these
borrowings were $82,000 and $71.7 million, respectively, and the maximum
month-end balances were $4.7 million and $143.0 million, respectively, for the
years ended September 30, 2010 and 2009.  The average rates paid
during the years ended September 30, 2010 and 2009 were 0.59% and 0.45%,
respectively.




The Bank
has the ability to borrow funds from the Federal Reserve under an agreement that
assigns certain qualifying loans as collateral to secure the amounts
borrowed.  At September 30, 2010, $153.0 million of commercial loans
were assigned under this arrangement.  The assets underlying these
borrowings are under the Bank’s physical control.  As of September 30,
2010, the Bank had approximately $93.3 million in additional borrowing capacity
available to it under this arrangement.




12.
            SUBORDINATED
      DEBENTURES




On March
30, 2004, Pulaski Financial Statutory Trust I (“Trust I”), a Connecticut
statutory trust, issued $9.0 million of adjustable-rate preferred
securities.  The proceeds from this issuance, along with the Company’s
$279,000 capital contribution for Trust I’s common securities, were used to
acquire $9.3 million aggregate principal amount of the Company’s floating rate
junior subordinated deferrable interest debentures due in 2034, which constitute
the sole asset of Trust I.  The interest rate on the debentures and
the capital securities at September 30, 2010 was 2.99% and is adjustable
quarterly at 2.70% over the three-month LIBOR.




The
stated maturity of the Trust I debenture is June 17, 2034.  In
addition, the Trust I debentures are subject to redemption at par at the option
of the Company, subject to prior regulatory approval, in whole or in part on any
interest payment date on or after June 17, 2011.




On
December 15, 2004, Pulaski Financial Statutory Trust II (“Trust II”), a Delaware
statutory trust, issued $10.0 million of adjustable-rate preferred
securities.  The proceeds from this issuance, along with the Company’s
$310,000 capital contribution for Trust II’s common securities, were used to
acquire $10.3 million of the Company’s floating rate junior subordinated
deferrable interest debentures due in 2034, which constitute the sole asset of
Trust II.  The interest rate on the debentures and the capital
securities at September 30, 2010 was 2.15% and is adjustable quarterly at 1.86%
over the three-month LIBOR.




The
stated maturity of the debentures held by Trust II is December 15,
2034.  In addition, the Trust II debentures are subject to redemption
at par at the option of the Company, subject to prior regulatory approval, in
whole or in part on any interest payment date on or after December 15,
2011.




13.
            NOTE
      PAYABLE




The
Company had no outstanding notes payable at September 30, 2009 or at any time
during 2010. The average balance of note payable borrowings were $2.3 million
and the maximum month-end balance were $7.6 million for the year ended September
30, 2009.  The average rate paid during the year ended September 30,
2009 was 4.88%.




The note
payable outstanding during 2009 was a variable-rate obligation of the Company
that was payable to a correspondent bank and was secured by all of the Bank’s
common stock.  The Company repaid the entire $7.6 million of these
borrowings during the year ended September 30, 2009 using a portion of the
proceeds from the sale of preferred stock to the U.S. Treasury.  Under
the arrangement, the note was divided into two principal amounts of $5.0 million
and $2.6 million with variable interest rates equal to the one-month LIBOR rate
plus 2.5% and the bank’s prime rate less 1.25%,
respectively.  Interest was payable quarterly.




- 56
-




14.
            INCOME
      TAXES




Income
tax expense for the years ended September 30, 2010, 2009 and 2008 is summarized
as follows:




2010
                  
                  
                  2009
                  
                  
                  2008Current:Federal
                  
                  $
                  4,102,344
                  
                  
                  $
                  2,631,738
                  
                  
                  $
                  3,577,591State
                  
                  
                  18,100
                  
                  
                  
                  231,600
                  
                  
                  
                  118,700Deferred
      benefit
                  
                  
                  (3,861,067
                  )
                  
                  
                  (1,233,593
                  )
                  
                  
                  (3,011,846
                  )Total
                  
                  $
                  259,377
                  
                  
                  $
                  1,629,745
                  
                  
                  $
                  684,445




Income tax expense for the years ended
September 30, 2010, 2009 and 2008 differs from that computed at the federal
statutory rate of 34% as follows:




2010
                        
                        
                        2009
                        
                        
                        2008Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %Tax
      at statutory federal income tax rate
                        
                        $
                        1,207,736
                        
                        
                        
                        34.0
                        %
                        
                        $
                        2,280,280
                        
                        
                        
                        34.0
                        %
                        
                        $
                        1,214,884
                        
                        
                        
                        34.0
                        %Non-taxable
      income from bank-ownedlife
      insurance
                        
                        
                        (371,331
                        )
                        
                        
                        (10.4
                        )
                        
                        
                        (369,476
                        )
                        
                        
                        (5.5
                        )
                        
                        
                        (351,042
                        )
                        
                        
                        (9.8
                        )Non-taxable
      interest and dividends
                        
                        
                        (440,263
                        )
                        
                        
                        (12.4
                        )
                        
                        
                        (305,539
                        )
                        
                        
                        (4.6
                        )
                        
                        
                        (129,368
                        )
                        
                        
                        (3.6
                        )State
      taxes, net of federal benefit
                        
                        
                        11,946
                        
                        
                        
                        0.3
                        
                        
                        
                        152,856
                        
                        
                        
                        2.3
                        
                        
                        
                        78,342
                        
                        
                        
                        2.2Other,
      net
                        
                        
                        (148,711
                        )
                        
                        
                        (4.2
                        )
                        
                        
                        (128,376
                        )
                        
                        
                        (1.9
                        )
                        
                        
                        (128,371
                        )
                        
                        
                        (3.6
                        )Total
                        
                        $
                        259,377
                        
                        
                        
                        7.3
                        %
                        
                        $
                        1,629,745
                        
                        
                        
                        24.3
                        %
                        
                        $
                        684,445
                        
                        
                        
                        19.2
                        %




- 57
-




The
components of deferred tax assets and liabilities are as follows:




2010
                  
                  
                  2009Deferred
      tax assets:Allowance
      for loan losses
                  
                  $
                  10,824,802
                  
                  
                  $
                  7,884,406Restricted
      stock awards
                  
                  
                  85,944
                  
                  
                  
                  245,397Deferred
      compensation
                  
                  
                  1,912,158
                  
                  
                  
                  1,573,761Equity
      investments
                  
                  
                  122,666
                  
                  
                  
                  101,772Other
                  
                  
                  740,945
                  
                  
                  
                  281,035Total
      deferred tax assets
                  
                  
                  13,686,515
                  
                  
                  
                  10,086,371Deferred
      tax liabilities:FHLB
      stock dividends
                  
                  
                  152,311
                  
                  
                  
                  152,311Core
      deposit intangible
                  
                  
                  56,241
                  
                  
                  
                  92,378Premises
      and equipment
                  
                  
                  266,015
                  
                  
                  
                  391,008Unrealized
      losses on securities available for sale
                  
                  
                  23,188
                  
                  
                  
                  118,151Other
                  
                  
                  31,460
                  
                  
                  
                  36,289Total
      deferred tax liabilities
                  
                  
                  529,215
                  
                  
                  
                  790,137Net
      deferred tax assets
                  
                  $
                  13,157,300
                  
                  
                  $
                  9,296,234




At
September 30, 2010, the Company had $197,000 of unrecognized tax benefits,
$129,000 of which would affect the effective tax rate if
recognized.  The Company recognizes interest related to uncertain tax
positions in income tax expense and classifies such interest and penalties in
the liability for unrecognized tax benefits.  As of September 30,
2010, the Company had approximately $68,000 accrued for the payment of interest
and penalties.  The tax years ended September 30, 2007 through 2010
remain open to examination by the taxing jurisdictions to which the Company is
subject.




The
aggregate changes in the balance of gross unrecognized tax benefits, which
excludes interest and penalties, for the year ended September 30, 2010 are as
follows:




Balance
      at September 30, 2009
                  
                  $
                  134,000Increases
      related to tax positions taken during a prior period
                  
                  
                  -Decreases
      related to tax positions taken during a prior period
                  
                  
                  -Increases
      related to tax positions taken during the current period
                  
                  
                  32,000Decreases
      related to tax positions taken during the current period
                  
                  
                  -Decreases
      related to settlements with taxing authorities
                  
                  
                  -Decreases
      related to the expiration of the statute of limitations
                  
                  
                  (37,000
                  )Balance
      at September 30, 2010
                  
                  $
                  129,000




Retained
earnings at September 30, 2010 included earnings of approximately $4.1 million
representing tax bad debt deductions, net of actual bad debts and bad debt
recoveries, for which no provision for federal income taxes has been
made.  If these amounts are used for any purpose other than to absorb
loan losses, they will be subject to federal income taxes at the then prevailing
corporate rate.




- 58
-




A
valuation allowance should be provided on deferred tax assets when it is more
likely than not that some portion of the assets will not be
realized.  The Company has not established a valuation allowance at
September 30, 2010 or 2009 because management believes that all criteria
for recognition have been met, including the existence of a history of taxes
paid or qualifying tax planning strategies that are sufficient to support the
realization of deferred tax assets.




15.
            STOCKHOLDERS’
      EQUITY




On
January 16, 2009, as part of the U.S. Department of Treasury’s Capital Purchase
Program, the Company issued 32,538 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, $1,000 per share liquidation preference, and a
warrant to purchase up to 778,421 shares of the Company’s common stock for a
period of ten years at an exercise price of $6.27 per share in exchange for
$32.5 million in cash from the U.S. Department of Treasury.  The
proceeds, net of issuance costs consisting primarily of legal fees, were
allocated between the preferred stock and the warrant on a pro rata basis, based
upon the estimated market values of the preferred stock and the
warrants.  As a result, $2.2 million of the proceeds were allocated to
the warrant, which increased additional paid-in capital from common
stock.  The amount allocated to the warrant is considered a discount
on the preferred stock and will be amortized using the level yield method over a
five-year period through a charge to retained earnings.  Such
amortization will not reduce net income, but will reduce income available for
common shares.





The fair
value of the preferred stock was estimated on the date of issuance by computing
the present value of expected future cash flows using a risk-adjusted rate of
return for similar securities of 12%.  The fair value of the warrant
was estimated on the date of grant using the Black-Scholes option pricing model
assuming a risk-free interest rate of 4.30%, expected volatility of 35.53% and a
dividend yield of 4.50%.





The
preferred stock pays cumulative dividends of 5% per year for the first five
years and 9% per year thereafter.  The Company may, at its option,
redeem the preferred stock at its liquidation preference plus accrued and unpaid
dividends.  The securities purchase agreement between the Company and
the U.S. Treasury limits, for three years, the rate of dividend payments on the
Company’s common stock to the amount of its last quarterly cash dividend prior
to participation in the program of $0.095 per share unless an increase is
approved by the Treasury, limits the Company’s ability to repurchase its common
stock for three years, and subjects the Company to certain executive
compensation limitations included in the Emergency Economic Stabilization Act of
2008, as amended by the American Recovery and Reinvestment Act of
2009.





During
fiscal 2010, the Company paid quarterly cash dividends on common stock of $0.095
per share on July 15, 2010, April 15, 2010, January 15, 2010 and October 15,
2009.  During fiscal 2009, the Company paid quarterly cash dividends
on common stock of $0.095 per share on July 15, 2009, April 14, 2009, January
15, 2009 and October 13, 2008.




During
fiscal 2010, the Company withheld 11,655 shares for tax withholding on employees
in benefit plans with a total value of approximately $78,400. In addition,
43,553 shares were purchased in the open market with a total cost of $219,800,
and 228,761 shares were issued from treasury stock with a total cost of $548,700
to fund the Company’s equity trust plan.




16.
            REGULATORY
      CAPITAL REQUIREMENTS




The
Company is not subject to any separate capital requirements from those of the
Bank.  The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators which, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.




- 59
-




Quantitative
measures that have been established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios (set forth in
the table below). The Bank’s primary regulatory agency, the Office of Thrift
Supervision (“OTS”), requires that the Bank maintain minimum ratios, as defined
in the regulations, of tangible capital of 1.5%, core capital of 4.0% and total
risk-based capital of 8.0%.  The Bank is also subject to prompt
corrective action capital requirement regulations set forth by the
OTS.  As defined in the regulations, the OTS requires the Bank to
maintain minimum total and Tier I capital to risk-weighted assets and Tier I
capital to average assets.  The Bank met all capital adequacy
requirements to which it was subject at September 30, 2010.




As of
September 30, 2010, the most recent notification from the OTS categorized the
Bank as “well capitalized” under the regulatory framework for prompt corrective
action. To be categorized as “well capitalized,” the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the following table.  There are no conditions or events since that
notification that management believes have changed the Bank’s
category.




- 60
-




To be Categorized as"Well Capitalized"under PromptFor Capital
                  
                  
                  Corrective ActionActual
                  
                  
                  Adequacy Purposes
                  
                  
                  ProvisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio(Dollars in thousands)As
      of September 30, 2010:Tangible
      capital (to total assets)
                  
                  $
                  130,571
                  
                  
                  
                  9.02
                  %
                  
                  $
                  21,708
                  
                  
                  
                  1.50
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ATotal
      risk-based capital (to risk-weighted assets)
                  
                  
                  145,268
                  
                  
                  
                  12.40
                  %
                  
                  
                  93,750
                  
                  
                  
                  8.00
                  %
                  
                  $
                  117,188
                  
                  
                  
                  10.00
                  %Tier
      I risk-based capital (to risk-weighted assets)
                  
                  
                  130,571
                  
                  
                  
                  11.14
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  70,313
                  
                  
                  
                  6.00
                  %Tier
      I leverage capital (to average assets)
                  
                  
                  130,571
                  
                  
                  
                  9.02
                  %
                  
                  
                  57,887
                  
                  
                  
                  4.00
                  %
                  
                  
                  72,359
                  
                  
                  
                  5.00
                  %As
      of September 30, 2009:Tangible
      capital (to total assets)
                  
                  $
                  128,750
                  
                  
                  
                  9.19
                  %
                  
                  $
                  21,004
                  
                  
                  
                  1.50
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ATotal
      risk-based capital (to risk-weighted assets)
                  
                  
                  143,297
                  
                  
                  
                  12.33
                  %
                  
                  
                  92,943
                  
                  
                  
                  8.00
                  %
                  
                  $
                  116,179
                  
                  
                  
                  10.00
                  %Tier
      I risk-based capital (to risk-weighted assets)
                  
                  
                  128,750
                  
                  
                  
                  11.08
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  69,707
                  
                  
                  
                  6.00
                  %Tier
      I leverage capital (to average assets)
                  
                  
                  128,750
                  
                  
                  
                  9.19
                  %
                  
                  
                  56,010
                  
                  
                  
                  4.00
                  %
                  
                  
                  70,012
                  
                  
                  
                  5.00
                  %




A
reconciliation of the Bank’s Tier I stockholders’ equity and regulatory
risk-based capital at September 30, 2010 follows:




(in thousands)Tier
      I stockholders’ equity
                  
                  $
                  134,762Deduct:Intangible
      assets
                  
                  
                  (4,087
                  )Disallowed
      servicing rights
                  
                  
                  (66
                  )Add:Unrealized
      gains on available-for-sale securities
                  
                  
                  (38
                  )Tangible
      capital
                  
                  
                  130,571Add:General
      valuation allowances
                  
                  
                  14,697Total
      risk-based capital
                  
                  $
                  145,268




The Bank
is prohibited from paying cash dividends if the effect thereof would be to
reduce the regulatory capital of the Bank below the amount required for the
liquidation account that the Bank established in connection with the
consummation of the conversion from the mutual holding company structure on
December 2, 1998. In addition, OTS regulations, as currently applied to the
Bank, impose limitations upon payment of capital distributions to the
Company.  Under the regulations, the prior approval of the OTS is
required prior to any capital distribution.  To the extent that any such
capital distributions are not approved by the OTS in future periods, the Company
could find it necessary to reduce or eliminate the payment of common dividends
to its shareholders.  In addition, the Company could find it necessary
to temporarily suspend the payment of dividends on its preferred stock and
interest on its subordinated debentures.




- 61
-




17.
            EMPLOYEE
      BENEFITS




The
Company maintains shareholder-approved, stock-based incentive plans, which
permit the granting of options to purchase common stock of the Company and
awards of restricted shares of common stock.  All employees,
non-employee directors and consultants of the Company and its affiliates are
eligible to receive awards under the plans.  The plans authorize the
granting of awards in the form of options intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code, options that do not so
qualify (non-statutory stock options) and granting of restricted shares of
common stock.  Stock option awards are generally granted with an
exercise price equal to the market value of the Company’s shares at the date of
grant and generally vest over a period of three to five
years.  Generally, option and share awards provide for accelerated
vesting if there is a change in control (as defined in the plans). As a
participant in the U.S. Department of Treasury’s Capital Purchase Program,
certain employees are prohibited from receiving golden parachute payments while
the Company has any outstanding funds related to the program.  Under
the Treasury’s guidelines, golden parachute payments are defined to include any
payment due to a change in control of the Company, which includes the
acceleration of vesting in stock-based incentive plans due to the departure or
change in control.  Accordingly, the affected employees have signed
agreements to forfeit the right to accelerated vesting while any funds related
to the Treasury’s program are outstanding.  The exercise period for
all stock options generally may not exceed 10 years from the date of
grant.  Shares used to satisfy stock awards and stock option exercises
are generally issued from treasury stock.  At September 30, 2010, the
Company had 432,166 reserved but unissued shares that can be awarded in the form
of stock options or restricted share awards.




Restricted Stock
Awards- A
summary of the Company’s restricted stock awards as of and for the years ended
September 30, 2010, 2009 and 2008 is as follows:




2010
                              
                              
                              2009
                              
                              
                              2008Weighted
                              
                              
                              
                              
                              
                              Weighted
                              
                              
                              
                              
                              
                              WeightedAverage
                              
                              
                              
                              
                              
                              Average
                              
                              
                              
                              
                              
                              AverageGrant-Date
                              
                              
                              
                              
                              
                              Grant-Date
                              
                              
                              
                              
                              
                              Grant-DateNumber
                              
                              
                              Fair Value
                              
                              
                              Number
                              
                              
                              Fair Value
                              
                              
                              Number
                              
                              
                              Fair ValueNonvested
      at beginning of year
                              
                              
                              24,477
                              
                              
                              $
                              4.88
                              
                              
                              
                              667
                              
                              
                              $
                              13.20
                              
                              
                              
                              3,105
                              
                              
                              $
                              10.21Granted
                              
                              
                              49,012
                              
                              
                              
                              7.37
                              
                              
                              
                              24,327
                              
                              
                              
                              4.83
                              
                              
                              
                              -
                              
                              
                              
                              -Vested
                              
                              
                              (5,658
                              )
                              
                              
                              7.52
                              
                              
                              
                              (517
                              )
                              
                              
                              13.26
                              
                              
                              
                              (2,438
                              )
                              
                              
                              9.39Forfeited
                              
                              
                              (612
                              )
                              
                              
                              7.37
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Nonvested
      at end of year
                              
                              
                              67,219
                              
                              
                              $
                              6.45
                              
                              
                              
                              24,477
                              
                              
                              $
                              4.88
                              
                              
                              
                              667
                              
                              
                              $
                              13.20




- 62
-


Stock Option
Awards- A
summary of the Company’s stock option program as of and for the years ended
September 30, 2010, 2009 and 2008 is as follows:




2010
                    
                    
                    2009
                    
                    
                    2008WeightedWeighted
                    
                    
                    
                    
                    
                    Average
                    
                    
                    
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    WeightedAverage
                    
                    
                    Aggregate
                    
                    
                    Remaining
                    
                    
                    
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageExercise
                    
                    
                    Intrinsic
                    
                    
                    Contractual
                    
                    
                    
                    
                    
                    Exercise
                    
                    
                    
                    
                    
                    ExerciseNumber
                    
                    
                    Price
                    
                    
                    Value
                    
                    
                    Life (years)
                    
                    
                    Number
                    
                    
                    Price
                    
                    
                    Number
                    
                    
                    PriceOutstanding
      at beginning of year
                    
                    
                    930,306
                    
                    
                    $
                    9.82
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    788,233
                    
                    
                    $
                    10.38
                    
                    
                    
                    780,008
                    
                    
                    $
                    8.51Granted
                    
                    
                    16,000
                    
                    
                    
                    7.19
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    201,100
                    
                    
                    
                    7.27
                    
                    
                    
                    330,550
                    
                    
                    
                    11.44Exercised
                    
                    
                    (72,900
                    )
                    
                    
                    2.70
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (23,827
                    )
                    
                    
                    4.45
                    
                    
                    
                    (245,542
                    )
                    
                    
                    4.70Forfeited
                    
                    
                    (23,566
                    )
                    
                    
                    9.23
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (35,200
                    )
                    
                    
                    11.53
                    
                    
                    
                    (76,783
                    )
                    
                    
                    14.05Outstanding
      at end of year
                    
                    
                    849,840
                    
                    
                    $
                    10.40
                    
                    
                    $
                    173,889
                    
                    
                    
                    5.9
                    
                    
                    
                    930,306
                    
                    
                    $
                    9.82
                    
                    
                    
                    788,233
                    
                    
                    $
                    10.38Exercisable
      at end of year
                    
                    
                    558,093
                    
                    
                    $
                    10.50
                    
                    
                    $
                    152,219
                    
                    
                    
                    5.0
                    
                    
                    
                    487,868
                    
                    
                    $
                    9.28
                    
                    
                    
                    380,522
                    
                    
                    $
                    8.24




The
weighted-average fair value per share of options and awards granted during the
years ended September 30, 2010, 2009 and 2008 was $1.80, $1.82 and $2.98,
respectively.  Cash received from stock options exercised totaled
$197,000, $161,000 and $1.2 million during the years ended September 30,
2010, 2009 and 2008, respectively.  The total intrinsic value of stock
options exercised totaled $298,000, $669,000 and $1.5 million during the years
ended September 30, 2010, 2009 and 2008, respectively.  Executive
officers and directors exercised 72,900 options during the year ended September
30, 2010.





The
following is a summary of the options outstanding at September 30,
2010:




Outstanding
                                    
                                    
                                    ExercisableWeighted Average
                                    
                                    
                                    Weighted
                                    
                                    
                                    
                                    
                                    
                                    WeightedRange of
                                    
                                    
                                    
                                    
                                    
                                    Remaining
                                    
                                    
                                    Average
                                    
                                    
                                    
                                    
                                    
                                    AverageExercise Prices
                                    
                                    
                                    Number
                                    
                                    
                                    Contractual Life (yrs)
                                    
                                    
                                    Exercise Price
                                    
                                    
                                    Number
                                    
                                    
                                    Exercise Price$
                                    5.13
                                    -
                                    $
                                    5.90
                                    
                                    
                                    
                                    89,097
                                    
                                    
                                    
                                    4.74
                                    
                                    
                                    $
                                    5.51
                                    
                                    
                                    
                                    78,995
                                    
                                    
                                    $
                                    5.496.12
                                    -
                                    
                                    6.75
                                    
                                    
                                    
                                    101,914
                                    
                                    
                                    
                                    5.90
                                    
                                    
                                    
                                    6.41
                                    
                                    
                                    
                                    71,448
                                    
                                    
                                    
                                    6.327.00
                                    -
                                    
                                    8.66
                                    
                                    
                                    
                                    139,334
                                    
                                    
                                    
                                    8.69
                                    
                                    
                                    
                                    7.72
                                    
                                    
                                    
                                    64,920
                                    
                                    
                                    
                                    7.769.46
                                    -
                                    
                                    10.96
                                    
                                    
                                    
                                    84,907
                                    
                                    
                                    
                                    6.48
                                    
                                    
                                    
                                    10.01
                                    
                                    
                                    
                                    58,657
                                    
                                    
                                    
                                    9.9911.10
                                    -
                                    
                                    11.94
                                    
                                    
                                    
                                    138,750
                                    
                                    
                                    
                                    6.58
                                    
                                    
                                    
                                    11.24
                                    
                                    
                                    
                                    68,550
                                    
                                    
                                    
                                    11.2612.07
                                    -
                                    
                                    12.99
                                    
                                    
                                    
                                    124,219
                                    
                                    
                                    
                                    5.36
                                    
                                    
                                    
                                    12.79
                                    
                                    
                                    
                                    63,619
                                    
                                    
                                    
                                    12.7513.00
                                    -
                                    
                                    14.72
                                    
                                    
                                    
                                    75,031
                                    
                                    
                                    
                                    4.86
                                    
                                    
                                    
                                    13.46
                                    
                                    
                                    
                                    70,831
                                    
                                    
                                    
                                    13.4015.05
                                    -
                                    
                                    18.70
                                    
                                    
                                    
                                    96,588
                                    
                                    
                                    
                                    5.47
                                    
                                    
                                    
                                    16.64
                                    
                                    
                                    
                                    81,073
                                    
                                    
                                    
                                    16.68$
                                    5.13
                                    -
                                    $
                                    18.70
                                    
                                    
                                    
                                    849,840
                                    
                                    
                                    
                                    5.91
                                    
                                    
                                    $
                                    10.40
                                    
                                    
                                    
                                    558,093
                                    
                                    
                                    $
                                    10.50




- 63
-





A summary
of total stock-based compensation expense for the years ended September 30,
2010, 2009 and 2008 follows:





2010
                  
                  
                  2009
                  
                  
                  2008Total
      expense:Pre-tax
                  
                  $
                  555,086
                  
                  
                  $
                  491,000
                  
                  
                  $
                  465,000After-tax
                  
                  
                  344,153
                  
                  
                  
                  304,500
                  
                  
                  
                  293,000Earnings
      per share:Basic
                  
                  $
                  0.03
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.03Diluted
                  
                  
                  0.03
                  
                  
                  
                  0.03
                  
                  
                  
                  0.03





As of
September 30, 2010, the total unrecognized compensation expense related to
non-vested stock options and restricted stock awards was approximately $532,000
and $234,000, respectively, and the related weighted average period over which
it is expected to be recognized is approximately 1.8 and 1.7 years,
respectively.





The fair value of stock options granted
in 2010, 2009 and 2008 was estimated on the date of grant using the
Black-Scholes option pricing model with the following average
assumptions:





2010
                  
                  
                  2009
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  2.53
                  %
                  
                  
                  4.30
                  %
                  
                  
                  4.22
                  %Expected
      volatility
                  
                  
                  36.39
                  %
                  
                  
                  35.53
                  %
                  
                  
                  27.83
                  %Expected
      life in years
                  
                  
                  5.6
                  
                  
                  
                  5.4
                  
                  
                  
                  5.5Dividend
      yield
                  
                  
                  4.30
                  %
                  
                  
                  4.50
                  %
                  
                  
                  2.28
                  %Expected
      forfeiture rate
                  
                  
                  3.32
                  %
                  
                  
                  3.37
                  %
                  
                  
                  1.28
                  %





Equity Trust
Plan-The
Company maintains an Equity Trust Plan for the benefit of key loan officers and
sales staff.  The plan is designed to recruit and retain top-performing
loan officers and other key revenue-producing employees who are instrumental to
the Company’s success.  The plan allows the recipients to defer a
percentage of commissions earned into a rabbi trust for the benefit of the
participants.  The assets of the trust are limited to shares of Company
common stock and cash.  Awards generally vest over a period of three to
five years, and the participants will forgo any accrued but unvested benefits if
they voluntarily leave the Company.  At September 30, 2010, 272,314 shares
had been purchased on behalf of the participants at an average price of
$6.19.  Shares distributed to participants during the fiscal year were
33,742 with a market value at the time of distribution totaling $402,000, and
11,655 shares were withheld by the Company in order for the distribution
recipients to meet their tax obligations. Vested shares in the plan are treated
as issued and outstanding when computing basic and diluted earnings per share,
whereas unvested shares are treated as issued and outstanding only when
computing diluted earnings per share.




KSOP–Effective September 1,
2008, theBank
merged its 401(k) savings plan and its employee stock ownership plan into the
Pulaski Bank Savings and Ownership Plan (the “KSOP”) to provide greater
investment alternatives to plan participants and to reduce administrative
expenses.  Prior to January 1, 2010, the Bank matched 75% of each
participant’s contribution up to a maximum of 5% of salary.  Effective for
the calendar year 2010, the Company made the decision to suspend its 401(k)
employer matching contribution.  The Bank’s contributions to this plan were
$162,000, $658,000 and $591,000 for the years ended September 30, 2010, 2009 and
2008, respectively.




Supplemental
Retirement Agreement-In January 1998, the Bank entered into a supplemental retirement benefit
agreement with its chief executive officer in conjunction with his retirement
from the Company at that time.  Under the terms of the agreement, the
former chief executive officer is entitled to receive $2,473 monthly, for a
period of 15 years commencing upon his retirement.  The net present value
of these payments is reflected in other liabilities and totaled $59,000, $83,000
and $105,000 at September 30, 2010, 2009 and 2008, respectively. Compensation
expense under this agreement totaled approximately $6,000, $7,000 and $9,000 for
the years ended September 30, 2010, 2009 and 2008,
respectively.


- 64
-


Employment
Agreements- The
Company and the Bank maintain an employment agreement with its current CEO
(“CEO”).  The initial term of the agreement is three years. 
Commencing on the first anniversary of the effective date of May 1, 2008, the
term of the agreement decreased to two years.  Under the agreement, the
Bank pays the CEO a base salary, which is reviewed at least annually and may be
increased at the discretion of the Board of Directors.  In addition, the
CEO received a stock option grant on the effective date covering 100,000 shares
of the Company’s common stock at an exercise price of $12.84 per share, which
vests ratably over a period of five years. The CEO is also entitled to receive
health and welfare benefits provided to other Company and Bank employees. 
Additionally, the agreement provides for severance payments and continued
medical coverage for 24 months if employment is terminated following a change in
control or upon an event of termination as defined in the agreement.  In
the event of a change in control and subsequent termination of employment, the
CEO will receive a lump-sum payment equal to two times his average annual
compensation computed using his base pay rate at the date of termination plus
any bonus or incentive compensation earned by him in the prior fiscal
year.  The lump-sum payment will include an amount for any required excise
tax due under the Internal Revenue Code of 1986.  The agreement also
prohibits the CEO from soliciting the services of any of the Company’s
employees, and from competing with the Company, for a period of two years after
termination.  As a participant in the U.S. Department of Treasury’s Capital
Purchase Program, certain employees are prohibited from receiving golden
parachute payments while the preferred stock issued pursuant to the Capital
Purchase Program remains outstanding.  Under the Treasury’s guidelines,
golden parachute payments are defined to include any payment due to a change in
control of the Company or an event of the employee’s termination. 
Accordingly, the CEO has signed an agreement to forfeit the right to receive the
lump-sum separation payment under this agreement while the preferred stock
issued pursuant to the Capital Purchase Program remains
outstanding.




Separation and
Release Agreement-The Company entered into a separation and release agreement with its
former CEO in conjunction with his separation from the Company on May 1,
2008.  Under the agreement, the former CEO received a lump-sum payment of
$1,450,000 and will continue to participate in the Bank’s health, life and
disability insurance programs, at the Bank’s expense, for a period of 36 months
from the separation date.  The agreement also provides that the former CEO
will continue to serve as a member of the Board of Directors of the Bank and the
Company until his current terms expire and will receive compensation for such
service in the same manner and to the same extent as other non-employee
directors.  In addition, the agreement provides that the former CEO will
serve as a consultant to the Company for 36 months following his separation date
and shall receive an annual retainer of $100,000 for such service.  The
lump-sum payment was charged to salaries and employee benefits expense when
paid.  The annual retainer fee and expenses associated with the health,
life and disability insurance programs will be charged to salaries and employee
benefits expense as they are earned over the term of the agreement.




18.
            CONTINGENCIES




The
Company is a defendant in legal actions arising from normal business
activities.  Management, after consultation with counsel, believes that the
resolution of these actions will not have any material adverse effect on the
Company’s consolidated financial statements.




19.
            DERIVATIVES




The
Company originates and purchases derivative financial instruments, including
interest rate lock commitments, forward contracts to sell mortgage-backed
securities and interest rate swaps.  Derivative financial instruments
originated by the Company consist of interest rate lock commitments to originate
residential loans.  At September 30, 2010, the Company had issued $115.2
million of unexpired interest rate lock commitments to loan customers compared
to $147.8 million of unexpired commitments at September 30, 2009.  The
Company typically economically hedges interest rate lock commitments by
obtaining a corresponding best-efforts lock commitment with an investor to sell
the loan at an agreed-upon price.


- 65
-


Interest Rate Swaps - The
Company entered into two $14 million notional value interest-rate swap contracts
during 2008 totaling $28 million notional value.  These contracts
supported a $14 million, variable-rate, commercial loan relationship and were
used to allow the commercial loan customer to pay a fixed interest rate to the
Company, while the Company, in turn, charged the customer a floating interest
rate on the loan.  Under the terms of the swap contract between the Company
and the loan customer, the customer pays the Company a fixed interest rate of
6.58%, while the Company pays the customer a variable interest rate of one-month
LIBOR plus 2.30%.  Under the terms of a similar but separate swap contract
between the Company and a major securities broker, the Company pays the broker a
fixed interest rate of 6.58%, while the broker pays the Company a variable
interest rate of one-month LIBOR plus 2.30%.  The two contracts have
identical terms except for the interest rates and are scheduled to mature on May
15, 2015.  While these two swap derivatives generally work together as an
interest-rate hedge, the Company has not designated them for hedge
treatment.  Consequently, both derivatives are marked to fair value through
either a charge or credit to current earnings.




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




September 30,2010
                  
                  
                  2009Fair
      value recorded in other assets
                  
                  $
                  1,860,000
                  
                  
                  $
                  1,170,000Fair
      value recorded in other liabilities
                  
                  
                  1,860,000
                  
                  
                  
                  1,170,000




The gross
gains and losses on these contracts recorded in non-interest expense in the
consolidated statements of income and comprehensive income for the years ended
September 30, 2010 and 2009 are summarized as follows:




September 30,2010
                    
                    
                    2009Gross
      gains on derivative financial assets
                    
                    $
                    (690,000
                    )
                    
                    $
                    (1,100,000
                    )Gross
      losses on derivative financial liabilities
                    
                    
                    690,000
                    
                    
                    
                    1,100,000Net
      gain or loss
                    
                    $
                    -
                    
                    
                    $
                    -




20.
            FINANCIAL
      INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT
      RISK




The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers by
issuing commitments to extend credit.  Such commitments are agreements to
lend to a customer provided there is no violation of any condition established
in the contract. These commitments generally have fixed expiration dates or
other termination clauses and may require the borrower to pay a fee. The Company
evaluates each customer’s creditworthiness on a case-by-case basis.




At
September 30, 2010, the Company had firm commitments to originate loans of
approximately $115.2 million, of which $70.8 million were committed to be
sold.  Of the remaining $44.4 million, $5.9 million were in the process of
being committed and $38.0 million were commercial loans originated for
portfolio. At September 30, 2009, the Company had firm commitments to originate
loans of approximately $147.8 million, of which $94.2 million were committed to
be sold.  Of the remaining $53.6 million, $7.5 million were in the process
of being committed and $42.6 million were commercial loans originated for
portfolio.  Additionally, the Company had outstanding commitments to
borrowers under unused equity lines of credit, commercial lines of credit and
consumer lines of credit totaling $145.2 million, $61.3 million and
$32,000, respectively, at September 30, 2010 compared to $183.2 million,
$74.2 million and $858,000, respectively, at September 30, 2009.




At
September 30, 2010 and 2009, the Company had loans receivable held for sale
totaling $253.6 million and $109.1 million, respectively, substantially all
of which were under firm commitments to be sold on a best-efforts basis. 
Any unrealized loss on these commitment obligations is considered in conjunction
with the Company’s lower of cost or market valuation of its loans held for
sale.


- 66
-


Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party.  These standby letters of
credit are primarily issued for a fee to support contractual obligations of the
Company’s customers.  The credit risk involved with issuing letters of
credit is essentially the same as the risk involved in extending loans to
customers. At September 30, 2010, the Company had 54 letters of credit totaling
approximately $8.7 million due to expire no later than July 2019 compared to 57
letters of credit totaling approximately $12.2 million due to expire no later
than June 2015 at September 30, 2009.




21.
              FAIR
      VALUE MEASUREMENTS




Effective
October 1, 2008, the Company adopted the provisions of Accounting Standards
Codification TM (“ASC”) Topic 820, Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements.  Fair value is defined as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date.  A fair value measurement should reflect all of the
assumptions that market participants would use in pricing the asset or
liability, including assumptions about the risk inherent in a particular
valuation technique, the effect of a restriction on the sale or use of an asset,
and the risk of non-performance.




A
three-level hierarchy for valuation techniques is used to measure financial
assets and financial liabilities at fair value.  This hierarchy is based on
whether the valuation inputs are observable or unobservable. Financial
instrument valuations are considered Level 1 when they are based on quoted
prices in active markets for identical assets or liabilities.  Level 2
financial instrument valuations use quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data.  Financial
instrument valuations are considered Level 3 when they are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable, and when
determination of the fair value requires significant management judgment or
estimation.  ASC Topic 820 also provides guidance on determining fair value
when the volume and level of activity for the asset or liability has
significantly decreased and on identifying circumstances when a transaction may
not be considered orderly.




The
following disclosures for September 30, 2009 exclude certain non-financial
assets and liabilities, which are deferred under the provisions of ASC Topic
820.  Such non-financial assets include foreclosed real estate, long-lived
assets and goodwill, which are written down to fair value if considered
impaired.  The deferral of these disclosures was intended to allow
additional time to consider the effect of various implementation issues relating
to these non-financial assets and liabilities, and defered disclosures required
by ASC Topic 820 until the Company’s fiscal year beginning October 1,
2009.




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




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




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




Interest Rate Swap Assets and
Liabilities.  The fair values are based on quoted market prices by
an independent valuation service.


- 67
-


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




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




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




Intangible Assets and
Goodwill are reviewed annually in the fourth fiscal quarter and/or when
circumstances or other events indicate that impairment may have occurred. 
The Company reviewed goodwill for impairment as of September 30, 2010.  No
impairment losses were recognized during the years ended September 30, 2010 or
2009.




Assets
and liabilities that were recorded at fair value on a recurring basis at
September 30, 2010 and 2009 and the level of inputs used to determine their fair
values are summarized below:




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




Carrying Value at September 30, 2009Fair Value Measurements UsingTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3(In
      thousands)Assets:Debt
      securities available for sale
                  
                  
                  1,997
                  
                  
                  
                  -
                  
                  
                  
                  1,997
                  
                  
                  
                  -Mortgage-backed
      securities available for sale
                  
                  
                  16,087
                  
                  
                  
                  -
                  
                  
                  
                  16,087
                  
                  
                  
                  -Interest-rate
      swap
                  
                  
                  1,170
                  
                  
                  
                  -
                  
                  
                  
                  1,170
                  
                  
                  
                  -Total
      assets
                  
                  $
                  19,254
                  
                  
                  $
                  -
                  
                  
                  $
                  19,254
                  
                  
                  $
                  -Liabilities:Interest-rate
      swap
                  
                  $
                  1,170
                  
                  
                  $
                  -
                  
                  
                  $
                  1,170
                  
                  
                  $
                  -Total
      liabilities
                  
                  $
                  1,170
                  
                  
                  $
                  -
                  
                  
                  $
                  1,170
                  
                  
                  $
                  -


- 68
-


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




Total LossesRecognized inCarrying Value at September 30, 2010
                    
                    the Year EndedFair Value Measurements Using
                    
                    
                    September 30,Total
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    2010(In
      thousands)Assets:Mortgage
      loans held for sale
                    
                    $
                    113
                    
                    
                    $
                    -
                    
                    
                    $
                    113
                    
                    
                    $
                    -
                    
                    
                    $
                    -Impaired
      loans, net
                    
                    
                    17,748
                    
                    
                    
                    -
                    
                    
                    
                    10,826
                    
                    
                    
                    6,922
                    
                    
                    
                    4,335Real
      estate acquired in settlement of loans
                    
                    
                    14,900
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,900
                    
                    
                    
                    8,373Total
      assets
                    
                    $
                    32,761
                    
                    
                    $
                    -
                    
                    
                    $
                    10,939
                    
                    
                    $
                    21,822
                    
                    
                    $
                    12,708





Carrying Value at September 30, 2009
                  
                  Total Losses
                    Recognized in
                    the Year EndedFair Value Measurements Using
                  
                  
                  September 30,Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  2009(In
      thousands)Assets:Loans
      held for sale
                  
                  $
                  2,096
                  
                  
                  $
                  -
                  
                  
                  $
                  2,096
                  
                  
                  $
                  -
                  
                  
                  $
                  -Impaired
      loans
                  
                  
                  9,888
                  
                  
                  
                  -
                  
                  
                  
                  9,003
                  
                  
                  
                  885
                  
                  
                  
                  6,015Total
      assets
                  
                  $
                  11,984
                  
                  
                  $
                  -
                  
                  
                  $
                  11,099
                  
                  
                  $
                  885
                  
                  
                  $
                  6,015




22.
            FAIR
      VALUES OF FINANCIAL INSTRUMENTS




Fair
values of financial instruments have been estimated by the Company using
available market information and appropriate valuation methodologies, including
those described in Note 21. However, considerable judgment is necessarily
required to interpret market data used to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company might realize in a current market exchange.  The
use of different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts.


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


- 69
-


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




2010
                  
                  
                  2009Estimated
                  
                  
                  
                  
                  
                  EstimatedCarrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairValue
                  
                  
                  Value
                  
                  
                  Value
                  
                  
                  Value(In Thousands)ASSETS:Cash
      and cash equivalents
                  
                  $
                  15,603
                  
                  
                  $
                  15,603
                  
                  
                  $
                  37,451
                  
                  
                  $
                  37,451Debt
      securities - AFS
                  
                  
                  8,001
                  
                  
                  
                  8,001
                  
                  
                  
                  1,997
                  
                  
                  
                  1,997Capital
      stock of FHLB
                  
                  
                  9,774
                  
                  
                  
                  9,774
                  
                  
                  
                  11,650
                  
                  
                  
                  11,650Mortgage-backed  securities
      - HTM
                  
                  
                  10,297
                  
                  
                  
                  10,788
                  
                  
                  
                  12,078
                  
                  
                  
                  12,375Mortgage-backed  securities
      - AFS
                  
                  
                  8,846
                  
                  
                  
                  8,846
                  
                  
                  
                  16,087
                  
                  
                  
                  16,087Mortgage
      loans held for sale
                  
                  
                  253,578
                  
                  
                  
                  258,414
                  
                  
                  
                  109,130
                  
                  
                  
                  111,247Loans
      receivable
                  
                  
                  1,046,273
                  
                  
                  
                  1,094,190
                  
                  
                  
                  1,132,095
                  
                  
                  
                  1,158,721Accrued
      interest receivable
                  
                  
                  4,432
                  
                  
                  
                  4,432
                  
                  
                  
                  4,907
                  
                  
                  
                  4,907Interest-rate
      swap assets
                  
                  
                  1,860
                  
                  
                  
                  1,860
                  
                  
                  
                  1,170
                  
                  
                  
                  1,170LIABILITIES:Deposits
      transaction accounts
                  
                  
                  714,346
                  
                  
                  
                  714,346
                  
                  
                  
                  649,289
                  
                  
                  
                  649,289Certificates
      of deposit
                  
                  
                  400,857
                  
                  
                  
                  406,095
                  
                  
                  
                  542,341
                  
                  
                  
                  550,175Advances
      from the FHLB
                  
                  
                  181,000
                  
                  
                  
                  183,139
                  
                  
                  
                  61,000
                  
                  
                  
                  62,759Subordinated
      debentures
                  
                  
                  19,589
                  
                  
                  
                  19,583
                  
                  
                  
                  19,589
                  
                  
                  
                  19,591Accrued
      interest payable
                  
                  
                  945
                  
                  
                  
                  945
                  
                  
                  
                  1,035
                  
                  
                  
                  1,035Interest-rate
      swap liabilities
                  
                  
                  1,860
                  
                  
                  
                  1,860
                  
                  
                  
                  1,170
                  
                  
                  
                  1,170





2010
                  
                  
                  2009Contract
                  
                  
                  Estimated
                  
                  
                  Contract
                  
                  
                  Estimatedor
      Notional
                  
                  
                  Fair
                  
                  
                  or
      Notional
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  Value(In Thousands)OFF-BALANCE-SHEET
      FINANCIAL INSTRUMENTS:Commitments
      to originate residential first and second mortgage loans
                  
                  $
                  80,944
                  
                  
                  $
                  82,490
                  
                  
                  $
                  105,157
                  
                  
                  $
                  107,197Commitments
      to originate commercial mortgage loans
                  
                  
                  22,901
                  
                  
                  
                  23,737
                  
                  
                  
                  40,127
                  
                  
                  
                  40,994Commitments
      to originate non-mortgage loans
                  
                  
                  11,378
                  
                  
                  
                  10,918
                  
                  
                  
                  1,600
                  
                  
                  
                  1,511Unused
      lines of credit
                  
                  
                  206,451
                  
                  
                  
                  204,985
                  
                  
                  
                  258,249
                  
                  
                  
                  255,770




The following methods and
assumptions were used to estimate the fair value of the financial
instruments:




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




Securities and
Mortgage-backed Securities- Estimated fair values of securities and
mortgage-backed securities are based on quoted market prices and prices obtained
from independent pricing services. If quoted market prices are not available,
fair values are estimated using quoted market prices for similar
instruments.




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




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


- 70
-


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




Accrued Interest
Receivable- The carrying value approximates fair value.




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




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




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




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




Accrued Interest
Payable- The carrying value approximates fair value.




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




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




23.
            IMPACT
      OF RECENTLY ISSUED ACCOUNTING
STANDARDS




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





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


- 71
-


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





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





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





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





In July
2010, the FASB issued ASU No. 2010-20, Receivables (ASC Topic 310):
Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses. This ASU requires expanded credit risk disclosures
intended to provide investors with greater transparency regarding the allowance
for credit losses and the credit quality of financing receivables. Under this
ASU, companies will be required to provide more information about the credit
quality of their financing receivables in the disclosures to financial
statements, such as aging information, credit quality indicators, changes in the
allowance for credit losses, and the nature and extent of troubled debt
restructurings and their effect on the allowance for credit losses. Both new and
existing disclosures must be disaggregated by portfolio segment or class based
on the level of disaggregation that management uses when assessing its allowance
for credit losses and managing its credit exposure. The disclosures as of the
end of a reporting period will be effective for interim and annual periods
ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period will be effective for interim and annual reporting
periods beginning on or after December 15, 2010. Management is currently
evaluating the disclosure requirements under this ASU and the impact on the
Company’s consolidated financial statements and the disclosures presented in the
consolidated financial statements.


- 72
-


24.
            SELECTED
      QUARTERLY FINANCIAL DATA
(UNAUDITED)




The
results of operations by quarter for 2010 and 2009 were as follows:




First
                                                                                                
                                                                                                
                                                                                                Second
                                                                                                
                                                                                                
                                                                                                Third
                                                                                                
                                                                                                
                                                                                                FourthYear Ended September 30, 2010
                                                                                                
                                                                                                Quarter
                                                                                                
                                                                                                
                                                                                                Quarter
                                                                                                
                                                                                                
                                                                                                Quarter
                                                                                                
                                                                                                
                                                                                                QuarterInterest
      income
                                                                                                
                                                                                                $
                                                                                                16,837,055
                                                                                                
                                                                                                
                                                                                                $
                                                                                                16,050,620
                                                                                                
                                                                                                
                                                                                                $
                                                                                                15,917,855
                                                                                                
                                                                                                
                                                                                                $
                                                                                                16,298,660Interest
      expense
                                                                                                
                                                                                                
                                                                                                5,311,566
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,968,670
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,220,269
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,891,888Net
      interest income
                                                                                                
                                                                                                
                                                                                                11,525,489
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,081,950
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,697,586
                                                                                                
                                                                                                
                                                                                                
                                                                                                12,406,772Provision
      for loan losses
                                                                                                
                                                                                                
                                                                                                6,074,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,240,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,500,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,250,000Net
      interest income (loss) afterloan loss
    provision
                                                                                                
                                                                                                
                                                                                                5,451,489
                                                                                                
                                                                                                
                                                                                                
                                                                                                (158,050
                                                                                                )
                                                                                                
                                                                                                
                                                                                                7,197,586
                                                                                                
                                                                                                
                                                                                                
                                                                                                8,156,772Non-interest
      income
                                                                                                
                                                                                                
                                                                                                4,447,467
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,387,367
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,731,478
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,274,166Non-interest
      expense
                                                                                                
                                                                                                
                                                                                                8,182,400
                                                                                                
                                                                                                
                                                                                                
                                                                                                8,420,874
                                                                                                
                                                                                                
                                                                                                
                                                                                                7,342,217
                                                                                                
                                                                                                
                                                                                                
                                                                                                7,990,620Income
      (loss) before taxes
                                                                                                
                                                                                                
                                                                                                1,716,556
                                                                                                
                                                                                                
                                                                                                
                                                                                                (5,191,557
                                                                                                )
                                                                                                
                                                                                                
                                                                                                3,586,847
                                                                                                
                                                                                                
                                                                                                
                                                                                                3,440,318Income
      tax expense (benefit)
                                                                                                
                                                                                                
                                                                                                466,121
                                                                                                
                                                                                                
                                                                                                
                                                                                                (869,669
                                                                                                )
                                                                                                
                                                                                                
                                                                                                409,693
                                                                                                
                                                                                                
                                                                                                
                                                                                                253,232Net
      income (loss)
                                                                                                
                                                                                                $
                                                                                                1,250,435
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (4,321,888
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                3,177,154
                                                                                                
                                                                                                
                                                                                                $
                                                                                                3,187,086Income
      (loss) available to common shares
                                                                                                
                                                                                                $
                                                                                                736,029
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (4,836,673
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                2,661,990
                                                                                                
                                                                                                
                                                                                                $
                                                                                                2,671,541Earnings
      (loss) per common share - basic
                                                                                                
                                                                                                $
                                                                                                0.07
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (0.47
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                0.26
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.26Earnings
      (loss) per common share - diluted
                                                                                                
                                                                                                $
                                                                                                0.07
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (0.47
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                0.25
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.27Weighted
      average common sharesoutstanding - basic
                                                                                                
                                                                                                
                                                                                                10,274,066
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,364,565
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,418,153
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,466,557Weighted
      average common sharesoutstanding - diluted
                                                                                                
                                                                                                
                                                                                                10,483,880
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,364,565
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,622,155
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,807,056First
                                                                                                
                                                                                                
                                                                                                Second
                                                                                                
                                                                                                
                                                                                                Third
                                                                                                
                                                                                                
                                                                                                FourthYear
      Ended September 30, 2009
                                                                                                
                                                                                                Quarter
                                                                                                
                                                                                                
                                                                                                Quarter
                                                                                                
                                                                                                
                                                                                                Quarter
                                                                                                
                                                                                                
                                                                                                QuarterInterest
      income
                                                                                                
                                                                                                $
                                                                                                16,827,303
                                                                                                
                                                                                                
                                                                                                $
                                                                                                16,651,009
                                                                                                
                                                                                                
                                                                                                $
                                                                                                17,490,073
                                                                                                
                                                                                                
                                                                                                $
                                                                                                16,854,914Interest
      expense
                                                                                                
                                                                                                
                                                                                                7,721,257
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,575,311
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,092,810
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,825,981Net
      interest income
                                                                                                
                                                                                                
                                                                                                9,106,046
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,075,698
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,397,263
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,028,933Provision
      for loan losses
                                                                                                
                                                                                                
                                                                                                4,691,578
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,664,407
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,154,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,520,700Net
      interest income afterloan loss provision
                                                                                                
                                                                                                
                                                                                                4,414,468
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,411,291
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,243,263
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,508,233Non-interest
      income
                                                                                                
                                                                                                
                                                                                                3,388,770
                                                                                                
                                                                                                
                                                                                                
                                                                                                5,946,332
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,108,707
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,122,821Non-interest
      expense
                                                                                                
                                                                                                
                                                                                                6,940,525
                                                                                                
                                                                                                
                                                                                                
                                                                                                7,822,710
                                                                                                
                                                                                                
                                                                                                
                                                                                                8,561,559
                                                                                                
                                                                                                
                                                                                                
                                                                                                8,112,384Income
      before taxes
                                                                                                
                                                                                                
                                                                                                862,713
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,534,913
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,790,411
                                                                                                
                                                                                                
                                                                                                
                                                                                                518,670Income
      tax expense (benefit)
                                                                                                
                                                                                                
                                                                                                296,856
                                                                                                
                                                                                                
                                                                                                
                                                                                                761,910
                                                                                                
                                                                                                
                                                                                                
                                                                                                775,624
                                                                                                
                                                                                                
                                                                                                
                                                                                                (204,645
                                                                                                )Net
      income
                                                                                                
                                                                                                $
                                                                                                565,857
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1,773,003
                                                                                                
                                                                                                
                                                                                                $
                                                                                                2,014,787
                                                                                                
                                                                                                
                                                                                                $
                                                                                                723,315Income
      available to common shares
                                                                                                
                                                                                                $
                                                                                                565,857
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1,535,393
                                                                                                
                                                                                                
                                                                                                $
                                                                                                1,501,133
                                                                                                
                                                                                                
                                                                                                $
                                                                                                209,286Earnings
      per common share - basic
                                                                                                
                                                                                                $
                                                                                                0.06
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.15
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.15
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.01Earnings
      per common share - diluted
                                                                                                
                                                                                                $
                                                                                                0.06
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.15
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.14
                                                                                                
                                                                                                
                                                                                                $
                                                                                                0.02Weighted
      average common sharesoutstanding - basic
                                                                                                
                                                                                                
                                                                                                10,114,506
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,153,221
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,200,321
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,246,356Weighted
      average common sharesoutstanding - diluted
                                                                                                
                                                                                                
                                                                                                10,274,626
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,283,324
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,395,653
                                                                                                
                                                                                                
                                                                                                
                                                                                                10,550,782


- 73
-


25.
            CONDENSED
      PARENT-COMPANY-ONLY FINANCIAL
STATEMENTS.


The
following table presents the condensed parent-company-only balance sheets as of
September 30, 2010 and 2009, and the condensed parent-company-only statements of
income and cash flows of the Company for the years ended September 30,
2010, 2009 and 2008:




Condensed
      Balance Sheets
                                                                                                                                                                    
                                                                                                                                                                    2010
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2009ASSETS:Cash
      and cash equivalents
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    109,083
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    96,970Investment
      in Bank
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    134,762,057
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    133,201,445Intercompany
      loan to Bank
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,900,000
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2,800,000Other
      assets
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,757,055
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2,454,866Total
      assets
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    138,528,195
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    138,553,281LIABILITIES:Subordinated
      debentures
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    19,589,000
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    19,589,000Dividends
      payable
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,029,567
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    986,951Other
      liabilities
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,556,347
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,015,960Total
      liabilities
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    22,174,914
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    21,591,911STOCKHOLDER'S
      EQUITY
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    116,353,281
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    116,961,370Total
      liabilities and stockholder's equity
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    138,528,195
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    138,553,281Condensed
      Statements of Income
                                                                                                                                                                    
                                                                                                                                                                    2010
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2009
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2008Interest
      income
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    45,849
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    152,223
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    122,189Interest
      expense
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    515,307
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    872,846
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,479,892Net
      interest expense
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (469,458
                                                                                                                                                                    )
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (720,623
                                                                                                                                                                    )
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (1,357,703
                                                                                                                                                                    )Non-interest
      income
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,104,379
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    892,022
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    760,633Non-interest
      expense
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    551,600
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,201,803
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    675,571Income
      (loss) before income taxes and equity in earnings of Bank
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    83,321
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (1,030,404
                                                                                                                                                                    )
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (1,272,641
                                                                                                                                                                    )Income
      tax (benefit)
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    6,084
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (374,800
                                                                                                                                                                    )
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (406,564
                                                                                                                                                                    )Net
      income (loss) before equity in earnings of Bank
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    77,237
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (655,604
                                                                                                                                                                    )
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    (866,077
                                                                                                                                                                    )Equity
      in earnings of Bank, net of tax
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    3,215,550
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    5,732,566
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    3,754,821Net
      income
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    3,292,787
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    5,076,962
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    2,888,744Income
      available to common shares
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    1,232,887
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    3,811,669
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    2,888,744


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-




Condensed
      Statements of Cash Flows
                                
                                2010
                                
                                
                                2009
                                
                                
                                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                
                                $
                                3,292,787
                                
                                
                                $
                                5,076,962
                                
                                
                                $
                                2,888,744Adjustments
      to reconcile net income to net cash from operating
    activities:Equity
      in earnings of Bank
                                
                                
                                (3,215,550
                                )
                                
                                
                                (5,732,566
                                )
                                
                                
                                (3,754,821
                                )Net
      change in other assets and liabilities
                                
                                
                                1,293,313
                                
                                
                                
                                (290,999
                                )
                                
                                
                                (952,797
                                )Gain
      on sale of investment in joint venture
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (30,755
                                )Realized
      loss on sale of investments
                                
                                
                                -
                                
                                
                                
                                155,500
                                
                                
                                
                                25,955Net
      cash provided by (used in) operating activities
                                
                                
                                1,370,550
                                
                                
                                
                                (791,103
                                )
                                
                                
                                (1,823,674
                                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      paid for investment in joint venture
                                
                                
                                (12,500
                                )
                                
                                
                                -
                                
                                
                                
                                (233,691
                                )Dividends
      received from Bank
                                
                                
                                1,500,000
                                
                                
                                
                                -
                                
                                
                                
                                3,000,000Capital
      contribution to Bank
                                
                                
                                -
                                
                                
                                
                                (20,000,000
                                )
                                
                                
                                (3,000,000
                                )Decrease
      increase in intercompany loan
                                
                                
                                900,000
                                
                                
                                
                                (800,000
                                )
                                
                                
                                (2,000,000
                                )Proceeds
      from sale of investment in joint venture
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                49,375Proceeds
      from sales of investments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                425,985Principal
      payments on mortgage-backed securities
                                
                                
                                -
                                
                                
                                
                                2,026
                                
                                
                                
                                13,425Net
      cash provided by (used in) investing activities
                                
                                
                                2,387,500
                                
                                
                                
                                (20,797,974
                                )
                                
                                
                                (1,744,906
                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from note payable
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,000,000Payment
      of note payable
                                
                                
                                -
                                
                                
                                
                                (7,640,000
                                )
                                
                                
                                (340,000
                                )Equity
      trust shares purchased
                                
                                
                                (181,552
                                )
                                
                                
                                (441,753
                                )
                                
                                
                                (120,000
                                )Proceeds
      from stock options exercised
                                
                                
                                196,829
                                
                                
                                
                                105,949
                                
                                
                                
                                1,153,623Proceeds
      received from Bank for stock-based compensation
                                
                                
                                1,290,686
                                
                                
                                
                                1,204,203
                                
                                
                                
                                1,119,489Proceeds
      from cash received in dividend reinvestment plan
                                
                                
                                707,033
                                
                                
                                
                                785,669
                                
                                
                                
                                695,389Treasury
      stock issued
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                191,835Proceeds
      from issuance of preferred stock and common stock warrants
                                
                                
                                -
                                
                                
                                
                                32,501,768
                                
                                
                                
                                -Dividends
      paid on common stock
                                
                                
                                (4,053,659
                                )
                                
                                
                                (3,922,623
                                )
                                
                                
                                (3,748,701
                                )Dividends
      paid on preferred stock
                                
                                
                                (1,626,900
                                )
                                
                                
                                (944,506
                                )
                                
                                
                                -Common
      stock surrendered to satisfy tax withholding obligations of stock-based
      compensation
                                
                                
                                (78,374
                                )
                                
                                
                                (54,972
                                )
                                
                                
                                (204,503
                                )Common
      stock repurchased
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (388,750
                                )Net
      cash (used in) provided by financing activities
                                
                                
                                (3,745,937
                                )
                                
                                
                                21,593,735
                                
                                
                                
                                3,358,382NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                
                                
                                12,113
                                
                                
                                
                                4,658
                                
                                
                                
                                (210,198
                                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                                
                                
                                96,970
                                
                                
                                
                                92,312
                                
                                
                                
                                302,510CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                                
                                $
                                109,083
                                
                                
                                $
                                96,970
                                
                                
                                $
                                92,312


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-




* * * *
*




Common
Stock Information




The
common stock of the Company is listed on the NASDAQ Global Select Market under
the symbol “PULB.”  As of December 8, 2010, there were approximately3,247
stockholders of record of the Company, including brokers or other
nominees.




The
following table sets forth market price and dividend information for the
Company’s common stock for fiscal years 2010 and 2009.





DividendHigh
                  
                  
                  Low
                  
                  
                  Per ShareFiscal
      2010First
      Quarter
                  
                  $
                  8.01
                  
                  
                  $
                  6.09
                  
                  
                  $
                  0.095Second
      Quarter
                  
                  $
                  6.85
                  
                  
                  $
                  6.17
                  
                  
                  $
                  0.095Third
      Quarter
                  
                  $
                  8.00
                  
                  
                  $
                  5.86
                  
                  
                  $
                  0.095Fourth
      Quarter
                  
                  $
                  7.00
                  
                  
                  $
                  6.25
                  
                  
                  $
                  0.095Fiscal
      2009First
      Quarter
                  
                  $
                  9.08
                  
                  
                  $
                  5.40
                  
                  
                  $
                  0.095Second
      Quarter
                  
                  $
                  7.52
                  
                  
                  $
                  4.09
                  
                  
                  $
                  0.095Third
      Quarter
                  
                  $
                  7.27
                  
                  
                  $
                  5.07
                  
                  
                  $
                  0.095Fourth
      Quarter
                  
                  $
                  8.92
                  
                  
                  $
                  6.15
                  
                  
                  $
                  0.095


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-


Directors
and Officers




Directors
      of Pulaski Financial Corp.
              
              Senior
      Officers of Pulaski BankStanley
      J. Bradshaw
              
              Gary
      W. DouglassChairman
      of the Board
              
              Chairman
      of the Bank and Chief Executive OfficerPrincipal,
      Bradshaw Capital ManagementW.
      Thomas ReevesLee
      S. Wielansky
              
              President
      of the BankVice
      Chairman of the BoardChairman
      and Chief Executive Officer of Midland
              
              Paul
      J. MilanoDevelopment
      Group, Inc.
              
              Chief
      Financial OfficerWilliam
      M. Corrigan, Jr.
              
              Brian
      J. BjörkmanPartner,
      Armstrong Teasdale LLP
              
              President,
      Commercial LendingWilliam
      A. Donius
              
              Brian
      C. BoylesRetired
      Chief Executive Officer of the Bank
              
              President,
      Mortgage LendingGary
      W. Douglass
              
              Matthew
      A. LockePresident
      and Chief Executive Officer
              
              President,
      Kansas City Mortgage DivisionLeon
      A. Felman
              
              Cheri
      G. BliefernichManaging
      Partner of Felman Family Partnership LP
              
              Executive
      Vice President, Banking OperationsMichael
      R. Hogan
              
              James
      W. SullivanRetired
      Chief Administrative Officer and Chief
              
              Executive
      Vice President, Corporate DevelopmentFinancial
      Officer of Sigma-Aldrich Corporation
              
              &
      CFO of Mortgage DivisionTimothy
      K. Reeves
              
              Michael
      J. BenneyPresident
      and Owner of Keenan Properties of St. Louis
              
              Senior
      Vice President, Chief Information OfficerSteven
      C. Roberts
              
              Denise
      K. DeRoussePresident
      of the Roberts Companies
              
              Senior
      Vice President, Retail Banking OperationsPaul
      D. GrosseRegional
      President, Commercial LendingRita
      M. KusterSenior
      Vice President, Commercial LendingWallace
      D. NiedringhausSenior
      Vice President, Investment BrokerageW.
      Bruce PhelpsSenior
      Vice President, ControllerLisa
      K. SimpsonSenior
      Vice President, Director of Human
Resources


- 77
-


Corporate
Information





Corporate
Headquarters





12300
Olive Boulevard


St.
Louis, Missouri  63141


314.878.2210


www.pulaskibankstl.com





Independent
Auditors





KPMG
LLP


St.
Louis, Missouri





General
Counsel





King,
Krehbiel, Hellmich, Hacking & Borbonus, LLC


St.
Louis, Missouri





Armstrong
Teasdale LLP


St.
Louis, Missouri





Special
Securities Counsel





Kilpatrick  Townsend
& Stockton,  LLP


Washington,
D.C.





Stock Transfer
Agent





Registrar
and Transfer Company


Cranford,
New Jersey


800.866.1340


www.rtco.com





Annual
Meeting





The
annual meeting of the stockholders will be held Wednesday, February 2, 2011 at
2:00 p.m., Central Time, at the St. Louis Marriott West, 660 Maryville
Centre Drive, St. Louis, Missouri, 63141.


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-