UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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





For the
quarterly period ended December 31, 2009





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





For the
transition period from ______________ to _________________





Commission
File Number 0-25049





FIRST
PLACE FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)





Delaware
              34-1880130(State
      or other jurisdiction of incorporation)
              (IRS
      Employer Identification
Number)





185 E. Market Street, Warren
OH   44481


(Address
of principal executive offices)





(330)
373-1221


(Registrant’s
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if change since last
report)





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





Yes  x                            No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  x                            No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange
Act.





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act).


Yes   ̈                           No  x





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





16,973,270
shares of common stock outstanding as of January 31, 2010








TABLE OF
CONTENTS





PageNumberPART
      I. FINANCIAL INFORMATIONItem
      1.
                  Financial
      Statements (Unaudited)Condensed
      Consolidated Statements of Financial Condition as of December 31, 2009 and
      June 30, 2009
                  
                  3Condensed
      Consolidated Statements of Income for the Three and Six Months Ended
      December 31, 2009 and 2008
                  
                  4Condensed
      Consolidated Statements of Changes in Shareholders’ Equity for the Six
      Months Ended December 31, 2009 and 2008
                  
                  5Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended December
      31, 2009 and 2008
                  
                  6Notes
      to Condensed Consolidated Financial Statements
                  
                  7-18Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  18-35Item
      3.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  36Item
      4.
                  Controls
      and Procedures
                  
                  37PART
      II.  OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  
                  37Item
      1A.
                  Risk
      Factors
                  
                  37Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  37Item
      3.
                  Defaults
      Upon Senior Securities
                  
                  37Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  
                  37Item
      5.
                  Other
      Information
                  
                  37Item
      6.
                  Exhibits
                  
                  38SIGNATURES
                  
                  39


2





Part
I.          FINANCIAL
INFORMATION


Item
1.          Financial
Statements





FIRST
PLACE FINANCIAL CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)


(Dollars
in thousands, except share data)





December 31, 2009
                    
                    
                    June 30, 2009ASSETSCash
      and due from banks
                    
                    $
                    29,805
                    
                    
                    $
                    38,321Interest-bearing
      deposits in other banks
                    
                    
                    55,857
                    
                    
                    
                    56,614Trading
      securities, at fair value
                    
                    
                    11,685
                    
                    
                    
                    11,786Securities
      available for sale, at fair value
                    
                    
                    271,840
                    
                    
                    
                    264,814Loans
      held for sale, at fair value
                    
                    
                    281,861
                    
                    
                    
                    376,406Loans
                    
                    
                    2,420,917
                    
                    
                    
                    2,468,444Less
      allowance for loan losses
                    
                    
                    52,473
                    
                    
                    
                    39,580Loans,
      net
                    
                    
                    2,368,444
                    
                    
                    
                    2,428,864Federal
      Home Loan Bank stock
                    
                    
                    35,041
                    
                    
                    
                    36,221Premises
      and equipment, net
                    
                    
                    50,661
                    
                    
                    
                    52,222Goodwill
                    
                    
                    885
                    
                    
                    
                    885Core
      deposit and other intangibles
                    
                    
                    9,163
                    
                    
                    
                    10,639Other
      assets
                    
                    
                    143,881
                    
                    
                    
                    127,695Total
      assets
                    
                    $
                    3,259,123
                    
                    
                    $
                    3,404,467LIABILITIESDepositsNoninterest-bearing
      checking
                    
                    $
                    252,009
                    
                    
                    $
                    238,417Interest-bearing
      checking
                    
                    
                    242,588
                    
                    
                    
                    173,376Savings
                    
                    
                    404,353
                    
                    
                    
                    400,424Money
      markets
                    
                    
                    342,970
                    
                    
                    
                    291,131Certificates
      of deposit
                    
                    
                    1,224,850
                    
                    
                    
                    1,332,253Total
      deposits
                    
                    
                    2,466,770
                    
                    
                    
                    2,435,601Short-term
      borrowings
                    
                    
                    158,827
                    
                    
                    
                    323,458Long-term
      debt
                    
                    
                    348,977
                    
                    
                    
                    335,159Other
      liabilities
                    
                    
                    6,968
                    
                    
                    
                    28,770Total
      liabilities
                    
                    
                    2,981,542
                    
                    
                    
                    3,122,988SHAREHOLDERS'
      EQUITYPreferred
      stock, $.01 par value: 3,000,000 shares authorizedFixed
      Rate Cumulative Perpetual Preferred stock, Series A, $1,000 liquidation
      preference per share: 72,927 shares issued and outstanding at December 31,
      2009 and June 30, 2009
                    
                    
                    69,473
                    
                    
                    
                    69,198Common
      stock, $.01 par value: 53,000,000 shares authorized,18,114,673
      shares issued
                    
                    
                    181
                    
                    
                    
                    181Additional
      paid-in capital
                    
                    
                    218,385
                    
                    
                    
                    218,310Retained
      earnings
                    
                    
                    9,936
                    
                    
                    
                    17,193Unearned
      employee stock ownership plan (ESOP) shares
                    
                    
                    (2,908
                    )
                    
                    
                    (3,116
                    )Treasury
      stock, at cost: 1,141,403 shares at December 31, 2009 and June 30,
      2009
                    
                    
                    (19,274
                    )
                    
                    
                    (19,274
                    )Accumulated
      other comprehensive income (loss), net
                    
                    
                    1,788
                    
                    
                    
                    (1,013
                    )Total
      shareholders' equity
                    
                    
                    277,581
                    
                    
                    
                    281,479Total
      liabilities and shareholders' equity
                    
                    $
                    3,259,123
                    
                    
                    $
                    3,404,467





See
accompanying notes to condensed consolidated financial
statements.


3


FIRST
PLACE FINANCIAL CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


(Dollars
in thousands, except per share data)


Three
      months ended
                
                
                Six
      months endedDecember
      31,
                
                
                December
      31,2009
                
                
                2008
                
                
                2009
                
                
                2008INTEREST
      INCOMELoans,
      including fees
                
                $
                36,640
                
                
                $
                39,540
                
                
                $
                74,043
                
                
                $
                80,101Securities
      and interest-bearing depositsTaxable
                
                
                2,388
                
                
                
                2,722
                
                
                
                4,821
                
                
                
                5,375Tax-exempt
                
                
                639
                
                
                
                658
                
                
                
                1,261
                
                
                
                1,320Dividends
                
                
                394
                
                
                
                577
                
                
                
                838
                
                
                
                1,161TOTAL
      INTEREST INCOME
                
                
                40,061
                
                
                
                43,497
                
                
                
                80,963
                
                
                
                87,957INTEREST
      EXPENSEDeposits
                
                
                7,649
                
                
                
                16,199
                
                
                
                18,201
                
                
                
                31,419Short-term
      borrowings
                
                
                1,155
                
                
                
                1,235
                
                
                
                2,318
                
                
                
                2,701Long-term
      debt
                
                
                3,595
                
                
                
                4,760
                
                
                
                7,224
                
                
                
                9,579TOTAL
      INTEREST EXPENSE
                
                
                12,399
                
                
                
                22,194
                
                
                
                27,743
                
                
                
                43,699NET
      INTEREST INCOME
                
                
                27,662
                
                
                
                21,303
                
                
                
                53,220
                
                
                
                44,258Provision
      for loan losses
                
                
                14,000
                
                
                
                9,216
                
                
                
                36,500
                
                
                
                16,567NET
      INTEREST INCOME AFTERPROVISION
      FOR LOAN LOSSES
                
                
                13,662
                
                
                
                12,087
                
                
                
                16,720
                
                
                
                27,691NONINTEREST
      INCOMEService
      charges and fees on deposit accounts
                
                
                3,155
                
                
                
                2,461
                
                
                
                6,303
                
                
                
                4,603Net
      gain on sales of securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                319Change
      in fair value of securities
                
                
                -
                
                
                
                (2,544
                )
                
                
                400
                
                
                
                (11,864
                )Mortgage
      banking gains
                
                
                4,832
                
                
                
                2,106
                
                
                
                8,740
                
                
                
                3,881Gain
      on sale of loan servicing rights
                
                
                -
                
                
                
                -
                
                
                
                689
                
                
                
                -Loan
      servicing income (loss)
                
                
                648
                
                
                
                (940
                )
                
                
                800
                
                
                
                (984
                )Other
      income – bank
                
                
                1,649
                
                
                
                1,611
                
                
                
                3,272
                
                
                
                3,300Insurance
      commission income
                
                
                1,034
                
                
                
                1,088
                
                
                
                2,324
                
                
                
                2,021Other
      income – nonbank subsidiaries
                
                
                732
                
                
                
                761
                
                
                
                1,264
                
                
                
                1,669TOTAL
      NONINTEREST INCOME
                
                
                12,050
                
                
                
                4,543
                
                
                
                23,792
                
                
                
                2,945NONINTEREST
      EXPENSESalaries
      and employee benefits
                
                
                10,916
                
                
                
                9,809
                
                
                
                20,886
                
                
                
                20,436Occupancy
      and equipment
                
                
                3,608
                
                
                
                3,383
                
                
                
                7,189
                
                
                
                6,782Professional
      fees
                
                
                825
                
                
                
                817
                
                
                
                1,869
                
                
                
                1,662Loan
      expenses
                
                
                1,231
                
                
                
                613
                
                
                
                3,059
                
                
                
                1,340Marketing
                
                
                881
                
                
                
                577
                
                
                
                1,271
                
                
                
                1,155Federal
      deposit insurance premiums
                
                
                1,308
                
                
                
                1,295
                
                
                
                2,751
                
                
                
                1,403Merger,
      integration and restructuring
                
                
                -
                
                
                
                1,064
                
                
                
                297
                
                
                
                1,109Goodwill
      impairment
                
                
                -
                
                
                
                93,741
                
                
                
                -
                
                
                
                93,741Amortization
      of intangible assets
                
                
                728
                
                
                
                788
                
                
                
                1,477
                
                
                
                1,594Real
      estate owned expense
                
                
                2,305
                
                
                
                1,392
                
                
                
                3,373
                
                
                
                2,472Other
                
                
                3,499
                
                
                
                3,120
                
                
                
                7,454
                
                
                
                6,265TOTAL
      NONINTEREST EXPENSE
                
                
                25,301
                
                
                
                116,599
                
                
                
                49,626
                
                
                
                137,959INCOME
      (LOSS) BEFORE INCOME TAX BENEFIT
                
                
                411
                
                
                
                (99,969
                )
                
                
                (9,114
                )
                
                
                (107,323
                )Income
      tax benefit
                
                
                (182
                )
                
                
                (5,872
                )
                
                
                (3,793
                )
                
                
                (7,067
                )NET
      INCOME (LOSS)
                
                
                593
                
                
                
                (94,097
                )
                
                
                (5,321
                )
                
                
                (100,256
                )Preferred
      stock dividends and discount accretion
                
                
                1,090
                
                
                
                -
                
                
                
                2,181
                
                
                
                -LOSS
      ATTRIBUTABLE TO COMMON SHAREHOLDERS
                
                $
                (497
                )
                
                $
                (94,097
                )
                
                $
                (7,502
                )
                
                $
                (100,256
                )Basic
      loss per common share
                
                $
                (0.03
                )
                
                $
                (5.68
                )
                
                $
                (0.45
                )
                
                $
                (6.06
                )Diluted
      loss per common share
                
                $
                (0.03
                )
                
                $
                (5.68
                )
                
                $
                (0.45
                )
                
                $
                (6.06
                )





See
accompanying notes to condensed consolidated financial
statements.


4





FIRST
PLACE FINANCIAL CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


(Dollars
in thousands, except per share data)


AccumulatedAdditional
                          
                          
                          
                          
                          
                          Unearned
                          
                          
                          
                          
                          
                          OtherPreferred
                          
                          
                          Common
                          
                          
                          Paid-in
                          
                          
                          Retained
                          
                          
                          ESOP
                          
                          
                          Treasury
                          
                          
                          ComprehensiveStock
                          
                          
                          Stock
                          
                          
                          Capital
                          
                          
                          Earnings
                          
                          
                          Shares
                          
                          
                          Stock
                          
                          
                          Income
      (Loss)
                          
                          
                          TotalBalance
      at July 1, 2008
                          
                          $
                          -
                          
                          
                          $
                          181
                          
                          
                          $
                          214,216
                          
                          
                          $
                          131,770
                          
                          
                          $
                          (3,531
                          )
                          
                          $
                          (19,274
                          )
                          
                          $
                          (4,395
                          )
                          
                          $
                          318,967Comprehensive
      incomeNet
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (100,256
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (100,256
                          )Change
      in unrealized gain on securities available for sale, net of
      reclassification and tax effects
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,004
                          
                          
                          
                          1,004Loss
      on termination of interest rate swaps reclassified into income, net of
      tax
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          300
                          
                          
                          
                          300Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (98,952
                          )Adjustment
      to initially apply the effect of fair value accounting, net of
      tax
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          188
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          188Dividends
      declared and paid on common shares ($0.17 per share)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,695
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,695
                          )Commitment
      to release employee stock ownership plan shares (20,774
      shares)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (41
                          )
                          
                          
                          
                          
                          
                          
                          207
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          166Commitment
      to release recognition and retention plan shares (1,388
      shares)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          30
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          30Stock
      option expense
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          153
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          153Balance
      at December 31, 2008
                          
                          $
                          -
                          
                          
                          $
                          181
                          
                          
                          $
                          214,358
                          
                          
                          $
                          29,007
                          
                          
                          $
                          (3,324
                          )
                          
                          $
                          (19,274
                          )
                          
                          $
                          (3,091
                          )
                          
                          $
                          217,857Balance
      at July 1, 2009
                          
                          $
                          69,198
                          
                          
                          $
                          181
                          
                          
                          $
                          218,310
                          
                          
                          $
                          17,193
                          
                          
                          $
                          (3,116
                          )
                          
                          $
                          (19,274
                          )
                          
                          $
                          (1,013
                          )
                          
                          $
                          281,479Comprehensive
      incomeNet
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (5,321
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (5,321
                          )Change
      in unrealized gain on securities available for sale, net of
      reclassification and tax effects
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,508
                          
                          
                          
                          2,508Loss
      on termination of interest rate swaps reclassified into income, net of
      tax
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          293
                          
                          
                          
                          293Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,520
                          )Adjustment
      to apply the effect of Employer’s Accounting for Employee Stock Ownership
      Plans, net of tax
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          51
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          51Recovery
      of dividends from RRP Plan
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          414
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          414Dividends
      declared and paid on common shares ($0.01 per share)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (170
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (170
                          )Commitment
      to release employee stock ownership plan shares (20,774
      shares)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (147
                          )
                          
                          
                          
                          
                          
                          
                          208
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          61Commitment
      to release recognition and retention plan shares (7,754
      shares)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          50
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          50Direct
      costs incurred in connection with issuance of preferred stock and common
      stock warrant
                          
                          
                          (82
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (82
                          )Accretion
      of preferred stock discount
                          
                          
                          357
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (357
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Preferred
      stock dividends accrued
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,823
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,823
                          )Stock
      option expense
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          121
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          121Balance
      at December 31, 2009
                          
                          $
                          69,473
                          
                          
                          $
                          181
                          
                          
                          $
                          218,385
                          
                          
                          $
                          9,936
                          
                          
                          $
                          (2,908
                          )
                          
                          $
                          (19,274
                          )
                          
                          $
                          1,788
                          
                          
                          $
                          277,581





See
accompanying notes to condensed consolidated financial
statements.


5





FIRST
PLACE FINANCIAL CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


(Dollars
in thousands)


Six
      months endedDecember
      31,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      cash from (used in) operating activities
                  
                  $
                  127,256
                  
                  
                  $
                  (8,720
                  )Cash
      flows from investing activities:Securities:Proceeds
      from sales and redemptions
                  
                  
                  500
                  
                  
                  
                  2,802Proceeds
      from maturities, calls and principal paydowns
                  
                  
                  28,740
                  
                  
                  
                  22,771Purchases
                  
                  
                  (30,859
                  )
                  
                  
                  (34,154
                  )Net
      change in interest-bearing deposits in other banks
                  
                  
                  757
                  
                  
                  
                  (70,343
                  )Net
      change in Federal Funds Sold
                  
                  
                  -
                  
                  
                  
                  5,608Net
      change in loans
                  
                  
                  (39,350
                  )
                  
                  
                  815Proceeds
      from sale of loans
                  
                  
                  12,286
                  
                  
                  
                  -Proceeds
      from sales of real estate owned
                  
                  
                  14,594
                  
                  
                  
                  8,329Premises
      and equipment expenditures, net
                  
                  
                  (1,259
                  )
                  
                  
                  (2,438
                  )Investment
      in nonbank affiliates
                  
                  
                  -
                  
                  
                  
                  (115
                  )Net
      cash used in investing activities
                  
                  
                  (14,591
                  )
                  
                  
                  (66,725
                  )Cash
      flows from financing activities:Net
      change in deposits
                  
                  
                  31,157
                  
                  
                  
                  171,873Net
      change in short-term borrowings
                  
                  
                  (164,504
                  )
                  
                  
                  (114,364
                  )Proceeds
      from long-term debt
                  
                  
                  20,000
                  
                  
                  
                  -Repayment
      of long-term debt
                  
                  
                  (6,173
                  )
                  
                  
                  (205
                  )Common
      dividends paid
                  
                  
                  (170
                  )
                  
                  
                  (2,695
                  )Preferred
      dividends paid
                  
                  
                  (1,823
                  )
                  
                  
                  -Direct
      costs incurred in connection with issuance of preferred stock and common
      stock warrant
                  
                  
                  (82
                  )
                  
                  
                  -Recovery
      of dividends from RRP plan
                  
                  
                  414
                  
                  
                  
                  -Net
      cash (used in) from financing activities
                  
                  
                  (121,181
                  )
                  
                  
                  54,609Net
      change in cash and cash equivalents
                  
                  
                  (8,516
                  )
                  
                  
                  (20,836
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  38,321
                  
                  
                  
                  59,483Cash
      and cash equivalents at end of period
                  
                  $
                  29,805
                  
                  
                  $
                  38,647Supplemental
      cash flow information:Cash
      payments of interest expense
                  
                  $
                  33,911
                  
                  
                  $
                  43,420Cash
      payments of income taxes
                  
                  
                  2,510
                  
                  
                  
                  527Supplemental
      noncash disclosures:Loans
      securitized
                  
                  
                  -
                  
                  
                  
                  9,625Transfer
      of loans to real estate owned
                  
                  
                  12,243
                  
                  
                  
                  20,764Transfer
      of loans to real estate held for sale
                  
                  
                  55
                  
                  
                  
                  -Transfer
      of loans from portfolio to loans held for sale
                  
                  
                  32,664
                  
                  
                  
                  -Transfer
      from long-term to short-term borrowings
                  
                  
                  127
                  
                  
                  
                  59,718Allocation
      of loan basis to mortgage servicing asset
                  
                  
                  7,850
                  
                  
                  
                  2,483Loans
      held for sale transferred to fair value
                  
                  
                  -
                  
                  
                  
                  72,341Securities
      available for sale transferred to fair value
                  
                  
                  -
                  
                  
                  
                  24,766Initial
      application of the effect of fair value accounting, net of
    tax
                  
                  
                  -
                  
                  
                  
                  188





See
accompanying notes to condensed consolidated financial statements.




6





FIRST
PLACE FINANCIAL CORP. AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements (Unaudited)





Note
1. Significant Accounting Policies


(Dollars
in thousands)





Basis of Presentation. The
interim unaudited condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America (GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange
Commission (SEC). The financial statements should be read in conjunction with
the audited consolidated financial statements and related notes included in
First Place Financial Corp.’s (the Company) Annual Report on Form 10-K for the
year ended June 30, 2009. The interim unaudited condensed consolidated financial
statements include all adjustments, consisting of only normal recurring items,
which, in the opinion of management, are necessary for a fair presentation of
the financial condition and results of operations for the periods presented. The
results of operations for the interim periods included in the interim unaudited
condensed consolidated financial statements are not necessarily indicative of
the results that may be expected for a full year.





Principles of Consolidation.
The interim unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, First Place Bank (the
Bank) and First Place Holdings, Inc. Active subsidiaries of the Bank include the
wholly-owned Ardent Service Corporation and two partially-owned affiliates
accounted for under the equity method, 50% owned Bercley Woods Development
Company, Ltd. and 99% owned Shiloh Springs, L.P. The Bank also has wholly-owned
subsidiaries that are currently inactive including Western Reserve Mortgage
Corporation, AutoArm, LLC and Odin Properties, Inc. Wholly owned subsidiaries of
First Place Holdings, Inc. include First Place Insurance Agency, Ltd., APB
Financial Group, Ltd., Coldwell Banker First Place Real Estate, Ltd. and its
subsidiary, First Place Referral Network, Ltd., and Title Works Agency, LLC, a
75% owned affiliate of First Place Holdings, Inc. The investments of the Company
in its wholly owned subsidiaries, First Place Capital Trust, First Place Capital
Trust II and First Place Capital Trust III, have been accounted for using the
equity method based on their nature as trusts, which are special purpose
entities. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company’s employee benefits consulting firm,
American Pension Benefits, was sold in June 2009.





Business Segments.While the
Company's chief decision-maker monitors the revenue streams of the various
Company products and services, the segments that could be separated from the
Company’s primary business of banking are not material. Accordingly, all of the
Company's financial service operations are considered by management to be
combined in one reportable operating segment.





Use of Estimates. The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Areas involving the use of management’s estimates
and assumptions include the allowance for loan losses, fair values of financial
instruments, the realization of deferred tax assets, the identification and
carrying value of impaired loans, the carrying value and amortization of
intangibles, useful life and impairment of premises and equipment, the carrying
value of goodwill, the determination of an other-than-temporary impairment on
investments and valuations of foreclosed assets, mortgage servicing assets,
stock options and securitizations. Actual results could differ from those
estimates.





Cash Flows.Cash and cash
equivalents includes cash and due from banks. Net cash flows are reported for
interest-bearing deposits in other banks, federal funds sold, loans, deposits
and short-term borrowings.





Subsequent Events.Management
has evaluated events and transactions through February 5, 2010, the date the
condensed consolidated financial statements were issued, for potential
recognition or disclosure herein. Any discovery of additional evidence about
conditions that existed at December 31, 2009, including the estimates inherent
in the process of preparing condensed consolidated financial statements would be
recognized in these condensed consolidated financial statements. Any discovery
of evidence about conditions that did not exist at December 31, 2009, but arose
thereafter, could be disclosed herein dependent on the nature and financial
effect of the event on the Company.


7


Reclassifications. Certain
items in the prior year financial statements were reclassified to conform to the
current presentation.





Note
2. Recent Accounting Pronouncements




In
December 2007, the FASB issued ASC 805 (formerly Statement of Financial
Accounting Standards (SFAS) No. 141(R) (revised version of SFAS No. 141),
Business Combinations. This pronouncement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at fair value as of the acquisition date. ASC 805 expands on required
disclosures to improve the statement user’s abilities to evaluate the nature and
financial effects of business combinations. For the Company, it will apply to
business combinations where the acquisition date is after June 30, 2009. Since
this pronouncement will be applied prospectively, there was no impact on the
Company’s consolidated financial statements upon adoption.





In
December 2007, the FASB issued ASC 810 (formerly SFAS No. 160), Noncontrolling
Interests in Consolidated Financial Statements. This pronouncement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. ASC 810 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. ASC 810 also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. This pronouncement is effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008. The adoption of ASC 810 did not have a material impact on the
Company’s consolidated financial statements.





In March
2008, the FASB issued ASC 815 (formerly SFAS No. 161), Disclosures about
Derivative Instruments and Hedging Activities. This pronouncement requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This pronouncement is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008. The adoption of ASC 815
did not have a material impact on the Company’s consolidated financial
statements. For more information on the Company’s derivative instruments and
hedging activities, see Note 7
- Commitments, Contingencies and Guarantees and Note 8 – Fair Value Measurement and
Fair Value of Financial Instruments.





In April
2009, the FASB issued ASC 820 (formerly Staff Position SFAS No. 157-4),
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. This pronouncement affirms the objective of fair value when there is no
active market, clarifies and includes additional factors for determining whether
there has been a significant decrease in market activity, eliminates the
presumption that all transactions are distressed unless otherwise proven and
requires an entity to disclose a change in valuation technique. This
pronouncement became effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of ASC 820 did not have a material impact on
the Company’s consolidated financial statements.





In April
2009, the FASB issued ASC 320 (formerly Staff Position SFAS No. 115-2 and SFAS
No. 124-2), Recognition and Presentation of Other-Than-Temporary Impairment.
This guidance eliminates the “ability and intent to hold” provision for debt
securities and impairment is considered to be other than temporary if a company
(i) intends to sell the security, (ii) more likely than not will be
required to sell the security before recovering its cost, or (iii) does not
expect to recover the security’s entire amortized cost. This guidance also
eliminates the “probability” standard relating to the collectibility of cash
flows and impairment is considered to be other than temporary if the present
value of cash flows expected to be collected is less than the amortized cost
(credit loss). Other-than-temporary losses also need to be separated between the
amount related to credit loss (which is recognized in current earnings) and the
amount related to all other factors (which is recognized in other comprehensive
income). This pronouncement is effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of ASC 320 did not have a
material impact on the Company’s consolidated financial statements.





In April
2009, the FASB issued ASC 825 (formerly Staff Position SFAS No. 107-1), Interim
Disclosures about Fair Value of Financial Instruments. This pronouncement
requires disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. This position became effective for interim reporting periods ending
after June 15, 2009. The adoption of this pronouncement did not have a material
impact on the Company’s consolidated financial statements.


8


In May
2009, the FASB issued ASC 855 (formerly SFAS No. 165), Subsequent Events. This
new pronouncement established principles and standards related to the accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued. ASC 855 requires an entity to recognize, in
the financial statements, subsequent events that provide additional information
regarding conditions that existed at the balance sheet date. Subsequent events
that provide information about conditions that did not exist at the balance
sheet date shall not be recognized in the financial statements under ASC 855.
This pronouncement is effective for interim and annual financial periods ending
after June 15, 2009. The adoption of ASC 855 did not have a material impact on
the Company’s consolidated financial statements.





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets, an amendment of FASB No. 140. SFAS No. 166 changes the way entities
account for transfers of financial assets and determines what entities must be
consolidated. SFAS No. 166 provides the accounting framework for determining
whether a transfer of financial assets constitutes a sale or a secured borrowing
and, if the transfer constitutes a sale, the determination of any resulting gain
or loss. SFAS No. 166 removes the concept of a Qualifying Special-Purpose Entity
(QSPE) from SFAS No. 140. This Statement is effective for the first annual
period beginning after November 15, 2009. The adoption of SFAS No. 166 is not
expected to have a material impact on the Company’s consolidated financial
statements. This authoritative guidance has not yet been incorporated within the
FASB’s Codification.





In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R).
SFAS No. 167 addresses the effects of eliminating the QSPE concept from SFAS No.
140 and the transparency involved with Variable Interest Entities. This
Statement is effective for the first annual period beginning after November 15,
2009. The adoption of SFAS No. 167 is not expected to have a material impact on
the Company’s consolidated financial statements. This authoritative guidance has
not yet been incorporated within the FASB’s Codification.





In June
2009, the FASB issued ASC 105 (formerly SFAS No. 168), Generally Accepted
Accounting Principles - FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles. The CodificationTM is the
source of authoritative United States generally accepted accounting principles
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC are also sources of authoritative GAAP for SEC
registrants. All existing accounting standard documents are superseded and all
other accounting literature not included in the CodificationTM is considered
nonauthoritative. The CodificationTM is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The Company has
made the appropriate changes to GAAP references in the consolidated financial
statements.





In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value
Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.
This ASU provides amendments for fair value measurements of liabilities. It
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more techniques. ASU 2009-05 also
clarifies that when estimating a fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. ASU 2009-05 was effective October 1, 2009. The adoption of ASU
2009-05 did not have a material impact on the Company’s consolidated financial
statements.





In
September 2009, the FASB issued ASU No. 2009-12, Fair Value Measurements and
Disclosures (Topic 820) – Investments in Certain Entities that Calculate Net
Asset Value per Share (or its Equivalent). This ASU permits, as a practical
expedient, a reporting entity to measure the fair value of an investment that is
within the scope of the amendments in this ASU on the basis of the net asset
value per share of the investment (or its equivalent) if the net asset value of
the investment (or its equivalent) is calculated in a manner consistent with the
measurement principles of ASC 946 as of the reporting entity’s measurement date.
The ASU also requires disclosures by major category of investment about the
attributes of investments within the scope of the ASU. This ASU is effective for
interim and annual periods ending after December 15, 2009. The adoption of ASU
2009-12 did not have a material impact on the Company’s consolidated financial
statements.


9


In
December 2009, the FASB issued ASU No. 2009-16, Transfers and Servicing (Topic
860) – Accounting for Transfers of Financial Assets (SFAS No. 166, an amendment
of FSAB No. 140). The amendments in this ASU improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. This ASU is effective for the first annual period ending after
December 15, 2009. The adoption of ASU 2009-16 is not expected to have a
material impact on the Company’s consolidated financial statements.





In
December 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities (SFAS No. 167, an amendment to FASB Interpretation No. 46(R)).
The amendments in this ASU replace the quantitative-based risks and rewards
calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. An approach that is expected to be
primarily qualitative will be more effective for identifying which enterprise
has a controlling financial interest in a variable interest entity. The
amendments in this ASU also require additional disclosures about an enterprise’s
involvement in variable interest entities, which will enhance the information
provided to users of financial statements. This ASU is effective for interim and
annual periods ending after December 15, 2009. The adoption of ASU 2009-17 did
not have a material impact on the Company’s consolidated financial
statements.





Note
3. Securities


(Dollars
in thousands)





The fair
value and amortized cost of available for sale and trading securities and the
related gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) were as follows:





Gross
                
                
                GrossFair
                
                
                Unrealized
                
                
                Unrealized
                
                
                AmortizedAt
      December 31, 2009
                
                Value
                
                
                Gains
                
                
                Losses
                
                
                CostDebt
      securities - available for saleU.S.
      Government agencies and other government sponsored
    enterprises
                
                $
                9,411
                
                
                $
                -
                
                
                $
                (89
                )
                
                $
                9,500Obligations
      of states and political subdivisions
                
                
                66,806
                
                
                
                679
                
                
                
                (16
                )
                
                
                66,143Trust
      preferred securities
                
                
                9,429
                
                
                
                -
                
                
                
                (3,814
                )
                
                
                13,243One-
      to four-family mortgage-backed securities and collateralized mortgage
      obligations issued by government sponsored enterprises
                
                
                185,926
                
                
                
                6,485
                
                
                
                -
                
                
                
                179,441Total
                
                
                271,572
                
                
                
                7,164
                
                
                
                (3,919
                )
                
                
                268,327Equity
      securities - available for saleCommon
      stock
                
                
                268
                
                
                
                -
                
                
                
                (29
                )
                
                
                297Total
                
                
                268
                
                
                
                -
                
                
                
                (29
                )
                
                
                297Equity
      securities - tradingMortgage-backed
      securities mutual fund
                
                
                11,685
                
                
                
                -
                
                
                
                -
                
                
                
                11,685Total
                
                
                11,685
                
                
                
                -
                
                
                
                -
                
                
                
                11,685Total
      securities
                
                $
                283,525
                
                
                $
                7,164
                
                
                $
                (3,948
                )
                
                $
                280,309


10





Gross
                
                
                GrossFair
                
                
                Unrealized
                
                
                Unrealized
                
                
                AmortizedAt
      June 30, 2009
                
                Value
                
                
                Gains
                
                
                Losses
                
                
                CostDebt
      securities - available for saleU.S.
      Government agencies and other government sponsored
    enterprises
                
                $
                4,582
                
                
                $
                82
                
                
                $
                -
                
                
                $
                4,500Obligations
      of states and political subdivisions
                
                
                62,946
                
                
                
                496
                
                
                
                (1,205
                )
                
                
                63,655Trust
      preferred securities
                
                
                8,267
                
                
                
                -
                
                
                
                (4,955
                )
                
                
                13,222One-
      to four-family mortgage-backed securities and collateralized mortgage
      obligations issued by government sponsored enterprises
                
                
                188,722
                
                
                
                5,107
                
                
                
                (171
                )
                
                
                183,786Total
                
                
                264,517
                
                
                
                5,685
                
                
                
                (6,331
                )
                
                
                265,163Equity
      securities - available for saleCommon
      stock
                
                
                297
                
                
                
                -
                
                
                
                -
                
                
                
                297Total
                
                
                297
                
                
                
                -
                
                
                
                -
                
                
                
                297Equity
      securities - tradingMortgage-backed
      securities mutual fund
                
                
                11,786
                
                
                
                -
                
                
                
                -
                
                
                
                11,786Total
                
                
                11,786
                
                
                
                -
                
                
                
                -
                
                
                
                11,786Total
      securities
                
                $
                276,600
                
                
                $
                5,685
                
                
                $
                (6,331
                )
                
                $
                277,246





The
amortized cost and estimated fair value of debt securities available for sale by
contractual maturity at December 31, 2009 are summarized in the following table.
Expected maturities may differ from contractual maturities because some issuers
have the right to call or prepay obligations with or without call or prepayment
penalties. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.





AmortizedFair Value
                  
                  
                  CostDebt
      securities available for saleDue
      in one year or less
                  
                  $
                  3,472
                  
                  
                  $
                  3,431Due
      after one year through five years
                  
                  
                  7,871
                  
                  
                  
                  7,737Due
      after five years through ten years
                  
                  
                  21,541
                  
                  
                  
                  21,228Due
      after ten years
                  
                  
                  52,762
                  
                  
                  
                  56,49085,646
                  
                  
                  
                  88,886Mortgage-backed
      securities and collateralized mortgage obligations
                  
                  
                  185,926
                  
                  
                  
                  179,441Total
                  
                  $
                  271,572
                  
                  
                  $
                  268,327





Debt and
mortgage-backed securities with a fair value of $242,579 and $228,654 as of
December 31, 2009 and June 30, 2009 were pledged to secure public deposits,
repurchase agreements, borrowings from the Federal Home Loan Bank, borrowings
from the Federal Reserve Bank and for other purposes as required or permitted by
law.





A review
for other-than-temporary impairment was performed as of December 31, 2009 on the
$9,429 portfolio of trust preferred securities, which has declined in value by
$3,814 from an amortized cost of $13,243. The trust preferred securities
portfolio consists of large single issuers with investment grade credit ratings
of Baa2 or higher by Moody’s, which are within the Company’s investment policy
guidelines. Each of the issuers is a recipient of the U.S. Department of the
Treasury’s Troubled Asset Relief Program funding and has not deferred interest
payments on their obligations. The $3,814 decline over the past several quarters
is attributable to the historically low level of interest rates, lack of
liquidity in the trust preferred securities market and a lack of confidence in
the entire financial institution capital market. As this variable rate portfolio
is based on three-month LIBOR, it trades at a deep discount to its fixed rate
counterparts. As interest rates return to historically normal levels, this
portfolio is expected to recover. The Company does not intend to sell and it is
more likely than not that it will not be required to sell prior to their
recovery and thus no other-than-temporary impairment has been recognized in the
current quarter. The Company will continue to monitor these securities and the
events and conditions that have an impact on their values and make impairment
decisions as necessary prospectively.


11





Note
4. Loans


(Dollars
in thousands)





Loans
were as follows:





December 31,
                  
                  
                  June 30,2009
                  
                  
                  2009One-to
      four-family residential real estate loans:Permanent
      financing
                  
                  $
                  749,427
                  
                  
                  $
                  803,555Construction
                  
                  
                  68,213
                  
                  
                  
                  47,726Total
                  
                  
                  817,640
                  
                  
                  
                  851,281Commercial
      loans:Multifamily
      real estate
                  
                  
                  114,107
                  
                  
                  
                  111,281Commercial
      real estate
                  
                  
                  901,278
                  
                  
                  
                  875,836Commercial
      construction
                  
                  
                  62,396
                  
                  
                  
                  68,315Commercial
      non real estate
                  
                  
                  171,053
                  
                  
                  
                  189,083Total
                  
                  
                  1,248,834
                  
                  
                  
                  1,244,515Consumer
      loans:Home
      equity lines of credit
                  
                  
                  208,989
                  
                  
                  
                  215,136Home
      equity loans
                  
                  
                  122,151
                  
                  
                  
                  129,661Automobiles
      and other
                  
                  
                  23,303
                  
                  
                  
                  27,851Total
                  
                  
                  354,443
                  
                  
                  
                  372,648Total
      loans
                  
                  $
                  2,420,917
                  
                  
                  $
                  2,468,444





Activity
in the allowance for loan losses was as follows:





Six months endedDecember
      31,2009
                  
                  
                  2008Beginning
      of period
                  
                  $
                  39,580
                  
                  
                  $
                  28,216Provision
      for loan losses
                  
                  
                  36,500
                  
                  
                  
                  16,567Loans
      charged-off
                  
                  
                  (23,804
                  )
                  
                  
                  (11,381
                  )Recoveries
                  
                  
                  197
                  
                  
                  
                  175End
      of period
                  
                  $
                  52,473
                  
                  
                  $
                  33,577





Impaired
loans were as follows:





December 31,
                  
                  
                  June 30,2009
                  
                  
                  2009Loans
      with no allocated allowance for loan losses
                  
                  $
                  16,507
                  
                  
                  $
                  12,494Loans
      with allocated allowance for loan losses
                  
                  
                  51,876
                  
                  
                  
                  38,397Total
                  
                  $
                  68,383
                  
                  
                  $
                  50,891Amount
      of the allowance for loan losses allocated
                  
                  $
                  11,871
                  
                  
                  $
                  11,663





Nonperforming
loans were as follows:





December 31,
                  
                  
                  June 30,2009
                  
                  
                  2009Nonaccrual
      loans
                  
                  $
                  125,591
                  
                  
                  $
                  92,752Troubled
      debt restructuring
                  
                  
                  16,210
                  
                  
                  
                  10,476Total
      nonperforming loans
                  
                  $
                  141,801
                  
                  
                  $
                  103,228





There
were $751 of loans past due over 90 days and still accruing interest as of
December 31, 2009 and $503 as of June 30, 2009.





Included
in nonperforming loans at December 31, 2009 were two loans totaling $7,454. In
the third quarter of fiscal year 2009, the Company became aware that the
collateral pledged on these loans was fraudulent and evidenced by fraudulently
altered documents. The Company then requested and received assignments of
replacement collateral from the borrower which the Company now anticipates will
be set aside in a subsequent involuntary bankruptcy proceeding. During the
fourth quarter of fiscal year 2009 the borrower stopped making payments and the
Company placed these loans on nonaccrual and nonperforming status. Based on the
preliminary state of the bankruptcy proceedings, the amount of any loss on the
loans is not estimable at this time. The Company is also considering legal
action against other parties who may have facilitated the fraudulent activity.
If the total loan balance is not realized through a combination of the
bankruptcy and legal actions, the Company believes, based on consultation with
legal counsel, that it is probable a court would determine that the Company
holds a valid claim under its blanket bond insurance policy and it is therefore
probable that a court would determine that the Company will recover any
ascertainable loss resulting from the Company's good faith reliance on the
as-altered collateral documents. As a result, a loss on these loans is not
believed to be probable at this time and no specific allowance or charge-off was
recorded at December 31, 2009.


12





Note
5. Mortgage Servicing Assets


(Dollars
in thousands)





Following
is a summary of mortgage servicing assets:





Six months endedDecember 31,2009
                  
                  
                  2008Servicing
      rights:Beginning
      of period
                  
                  $
                  20,114
                  
                  
                  $
                  14,272Additions
                  
                  
                  7,850
                  
                  
                  
                  2,483Net
      change in valuation allowance
                  
                  
                  464
                  
                  
                  
                  (1,363
                  )Amortized
      to expense
                  
                  
                  (2,998
                  )
                  
                  
                  (1,756
                  )End
      of period
                  
                  $
                  25,430
                  
                  
                  $
                  13,636





The fair
value of mortgage servicing assets was $27,610 at December 31, 2009 and $22,041
at June 30, 2009 as determined by an independent third party
appraisal.





Activity
in the valuation allowance for mortgage servicing rights was as
follows:





Six months endedDecember 31,2009
                  
                  
                  2008Beginning
      of period
                  
                  $
                  1,052
                  
                  
                  $
                  100Additions
      expensed
                  
                  
                  112
                  
                  
                  
                  1,363Reductions
      credited to expense
                  
                  
                  (576
                  )
                  
                  
                  -End
      of period
                  
                  $
                  588
                  
                  
                  $
                  1,463





Loans
serviced for others, which are not reported as assets, totaled $2,520,768 and
$2,052,135 at December 31, 2009 and June 30, 2009, respectively.
Noninterest-bearing deposits included $28,650 and $17,892 of custodial account
deposits related to loans serviced for others as of December 31, 2009 and June
30, 2009, respectively.





Note
6. Short-term Borrowings and Long-term Debt


(Dollars
in thousands)





Following
is a summary of short-term borrowings and long-term debt:





December 31,
                  
                  
                  June 30,2009
                  
                  
                  2009Short-term
      borrowings:Federal
      Home Loan Bank advances
                  
                  $
                  76,081
                  
                  
                  $
                  153,993Securities
      sold under agreement to repurchase
                  
                  
                  32,746
                  
                  
                  
                  33,165Federal
      Reserve Discount Window
                  
                  
                  50,000
                  
                  
                  
                  136,300Total
                  
                  $
                  158,827
                  
                  
                  $
                  323,458Long-term
      debt:Federal
      Home Loan Bank advances
                  
                  $
                  237,121
                  
                  
                  $
                  223,303Securities
      sold under agreement to repurchase
                  
                  
                  50,000
                  
                  
                  
                  50,000Junior
      subordinated debentures owed to unconsolidated subsidiary
      trusts
                  
                  
                  61,856
                  
                  
                  
                  61,856Total
                  
                  $
                  348,977
                  
                  
                  $
                  335,159


13


The Bank
has a borrowing capacity of approximately $453,000 with the Federal Home Loan
Bank which is collateralized by real estate and commercial loans with a carrying
value of approximately $1,765,000, securities with a fair value of approximately
$23,000 and the Company’s stock in the Federal Home Loan Bank. The Bank has
approximately $97,000 of borrowing capacity available from the Federal Home Loan
Bank at December 31, 2009. The Bank also has a borrowing capacity of
approximately $50,000 with the Federal Reserve Bank through its discount window
borrowing program collateralized by consumer loans with a carrying value of
approximately $302,000. The Company had no Federal Reserve Bank borrowings
available at December 31, 2009. In addition, the Bank has a $10,000 unsecured
line of credit with a commercial bank, all of which was available at December
31, 2009.





Note
7. Commitments, Contingencies and Guarantees


(Dollars
in thousands)





The
Company regularly enters into transactions that generate off-balance sheet risk.
These transactions include commitments to originate loans, commitments to sell
loans, loans with future commitments to disburse funds such as construction
loans and lines of credit, recourse obligations for loans sold and letters of
credit. The Company enters into these transactions to meet customer needs or to
facilitate the sale of assets.





The
financial instruments with off-balance sheet risk as of December 31, 2009 were
as follows:





Contractual
                  
                  
                  Current asset/amount
                  
                  
                  (liability) valueCommitmentsCommitments
      to make loans
                  
                  $
                  174,710
                  
                  
                  $
                  235Construction
      loan funds not yet disbursed
                  
                  
                  82,026
                  
                  
                  
                  -Unused
      lines of credit and letters of credit
                  
                  
                  268,452
                  
                  
                  
                  (98
                  )Mortgage
      loan sales commitment
                  
                  
                  114,034
                  
                  
                  
                  (2,732
                  )Mortgage-backed
      securities sales commitment
                  
                  
                  241,000
                  
                  
                  
                  1,401GuaranteesLoans
      sold with recourse
                  
                  
                  108,114
                  
                  
                  
                  (521
                  )Standby
      letters of credit
                  
                  
                  3,871
                  
                  
                  
                  (17
                  )





The
Company has originated and sold certain loans for which the buyer has recourse
to the Company in the event the loans do not perform as specified in the
agreements or if there is noncompliance with the buyer’s underwriting
specifications. Depending on the agreement, recourse may be limited to a
predetermined length of time or over the entire life of the loan. Therefore,
these sold loans with limited recourse represent a risk to the Company and a
liability has been established to recognize any credit losses. The Company also
has risk associated with unused lines of credit and letters of credit and a
liability has been established to recognize any credit losses.





Note
8. Fair Value Measurement and Fair Value of Financial Instruments


(Dollars
in thousands)





Fair
Value Measurement





The
Company groups assets and liabilities recorded at fair value into three levels
based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. A financial
instrument’s level within the fair value hierarchy is based on the lowest level
of input that is significant to the fair value measurement (with level 1
considered highest and level 3 considered lowest). A brief description of each
level follows:





Level 1 — Valuation is based
upon quoted prices for identical instruments in active markets.




14




Level 2 — Valuation is based
upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the
market.





Level 3 — Valuation is
generated from model-based techniques that use at least one significant
assumption not observable in the market. These unobservable assumptions reflect
estimates that market participants would use in pricing the asset or liability.
Valuation techniques include use of discounted cash flow models and similar
techniques.





The
following tables summarize the financial assets and liabilities measured at fair
value on a recurring basis as of December 31, 2009 and June 30, 2009, segregated
by the level of the valuation inputs within the fair value
hierarchy:





Fair value measurements at
                    December 31, 2009 usingTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets and (liabilities) measured on a recurring
      basisTrading
      securitiesMortgage-backed
      securities mutual fund
                  
                  $
                  11,685
                  
                  
                  $
                  -
                  
                  
                  $
                  11,685
                  
                  
                  $
                  -Securities
      available for saleU.S.
      Government agencies and other government sponsored
    enterprises
                  
                  
                  9,411
                  
                  
                  
                  -
                  
                  
                  
                  9,411
                  
                  
                  
                  -Obligations
      of states and political subdivisions
                  
                  
                  66,806
                  
                  
                  
                  -
                  
                  
                  
                  66,806
                  
                  
                  
                  -Trust
      preferred securities
                  
                  
                  9,429
                  
                  
                  
                  -
                  
                  
                  
                  8,974
                  
                  
                  
                  455One-
      to four-family mortgage-backed securities and collateralized mortgage
      obligations issued by government sponsored enterprises
                  
                  
                  185,926
                  
                  
                  
                  -
                  
                  
                  
                  185,926
                  
                  
                  
                  -Common
      stocks
                  
                  
                  268
                  
                  
                  
                  -
                  
                  
                  
                  268
                  
                  
                  
                  -Loans
      held for sale
                  
                  
                  281,861
                  
                  
                  
                  -
                  
                  
                  
                  281,861
                  
                  
                  
                  -Derivatives
      – mortgage-backed securities sales commitments
                  
                  
                  1,401
                  
                  
                  
                  -
                  
                  
                  
                  1,401
                  
                  
                  
                  -Derivatives
      – commitments to make loans
                  
                  
                  235
                  
                  
                  
                  -
                  
                  
                  
                  235
                  
                  
                  
                  -





Fair value measurements at
                    June 30, 2009 usingTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets and (liabilities) measured on a recurring
      basisTrading
      securitiesMortgage-backed
      securities mutual fund
                  
                  $
                  11,786
                  
                  
                  $
                  11,786
                  
                  
                  $
                  -
                  
                  
                  $
                  -Securities
      available for saleU.S.
      Government agencies and other government sponsored
    enterprises
                  
                  
                  4,582
                  
                  
                  
                  -
                  
                  
                  
                  4,582
                  
                  
                  
                  -Obligations
      of states and political subdivisions
                  
                  
                  62,946
                  
                  
                  
                  -
                  
                  
                  
                  62,946
                  
                  
                  
                  -Trust
      preferred securities
                  
                  
                  8,267
                  
                  
                  
                  -
                  
                  
                  
                  7,847
                  
                  
                  
                  420One-
      to four-family mortgage-backed securities and collateralized mortgage
      obligations issued by government sponsored enterprises
                  
                  
                  188,722
                  
                  
                  
                  -
                  
                  
                  
                  188,722
                  
                  
                  
                  -Common
      stocks
                  
                  
                  297
                  
                  
                  
                  -
                  
                  
                  
                  297
                  
                  
                  
                  -Loans
      held for sale
                  
                  
                  376,406
                  
                  
                  
                  -
                  
                  
                  
                  376,406
                  
                  
                  
                  -Derivatives
      – mortgage-backed securities sales commitments
                  
                  
                  2,544
                  
                  
                  
                  -
                  
                  
                  
                  2,544
                  
                  
                  
                  -Derivatives
      – commitments to make loans
                  
                  
                  427
                  
                  
                  
                  -
                  
                  
                  
                  427
                  
                  
                  
                  -


15




The
following table presents additional information about assets measured at fair
value on a recurring basis and for which the Company has utilized Level 3 inputs
to determine fair value:


Six months ended December 31,2009
                
                
                2008Balance
      at beginning of period
                
                $
                420
                
                
                $
                -Gross
      gains (losses) included in other comprehensive income
                
                
                35
                
                
                
                -Transfer
      to Level 3
                
                
                -
                
                
                
                400Balance
      at end of period
                
                $
                455
                
                
                $
                400





The
following table summarizes the financial assets and liabilities measured at fair
value on a nonrecurring basis as of December 31, 2009 and June 30, 2009,
segregated by the level of the valuation inputs within the fair value
hierarchy:





Fair value measurements at
                    December 31, 2009 usingTotal
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets and (liabilities) measured on a
      nonrecurring basisImpaired
      loans, net of allowance
                  
                  $
                  40,005
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  40,005Mortgage
      servicing assets
                  
                  
                  3,306
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,306





Fair value measurements at
                      June 30, 2009 usingTotal
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Assets and (liabilities) measured on a
      nonrecurring basisImpaired
      loans, net of allowance
                    
                    $
                    26,734
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    26,734Mortgage
      servicing assets
                    
                    
                    5,411
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,411





Securities- Securities in the
Company’s investment portfolio are recorded at fair value on a recurring basis
and certain securities are classified as trading securities. The amount of the
adjustment for the fair value of trading securities for the six months ended
December 31, 2009 was a gain of $400 and is included in the Condensed
Consolidated Statements of Income under the caption Change in Fair Value of
Securities. Recurring Level 2 trading securities include the Company’s
investment in a mortgage-backed securities mutual fund. The remaining securities
in the Company’s investment portfolio are classified as available for sale.
Recurring Level 2 available for sale securities include the Company’s
investments in U.S. government agency obligations, obligations of state and
political subdivisions, trust preferred securities, mortgage-backed securities,
collateralized mortgage obligations and equity securities. Recurring Level 3
available for sale securities include the Company’s investment in a single trust
preferred security.





Loans held for sale- Loans held for sale
consist of residential mortgage loans originated for sale and other loans which
have been identified for sale. From time to time, loans held for sale may also
include the guaranteed portion of SBA loans. Interest on loans held for sale is
recognized according to the contractual terms on the loans and included in
interest income on loans. Loans held for sale are recorded at fair value based
on what secondary markets are currently offering for loans with similar
characteristics. As such, the Company classifies loans held for sale as
recurring Level 2. At December 31, 2009, the fair value of loans held for sale
exceeded the aggregate unpaid principal balance by $4,905. The amount of the
adjustment for fair value for the six months ended December 31, 2009 was a gain
of $5,720 and is included in the Condensed Consolidated Statements of Income
under the caption Mortgage Banking Gains.





Impaired loans - Impaired
loans are measured for impairment based on i) the present value of the expected
future cash flows discounted at the loan’s effective interest rate, (ii) a
loan’s observable market price, or (iii) the fair value of the collateral if the
loan is collateral dependent. For collateral-dependent loans, the collateral had
a carrying value of $51,876 and a valuation allowance of $11,871. The Company
measures impairment on all nonaccrual loans for which it has established
specific allowances as part of the specific allocated allowance component of the
allowance for loan losses. As such, the Company classifies impaired loans as
nonrecurring Level 3. Changes in the specifically allocated allowance are
recorded within the provision for loan losses and amounted to a net increase of
the provision for loan losses by $208 for the six months ended December 31,
2009.


16


Mortgage servicing assets -
Mortgage servicing assets of $25,430 represent the value of retained servicing
rights on loans sold. Servicing assets are valued at the lower of cost or fair
value and are based upon an independent third party appraisal. Accordingly, the
Company classifies the fair value portion of its mortgage servicing assets as
nonrecurring Level 3. The fair value of mortgage servicing assets includes $464
in net reduction of impairment for the six months ended December 31, 2009 and
the valuation allowance at December 31, 2009 was $588. Mortgage servicing assets
of $21,129 are valued at amortized cost.





Mortgage banking derivatives
- The Company enters into commitments with customers to make loans as a part of
its residential lending program. These commitments are considered derivative
instruments for those loans intended to be held for sale. The Company also
enters into forward commitments for the future delivery of residential mortgage
loans when interest rate locks are entered into in order to economically hedge
the effect of changes in interest rates resulting from its commitments to fund
the loans. These forward contracts are also derivative instruments. All
derivative instruments are recognized as either assets or liabilities at fair
value in the statement of financial condition as indicated in the table above on
a recurring basis. Fair value adjustments related to these mortgage banking
derivatives are recorded in current period earnings as a component of mortgage
banking gains. For the six months ended December 31, 2009, the Company had $864
in net losses attributed to the fair value adjustments of derivatives, while
gains on sales of loans were $9,604. At December 31, 2009, no derivatives were
designated as cash flow hedges or fair value hedges.





Fair
Value of Financial Instruments





The
following table shows the estimated fair value and the related carrying value of
the Company’s financial instruments at December 31, 2009 and June 30,
2009:





December 31,
                    2009
                  
                  
                  June 30,
                    2009Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value
                  
                  
                  Amount
                  
                  
                  Fair ValueFinancial assetsCash
      and due from banks
                  
                  $
                  29,805
                  
                  
                  $
                  29,805
                  
                  
                  $
                  38,321
                  
                  
                  $
                  38,321Interest-bearing
      deposits in other banks
                  
                  
                  55,857
                  
                  
                  
                  55,857
                  
                  
                  
                  56,614
                  
                  
                  
                  56,614Trading
      securities
                  
                  
                  11,685
                  
                  
                  
                  11,685
                  
                  
                  
                  11,786
                  
                  
                  
                  11,786Securities
      available for sale
                  
                  
                  271,840
                  
                  
                  
                  271,840
                  
                  
                  
                  264,814
                  
                  
                  
                  264,814Loans
      held for sale
                  
                  
                  281,861
                  
                  
                  
                  281,861
                  
                  
                  
                  376,406
                  
                  
                  
                  376,406Loans,
      net
                  
                  
                  2,368,444
                  
                  
                  
                  2,434,464
                  
                  
                  
                  2,428,864
                  
                  
                  
                  2,498,517Federal
      Home Loan Bank stock
                  
                  
                  35,041
                  
                  
                  
                  35,041
                  
                  
                  
                  36,221
                  
                  
                  
                  36,221Derivative
      assets
                  
                  
                  1,636
                  
                  
                  
                  1,636
                  
                  
                  
                  2,971
                  
                  
                  
                  2,971Other
      financial assets
                  
                  
                  12,391
                  
                  
                  
                  12,391
                  
                  
                  
                  12,629
                  
                  
                  
                  12,629Financial
      liabilitiesDemand
      and savings deposits
                  
                  $
                  1,241,920
                  
                  
                  $
                  1,241,920
                  
                  
                  $
                  1,103,348
                  
                  
                  $
                  1,103,348Time
      deposits
                  
                  
                  1,224,850
                  
                  
                  
                  1,237,186
                  
                  
                  
                  1,332,253
                  
                  
                  
                  1,345,895Short-term
      borrowings
                  
                  
                  158,827
                  
                  
                  
                  159,432
                  
                  
                  
                  323,458
                  
                  
                  
                  325,180Long-term
      debt
                  
                  
                  348,977
                  
                  
                  
                  367,261
                  
                  
                  
                  335,159
                  
                  
                  
                  355,236Derivative
      liabilities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      financial liabilities
                  
                  
                  4,540
                  
                  
                  
                  4,540
                  
                  
                  
                  9,429
                  
                  
                  
                  9,429





The
methods and assumptions used to estimate fair value are described as follows.
Carrying amount is the estimated fair value for cash and due from banks,
interest-bearing deposits in other banks, accrued interest receivable and
payable, demand deposits, savings, money market accounts and advances by
borrowers for taxes and insurance. Security fair values, including trust
preferred securities, are based on market prices or dealer quotes, and if no
such information is available, on the rate and term of the security and
information about the issuer. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, fair value
is based on discounted cash flows using current market rates applied to the
estimated life and credit risk which is not indicative of an exit price. Fair
value of loans held for sale and commitments to purchase/sell/originate loans
and mortgage-backed securities is based on market quotes. Fair value of Federal
Home Loan Bank stock is based on the redemption value of the FHLB stock. Fair
value of securities sold under agreements to repurchase, borrowings and junior
subordinated debentures is based on current rates for similar
financing.


17


Note
9. Earnings per Common Share


(Dollars
in thousands, except per share data)





The
factors used in the earnings (loss) per common share computation are as
follows:





Three months ended
                
                
                Six months endedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Basic:Loss
      attributable to common shareholders
                
                $
                (497
                )
                
                $
                (94,097
                )
                
                $
                (7,502
                )
                
                $
                (100,256
                )Average
      common shares outstanding
                
                
                16,973,270
                
                
                
                16,973,270
                
                
                
                16,973,270
                
                
                
                16,973,270Less:
      Average unearned ESOP shares
                
                
                (297,649
                )
                
                
                (339,207
                )
                
                
                (302,861
                )
                
                
                (344,419
                )Less:
      Average unearned recognition and retention plan shares
                
                
                (67,806
                )
                
                
                (75,780
                )
                
                
                (69,751
                )
                
                
                (76,129
                )Weighted
      average common shares outstanding – basic
                
                
                16,607,815
                
                
                
                16,558,283
                
                
                
                16,600,658
                
                
                
                16,552,722Basic
      loss per common share
                
                $
                (0.03
                )
                
                $
                (5.68
                )
                
                $
                (0.45
                )
                
                $
                (6.06
                )Diluted:Loss
      attributable to common shareholders
                
                $
                (497
                )
                
                $
                (94,097
                )
                
                $
                (7,502
                )
                
                $
                (100,256
                )Weighted
      average common shares outstanding – basic
                
                
                16,607,815
                
                
                
                16,558,283
                
                
                
                16,600,658
                
                
                
                16,552,722Add:
      Dilutive effects of assumed exercises of stock options, recognition and
      retention plan shares and warrant
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Weighted
      average common shares outstanding – diluted
                
                
                16,607,815
                
                
                
                16,558,283
                
                
                
                16,600,658
                
                
                
                16,552,722Diluted
      loss per common share
                
                $
                (0.03
                )
                
                $
                (5.68
                )
                
                $
                (0.45
                )
                
                $
                (6.06
                )





Because
the Company was in a net loss position, all stock options and stock grants of
the Company’s common stock and the warrant pertaining to the U.S. Treasury’s
Capital Purchase Program were not included in the computation of diluted loss
per common share during the three and six months ended December 31, 2009 and
2008, respectively, because they were antidilutive.





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


Management’s
discussion and analysis represents a review of First Place Financial Corp.’s
(the Company) consolidated financial condition and results of operations. This
review should be read in conjunction with the condensed consolidated financial
statements and footnotes.


18


Business
Overview





The
Company was formed as a thrift holding company as a result of the conversion of
First Place Bank (Bank), formerly known as First Federal Savings and Loan
Association of Warren, from a federally chartered mutual savings and loan
association to a federally chartered stock savings association in December 1998.
First Federal Savings and Loan Association of Warren originally opened for
business in 1922. At the time of the conversion, the Company had total assets of
approximately $610 million. During fiscal year 2000, the Company acquired
Ravenna Savings Bank with total assets of $200 million. During fiscal year 2001,
the Company completed a merger-of-equals with FFY Financial Corp. with total
assets of $680 million. During fiscal year 2004, the Company acquired Franklin
Bancorp, Inc. of Southfield, Michigan with total assets of $627 million. During
fiscal year 2006, the Company acquired The Northern Savings & Loan Company
of Elyria, Ohio with total assets of $360 million. During fiscal year 2007, the
Company acquired seven retail banking offices from Republic Bancorp, Inc. and
Citizens Banking Corporation in the greater Flint, Michigan area assuming $200
million in deposits. During fiscal year 2008, the Company acquired Hicksville
Building, Loan and Savings Bank of Hicksville, Ohio with total assets of $53
million and OC Financial, Inc. of Dublin, Ohio with total assets of $68
million.





The
Company is a community-oriented financial institution engaged primarily in
gathering deposits to originate one-to-four family residential mortgage loans,
commercial and consumer loans. The Company currently operates 44 retail
locations, 2 business financial centers and 18 loan production offices located
in Ohio, Michigan, Indiana and Maryland with a concentration of banking offices
in Northeast Ohio and Southeast Michigan. In addition, the Company owns nonbank
subsidiaries that operate in the following industries: real estate brokerage,
title insurance, investment brokerage, wealth management and general
insurance.





The
Company has expanded its asset base and product offerings in order to increase
both fee income and net income. Growth has been achieved by increasing market
share in current markets, expanding into new markets in the Midwest by opening
de novo loan production and retail banking offices and through acquisitions. The
Company evaluates acquisition targets based on the economic viability of the
markets they are in, the degree to which they can be efficiently integrated into
current operations and the degree to which they are accretive to capital and
earnings.





The
Company seeks to provide a return to its shareholders through dividends and
appreciation by taking on various levels of credit risk, interest rate risk,
liquidity risk and capital risk in order to achieve profits. The goal of
achieving high levels of profitability on a consistent basis is balanced with
acceptable levels of risk in each area. The Company monitors a number of
financial measures to assess profitability and various types of risk. Those
measures include but are not limited to diluted earnings (loss) per common
share, return on average assets, return on average equity, efficiency ratio, net
interest margin, noninterest expense to average assets, loans to deposits,
equity to assets, tangible equity to tangible assets, nonperforming loans to
total loans, nonperforming assets to total assets, allowance for loan losses to
total loans, allowance for loan losses to nonperforming loans and net portfolio
value.





Forward-Looking
      Statements





When used
in this Form 10-Q, or in future filings with the Securities and Exchange
Commission (SEC), in press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases “will likely result,” “expect,” “will
continue,” “anticipate,” “estimate,” “project,” “believe,” “should,” “may,”
“will,” “plan,” or variations of such terms or similar expressions are intended
to identify “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the Company’s actual results to be materially different from those
indicated. Such statements are subject to certain risks and uncertainties,
including changes in economic conditions in the market areas the Company
conducts business that could materially impact credit quality trends, changes in
laws, regulations or policies of regulatory agencies, fluctuations in interest
rates, demand for loans in the market areas the Company conducts business, and
competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.





Financial
Condition





General. Assets totaled
$3.259 billion at December 31, 2009, a decrease of $145 million or 4.3% from
$3.404 billion at June 30, 2009. The majority of this decrease was due to
decreases of $95 million in loans held for sale and $48 million in portfolio
loans. Total liabilities decreased $141 million to $2.982 billion at December
31, 2009 primarily due to a decrease of $165 million in short-term borrowings,
partially offset by an increase of $31 million in deposits. Total equity was
$278 million at December 31, 2009, a decrease of $4 million, primarily due to
the Company’s net loss of $5 million for the six months ended December 31,
2009.


19


The
following table presents the Company’s financial condition at December 31, 2009
and June 30, 2009, along with selected GAAP financial ratios and measures and
other financial measures.





Financial
Condition


(Dollars
in thousands)


At
                        
                        
                        AtDecember 31,
                        
                        
                        June 30,
                        
                        
                        Increase (Decrease)2009
                        
                        
                        2009
                        
                        
                        Amount
                        
                        
                        PercentLoans
                        
                        $
                        2,420,917
                        
                        
                        $
                        2,468,444
                        
                        
                        $
                        (47,527
                        )
                        
                        
                        (1.9
                        )%Assets
                        
                        $
                        3,259,123
                        
                        
                        $
                        3,404,467
                        
                        
                        $
                        (145,344
                        )
                        
                        
                        (4.3
                        )%Deposits
                        
                        $
                        2,466,770
                        
                        
                        $
                        2,435,601
                        
                        
                        $
                        31,169
                        
                        
                        
                        1.3
                        %Total
      equity
                        
                        $
                        277,581
                        
                        
                        $
                        281,479
                        
                        
                        $
                        (3,898
                        )
                        
                        
                        (1.4
                        )%Selected
      GAAP financial ratios andmeasures
                          and other financial
measuresLoans
      to deposits
                        
                        
                        98.14
                        %
                        
                        
                        101.35
                        %Equity
      to assets
                        
                        
                        8.52
                        %
                        
                        
                        8.27
                        %Tangible
      equity to tangible assets
                        
                        
                        8.23
                        %
                        
                        
                        7.96
                        %Nonperforming
      loans to total loans
                        
                        
                        5.86
                        %
                        
                        
                        4.18
                        %Nonperforming
      assets to total assets
                        
                        
                        5.29
                        %
                        
                        
                        4.11
                        %Allowance
      for loan losses to total loans
                        
                        
                        2.17
                        %
                        
                        
                        1.60
                        %Allowance
      for loan losses to nonperforming loans
                        
                        
                        37.00
                        %
                        
                        
                        38.34
                        %





Securities. The Company’s
securities balance increased $7 million and totaled $284 million at December 31,
2009, compared to $277 million at June 30, 2009. During the first six months of
fiscal year 2010, the Company purchased $31 million in securities and received
principal paydowns on mortgage-backed securities of $26 million.





Significant
reductions in securities are not likely as the Company strives to maintain a
reasonable level of securities to provide adequate liquidity and in order to
have securities available to pledge to secure public funds, repurchase
agreements and other types of transactions. Fluctuations in the market value of
securities held by the Company relate primarily to changes in interest rates,
and management believes, at the date of this report, that all declines in market
value in the securities portfolio are temporary.





Loans held for sale.The Company engages in
mortgage banking as part of an overall strategy to deliver loan products to
customers. As a result, the Company sells most fixed rate residential loans
originated and a portion of its adjustable-rate residential loans originated.
During the quarter ended December 31, 2009, the Company sold $502 million in
loans compared with sales of $243 million for the quarter ended December 31,
2008. For the six months ended December 31, 2009, the Company sold $1.009
billion in loans compared with sales of $498 million for the six months ended
December 31, 2008. The Company was able to increase the level of sales activity
during the first half of fiscal year 2010 compared to the same period in the
prior year due to continued favorable long-term interest rates and the addition
of experienced loan officers.





Loans
held for sale totaled $282 million at December 31, 2009, compared to $377
million at June 30, 2009, a decrease of $95 million or 25.1%. The decrease in
loans held for sale was primarily due to a decrease in the volume of mortgage
loan originations from $637 million for the quarter ended June 30, 2009 to $512
million for the quarter ended December 31, 2009. The decrease in mortgage loan
originations was due to a lower volume of refinanced loans. The Company
anticipates that it will continue to sell a majority of the one-to-four family
residential loans that it originates.





Loans. The loan portfolio
totaled $2.421 billion at December 31, 2009, a decrease of $48 million, or 1.9%
from $2.468 billion at June 30, 2009. The decrease in the loan portfolio was due
to decreases of $34 million, or 4.0% in mortgage and construction loans and $18
million, or 4.9% in consumer loans, partially offset by an increase of $4
million, or 0.3% in commercial loans. The decrease in mortgage and construction
loans and consumer loans was the result of deteriorating economic conditions and
the tightening of credit underwriting standards during the first half of fiscal
year 2010. During the quarter ended December 31, 2009, the mix of the loan
portfolio did not change significantly as commercial loans accounted for 51.6%
of the loan portfolio, mortgage and construction loans accounted for 33.8% and
consumer loans accounted for 14.6%. The Company anticipates the volume of the
loan portfolio to remain level or decrease slightly during the remainder of
fiscal year 2010 and the mix of the loan portfolio to remain relatively
unchanged from the mix at December 31, 2009.


20


Nonperforming Assets.Nonperforming assets consist of nonperforming loans and real estate
owned. The following table presents for the periods indicated delinquent loans,
total nonperforming loans and nonperforming assets, as well as the allowance for
loan losses and selected ratios.





Asset
Quality History


(Dollars
in thousands)


December
      31,
                
                
                September
      30,
                
                
                June
      30,
                
                
                March
      31,
                
                
                December
      31,2009
                
                
                2009
                
                
                2009
                
                
                2009
                
                
                2008Delinquent
      loans
                
                $
                169,728
                
                
                $
                175,102
                
                
                $
                141,623
                
                
                $
                127,827
                
                
                $
                86,920Nonperforming
      AssetsNonaccrual
      loans
                
                $
                125,591
                
                
                $
                116,487
                
                
                $
                92,752
                
                
                $
                66,188
                
                
                $
                63,945Troubled
      debt restructurings
                
                
                16,210
                
                
                
                10,253
                
                
                
                10,476
                
                
                
                3,002
                
                
                
                3,006Total
      nonperforming loans
                
                
                141,801
                
                
                
                126,740
                
                
                
                103,228
                
                
                
                69,190
                
                
                
                66,951Real
      estate owned
                
                
                30,726
                
                
                
                33,123
                
                
                
                36,790
                
                
                
                34,969
                
                
                
                34,801Total
      nonperforming assets
                
                $
                172,527
                
                
                $
                159,863
                
                
                $
                140,018
                
                
                $
                104,159
                
                
                $
                101,752Allowance
      for loan losses
                
                $
                52,473
                
                
                $
                50,643
                
                
                $
                39,580
                
                
                $
                35,766
                
                
                $
                33,577RatiosNonperforming
      loans to total loans
                
                
                5.86
                %
                
                
                5.17
                %
                
                
                4.18
                %
                
                
                2.74
                %
                
                
                2.56
                %Nonperforming
      assets to total assets
                
                
                5.29
                %
                
                
                4.93
                %
                
                
                4.11
                %
                
                
                3.08
                %
                
                
                3.10
                %Allowance
      for loan losses to total loans
                
                
                2.17
                %
                
                
                2.07
                %
                
                
                1.60
                %
                
                
                1.41
                %
                
                
                1.28
                %Allowance
      for loan losses to nonperforming loans
                
                
                37.00
                %
                
                
                39.96
                %
                
                
                38.34
                %
                
                
                51.69
                %
                
                
                50.15
                %





In the
normal course of business, the Company continually works with borrowers in
various stages of delinquency. When deemed beneficial for the borrower and the
Company, concessions are made through modifications of current loan terms with
the intention of maximizing the amounts collected on the loans prospectively.
These modified loans are considered troubled debt restructurings under current
accounting guidance and are classified as nonperforming loans even if all
contractual terms are met. In the current recessionary economy, these
restructurings are becoming more prevalent. The Company also works with
borrowers to avoid foreclosure if possible. Furthermore, if it becomes
inevitable that a borrower will not be able to retain ownership of their
property, the Company often seeks a deed in lieu of foreclosure in order to gain
control of the property earlier in the recovery process. The strategy of
pursuing deeds in lieu of foreclosure more aggressively should result in a
reduction in the holding period for nonperforming assets and ultimately reduce
economic losses. The increase of $39 million or 37.4% in nonperforming loans
during the six months ended December 31, 2009 was composed of $21 million of
mortgage and construction loans, $15 million of commercial loans and $3 million
of consumer loans. The increase in nonperforming loans was related to a
continued decline in the local economies of the Company’s market areas,
particularly in the housing markets and automotive industry. This is consistent
with both Midwest and national trends. Of the total nonperforming loans at
December 31, 2009, 89% were secured by real estate. Real estate loans are
generally well secured and if these loans do default, the majority of the loan
balance, net of any charge-offs, is usually recovered by liquidating the real
estate.


21


Included
in nonperforming loans at December 31, 2009 were two loans totaling $7 million.
In the third quarter of fiscal year 2009, the Company became aware that the
collateral pledged on these loans was fraudulent and evidenced by fraudulently
altered documents. The Company then requested and received assignments of
replacement collateral from the borrower which the Company now anticipates will
be set aside in a subsequent involuntary bankruptcy proceeding. During the
fourth quarter of fiscal year 2009 the borrower stopped making payments and the
Company placed these loans on nonaccrual and nonperforming status. Based on the
preliminary state of the bankruptcy proceedings the amount of any loss on the
loans is not estimable at this time. The Company is also considering legal
action against other parties who may have facilitated the fraudulent activity.
If the total loan balance is not realized through a combination of the
bankruptcy and legal actions, the Company believes, based on consultation with
legal counsel, that it is probable a court would determine that the Company
holds a valid claim under its blanket bond insurance policy and it is therefore
probable that a court would determine that the Company will recover any
ascertainable loss resulting from the Company's good faith reliance on the
as-altered collateral documents. As a result, a loss on these loans is not
believed to be probable at this time and no specific allowance or charge-off was
recorded at December 31, 2009.





Allowance for loan losses.The allowance for loan losses represents management’s estimate of
probable incurred credit losses inherent in the loan portfolio at each balance
sheet date. All lending activity contains associated risks of loan losses,
although the Company has not substantially engaged in high risk products such as
subprime loans. Each quarter management analyzes the adequacy of the allowance
for loan losses based on a review of the loans in the portfolio along with an
analysis of external factors and historical delinquency and loss trends. The
allowance is developed through four specific components; 1) the specific
allowance for loans subject to individual analysis, 2) the allowance for
classified loans not otherwise subject to individual analysis, 3) the allowance
for non-classified loans (primarily homogenous), and 4) the remaining
unallocated balance.





Classified
loans with a balance of $1 million or greater are subject to individual analysis
under accounting guidance for impaired loans. Loan classifications are those
used by regulators consisting of (in order of increasing deterioration) Other
Assets Especially Mentioned, Substandard, Doubtful, and Loss. In evaluating each
of these loans for impairment, the measure of expected loss is based on i) the
present value of the expected future cash flows discounted at the loan’s
effective interest rate, (ii) a loan’s observable market price, or (iii) the
fair value of the collateral if the loan is collateral dependent.





Classified
assets under the $1 million threshold are segregated into twelve loan pools with
similar risk characteristics (one-to-four family, construction, home equity,
etc.). Weighted historic loss rate factors are developed for each loan pool and
classification with the most recent loss experience given the most weight. The
factors are used to estimate losses and determine an allowance for each loan
pool and classification.





For the
remaining non-classified loans, a weighted historic net charge-off factor is
applied to each of the twelve loan segments. Utilizing weighted historic loss
data against both classified and non-classified loans captures the more
detrimental effects of the current ongoing recession, by emphasizing the most
recent experience.





The
remaining unallocated allowance relates to other potential risks inherent in the
loan portfolio.  Management determines this component using judgment about
qualitative issues as the other three components of the allowance capture those
risks that lend themselves to quantitative analysis.





Each
quarter, management will evaluate trends in regional economic conditions that
have the potential to impair the repayment of the loans currently in the
Company’s portfolio.  These factors will include such things as, but will
not be limited to, trends in unemployment, foreclosure and bankruptcy filings,
delinquencies, non-performing and criticized loans, and charge-offs.  The
Company believes these metrics assist in the identification and measurement of
possible losses inherent in the loan portfolio that have not yet been identified
through management’s routine delinquency monitoring.  Based on the
direction of these trends, an appropriate allowance will be
quantified.





In an
effort to limit the Company’s exposure to real estate related losses, multiple
reviews of credit scores were performed on existing home equity lines over the
past year. In instances where the score had fallen below a satisfactory level,
caps were placed on the lines or the lines were frozen at their current balance
in order to limit exposure in a deteriorating situation.





Based on
variables involved and the fact that management must make judgments about
outcomes that are uncertain, the determination of the allowance for loan losses
is considered a critical accounting policy.


22


The
allowance for loan losses was $52 million at December 31, 2009, up from $40
million at June 30, 2009 and $34 million at December 31, 2008.  Net
charge-offs during the quarter ended December 31, 2009 were $12 million, an
increase of $5 million from net charge-offs of $7 million during the quarter
ended December 31, 2008.  Net charge-offs for the six months ended
December 31, 2009 were $24 million, an increase of $13 million from net
charge-offs of $11 million during the six months ended December 31,
2008.  Net charge-offs to average loans increased to 1.97% for the
quarter ended December 31, 2009 compared with 1.07% for the quarter ended
December 31, 2008.  Net charge-offs to average loans increased to
1.91% for the six months ended December 31, 2009 compared with 0.85% for the six
months ended December 31, 2008. The mix and composition of portfolio loans and
nonperforming loans changes from year to year.  The ratio of the
allowance for loan losses to nonperforming loans at December 31, 2009 decreased
from December 31, 2008 while the ratio of the allowance for loan losses to total
loans at December 31, 2009 increased from December 31, 2008.  The
allowance for loan losses to nonperforming loans was 37.00% at December 31, 2009
compared with 38.34% at June 30, 2009 and 50.15% at December 31,
2008.  Additionally, the ratio of the allowance for loan losses to
total loans for the Company was 2.17% at December 31, 2009 compared with 1.60%
at June 30, 2009 and 1.28% at December 31, 2008.  The ratio of
nonperforming loans to total loans was 5.86% at December 31, 2009 compared with
4.18% at June 30, 2009 and 2.56% at December 31, 2008.  Although the
allowance for loan losses to nonperforming loans decreased, most of the
nonperforming loans are allocated a specific allowance as a result of individual
analysis or the application of weighted historic loss rate or net charge-off
factors.





Real Estate
Owned.  At December 31, 2009, the Company’s real estate owned
(REO) consisted of 214 repossessed properties with a net book value of $31
million.  When a property is acquired, any initial loss is recorded as
a charge to the allowance for loan losses before being transferred from the loan
portfolio to REO.  The Company initially records an acquired property
at the fair value of the related asset, less estimated costs to sell the
property.  Thereafter, if there is a further deterioration in value, a
specific valuation allowance is established and charged to
operations.  The costs to carry REO are charged to expense as
incurred.





Real Estate Held for
Investment.  At December 31, 2009, the Company’s real estate
held for investment (REH) consisted of 24 repossessed properties with a net book
value of $7 million.  Selected properties are transferred to REH
primarily due to their ability to generate cash flow from rent
receipts.  When a property is acquired, any initial loss is recorded
as a charge to the allowance for loan losses before being transferred from the
loan portfolio to REH.  The Company initially records an acquired
property at the fair value of the related asset.  The Company also
depreciates REH properties with depreciation being calculated using the
straight-line method based on the estimated useful lives of the
assets.  Thereafter, if there is a further deterioration in value, a
specific valuation allowance is established and charged to
operations.  The costs to carry REH are charged to expense as
incurred.





Deposits.Total deposits were
$2.467 billion at December 31, 2009, an increase of $31 million or 1.3%,
compared to $2.436 billion at June 30, 2009.  The increase in deposits
was primarily due to an increase of $44 million in the Company’s retail branch
network, partially offset by a decrease of $13 million in certificates of
deposit obtained through brokers.  The increase in retail deposits was
primarily due to increases of $95 million in public funds obtained through
participation in a national referral program and $35 million in public funds of
the State of Ohio, partially offset by a decrease of $86 million in other retail
deposits due to the maturity of higher rate certificates of
deposit.  The Company’s participation in a national referral program
brought in approximately $48 million in checking accounts and $47 million in
certificates of deposit during the quarter ended December 31,
2009.  The public funds obtained in the national referral program had
the same or lower interest rates than those offered in the Company’s retail
branch network and are not considered brokered deposits.  The Company
considers brokered deposits to be an element of a diversified funding strategy
and an alternative to borrowings.  Management regularly compares rates
to determine the most economical source of funding.  The Company
anticipates that it will continue to consider brokered funds as a funding
alternative in the future and as a source of short-term liquidity, but not as
the primary source of funding to support growth.  The Company’s
brokered deposit balance cannot exceed approximately $231 million without the
prior approval of its primary regulator, the Office of Thrift Supervision
(OTS).  The Company currently has an availability of $46 million that
could be raised through brokered deposits without prior approval of the
OTS.





The
Company participates in the Certificate of Deposit Account Registry Service
(CDARS) program, a network of financial institutions that exchange funds among
members in order to ensure Federal Deposit Insurance Corporation (FDIC)
insurance coverage on customer deposits above the single institution
limit.  These deposits are considered brokered deposits and are
included in the brokered deposit totals above.  Using a sophisticated
matching system, funds are exchanged on a dollar-for-dollar basis, so that the
equivalent of an original deposit comes back to the originating
institution.  Included in certificates of deposit at December 31, 2009
are CDARS balances of $69 million, a decrease of $42 million from the $111
million at June 30, 2009.  With the increase in deposit insurance,
many customers have opted to return to the traditional deposit
accounts.


23


Short-term Borrowings and Long-term
Debt.  During the first six months of fiscal year 2010,
short-term borrowings decreased $164 million to $159 million at December 31,
2009, from $323 million at June 30, 2009.  The decrease in short-term
borrowings was primarily due to decreases in loans held for sale and the loan
portfolio, which reduced the need for short-term funding.  During the
first six months of fiscal year 2010, long-term debt increased $14 million to
$349 million at December 31, 2009, from $335 million at June 30,
2009.  The increase in long-term debt was due to an increase in
long-term borrowings of $20 million, partially offset by repayments on long-term
debt of $6 million.  During the first six months of fiscal 2010, the
Company borrowed $20 million in long-term fixed-rate advances from the Federal
Home Loan Bank with an original maturity of 38 months at rates ranging from
1.71% to 1.82% with a weighted average rate of 1.76%.  The Company
uses short-term borrowings and long-term debt as part of its liquidity
management, cash flow, and asset/liability management and considers them part of
a diversified funding strategy.  Short-term borrowings and long-term
debt are alternatives to raising cash through deposit growth and are used when
they offer a favorable alternative to deposits in terms of rate, maturity or
volume.  Currently, the parent holding company may not incur
additional debt without OTS approval.  For additional information on
short-term borrowings and long-term debt, see Note 6 – Short-Term Borrowings and
Long-Term Debt in the Notes to Condensed Consolidated
Financial Statements and as described below under the heading Liquidity and Cash
Flows.





Capital
Resources.  During the first six months of fiscal year 2010,
total shareholders’ equity decreased $4 million, or 1.4% to $278 million at
December 31, 2009 compared with $282 million at June 30, 2009.  The
decrease was primarily composed of the net loss of $5 million and $2 million in
dividends paid on the Company’s preferred stock, partially offset by an increase
of $3 million in unrealized gains on securities available for
sale.  Total equity to total assets was 8.52% at December 31, 2009, up
from 8.27% at June 30, 2009.  Total tangible equity to total tangible
assets was 8.23% at December 31, 2009, up from 7.96% at June 30,
2009.





In
connection with the issuance of the preferred stock and common stock warrant to
the Treasury in 2009, the ability to declare or pay dividends on the Company’s
common shares is limited to $0.085 per share per quarter, and only if all
dividends have been paid on the Series A preferred shares.  The
Company’s ability to pay dividends on common shares is further limited by
restrictions of the OTS as described below under the heading Liquidity and Cash
Flows.  In addition, the Company’s ability to repurchase common
shares is subject to the approval of the Treasury and again, only if there are
no payments in arrears on the Series A preferred share dividends.





The OTS
regulations require savings institutions to maintain certain minimum levels of
regulatory capital.  Additionally, the regulations establish a
framework for the classification of savings institutions into five categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.  At December 31,
2009, the Bank’s capital levels exceeded the levels required to be
well-capitalized.  A comparison between the Bank’s actual capital
ratios to the ratios required to be well-capitalized under OTS regulations at
December 31, 2009 and June 30, 2009 follows.





Actual
      ratios
                  
                  
                  Actual
      ratios
                  
                  
                  Well-capitalizedat
      December 31, 2009
                  
                  
                  at
      June 30, 2009
                  
                  
                  RatiosTotal
      capital to risk-weighted assets
                  
                  
                  13.14
                  %
                  
                  
                  12.37
                  %
                  
                  
                  10.00
                  %Tier
      1 (core) capital less deductions to risk-weighted assets
                  
                  
                  11.88
                  %
                  
                  
                  11.23
                  %
                  
                  
                  6.00
                  %Tier
      1 (core) capital to adjusted total assets
                  
                  
                  8.72
                  %
                  
                  
                  8.16
                  %
                  
                  
                  5.00
                  %





Off-balance
Sheet Arrangements





See Note 7 - Commitments, Contingencies
and Guarantees in the Notes to Condensed Consolidated
Financial Statements for a discussion of off-balance sheet
arrangements.





Results
of Operations





Comparison
of the Three and Six Months Ended December 31, 2009 and 2008





The
following table presents the Company’s results of operations for the three and
six months ended December 31, 2009 and 2008, along with selected GAAP financial
ratios and measures and other financial measures.


24





Results
of Operations


(Dollars
in thousands, except per share data)





For the three months ended
                
                
                For the six months endedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                593
                
                
                $
                (94,097
                )
                
                $
                (5,321
                )
                
                $
                (100,256
                )Loss
      attributable to common shareholders
                
                $
                (497
                )
                
                $
                (94,097
                )
                
                $
                (7,502
                )
                
                $
                (100,256
                )Diluted
      loss per common share
                
                $
                (0.03
                )
                
                $
                (5.68
                )
                
                $
                (0.45
                )
                
                $
                (6.06
                )Selected
      GAAP financial ratios and measuresand other
      financial measuresReturn
      on average assets
                
                
                0.07
                %
                
                
                (11.14
                )%
                
                
                (0.33
                )%
                
                
                (5.97
                )%Return
      on average equity
                
                
                0.85
                %
                
                
                (121.96
                )%
                
                
                (3.79
                )%
                
                
                (63.99
                )%Net
      interest margin, fully tax-equivalent
                
                
                3.65
                %
                
                
                2.81
                %
                
                
                3.52
                %
                
                
                2.94
                %Efficiency
      ratio
                
                
                63.15
                %
                
                
                444.10
                %
                
                
                63.86
                %
                
                
                287.32
                %Noninterest
      expense to average assets
                
                
                3.12
                %
                
                
                13.81
                %
                
                
                3.05
                %
                
                
                8.22
                %





Summary.  Net
income for the quarter ended December 31, 2009 was $0.6 million compared with a
net loss of $94.1 million for the quarter ended December 31,
2008.  The overriding factor for the three months ended December 31,
2008 was the goodwill impairment charge of $93.7 million included in noninterest
expense.  The remaining portion of the increase in net income for the
current quarter compared to the same period in the prior year was primarily due
to increases of $6.4 million in net interest income and $7.5 million in
noninterest income, partially offset by increases of $4.8 million in the
provision for loan losses and $2.4 million in noninterest expense, and a
reduction of $4.1 million in income tax benefits.  The increase in
noninterest income was primarily due to an increase of $2.7 million in mortgage
banking gains and a prior year decline of $2.5 million in the fair value of
securities.  The increase in noninterest expense was primarily due to
increases of $1.1 million in salaries and employee benefits and $0.9 million in
real estate owned expense.  After deducting the preferred stock
dividends and discount accretion of $1.1 million from net income of $0.6
million, the loss attributable to common shareholders was $0.5
million.





Net loss
for the six months ended December 31, 2009 was $5.3 million compared with a net
loss of $100.3 million for the six months ended December 31,
2008.  The overriding factor for the six months ended December 31,
2008 was the goodwill impairment charge of $93.7 million included in noninterest
expense.  The remaining portion of the decline in net loss for the six
months ended December 31, 2009 compared to the same period in the prior year was
primarily due to increases of $9.0 million in net interest income and $20.8
million in noninterest income, partially offset by increases of $19.9 million in
provision for loan losses and $5.4 million in noninterest expense, and a
reduction of $1.7 million in income tax benefits.  The increase in
noninterest income was primarily due to the prior period charge of $11.9 million
for the decline in the fair value of securities, including Fannie Mae preferred
stock, which the Company has since sold, and a mortgage-backed securities mutual
fund, along with an increase of $4.9 million in mortgage banking
gains.  The increase in noninterest expense was primarily due to
increases of $1.7 million in loan expenses and $1.3 million in Federal Deposit
Insurance Corporation (FDIC) premiums.  The preferred stock dividends
and discount accretion of $2.2 million, in addition to the net loss of $5.3
million, resulted in a loss attributable to common shareholders of $7.5
million.





The
current economic conditions continued to significantly affect the banking
industry and impacted the Company’s financial results for the second quarter and
first six months of fiscal year 2010.  The provision for loan losses
increased 51.9% for the quarter ended December 31, 2009 compared to the same
period in the prior year.  For the six months ended December 31, 2009,
the provision for loan losses increased 120.3% compared to the same period in
the prior year.  The ratio of nonperforming loans to total loans has
increased to 5.86% at December 31, 2009 compared with 4.18% at June 30,
2009.  The allowance for loan losses to total loans was 2.17% at
December 31, 2009 compared with 1.60% at June 30, 2009.


25


Explanation of Certain Non-GAAP
Measures.This Form 10-Q contains
certain financial information determined by methods other than
GAAP.  Specifically, the Company has provided financial measures that
are based on core earnings rather than net income (loss).  Ratios and
other financial measures with the word core in their title were computed using
core earnings rather than net income (loss).  Core earnings exclude
merger, integration and restructuring expense, goodwill impairment,
extraordinary income or expense, income or expense from discontinued operations,
and income, expense, gains and losses that are not reflective of ongoing
operations or that the Company does not expect to reoccur.  Management
of the Company believes that this information is useful to both investors and to
management and can aid them in understanding the Company’s current performance,
performance trends and financial condition.  While core earnings can
be useful in evaluating current performance and projecting current trends into
the future, management does not believe that core earnings are a substitute for
net income (loss).  Investors and others are encouraged to use core
earnings as a supplemental tool for analysis and not as a substitute for net
income (loss).  The Company’s non-GAAP measures may not be comparable
to the non-GAAP numbers of other companies.  In addition, future
results of operations may include nonrecurring items that would not be included
in core earnings.





For the
quarter ended December 31, 2009, there were no differences between net income
and core earnings.  For the quarter ended December 31, 2008, the
pre-tax charges of $93.7 million in goodwill impairment and $1.1 million in
merger, integration and restructuring expenses have been excluded from core
loss.  For the six months ended December 31, 2009, the pre-tax charge
of $0.3 million in merger, integration and restructuring expenses has been
excluded from core loss.  For the six months ended December 31, 2008,
the pre-tax charges of $93.7 million in goodwill impairment and $1.1 million in
merger, integration and restructuring expenses have been excluded from core
loss.  Reconciliation of net income (loss) to the non-GAAP measure of
core earnings (loss), along with selected core financial ratios is shown
below.





As of or for the
                
                
                As of or for thethree months ended
                
                
                six months endedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008(Dollars
      in thousands, except per share data)Reconciliation of net loss to core
      lossNet
      income (loss)
                
                $
                593
                
                
                $
                (94,097
                )
                
                $
                (5,321
                )
                
                $
                (100,256
                )Goodwill
      impairment, net of tax
                
                
                -
                
                
                
                92,139
                
                
                
                -
                
                
                
                92,139Merger,
      integration and restructuring expense, net of tax
                
                
                -
                
                
                
                692
                
                
                
                193
                
                
                
                721Core
      earnings (loss)
                
                
                593
                
                
                
                (1,266
                )
                
                
                (5,128
                )
                
                
                (7,396
                )Preferred
      stock dividends and discount accretion
                
                
                1,090
                
                
                
                -
                
                
                
                2,181
                
                
                
                -Core
      loss attributable to common shareholders
                
                $
                (497
                )
                
                $
                (1,266
                )
                
                $
                (7,309
                )
                
                $
                (7,396
                )Core
      loss per common share
                
                $
                (0.03
                )
                
                $
                (0.08
                )
                
                $
                (0.44
                )
                
                $
                (0.45
                )Selected Core Financial
    RatiosCore
      return on average assets
                
                
                0.07
                %
                
                
                (0.15
                )%
                
                
                (0.32
                )%
                
                
                (0.44
                )%Core
      return on average equity
                
                
                0.85
                %
                
                
                (1.64
                )%
                
                
                (3.65
                )%
                
                
                (4.72
                )%Core
      net interest margin, fully tax-equivalent
                
                
                3.65
                %
                
                
                2.81
                %
                
                
                3.52
                %
                
                
                2.94
                %Core
      efficiency ratio
                
                
                63.15
                %
                
                
                83.00
                %
                
                
                63.47
                %
                
                
                89.78
                %Core
      noninterest expense to average assets
                
                
                3.12
                %
                
                
                2.58
                %
                
                
                3.03
                %
                
                
                2.57
                %





The
reasons for the changes in core loss, core loss attributable to common
shareholders and the selected core financial ratios for the three and six months
ended December 31, 2009 compared with the three and six months ended December
31, 2008 are not significantly different than the reasons used to describe
changes in the GAAP results and financial ratios for the same
periods.





Net Interest
Income.The following tables provide important information on
factors impacting net interest income and should be read in conjunction with
this discussion of net interest income.  Interest income and the
resulting yields in the following table are stated on a fully tax-equivalent
basis.  Therefore, they will vary slightly form interest income in the
Condensed Consolidated Statements of Income included in the Condensed
Consolidated Financial Statements.


26


Average
Balances, Interest Rates and Yields


(Dollars in
thousands)





Three months ended
                      December 31, 2009
                    
                    
                    Three months ended
                      December 31, 2008Average
                    
                    
                    
                    
                    
                    Average
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageBalance
                    
                    
                    Interest
                    
                    
                    Yield/cost
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    Yield/costASSETSInterest-earning
      assetsLoans
      and loans held for sale
                    
                    $
                    2,716,326
                    
                    
                    $
                    36,675
                    
                    
                    
                    5.36
                    %
                    
                    $
                    2,686,814
                    
                    
                    $
                    39,572
                    
                    
                    
                    5.84
                    %Securities
      and interest-bearing deposits
                    
                    
                    291,087
                    
                    
                    
                    3,346
                    
                    
                    
                    4.60
                    %
                    
                    
                    340,945
                    
                    
                    
                    3,896
                    
                    
                    
                    4.57
                    %Federal
      Home Loan Bank stock
                    
                    
                    35,041
                    
                    
                    
                    394
                    
                    
                    
                    4.46
                    %
                    
                    
                    36,221
                    
                    
                    
                    438
                    
                    
                    
                    4.79
                    %Total
      interest-earning assets
                    
                    
                    3,042,454
                    
                    
                    
                    40,415
                    
                    
                    
                    5.27
                    %
                    
                    
                    3,063,980
                    
                    
                    
                    43,906
                    
                    
                    
                    5.69
                    %Noninterest-earning
      assetsCash
      and due from banks
                    
                    
                    47,425
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    41,762Allowance
      for loan losses
                    
                    
                    (55,820
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (35,325
                    )Other
      assets
                    
                    
                    188,281
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    280,428Total
      assets
                    
                    $
                    3,222,340
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    3,350,845LIABILITIESInterest-bearing
      liabilitiesDepositsInterest-bearing
      checking accounts
                    
                    $
                    186,588
                    
                    
                    
                    55
                    
                    
                    
                    0.12
                    %
                    
                    $
                    158,624
                    
                    
                    
                    234
                    
                    
                    
                    0.58
                    %Savings
      and money market accounts
                    
                    
                    755,054
                    
                    
                    
                    1,292
                    
                    
                    
                    0.68
                    %
                    
                    
                    701,634
                    
                    
                    
                    3,340
                    
                    
                    
                    1.89
                    %Certificates
      of deposit
                    
                    
                    1,158,393
                    
                    
                    
                    6,302
                    
                    
                    
                    2.16
                    %
                    
                    
                    1,390,296
                    
                    
                    
                    12,625
                    
                    
                    
                    3.60
                    %Total
      deposits
                    
                    
                    2,100,035
                    
                    
                    
                    7,649
                    
                    
                    
                    1.45
                    %
                    
                    
                    2,250,554
                    
                    
                    
                    16,199
                    
                    
                    
                    2.86
                    %BorrowingsShort-term
      borrowings
                    
                    
                    229,610
                    
                    
                    
                    1,155
                    
                    
                    
                    2.00
                    %
                    
                    
                    121,378
                    
                    
                    
                    1,235
                    
                    
                    
                    4.04
                    %Long-term
      debt
                    
                    
                    341,212
                    
                    
                    
                    3,595
                    
                    
                    
                    4.18
                    %
                    
                    
                    412,712
                    
                    
                    
                    4,760
                    
                    
                    
                    4.58
                    %Total
      interest-bearing liabilities
                    
                    
                    2,670,857
                    
                    
                    
                    12,399
                    
                    
                    
                    1.84
                    %
                    
                    
                    2,784,644
                    
                    
                    
                    22,194
                    
                    
                    
                    3.16
                    %Noninterest-bearing
      liabilitiesNoninterest-bearing
      checking accounts
                    
                    
                    259,435
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    232,547Other
      liabilities
                    
                    
                    15,524
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    27,555Total
      liabilities
                    
                    
                    2,945,816
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,044,746Shareholders’
      equity
                    
                    
                    276,524
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    306,099Total
      liabilities and shareholders’ equity
                    
                    $
                    3,222,340
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    3,350,845Fully
      tax-equivalent net interest income
                    
                    
                    
                    
                    
                    
                    28,016
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    21,712Interest
      rate spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.43
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.53
                    %Net
      interest margin, fully tax-equivalent
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.65
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.81
                    %Average
      interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    113.91
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    110.03
                    %Tax-equivalent
      adjustment
                    
                    
                    
                    
                    
                    
                    354
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    409Net
      interest income
                    
                    
                    
                    
                    
                    $
                    27,662
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    21,303


27


Average
Balances, Interest Rates and Yields


(Dollars in
thousands)





Six months ended
                    December 31, 2009
                  
                  
                  Six months ended
                    December 31, 2008Average
                  
                  
                  
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageBalance
                  
                  
                  Interest
                  
                  
                  Yield/cost
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Yield/costASSETSInterest-earning
      assetsLoans
      and loans held for sale
                  
                  $
                  2,718,243
                  
                  
                  $
                  74,117
                  
                  
                  
                  5.41
                  %
                  
                  $
                  2,680,459
                  
                  
                  $
                  80,168
                  
                  
                  
                  5.93
                  %Securities
      and interest-bearing deposits
                  
                  
                  288,493
                  
                  
                  
                  6,711
                  
                  
                  
                  4.65
                  %
                  
                  
                  323,846
                  
                  
                  
                  7,681
                  
                  
                  
                  4.74
                  %Federal
      Home Loan Bank stock
                  
                  
                  35,093
                  
                  
                  
                  838
                  
                  
                  
                  4.73
                  %
                  
                  
                  35,994
                  
                  
                  
                  920
                  
                  
                  
                  5.07
                  %Total
      interest-earning assets
                  
                  
                  3,041,829
                  
                  
                  
                  81,666
                  
                  
                  
                  5.33
                  %
                  
                  
                  3,040,299
                  
                  
                  
                  88,769
                  
                  
                  
                  5.79
                  %Noninterest-earning
      assetsCash
      and due from banks
                  
                  
                  47,019
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  42,399Allowance
      for loan losses
                  
                  
                  (50,201
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (33,444
                  )Other
      assets
                  
                  
                  188,641
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  280,667Total
      assets
                  
                  $
                  3,227,288
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,329,921LIABILITIESInterest-bearing
      liabilitiesDepositsInterest-bearing
      checking accounts
                  
                  $
                  182,978
                  
                  
                  
                  146
                  
                  
                  
                  0.16
                  %
                  
                  $
                  159,375
                  
                  
                  
                  458
                  
                  
                  
                  0.57
                  %Savings
      and money market accounts
                  
                  
                  737,482
                  
                  
                  
                  2,640
                  
                  
                  
                  0.71
                  %
                  
                  
                  740,958
                  
                  
                  
                  7,245
                  
                  
                  
                  1.94
                  %Certificates
      of deposit
                  
                  
                  1,211,551
                  
                  
                  
                  15,415
                  
                  
                  
                  2.52
                  %
                  
                  
                  1,305,874
                  
                  
                  
                  23,716
                  
                  
                  
                  3.60
                  %Total
      deposits
                  
                  
                  2,132,011
                  
                  
                  
                  18,201
                  
                  
                  
                  1.69
                  %
                  
                  
                  2,206,207
                  
                  
                  
                  31,419
                  
                  
                  
                  2.83
                  %BorrowingsShort-term
      borrowings
                  
                  
                  205,459
                  
                  
                  
                  2,318
                  
                  
                  
                  2.24
                  %
                  
                  
                  135,639
                  
                  
                  
                  2,701
                  
                  
                  
                  3.96
                  %Long-term
      debt
                  
                  
                  338,212
                  
                  
                  
                  7,224
                  
                  
                  
                  4.25
                  %
                  
                  
                  416,726
                  
                  
                  
                  9,579
                  
                  
                  
                  4.57
                  %Total
      interest-bearing liabilities
                  
                  
                  2,675,682
                  
                  
                  
                  27,743
                  
                  
                  
                  2.06
                  %
                  
                  
                  2,758,572
                  
                  
                  
                  43,699
                  
                  
                  
                  3.14
                  %Noninterest-bearing
      liabilitiesNoninterest-bearing
      checking accounts
                  
                  
                  252,495
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  232,462Other
      liabilities
                  
                  
                  20,781
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  28,078Total
      liabilities
                  
                  
                  2,948,958
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,019,112Shareholders’
      equity
                  
                  
                  278,330
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  310,809Total
      liabilities and shareholders’ equity
                  
                  $
                  3,227,288
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,329,921Fully
      tax-equivalent net interest income
                  
                  
                  
                  
                  
                  
                  53,923
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  45,070Interest
      rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.27
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.65
                  %Net
      interest margin, fully tax-equivalent
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.52
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.94
                  %Average
      interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  113.68
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  110.21
                  %Tax-equivalent
      adjustment
                  
                  
                  
                  
                  
                  
                  703
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  812Net
      interest income
                  
                  
                  
                  
                  
                  $
                  53,220
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  44,258


28





Net
interest income for the quarter ended December 31, 2009, totaled $27.7 million,
an increase of $6.4 million or 29.9% from $21.3 million for the quarter ended
December 31, 2008.  The increase in net interest income was the result
of an increase of 84 basis points in the net interest margin to 3.65% for the
current quarter compared with 2.81% for the same quarter in the prior
year.  Net interest income for the six months ended December 31, 2009,
totaled $53.2 million, an increase of $8.9 million or 20.2% from $44.3 million
for the six months ended December 31, 2008.  The increase in net
interest income was the result of an increase of 58 basis points in the net
interest margin to 3.52% for the current quarter compared with 2.94% for the
same period in the prior year.  The increase in net interest margin
for the three and six months ended December 31, 2009 was primarily due to the
interest rates paid on interest-bearing liabilities continuing to reprice lower,
catching up with the already lower yielding assets.  In addition,
since June 30, 2009, the Company has utilized a portion of its short-term liquid
assets to retire maturing liabilities with high interest rates, further
contributing to the improved net interest margin.





The net
interest margin has continued to be affected by the Federal Reserve’s response
to the national credit crisis – the continued historically low, targeted federal
funds rate that ranges from zero to 25 basis points.  With
approximately 89% of the Company’s interest-earning assets in loans and the mix
of loans in the portfolio changing to include a greater percentage of commercial
loans, many of which carry yields based on a variable rate index (prime rate),
the yield on interest-earning assets declined 42 and 46 basis points for the
three and six months ended December 31, 2009, respectively, compared with the
same periods in the prior year.





The
Federal Reserve’s rate reductions also had an impact on the liability side of
the balance sheet.  The average rate paid on interest-bearing
liabilities was 1.84% for the quarter ended December 31, 2009 compared to 3.16%
for the same quarter in the prior year, a decrease of 132 basis
points.  Deposits were approximately 79% of interest-bearing
liabilities and had cost reductions of 141 basis points for the quarter ended
December 31, 2009 compared to the same quarter in the prior year.  For
the six months ended December 31, 2009, the average rate paid on
interest-bearing liabilities was 2.06% compared to 3.14% for the same period in
the prior year, a decrease of 108 basis points.  For the six months
ended December 31, 2009, deposits were approximately 80% of interest-bearing
liabilities and had cost reductions of 114 basis points compared to the same
period in the prior year.  The decrease in the average cost of
deposits was due to the continued government-driven low interest rates which
resulted in certificates of deposit and nonmaturity deposit accounts repricing
at much lower interest rates.  In the prior year, the mix within
deposits shifted to the higher paying certificates of deposits, as customers
were unsatisfied with savings and money market rates.  During that
time, and as a result of the national credit crisis, higher-than-market rates
were offered by other financial institutions across the Company’s footprint,
thereby keeping the Company’s certificate rates somewhat higher than the Company
would have normally paid.





Provision for Loan
Losses.  The provision for loan losses represents the charge to
income necessary to adjust the allowance for loan losses to an amount that
represents management’s assessment of the estimated probable incurred credit
losses inherent in the loan portfolio.  For a more detailed discussion
of management’s assessment of the allowance for loan losses, see Allowance for Loan Losses
section under Financial
Condition in Management’s Discussion and
Analysis of this Form 10-Q.





The
following table presents the Company’s provision for loan losses and net
charge-offs for the three and six months ended December 31, 2009 and 2008, along
with the ratio of net charge-offs to average loans.





For the three months ended
                  
                  
                  For the six months endedDecember 31,
                  
                  
                  December 31,Increase
                  
                  
                  
                  
                  
                  
                  
                  
                  Increase2009
                  
                  
                  2008
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Amount
                  
                  
                  Percent(Dollars
      in thousands)Provision
      for loan losses
                  
                  $
                  14,000
                  
                  
                  $
                  9,216
                  
                  
                  $
                  4,784
                  
                  
                  
                  51.9
                  %
                  
                  $
                  36,500
                  
                  
                  $
                  16,567
                  
                  
                  $
                  19,933
                  
                  
                  
                  120.3
                  %Net
      charge-offs
                  
                  $
                  12,170
                  
                  
                  $
                  7,066
                  
                  
                  $
                  5,104
                  
                  
                  
                  72.2
                  %
                  
                  $
                  23,607
                  
                  
                  $
                  11,206
                  
                  
                  $
                  12,401
                  
                  
                  
                  110.7
                  %Excess
      provision for loan losses over net charge-offs
                  
                  $
                  1,830
                  
                  
                  $
                  2,150
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  12,893
                  
                  
                  $
                  5,361Net
      charge-offs to average loans
                  
                  
                  1.97
                  %
                  
                  
                  1.07
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1.91
                  %
                  
                  
                  0.85
                  %


29





Nonperforming
loans increased $15.1 million or 11.9% during the current quarter to $141.8
million at December 31, 2009.  The allowance for loan losses was
increased to a level deemed adequate by management, after review, to cover the
current estimated probable incurred credit losses inherent in the loan
portfolio.  The allowance for loan losses to total loans increased
from 1.60% at June 30, 2009 to 2.17% at December 31, 2009.





Noninterest
Income.  Noninterest income totaled $12.1 million for the
quarter ended December 31, 2009 compared with $4.5 million in the same quarter
in the prior year.  The increase in the current quarter over the prior
year quarter was primarily due to the prior year charge of $2.5 million for the
decline in the fair value of securities and increases of $2.7 million in
mortgage banking gains and $1.6 million in loan servicing income.





Noninterest
income totaled $23.8 million for the six months ended December 31, 2009 compared
with $2.9 million for the six months ended December 31, 2008.  The
increase for the first half of fiscal year 2010 over the same period in the
prior year was primarily due to the prior year charge of $11.9 million for the
decline in the fair value of Fannie Mae preferred stock, which the Company has
since sold, and a mortgage-backed securities mutual fund, along with current
period increases of $4.9 million in mortgage banking gains, $1.8 million in loan
servicing income and $1.7 million in service charges and fees on deposit
accounts.





Effective
July 1, 2008, the Company elected to account for certain equity investments and
a mortgage-backed securities mutual fund at fair value under ASC
820.  There was no impact to adopting fair value for these securities
as of July 1, 2008 as the Company had previously recorded them at fair value on
June 30, 2008 under the other-than-temporary impairment
guidelines.  The $11.9 million decline in the fair value of securities
for the six months ended December 31, 2008 was primarily due to a decline in the
fair value of Fannie Mae preferred stock and to a lesser extent, the decline in
the fair value of the mutual fund investment.  The decline in the fair
value of Fannie Mae preferred stock was caused by government actions placing
Fannie Mae under conservatorship and suspending future dividends.  All
Fannie Mae preferred stock was sold during fiscal year 2009.  The
decline in the value of the mutual fund investment was due to increases in the
spreads between the yield of the underlying mortgage-backed securities and
treasury yields related to credit quality concerns.





Mortgage
banking gains increased 129.4% or $2.7 million to $4.8 million for the quarter
ended December 31, 2009 compared with $2.1 million for the quarter ended
December 31, 2008.  Gains in the current quarter averaged 96 basis
points on $502 million in sales compared with 87 basis points on $243 million in
sales for the same period in the prior year.  For the six months ended
December 31, 2009, mortgage banking gains increased 125.2% or $4.8 million to
$8.7 million compared with $3.9 million for the six months ended December 31,
2008.  Gains for the six months ended December 31, 2009 averaged 87
basis points on $1.009 billion in sales compared with 78 basis points on $498
million in sales for the same period in the prior year.  The increase
in mortgage banking gains was primarily due to an increase in the volume of
loans sold due to continued favorable long-term interest rates and the addition
of experienced loan officers.  Also contributing to the increase in
mortgage banking gains was higher margins on sales of loans.  The
level of loan originations, sales and gains on the sale of loans are all results
that tend to vary inversely with interest rates.  Loan activity tends
to increase as interest rates decrease and loan activity tends to decrease as
interest rates increase.  In conjunction with favorable long-term
mortgage interest rates during the three and six month periods ended December
31, 2009, the Company was able to increase mortgage banking activity levels by
selectively adding experienced, successful loan officers and by concentrating on
servicing customers seeking to refinance their existing homes.  For
the quarter ended December 31, 2009, 42% of the loans sold also included the
sale of the servicing rights on those loans compared with 56% for the same
quarter in the prior year.  For the six months ended December 31,
2009, 35% of the loans sold also included the sale of servicing rights on those
loans compared with 56% for the same period in the prior year.  Due to
the continued low interest rate environment, the Company anticipates that the
value of its servicing rights on sold loans with historically low interest rates
will increase in the future due to the change in value that is related to a
possible rise in interest rates and the related decline in prepayment
speeds.





Loan
servicing income is composed of the current fees generated from the servicing of
sold loans less the current amortization of mortgage servicing rights (MSRs) and
the adjustment for any change in the allowance for impairment of MSRs, which are
valued at the lower of cost or market.  The valuation of MSRs is a
critical accounting policy and the Company utilizes the services of an
independent firm to determine market value.  Both the amortization and
the valuation of MSRs are sensitive to movements in interest
rates.  Both amortization and impairment valuation allowances tend to
increase as rates fall and tend to decrease as rates rise.  However,
the level of amortization is a function of interest rates over the period while
the level of impairment valuation allowances is a function of interest rates at
the end of the period.  During the past two years, both short-term and
long-term interest rates have varied significantly and have not moved in tandem
resulting in significant shifts in the shape and slope of the yield
curve.  The level and variability in interest rates over that period
have resulted in significant variations in loan servicing income, including
changes in the level of impairment of MSRs.  The table below shows how
the change in the impairment of MSRs has impacted loan servicing income over the
periods indicated.


30





Three months ended
                
                
                Six months endedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008(Dollars in thousands)Loan
      servicing income (loss)Loan
      servicing revenue, net of amortization
                
                $
                72
                
                
                $
                131
                
                
                $
                336
                
                
                $
                379Change
      in impairment
                
                
                576
                
                
                
                (1,071
                )
                
                
                464
                
                
                
                (1,363
                )Total
      loan servicing income (loss)
                
                $
                648
                
                
                $
                (940
                )
                
                $
                800
                
                
                $
                (984
                )





For both
the three and six month periods ended December 31, 2009, the increase in loan
servicing income was primarily due to the reduction in impairment of
MSRs.  The decrease in impairment in the three and six month periods
ended December 31, 2009 was primarily due to a significantly greater portion of
the portfolio comprised of loans with interest rates at 5.50% or lower compared
to the same periods in the prior year.  This shift extended the
anticipated life and earnings potential of the portfolio.  At December
31, 2009, there was $0.6 million of allowance for impairment of
MSRs.





Service
charges and fees on deposit accounts increased $0.7 million, or 28.2% to $3.2
million for the quarter ended December 31, 2009, as compared with $2.5 million
for the quarter ended December 31, 2008.  For the six months ended
December 31, 2009, service charges and fees on deposit accounts increased $1.7
million, or 36.9% to $6.3 million compared with $4.6 million for the six months
ended December 31, 2008.  For both the three and six month periods
ended December 31, 2009, the increase in service charges and fees on deposit
accounts was primarily due to the impact of overdraft fee income.





There
were no sales of securities for both the three months ended December 31, 2009
and 2008.  There were no sales of securities for the six months ended
December 31, 2009 compared with net gains of $0.3 million for the six months
ended December 31, 2008.  Securities may be sold to respond to
liquidity needs, to impact interest rate risk, to maximize total returns on
securities or to minimize losses on securities in anticipation of changes in
interest rates.  The Company does not anticipate that future gains or
losses on the sale of securities will be a major component of net
income.  However, the purchase and sale of securities do play a
significant part in managing the overall liquidity, credit and interest rate
risk of the Company.





Over the
past several years, the volume and dollar value of loan servicing rights has
been growing more rapidly than total assets on a percentage basis.  As
a result, the Company’s exposure to volatility in mortgage banking revenue has
also increased.  In order to reduce exposure to volatility due to
rapid payoffs or impairment, the Company sold loan servicing rights in fiscal
year 2008 and fiscal year 2006.  There were no sales of loan servicing
rights in the three month period ended December 31, 2009.  The $0.7
million gain on sale of loan servicing rights in the first half of fiscal year
2010 represented the final resolution of contingencies related to the 2008 and
2006 sales of loan servicing rights.





The
Company monitors the level of its investment in mortgage loan servicing rights
in relation to its other activities in order to limit its exposure to
significant fluctuations in loan servicing income.  In addition, the
Company may sell MSRs in the future depending on the size of the servicing asset
relative to total assets and based on the current market for the sale of
MSRs.


31


Noninterest Expense.Noninterest expense for the quarter ended December 31, 2009 was $25.3
million, a decrease of $91.3 million or 78.3% compared with $116.6 million for
the prior year quarter.  The primary factor for the decrease in
noninterest expense was the prior year pre-tax goodwill impairment charge of
$93.7 million.  The remaining portion of the change in noninterest
expense was primarily due to increases of $1.1 million in salaries and employee
benefits and $0.9 million in real estate owned expense, partially offset by a
decrease of $1.1 million in merger, integration and restructuring
expense.  The increase in salaries and employee benefits was primarily
due to an increase in incentive compensation related to a higher volume of
mortgage loan originations.  Annualized noninterest expense to average
assets decreased to 3.12% for the quarter ended December 31, 2009 from 13.81%
for the same quarter in the prior year.  Real estate owned expense to
average assets was 0.28% for the quarter ended December 31, 2009 compared with
0.16% for the quarter ended December 31, 2008.  There were no
differences between noninterest expense and core noninterest expense for the
quarter ended December 31, 2009.  For the quarter ended December 31,
2008, core noninterest expense excludes the $93.7 million charge for goodwill
impairment and $1.1 million in merger, integration and restructuring
costs.  Core noninterest expense for the quarter ended December 31,
2009 was $25.3 million, an increase of $3.5 million or 16.1% over core
noninterest expense of $21.8 million for the same quarter in the prior
year.  The increase was primarily due to increases in salaries and
employee benefits and real estate owned expense.  Core noninterest
expense to average assets increased to 3.12% for the quarter ended December 31,
2009 from 2.58% for the same quarter in the prior year.





Noninterest
expense for the first six months of fiscal year 2010 was $49.6 million, a
decrease of $88.4 million or 64.0% compared with $138.0 million for the same
period in the prior year.  The primary factor for the decrease in
noninterest expense was the prior year pre-tax goodwill impairment charge of
$93.7 million.  The remaining portion of the change in noninterest
expense was primarily due to increases of $1.7 million in loan expenses, $1.3
million in FDIC premiums and $0.9 million in real estate owned expense,
partially offset by a decrease of $0.8 million in merger, integration and
restructuring expense.  The increase in loan expenses was primarily
due to an increase in costs related to a higher volume of mortgage loan
originations and nonperforming loans.  Annualized noninterest expense
to average assets decreased to 3.05% for the six months ended December 31, 2009
from 8.22% for the same period in the prior year.  Real estate owned
expense to average assets was 0.21% for the six months ended December 31, 2009
compared with 0.15% for the six months ended December 31, 2008.  Core
noninterest expense for the six months ended December 31, 2009 excludes $0.3
million in merger, integration and restructuring costs.  For the six
months ended December 31, 2008, core noninterest expense excludes the $93.7
million charge for goodwill impairment and $1.1 million in merger, integration
and restructuring costs.  Core noninterest expense for the six months
ended December 31, 2009 was $49.3 million, an increase of $6.2 million or 14.4%
over core noninterest expense of $43.1 million for the same period in the prior
year.  The increase was primarily due to increases in loan expenses
and FDIC premiums.  Core noninterest expense to average assets
increased to 3.03% for the six months ended December 31, 2009 from 2.57% for the
same period in the prior year.





Income Taxes.  An
income tax benefit of $0.2 million was recorded for the quarter ended December
31, 2009 attributable to pre-tax income of $0.4 million, compared with an income
tax benefit of $5.9 million for the quarter ended December 31, 2008 attributable
to the pre-tax loss of $100.0 million.  For the six months ended
December 31, 2009, the Company recorded an income tax benefit of $3.8 million,
attributable to the pre-tax loss of $9.1 million, compared with an income tax
benefit of $7.1 million for the six months ended December 31, 2008 attributable
to the pre-tax loss of $107.3 million.





The
Company ordinarily applies an annual effective tax rate, which is an annual
forecast of tax expense as a percentage of expected full year pre-tax income (an
annual effective tax rate approach).  Under this approach, a company
would provide income tax expense or benefit based on the application of the most
recent estimated annual effective tax rate to a company’s pre-tax income for the
interim period.  The Company generates an annual effective tax rate
that is less than the statutory rate of 35% due to benefits resulting from
tax-exempt interest, excludible dividend income, and tax benefits associated
with Low Income Housing Tax Credit, where such benefits are relatively
consistent from year to year regardless of the level of pre-tax
income.  The Company used the annual effective tax rate approach for
the three and six month periods ended December 31, 2008.





Due to
the consistent level of tax benefits that reduce the Company’s tax rate below
the 35% statutory rate and the difficulty for the Company in projecting annual
pre-tax income for the fiscal year ended June 30, 2010, the actual method,
(based on the period’s actual income tax calculation), is expected to provide a
more accurate correlation to year-to-date results.  Accordingly, the
income tax benefit recognized for the three and six month periods ended December
31, 2009 are the amounts related to actual results and tax benefits generated in
the three and six month periods ended December 31, 2009.





Liquidity
and Cash Flows





Liquidity
      is the Company’s ability to generate adequate cash flows to meet the
      demands of its customers and provide adequate flexibility for the Company
      to take advantage of market opportunities.  Cash is used to fund
      loans, purchase investments, fund the maturity of liabilities, and, at
      times, to fund deposit outflows and operating activities.  The
      Company’s principal sources of funds are deposits; amortization,
      prepayments and sales of loans; maturities, sales and principal receipts
      from securities; borrowings; the issuance of debt or equity securities and
      operations.  Managing liquidity entails balancing the need for
      cash or the ability to borrow against the objectives of maximizing
      profitability and minimizing interest rate risk.  The most
      liquid types of assets typically carry the lowest
  yields.


32








Since the
conservatorship of Fannie Mae and Freddie Mac in September 2008 and the series
of financial dilemmas at a national level that transpired thereafter, the
condition of the financial markets has deteriorated.  From a liquidity
standpoint, the government’s support of the secondary mortgage market has
allowed a primary business function of the Company to continue
uninhibited.  Mortgage originations totaled $970 million for the first
six months of fiscal year 2010, while loans sold were $1.009 billion, a 104%
turnover rate.  The higher volume of refinanced loans resulting from
favorable long-term interest rates during the first half of fiscal year 2010 and
the extension of the holding period for loans held for sale from 10 days to 45
days contributed to the Company selling more loans than it originated during the
first half of fiscal year 2010.  With the continued historically low
mortgage rates, refinance activity has been robust, and the Company expects to
continue to originate and sell loans at a turnover rate of 80% or
higher.  Should there be any inability to securitize loan originations
resulting from deteriorating market conditions, the Company may opt to curtail
originations.





The
following table summarizes the Company’s potential cash available as measured by
liquid assets and borrowing capacity at December 31, 2009 and June 30,
2009.





December 31, 2009
                          
                          
                          June 30, 2009(Dollars
      in thousands)Cash
      and unpledged securities
                          
                          $
                          111,211
                          
                          
                          $
                          149,236Additional
      borrowing capacity at the FederalHome Loan Bank
                          
                          
                          97,289
                          
                          
                          
                          -Unsecured
      line of credit with a commercial bank
                          
                          
                          10,000
                          
                          
                          
                          -Additional
      borrowing capacity at the FederalReserve Bank
                          
                          
                          -
                          
                          
                          
                          24,759Potential
      cash available as measured by liquid assets and borrowing
      capacity
                          
                          $
                          218,500
                          
                          
                          $
                          173,995





The
Company’s cash and unpledged securities are available to meet cash
needs.  Unpledged securities can be sold or pledged to secure
additional borrowings.  Since June 30, 2009, the Federal Reserve Bank
has reduced the availability of funds to banks and in the near future will
extend credit only in emergency funding situations.  To bolster
liquidity, the Company participated in a national public funds referral program
which brought in approximately $95 million of funds.  These funds are
not considered brokered deposits.  Management receives reports on
liquidity on a regular basis and considers the level of liquidity in setting
both loan and deposit rates.  In addition to the sources of funds
listed above, the Company has the ability to raise additional funds by
increasing deposit rates relative to competition in national markets, by
accelerating the sales of loans held for sale, or by selling loans currently
held in the loan portfolio.  Deposits raised in national markets
include brokered deposits.  Brokered deposits are a secondary source
of liquidity and can be used as an alternative to local deposits when national
rates are lower than local deposit rates.  Unlike correspondent
banking relationships which have tightened in the current market, brokered
deposits have continued to offer funds at competitive rates.  The
Company’s brokered deposit balance cannot exceed approximately $231 million
without the prior approval of the OTS.  At December 31, 2009, the
Company had $185 million of brokered deposits and currently has an availability
of $46 million that could be raised without prior approval of the
OTS.  Under its current liquidity guidelines of limiting total
borrowings to 30% of assets, the Company could raise additional funds through
overnight borrowings.  The Company’s access to funds of up to $59
million of senior unsecured debt issuances guaranteed under the FDIC’s Temporary
Liquidity Guarantee Program expired October 31, 2009.  Management
believes that the current and potential resources mentioned are adequate to meet
liquidity needs in the foreseeable future.





The
parent holding company, as a thrift holding company, has more limited sources of
liquidity.  In addition to its existing liquid assets, it can raise
funds in the securities markets through debt or equity offerings or it can
receive dividends from its subsidiaries.  Any debt offerings or cash
dividends of the parent holding company require the prior approval of the
OTS.  Cash can be used by the parent holding company to make
acquisitions, pay quarterly interest payments on its Junior Subordinated
Debentures, pay dividends on the perpetual preferred stock issued to the
Treasury, pay dividends to common shareholders and to fund operating
expenses.  At December 31, 2009, the parent holding company had cash
and unpledged securities of $36 million available to meet cash
needs.  Annual debt service on the Junior Subordinated Debentures is
approximately $3 million.  Annual dividends on the perpetual preferred
stock are approximately $4 million.  Banking regulations limit the
amount of dividends that can be paid to the parent holding company by the Bank
without prior approval of the OTS.  Generally, the Bank may pay
dividends without prior approval as long as the dividend is not more than the
total of the current calendar year-to-date earnings plus any earnings from the
previous two years not already paid out in dividends, and as long as the Bank
would remain well capitalized after the dividend payment.  As of
December 31, 2009, the Bank can pay no dividends to the parent holding company
without OTS approval.  Future dividend payments by the Bank to the
parent holding company would be based upon future earnings or the approval of
the OTS.


33


At
December 31, 2009, the Company had $50 million of repurchase agreements from
various financial institutions.  These financial institutions are
evaluated with regards to their financial stability before entering into the
repurchase transaction and are evaluated on a regular basis until the repurchase
agreement matures.  The Company’s repurchase agreements are
collateralized by available for sale securities held by the other financial
institutions which at December 31, 2009, had a fair value of approximately $60
million.





Critical
Accounting Policies





The
Company follows financial accounting and reporting policies that are in
accordance with GAAP and conform to general practices within the banking
industry.  Some of these accounting policies require management to
make estimates and judgments about matters that are
uncertain.  Application of assumptions different from those used by
management could have a material impact on the Company’s financial condition or
results of operations.  These policies are considered critical
accounting policies.  These policies include the policies to determine
the adequacy of the allowance for loan losses, the valuation of the mortgage
servicing rights, other-than-temporary impairment of securities and goodwill
impairment.  These policies, current assumptions and estimates
utilized and the related disclosure of this process are determined by management
and reviewed periodically with the Audit Committee of the Board of
Directors.  Management believes that the judgments, estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate given the factual circumstances at the time.  Details of
the policies and the nature of the estimates follow.





Allowance for Loan
Losses.  Management considers the policies related to the
allowance for loan losses as the most critical policy to financial statement
presentation.  The allowance for loan losses includes activity related
to allowances calculated in accordance with generally accepted accounting
principles relating to receivables and contingencies.  The allowance
for loan losses represents management’s estimate of probable incurred credit
losses in the loan portfolio at each balance sheet date.  Each quarter
management analyzes the adequacy of the allowance based on a review of the loans
in the portfolio along with an analysis of external factors.  Loans
are reviewed individually, or in the case of small homogeneous loans, in the
aggregate, by applying a factor based on historical loss
experience.  An allowance is established for probable credit losses on
impaired loans.  Nonperforming commercial loans exceeding policy
thresholds are regularly reviewed to identify impairment.  A loan is
impaired when, based on current information and events, it is probable that the
Company will not be able to collect all amounts contractually
due.  Measuring impairment of a loan requires judgment and estimates,
and the eventual outcomes may differ from those estimates.  Impairment
is measured primarily based upon the fair value of collateral, if the loan is
collateral dependent, or alternatively, the present value of expected future
cash flows from the loan discounted at the loan’s effective
rate.  When the selected measure is less than the recorded investment
in the loans impairment has occurred.  This review includes historical
data, the ability of the borrower to meet the terms of the loan, an evaluation
of the collateral securing the loan, various collection strategies and other
factors relevant to the loan or loans.  External factors considered
include but are not limited to economic conditions, current interest rates,
trends in the borrower’s industry and the market for various types of
collateral.  In addition, overall information about the loan portfolio
or segments of the portfolio is considered, including delinquency statistics and
workout experience based on factors such as historical loss experience, the
nature and volume of the portfolio, loan concentrations, specific problem loans
and current economic conditions.  As a result, determining the
appropriate level for the allowance for loan losses involves not only evaluating
the current financial situation of individual borrowers or groups of borrowers
but also current predictions about future cash flows that could change before an
actual loss is determined.  Based on the variables involved and the
fact that management must make judgments about outcomes that are uncertain, the
determination of the allowance for loan losses is considered to be a critical
accounting policy.





One of
the tools utilized by management to determine the appropriate level for the
allowance for loan losses is the grading of individual loans according to the
severity of the credit issues.  An illustration of the sensitivity of
this system to changes in conditions or changes in estimates
follows.  The most serious grading a loan can receive is to be
classified as a loss.  A loan classified in the loss grade would be
100% reserved and would be subject to charge-off.  The next most
serious grade is identified as doubtful.  At December 31, 2009, the
Company had $37.2 million of loans classified as doubtful.  If all of
these loans were to deteriorate and become classified as a loss, the allowance
for loan losses would need to increase by approximately $30.0
million.


34


Mortgage Servicing
Assets.  Mortgage servicing assets represent the value of
retained servicing rights on loans sold.  When loans are sold or
securitized and the servicing rights are retained, the initial servicing right
is recorded at its fair value.  The basis assigned to the mortgage
servicing right is amortized in proportion to and over the life of the net
revenue anticipated to be received from servicing the loan.  Mortgage
servicing rights are valued at the lower of amortized cost or estimated fair
value.  Fair value is measured by stratifying the portfolio of loan
servicing rights into groups of loans with similar risk
characteristics.  When the amortized cost of a group of loans exceeds
the fair value, an allowance for impairment is recorded to reduce the value of
the mortgage servicing rights to fair value.  Fair value for each
group of loans is determined quarterly by obtaining an appraisal from an
independent third party.  That appraisal is based on a modeling
process in conjunction with information on recent bulk and flow sales of
mortgage servicing rights.  Some of the assumptions used in the
modeling process are prepayment speeds, delinquency rates, servicing costs,
periods to hold idle cash, returns currently available on idle cash, and a
discount rate, which takes into account the current rate of return anticipated
by holders of servicing rights.  The process of determining the fair
value of servicing rights involves a number of judgments and estimates including
the way loans are grouped, the estimation of the various assumptions used by
recent buyers and a projection of how those assumptions may change in the
future.  The most important variable in valuing servicing rights is
the level of interest rates.  Long-term interest rates are the primary
determinant of prepayment speeds while short-term interest rates determine the
return available on idle cash.  The process of estimating the value of
loan servicing rights is further complicated by the fact that short-term and
long-term interest rates may change in a similar magnitude and direction or may
change independent of each other.





Loan
prepayment speeds have varied significantly over the past two years and could
continue to vary in the future.  In addition, any of the other
variables mentioned above could change over time.  Therefore, the
valuation of mortgage servicing rights is, and is expected to continue to be, a
critical accounting policy where the results are based on estimates that are
subject to change over time and can have a significant financial impact on the
Company.





Other-than-temporary Impairment of
Securities.  The Company monitors securities in its portfolio
for other-than-temporary impairment.  The Company considers various
factors in determining if impairment is other-than-temporary, including but not
limited to the length of time and extent the security’s fair value has been less
than cost, the financial condition and external credit ratings of the issuer,
and general market conditions.  The Company also determines whether it
does not intend to sell and whether it is more likely than not that it will not
be required to sell the securities prior to their recovery.  In
determining if impairment is other-than-temporary in nature, the Company must
use certain judgments and assumptions in interpreting market data for the
likelihood of recovery in fair value.  Securities are written down to
fair value when a decline in fair value is other-than-temporary.  When
applicable, other-than-temporary valuation losses on securities are reported in
the Condensed Consolidated Statements of Income under the Noninterest Income
caption “Other-than-temporary impairment of securities.”





Goodwill
Impairment.  The Company annually reviews recorded goodwill for
impairment during the fourth fiscal quarter.  However, if an event
occurs or circumstances change that would more likely than not reduce the fair
value of the Company or its reporting units below its carrying amount, then
goodwill is tested between annual tests.  The Company follows a
two-step process to test for impairment.  The first step, used to
identify potential impairment, compares the fair value of the Company with its
carrying amount, including goodwill.  If fair value exceeds the
carrying amount, goodwill is considered not impaired, and the second step of the
impairment test is unnecessary.  The second step, used to measure the
amount of impairment loss, compares the implied fair value of the Company’s
goodwill with the carrying amount of that goodwill.  The implied fair
value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination is determined.  If the carrying
amount of goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess, but limited to
the carrying amount of the goodwill.  Goodwill impairment is reported
in the Condensed Consolidated Statements of Income under the Noninterest Expense
caption “Goodwill impairment.”


35


Item
3.          Quantitative and
Qualitative Disclosures about Market Risk





Asset/Liability
Management and Market Risk





The
      Company, like other financial institutions, is subject to market
      risk.  Market risk is the type of risk that occurs when a
      company suffers economic loss due to changes in the market value of
      various types of assets or liabilities.  As a financial
      institution, the Company makes a profit by accepting and managing various
      risks such as credit risk and interest rate risk.  Interest rate
      risk is the Company’s primary market risk.  It is the risk that
      occurs when changes in market interest rates will result in a reduction in
      net interest income or net interest margin because interest-earning assets
      and interest-bearing liabilities mature at different intervals and reprice
      at different times.  Asset/liability management is the
      measurement and analysis of the Company’s exposure to changes in net
      interest income due to changes in interest rates.  The objective
      of the Company’s asset/liability management function is to balance the
      goal of maximizing net interest income with the control of risks in the
      areas of liquidity, safety, capital adequacy and earnings
      volatility.  In general, the Company’s customers seek loans with
      long-term fixed rates and deposit products with shorter maturities, which
      creates a mismatch of asset and liability maturities.  The
      Company’s primary strategy to counteract this mismatch is to sell the
      majority of long-term fixed-rate loans within 45 days after they are
      closed.  The Company manages this risk and other aspects of
      interest rate risk on a continuing basis through a number of functions
      including review of monthly financial results, rate setting, cash
      forecasting and planning, budgeting and an Asset/Liability
      Committee.





On a
quarterly basis, the Asset/Liability Committee reviews the results of an
interest rate risk model that forecasts changes in net interest income and net
portfolio value (NPV), based on one or more interest rate
scenarios.  NPV is the market value of financial assets less the
market value of financial liabilities.  NPV is performed as of a
single point in time and does not include estimates of future business
volumes.  The model combines detailed information on existing assets
and liabilities with an interest rate forecast, loan prepayment speed
assumptions and assumptions about how those assets and liabilities will react to
changes in interest rates.  These assumptions are inherently
uncertain, and as a result, the model cannot precisely measure net interest
income or precisely predict the impact of fluctuations in interest rates on net
interest income.  Actual results will differ from simulated results
due to timing, customer product and term selection, magnitude and frequency of
interest rate changes as well as differences in how interest rates change at
various points along the yield curve.





The
results below indicate how NPV would change based on various changes in interest
rates.  The projections are as of December 31, 2009 and June 30, 2009,
and are based on an instantaneous change in interest rates and assume that
short-term and long-term interest rates change by the same magnitude and in the
same direction.





Basis
      point
                  
                  NPV
      ratio
                  
                  
                  NPV
      ratiochange in rates
                  
                  December 31, 2009
                  
                  
                  June 30, 2009+ 200
                  
                  
                  11.11
                  %
                  
                  
                  10.86
                  %+ 100
                  
                  
                  10.60
                  %
                  
                  
                  10.28
                  %No change
                  
                  
                  9.73
                  %
                  
                  
                  9.29
                  %- 100
                  
                  
                  9.11
                  %
                  
                  
                  8.50
                  %- 200
                  
                  
                  8.89
                  %
                  
                  
                  8.19
                  %





The
change in the NPV ratio is a long-term measure of what might happen to the
market value of financial assets and liabilities over time if interest rates
changed instantaneously and the Company did not change existing
strategies.  The actual results could be better or worse based on
changes in interest rate risk strategies.  The above results at
December 31, 2009 indicate that the Company would continue to benefit in a
rising interest rate environment when compared to June 30, 2009.  The
Company has experienced a decrease in its exposure to falling interest rates for
the same comparable periods.  Based on the current Federal Funds rate,
at a range from zero to 25 basis points, a 100 basis point or more decrease in
rates is highly unlikely.  The NPV ratio for no change in rates has
increased 44 basis points at December 31, 2009 compared to June 30,
2009.  This model indicates theoretical results given various changes
in the level of interest rates but no change in the shape of the yield
curve.  The Company also has exposure to changes in the shape of the
yield curve.  The results of the projections are within parameters
established by the Board of Directors.





In
addition to the risk of changes in net interest income, the Company is exposed
to interest rate risk related to loans held for sale and loan
commitments.  This is the risk that occurs when changes in interest
rates will reduce gains or result in losses on the sale of residential mortgage
loans that the Company has committed to originate but has not yet contracted to
sell.  The Company hedges this risk by executing commitments to sell
loans or mortgage-backed securities based on the volume of committed loans that
are likely to close.  Additionally, MSRs act as a hedge against rising
rates, as they become more valuable in a rising rate environment, offsetting the
decline in the value of loan commitments or loans held for sale in a rising rate
environment.


36





Item
4.          Controls and
Procedures





The
Company’s management is responsible for establishing and maintaining effective
disclosure controls and procedures, as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934.  As of December 31,
2009, an evaluation was performed under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures.  This evaluation
included consideration of the disagreement with the prior independent registered
public accounting firm over the severity of an internal control deficiency over
financial reporting that the Company reported in its Annual Report on Form 10-K
for the year ended June 30, 2009.  The Company disclosed in the Annual
Report on Form 10-K that additional verification procedures were implemented
which provided improved internal control over financial
reporting.  Management is continuing to monitor, evaluate and test the
operating effectiveness of these additional verification
controls.  Based on the current evaluation, management concluded that
disclosure controls and procedures were effective as of December 31,
2009.  There were no changes in the Company’s internal control over
financial reporting that occurred during the quarter ended December 31, 2009
that have materially adversely affected, or are reasonably likely to materially
adversely affect, the Company’s internal control over financial
reporting.





PART
II.  OTHER INFORMATION





Item
1.          Legal
Proceedings





From time
to time, the Company is involved either as a plaintiff or defendant in various
legal proceedings that arise during the normal course of
business.  Currently, the Company is not involved in any material
legal proceedings, the outcome of which would have a material impact on the
financial condition of the Company.





Item
1A.       Risk Factors





Information
concerning risk factors is incorporated herein by reference to the Company’s
Annual Report on Form 10-K for the year ended June 30, 2009 filed with the
Securities and Exchange Commission on September 14, 2009.





Item
2.          Unregistered Sales
of Equity Securities and Use of Proceeds – Not applicable.





Item
3.          Defaults Upon
Senior Securities – Not applicable.





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





Item
5.          Other Information
– Not applicable.


37


Item
6.                      Exhibits





The
following exhibits are filed as part of this Form 10-Q, and this list includes
the Exhibit Index:





ExhibitNumber
                
                Document
                
                Reference31.1
                
                Certification
      of Chief Executive Officer Pursuant to Rule13a-14(a) or
                
                Filed
      herewith15(d)
      – 14(a) of the Securities Exchange Act of 1934, as adoptedpursuant
      to Section 302 of the Sarbanes-Oxley Act of 200231.2
                
                Certification
      of Chief Financial Officer Pursuant to Rule13a-14(a) or
                
                Filed
      herewith15(d)
      – 14(a) of the Securities Exchange Act of 1934, as adoptedpursuant
      to Section 302 of the Sarbanes-Oxley Act of 200232.1
                
                Chief
      Executive Officer’s Certification Pursuant to 18 U.S.C. Section
      1350,
                
                Filed
      herewithas
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
                
                Chief
      Financial Officer’s Certification Pursuant to 18 U.S.C. Section
      1350,
                
                Filed
      herewithas
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


38





SIGNATURES





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





FIRST
PLACE FINANCIAL CORP.





Date:
              February
      5, 2010
              /s/ Steven R. Lewis
              
              /s/ David W. GiffordSteven
      R. Lewis
              
              David
      W. GiffordPresident
      and Chief Executive Officer
              
              Chief
      Financial Officer


39