Edgar Filing: CHARTER FINANCIAL CORP/GA

cfc_10q-033111.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from to

Commission File No. 001-34889

Charter Financial Corporation

(Exact name of registrant as specified in its charter)

United States	58-2659667
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1233 O.G. Skinner Drive, West Point, Georgia	31833
(Address of Principal Executive Offices)	Zip Code

(706) 645-1391

(Registrant’s telephone number)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES x NO ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if smaller reporting company)	Smaller reporting company	þ

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

The number of shares of the registrant’s common stock outstanding as of May 6, 2011 was 18,672,361, including 11,457,924 shares (or 61.36%) held by First Charter, MHC, the registrant’s mutual holding company and an affiliate of the registrant.

CHARTER FINANCIAL CORPORATION

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Statements of Financial Condition at March 31, 2011 and September 30, 2010	1

	Condensed Consolidated Statements of Income for the Three and Six Months Ended March 31, 2011 and 2010	2

	Condensed Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Six Months Ended March 31, 2011 and Year Ended September 30, 2010	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010	4

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	45

Part II. Other Information

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	(Removed and Reserved)

Item 5.	Other Information	45

Item 6.	Exhibits	45

	Signatures	46

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	March 31, 2011			September 30, 2010
Assets
Cash and amounts due from depository institutions	$	10,495,565		$	15,842,048
Interest-bearing deposits in other financial institutions		95,297,342			219,796,534
Cash and cash equivalents		105,792,907			235,638,582

Loans held for sale, fair value of $798,475 and $2,079,239		790,849			2,061,489
Mortgage-backed securities and collateralized mortgage obligations available for sale		118,165,025			133,079,915
Other investment securities available for sale		25,322,996			102,821
Federal Home Loan Bank stock		13,542,100			14,071,200
Loans receivable:
Not covered under FDIC loss sharing agreements		445,941,759			461,786,959
Covered under FDIC loss sharing agreements, net		124,583,420			148,138,148
Unamortized loan origination fees, net (non-covered loans)		(971,615	)		(758,407	)
Allowance for loan losses (non-covered loans)		(9,694,175	)		(9,797,095	)
Loans receivable, net		559,859,389			599,369,605

Other real estate owned:
Not covered under FDIC loss sharing agreements		7,719,813			9,641,425
Covered under FDIC loss sharing agreements		20,622,894			29,626,581
Accrued interest and dividends receivable		3,576,211			3,232,330
Premises and equipment, net		21,911,509			22,150,242
Goodwill		4,325,282			4,325,282
Other intangible assets, net of amortization		819,301			930,202
Cash surrender value of life insurance		32,249,088			31,678,013
FDIC receivable for loss sharing agreements		64,691,226			89,824,798
Deferred income taxes		4,987,835			3,379,577
Other assets		6,946,071			6,969,849
Total assets	$	991,322,496		$	1,186,081,911

Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	735,289,526		$	823,134,133
FHLB advances and other borrowings		110,000,000			212,000,000
Advance payments by borrowers for taxes and insurance		429,700			936,793
Other liabilities		8,600,725			13,134,618
Total liabilities		854,319,951			1,049,205,544

Stockholders’ equity:
Common stock, $0.01 par value; 19,859,219 shares issued at March 31, 2011 and September 30, 2010, respectively; 18,591,698 shares outstanding at March 31, 2011 and 18,588,398 shares outstanding at September 30, 2010		198,592			198,592
Preferred stock, no par value; 10,000,000 shares authorized		—			—
Additional paid-in capital		73,171,278			73,073,216
Treasury stock, at cost; 1,267,521 shares at March 31, 2011 and 1,270,821 shares at September 30, 2010		(36,511,194	)		(36,614,648	)
Unearned compensation – ESOP		(3,729,390	)		(3,880,990	)
Retained earnings		107,158,625			107,598,080
Accumulated other comprehensive loss – net unrealized holding losses on securities available for sale, net of tax		(3,285,366	)		(3,497,883	)
Total stockholders’ equity		137,002,545			136,876,367
Commitments and contingencies
Total liabilities and stockholders’ equity	$	991,322,496		$	1,186,081,911

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31,						Six Months Ended March 31,
	2011			2010			2011			2010
Interest and dividend income:
Loans receivable	$	10,228,820		$	9,083,899		$	21,531,510		$	18,155,653
Mortgage-backed securities and collateralized mortgage obligations		945,306			1,862,565			1,917,556			3,961,812
Equity securities		27,481			763			41,666			15,268
Debt securities (nontaxable of $51,260 in 2011 and $7,639 in 2010)		47,050			47,872			57,174			98,610
Interest-bearing deposits in other financial institutions		63,422			29,460			148,909			42,400
Total interest and dividend income		11,312,079			11,024,559			23,696,815			22,273,743
Interest expense:
Deposits		2,379,582			2,683,068			5,365,431			5,125,901
Borrowings		1,630,911			2,623,955			3,463,223			5,252,253
Total interest expense		4,010,493			5,307,023			8,828,654			10,378,154
Net interest income		7,301,586			5,717,536			14,868,161			11,895,589
Provision for loan losses, not covered under FDIC loss sharing agreement		300,000			3,000,000			1,100,000			3,800,000
Provision for covered loan losses		400,000			---			400,000			---
Net interest income after provision for loan losses		6,601,586			2,717,536			13,368,161			8,095,589
Noninterest income:
Service charges on deposit accounts		1,360,229			1,396,131			2,793,568			2,672,460
Gain (loss) on securities available for sale		---			194,844			170,845			203,188
Total impairment losses on securities		(1,383,314	)		(4,391,283	)		(1,530,359	)		(4,576,047	)
Portion of losses recognized in other comprehensive income		1,160,314			2,017,609			1,307,359			2,049,373
Net impairment losses recognized in earnings		(223,000	)		(2,373,674	)		(223,000	)		(2,526,674	)
Impairment loss on equity security		---			(1,000,000	)		---			(1,000,000	)
Bank owned life insurance		290,478			205,379			571,076			566,365
Gain on sale of loans and loan servicing release fees		117,033			379,511			379,340			468,245
Loan servicing fees		92,612			73,297			191,547			137,178
Brokerage commissions		201,631			143,156			369,074			248,909
Acquisition gain		---			9,342,816			---			9,342,816
FDIC receivable for loss sharing agreements accretion		254,357			268,132			596,658			834,310
Other		121,352			114,781			275,608			207,004
Total noninterest income		2,214,692			8,744,373			5,124,716			11,153,801
Noninterest expenses:
Salaries and employee benefits		3,704,877			3,194,198			7,632,796			6,243,395
Occupancy		1,700,843			1,572,132			3,243,622			2,929,966
FHLB advance prepayment penalty		---			---			809,558			---
Legal and professional		469,441			705,924			894,617			956,271
Marketing		426,255			330,675			815,558			719,275
Federal insurance premiums and other regulatory fees		396,442			273,416			718,502			544,160
Net cost of operations of real estate owned		764,378			244,390			1,625,067			526,071
Furniture and equipment		196,168			167,481			396,077			314,186
Postage, office supplies and printing		255,915			189,998			494,355			341,540
Core deposit intangible amortization expense		54,815			33,600			110,902			67,201
Other		657,570			552,767			1,294,604			706,946
Total noninterest expenses		8,626,704			7,264,581			18,035,658			13,349,011
Income before income taxes		189,574			4,197,328			457,219			5,900,379
Income tax (benefit) expense		(62,176	)		1,510,323			(70,073	)		2,011,259
Net income	$	251,750		$	2,687,005		$	527,292		$	3,889,120

Basic net income per share	$	0.01		$	0.15		$	0.03		$	0.21
Diluted net income per share	$	0.01		$	0.15		$	0.03		$	0.21
Weighted average number of common shares outstanding		18,136,137			18,424,157			18,134,905			18,416,549
Weighted average number of common and potential common shares outstanding		18,187,214			18,458,773			18,185,982			18,451,165

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(LOSS)

			Common Stock
	Comprehensive income (loss)		Number of Shares			Amount			Additional Paid-in Capital		Treasury Stock			Unearned Compensation ESOP			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity

Balance at September 30, 2009				19,859,219		$	198,592		$	42,751,898	$	(36,948,327	)	$	(1,683,990	)	$	102,215,498		$	(8,277,011	)	$	98,256,660
Adjustment of income tax accounts				—			—			—		—			—			1,088,518			—			1,088,518
Comprehensive income:
Net income	$	5,934,990		—			—			—		—			—			5,934,990			—			5,934,990
Other comprehensive income – change in unrealized loss on securities, net of income tax benefit of $3,004,468		4,779,128		—			—			—		—			—			—			4,779,128			4,779,128
Total comprehensive income	$	10,714,118
Dividends paid, $0.40 per share				—			—			—		—			—			(1,640,926	)		—			(1,640,926	)
Allocation of ESOP common stock				—			—			—		—			137,000			—			—			137,000
Stock issuance				4,400,000			440,000			30,191,569		—			(2,334,000	)		—			—			27,857,569
Cancellation of shares previously owned by First Charter, MHC				(4,400,000	)		(440,000	)		—		—			—			—			—			—
Vesting of restricted shares										68,563		333,679												402,242
Stock based compensation expense				—			—			61,186					—			—			—			61,186
Balance at September 30, 2010				19,859,219		$	198,592		$	73,073,216	$	(36,614,648	)	$	(3,880,990	)	$	107,598,080		$	(3,497,883	)	$	136,876,367
Comprehensive income:
Net income	$	527,292		—			—			—		—			—			527,292			—			527,292
Other comprehensive income – change in unrealized loss on securities, net of income taxes of $130,485		212,517		—			—			—		—			—			—			212,517			212,517
Total comprehensive income	$	739,809
Dividends paid, $0.05 per share				—			—			—		—			—			(966,747	)		—			(966,747	)
Allocation of ESOP common stock				—			—			—		—			151,600			—			—			151,600
Vesting of restricted shares				—			—			36,542		103,454			—			—			—			139,996
Stock based compensation expense				—			—			61,520		—			—			—			—			61,520

Balance at March 31, 2011				19,859,219		$	198,592		$	73,171,278	$	(36,511,194	)	$	(3,729,390	)	$	107,158,625		$	(3,285,366	)	$	137,002,545

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	527,292		$	3,889,120
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses, not covered under FDIC loss sharing agreements		1,100,000			3,800,000
Provision for covered loan losses		400,000			—
Depreciation and amortization		657,446			522,261
Deferred income tax expense (benefit)		(1,717,735	)		3,444,204
Accretion and amortization of premiums and discounts, net		1,021,965			585,851
Accretion of fair value discounts related to covered loans		(4,597,432	)		(2,499,643	)
Accretion of fair value discounts related to FDIC receivable		(596,658	)		(834,310	)
Gain on sale of loans and loan servicing release fees		(379,340	)		(468,245	)
Proceeds from sale of loans		13,784,749			10,454,196
Originations and purchases of loans held for sale		(12,134,769	)		(9,552,763	)
Gain on acquisition		—			(9,342,816	)
(Gain) loss on sale of mortgage-backed securities, collateralized mortgage obligations, and other investments		(170,845	)		(203,188	)
Other-than-temporary impairment-securities		223,000			2,526,674
Other-than-temporary impairment-other		—			1,000,000
Write down of real estate owned		513,922			199,776
Loss (gain) on sale of real estate owned		56,241			(81,359	)
Recovery payable to FDIC on other real estate owned gains		(154,918	)		(449,858	)
Restricted stock award expense		151,600			105,784
Stock option expense		61,520			16,916
Increase in cash surrender value on bank owned life insurance		(571,075	)		(566,365	)
Changes in assets and liabilities:
(Increase) decrease in accrued interest and dividends receivable		(343,881	)		109,301
Decrease (increase) in other assets		23,778			(3,987,889	)
Decrease in other liabilities		(4,393,899	)		(2,818,105	)
Net cash used in operating activities		(6,539,039	)		(4,150,458	)

Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available for sale		9,861,927			15,026,370
Proceeds from sales of other securities available for sale		15,300			—
Principal collections on government sponsored entities securities available for sale		—			411,790
Principal collections on mortgage-backed securities and collateralized mortgage obligations available for sale		30,051,894			28,893,423
Purchase of mortgage-backed securities and collateralized mortgage obligations available for sale		(25,658,611	)		(14,107,959	)
Purchase of other securities available for sale		(26,108,219	)		—
Proceeds from maturities of other securities available for sale		780,300			—
Proceeds from redemption of FHLB stock		529,100			—
Net decrease (increase) in loans receivable		31,974,228			(3,894,572	)
Net decrease in FDIC receivable		25,730,230			4,394,648
Proceeds from sale of real estate owned		21,143,474			5,578,994
Purchases of premises and equipment		(307,812	)		(681,293	)
Net cash received from acquisitions		—			68,914,993
Net cash provided by investing activities		68,011,811			104,536,394

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

	Six Months Ended
	March 31,
	2011			2010
Cash flows from financing activities:
Dividends on restricted stock awards	$	(5,018	)	$	(16,684	)
Dividends paid		(961,729	)		(784,224	)
Net (decrease) increase in deposits		(87,844,607	)		12,956,717
Principal payments on Federal Home Loan Bank advances		(102,000,000	)		(24,259,014	)
Net decrease in advance payments by borrowers for taxes and insurance		(507,093	)		(486,349	)
Net cash used in financing activities		(191,318,447	)		(12,589,554	)
Net (decrease) increase in cash and cash equivalents		(129,845,675	)		87,796,382
Cash and cash equivalents at beginning of period		235,638,582			53,840,036
Cash and cash equivalents at end of period	$	105,792,907		$	141,636,418
Supplemental disclosures of cash flow information:
Interest paid	$	7,578,762		$	10,298,627
Income taxes paid	$	87,641		$	2,450,000
Supplemental disclosure of noncash activities:
Real estate acquired through foreclosure of collateral on loans receivable	$	10,633,420		$	9,280,990
Issuance of ESOP common stock	$	151,600		$	137,000
Unrealized gain on securities available for sale, net	$	212,517		$	5,246,123

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Nature of Operations

Charter Financial Corporation (“Charter Financial” or the “Company”), a federally chartered corporation, was organized on October 16, 2001 by CharterBank (the “Bank” ), to become the mid-tier holding company for the Bank in connection with the Bank’s reorganization from a federal mutual savings and loan association into the two-tiered mutual holding company structure. In connection with the reorganization, the Company sold 3,964,481 shares of its common stock to the public, representing 20% of the outstanding shares at $10.00 per share, and received net proceeds of $37.2 million. An additional 15,857,924 shares, or 80% of the Company’s outstanding shares, were issued to First Charter, MHC, the Bank’s federally chartered mutual holding company.

In January 2007, Charter Financial repurchased 508,842 shares of its common stock at $52.00 per share through a self-tender offer. Following the stock repurchase, Charter Financial delisted its common stock from the NASDAQ Global Market and deregistered its common stock with the Securities and Exchange Commission. Between January 2007 and September 2009 Charter Financial repurchased 1,186,858 additional shares of its common stock. In September 2010, through an incremental offering, the Company issued 4,400,000 shares with net proceeds of $26.6 million, and First Charter, MHC canceled 4,400,000 shares of Company stock that it held.

As of March 31, 2011, First Charter, MHC owned 11,457,924 shares of the Company’s common stock, representing approximately 61% of the Company’s 18,672,361 outstanding shares of common stock at that date. The remaining 7,214,437 shares of common stock, or approximately 39% of the outstanding shares of common stock, were held by the public.

Note 2: Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Charter Financial Corporation and subsidiary include the accounts of the Company and the Bank as of March 31, 2011 and September 30, 2010 (derived from audited financial statements), and for the three and six-month periods ended March 31, 2011 and 2010. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented. The results of operations for the three-and six-month periods ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the estimates used for fair value acquisition accounting and the Federal Deposit Insurance Corporation receivable for loss sharing agreements, estimate of expected cash flows on purchased impaired and other acquired loans, and the assessment for other-than-temporary impairment of investment securities, mortgage-backed securities, and collateralized mortgage obligations. The Company recorded an increase in retained earnings of $1.09 million in the earliest period presented herein with a corresponding decrease to income taxes payable to correct historical income tax accounts for this immaterial adjustment. Qualitative considerations also conclude that such adjustment is immaterial. Certain reclassifications of 2010 balances have been made to conform to classifications used in 2011. These reclassifications did not change stockholders’ equity or net income as previously reported.

Note 3: Recent Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standards for disclosures associated with credit quality and the allowance for loan losses. This standard requires additional disclosures related to the allowance for loan loss with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructures with its effect on the allowance for loan loss. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s financial position and results of operations; however, it increased the amount of disclosures in the notes to the consolidated financial statements.

In December 2010, the FASB issued an update to the accounting standards regarding the disclosure of supplementary pro forma information for business combinations. This update provides clarification regarding the acquisition date that should be used for reporting the pro forma financial information disclosures required by existing accounting guidance when comparative financial statements are presented. This update also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. This guidance will be effective for the Company prospectively for business combinations for which the acquisition date is on or after October 1, 2011 and early adoption is permitted. Management is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.

In April 2011, the FASB issued an update to the accounting standards to provide additional guidance to assist creditors in determining whether a restructuring is a troubled debt restructuring (“TDR”). The provisions of this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring the impairment of newly identified receivables as a result of applying this guidance, an entity should apply the provisions prospectively for the first interim or annual period beginning on or after June 15, 2011. The information required to be disclosed regarding TDRs within the new credit quality disclosures will now be required for interim and annual periods beginning on or after June 15, 2011 as well. The Company is currently evaluating the impact of adoption on its financial position and results of operations, but does not believe that adoption will have a material impact.

Note 4: Federally Assisted Acquisition of McIntosh Commercial Bank

On March 26, 2010, the Bank purchased substantially all of the assets and assumed substantially all the liabilities of McIntosh Commercial Bank (MCB) from the FDIC, as Receiver of MCB. MCB operated four commercial banking branches and was headquartered in Carrollton, Georgia. The FDIC took MCB under receivership upon its closure by the Georgia Department of Banking and Finance. The Bank’s bid to purchase MCB included the purchase of substantially all MCB’s assets at a discount of $53,000,000 in exchange for assuming certain MCB deposits and certain other liabilities. No cash, deposit premium or other consideration was paid by the Bank. The Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 80 percent of net losses on covered assets incurred up to $106,000,000, and 95 percent of net losses exceeding $106,000,000. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, the Bank recorded a receivable of $108,252,007 at the time of acquisition.

The acquisition of MCB was accounted for under the acquisition method of accounting. The statement of net assets acquired and the resulting acquisition date purchase gain net of taxes is presented in the following table. As explained in the explanatory notes that accompany the following table, the purchased assets, assumed liabilities and identifiable intangible assets were recorded at the acquisition date fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.

Noninterest income includes a pre-tax gain on acquisition of $9,342,816. The amount of the gain is equal to the excess of the fair value of the recorded assets over the fair value of liabilities assumed.

The following table presents the assets acquired and liabilities assumed, as recorded by MCB on the acquisition date and as adjusted for purchase accounting adjustments.

	As recorded by MCB			Fair value adjustments			As recorded by CharterBank
Assets
Cash and due from banks	$	32,285,757		$	36,629,236	(a)	$	68,914,993
FHLB and other bank stock		1,321,710			(200,410	)(b)		1,121,300
Mortgage-backed securities		24,744,318			(75,028	)(c)		24,669,290
Loans		207,644,252			(110,645,341	)(d)		96,998,911
Other real estate owned		55,267,968			(40,136,424	)(e)		15,131,544
FDIC receivable for loss sharing agreements		—			108,252,007	(f)		108,252,007
Core deposit intangible		—			258,811	(g)		258,811
Other assets		1,313,923			(427,702	)(h)		886,221
Total assets	$	322,577,928		$	(6,344,851	)	$	316,233,077

Liabilities
Deposits:
Noninterest-bearing	$	5,443,673		$	—		$	5,443,673
Interest-bearing		289,862,953			683,100	(i)		290,546,053
Total deposits		295,306,626			683,100			295,989,726
FHLB advance and other borrowings		9,491,486			—			9,491,486
Deferred tax liability		—			3,737,126	(j)		3,737,126
Other liabilities		1,409,048			—			1,409,048
Total liabilities		306,207,160			4,420,226			310,627,386
Excess of assets acquired over liabilities assumed	$	16,370,768	(k)
Aggregate fair value adjustments				$	(10,765,077	)
Net assets of MCB acquired							$	5,605,691

Explanation of fair value adjustments

(a) –

Adjustment reflects the initial wire received from the FDIC on the acquisition date.

(b) –

Adjustment reflects the estimated fair value of other bank stock.

Adjustment reflects fair value adjustments based on the Bank’s evaluation of the acquired mortgage-backed securities portfolio.

(d) –

Adjustment reflects fair value adjustments based on the Bank’s evaluation of the acquired loan portfolio. The fair value adjustment includes adjustments for estimated credit losses, liquidity and servicing costs.

(e) –

Adjustment reflects the estimated other real estate owned losses based on the Bank’s evaluation of the acquired other real estate owned portfolio.

(f) –

Adjustment reflects the estimated fair value of payments the Bank will receive from the FDIC under loss sharing agreements. The receivable was recorded at present value of the estimated cash flows using an average discount rate of one and a half percent.

(g) –

Adjustment reflects fair value adjustments to record the estimated core deposit intangible.

(h) –

Adjustment reflects fair value adjustments to record certain other assets acquired in this transaction.

(i) –

Adjustment reflects fair value adjustments based on the Bank’s evaluation of the acquired time deposit portfolio.

(j) –

Adjustment reflects differences between the financial statement and tax bases of assets acquired and liabilities assumed.

(k) –

Amount represents the excess of assets acquired over liabilities assumed and since the asset discount bid by CharterBank of $53 million exceeded this amount, the difference resulted in a cash settlement with the FDIC on the acquisition date.

Note 5: Other Investment Securities

Other investment securities available for sale are summarized as follows:

	March 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
U.S. Treasury securities	$	20,198,968	$	8,104	$	(26,602	)	$	20,180,470
Tax-free municipals		5,122,502		20,024		—			5,142,526
	$	25,321,470	$	28,128	$	(26,602	)	$	25,322,996

	September 30, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Tax-free municipals	$	100,000	$	2,821	$	—	$	102,821

The amortized cost and estimated fair value of other investment and municipal securities available for sale as of March 31, 2011, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the municipal bonds in the table below are pre-funded and are expected to be prepaid before contractual maturity.

	Amortized cost		Estimated fair value
1-5 years	$	21,642,727	$	21,628,723
Greater than 5 years		3,678,743		3,694,273
	$	25,321,470	$	25,322,996

Proceeds from called or matured other investment securities during the six months ended March 31, 2011 and 2010 were $780,300, and $0, respectively. Proceeds from sales for the six months ended March 31, 2011 and 2010 were $15,300 and $0, respectively. There were no gains or losses upon the sale of other investment securities.

Proceeds from called or matured other investment securities during the three months ended March 31, 2011 and 2010 were $780,300 and $0, respectively. Proceeds from sales for the three months ended March 31, 2011 and 2010 were $15,300 and $0, respectively. There were no gains or losses upon the sale of other investment securities.

At March 31, 2011, there were two U.S. Treasuries with an amortized cost of $10,158,634 and an estimated fair value of $10,132,032 that had been in a loss position for less than 12 months and there were no other investment securities available for sale that were in a loss position.

Other investment securities with an aggregate carrying amount of $15,198,438 and $0 at March 31, 2011 and September 30, 2010, respectively, were pledged to collateralize FHLB advances.

Note 6: Mortgage–Backed Securities and Collateralized Mortgage Obligations

Mortgage–backed securities and collateralized mortgage obligations available for sale are summarized as follows:

	March 31, 2011
	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Mortgage-backed securities:
FNMA certificates	$	37,657,086	$	527,833	$	(135,887	)	$	38,049,032
GNMA certificates		6,468,252		292,948		—			6,761,200
FHLMC certificates		29,623,312		537,685		(3,628	)		30,157,369
Collateralized mortgage obligations:
FNMA		14,286,188		401,041		—			14,687,229
GNMA		3,911,443		24,555		(7,474	)		3,928,524
FHLMC		3,105,908		59,196		(1,234	)		3,163,870
Private-label mortgage securities:
Investment grade		6,790,830		53,973		(691,877	)		6,152,926
Split rating [1]		7,015,755		—		(557,875	)		6,457,880
Non investment grade		14,285,604		—		(5,478,609	)		8,806,995
	$	123,144,378	$	1,897,231	$	(6,876,584	)	$	118,165,025

	September 30, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Mortgage-backed securities:
FNMA certificates	$	35,164,154	$	798,264	$	—		$	35,962,418
GNMA certificates		7,134,764		479,147		—			7,613,911
FHLMC certificates		25,437,288		660,606		—			26,097,894
Collateralized mortgage obligations:
FNMA		9,605,091		291,337		(24,691	)		9,871,737
GNMA		6,130,553		9,117		(31,337	)		6,108,333
FHLMC		20,515,780		275,356		(6,603	)		20,784,533
Private-label mortgage securities:
Investment grade		22,872,709		79,523		(1,764,296	)		21,187,936
Split Rating [1]		11,522,219		—		(6,069,066	)		5,453,153
	$	138,382,558	$	2,593,350	$	(7,895,993	)	$	133,079,915

Credit ratings are as of March 31, 2011 and September 30, 2010, respectively.

[1] Bonds with split ratings would represent non-investment grade based on lower rating.

During the quarter ended March 31, 2011 three of the Bank’s non-agency CMO instruments with an estimated market value of $9.4 million experienced a rating downgrade. Each of these instruments continues to maintain favorable credit support levels and Bloomberg coverage ratios. Two of the three obligations with an estimated market value of $6.6 million demonstrate no losses under the Bloomberg credit model thus suggesting that future losses are remote. The remaining instrument with an estimated market value of $2.8 million demonstrates a potential loss of 0.3%, a nominal amount approximating $8,000 under the Bloomberg credit model.

Proceeds from sales of mortgage–backed securities and collateralized mortgage obligations during the six months ended March 31, 2011 and 2010 were $9,861,927 and $15,026,370, respectively. Gross realized gains on the sale of these securities were $170,845 and $203,188 for the six months ended March 31, 2011 and 2010, respectively.

Proceeds from sales of mortgage–backed securities and collateralized mortgage obligations during the three months ended March 31, 2011 and 2010 were $0 and $14,400,569, respectively. Gross realized gains on the sale of these securities were $0 and $194,844 for the three months ended March 31, 2011 and 2010, respectively.

Mortgage–backed securities and collateralized mortgage obligations with an aggregate carrying amount of $72,437,320 and $92,865,006 at March 31, 2011 and September 30, 2010, respectively, were pledged to secure FHLB advances.

Mortgage–backed securities and collateralized mortgage obligations that had been in a continuous unrealized loss position for less than 12 months at March 31, 2011 and September 30, 2010 were as follows:

	March 31, 2011
	Amortized cost		Gross unrealized losses			Estimated fair value
Mortgage–backed securities:
FNMA certificates	$	14,736,020	$	(135,887	)	$	14,600,133
FHLMC		9,179,007		(3,629	)		9,175,378
Collateralized mortgage obligations:
GNMA		1,075,024		(2,053	)		1,072,971
Private-label mortgage securities		19,347		(24	)		19,323
	$	25,009,398	$	(141,593	)	$	24,867,805

	September 30, 2010
	Amortized cost		Gross unrealized losses			Estimated fair value
Collateralized mortgage obligations:
FNMA	$	3,760,606	$	(24,691	)	$	3,735,915
FHLMC certificates		1,531,605		(6,603	)		1,525,002
Private-label mortgage securities		4,871,106		(31,337	)		4,839,769
	$	10,163,317	$	(62,631	)	$	10,100,686

Mortgage–backed securities and collateralized mortgage obligations that had been in a continuous unrealized loss position for greater than 12 months at March 31, 2011 and September 30, 2010 were as follows:

	March 31, 2011
	Amortized cost		Gross unrealized losses			Estimated fair value
Collateralized mortgage obligations:
FHLMC certificates	$	370,344	$	(1,234	)	$	369,110
GNMA		443,630		(5,421	)		438,209
Private-label mortgage securities		24,669,325		(6,728,336	)		17,940,989
	$	25,483,299	$	(6,734,991	)	$	18,748,308

	September 30, 2010
	Amortized cost		Gross unrealized losses			Estimated fair value
Collateralized mortgage obligations:
Private-label mortgage securities	$	29,058,952	$	(7,833,362	)	$	21,225,590

At March 31, 2011, the Company had approximately $6.7 million of gross unrealized losses on non-GSE collateralized mortgage obligations with aggregate amortized cost of approximately $24.7 million. During the year ended September 30, 2010 the Company recorded $2.5 million in other than temporary impairment on two securities, $153,000 of which was recorded in the quarter ended December 31, 2009, and $2.4 million was recorded in the quarter ended March 31, 2010. During the quarter ended March 31, 2011 an additional $223,000 in other than temporary impairment was recorded. The remaining decline in fair value of the mortgage securities primarily resulted from illiquidity and other uncertainties in the marketplace. Additionally, the Company has recorded $979,000 in accumulated other comprehensive loss (pre-tax) related to these two securities at March 31, 2011, and $1.3 million at September 30, 2010.

Regularly, the Company performs an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired other-than-temporarily. The assessment considers many factors including the severity and duration of the impairment, the Company’s intent and ability to hold the security for a period of time sufficient for recovery in value, recent events specific to the industry, and current characteristics of each security such as delinquency and foreclosure levels, credit enhancements, and projected losses and loss coverage ratios. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future include but are not limited to, deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity. All of these positions were evaluated for other-than-temporary impairment based on an analysis of the factors and characteristics of each security as previously enumerated. The Company considers these unrealized losses to be temporary impairment losses primarily because of continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches in such securities to positions held by the Company.

The following table summarizes the changes in the amount of credit losses on the Company’s investment securities recognized in earnings for the three and six months ended March 31, 2011 and 2010:

	Three Months Ended				Six Months Ended
	March 31				March 31
	2011		2010		2011		2010

Beginning balance of credit losses previously recognized in earnings	$	2,526,674	$	153,000	$	2,526,674	$	-
Amount related to credit losses for securities for which an other-than-temporary impairment was not previously recognized in earnings		-		2,373,674		-		2,526,674
Amount related to credit losses for securities for which an other-than-temporary impairment was recognized in earnings		223,000		-		223,000		-
Ending balance of cumulative credit losses recognized in earnings	$	2,749,674	$	2,526,674	$	2,749,674	$	2,526,674

Note 7: Loans Receivable

Loans receivable are summarized as follows:

	March 31, 2011		September 30, 2010
Loans not covered by loss sharing agreements:
1-4 family residential real estate mortgage	$	104,080,480	$	106,041,006
Commercial real estate		257,927,053		267,725,686
Commercial		19,358,904		19,603,898
Real estate construction		44,302,958		45,930,424
Consumer and other		20,272,364		22,485,945
Loans receivable, net of undisbursed proceeds of loans in process		445,941,759		461,786,959
Less:
Unamortized loan origination fees, net		971,615		758,407
Allowance for loan losses		9,694,175		9,797,095
Total loans not covered, net	$	435,275,969	$	451,231,457

The carrying amount of covered loans at March 31, 2011 and September 30, 2010, consisted of impaired loans at acquisition date and all other acquired loans and are presented in the following tables.

	March 31, 2011
	Impaired Loans at Acquisition		All Other Acquired Loans		Total Covered Loans
Loans covered by loss sharing agreements:
1-4 family residential real estate mortgage	$	4,123,224	$	7,634,317	$	11,757,541
Commercial real estate		37,564,432		85,183,393		122,747,825
Commercial		15,143,919		23,044,867		38,188,786
Real estate construction		2,340,585		1,230,027		3,570,612
Consumer and other		1,267,663		7,843,030		9,110,693
Loans receivable, gross		60,439,823		124,935,634		185,375,457
Less:
Non-accretable difference		29,305,637		9,342,785		38,648,422
Allowance for covered loan losses		—		8,059,467		8,059,467
Accretable discount		7,973,975		6,071,929		14,045,904
Unamortized loan origination fees, net		—		38,244		38,244
Total loans covered, net	$	23,160,211	$	101,423,209	$	124,583,420

	September 30, 2010
	Impaired Loans at Acquisition		All Other Acquired Loans		Total Covered Loans
Loans covered by loss sharing agreements:
1-4 family residential real estate mortgage	$	4,440,436	$	7,464,467	$	11,904,903
Commercial real estate		53,347,535		97,615,020		150,962,555
Commercial		23,848,208		28,715,756		52,563,964
Real estate construction		6,879,358		2,078,078		8,957,436
Consumer and other		1,479,003		9,345,905		10,824,908
Loans receivable, gross		89,994,540		145,219,226		235,213,766
Less:
Non-accretable difference		40,203,964		12,656,615		52,860,579
Allowance for covered loan losses		—		15,553,536		15,553,536
Accretable discount		10,166,664		8,476,672		18,643,336
Unamortized loan origination fees, net		—		18,167		18,167
Total loans covered, net	$	39,623,912	$	108,514,236	$	148,138,148

The following table documents changes in the carrying value of acquired loans during the year ended September 30, 2010 and the six months ended March 31, 2011:

	Impaired Loans at Acquisition			All Other Acquired Loans
Balance, September 30, 2009	$	18,246,596		$	71,517,348
Fair value of acquired loans covered under loss sharing agreements		50,415,463			46,583,448
Reductions since acquisition date resulting from repayments, write-offs and foreclosures		(29,038,147	)		(9,586,560	)
Balance, September 30, 2010		39,623,912			108,514,236
Reductions since acquisition date resulting from repayments, write-offs and foreclosures		(16,463,701	)		(7,091,027	)
Balance, March 31, 2011	$	23,160,211		$	101,423,209

The following table documents changes in the accretable discount on acquired loans during the year ended September 30, 2010 and the six months ended March 31, 2011:

	Impaired Loans at Acquisition			All Other Acquired Loans			Total Covered Loans
Balance, September 30, 2009	$	—		$	8,794,367		$	8,794,367
Accretable yield acquired		12,603,800			5,303,343			17,907,143
Other adjustments to decrease accretable yield		—			(297,609	)		(297,609	)
Loan accretion		(2,437,136	)		(5,323,429	)		(7,760,565	)
Balance, September 30, 2010		10,166,664			8,476,672			18,643,336
Loan accretion		(2,192,689	)		(2,404,743	)		(4,597,432	)
Balance, March 31, 2011	$	7,973,975		$	6,071,929		$	14,045,904

The following table documents changes in the value of the non-accretable principal difference during the year ended September 30, 2010 and the six months ended March 31, 2011:

	Impaired Loans at Acquisition			All Other Acquired Loans			Total Covered Loans
Balance, September 30, 2009	$	7,136,864		$	—		$	7,136,864
Non-accretable principal difference at acquisition		73,841,461			18,896,737			92,738,198
Reductions since acquisition date resulting from charge-offs		(40,774,361	)		(6,240,122	)		(47,014,483	)
Balance, September 30, 2010		40,203,964			12,656,615			52,860,579
Reductions since acquisition date resulting from charge-offs		(10,898,327	)		(3,313,830	)		(14,212,157	)
Balance, March 31, 2011	$	29,305,637		$	9,342,785		$	38,648,422

The following is a summary of transactions in the allowance for loan losses on loans covered by loss sharing:

Balance, September 30, 2009	$	23,832,265
Loans charged-off (gross)		(10,786,622	)
Recoveries on loans previously charged-off		404,716
Provision for loan losses charged to FDIC receivable		1,682,542
Provision for loan losses charged to operations		420,635
Balance, September 30, 2010		15,553,536
Loans charged-off (gross)		(9,494,069	)
Provision for loan losses charged to FDIC receivable		1,600,000
Provision for loan losses charged to operations		400,000
Balance, March 31, 2011	$	8,059,467

The following table documents changes in the carrying value of the FDIC receivable for loss sharing agreements relating to covered loans and other real estate during the year ended September 30, 2010 and the six months ended March 31, 2011:

Balance, September 30, 2009	$	26,481,146
Fair value of FDIC receivable for loss sharing agreements at acquisition		108,252,007
Receipt of payments from FDIC		(54,680,714	)
Accretion of fair value adjustment		1,840,856
Provisions for estimated losses on covered assets		4,448,908
External expenses qualifying under loss sharing agreements		3,482,595
Balance, September 30, 2010		89,824,798
Payments received from FDIC		(30,679,040	)
Recovery of previous loss reimbursements		(1,598,478	)
Provision for loan losses		1,600,000
Accretion of fair value adjustment		596,658
External expenses qualifying under loss sharing agreements		4,947,288
Balance, March 31, 2011	$	64,691,226

Loan Origination and Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial real estate loans are generally made by the Company to Georgia or Alabama entities and are secured by properties in these states. Commercial real estate lending involves additional risks compared to one- to four-family residential lending. Repayment of commercial real estate loans often depends on the successful operations and income stream of the borrowers, and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. The Company’s underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayment, guarantor requirements, net worth requirements and quality of cash flow. As part of the loan approval and underwriting of commercial real estate loans, management undertakes a cash flow analysis, and requires a debt-service coverage ratio of at least 1.15 times. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2011, approximately 41.9% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

The Company makes construction and land development loans primarily for the construction of one- to four-family residences but also for multi-family and nonresidential real estate projects on a select basis. While current market conditions have suppressed demand for construction and land loans, there are opportunities to lend to quality borrowers in the Company’s market area. The Company offers two principal types of construction loans: builder loans, including both speculative (unsold) and pre-sold loans to pre-approved local builders; and construction/permanent loans to property owners that are converted to permanent loans at the end of the construction phase. The number of speculative loans that management will extend to a builder at one time depends upon the financial strength and credit history of the builder. The Company’s construction loan program is expected to remain a modest portion of the loan volume and management generally limits the number of outstanding loans on unsold homes under construction within a specific area.

The Company also originates first and second mortgage loans secured by one- to four-family residential properties within Georgia and Alabama. Management currently originates mortgages at all branch locations, but utilizes a centralized processing location to reduce the underwriting risk. The Company originates both fixed rate and adjustable rate one- to four-family residential mortgage loans. Fixed rate conforming loans are generally originated for resale into the secondary market on a servicing-released basis and loans that are non-conforming due to property exceptions and that have adjustable rates are generally retained in the Company’s portfolio. The non-conforming loans originated are not considered to be subprime loans and the amount of subprime and low documentation loans held by the Company is not material.

The majority of the Company’s non-mortgage loans consist of consumer loans, including loans on deposits, second mortgage loans, home equity lines of credit, auto loans and various other installment loans. The Company primarily offers consumer loans (excluding second mortgage loans and home equity lines of credit) as an accommodation to customers. Consumer loans tend to have a higher credit risk than residential mortgage loans because they may be secured by rapidly depreciable assets, or may be unsecured. The Company’s consumer lending generally follows accepted industry standards for non sub-prime lending, including credit scores and debt to income ratios. The Company also offers home equity lines of credit as a complement to one- to four-family residential mortgage lending. The underwriting standards applicable to home equity credit lines are similar to those for one- to four-family residential mortgage loans, except for slightly more stringent credit-to-income and credit score requirements. Home equity loans are generally limited to 80% of the value of the underlying property unless the loan is covered by private mortgage insurance or a loss sharing agreement. At March 31, 2011, the Company had $16.5 million of home equity lines of credit and second mortgage loans not covered by loss sharing.

The Company’s commercial business loans are generally limited to terms of five years or less. Management typically collateralizes these loans with a lien on commercial real estate or, very rarely, with a lien on business assets and equipment. Management also generally requires the personal guarantee of the business owner. Interest rates on commercial business loans are generally higher than interest rates on residential or commercial real estate loans due to the risk inherent in this type of loan. Commercial business loans are generally considered to have more risk than residential mortgage loans or commercial real estate loans because the collateral may be in the form of intangible assets and/or readily depreciable inventory. Commercial business loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower. Such risks can be significantly affected by economic conditions. In addition, commercial business lending generally requires substantially greater supervision efforts by Management compared to residential mortgage or commercial real estate lending.

The Company maintains an independent loan review function that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. The Company further engages an independent, external loan reviewer on an annual basis.

Nonaccrual and Past Due Loans. At March 31, 2011 and September 30, 2010, the Company had $11,719,663 and $11,654,501, respectively, of nonaccrual loans not covered by loss sharing. At March 31, 2011 the Company had $0 and at September 30, 2010, the Company had $139,972 of past due loans 90 days and more still accruing interest not covered by loss sharing.

Nonaccrual loans not covered by loss sharing, segregated by class of loans at March 31, 2011 were as follows:

1-4 family residential real estate	$	4,315,283
Commercial real estate		6,289,336
Commercial		464,052
Real estate construction		511,452
Consumer and other		139,540
Total	$	11,719,663

Nonaccrual loans covered by loss sharing, segregated by class of loans at March 31, 2011 were as follows:

1-4 family residential real estate	$	2,353,912
Commercial real estate		31,997,181
Commercial		12,019,949
Real estate construction		380,868
Consumer and other		1,003,295
Total Covered Nonaccrual Loans [1] [2]	$	47,755,205

[1]	Covered loan balances are net of non-accretable differences and allowance for covered loan losses.

[2]	Substantially all covered loans record accretion income and the above amounts reflect only the nonaccrual of contractual interest.

The following is a summary of interest income relating to nonaccrual loans not covered by loss sharing agreements for the six months ended March 31, 2011 and 2010. No contractual interest income on covered impaired loans was recorded for the six months ended March 31, 2011 or 2010.

	Six Months Ended March 31, 2011			Six Months Ended March 31, 2010
Interest income at contractual rates	$	218,590		$	175,964
Interest income actually recorded		(13,983	)		(35,216	)
Reduction of interest income	$	204,607		$	140,748

An age analysis of past due loans not covered by loss sharing, segregated by class of loans, as of March 31, 2011 was as follows:

			Greater than								Loans > 90
	30-89 Days		90 Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Current		Loans		Accruing
1-4 family residential real estate	$	4,083,177	$	2,042,080	$	6,125,257	$	97,955,223	$	104,080,480	$	-
Commercial real estate		12,653,307		2,137,077		14,790,384		243,136,669		257,927,053		-
Commercial		1,447,017		237,127		1,684,144		17,674,760		19,358,904		-
Real estate construction		391,205		95,997		487,202		43,815,756		44,302,958		-
Consumer and other		357,122		19,942		377,064		19,895,300		20,272,364		-
	$	18,931,828	$	4,532,223	$	23,464,051	$	422,477,708	$	445,941,759	$	-

An age analysis of past due loans covered by loss sharing, segregated by class of loans, as of March 31, 2011 was as follows:

			Greater than								Loans > 90
	30-89 Days		90 Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Current		Loans		Accruing
1-4 family residential real estate	$	1,282,998	$	1,449,983	$	2,732,981	$	6,872,527	$	9,605,508	$	65,693
Commercial real estate		12,052,809		17,957,055		30,009,864		65,685,913		95,695,777		1,263,257
Commercial		4,861,569		7,493,368		12,354,937		11,388,049		23,742,986		135,713
Real estate construction		-		365,906		365,906		1,634,005		1,999,911		-
Consumer and other		221,444		553,714		775,158		6,848,228		7,623,386		-
	$	18,418,820	$	27,820,026	$	46,238,846	$	92,428,722	$	138,667,568	$	1,464,663

[1]	Covered loan balances are net of non-accretable differences and allowance for covered loan losses and have not been reduced by $14,084,148 of accretable discounts.

Impaired Loans. At March 31, 2011 and September 30, 2010, the Company had impaired loans not covered by loss sharing of approximately $11,580,122 and $11,499,451, respectively. There were specific allowances attributable to impaired loans at March 31, 2011 and September 30, 2010, of $1,205,073 and $1,434,751, respectively. At March 31, 2011 and September 30, 2010, there were impaired loans of $7,389,401 and $6,312,882, respectively, with no specific allowance. The average recorded investments in impaired loans not covered by loss sharing for the six months ended March 31, 2011 and the year ended September 30, 2010, were approximately $11,550,000 and $13,600,000, respectively. Interest income recognized on impaired loans for the six months ended March 31, 2011 and the year ended September 30, 2010, was $43,500 and $88,000, respectively.

Impaired loans not covered by loss sharing, segregated by class of loans, as of March 31, 2011 are as follows:

			Unpaid
	Recorded		Principal		Related		Fair
	Investment		Balance		Allowance		Value [1]
With no related allowance recorded:
1-4 family residential real estate	$	2,520,612	$	2,520,612	$	-	$	2,520,612
Commercial real estate		3,994,104		3,994,104		-		3,994,104
Commercial		387,483		387,483		-		387,483
Real estate construction		487,202		487,202		-		487,202
Subtotal:		7,389,401		7,389,401		-		7,389,401
With an allowance recorded:
1-4 family residential real estate		1,794,671		1,794,671		174,476		1,620,195
Commercial real estate		2,295,232		2,529,777		944,029		1,351,203
Commercial		76,568		76,568		76,568		-
Real estate construction		24,250		46,072		10,000		14,250
Subtotal:		4,190,721		4,447,088		1,205,073		2,985,648
Totals:
1-4 family residential real estate		4,315,283		4,315,283		174,476		4,140,807
Commercial real estate		6,289,336		6,523,881		944,029		5,345,307
Commercial		464,051		464,051		76,568		387,483
Real estate construction		511,452		533,274		10,000		501,452
Grand Total:	$	11,580,122	$	11,836,489	$	1,205,073	$	10,375,049

[1]	Fair values for covered loans are based on a discounted cash flow methodology (Level 3 pricing).

Impaired loans covered by loss sharing have shown evidence of further credit deterioration subsequent to acquisition. The average recorded investment on impaired loans covered by loss sharing agreements for the six months ended March 31, 2011 and the year ended September 30, 2010 was approximately $23.4 million and $30.0 million, respectively. No contractual interest income was recorded on covered impaired loans for such periods.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio for both loans covered and not covered by loss sharing agreements, management tracks certain credit quality indicators including the level of classified loans, net charge-offs, non-performing loans (see details above) and the general economic conditions in its market areas.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk grade factors is as follows:

Grade 1: Virtual Absence of Credit Risk (Pass 1) - Loans graded 1 are substantially risk-free or have limited risk. They are characterized by loans to borrowers with unquestionable financial strength and a long history of solid earnings performance. Loans to borrowers collateralized by cash or equivalent liquidity may be included here. Loans secured, by readily marketable collateral may also be graded 1 provided the relationship meets all other characteristics of the grade.

Grade 2: Minimal Credit Risk (Pass 2) - Loans graded 2 represent above average borrowing relationships, generally with local borrowers. Such loans will have clear, demonstrative sources of repayment, financially sound guarantors, and adequate collateral.

Grade 3: Less Than Average Credit Risk (Pass 3) - Loans graded 3 are of average credit quality, are properly structured and documented and require only normal supervision. Financial data is current and document adequate revenue, cash flow, and satisfactory payment history to indicate that financial condition is satisfactory. Unsecured loans are normally for a specific purpose and short term. Secured loans have properly margined collateral. Repayment terms are realistic, clearly defined and based upon a primary, identifiable source of repayment. All grade 3 loans meet the Company’s lending guidelines.

Grade 4: Acceptable With Average Risk (Pass 4) - Loans graded 4 represent loans where a borrower’s character, capacity, credit or collateral may be a concern. Grade 4 loans will be performing credits and will not necessarily represent weakness unless that area of weakness remains unresolved. Loans most commonly graded 4 will likely include loans with technical exceptions, loans outside of policy parameters without justification for exception and loans with collateral imperfections. Loans in this category, while acceptable, generally warrant close monitoring. Resolution of questionable areas will generally result in an upgrade or downgrade.

Grade 5: Special Mention - (Greater Than Normal Credit Risk) - Loans graded 5 have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the bank’s credit position at a future date. Grade 5 loans should include loans where repayment is highly probable, but timeliness of repayment is uncertain due to unfavorable developments. Special Mention assets are not adversely classified and do not expose the bank to sufficient risk to warrant adverse classification. Assets that could be included in this category include loans that have developed credit weaknesses since origination as well as those that were originated with such weaknesses. Special Mention should not be used to identify an asset that has as its sole weakness credit data exceptions or collateral documentation exceptions that are not material to the timely repayment of the asset.

Grade 6: Substandard - (Excessive Credit Risk) - Grade 6 loans are inadequately protected by current sound worth and paying capacity of the borrower or of collateral pledged. Substandard assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct probability that the bank will sustain some loss if the deficiencies are not corrected.

Grade 7: Doubtful - (Potential Loss) - Loans graded 7 possess all of the characteristics of Substandard loans with the addition that full collection is improbable on the basis of existing facts, values, and conditions. Possibility of loss is high; however, due to important and reasonably specific pending factors that may work to the loans’ advantage, a precise indication of estimated loss is deferred until a more exact status can be determined. The Doubtful classification is not to be used to defer the full recognition of an expected loss.

Grade 8: Loss - That portion of an asset classified Loss is considered un-collectible and of such little value that its continuance as an asset, without establishment of a specific valuation allowance or charge-off is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset (or portion) even though partial recovery may be affected in the future. An asset may be subject to a split classification whereby two or more portions of the same asset are given separate classifications.

The following table presents the risk grades of the loan portfolio not covered by loss sharing, segregated by class of loans, as of March 31, 2011:

	1-4 family
	residential		Commercial				Real estate		Consumer
	real estate		real estate		Commercial		construction		and other		Total
Pass (1-4)	$	94,068,771	$	222,125,802	$	14,183,441	$	34,340,166	$	19,719,210	$	384,437,390
Special Mention (5)		4,611,057		19,033,957		527,214		5,083,359		309,511		29,565,098
Substandard (6)		5,388,017		16,649,467		4,648,249		4,879,433		209,978		31,775,144
Doubtful (7)		12,635		117,827		-		-		33,665		164,127
Loss (8)		-		-		-		-		-		-
Total not covered loans	$	104,080,480	$	257,927,053	$	19,358,904	$	44,302,958	$	20,272,364	$	445,941,759

The following table presents the risk grades of the loan portfolio covered by loss sharing agreements, segregated by class of loans, as of March 31, 2011:

	1-4 family
	residential		Commercial				Real estate		Consumer
	real estate		real estate		Commercial		construction		and other		Total
Pass (1-4)	$	5,550,090	$	34,050,802	$	8,066,359	$	1,497,788	$	5,696,660	$	54,861,699
Special Mention (5)		1,863,786		22,596,943		2,527,226		-		308,043		27,295,998
Substandard (6)		1,784,280		28,649,483		5,574,000		108,494		1,355,187		37,471,444
Doubtful (7)		557,509		9,385,597		8,575,402		257,412		262,507		19,038,427
Loss (8)		-		-		-		-		-		-
Total covered loans [1]	$	9,755,665	$	94,682,825	$	24,742,987	$	1,863,694	$	7,622,397	$	138,667,568

[1]	Covered loan balances are net of non-accretable differences and allowance for covered loan losses.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense and is an amount that management believes will be adequate to absorb losses on existing loans that become uncollectible, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to repay. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely and subsequent recoveries are added to the allowance.

Management’s allowance for loan losses methodology is a loan classification-based system. Management bases the required reserve on a percentage of the loan balance for each type of loan and classification level. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our loan loss history for the last two years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.

Management segments its allowance for loan losses into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. Risk grades are initially assigned in accordance with the Company’s loan and collection policy. An organizationally independent department reviews risk grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers’ financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based on the fair value of the collateral as the measure for the amount of the impairment. Impaired and Classified/Watch loans are aggressively monitored.

The allowances for loans rated satisfactory are further subdivided into various types of loans as defined by loan type. Management has developed specific quantitative allowance factors to apply to each individual component of the allowance and considers loan charge-off experience over the most recent two years. These quantitative allowance factors are based upon economic, market and industry conditions that are specific to the Company’s local markets. These quantitative allowance factors consider, but are not limited to, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, dependency upon government installations and facilities, and competitive factors in the local market. These allocations for the quantitative allowance factors are included in the various individual components of the allowance for loan losses. In addition, some qualitative allowance factors are used that are subjective in nature and require considerable judgment on the part of management. However, it is management’s opinion that these items do represent uncertainties in the Company’s business environment that must be factored into its analysis of the allowance for loan losses.

The unallocated component of the allowance is established for losses that specifically exist in the remainder of the portfolio, but have yet to be identified. An unallocated allowance is generally maintained in a range of 4% to 10% of the total allowance in recognition of the imprecision of the estimates. In times of greater economic downturn and uncertainty, the higher end of this range is provided. Increased allocations in the commercial real estate and real estate construction portfolios reflect increased nonperforming loans, declining real estate values and increased net charge-offs.

Through the FDIC-assisted acquisition of the assets of NCB, management established an allowance for loan losses for non-impaired loans covered by loss-sharing agreements and such allowance for loan losses was $8.1 million and $15.6 million at March 31, 2011 and September 30, 2010, respectively. The NCB acquisition was completed under previously applicable accounting pronouncements related to business combinations.

Through the FDIC-assisted acquisitions of the loans of NCB and MCB, management established non-accretable discounts for the acquired impaired loans and also for all other loans of MCB. These non-accretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, management continues to assess the experience of actual cash flows compared to estimates. When management determines that non-accretable discounts are insufficient to cover expected losses in the applicable covered loan portfolios, such non-accretable discounts are increased with a corresponding provision for covered loan losses as a charge to earnings and an increase in the applicable FDIC receivable based on loss sharing indemnification. During the year ended September 30, 2010, the Company increased non-accretable discounts relating to NCB-acquired loans by $2.1 million and recorded $421,000 as a charge to earnings with $1.7 million recorded as an increase to the FDIC receivable. During the quarter ended March 31, 2011 the Company increased allowance for covered loan losses relating to NCB acquired loans by $2.0 million and recorded $400,000 as a charge to earnings with $1.6 million as an increase to the FDIC receivable. There was no such provision for the quarter ended March 31, 2011 for MCB acquired loans.

The following is a summary of transactions in the allowance for loan losses on loans not covered by loss sharing:

	Three Months Ended						Six Months Ended
	March 31						March 31
	2011			2010			2011			2010
Balance, beginning of period	$	10,025,910		$	9,965,935		$	9,797,095		$	9,331,612
Loans charged off		(689,422	)		(1,571,426	)		(1,310,517	)		(1,763,577	)
Recoveries on loans previously charged off		57,687			1,995			107,597			28,469
Provision for loan losses charged to operations		300,000			3,000,000			1,100,000			3,800,000
Balance, end of period	$	9,694,175		$	11,396,504		$	9,694,175		$	11,396,504

The Company maintained its provisions for loan losses for the six months ending March 31, 2011 and 2010 in response to continued weak economic conditions, net charge-offs, weak financial indicators for borrowers in the real estate sectors, continuing low collateral values of commercial and residential real estate, and nonaccrual and impaired loans. The following table details the allowance for loan losses on loans not covered by loss sharing by portfolio segment as of March 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude availability to absorb losses in other categories.

	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction			Consumer and Other			Unallocated		Total

Allowance for loan losses:
Balance at beginning of year	$	1,023,078		$	6,103,391		$	623,479		$	1,236,169		$	79,149		$	731,829	$	9,797,095
Charge-offs		(165,351	)		(957,063	)		(58,937	)		(21,822	)		(107,343	)		-		(1,310,516	)
Recoveries		61,249			-			36,487			159			9,701			-		107,596
Provision		(148,056	)		438,045			(22,732	)		537,778			110,269			184,696		1,100,000
Ending balance	$	770,920		$	5,584,373		$	578,297		$	1,752,284		$	91,776		$	916,525	$	9,694,175

Ending balance: individually evaluated for impairment	$	174,476		$	944,029		$	76,568		$	10,000		$	-				$	1,205,073

Loans:
Ending balance	$	104,080,480		$	257,927,053		$	19,358,904		$	44,302,958		$	20,272,364				$	445,941,759

Ending balance: individually evaluated for impairment	$	4,315,283		$	6,289,336		$	464,051		$	511,452		$	-				$	11,580,122

The following table details the nonaccretable discount on loans covered by loss sharing by portfolio segment as of March 31, 2011.

	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction			Consumer and Other			Total

Non-accretable differences [1]:
Balance at beginning of year	$	1,856,851		$	38,170,313		$	24,257,466		$	2,497,018		$	1,632,467		$	68,414,115
Charge-offs		(188,686	)		(12,209,908	)		(11,646,678	)		(1,115,195	)		(908,150	)		(26,068,617	)
Recoveries		61,449			362,353			1,825,618			74,199			38,774			2,362,393
Provision for loan losses charged to FDIC receivable		217,809			1,393,796			(792,486	)		200,717			580,164			1,600,000
Provision for loan losses charged to operations		54,452			348,449			(198,121	)		50,179			145,041			400,000
Ending balance	$	2,001,875		$	28,065,003		$	13,445,799		$	1,706,918		$	1,488,296		$	46,707,891

Ending balance: individually evaluated for impairment	$	994,644		$	15,770,331		$	10,835,162		$	1,458,031		$	242,469		$	29,300,637

Covered loans:
Ending contractual balance	$	11,757,541		$	122,747,825		$	38,188,786		$	3,570,612		$	9,110,693		$	185,375,457

Ending contractual balance: individually evaluated for impairment	$	4,123,224		$	37,564,432		$	15,143,919		$	2,340,585		$	1,267,663		$	60,439,823

[1]	Amounts include the allowance for covered loan losses.

Loans are classified as restructured by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. At March 31, 2011 and September 30, 2010, the Company had restructured loans not covered by loss sharing of $12.4 million and $3.6 million, respectively, and of those amounts, $4.0 million and $1.9 million were on nonaccrual. All nonaccrual restructured loans are considered to be impaired and are evaluated as such in the quarterly allowance calculation. As of March 31, 2011, the allowance for loan and lease losses allocated to restructured loans on nonaccrual totaled $342,000. Also, at March 31, 2011 and September 30, 2010, the Company had restructured loans covered by loss sharing of $16.2 million (contractual balance) and $15.7 million (contractual balance), respectively.

Note 8: Income Per Share

Basic net income per share is computed on the weighted average number of shares outstanding. Diluted net income per share is computed by dividing net income by weighted average shares outstanding plus potential common shares resulting from dilutive stock options, determined using the treasury stock method.

	Three Months Ended				Six Months Ended
	March 31				March 31
	2011		2010		2011		2010
Net income	$	251,750	$	2,687,005	$	527,292	$	3,889,120
Denominator:
Weighted average common shares outstanding		18,136,137		18,424,157		18,134,905		18,416,549
Equivalent shares issuable upon vesting of restricted
stock awards and dilutive shares		51,077		34,616		51,077		34,616
Diluted shares		18,187,214		18,458,773		18,185,982		18,451,165
Net income per share
Basic	$	0.01	$	0.15	$	0.03	$	0.21
Diluted	$	0.01	$	0.15	$	0.03	$	0.21

For the three and six months ended March 31, 2010 there were 3,803 stock options antidilutive. For the three and six months ended March 31, 2011 some stock options were dilutive.

Basic earnings per share for the three and six month periods ended March 31, 2011 and 2010 were computed by dividing net income to common shareholders by the weighted-average number of shares of common stock outstanding, which consists of issued shares less treasury stock.

Diluted earnings per share for the three and six month periods ended March 31, 2011 and 2010 were computed by dividing net income to common shareholders by the weighted-average number of shares of common stock outstanding and the dilutive effect of the shares awarded under the Company’s equity compensation plans.

Note 9: Real Estate Owned

The following is a summary of transactions in real estate owned:

Non-covered real estate owned

	Six Months Ended March 31, 2011			Year Ended September 30, 2010
Balance, beginning of period	$	9,641,425		$	4,777,542
Real estate acquired through foreclosure of loans receivable		2,103,019			10,528,383
Real estate sold		(3,454,468	)		(4,789,815	)
Write down of real estate owned		(513,922	)		(707,519	)
Gain (loss) on sale of real estate owned		(56,241	)		(167,166	)
Balance, end of period	$	7,719,813		$	9,641,425

Covered real estate owned

	Six Months Ended March 31, 2011			Year Ended September 30, 2010
Balance, beginning of period	$	29,626,581		$	10,681,499
Real estate acquired and subject to FDIC loss sharing agreement		—			15,131,544
Real estate acquired through foreclosure of loans receivable		8,530,401			19,938,614
Real estate sold		(17,689,006	)		(12,991,775	)
Provision for losses on other real estate owned:
Write down of real estate owned recognized in noninterest expense		—			(691,592	)
Increase of FDIC receivable for loss sharing agreement		—			(2,766,366	)
Gain (loss) on sale of real estate owned:
Recognized in noninterest income		—			64,931
Reduction of FDIC receivable for loss sharing agreements		154,918			259,726
Balance, end of period	$	20,622,894		$	29,626,581

Note 10: Employee Benefits

The Company has a stock option plan which allows for stock option awards of the Company’s common stock to eligible directors and key employees of the Company. The option price is determined by a committee of the board of directors at the time of the grant and may not be less than 100% of the market value of the common stock on the date of the grant. When granted, the options vest over periods up to four or five years from grant date or upon death, disability, or qualified retirement. All options must be exercised within a 10 year period from grant date. The Company may grant either incentive stock options, which qualify for special federal income tax treatment, or nonqualified stock options, which do not receive such tax treatment. The Company’s stockholders have authorized 707,943 shares for the plan of which 54,650 have been granted and exercised, 567,775 are granted and outstanding with the remaining 85,518 shares available to be granted.

The fair value of the options granted during the six months ended March 31, 2011 was estimated on the date of grant using the Black-Scholes-Merton model with the following assumptions:

Risk- free interest rate		3.21	%
Dividend yield		2.50	%
Expected life at date of grant	90 Months
Volatility		17.78	%
Weighted average grant-date fair value	$	1.27

The following table summarizes activity for shares under option and weighted average exercise price per share:

	Shares		Weighted average exercise price/share		Weighted average remaining life (years)
Options outstanding- September 30, 2010		512,775		10.96		8.19
Options exercised		—		—		—
Options forfeited		—		—		—
Options granted		55,000		9.00		9.67
Options outstanding- March 31, 2011		567,775		10.77		8.33
Options exercisable – March 31, 2011		5,750		29.42		1.58

Stock option expense was $37,316 and $8,458 for the six months ended March 31, 2011 and 2010, respectively. The intrinsic value of 567,775 shares outstanding at March 31, 2011 was $156,461.The following table summarizes information about the options outstanding at March 31, 2011:

Number outstanding at March 31, 2011	Weighted average remaining contractual life in years	Exercise price per share
5,500	3	29.26
250	5	32.99
325,025	9	11.00
155,000	9	10.20
55,000	10	9.00
540,775

The Company has a recognition and retention plan which has been authorized to grant up to 283,177 shares of restricted stock to key employees and directors. The Company has established a grantor trust to purchase these common shares of the Company in the open market or in private transactions. The grantor trust has not purchased previously authorized but unissued shares from the Company. The grantor trust has purchased all of the 283,177 shares that have been authorized. As of March 31, 2011, 80,963 shares remain in the trust and are disclosed as treasury stock in the consolidated statements of financial condition. Of the 80,663 shares remaining in the trust, 47,274 shares have been granted and are not yet vested and 33,389 shares are available for grants.

	Weighted average
	Shares		grant date fair value per award
Unvested restricted stock awards-September 30, 2010		51,574		22.74
Granted		—		—
Vested		3,300		42.42
Cancelled or expired		1,000		50.00
Unvested restricted stock awards-March 31, 2011		47,274		20.79

All grants prior to October 1, 2005 vest at the earlier of the scheduled vesting or death, disability, or qualified retirement which is generally age 65 or age 55 with 10 years of service. All grants prior to October 1, 2005 are expensed to the scheduled vesting date. Grants subsequent to January 1, 2009 will be expensed to the earlier of scheduled vesting or substantive vesting which is when the recipient becomes qualified for retirement which is generally age 65.

Note 11: Commitments and Contingent Liabilities

In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At March 31, 2011, commitments to extend credit and standby letters of credit totaled $37.5 million. The Company does not anticipate any material losses as a result of these transactions.

In the normal course of business, the Company is party (both as plaintiff and defendant) to certain matters of litigation. In the opinion of management and counsel, none of these matters should have a material adverse effect on the Company’s financial position or results of operation.

Note 12: Fair Value of Financial Instruments and Fair Value Measurement

Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting standards also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The applicable standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Most of the Company’s available for sale securities fall into Level 2 of the fair value hierarchy. These securities are priced via independent service providers. In obtaining such valuation information, the Company has evaluated the valuation methodologies used to develop the fair values.

Assets and Liabilities Measured on a Recurring Basis:

Assets and liabilities measured at fair value on a recurring basis are summarized below.

March 31, 2011	Fair value measurements using:
	Fair value		Quoted prices in active markets for identical assets (Level 1 inputs)		Quoted prices for similar assets (Level 2 inputs)		Significant unobservable inputs (Level 3 inputs)
Investment securities available for sale:
U.S. Treasury securities:	$	20,180,470	$	20,180,470	$	—	$	—
State and municipal obligations		5,142,526		—		5,142,526		—
Mortgage–backed securities:
FNMA certificates		38,049,032		—		38,049,032		—
GNMA certificates		6,761,200		—		6,761,200		—
FHLMC certificates		30,157,369		—		30,157,369		—
Collateralized mortgage obligations:
FNMA		14,687,229		—		14,687,229		—
GNMA		3,928,524		—		3,928,524		—
FHLMC		3,163,870		—		3,163,870		—
Other:
Investment grade		6,152,926		—		6,152,926		—
Split Rating [1]		6,457,880		—		6,457,880		—
Non investment grade		8,806,995		—		8,806,995		—
Available for sale securities	$	143,488,021	$	20,180,470	$	123,307,551	$	—

September 30, 2010	Fair value measurements using:
	Fair value		Quoted prices in active markets for identical assets (Level 1 inputs)		Quoted prices for similar assets (Level 2 inputs)		Significant unobservable inputs (Level 3 inputs)
Investment securities available for sale:
Tax free municipals	$	102,821	$	—	$	102,821	$	—
Mortgage–backed securities:
FNMA certificates		35,962,418		—		35,962,418		—
GNMA certificates		7,613,911		—		7,613,911		—
FHLMC certificates		26,097,894		—		26,097,894		—
Collateralized mortgage obligations:
FNMA		9,871,737		—		9,871,737		—
GNMA		6,108,333		—		6,108,333		—
FHLMC		20,784,533		—		20,784,533		—
Other:
Investment grade		21,187,936		—		21,187,936
Split Rating [1]		5,453,153		—		5,453,153		—
Available for sale securities	$	133,182,736	$	—	$	133,182,736	$	—

Credit ratings are as of March 31, 2011 and September 30, 2010, respectively.

[1] Bonds with split ratings would be non-investment grade based on lower rating.

Assets and Liabilities Measured on a Nonrecurring Basis:

Assets and liabilities measured at fair value on a nonrecurring basis are summarized below.

	Fair value measurements using:
	Fair value		Quoted prices in active markets for identical assets (Level 1 inputs)		Quoted prices for similar assets (Level 2 inputs)		Significant unobservable inputs (Level 3 inputs)
March 31, 2011
Impaired loans:
Not covered under loss share	$	2,985,648	$	—	$	—	$	2,985,648
Covered under loss share		16,132,547		—		—		16,132,547
Other real estate owned:
Not covered under loss share		7,719,813		—		—		7,719,813
Covered under loss share		20,622,894		—		—		20,622,894
September 30, 2010
Impaired loans:
Not covered under loss share		3,751,818		—		—		3,751,818
Covered under loss share		51,468,000		—		—		51,468,000
Other real estate owned:
Not covered under loss share		9,641,425		—		—		9,641,425
Covered under loss share		29,626,581		—		—		29,626,581

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors. After evaluating the underlying collateral, the fair value of the impaired loans is determined by allocating specific reserves from the allowance for loan and lease losses to the loans. Thus, the fair value reflects the loan balance less the specifically allocated reserve.

Other real estate owned is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan and lease losses at the time of foreclosure. A provision is charged to earnings for subsequent losses on other real estate owned when market conditions indicate such losses have occurred. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors beyond our control, and future declines in the value of the real estate would result in a charge to earnings. The recognition of sales and sales gains is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If those requirements are not met, sale and gain recognition is deferred.

Accounting standards require disclosures of fair value information about financial instruments, whether or not recognized in the Statement of Condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to Management as of March 31, 2011 and September 30, 2010.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value because of the short maturity of these instruments.

INVESTMENTS AVAILABLE FOR SALE AND FHLB STOCK - The fair value of investments and mortgage–backed securities and collateralized mortgage obligations available for sale is estimated based on bid quotations received from securities dealers. The FHLB stock is considered a restricted stock and is carried at cost which approximates its fair value.

LOANS RECEIVABLE - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. The estimated fair value at September 30, 2010 and 2009 has been affected by an estimate of liquidity risk of 5.5%.

LOANS HELD FOR SALE - Loans held for sale are carried at the lower of cost or market value. The fair values of loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics

CASH SURRENDER VALUE OF LIFE INSURANCE - The Company’s cash surrender value of bank owned life insurance approximates its fair value.

FDIC RECEIVABLE FOR LOSS SHARING AGREEMENTS - The Company’s FDIC receivable for loss sharing agreements approximates fair value.

DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest–bearing demand deposits, savings, NOW accounts, and money market and checking accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

BORROWINGS - The fair value of the Company’s Federal Home Loan Bank advances is estimated based on the discounted value of contractual cash flows. The fair value of securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.

ACCRUED INTEREST AND DIVIDENDS RECEIVABLE AND PAYABLE - The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.

COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The value of these unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. Since no significant credit exposure existed, and because such fee income is not material to the Company's financial statements at March 31, 2011 and at September 30, 2010, the fair value of these commitments is not presented.

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the Statement of Condition approximate fair value. These items include cash and due from banks, interest-bearing bank balances, federal funds sold, other short-term borrowings and accrued interest receivable and payable balances. The estimated fair value of the Company’s remaining on-balance sheet financial instruments as of March 31, 2011 and September 30, 2010 are summarized below.

	March 31, 2011				September 30, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	105,792,907	$	105,792,907	$	235,638,582	$	235,638,582
Investments available for sale		143,488,021		143,488,021		133,182,736		133,182,736
FHLB stock		13,542,100		13,542,100		14,071,200		14,071,200
Loans receivable, net		559,859,389		528,506,326		599,369,605		555,177,903
Loans held for sale		790,849		798,475		2,061,489		2,079,239
Cash surrender value of life insurance		32,249,088		32,249,088		31,678,013		31,678,013
FDIC Receivable for loss sharing agreements		64,691,226		64,021,185		89,824,798		90,012,434
Accrued interest and dividends receivable		3,576,211		3,576,211		3,232,330		3,232,330
Financial liabilities:
Deposits	$	735,289,526	$	744,406,259	$	823,134,133	$	830,427,887
FHLB advances and other borrowings		110,000,000		117,834,977		212,000,000		226,983,028
Accrued interest payable		793,916		793,916		2,043,608		2,043,608

Note 13: Comprehensive Income (Loss)

Comprehensive income (loss) includes net income and other comprehensive income (loss) which includes the effect of unrealized holding gains on investment and mortgage-backed securities available for sale in stockholders’ equity. The only component of accumulated other comprehensive loss is the fair value adjustment on investment securities available for sale, net of income taxes. Accumulated other comprehensive loss was $(3,285,366) and $(3,497,883) as of March 31, 2011 and 2010, respectively, and the related income taxes were $1,692,461 and $1,561,367 for those same periods, respectively. The following table sets forth the amounts of comprehensive income (loss) included in stockholders’ equity along with the related tax effect for the three and six months ended March 31, 2011 and 2010.

	Three Months Ended					Six Months Ended
	March 31					March 31
	2011		2010			2011			2010
Net income	$	251,750	$	2,687,005		$	527,292		$	3,889,120
Less reclassification adjustment for net gains realized in net income, net of taxes of $0, $75,210, $65,946 and $78,431, respectively		-		(119,634	)		(104,898	)		(124,757	)
Net unrealized holding gains (losses) on investment and mortgage securities available for sale arising during the year, net of taxes of $(473,960), $(1,092,362), $(113,470) and $(2,401,185), respectively		753,915		1,737,592			180,493			3,819,501
Other-than-temporary impairment losses recognized in earnings, net of taxes of $(86,078), $(916,238), $(86,078) and $(975,296), respectively		136,922		1,457,436			136,922			1,551,378
Comprehensive income	$	1,142,587	$	5,762,399		$	739,809		$	9,135,242

Item 2.

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

Management’s discussion and analysis of the financial condition and results of operations at and for the three and six months ended March 31, 2011 and 2010 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities; our incurring higher than expected loan charge-offs with respect to assets acquired in FDIC-assisted acquisitions; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and changes in our organization, compensation and benefit plans. Additional factors are discussed in the Company’s Form 10-K for the year ended September 30, 2010 under Part I; Item 1A.- “Risk Factors,” and in the Company’s other filings with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities, collateralized mortgage obligations and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of deposits and Federal Home Loan Bank advances and other borrowings.

Our principal business consists of attracting deposits from the general public and investing those funds primarily in loans. We make loans secured by first mortgages on owner-occupied, one- to four-family residences, consumer loans, loans secured by first mortgages on non-owner-occupied one- to four-family residences, construction loans secured by one- to four-family residences, commercial real estate loans, and multi-family real estate loans. While our primary business is the origination of loans funded through retail deposits, we also purchase whole loans and invest in certain investment securities and mortgage-backed securities, and use FHLB advances, repurchase agreements and other borrowings as additional funding sources.

The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates paid on competing personal investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and other loans, changing loan underwriting guidelines, as well as interest rate pricing competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, investment income, borrowings, and funds provided from operations.

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, mortgage-backed securities, investment securities and cash, and the interest paid on deposits and borrowings. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. Generally, deposit pricing is based upon a survey of competitors in the Bank’s market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are adjustable rate products that have a fixed rate for six months to five years with annual adjustments thereafter.

During the first six months of fiscal year 2011, the economy began to show signs of recovery, as evidenced by increases in consumer spending and the stabilization of the labor market, the housing sector, and financial markets. However, unemployment levels remained elevated and unemployment periods prolonged, housing prices remained depressed and demand for housing was weak, due to distressed sales and tightened lending standards. In an effort to support mortgage lending and housing market recovery, and to help improve credit conditions overall, the Federal Open Market Committee of the Federal Reserve has maintained the overnight lending rate between zero and 25 basis points since December 2008.

Net income was $527,000 for the six months ended March 31, 2011. Net income for the six months ended March 31, 2010 was $3.9 million, an increase of $3.4 million over the prior year period, due to a $9.3 million purchase gain on March 26, 2010 on the FDIC assisted acquisition of assets and liabilities of McIntosh Commercial Bank.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. As discussed in the Company’s Form 10-K for the fiscal year ended September 30, 2010, the Company considers its critical accounting policies to be the allowance for loan losses, other-than-temporary impairment of investment securities, real estate owned, mortgage banking activities, goodwill and other intangible assets, deferred income taxes, receivable from FDIC under loss sharing agreements, and estimation of fair value.

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

Assets. Total assets decreased $194.8 million, or 16.4%, to $991.3 million at March 31, 2011 from $1.2 billion at September 30, 2010. There was a decrease in liabilities of $196.0 million due to a $102.0 million reduction in FHLB advances and $87.8 million reduction in deposits, primarily certificates of deposits. The reduction in liabilities was funded by a $14.9 million decrease in mortgage securities available for sale, a $39.3 million decrease in loans, and a $129.8 million reduction in cash and cash equivalents. The de-leveraging of the Company’s balance sheet during the six months ended March 31, 2011 was planned in connection with maturity of $102 million of FHLB advances. These advances were at a weighted average fixed rate of 5.64% and liquid assets utilized to repay these liabilities earned interest of less than 1%. The de-leveraging is expected to improve the net interest margin in future periods.

Loans. At March 31, 2011, total loans were $570.6 million, or 57.6% of total assets compared to $609.9 million or 51.4% of total assets at September 30, 2010. As indicated in the table below, over this six month period our net loans covered by loss sharing were reduced by $23.6 million and at March 31, 2011, our covered loans totaled $124.6 million, or 22.3% of our total loan portfolio.

Non-covered and Covered Loans, net

	Non-covered		Covered		Total
	(Dollars in Thousands)
Loan Balances:
March 31, 2011	$	435,276	$	124,583	$	559,859
December 31, 2010		447,621		136,400		584,021
September 30, 2010		451,231		148,139		599,370
June 30, 2010		463,725		201,673		665,398
March 31, 2010		463,934		178,929		642,863

Investment and Mortgage Securities Portfolio. At March 31, 2011, our investment and mortgage securities portfolio totaled $143.5 million, compared to $133.2 million at September 30, 2010.

We analyze our non-agency collateralized mortgage securities for other than temporary impairment at least quarterly. We use a multi-step approach using Bloomberg analytics considering market price, ratings, ratings changes, and underlying mortgage performance including delinquencies, foreclosures, deal structure, underlying collateral losses, prepayments, loan-to-value ratios, credit scores, and loan structure and underwriting, among other factors. Our first test is whether the bond has loss coverage of greater than five times losses (assumes loss of 40% of balance and defaults of 60% on 60-day delinquencies, 70% on 90-day delinquencies, 100% on foreclosures and other real estate owned). If a bond passes this test, we consider it not other than temporarily impaired. For bonds that do not pass the first test, we apply the Bloomberg default model, and if the bond shows no losses we consider it not other than temporarily impaired. If a bond shows material losses or a break in yield with the Bloomberg default model, we create a probable vector of loss severities and defaults and if it shows a loss we consider it other than temporarily impaired.

The following table shows issuer-specific information, book value, fair value credit rating and unrealized gain (loss) for our portfolio of non-agency collateralized mortgage obligations as of March 31, 2011. At March 31, 2011, we had recorded a total of $1.9 million of other than temporary impairment charges with respect to CWALT 2005-63 2A2, and a total of $872,000 of other than temporary impairment charges with respect to SARM 2005-15 2A2. No other mortgage securities in our investment portfolio were other than temporarily impaired at March 31, 2011.

Description	Credit Rating			Book value	Market Value	Unrealized Gain (Loss)
	Moody	S&P	Fitch	(Dollars in thousands)
GSR 2003-4F 1A2	n/a	AAA	AAA	$ 669	$ 684	$ 15
GSR 2005-2F 1A2	n/a	AAA	AA	1,196	1,201	5
MASTR 2003-8 4A1	n/a	AAA	AAA	1,539	1,573	34
WFMBS 2006-12 A1	Baa2	n/a	BBB	19	19	0
CMLTI 2004-HYB1 A31	A1/*-	n/a	n/a	1,915	1,797	(118)
CMSI 1993-14 A3	WR	BB	n/a	179	156	(23)
MARM 2004-7 5A1	Ba3	AAA	n/a	7,016	6,458	(558)
MARM 2004-15 4A1	Ba3	n/a	A	3,302	2,774	(528)
SARM 2004-6 3A3	n/a	AAA	n/a	1,453	879	(574)
MARM 2004-13 B1	NR	B+	n/a	7,427	3,478	(3,949)
SARM 2005-15 2A2	NR	CCC	n/a	2,760	1,916	(844)
CWALT 2005-63 2A2	C	D	n/a	617	482	(135)
				$ 28,092	$ 21,417	$ (6,675)

Cash flow analysis indicates that the yields on all of the securities listed in the table are maintained. The unrealized losses shown may relate to general market liquidity and, in the securities with the larger unrealized losses, weakness in the underlying collateral, market concerns over foreclosure levels, and geographic concentration. We consider these unrealized losses to be temporary impairment losses primarily because cash flow analysis indicates that there are continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches. As of March 31, 2011, the securities above were classified as available for sale and a total of $2.7 million had been recognized as impairment through net income. Based on the analysis performed by management as of March 31, 2011, the Company deemed it probable that all contractual principal and interest payments on the above securities, other than the two securities identified above as being other than temporarily impaired, will be collected and therefore there is no additional other than temporary impairment.

Bank Owned Life Insurance. The total cash surrender value of our bank owned life insurance at March 31, 2011 was $32.2 million, an increase of $571,000 compared to the cash surrender value of $31.7 million at September 30, 2010.

Deposits. Total deposits decreased by $87.8 million, or 10.7%, to $735.3 million at March 31, 2011 from $823.1 million at September 30, 2010. As indicated below we reduced wholesale certificates of deposit by $41.4 million and retail certificates by $54.4 million for the same period. Transaction accounts were up by $8.4 million in spite of reduced rates that we are paying and other tightening of terms on our rewards checking account. The Company’s funding strategy has focused on lower cost core deposit growth and less wholesale deposit funding. The two FDIC assisted acquisition transactions brought a larger degree of wholesale time deposit funding which we have sought to decrease in our strategy.

Deposit Balances

											Retail		Wholesale
			Transaction				Money		Total Core		Certificates of		Certificates of
	Deposit Fees		Accounts		Savings		Market		Deposits		Deposit		Deposit
	(Dollars in Thousands)
March 31, 2011	$	1,360	$	214,810	$	19,329	$	87,005	$	321,144	$	372,160	$	41,987
December 31, 2010		1,433		202,632		16,850		91,974		311,456		395,744		52,212
September 30, 2010		1,564		206,373		17,409		89,388		313,170		426,521		83,443
June 30, 2010		1,553		190,325		18,613		99,464		308,402		402,218		100,438
March 31, 2010		1,396		180,508		29,725		109,595		319,828		417,961		168,791
December 31, 2009		1,276		143,187		17,256		80,772		241,485		256,666		116,583

Borrowings. Borrowings decreased to $110.0 million at March 31, 2011 from $212.0 million at September 30, 2010. In October 2010 we prepaid $60.0 million of FHLB advances that were originally scheduled to mature in early January 2011. The prepayment penalty of $810,000 approximated the net present value of interest that would have been paid if we had kept the borrowing to its original maturity. In March 2011 we paid off $42 million of FHLB advances that matured. Paying off the $42 million of borrowings using cash equivalents resulted in a net interest income increase estimated at $567,000 a quarter.

Equity. At March 31, 2011, our total equity equaled $137.0 million (or $7.55 per share), a $100,000 increase from September 30, 2010. The increase was primarily due to $527,000 of net income, a decrease in unrealized losses on securities available for sale, net of tax, partially offset by $969,000 of dividends to shareholders paid during the six months ended March 31, 2011.

Comparison of Operating Results for the Three Months Ended March 31, 2011 and March 31, 2010

General. The Company recognized net income of $252,000 for the quarter ended March 31, 2011, compared to net income of $2.7 million for the quarter ended March 31, 2010. The $2.4 million decrease in net income between periods was a result of a $6.5 million decrease in noninterest income and a $1.4 million increase in noninterest expense partially offset by a decrease of $1.3 million in interest expense. Major contributors to the decrease in noninterest income were a $9.3 million purchase gain on the FDIC assisted acquisition of assets and liabilities of MCB during the quarter ended March 31, 2010.

Interest and Dividend Income. Total interest and dividend income increased $288,000, or 2.6%, to $11.3 million for the three months ended March 31, 2011 from $11.0 million for the three months ended March 31, 2010. Interest on loans increased $1.1 million, or 12.6%, to $10.2 million as a result of a $725,000, or 1.6%, increase in the average balance of loans receivable to $580.6 million and a 78 basis point increase in the average yield on loans. The increase in the average balance was primarily the result of the acquisition of loans in the MCB transaction. As indicated in the table below, the average yield on loans over the past year increased from 6.27% for the three months ended March 31, 2010 to 7.05% for the three months ended March 31, 2011. The increase relates to the MCB acquisition and related accretion income. Interest income was negatively impacted by high balances of cash and cash equivalents and also nonperforming assets, primarily covered by loss sharing.

	Three Months Ended
	March			December			September			June			March			December
	2011			2010			2010			2010			2010			2009
Cost of Liabilities		1.92	%		2.14	%		2.52	%		2.49	%		2.60	%		2.63	%
Cost of Deposits		1.38			1.61			1.84			1.82			1.78			1.77
Cost of CD's		1.78			1.97			2.06			2.07			2.07			2.15
Cost of NOW Accounts		0.32			0.36			0.65			0.71			0.84			0.75
Cost of Rewards Checking		1.63			2.35			3.65			3.51			3.27			3.19
Cost of Savings		0.09			0.14			0.36			0.63			0.28			0.26
Cost of MMDA		0.47			0.51			0.60			0.81			0.73			0.82
Cost of Borrowings		4.51			4.69			5.00			4.95			4.86			4.78
Yield of Assets		5.26	%		5.53	%		5.73	%		6.15	%		5.06	%		5.51	%
Yield of Loans		7.05			7.51			7.63			7.68			6.27			6.46
Yield on Mortgage Securities		3.03			3.02			3.56			3.81			4.00			4.27
Loan/Deposit Spread		5.67	%		5.90	%		5.79	%		5.86	%		4.49	%		4.69	%
Mortgage Securities/Borrowings Spread		-1.48			-1.67			-1.44			-1.14			-0.86			-0.51
Asset/Liability Spread		3.34			3.39			3.21			3.66			2.46			2.88

Interest and dividend income on mortgage-backed securities decreased $917,000, or 49.2%, to $945,000 for the three months ended March 31, 2011 from $1.9 million for the three months ended March 31, 2010. The decrease reflected a $61.6 million, or 33.0%, decrease in the average balance of securities to $124.7 million and a 97 basis point decrease in the average yield on securities in the generally lower market interest rate environment.

Interest Expense. Total interest expense decreased $1.3 million, or 24.4%, to $4.0 million for the three months ended March 31, 2011 from $5.3 million for the three months ended March 31, 2010. The decrease was due to a $993,000 decrease in interest paid on borrowed funds. The decrease reflected a $71.5 million or 33.1% decrease in average borrowings to $144.5 million from $216.0 million. Interest on deposits decreased to $2.4 million for the three months ended March 31, 2011 from $2.7 million for the three months ended March 31, 2010. This was a $303,000, or 11.3% decrease.

Net Interest Income. Net interest income increased $1.6 million, or 27.7%, to $7.3 million for the three months ended March 31, 2011, from $5.7 million for the three months ended March 31, 2010. The increase primarily reflected the $1.1 million, or 12.6%, increase in interest income on loans combined with the 68 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a $19.0 million, or 2.3%, increase in the average balance of interest-bearing liabilities for the three-months ended March 31, 2011 compared to the three months ended March 31, 2010. Our net interest margin increased 78 basis points to 3.40% for the three months ended March 31, 20101 from 2.62% for the 2010 period, while our net interest rate spread increased 88 basis points to 3.34% from 2.46%. Lower deposit costs and accretion of purchase discounts from the Neighborhood Community Bank (“NCB”) and McIntosh Commercial Bank (“MCB”) acquisitions contributed to the improved net interest margin and net interest rate spread. As indicated in the table below our percentage of interest-earning assets to average interest-bearing liabilities decreased from 106.63% in March 2010 to 102.77% in March 2011. The ratio dropped due to high levels of the FDIC receivable. Nonperforming assets also reduced net interest income.

	For the Three Months Ended March 31,
	2011							2010
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets:	(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other financial institutions			$	64		0.22	%	$	87,316	$	29		0.13
FHLB common stock		13,542		27		0.80			14,086		1		0.03
Mortgage-backed securities and collateralized mortgage
obligations available for sale		124,761		945		3.03			186,330		1,863		4.00
Other investment securities available for sale		25,402		47		0.74			4,103		48		4.68
Loans receivable (1) (2)		580,622		10,229		7.05			579,897		9,084		6.27
Total interest-earning assets		859,624		11,312		5.26			871,732		11,025		5.06
Total noninterest-earning assets		272,158		-					107,149		-
Total assets	$	1,131,782		11,312				$	978,881		11,025

Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts	$	85,485	$	69		0.32		$	65,078	$	136		0.84
Rewards checking		69,581		284		1.63			37,010		303		3.27
Savings accounts		18,012		4		0.09			18,701		13		0.28
Money market deposit accounts		88,716		105		0.47			77,378		142		0.73
Certificate of deposit accounts		430,140		1,917		1.78			403,276		2,089		2.07
Total interest-bearing deposits		691,934		2,379		1.38			601,443		2,683		1.78
Borrowed funds		144,522		1,631		4.51			216,049		2,624		4.86
Total interest-bearing liabilities		836,456		4,010		1.92			817,492		5,307		2.60
Noninterest-bearing deposits		52,783							44,549
Other noninterest-bearing liabilities		14,718		-					13,406		-
Total noninterest-bearing liabilities		67,501							57,955
Total liabilities		903,957		-					875,447		-
Total stockholders' equity		227,825							103,434
Total liabilities and stockholders' equity	$	1,131,782		4,010				$	978,881		5,307
Net interest income			$	7,302						$	5,718

Net interest rate spread (3)						3.34	%						2.46	%
Net interest margin (4)						3.40	%						2.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities						102.77	%						106.63	%

(1)	Includes net loan fees deferred and accreted pursuant to applicable accounting requirements.

(2)	Interest income on loans is interest income as recorded in the income statement and, therefore, does not include interest income on nonaccrual loans.

(3)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest bearing liabilities.

(4)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

Rate/Volume Analysis. The following tables set forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rates (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). Changes due to both volume and rate have been allocated proportionately to the volume and rate changes. The net column represents the sum of the prior columns.

	For the Three Months Ended March 31, 2011
	Compared to
	Three Months Ended March 31, 2010
	Increase/(Decrease) Due to
	(In Thousands)
	Volume			Rate			Combined			Net
Interest Income:
Loans	$	11		$	1,132		$	1		$	1,144
Securities		(366	)		(492	)		(61	)		(919	)
Other interest-earning assets		9			47			5			61
Total interest-earning assets		(346	)		687			(55	)		286

Interest Expense
Deposits		387			(558	)		(134	)		(305	)
Borrowings		(869	)		(186	)		62			(993	)
Total interest-bearing liabilities		(482	)		(744	)		(72	)		(1,298	)

Net change in net interest income	$	136		$	1,431		$	17		$	1,584

Provision for Loan Losses. The provision for loan losses for the three months ended March 31, 2011 were $300,000 for non-covered loans and $400,000 for covered loans, compared to $3.0 million for noncovered loans for the three months ended March 31, 2010. Net charge-offs on non-covered loans decreased to $632,000 for the three months ended March 31, 2011, from $1.6 million for the three months ended March 31, 2010. The allowance for loan losses for non-covered loans was $9.7 million, or 2.18% of total non-covered loans receivable at March 31, 2011.

Noninterest Income. Noninterest income decreased $6.5 million, or 74.7%, to $2.2 million for the three months ended March 31, 2011 from $8.7 million for the three months ended March 31, 2010. The decrease in noninterest income was largely attributed to a $9.3 million purchase gain on March 26, 2010 on the FDIC assisted acquisition of assets and liabilities of MCB. As indicated in the table below, deposit fees for the three months ended March 31, 2011 were down $36,000 in the second full quarter since the implementation of customers opting in for nonsufficient fund charges on electronic transactions. Accretion on the FDIC indemnification asset is decreasing as a result of the reduction of the indemnification asset as the FDIC pays loss share claims.

	For the Three Months Ended
	(Dollars in Thousands)
	March			December		September		June		March			December			September
	2011			2010		2010		2010		2010			2009			2009
Deposit fees	$	1,360		$	1,433	$	1,564	$	1,553	$	1,396		$	1,276		$	1,284
Gain on the sale of loans		117			262		171		157		380			89			135
Brokerage commissions		202			167		140		130		143			106			98
Bank owned life insurance		290			281		279		283		205			361			319
Gain on sale of investments, net		-			171		568		128		195			8			1,464
Impairment losses on securities recognized in earnings		(223	)		-		-		-		(3,374	)		(153	)		-
FDIC accretion		254			342		450		557		268			566			-
Other income		215			254		199		177		188			156			888
Gain on MCB acquisition		-			-		-		-		9,343			-			-
Total Noninterest Income	$	2,215		$	2,910	$	3,371	$	2,985	$	8,744		$	2,409		$	4,188

Noninterest Expense. Total noninterest expense increased $1.4 million, or 18.8%, to $8.6 million for the three months ended March 31, 2011, from $7.3 million for the three months ended March 31, 2010. As indicated in the table below the increase included an increase of $511,000 or 16.0%, in salaries and employee benefits resulting from our acquisition of MCB and additional special asset and regulatory reporting personnel related to FDIC-assisted acquisitions. Other increases included $520,000 in the cost of REO primarily due to write downs of real estate owned, an increase of $129,000 in occupancy attributed to the acquisition of MCB, partially offset by a decrease of $237,000 in legal and professional fees relating primarily to collection matters on nonperforming loan and public company reporting requirements. The cost of REO for the quarter ended March 31, 2011 was primarily fair value write-downs while previous quarters cost was primarily operations expenses such as real estate taxes and legal fees.

Noninterest Expense

	For the Three Months Ended
	March		December		September		June		March
	2011		2010		2010		2010		2010
Compensation & employee benefits	$	3,705	$	3,928	$	3,607	$	3,963	$	3,194
Occupancy		1,701		1,543		1,603		1,412		1,572
Legal & professional		469		425		32		519		706
Marketing		426		389		433		424		331
Furniture & equipment		196		200		186		169		167
Postage, office supplies, and printing		256		238		197		241		190
Deposit premium amortization expense		55		56		57		59		34
Other		658		637		652		566		553
FHLB advance prepayment penalty		-		810		-		-		-
Federal insurance premiums and other regulatory fees		396		322		530		313		273
Net cost of operations of real estate owned		765		861		1,785		372		244
	$	8,627	$	9,409	$	9,082	$	8,038	$	7,264

Income Taxes. There was an income tax benefit of ($62,000) for the three months ended March 31, 2011 compared to an expense of $1.5 million for the three months ended March 31, 2010. Our effective tax rate was (32.80)% for the three months ended March 31, 2011, compared to 35.98% for the three months ended March 31, 2010. The decrease in the effective tax rate for the 2011 period was due to lower pretax income which created a higher benefit on a percentage basis from tax advantaged investments such as bank owned life insurance.

Comparison of Operating Results for the Six Months Ended March 31, 2011 and March 31, 2010

General. The Company recognized net income of $527,000 for the six months ended March 31, 2011, compared to net income of $3.9 million for the six months ended March 31, 2010. The $3.4 million decrease in net income between periods was a result of a $6.0 million decrease in noninterest income and a $4.7 million increase in noninterest expense which was partially offset by a $1.4 million increase in interest income and a decrease in interest expense of $1.5 million. Major contributors to the decrease in noninterest income and increase in noninterest expense was a $9.3 million purchase gain on the FDIC assisted acquisition of assets and liabilities of MCB, impairment of securities, and expenses related to the Company’s FDIC-assisted acquisitions, respectively.

Interest and Dividend Income. Total interest and dividend income increased $1.4 million, or 6.4%, to $23.7 million for the six months ended March 31, 2011 from $22.3 million for the six months ended March 31, 2010. Interest on loans increased $3.4 million, or 18.6%, to $21.5 million as a result of a $16.7 million, or 2.9%, increase in the average balance of loans receivable to $591.6 million and a 96 basis point increase in the average yield on loans. The increase in the average balance was primarily the result of the acquisition of loans in the MCB transaction. The average yield on loans over the past year increased from 6.32% for the six months ended March 31, 2010 to 7.28% for the six months ended March 31, 2011. The increase related to the MCB acquisition and related accretion income. Interest income was reduced by high balances of cash and cash equivalents and also nonperforming loans, primarily covered by loss sharing.

Interest and dividend income on mortgage-backed securities decreased $2.0 million, or 51.6%, to $1.9 million for the six months ended March 31, 2011 from $4.0 million for the six months ended March 31, 2010. The decrease reflected a $64.9 million, or 33.9%, decrease in the average balance of securities to $126.8 million and a 111 basis point decrease in the average yield on securities in the generally lower market interest rate environment.

Interest Expense. Total interest expense decreased $1.5 million, or 14.9%, to $8.8 million for the six months ended March 31, 2011 from $10.4 million for the six months ended March 31, 2010. The decrease was due to a $1.8 million decrease in interest paid on borrowed funds. The decrease reflected a $67.6 million or 31.0% decrease in average borrowings to $150.4 million from $218.0 million. Interest on deposits increased to $5.4 million for the six months ended March 31, 2011 from $5.1 million for the six months ended March 31, 2010. The cost of deposits decreased from 1.78% for the six months ended March 31, 2010 to 1.49% for the six months ended March 31, 2011; however, the volume variance resulted in increased interest expense as the average balance of deposits were $142 million higher in the 2011 period.

Net Interest Income. Net interest income increased $3.0 million, or 25.0%, to $14.9 million for the six months ended March 31, 2011, from $11.9 million for the six months ended March 31, 2010. The increase primarily reflected the $3.4 million, or 18.6%, increase in interest income on loans combined with the 58 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a $74.4 million, or 9.4%, increase in the average balance of interest-bearing liabilities for the six-months ended March 31, 2011 compared to the six months ended March 31, 2010. Our net interest margin increased 58 basis points to 3.39% for the 2011 period from 2.81% for the 2010 period, while our net interest rate spread increased 73 basis points to 3.37% from 2.64%. Lower deposit costs and accretion of purchase discounts from the “NCB and MCB” acquisitions contributed to the improved net interest margin and net interest rate spread. As indicated in the table below our percentage of interest-earning assets to average interest-bearing liabilities decreased from 106.82% for the six months ended March 2010 to 101.14% for the six months ended March 2011. The ratio dropped due to high levels of cash and the FDIC receivable. Nonperforming assets also reduced net interest income.

	For the Six Months Ended March 31,
	2011							2010
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets:	(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	130,438	$	149		0.23	%	$	63,082	$	42		0.13	%
FHLB common stock and other equity securities		13,673		42		0.61			14,060		15		0.21
Mortgage-backed securities and collateralized mortgage
obligations available for sale		126,761		1,917		3.02			191,645		3,962		4.13
Other investment securities available for sale		15,621		57		0.73			4,223		99		4.69
Loan receivable (1) (2)		591,604		21,532		7.28			574,947		18,156		6.32
Total interest-earning assets		878,097		23,697		5.40			847,957		22,274		5.25
Total noninterest-earning assets		226,671		-					100,516		-
Total assets	$	1,104,768		23,697					948,473		22,274

Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts	$	83,325	$	143		0.34		$	64,649	$	256		0.79
Rewards checking		69,791		695		1.99			27,251		444		3.26
Savings accounts		17,692		11		0.12			16,231		22		0.27
Money market deposit accounts		89,639		220		0.49			79,455		311		0.78
Certificate of deposit accounts		457,294		4,296		1.88			388,219		4,093		2.11
Total interest-bearing deposits		717,741		5,365		1.49			575,805		5,126		1.78
Borrowed funds		150,445		3,463		4.60			218,013		5,252		4.82
Total interest-bearing liabilities		868,186		8,828		2.03			793,818		10,378		2.61
Noninterest-bearing deposits		51,746							42,711
Other noninterest-bearing liabilities		15,320		-					10,214		-
Total noninterest-bearing liabilities		67,066		-					52,925		-
Total liabilities		935,252		8,828					846,743		10,378
Total stockholders' equity		169,516		-					101,730		-
Total liabilities and stockholders' equity	$	1,104,768		8,828				$	948,473		10,378
Net interest income			$	14,869						$	11,896

Net interest rate spread (3)						3.37	%						2.64	%
Net interest margin (4)						3.39	%						2.81	%
Ratio of average interest-earning assets to average interest-bearing liabilities						101.14	%						106.82	%

(1)	Includes net loan fees deferred and accreted pursuant to applicable accounting requirements.

(2)	Interest income on loans is interest income as recorded in the income statement and, therefore, does not include interest income on nonaccrual loans.

(3)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest bearing liabilities.

(4)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

	For the Six Months Ended March 31, 2011
	Compared to
	Six Months Ended March 31, 2010
	Increase/(Decrease) Due to
	(In Thousands)
	Volume			Rate			Combined			Net
Interest Income:
Loans	$	526		$	2,770		$	80		$	3,376
Securities		(1,074	)		(1,147	)		135			(2,086	)
Other interest-earning assets		44			58			31			133
Total interest-earning assets		(504	)		1,681			246			1,423

Interest Expense
Deposits		1,236			(771	)		(227	)		238
Borrowings		(1,628	)		(234	)		72			(1,790	)
Total interest-bearing liabilities		(392	)		(1,005	)		(155	)		(1,552	)

Net change in net interest income	$	(112	)	$	2,686		$	401		$	2,975

Provision for Loan Losses. The provision for loan losses for the six months ended March 31, 2011 was $1.1 million for non-covered loans and $400,000 for covered loans, compared to $3.8 million for noncovered loans for the six months ended March 31, 2010. The larger 2010 provision for loan losses reflected increased specific allowances on two large impaired loans which ultimately were foreclosed later in 2010. Net charge-offs on non-covered loans decreased to $1.2 million for the six months ended March 31, 2011, from $1.7 million for the six months ended March 31, 2010. The allowance for loan losses for non-covered loans was $9.7 million, or 2.18% of total non-covered loans receivable at March 31, 2011.

Noninterest Income. Noninterest income decreased $6.0 million, or 54.1%, to $5.1 million for the six months ended March 31, 2011 from $11.2 million for the six months ended March 31, 2010. The decrease in noninterest income was largely attributed to a $9.3 million purchase gain on March 26, 2010 on the FDIC assisted acquisition of assets and liabilities of MCB and impairment of securities, partially offset by a decrease of $3.5 million in other than temporary impairments.

Noninterest Expense. Total noninterest expense increased $4.7 million, or 35.1%, to $18.0 million for the six months ended March 31, 2011, from $13.3 million for the six months ended March 31, 2010. The six months ended March 31, 2011 included an increase of $1.4 million or 22.3%, in salaries and employee benefits resulting from our acquisition of MCB and additional special asset and regulatory reporting personnel related to FDIC-assisted acquisitions. Other increases included $1.1 million in the cost of REO primarily due to our portion of real estate taxes and other expenses on foreclosed real estate covered by loss sharing, an $810,000 FHLB advance prepayment penalty in October of 2010, and an increase of $314,000 in occupancy attributed to the acquisition of MCB.

Income Taxes. There was an income tax benefit of $(70,000) for the six months ended March 31, 2011 compared to an expense of $2.0 million for the six months ended March 31, 2010. Our effective tax rate was (15.33)% for the six months ended March 31, 2011, compared to 34.09% for the six months ended March 31, 2010. The decrease in the effective tax rate for the 2011 period was due to lower pretax income which created a higher benefit on a percentage basis from tax advantaged investments such as bank- owned life insurance.

Asset Quality

Delinquent Loans and Foreclosed Assets. Our policies require that management continuously monitor the status of the loan portfolio and report to the Loan Committee of the Board of Directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate, and our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed property. The Loan Committee approves action plans on all loans that are 90 days or more delinquent. The Loan Committee consists of three outside directors. One position on the committee, the chairman, is permanent, and the other two positions alternate between four outside directors.

We generally stop accruing interest income when we consider the timely collectibility of interest or principal to be doubtful. We generally stop accruing for loans that are 90 days or more past due unless the loan is well secured and we determine that the ultimate collection of all principal and interest is not in doubt. When we designate loans as nonaccrual, we reverse all outstanding interest that we had previously credited. If we receive a payment on a nonaccrual loan, we may recognize a portion of that payment as interest income if we determine that the ultimate collectibility of principal is no longer in doubt. However, such loans may remain on nonaccrual status until a regular pattern of timely payments is established.

Impaired loans are individually assessed to determine whether the carrying value exceeds the fair value of the collateral or the present value of the expected cash flows to be received. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, are collectively evaluated for impairment.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of the related loan balance or its fair value as determined by an appraisal, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss reserve allocations, the difference is charged against the allowance for loan losses. Any subsequent write-down of real estate owned or loss at the time of disposition is charged against earnings.

Nonperforming assets decreased to $89.3 million at March 31, 2011 from $103.7 million at September 30, 2010. The purchased loans and commitments (“covered loans”) and other real estate owned (“covered other real estate”) acquired in the MCB and NCB acquisitions are covered by loss sharing agreements between the FDIC and CharterBank. Under these agreements, with respect to the NCB acquisition, the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $82.0 million of losses, and 95% of losses and share 95% of loss recoveries on losses exceeding that amount; and with respect to the MCB acquisition, the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $106.0 million of losses, and 95% of losses and share 95% of loss recoveries on losses exceeding that amount. We expect to exceed the threshold level that will result in 95% loss sharing at MCB.

As of March 31, 2011, our nonperforming covered and non-covered assets totaled $89.3 million and consisted of $59.5 million of nonaccrual loans, $1.5 million of loans 90 days or more past due and still accruing and other real estate owned of $28.3 million.

	March 31 2011				September 30 2010
	Covered [1]		Non-covered		Covered [1]		Non-covered
Non-accrual loans:
1-4 family residential real estate	$	2,354	$	4,315	$	3,747	$	5,946
Commercial real estate		31,997		6,289		37,476		5,243
Real estate construction		381		512		3,147		—
Commercial		12,020		464		7,098		246
Consumer and other loans		1,003		140		1,126		209
Total non-accrual loans	$	47,755	$	11,720	$	52,594	$	11,644

Loans delinquent 90 days or greater and still accruing:
1-4 family residential real estate		66		—		—		—
Commercial real estate		1,263		—		49		—
Real estate construction		—		—		—		—
Commercial		136		—		—		140
Consumer and other loans		—		—		—		—
Total loans delinquent 90 days or greater and still accruing	$	1,465	$	—	$	49	$	140
Total non-performing loans	$	49,220	$	11,720	$	52,643	$	11,784

Real estate owned:
One- to four-family residential real estate		3,848		650		9,383		1,855
Commercial real estate		16,775		6,895		13,630		7,786
Real estate construction		—		175		5,575		—
Commercial		—		—		—		—
Consumer and other loans		—		—		1,039		—
Total real estate owned	$	20,623	$	7,720	$	29,627	$	9,641
Total non-performing assets	$	69,843	$	19,440	$	82,270	$	21,425

[1] Nonaccrual covered loans references status of contractual interest income recognition as accretion income is generally recorded on these covered loans.

	March 31					September 30
	2011					2010
	Covered		Non-covered			Covered		Non-covered
Ratios:
Non-performing loans as a percentage of total non-covered loans		N/M		2.63	%		N/M		2.61	%
Non-performing assets as a percentage of total non-covered assets		N/M		2.50	%		N/M		2.34	%

Allowance for Loan Losses on Non-covered Loans. The allowance for loan losses on non-covered loans represents a reserve for probable loan losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans with particular emphasis on impaired, non-accruing, past due and other loans that management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting policy.

Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based on management’s analysis of loss inherent in the loan portfolio. The amount of the provision for loan losses is determined by an evaluation of the level of loans outstanding, loss risk as determined based on a loan grading system, the level of non-performing loans, historical loss experience, delinquency trends, the amount of losses charged to the allowance in a given period, and an assessment of economic conditions.

The Company maintained its provisions for loan losses for the six months ending March 31, 2011 in response to continued weak economic conditions, net charge-offs, weak financial indicators for borrowers in the real estate sectors, continuing low collateral values of commercial and residential real estate, and nonaccrual and impaired loans. The following table details the allowance for loan losses on loans not covered by loss sharing by portfolio segment as of March 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude availability to absorb losses in other categories.

	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction			Consumer and Other			Unallocated		Total

Allowance for loan losses:
Balance at beginning of year	$	1,023,078		$	6,103,391		$	623,479		$	1,236,169		$	79,149		$	731,829	$	9,797,095
Charge-offs		(165,351	)		(957,063	)		(58,937	)		(21,822	)		(107,343	)		-		(1,310,516	)
Recoveries		61,249			-			36,487			159			9,701			-		107,596
Provision		(148,056	)		438,045			(22,732	)		537,778			110,269			184,696		1,100,000
Ending balance	$	770,920		$	5,584,373		$	578,297		$	1,752,284		$	91,776		$	916,525	$	9,694,175

Ending balance: individually evaluated for impairment	$	174,476		$	944,029		$	76,568		$	10,000		$	-				$	1,205,073

Loans:
Ending balance	$	104,080,480		$	257,927,053		$	19,358,904		$	44,302,958		$	20,272,364				$	445,941,759

Ending balance: individually evaluated for impairment	$	4,315,283		$	6,289,336		$	464,051		$	511,452		$	-				$	11,580,122

Our allowance for loan loss methodology is a loan classification-based system. Our allowance for loan losses is segmented into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. We base the required reserve on a percentage of the loan balance for each type of loan and classification level. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our loan loss history for the last two years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.

At March 31, 2011 and September 30, 2010, specific reserves represented 10.76% and 12.79%, respectively, of the Bank’s loans individually evaluated for impairment. At March 31, 2011 and September 30, 2010, general allowances, including the unallocated component, represented 1.95% and 1.85%, respectively, of the general loan portfolio not considered to be impaired. The general component increased by 10 basis points primarily because the Company increased its unallocated reserves by approximately $200 thousand to consider the slow and uncertain real estate markets.

The allowance for loan and lease losses represented 82.71 % and 83.07 % of non-performing loans and leases at March 31, 2011 and September 30, 2010, respectively. The allowance for loan losses as a percentage of non-covered loans, net of unearned income, was 2.18 % and 2.12% at March 31, 2011 and September 30, 2010, respectively. Management reviews the adequacy of the allowance for loan losses on a continuous basis. Management considered the allowance for loan losses on non-covered loans adequate at March 31, 2011 to absorb probable losses inherent in the loan portfolio. However, adverse economic circumstances or other events, including additional loan review, future regulatory examination findings or changes in borrowers' financial conditions, could result in increased losses in the loan portfolio or in the need for increases in the allowance for loan losses.

Non-accretable Differences on Covered Loans. Through the FDIC-assisted acquisitions of the loans of NCB and MCB, we established an allowance for loan losses for non-impaired covered loans for NCB, non-accretable discounts for the acquired impaired loans for both NCB and MCB, and we also established non-accretable discounts for all other loans of MCB. Collectively, these non-accretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, we continue to assess the experience of actual cash flows compared to our estimates. When we determine that non-accretable discounts are insufficient to cover expected losses in the applicable covered loan portfolios, such non-accretable discounts are increased with a corresponding provision for covered loan losses as a charge to earnings and an increase in the applicable FDIC receivable based on loss sharing indemnification. The following table details the non-accretable discount on loans covered by loss sharing by portfolio segment as of March 31, 2011.

	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction			Consumer and Other			Total

Non-accretable differences [1]:
Balance at beginning of year	$	1,856,851		$	38,170,313		$	24,257,466		$	2,497,018		$	1,632,467		$	68,414,115
Charge-offs		(188,686	)		(12,209,908	)		(11,646,678	)		(1,115,195	)		(908,150	)		(26,068,617	)
Recoveries		61,449			362,353			1,825,618			74,199			38,774			2,362,393
Provision for loan losses charged to FDIC receivable		217,809			1,393,796			(792,486	)		200,717			580,164			1,600,000
Provision for loan losses charged to operations		54,452			348,449			(198,121	)		50,179			145,041			400,000
Ending balance	$	2,001,875		$	28,065,003		$	13,445,799		$	1,706,918		$	1,488,296		$	46,707,891


Covered loans:
Ending contractual balance	$	11,757,541		$	122,747,825		$	38,188,786		$	3,570,612		$	9,110,693		$	185,375,457

[1]Amounts include the allowance for covered loan losses.

The total non-accretable discount as a percentage of the ending contractual balance of acquired loans was 25.20% at March 31, 2011, compared to 29.08% at September 30, 2010. This decrease during the six month period ended March 31, 2011 is related to increased charge-off activity on covered loans with such losses subject to applicable loss sharing agreements with the FDIC. It is expected that the ratio of non-accretable discounts to contractual covered principal outstanding will trend downwards as the more significant problem loans are charged-off and submitted for loss sharing reimbursement from the FDIC. Management considered the non-accretable discounts on covered loans adequate at March 31, 2011 to absorb probable losses inherent in the covered loan portfolio.

Liquidity Management. Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of deposit inflows, advances from the Federal Home Loan Bank, loan payments and prepayments, mortgage-backed securities and collateralized mortgage obligations repayments and maturities and sales of loans and other securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. At March 31, 2011 and September 30, 2010, we had access to immediately available funds of approximately $119.6 million and $273.3 million, respectively, including overnight funds and a Federal Reserve line of credit.

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are subject to our operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash equivalents totaled $105.8 million and securities classified as available-for-sale, which provide additional sources of liquidity, totaled $143.5 million. In addition, at March 31, 2011, we had access to additional Federal Home Loan Bank advances of up to $315.1 million. At March 31, 2011, we had $110.0 million in advances outstanding. However, based on available collateral, additional advances would be limited to $68.7 million.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At March 31, 2011, we had $6.0 million of new loan commitments outstanding, and $28.1 million of unfunded construction and development loans. In addition to commitments to originate loans, we had $11.6 million of unused lines of credit to borrowers. Certificates of deposit due within one year of March 31, 2011 totaled $266.7 million, or 36.3% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2011. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended March 31, 2011, we originated $11.5 million of loans and purchased $641,000 of securities.

Financing activities consist primarily of changes in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $27.1 million for the quarter ended March 31, 2011, primarily from decreases in time deposits. We also paid off $102.0 million in FHLB advances during the six months ended March 31, 2011. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank which provides an additional source of funds. Federal Home Loan Bank of Atlanta advances decreased by $42.0 million to $110.0 million during the three months ended March 31, 2011 due to a maturity payoff. For the six months ended March 31, 2011, the Company has decreased FHLB advances by $102 million through the reduction of liquid assets in a planned de-leveraging strategy designed to improve the net interest margin. Federal Home Loan Bank advances have been used primarily to fund loan demand and to purchase securities.

Cash receipts arising from payments on covered loans and loss-sharing collections from the FDIC are expected to provide positive net cash flows.

Capital Management and Resources. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2011, CharterBank exceeded all of our regulatory capital requirements. CharterBank is considered “well capitalized” under regulatory guidelines.

Capital Adequacy Ratios	March 31, 2011			September 30, 2010			March 31, 2010
Tier 1 capital (to risk-weighted assets)		23.40	%		20.28	%		16.51	%
Total capital (to risk-weighted assets)		24.66	%		21.53	%		16.53	%
Tier 1 capital (to total assets)		12.49	%		10.21	%		8.27	%

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the three months ended March 31, 2011, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. We employ several strategies to manage the interest rate risk inherent in our mix of assets and liabilities, including:

•

selling fixed rate mortgages we originate to the secondary market, generally on a servicing released basis;

•

maintaining the diversity of our existing loan portfolio by originating commercial real estate and consumer loans, which typically have adjustable rates and shorter terms than residential mortgages;

•

emphasizing investments with adjustable interest rates;

•

maintaining fixed rate borrowings from the Federal Home Loan Bank of Atlanta; and

•

increasing retail transaction deposit accounts, which typically have long durations.

We have an Asset/Liability Management Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk. The Office of Thrift Supervision requires the computation of amounts by which the difference between the present value of an institution’s assets and liabilities (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of NPV. Depending on current market interest rates we historically have estimated the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100, 200, or 300 basis points, or a decrease of 100 and 200 basis points, which is based on the current interest rate environment. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, a NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

The table below sets forth, as of March 31, 2011, our calculation of the estimated changes in CharterBank’s net portfolio value that would result from the designated instantaneous changes in the interest rate yield curve.

Change in Interest Rates (bp) (1)	Estimated NPV (2)		Estimated Increase (Decrease) in NPV			Percentage Change in NPV			NPV Ratio as a Percent of Present Value of Assets (3)(4)			Increase (Decrease) in NPV Ratio as a Percent of Present Value of Assets (3)(4)

						(Dollars in thousands)
+300	$	110,885	$	7,370			7.1	%		11.4	%		0.8	%
+200	$	109,312	$	5,798			5.6	%		11.3	%		0.6	%
+100	$	107,202	$	3,687			3.6	%		11.0	%		0.4	%
0	$	103,515	$	—			—			10.7	%		—
(100)	$	102,277	$	(1,237	)		(1.2	%)		10.5	%		(0.1	%)

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

(2)	NPV is the difference between the present value of an institution’s assets and liabilities.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	NPV Ratio represents NPV divided by the present value of assets.

The table above indicates that at March 31, 2011, in the event of a 200 basis point increase in interest rates, we would experience a 5.6% increase in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 1.2% decrease in net portfolio value. Additionally, our internal policy states that our minimum NPV of estimated present value of assets shall range from a low of 5.5% for a 300 basis point change in rates to 7.5% for no change in interest rates. As of March 31, 2011, we were in compliance with our Board approved policy limits.

The effects of interest rates on net portfolio value and net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in these computations. Although some assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in market interest rates. Rates on other types of assets and liabilities may lag behind changes in market interest rates. Assets, such as adjustable rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. After a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase.

Item 4.

Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings.

From time to time, we may be party to various legal proceedings incident to our business. At March 31, 2011, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A.

Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item1.A.- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not only the risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3.

Defaults Upon Senior Securities.

None

Item 5.

Other Information.

None

Item 6.

Exhibits.

31.1	Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer

31.2	Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer

32.1	Section 1350 Certifications

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.


	CHARTER FINANCIAL CORPORATION

Date: May 16, 2011	By:	/s/ Robert L. Johnson
		Robert L. Johnson
		President and Chief Executive Officer

Date: May 16, 2011	By:	/s/ Curtis R. Kollar
		Curtis R. Kollar
		Senior Vice President and Chief Financial Officer