ESSA Bancorp - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2007

OR

For the transition period from              to            

Commission File No. 001-33384

ESSA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

(570) 421-0531

(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

As of February 11, 2008 there were 16,980,900 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

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ESSA Bancorp, Inc.

FORM 10-Q

Index

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Part I. Financial Information

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

The unaudited, consolidated financial statements include the accounts of ESSA Bancorp, Inc. (the “Company”), ESSA Bank & Trust (the “Bank”), and the Bank’s wholly owned subsidiaries, ESSACOR Inc. and Pocono Investment Company. The primary purpose of the Company is to act as a holding company for the Bank. The Company is subject to regulation and supervision by the Office of Thrift Supervision (the “OTS”) The Bank is a Pennsylvania chartered savings association located in Stroudsburg, Pennsylvania. The Bank’s primary business consists of the taking of deposits and granting of loans to customers generally in Monroe and Northampton counties, Pennsylvania. The Bank is subject to regulation and supervision by the Pennsylvania Department of Banking and the OTS. The investment in subsidiary on the parent company’s financial statements is carried at the parent company’s equity in the underlying net assets.

ESSACOR, Inc. is a Pennsylvania corporation that is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments of the Bank, including certain intellectual property. All intercompany transactions have been eliminated in consolidation.

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three month period ended December 31, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2008.

On July 25, 2006, the Bank’s Board of Directors adopted a Plan of Conversion (the “Plan”) pursuant to which the Bank converted to a Pennsylvania chartered stock association and formed ESSA Bancorp, Inc., a Pennsylvania chartered company (the “Company”). On December 7, 2006 the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (File No. 333-139157) with respect to the shares to be offered and sold pursuant to the Plan. The Company registered for offer and sale 16,980,900 shares of common stock, par value $0.01 per share, at a sales price of $10.00 per share.

The stock offering was consummated on April 3, 2007, resulting in gross proceeds of $158.7 million, through the sale of 15,870,000 shares at a price of $10.00 per share. The Company also contributed 1,110,900 shares of its common stock to the ESSA Bank & Trust Foundation (the “Foundation”) and $1.6 million in cash. Expenses related to the offering were approximately $2.9 million which resulted in net proceeds of approximately $155.8 million prior to the contribution to the Foundation.

The Company lent approximately $13.6 million to the Bank’s Employee Stock Ownership Plan (“ESOP”). The Company retained approximately $64.3 million of the net proceeds of the offering prior to the contribution to the Foundation, and the remainder of the net proceeds were contributed to the Bank.

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income of $1,697,000 for the three months ended December 31, 2007 will be used as the numerator.

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The following table sets for the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

The accounting principles followed by the Bank and its subsidiaries and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and related revenues and expenses for the period. Actual results could differ significantly from those estimates.

The components of comprehensive income consist of unrealized gains and losses on available for sale securities and the change in minimum pension liability. For the three months ended December 31, 2007, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited). For the three months ended December 31, 2006, comprehensive income totaled $875,000.

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations or financial condition.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is

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outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 October 1, 2007, the adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective as of the end of the fiscal year ending after December 15, 2006, for public companies. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning on November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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The amortized cost and estimated fair value of investment securities available for sale and held to maturity are summarized as follows (in thousands):

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The amortized cost and estimated fair value of debt securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

The Bank had no sale of investment securities for the three months ended December 31, 2007 or 2006.

Loans receivable consist of the following (in thousands):

The activity in the allowance for loan losses is summarized as follows (in thousands):

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Deposits consist of the following major classifications (in thousands):

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 15 of the Bank’s Consolidated Financial Statements for the year ended September 30, 2007 included in the Company’s form 10-K.

The following table comprises the components of net periodic benefit cost for the periods ended (in thousands):

The Bank expects to contribute $583,000 to its pension plan in 2008.

Forward Looking Statements

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

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Overview

The Company consummated its initial stock offering on April 3, 2007 with the sale of 15,870,000 shares of common stock. The Company also contributed 1,110,900 shares of the Company’s outstanding common stock, and contributed $1.6 million in cash, to a charitable foundation established by the Bank. Net proceeds of the offering were approximately $155.9 million prior to the contribution to ESSA Bank & Trust Foundation.

Comparison of Financial Condition at December 31, 2007 and September 30, 2007

Total Assets. Total assets increased by $20.2 million, or 2.2%, to $930.6 million at December 31, 2007 from $910.4 million at September 30, 2007. This increase was primarily due to increases in interest-bearing deposits with other institutions and loans receivable.

Interest-Bearing Deposits with Other Institutions. Interest-bearing deposits with other institutions increased $2.5 million to $8.7 million at December 31, 2007 from $6.2 million at September 30, 2007. The primary reason for the increase was an increase in the Company’s interest-bearing demand deposit account at FHLBank Pittsburgh of $2.3 million. The demand deposit account increased as a result of the Company’s receipt in December, 2007 of the first loan payment from the Bank’s ESOP of $1.2 million along with the accumulated interest income received from the Company’s investment portfolio.

Net Loans. Net loans increased $19.1 million, or 3.1%, to $638.9 million at December 31, 2007 from $619.8 million at September 30, 2007. Loan growth was primarily attributed to growth in several product categories as a result of our continued marketing efforts. During this period residential, construction and commercial real estate loans outstanding increased by $10.9 million to $510.9 million, $1.6 million to $9.4 million and $2.7 million to $61.1 million, respectively. Commercial loans outstanding increased by $3.3 million to $10.9 million. Home equity loans and lines of credit outstanding increased by $146,000 to $47.7 million and other loans outstanding increased by $387,000 to $4.3 million.

Deposits. Deposits decreased $11.8 million, or 3.1%, to $372.9 million at December 31, 2007 from $384.7 million at September 30, 2007. At December 31, 2007 compared to September 30, 2007 money market accounts increased $5.8 million to $45.6 million. This increase was offset during the same period by decreases in non-interest bearing demand accounts of $1.8 million to $24.1 million, NOW accounts of $2.9 million to $54.6 million, savings and club accounts of $3.3 million to $62.7 million and certificates of deposit of $9.6 million to $185.8 million. Included in the certificates of deposit at December 31, 2007 was a decrease of $5.6 million in brokered certificates of deposit to $14.4 million. The decline in brokered certificates was the result of the Company’s decision not to renew maturing certificates based on the cost of renewing those certificates compared to other available funding sources. The decline in retail deposits was primarily attributable to the increasingly competitive environment within the Company’s market.

Borrowed Funds. Borrowed funds increased by $28.1 million to $342.0 million at December 31, 2007, from $313.9 million at September 30, 2007. The increase in borrowed funds was used primarily to offset the decline in deposits and to fund additional loan growth.

Stockholders’ Equity. Stockholders’ equity increased by $2.4 million, to $207.1 million at December 31, 2007 from $204.7 million at September 30, 2007. This increase was primarily the result of the addition of net income for the three months ended December 31, 2007 of $1.7 million together with an increase in the unrealized gain on investment securities available for sale, net of taxes, of $504,000 at December 31, 2007 compared to September 30, 2007 and a decrease in unallocated shares held by the Bank’s ESOP of $171,000 for the same period.

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Average Balance Sheets for the Three Months Ended December 31, 2007 and 2006

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances, The yields set forth below include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income.

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Comparison of Operating Results for the Three Months Ended December 31, 2007 and December 31, 2006

Net Income. Net income increased $836,000, to $1.7 million for the three months ended December 31, 2007 compared to net income of $861,000 for the comparable period in 2006. The primary reason for this increase was an increase in the Company’s net average interest earning assets of $147.3 million for the three months ended December 31, 2007 compared to the corresponding 2006 period. The increase in net average interest earning assets was the result of the Company’s lending volume which resulted in a $69.0 million increase in average loans outstanding from the previous period, together with the Bank’s mutual-to-stock conversion and the Company’s subsequent stock offering.

Net Interest Income. Net interest income increased $1.9 million, to $6.2 million for the three months ended December 31, 2007 from $4.3 million for the comparable period in 2006. The increase was primarily attributable to the increase in net average earning assets and was offset in part by a 27 basis point decrease in the Company’s interest rate spread to 1.93% for the three months ended December 31, 2007, from 2.20% for the comparable period in 2006.

Interest Income. Interest income increased $2.8 million, to $12.9 million for the three months ended December 31, 2007 from $10.1 million for the comparable 2006 period. The increase resulted from a $190.8 million increase in average interest-earning assets. The overall yield on interest earning assets was 5.82% for the three months ended December 31, 2007, and for the comparable 2006 period. Loans increased on average $69.0 million between the two periods along with increases in the average balance of investment securities of $45.0 million and mortgage-backed securities of $69.0 million. In addition, average Federal Home Loan Bank stock increased $2.8 million along with an increase in the average balance of other interest earning assets of $4.9 million. The primary reasons for the increase in investment securities and mortgage-backed securities was the partial reinvestment of borrowing proceeds into these assets along with the investment of the majority of the net proceeds from the stock offering into short-term, investment grade debt and mortgage-backed securities issued by United States government sponsored agencies or entities. Average Federal Home Loan Bank stock increased as a result of the Bank’s increase in borrowings from the FHLBank Pittsburgh. As a member of the Federal Home Loan Bank System, the Bank maintains an investment in the capital stock of the FHLBank Pittsburgh in an amount not less than 70 basis points of the outstanding unused FHLB borrowing capacity or 1/20 of its outstanding FHLB borrowings, whichever is greater, as calculated throughout the year. The increase in average other interest earning assets was the result of an increase in the Company’s interest bearing deposits with other institutions resulting primarily from a small portion of the funds received from the stock offering.

Interest Expense. Interest expense increased $856,000, to $6.7 million for the three months ended December 31, 2007 from $5.8 million for the comparable 2006 period. The increase resulted from a $43.5 million increase in average interest-bearing liabilities, combined with a 27 basis point increase in the overall cost of interest bearing liabilities to 3.89% for the three months ended December 31, 2007 from 3.62% for the comparable 2006 period. Average interest bearing deposits decreased $23.0 million which was offset by an increase in average borrowed funds of $66.4 million.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, and after considering the growth in the Company’s loan portfolio, management made a provision for loan losses of $150,000 for the three months ended December 31, 2007 as compared to $90,000 for the three months ended December 31, 2006. The allowance for loan losses was $4.4 million, or 0.68% of loans outstanding at December 31, 2007, compared to $3.9 million, or 0.68% of loans outstanding at December 31, 2006.

Non-interest Income. Non-interest income increased $35,000, to $1.5 million for the three months ended December 31, 2007, from $1.4 million for the comparable 2006 period. The increase was primarily due to

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increases in trust and investment fees of $35,000, service charges and fees on loans of $18,000 and earnings on Bank-owned life insurance of $8,000. These increases were offset, in part, by decreases in service fees on deposit accounts of $13,000 and other non-interest income of $2,000.

Non-interest Expense. Non-interest expense increased $601,000, to $5.0 million for the three months ended December 31, 2007 from $4.4 million for the comparable period in 2006. The primary reasons for the increase were increases in compensation and employee benefits of $422,000, occupancy and equipment of $67,000, professional fees of $152,000 and data processing fees of $52,000. These increases were offset, in part, by decreases in advertising costs of $42,000 and other expenses of $50,000. Compensation and employee benefits increased primarily as a result of normal compensation and benefit increases of $266,000 along with an expense of $171,000 related to the ESOP which was implemented in April, 2007. Occupancy and equipment costs increased primarily as a result of increases in rental costs of $21,000 along with increases in depreciation expense of $23,000. Professional fees increased primarily as a result of increased legal, accounting, and regulatory fees as a result of being a publicly reporting company. Data processing fees increased due to increased volume and ongoing technology upgrades.

Income Taxes. Income tax expense increased $477,000 to $783,000 for the three months ended December 31, 2007 from $306,000 for the comparable 2006 period. The effective tax rate was 31.6% for the three months ended December 31, 2007 compared to 26.2% for the comparable 2006 period.

NON-PERFORMING ASSETS

The following table provides information with respect to the Bank’s non-performing assets at the dates indicated. (Dollars in thousands)

Loans are reviewed on a regular basis and are placed on non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received.

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet both our short-term and long-term liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our primary sources of liquidity are deposits, and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLBank advances and other borrowing sources. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

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A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. At December 31, 2007, $19.5 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Short-term investment securities (maturing in one year or less) totaled $64.9 million at December 31, 2007. As of December 31, 2007, we had $312.0 million in borrowings outstanding from FHLBank Pittsburgh and $30.0 million in borrowings through repurchase agreements with another financial institution. We have access to additional FHLBank advances of up to approximately $301.6 million.

At December 31, 2007, we had $65.8 million in loan commitments outstanding, which included, in part, $23.2 million in undisbursed construction loans, $22.2 million in unused home equity lines of credit, $5.7 million in commercial lines of credit and $9.1 million to originate primarily multi-family and nonresidential mortgage loans. Certificates of deposit due within one year of December 31, 2007 totaled $135.6 million, or 72.6 % of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2008. 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.

As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $2.7 million and $1.7 million for the three months ended December 31, 2007 and 2006, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash used in investing activities was $17.9 million and $20.8 million for the three months ended December 31, 2007 and 2006, respectively, principally reflecting our loan and investment security activities in the respective periods. Investment security cash flows had the most significant effect, as net cash utilized in purchases amounted to $36.8 million and $16.4 million for the three months ended December 31, 2007 and 2006, respectively. Deposit, and borrowing, cash flows have comprised most of our financing activities which resulted in net cash provided of $17.9 million and $45.3 million for the three months ended December 31, 2007 and 2006, respectively.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

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Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carryback declines, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results. At December 31, 2007 the Company had a $2.6 million reserve established against its deferred tax asset. The tax deduction generated by the contribution to the Foundation as part of the Company’s stock offering exceeded the allowable federal income tax deduction limitations resulting in the establishment of this valuation allowance for the contribution carry forward.

Other-than-Temporary Investment Security Impairment.Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

During the first three months of 2008, the Company’s contractual obligations have not changed materially from those discussed in the Company’s Financial Statements for the year ended September 30, 2007.

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The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and borrowings. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has approved guidelines for managing the interest rate risk inherent in our assets and liabilities, given our business strategy, operating environment, capital, liquidity and performance objectives. Senior management monitors the level of interest rate risk on a regular basis and the asset/liability committee meets quarterly to review our asset/liability policies and interest rate risk position.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the offering increased our capital and provided management with greater flexibility to manage our interest rate risk. In particular, management used the majority of the capital we received to increase our interest-earning assets. There have been no material changes in our interest rate risk since September 30, 2007.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no significant changes made in the Company’s internal controls over financial reporting or in other factors that could significantly affect the Company’s internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

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

There have been no material changes in the “Risk Factors” disclosed in the Company’s Annual Report on Form 10-K filed on December 20, 2007.

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Not applicable.

During the period covered by this report, the Company did not submit any matters to the vote of security holders.

Not applicable.

The following exhibits are either filed as part of this report or are incorporated herein by reference:

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SIGNATURES

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

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