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EX-14 - EX 14 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex14czwi10k.htm
EX-32.1 - EX 32.1 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex321czwi10k.htm
EX-21 - EX 21 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex21czwiform10k.htm
EX-10.7 - EX 10.7 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex107czwiform10k.htm
EX-23.1 - EX 23.1 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex231czwiform10k.htm
EX-10.8 - EX 10.8 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex108czwiform10k.htm
EX-31.1 - EX31.1 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex311czwiform10k.htm
EX-31.2 - EX 31.2 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex312czwiform10k.htm
EX-23.2 - EX 23.2 TO CZWI FORM 10-K - Citizens Community Bancorp Inc.ex232czwiform10k.htm
UNITED STATES
SECURIT1ES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
x   ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934         
       For the fiscal year  ended    September 30, 2010
 
                                                   OR
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
       For the transition period from __________________________ to__________________________

 Commission file number    001-33003

CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
     
Maryland
 
20-5120010
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
     
2174 EastRidge Center, Eau Claire, WI 54701
(Address of principal executive offices)
 
715-836-9994
(Registrant’s telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
   
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $.01 par value per share
 
NASDAQ Global MarketSM

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
Yes [   ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [  ]  No [X]

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [   ]   No [    ]

Indicate by check mark if the disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [    ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small 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[  ]          Smaller reporting company [X]
                (do not check if a 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]

               The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked price of such stock as of the last business day of the registrant's most recently completed second fiscal quarter was $19,692,261.   Shares of the registrant's common stock held by any executive officer or director of the registrant have been excluded from this computation because such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes.

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At December 23, 2010 there were 5,113,258 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2011 Annual Meeting of the Stockholders of the Registrant are incorporated by reference into Part III of this report.

As used in this report, the terms “we,” “us,” “our,” “Citizens Community Bancorp” and the “Company” mean Citizens Community Bancorp, Inc. and its wholly owned subsidiary, Citizens Community Federal, unless the context indicates another meaning. As used in this report, the term “Bank” means our wholly owned subsidiary, Citizens Community Federal.

 
2

 

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-K

SEPTEMBER 30, 2010

TABLE OF CONTENTS
 
PART I
5
 
ITEM 1.   BUSINESS
5
 
ITEM 1A. RISK FACTORS
7
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
11
 
ITEM 2. PROPERTIES
12
 
ITEM 3. LEGAL PROCEEDINGS
15
 
ITEM 4. [REMOVED AND RESERVED]
15
PART II
15
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
               OF EQUITY SECURITIES
15
 
ITEM 6. SELECTED FINANCIAL DATA
16
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
37
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
40
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
72
 
ITEM 9A(T). CONTROLS AND PROCEDURES
72
 
ITEM 9B. OTHER INFORMATION
72
PART III
73
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
73
 
ITEM 11. EXECUTIVE COMPENSATION
73
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
                 MATTERS
73
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
73
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
74
PART IV
74
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
74

 
3

 

Forward Looking Statements

Certain matters discussed in this Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the save harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” and “would.”  Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements.  Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.  

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of this report and the following: general economic conditions, in particular, relating to consumer demand for the Bank’s products and services; the Bank’s ability to maintain current deposit and loan levels at current interest rates; competitive and technological developments; deteriorating credit quality, including changes in the interest rate environment reducing interest margins; prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions;  the Bank’s ability to maintain required capital levels and adequate sources of funding and liquidity; maintaining capital requirements may limit the Bank’s operations and potential growth; changes and trends in capital markets; competitive pressures among depository institutions; effects of critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; further write-downs in the Bank’s mortgage-backed securities portfolio; the Bank’s ability to implement its cost-savings and revenue enhancement initiatives;  legislative or regulatory changes or actions, or significant litigation, adversely affecting the Bank; fluctuation of the Bank’s stock price; ability to attract and retain key personnel; ability to secure confidential information through the use of computer systems and telecommunications networks; and the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.  Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

 
4

 

PART I

ITEM 1.     BUSINESS

General

The Company is a Maryland corporation organized in 2004. The Company is a unitary savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (OTS). Our primary activities consist of holding the stock of our wholly-owned subsidiary bank, Citizens Community Federal, and providing consumer banking activities through the Bank. At September 30, 2010, we had approximately $594 million in total assets, $476 million in deposits, and $50 million in equity. Unless otherwise noted herein, all monetary amounts in this report, other than share and per share amounts, are stated in thousands.

Citizens Community Federal

The Bank is a federally chartered stock savings institution with 26 full-service offices; eight stand-alone locations and 18 in-store branches, predominantly in Wal-Mart Supercenter branches. We grew from six legacy Wisconsin branches to twelve stand-alone branch offices from 2002 to 2005, through a combination of acquisitions and new branch openings in Wisconsin, Minnesota and Michigan. We added 17 in-store branches during 2008 and 2009 through a combination of acquisitions and new branch openings in Wisconsin and Minnesota. Through all of our branch locations, we provide a wide range of consumer banking products and services to customers primarily in Wisconsin, Minnesota and Michigan.

Internet Website

We maintain a website at www.ccf.us. We make available through that website, free of charge, copies of our Annual report on Forms 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”). We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants.

Selected Consolidated Financial Information

This information is included in Item 6; “Selected Financial Data”, herein.

Yields Earned and Rates Paid

This information is included in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Statement of Operations Analysis” herein.

Rate/Volume Analysis
 
This information is included in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Statement of Operations Analysis” herein.

Average Balance, Interest and Average Yields and Rates

This information is included in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Statement of Operations Analysis” herein.

 
5

 

Lending
 
We offer a variety of loan products including residential mortgages, home equity lines-of-credit and consumer loans secured by personal property. We make real estate and consumer loans in accordance with the basic lending policies established by management and approved by the Board of Directors. A majority of the Bank's first mortgage loans also contain a payable-on-demand clause, which allows the Bank to call the loan due after a stated period, usually between two and five years from origination.  We focus our lending activities on individual consumers within our market areas. Our lending has been historically concentrated primarily within Wisconsin, Minnesota and Michigan.  Competitive and economic pressures exist in our lending markets, and recent and any future developments in (a) the general economy, (b) real estate lending markets, and (c) the banking regulatory environment could have a material adverse effect on our business and operations. These factors may impact the credit quality of our existing loan portfolio, or adversely impact our ability to originate sufficient high quality real estate and consumer loans in the future.

Our total outstanding loans as of September 30, 2010, were $457,004, consisting of $262,691 in real estate loans, $189,677 in secure consumer loans, and $4,636 in unsecured consumer loans.

Investments

We maintain a portfolio of investments, consisting primarily of U.S. Government sponsored agency securities and non-agency mortgage-backed securities. We attempt to balance our portfolio to manage interest rate risk, regulatory requirements, and liquidity needs while providing an appropriate rate of return commensurate with the risk of the investment.

Deposits

We offer a broad range of deposit products through our branches, including demand deposits, various savings and money-market accounts and certificates of deposit. Deposits are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”) up to statutory limits. At September 30, 2010, our total deposits were $476,302, including interest-bearing deposits of $460,377 million and non-interest-bearing deposits of $15,925.

Competition

We compete with other financial institutions and businesses both in attracting and retaining deposits and making loans in all of our principal markets. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. Competition for deposit products comes primarily from other banks, credit unions and non-bank competitors, including insurance companies, money market and mutual funds, and other investment alternatives. The primary factors in competing for loans are interest rates, loan origination fees, and the quality and the range of lending services. Competition for loans comes primarily from other banks, mortgage banking firms, credit unions, finance companies, leasing companies and other financial intermediaries. Some of our competitors are not subject to the same degree of regulation as that imposed on savings and loan holding companies or federally insured institutions, and may be able to price loans and deposits more aggressively. We also face direct competition from other savings banks and their holding companies that have greater assets and resources than ours.

Regulation and Supervision

The Company and the Bank are examined and regulated by the OTS, its primary federal regulator.  The Company and the Bank are also regulated by the FDIC.  The Bank is required to have certain reserves set by the Federal Reserve Board and is a member of the Federal Home Loan Bank of Chicago, which is one of the 12 regional banks in the Federal Home Loan Bank System. The Company and the Bank are each currently under separate Memoranda of Understanding, issued by the OTS on December 23, 2009.  See the discussion contained below regarding the OTS’ Memorandum of Understanding in Item 7; Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Capital Resources”.

 
6

 

Employees

At September 30, 2010, we had 193 full-time equivalent employees, company-wide. We have no unionized employees, and we are not subject to any collective bargaining agreements.

ITEM 1A. RISK FACTORS

The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our future business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline.

Our business may be adversely affected by conditions in the financial markets and economic conditions generally. The United States economy has experienced a downturn and stagnation since 2007, leading to a general reduction of business activity and growth across industries and regions. Consumer spending, liquidity and availability of credit have all been restricted, and unemployment has increased nationally as well as in the markets we serve.

The financial services industry and the securities markets generally have been materially and adversely affected by significant declines in the values of nearly all asset classes. General declines in home prices and the resulting impact on sub-prime mortgages, and eventually, all mortgage and real estate classes as well as equity markets resulted in widespread shortages of liquidity across the financial services industry. Continuation of the economic downturn, high unemployment and liquidity shortages may negatively impact our operating results. Additionally, adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans. These factors could expose us to an increased risk of loan defaults and losses and have an adverse impact on our earnings.

Weaknesses in the markets for residential real estate, including secondary residential mortgage loan markets, could reduce our net income and profitability. Since 2007, softening residential housing markets, increasing delinquency and default rates, and increasingly volatile and constrained secondary credit markets have been negatively impacting the mortgage industry. Our financial results have been adversely affected by changes in real estate values, primarily in Wisconsin, Minnesota and Michigan. Decreases in real estate values have adversely affected the value of property used as collateral for loans and investments in our portfolios. The poor economic condition experienced since 2007 resulted in decreased demand for real estate loans and our net income has declined as a result.

We are subject to interest rate risk. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time.  Market interest rates change over time.  Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities.  The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk.

We are subject to lending risk. There are inherent risks associated with our lending activities. These risks include the impact of changes in interest rates and change in the economic conditions in the markets we serve, as well as those across the United States. An increase in interest rates and/or continuing weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. Continued downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.

 
7

 
 
Our allowance for loan losses may be insufficient. To address risks inherent in our loan portfolio, we maintain an allowance for loan losses that represents management’s best estimate of probable losses that exist within our loan portfolio. The level of the allowance reflects management’s continuing evaluation of various factors, including specific credit risks, historical loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Determining the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make estimates of significant credit risks, which may undergo material changes. In evaluating our impaired loans, we assess repayment expectations and determine collateral values based on all information that is available to us. However, we must often make subjective decisions based on our assumption about the creditworthiness of the borrowers and the values of collateral.

Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in our allowance for loan losses. In addition, bank regulatory agencies periodically examine our allowance for loan losses and may require an increase in the allowance or the recognition of further loan charge-offs, based on judgments different from those of management.

If charge-offs in future periods exceed our allowance for loan losses, we will need to take additional loan loss provisions to increase our allowance for loan losses. Any additional loan loss provision will reduce our net income or increase our net loss, which could have a direct material adverse affect on our financial condition and results of operations.

Changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings, or regulatory capital ratios. At September 30, 2010, $41,708 of our securities were classified as available-for-sale. The estimated fair value of our available-for-sale securities portfolio may increase or decrease depending on market conditions. Our securities portfolio is comprised primarily of fixed-rate securities. We increase or decrease stockholders’ equity by the amount of the change in unrealized gain or loss (the difference between the estimated fair value and amortized cost) of our available-for-sale securities portfolio, net of the related tax benefit, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as the book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold, the decrease may be recovered over the life of the securities.

We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. Factors which we consider in our analysis include, but are not limited to, the severity and duration of the decline in fair value of the security, the financial condition and near-term prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, our intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value and the likelihood of any near-term fair value recovery. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary related to credit losses, the security is written down to a new cost basis and the resulting loss is charged to earnings in the period in which the decline in value occurs as a component of non-interest income.

We have, in the past, recorded other than temporary impairment (“OTTI”) charges, principally arising from investments in non-agency mortgage-backed securities. We continue to monitor our securities portfolio as part of our ongoing OTTI evaluation process. No assurance can be given that we will not need to recognize OTTI charges related to securities in the future.

 
8

 

The capital that we are required to maintain for regulatory purposes is impacted by, among other factors, the securities ratings. Therefore, ratings downgrades on our securities may have a material adverse effect on our risk-based regulatory capital.

Competition may affect our results. We face strong competition in originating loans, in seeking deposits and in offering other banking services. We must compete with commercial banks, trust companies, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. Our market area is also served by commercial banks and savings associations that are substantially larger than us in terms of deposits and loans and have greater human and financial resources. This competitive climate can make it more difficult to establish and maintain relationships with new and existing customers and can lower the rate we are able to charge on loans, increase the rates we must offer on deposits, and affect our charges for other services. Those factors can, in turn, adversely affect our results of operations and profitability.
 
Maintaining or increasing our market share may depend on lowering prices and market acceptance of new products and services. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards and customer demands. We face increasing pressure to provide products and services at lower prices, which can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet banking services, could require us to make substantial expenditures to modify or adapt our existing products and services. Also, these and other capital investments in our business may not produce expected growth in earnings anticipated at the time of the expenditure. We may not be successful in introducing new products and services, achieving market acceptance of our products and services, or developing and maintaining loyal customers, which in turn, could adversely affect our results of operations and profitability.

Acts or threats of terrorism and political or military actions by the United States or other governments could adversely affect general economic industry conditions. Geopolitical conditions may affect our earnings. Acts or threats of terrorism and political actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general or industry conditions and, as a result, our consolidated financial condition and results of operations.

We operate in a highly regulated environment, and are subject to changes, which could increase our cost structure or have other negative impacts on our operations. The banking industry is extensively regulated at the federal and state levels. Insured depository institutions and their holding companies are subject to comprehensive regulation and supervision by financial regulatory authorities covering all aspects of their organization, management and operations. The OTS is the primary regulatory of the Bank. In addition to its regulatory powers, the OTS also has significant enforcement authority that it can use to address banking practices that it believes to be unsafe and unsound, violations of laws, and capital and operational deficiencies. Regulation includes, among other things, capital and reserve requirements, permissible investments and lines of business, dividend limitations, limitations on products and services offered, loan limits, geographical limits, consumer credit regulations, community reinvestment requirements and restrictions on transactions with affiliated parties. The system of supervision and regulation applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of the Deposit Insurance Fund, our depositors and the public, rather than our stockholders. We are also subject to regulation by the SEC. Failure to comply with applicable laws, regulations or policies could result in sanction by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on our business, consolidated financial condition and results of operations. In addition, any change in government regulation could have a material adverse effect on our business.

As described in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Capital Resources”, each of Citizens Community Bancorp, Inc. and Citizens Community Federal are subject to a Memorandum of Understanding with the OTS, which contains certain restrictions on our operations.

 
9

 

We are subject to increases in FDIC insurance premiums and special assessments by the FDIC, which will adversely affect our earnings. During 2008 and continuing in 2009, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund. In addition, the FDIC instituted two temporary programs to further insure customer deposits at FDIC insured banks: deposit accounts now are insured up to $250,000 per customer (up from $100,000) and noninterest-bearing transactional accounts are currently fully insured (unlimited coverage), under the Transaction Account Guarantee (“TAG”) program. These programs have placed additional stress on the Deposit Insurance Fund. In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC has increased assessment rates of the insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of estimated deposit insurance premiums by December 31, 2009. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If additional bank or financial institution failures continue or increase, or if the cost of resolving prior failures exceeds expectations, we may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings and financial condition.
 
Customers may decide not to use banks to complete their financial transactions, which could result in a loss of income to us. Technology and other changes are allowing customers to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, customers can now pay bills and transfer funds directly without going through a bank. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits.

Our internal controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Any (a) failure or circumvention of our controls and procedures, (b) failure to adequately address existing internal control deficiencies, or (c) failure to comply with regulations related to controls and procedures could have a material effect on our business, consolidated financial condition and results of operations. See Item 9A (T) “Controls and Procedures” for further discussion of internal controls.
 
We could experience an unexpected inability to obtain needed liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our funding needs are met by maintaining an appropriate level of liquidity through asset/liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business and, in turn, our consolidated financial condition and results of operations.
 
Future growth, operating results or regulatory requirements may require us to raise additional capital but that capital may not be available. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To the extent our future operating results erode capital or we elect to expand through loan growth or acquisition, we may be required to raise additional capital.
 
Our ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital when needed or on favorable terms. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These actions could negatively impact our ability to operate or further expand our operations and may result in increases in operating expenses and reductions in revenues that could have a material effect on our consolidated financial condition and results of operations.
 
 
10

 

We may not be able to attract or retain skilled people. Our success depends, in part, on our ability to attract and retain key people.  Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire people or retain them.  The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our local markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

We continually encounter technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by products and services.  The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.  Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to invest in technological improvements.  We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers.  Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
 
Our shares of common stock are thinly traded and our stock price may be more volatile. Because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on the NASDAQ Stock Market. We believe there are 4,735,863 shares of our common stock held by nonaffiliates as of December 23, 2010. Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the trading prices for our shares of common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


 
11

 

ITEM 2.  PROPERTIES
       
   
Lease
 Net Book Value
 
 Owned or
Expiration
 at September 30, 2010
     
Location
 Leased
Date
 (in thousands)
 
ADMINISTRATIVE OFFICES:
     
 
2174 EastRidge Center
 Lease
April 30, 2012
 
 
Eau Claire, WI  54701
     
         
 
BRANCH OFFICES
     
 
Appleton Branch (4)
 Lease
January 31, 2014
 
 
3701 E Calumet Street
     
 
Appleton, WI  54915
     
         
 
Black River Falls Branch (4)
 Lease
January 31, 2014
 
 
611 Highway 54 East
     
 
Black River Falls, WI 54615
     
         
 
Chippewa Falls Branch (2)
 Owned
N/A
 $ 328
 
427 W Prairie View Road
     
 
Chippewa Falls, WI  54729
     
         
 
Chippewa Falls Branch (2)
 Lease
January 31, 2016
 
 
2786 Commercial Boulevard
     
 
Chippewa Falls, WI  54729
     
         
 
Eastside Branch
 Owned
N/A
 $ 290
 
1028 N Hillcrest Parkway
     
 
Altoona, WI  54720
     
         
 
Fairfax Branch
 Owned
N/A
 $ 756
 
219 Fairfax Street
     
 
Altoona, WI  54720
     
         
 
Fond du Lac Branch (4)
 Lease
January 31, 2014
 
 
377 N Rolling Meadows Dr
     
 
Fond du Lac, WI 54936
     
         
 
Mondovi Branch (4)
 Lease
June 30, 2011
 
 
695 E Main Street
     
 
Mondovi, WI  54755
     
         
 
Oshkosh Branch (4)
 Lease
January 31, 2014
 
 
351 S Washburn Street
     
 
Oshkosh, WI 54904
     


 
12

 


       
   
Lease
 Net Book Value
   
 Owned or
Expiration
 at September 30, 2010
     
Location
 Leased
Date
 (in thousands)
         
 
Rice Lake Branch (4)
 Lease
May 10, 2013
 
 
2501 West Avenue
     
 
Rice Lake, WI 54868
     
         
 
Westside Branch
Owned
N/A
 $ 270
 
2125 Cameron Street
     
 
Eau Claire, WI  54703
     
         
 
Wisconsin Dells Branch (4)
 Lease
January 31, 2014
 
 
130 Commerce Street
     
 
Wisconsin Dells, WI 53965
     
         
 
Lake Orion Branch (1)
 Lease
February 28, 2012
 
 
688 S. LaPeer Road
     
 
Lake Orion, MI  48362
     
         
 
Rochester Hills Branch
Owned
N/A
 $ 445
 
310 W Tienken Road
     
 
Rochester Hills, MI  48306
     
         
 
Brooklyn Park Branch (4)
 Lease
January 31, 2014
 
 
8000 Lakeland Avenue
     
 
Brooklyn Park, MN  55445
     
         
 
Faribault Branch (4)
 Lease
January 31, 2014
 
 
150 Western Avenue
     
 
Faribault, MN 55021
     
         
 
Hutchinson Branch (4)
 Lease
January 31, 2014
 
 
1300 Trunk Highway 15 S
     
 
Hutchinson, MN 55350
     
         
 
Mankato Branch (3)
 Lease
October 30,2010
 
 
1410 Madison Ave
     
 
Mankato, MN 56001
     
         
 
Oakdale Branch
 Lease
September 30, 2014
 
 
7035 10th Street North
     
 
Oakdale, MN  55128
     
         
 
Red Wing Branch (4)
 Lease
March 3, 2013
 
 
295 Tyler Road S
     
 
Red Wing, MN 55066
     


 
13

 


         
     
Lease
 Net Book Value
   
 Owned or
Expiration
 at September 30, 2010
     
Location
 Leased
Date
 (in thousands)
         
 
Winona Branch (4)
 Lease
January 31, 2014
 
 
955 Frontenac Drive
     
 
Winona, MN 55987
     
         
 
Menomonie Branch (4)
 Lease
March 3, 2014
 
 
180 Cedar Falls Road
     
 
Menomonie, WI 54751
     
         
 
Neenah Branch (4)
 Lease
April 21, 2014
 
 
1155 Winneconne Avenue
     
 
Neenah, WI 54956
     
         
 
Wisconsin Rapids Branch (4)
 Lease
May 26, 2014
 
 
4331 8th Street S.
     
 
Wisconsin Rapids, WI 54494
     
         
 
Shawano Branch (4)
 Lease
June 9, 2014
 
 
1244 E Green Bay Street
     
 
Shawano, WI 54166
     
         
 
Oak Park Heights Branch (4)
 Lease
January 31, 2015
 
 
5815 Norell Avenue
     
 
Oak Park Heights, MN 55082
     
         
 
Plover Branch (4)
 Lease
January 31, 2015
 
 
250 Crossroads Drive
     
 
Plover, WI 54467
     
         
(1) Effective March 1, 2007, Citizens Community Federal has a right to cancel this lease, with the cancellation to take effect 90 days after it exercises the right to cancel.
 
(2) Effective September 30, 2010, the Chippewa Falls branch was moved from 427 W Prairie View Road to a branch office located within the WalMart Supercenter at 2786 Commercial Blvd. The building located at 427 W Prairie View Road, Chippewa Falls, Wisconsin is currently for sale.
 
(3)Effective November 1, 2010, the Mankato branch was moved from 1410 Madison Avenue to 1901 Madison Avenue, Suite 410,
Mankato, MN  56001.
 
(4) Leased WalMart locations each have a lessee option to extend the lease by up to two five-year periods, each at predetermined rent rates.
 


 
14

 


ITEM 3. LEGAL PROCEEDINGS

On January 4, 2010, we received notice of a demand for arbitration by James G. Cooley, the Company’s former President and Chief Executive Officer, from the American Arbitration Association in connection with our termination of his employment and his employment agreement.  As part of the demand, Mr. Cooley asserted claims against the Company (and certain members of the Company’s Board of Directors) related to breach of contract, wrongful discharge, defamation of character and intentional infliction of emotional distress.  Mr. Cooley sought relief in the form of actual damages, punitive damages, attorneys' fees, interest and reimbursement of costs. On March 1, 2010, Mr. Cooley initiated a declaratory judgment action in Wisconsin circuit court seeking a court determination as to whether the Company and certain members of the Company’s Board of Directors have a legal obligation to submit Mr. Cooley’s arbitration claims to an arbitrator. The declaratory judgment was dismissed on August 26, 2010, and the request for arbitration was subsequently withdrawn on August 26, 2010 as well.

  On September 27, 2010, Mr. Cooley filed a lawsuit in the Eau Claire County Circuit court against the Company and the Bank and individual directors thereof, seeking damages for breach of employment contract, violation of public policy in the State of Wisconsin, defamation of character and intentional infliction of emotional distress.

Management believes that the aforementioned claims are without merit. However, the Company intends to vigorously defend against the claims, although no assurances can be given regarding the outcome of this matter.

In the normal course of business, the Company occasionally becomes involved in various legal proceedings.  In our opinion, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

ITEM 4. [REMOVED AND RESERVED]

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
                OF EQUITY SECURITIES

Historically, trading in shares of our common stock has been limited. Citizens Community Bancorp, Inc. common stock is traded on the NASDAQ Global Market under the symbol “CZWI”.

The following table summarizes high and low bid prices and cash dividends declared for our common stock for the periods indicated. Bid prices are as provided by the Yahoo Finance System. The reported high and low prices represent interdealer bid prices, without retail mark-up, mark-downs or commission, and may not necessarily represent actual transactions.

   
High
   
Low
   
Cash dividends
per share
 
Fiscal 2010
                 
First Quarter (three months ended December 31, 2009)
  $ 4.64     $ 3.01     $ -  
Second Quarter (three months ended March 31, 2010)
  $ 4.83     $ 3.35     $ -  
Third Quarter (three months ended June 30, 2010)
  $ 5.30     $ 3.71     $ -  
Fourth Quarter (three months ended September 30, 2010)
  $ 4.49     $ 3.51     $ -  
Fiscal 2009
                       
First Quarter (three months ended December 31, 2008)
  $ 7.41     $ 5.80     $ 0.05  
Second Quarter (three months ended March 31, 2009)
  $ 7.39     $ 5.85     $ 0.05  
Third Quarter (three months ended June 30, 2009)
  $ 6.50     $ 5.27     $ 0.05  
Fourth Quarter (three months ended September 30, 2009)
  $ 6.38     $ 4.75     $ 0.05  
 


 
15

 

The closing price of Citizens Community Bancorp, Inc. common stock on September 30, 2010 was $4.43.

We had approximately 458 stockholders of record at December 23, 2010. The number of stockholders does not separately reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

The holders of our common stock are entitled to receive such dividends when and as declared by our Board of Directors and approved by our regulators. In determining the payment of cash dividends, our Board of Directors considers the earnings, capital and debt servicing requirements, financial ratio guidelines of our regulators, our financial condition and other relevant factors.

Through our fiscal year 2009, cash dividends on our common stock had historically been paid on a quarterly basis. No cash dividends were declared in our 2010 fiscal year, compared to total dividends of $0.20 per share in our 2009 and 2008 fiscal years. In December 2009, the OTS restricted our ability to declare and pay dividends indefinitely due to a reduction in our regulatory capital levels resulting from our financial results for our 2009 fiscal year. There is no assurance if or when we will be allowed to pay additional dividends, or in what amounts.

ITEM 6. SELECTED FINANCIAL DATA

   
Year ended September 30,
(dollars in thousands, except per share data)
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Selected Results of Operations Data:
                             
Interest income
  $ 32,759     $ 30,940     $ 26,734     $ 19,346     $ 15,311  
Interest expense
    11,579       14,688       14,139       8,889       7,221  
Net interest income
    21,180       16,252       12,595       10,457       8,090  
Provision for loan losses
    6,901       1,369       721       470       251  
Net interest income after povision for loan losses
    14,279       14,883       11,874       9,987       7,839  
Fees and service charges
    1,876       1,640       1,352       1,262       1,243  
Other gains (losses), net
    (2,261 )     (7,236 )     -       -       27  
Goodwill impairment
    (5,593 )     -       -       -       -  
Other non-interest income
    227       366       357       464       387  
Non-interest income (loss)
    (5,751 )     (5,230 )     1,709       1,726       1,657  
Non-interest expense
    16,574       14,925       11,101       10,522       8,741  
Income (loss) before provision (benefit) for income taxes
    (8,046 )     (5,272 )     2,482       1,191       755  
Income tax provision (benefit)
    (955 )     (2,089 )     1,008       448       309  
Net income (loss
  $ (7,091 )   $ (3,183 )   $ 1,474     $ 743     $ 446  
Per Share Data: (1)
                                       
Net income (loss) per share (basic) (1)
  $ (1.39 )   $ (0.59 )   $ 0.24     $ 0.11     $ 0.06  
Net income (loss) per share (diluted) (1)
  $ (1.39 )   $ (0.59 )   $ 0.24     $ 0.11     $ 0.06  
Cash dividends per common share
  $ -     $ 0.20     $ 0.20     $ 0.20     $ 0.20  
Book value per share at end of period
  $ 9.75     $ 10.12     $ 11.00     $ 10.98     $ 8.03  

 
16

 



CITIZENS COMMUNITY BANCORP, INC.
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
   
Year ended September 30,
(dollars in thousands, exept per share data)
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Selected Financial Condition Data:
                             
Total assets
    594,365       575,406       480,036       386,113       283,990  
Securities available for sale
    41,708       56,215       61,776       39,592       782  
Total loans (net of unearned income)
    456,232       442,470       369,710       320,953       259,302  
Total deposits
    476,302       409,311       297,243       207,734       186,711  
Short-term borrowings (2)
    33,800       42,605       23,395       60,696       55,858  
Other borrowings (2)
    64,200       106,805       110,245       96,446       61,200  
Total shareholders' equity
    49,877       55,365       68,476       78,149       30,082  
                                         
Performance Ratios:
                                       
Return on average assets
    (1.21 %)     (0.60 %)     0.34 %     0.22 %     0.17 %
Return on average total shareholders' equity
    (13.48 %)     (5.18 %)     2.00 %     1.09 %     1.50 %
Net interest margin (3)
    3.84 %     3.28 %     3.02 %     3.77 %     3.54 %
Net interest spread (3)
                                       
Average during period
    3.70 %     2.98 %     2.44 %     3.07 %     3.28 %
End of period
    4.39 %     3.53 %     3.31 %     3.05 %     3.11 %
Net overhead ratio (4)
    3.82 %     3.82 %     2.17 %     2.63 %     2.67 %
Average loan-to-average deposit ratio
    105.32 %     116.97 %     137.7 %     144.65 %     127.9 %
Average interest-bearing assets to average interest-bearing liabilities
    1.07 %     1.10 %     1.17 %     1.24 %     1.09 %
Efficiency ratio (5)
    71.18 %     81.74 %     77.61 %     86.37 %     89.68 %
                                         
Asset Quality Ratios:
                                       
Non-performing loans to total loans (6)
    1.11 %     1.31 %     0.88 %     0.47 %     0.54 %
Allowance for loan losses to:
                                       
Total loans (net of unearned income)
    0.91 %     0.44 %     0.32 %     0.29 %     0.32 %
Non-performing loans
    81.53 %     33.25 %     36.62 %     60.92 %     60.07 %
Net charge-offs to average loans
    1.03 %     0.16 %     0.13 %     0.13 %     0.09 %
Non-performing assets to total assets
    0.93 %     1.12 %     0.68 %     0.43 %     0.63 %
                                         
Capital Ratios:
                                       
Shareholders' equity to assets (7)
    8.39 %     9.62 %     14.26 %     20.24 %     10.59 %
Average equity to average assets (7)
    9.00 %     11.82 %     17.04 %     21.42 %     11.26 %
Tier 1 capital (leverage ratio) (8)
    8.9 %     8.9 %     9.6 %     11.5 %     7.2 %
Total risk-based capital (8)
    11.0 %     9.6 %     15.3 %     18.0 %     11.0 %
 
(1)   Earnings per share are based on the weighted average number of shares outstanding for the period.
(2)   Consists of Federal Home Loan Bank term notes.
(3)   Net interest margin represents net interest income as a percentage of average interest-earning assets, and net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted avarage cost of interest-bearing liabilities.
(4)   Net overhead ratio represents the difference between non-interest expense and non-interest income, divided by average assets.
(5)   Efficiency ratio represents non-interest expense, divided by the sum of net interest income and non-interest income, excluding
impairment losses from OTTI and Goodwill.
(6)   Non-performing loans consist of nonaccrual loans plus loans 91+ days past due. Non-performing assets consist of non-performing
        loans plus other real estate owned plus other collateral owned.
(7)   Presented on a consolidated basis.
(8)   Presented on a Bank (i.e. regulatory) basis.

 
17

 


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition and results of operations that should be read in conjunction with our consolidated financial statements, related notes, the selected financial data and the statistical information presented elsewhere in this report for a more complete understanding of the following discussion and analysis. Years refer to the Company’s fiscal years ended September 30, 2010 and 2009.

PERFORMANCE SUMMARY
 
The following is a brief summary of some of the factors that affected our operating results in 2010. See the remainder of this section for a more thorough discussion. We reported a net loss of $7,091 for the year ended September 30, 2010, an increase of $3,908 over a net loss of $3,183 in 2009. Both basic and diluted losses per share were ($1.39) for 2010 compared to ($0.59) basic and diluted losses per share for 2009. Return on average assets for the year ended September 30, 2010 was (1.21%) and (0.60%) for the year ended September 30, 2009. The return on average equity was (13.48%) for 2010 and (5.18%) for 2009. No cash dividends were declared in 2010. Cash dividends of $0.20 per share were paid in 2009.

Key factors behind these results were:
   
Net interest income and net interest margin improved in 2010, as the rates paid on interest bearing liabilities decreased at a greater rate than the decrease in rates on our interest earning assets, thereby increasing our interest rate spread.
   
Net interest income was $21,180 for 2010, an increase of $4,928, or 30.3% from $16,252 for 2009. Interest income increased to $32,759 from $30,940, or 5.9% from 2009 to 2010. Meanwhile, interest expense of $11,579 during 2010 decreased from $14,688, or (21.2%) during 2009.
   
The net interest margin for 2010 was 3.84% compared to 3.28% for 2009. The 56 basis point (“bp”) increase largely resulted from a 72 bp increase in interest rate spread caused by a 30 bp decrease in the return on interest earning assets, which was more than offset by a 102 bp decrease in the cost in interest-bearing liabilities.
   
Total loans were $456,232 at September 30, 2010, an increase of $13,762, or 3.11% from September 30, 2009. Total deposits were $476,302 at September 30, 2010, an increase of $66,991, or 16.4% from year-end 2009.
   
Loan charge-offs increased significantly from a year ago. Net charge-offs were $4,681, an increase of $4,045 compared to $636 for 2009. Increased charge-offs, along with increases in delinquency rates and non-performing loans led to significantly increased provision for loan losses of $6,901 for 2010 compared to $1,369 for 2009. Net loan charge-offs represented 1.04% of average loans outstanding in 2010, compared to 0.16% in 2009.
   
Non-interest income (loss), which includes valuation losses, was ($5,751) for 2010, compared to ($5,230) in 2009, an increase of $521, or 10.0%. OTTI losses on securities decreased from ($7,236) in 2009 to ($2,261) in 2010.  However, in 2010, based on the estimated enterprise value of the Company, we recorded impairment losses for the entire $5,593 balance of goodwill.
   
Non-interest expense was $16,574, an increase of $1,649 over 2009. This was primarily a result of increases in expenses related to increased compensation and professional services costs and increased occupancy costs resulting from branch openings in 2009.
   
We recognized tax benefits of ($955) and ($2,089) for 2010 and 2009, respectively.

 
 
18

 

CRITICAL ACCOUNTING POLICIES

In the course of our normal business activity, management must select and apply many accounting policies and methodologies that are the basis for the financial results presented in our consolidated financial statements. Some of these policies are more critical than others. Below is a discussion of our critical accounting policies.

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb probable incurred loss in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in our loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in the loan portfolio, historical loss experience, current adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC). The Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory expectations. However, based on periodic examinations by regulators, the amount of allowance for loan losses recorded during a particular period may be adjusted.

Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral; and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

Available for Sale Securities.

Securities are classified as available for sale and are carried at fair value, with unrealized gains and losses reported in other comprehensive income (loss).  Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.

We evaluate all investment securities on a quarterly basis, and more frequently when economic conditions warrant determining if other-than-temporary impairment exists.  A debt security is considered impaired if the fair value is less than its amortized cost at the report date.  If impaired, we then assess whether the impairment is other-than-temporary.

Current authoritative guidance provides that an unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security.  The credit loss component is recorded in earnings as a component of other-than-temporary impairment in the consolidated statements of operations, while the loss component related to other market factors is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security and it is “more likely than not” that the Company will not have to sell the debt security prior to recovery of the unrealized loss.

 
19

 
 
We consider the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
 
    The length of time, and extent to which, the fair value has been less than the amortized cost.
     
    Adverse conditions specifically related to the security, industry or geographic area.
     
    The historical and implied volatility of the fair value of the security.
     
    The payment structure of the debt security and the likelihood of the issuer or underlying borrowers being able to make payments that may increase in the future.
     
    The failure of the issuer of the security or the underlying borrowers to make scheduled interest or principal payments.
     
    Any changes to the rating of the security by a rating agency.
     
    Recoveries or additional declines in fair value subsequent to the balance sheet date.
     
 Interest income on securities for which other-than-temporary impairment has been recognized in earnings is recognized at a rate commensurate with the expected future cash flows and amortized cost basis of the securities after the impairment.
     
Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.
 
To determine if other-than-temporary impairment exists on a debt security, the Bank first determines if (1) it intends to sell the security or (2) it is more likely than not that it will be required to sell the security before its anticipated recovery.  If either of the foregoing conditions is met, the Bank will recognize other-than-temporary impairment in earnings equal to the difference between the security’s fair value and its adjusted cost basis.  If neither of the foregoing conditions is met, the Bank determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors.  The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss.  The credit loss is the amount of the other-than-temporary impairment that is recognized in earnings and is a reduction to the cost basis of the security.  The amount of the total impairment related to all other factors (excluding credit loss) is included in other comprehensive loss.

We monitor our portfolio investments on an on-going basis and we periodically obtain an independent valuation of our non-agency residential mortgage-backed securities.  This analysis is utilized to ascertain whether any decline in market value is other-than-temporary. In determining whether an impairment is other-than-temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer including investment downgrades by rating agencies and economic conditions within the issuer's industry, whether it is more likely than not that we will be required to sell the security before there would be a recovery in value, and credit performance of the underlying collateral backing the securities, including delinquency rates, cumulative losses to date, and prepayment speed.

The independent valuation process included:
 
    Obtaining individual loan level data directly from servicers and trustees, and making assumptions regarding the frequency of foreclosure, loss severity and conditional prepayment rate (both the entire pool and the loan group pertaining to the bond we hold).
     
    Projecting cash flows based on these assumptions and stressing the cash flows under different time periods and requirements based on the class structure and credit enhancement features of the bond we hold.
     
    Identifying various price/yield scenarios based on the Bank’s book value and valuations based on both hold-to-maturity and current free market trade scenarios. Discount rates were determined based on the volatility and complexity of the security and the yields demanded by buyers in the market at the time of the valuation.
 


 
20

 
 
For non-agency residential mortgage-backed securities that are considered other-than-temporarily impaired and for which we have the ability and intent to hold these securities until the recovery of our amortized cost basis, we recognize other-than-temporary impairment in accordance with accounting principles generally accepted in the United States.  Under these principles, we separate the amount of the other-than-temporary impairment into the amount that is credit related and the amount due to all other factors.  The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of expected future cash flows.  The amount due to other factors is recognized in other comprehensive income (loss).

Foreclosed Properties.

Foreclosed properties acquired through or in lieu of loan foreclosures are initially recorded at the lower of carrying cost or fair value, less estimated costs to sell, which establishes  a new cost basis. Fair value is determined using a market valuation determined by third party appraisals or broker price opinions. If fair value declines subsequent to foreclosure, a write-down is recorded through expense based on an updated third party appraisal less estimated selling costs.

Income Taxes.

The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings. We believe that the tax assets and liabilities are adequate and properly recorded in the consolidated financial statements. As of September 30, 2010, management does not believe a valuation allowance is necessary.

Goodwill and Other Intangibles.

Goodwill represents the difference between the cost of the acquisition and the fair value of the acquired net assets and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, and are classified separately under the appropriate balance sheet captions.  Goodwill is considered to have an indefinite useful life and is stated at cost less any accumulated impairment losses. Tests for impairment are conducted annually.

Other intangibles consist primarily of core deposit intangibles resulting from several bank acquisitions. Core deposit intangibles are recorded as an asset on our consolidated balance sheets, and are amortized on a straight-line basis, over their estimated remaining useful lives, which were initially determined at the time of acquisition, and reviewed annually as part of our impairment analysis. See Note 1; “Nature of Business and Significant Accounting Policies” and Note 6; “Goodwill and Intangible Assets”  below for further discussion of the factors that are considered in testing for goodwill impairment.

STATEMENT OF OPERATIONS ANALYSIS

2010 compared to 2009

Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share and per share amounts, are stated in thousands.

 
21

 


Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average earning assets. Net interest margin exceeds interest rate spread because non-interest bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support earning assets. The narrative below discuses net interest income, interest rate spread, and net interest margin.

Net interest income was $21,180 for 2010, compared to $16,252 for 2009. The net interest margin for 2010 was 3.84% compared to 3.28% for 2009. The 56 bp increase in net interest margin was attributable to a 72 bp increase in interest rate spread resulting from a 30 bp decline in return on interest-earning assets, which was more than offset by a 102 bp decrease in the cost of interest-bearing liabilities in 2010.

As shown in the rate/volume analysis below, volume changes resulted in $1,508 increase in net interest income in 2010. The increase and changes in the composition of interest earning assets resulted in a $1,819 increase in interest income for 2010, offset by a $3,109 decrease in interest expense due to the composition change in interest-bearing liabilities. Rate changes on interest earning assets decreased interest income by $692, but were more than offset by rate changes on interest-bearing liabilities that decreased interest expense by $4,112, for a net impact of $3,420 due to changes in interest rates.

For 2010, the yield on earning assets declined to 5.94%, which was the combined effect of a decrease of 14 bp in the loan yield and a 10 bp decline in the yield on securities. The average loan yield was 6.54% in 2010 and 6.68% in 2009. Competitive pricing on new and refinanced loans, tightened credit underwriting standards, as well as increased prepayments due to the current low rate environment, all contributed to reduced loan yields in 2010.

For 2010, the cost of interest-bearing liabilities decreased 102 bps from 3.26% in 2009, to 2.24%, resulting, in part, from a continuing decrease in interest rates, generally, in 2010. The combined average cost of interest-bearing deposits was 1.95%, down 99 bp from 2009, primarily resulting from the continued low short-term interest rate environment during 2010.

We have remained liability sensitive in the short term during the most recent two fiscal years, in which interest rates have declined to historically low levels. Continued low interest rates will enable us to experience a favorable interest rate margin.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at September 30 for each of the fiscal years shown below. No tax equivalent adjustments were made. Non-accruing loans have been included in the table as loans carrying a zero yield.

Average earning assets were $551,739 in 2010 compared to $495,857 in 2009. Average loans outstanding increased to $452,696 in 2010 from $404,335 in 2009. Average loans to average total assets increased to 77.40% in 2010 from 76.62% in 2009. Interest income on loans increased $2,603, of which $3,174 related to the increase in average outstanding balances offset by a decrease in interest income of $571 due to lower yields on such loans. Balances of securities decreased $9,540 on average. Interest income on securities decreased $619 from volume changes and $52 from the impact of the rate environment, for a combined $671 decrease in interest income on securities in our investment portfolio.

 
22

 

Average interest-bearing liabilities increased $67,171 in 2010 from 2009 levels, while net free funds (the total of accrued expenses, other liabilities and stockholders’ equity less non-interest earning assets) decreased $10,556. The decrease in net free funds is primarily due to a decrease in stockholders’ equity. Average stockholders’ equity decreased $9,300, or 15.0%. Average interest-bearing deposits increased $84,167, or 24.35% to $429,833. This increase primarily arose from an increase in deposits accepted by our branch offices of $67 million. Interest expense on interest-bearing deposits increased $1,671 during 2010 from the volume and mix changes and decreased $3,445 from the impact of the rate environment, resulting in an aggregate decrease of $1,774 in interest expense on interest-bearing deposits.


   
Year ended September 30, 2010
   
Year ended September 30, 2009
   
Year ended September 30, 2008
 
   
Average
Outstanding
Balance
   
Interest
Income/
Expense
   
Average
Yield/
Rate
   
Average
Outstanding
Balance
   
Interest
Income/
Expense
   
Average
Yield/
Rate
   
Average
Outstanding
Balance
   
Interest
Income/
Expense
   
Average
Yield/
Rate
 
Average interest-earning assets:
                                                     
Cash and cash equivalents
  $ 43,941     $ 21       0.05 %   $ 23,769     $ 27       0.11 %   $ 13,445     $ 277       2.06 %
Loans
    452,696       29,610       6.54 %   $ 404,335     $ 27,007       6.68 %   $ 344,654     $ 23,129       6.71 %
Interest-bearing deposits
    665       12       1.80 %   $ 3,894     $ 119       3.06 %   $ 371     $ 7       1.89 %
Securities available for sale
    48,455       3,116       6.43 %   $ 57,995     $ 3,787       6.53 %   $ 53,417     $ 3,320       6.22 %
FHLB stock
    5,982       -       0.00 %   $ 5,865     $ -       0.00 %   $ 5,420     $ -       0.00 %
Total interest earning assets
  $ 551,739     $ 32,759       5.94 %   $ 495,857     $ 30,940       6.24 %   $ 417,307     $ 26,733       6.41 %
Average interest-bearing liabilities:
                                                                       
Savings Accounts
  $ 25,812     $ 165       0.64 %   $ 23,162     $ 192       0.83 %   $ 21,091     $ 172       0.82 %
Demand deposits
    21,983       29       0.13 %   $ 19,805     $ 28       0.14 %   $ 18,711     $ 26       0.14 %
Money Market
    153,045       2,485       1.62 %   $ 81,922     $ 1,948       2.38 %   $ 31,711     $ 717       2.26 %
CD's
    209,723       5,202       2.48 %   $ 205,291     $ 7,446       3.63 %   $ 166,758     $ 7,716       4.63 %
IRA's
    19,270       503       2.61 %   $ 15,487     $ 544       3.51 %   $ 12,016     $ 507       4.22 %
Total deposits
    429,833       8,384       1.95 %     345,666       10,158       2.94 %     250,287       9,138       3.65 %
FHLB Advances
    88,173       3,195       3.62 %     105,169       4,530       4.31 %     105,699       5,001       4.73 %
Total interest bearing deposits
  $ 518,006     $ 11,579       2.24 %   $ 450,835     $ 14,688       3.26 %   $ 355,986     $ 14,139       3.97 %
Net interest income
          $ 21,180                     $ 16,252                     $ 12,594          
Interest rate spread
                    3.70 %                     2.98 %                     2.43 %
Net interest margin
                    3.84 %                     3.28 %                     3.02 %
Average interest-earning assets to
average interest-bearing liabilities
                    1.07                       1.10                       1.17  



 
23

 

Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e. holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e. holding the initial balance constant). Changes due to both rate and volume which cannot be segregated have been allocated in proportion to the relationship of the dollar amounts of the change in each.
 
   
Year ended September 30,
2010 v. 2009
Increase (decrease) due to
   
Year ended September 30,
2009 v. 2008
Increase (decrease) due to
   
Volume (1)
   
Rate (1)
   
Total
Increase/
(Decrease)
      Volume (1)      
Rate (1)
   
Total
Increase/
(Decrease)
 
Interest income:                                                
Cash and cash equivalents
  $ 17     $ (23 )   $ (6 )   $ 149     $ (400 )   $ (251 )
Loans receivable
    3,174       (571 )     2,603     $ 3,987     $ (109 )     3,878  
Interest-bearing deposits
    (61 )     (46 )     (107 )   $ 91     $ 21       112  
Securities available for sale
    (619 )     (52 )     (671 )   $ 296     $ 171       467  
FHLB stock
    -       -       -     $ -     $ -       -  
Total interest earning assets
  $ 2,511     $ (692 )   $ 1,819     $ 4,523     $ (317 )   $ 4,206  
 
Interest expense:
                                   
Savings Accounts
  $ 20     $ (47 )   $ (27 )   $ 17     $ 3     $ 20  
Demand deposits
    3       (2 )     1       2       -       2  
Money Market
    1,372       (835 )     537       1,192       39       1,231  
CD's
    158       (2,402 )     (2,244 )     1,584       (1,854 )     (270 )
IRA's
    118       (159 )     (41 )     131       (94 )     37  
Total deposits
    1,671       (3,445 )     (1,774 )     2,926       (1,906 )     1,020  
FHLB Advances
    (668 )     (667 )     (1,335 )     (25 )     (446 )     (471 )
Total interest bearing deposits
    1,003       (4,112 )     (3,109 )     2,901       (2,352 )     549  
Net interest income
  $ 1,508     $ 3,420     $ 4,928     $ 1,622     $ 2,035     $ 3,657  
 
(1) the change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

 
24

 

Provision for Loan Losses. We determine our provision for loan losses (“provision”, or “PLL”), based on our desire to provide an adequate allowance for loan losses (“ALL”) to reflect probable incurred credit losses in our loan portfolio. Based on increased historical charge off ratios and the negative influence of certain qualitative and general economic factors discussed above under “Critical Accounting Policies - Allowance for Loan Losses”, the provision for loan losses necessary to ensure an adequate allowance for loan losses continues to remain at elevated levels.

Net loan charge-offs for the years ended September 30, 2010 and 2009 were $4,681 and $636, respectively. Net charge-offs to average loans were 1.03% for 2010 compared to 0.16% for 2009. For 2010, non-performing loans decreased by $705 to $5,084 from $5,789 at September 30, 2009. Refer to the “Risk Management and the Allowance for Loan Losses” section below for more information related to non-performing loans.

We recorded provisions for loan losses of $6,901 and $1,369 for the years ended September 30, 2010 and 2009, respectively. Management believes that the provision taken for the year ended September 30, 2010 is adequate in view of the present condition of the loan portfolio and the sufficiency of collateral supporting non-performing loans. We are continually monitoring non-performing loan relationships and will make provisions, as necessary, if the facts and circumstances change. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could affect the adequacy of our ALL. If there are significant charge-offs against the ALL or we otherwise determine that the ALL is inadequate, we will need to record an additional PLL in the future. See the section captioned “Allowance for Loan Losses” in this discussion for further analysis of the provision for loan losses.

Non-Interest Income (loss). The following table reflects the various components of non-interest income (loss) for the years ended September 30, 2010, 2009 and 2008, respectively.

   
Twelve months ended
September 30,
   
Change:
 
    2010     2009     2008     2010 over
2009
    2009 over
2008
 
Noninterest Income (loss):
                             
Net impairment losses recognized in earnings
  $ (2,261 )   $ (7,236 )   $ -       (68.75 %)     n/a  
Goodwill impairment
    (5,593 )     -       -       n/a       n/a  
Service charges on deposit accounts
    1,514       1,361       1,069       11.24 %     27.32 %
Insurance commissions
    216       355       344       (39.15 %)     3.20 %
Loan fees and service charges
    362       279       283       29.75 %     (1.41 %)
Other
    11       11       13       0.00 %     (15.38 %)
Total non-interest income (loss)
  $ (5,751 )   $ (5,230 )   $ 1,709       9.96 %     (406.03 %)
 
Non-interest loss was ($5,751) for the year ended September 30, 2010, an increase of $521, or 9.96% over the year ended September 30, 2009. Based on a valuation analysis performed by an independent third party expert, we determined that the entire amount of $5,593 of goodwill was impaired, primarily due to our stock price per share remaining significantly below our book value per share for an extended period of time. We recorded $2,261 in credit-related other-than-temporary-impairment (“OTTI”) charges for the year ended September 30, 2010 compared to $7,236 for the year ended September 30, 2009. We also experienced increases in fees and service charges, offset slightly by decreases in insurance commissions.

 
25

 

Non-Interest Expense. The following table reflects the various components of non-interest expense for the years ended September 30, 2010, 2009 and 2008, respectively.

    Years ended
September 30,
    Change:  
    2010     2009     2008    
2010 over
2009
   
2009 over
2008
 
Non-interest Expense:
                             
Salaries and related benefits
  $ 7,797     $ 7,263     $ 5,857       7.35 %     24.01 %
Occupancy - net
    2,553       2,203       1,313       15.89 %     67.78 %
Office
    1,413       1,515       1,133       (6.73 %)     33.72 %
Data processing
    308       396       359       (22.22 %)     10.31 %
Amortization of core deposit
    333       333       307       0.00 %     8.47 %
Advertising, marketing and public relations
    173       242       148       (28.51 %)     63.51 %
FDIC premium assessment
    943       962       176       (1.98 %)     446.59 %
Professional services
    1,160       728       589       59.34 %     23.60 %
Other
    1,894       1,283       1,219       47.62 %     5.25 %
Total non-interest expense
  $ 16,574     $ 14,925     $ 11,101       11.05 %     34.45 %
                                         
Non-interest expense / Average assets
    2.83 %     2.83 %     2.56 %                

Non-interest expense increased $1,649 (11.05%) to $16,574 for the year ended September 30, 2010 compared to $14,925 for the same period in 2009. The non-interest expense to average assets ratio was 2.83% for the year ended September 30, 2010 compared to 2.83% for the same period in 2009.

The increases in salaries and related benefits in 2010 over 2009 were primarily due to an increase in full-time employees receiving benefits. The increase in occupancy expense is a result of 2010 being the first full year of occupancy costs on branches opened during 2009. Decreasing advertising expenses were the result of management cost reduction efforts. Increases in professional services costs were primarily the result of (a) increased legal fees incurred in defending litigation by the Company’s former CEO, (b) consulting fees paid to the Company’s acting CFO, and (c) quarterly valuation services associated with our non-agency mortgage-backed securities portfolio of $10 per quarter starting in the fourth quarter of 2009.

We continue our ongoing and entity-wide evaluation of all personnel, vendor, professional service and other discretionary costs and expenditures. We have realized savings of approximately $1,179 in these areas during the year ended September 30, 2010 over the prior fiscal year.

Income Taxes.  Income tax benefit was $955 for the year ended September 30, 2010, compared to income tax benefit of $2,089 for the year ended September 30, 2009. The decrease in income tax benefit resulted primarily from the income tax effects of: (a) loss before income taxes of $8,046 for the year ended September 30, 2010 compared to a loss before income taxes of $5,272 for the same period in 2009 and (b) the aforementioned goodwill impairment losses recorded in the consolidated statement of operations for which no tax deduction will be realized.

See Note 1, “Nature of Business and Summary of Significant Accounting Policies” and Note 14, “Income Taxes” in the Notes to Consolidated Financial Statements for a further discussion of income tax accounting. Income tax expense recorded in the consolidated statements of operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy. We undergo examination by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations.

 
26

 

BALANCE SHEET ANALYSIS

Loans. Total loans outstanding increased to $456,232 at September 30, 2010, a 3.11% increase from September 30, 2009. This follows a 19.68% increase from September 30, 2008 to September 30, 2009. The following table reflects the composition, or mix, of the loan portfolio at September 30, for the last five completed fiscal years:

   
2010
   
2009
   
2008
   
2007
   
2006
 
     Amount      
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Real Estate Loans:
                                                           
One to four-family first mortages
  $ 254,821       55.9 %   $ 230,412       52.1 %   $ 193,958       52.5 %   $ 177,281       55.2 %   $ 156,235       60.3 %
Second mortgages
    7,674       1.7 %     9,639       2.2 %     10,774       2.9 %     10,461       3.3 %     9,161       3.5 %
Multi-family and commercial
    196       0.0 %     174       0.0 %     180       0.0 %     215       0.1 %     240       0.1 %
Total real estate loans
  $ 262,691       57.6 %   $ 240,225       54.3 %   $ 204,912       55.4 %   $ 187,957       58.6 %   $ 165,636       63.9 %
Consumer Loans:
                                                                               
Automobile (1)
    18,542       4.1 %     24,875       5.6 %     25,887       7.0 %     27,168       8.5 %     24,445       9.4 %
Other secured personal loans (2)
    171,135       37.5 %     172,040       38.9 %     133,181       36.0 %     100,966       31.5 %     64,384       24.8 %
Unsecured personal loans (3)
    4,636       1.0 %     5,655       1.3 %     5,797       1.6 %     4,610       1.4 %     4,774       1.8 %
Total real consumer loans
  $ 194,313       42.6 %   $ 202,570       45.8 %   $ 164,865       44.6 %   $ 132,744       41.4 %   $ 93,603       36.1 %
                                                                                 
Gross loans
  $ 457,004             $ 442,795             $ 369,777             $ 320,701             $ 259,239          
Net deferred loan costs
  $ (772 )     (0.2 %)   $ (325 )     (0.1 %)   $ (67 )     (0.0 %)   $ 252       0.1 %   $ 63       0.0 %
Total loans (net of unearned income)
  $ 456,232       100.0 %   $ 442,470       100.0 %   $ 369,710       100.0 %   $ 320,953       100.0 %   $ 259,302       100.0 %
Allowance for loan losses
  $ (4,145 )           $ (1,925 )           $ (1,192 )           $ (926 )           $ (835 )        
Total loans receivable, net
  $ 452,087             $ 440,545             $ 368,518             $ 320,027             $ 258,467          
 
At September 30, 2010, the real estate loans comprised $262,691, or 57.6 percent of total loans. These loans increased $22,466, or 9.4% from their balance at September 30, 2009. Consumer loans (secured and unsecured) comprised $194,313, or 42.6 percent of total loans as of September 30, 2010. Residential real estate loans consist of fixed-rate conventional home mortgages and home equity loans. Consumer loans decreased by $8,257, or 4.1% at September 30, 2010 from their 2009 fiscal year balances. Consumer loans consist of short-term installment loans, direct and indirect personal property loans, credit card loans and other personal loans. With the exception of credit card loans, substantially all of our consumer loans are secured by personal property. Real estate and consumer loan demand, generally, has remained weak throughout 2010, and we anticipate this trend to continue into 2011.

Our loan portfolio is diversified by types of borrowers and industry groups within the market areas that we serve. Significant loan concentrations are considered to exist for a financial entity when the amounts of loans to multiple borrowers engaged in similar activities cause them to be similarly impacted by economic or other conditions. Management believes that no significant concentrations exist within our loan portfolio with respect to loan type, geographic location or other relevant factor.  See Note 4, “Loans / Allowance for Loan Losses” for tables and discussion regarding the composition of our loan portfolio.

The following table sets forth, for our last five completed fiscal years, fixed and adjustable rate loans in our loan portfolio:

 
27

 
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
    Amount    
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
Fixed Rate Loans:
                                                           
Real estate
                                                           
One to four-family first mortages
  $ 252,268       55.3 %   $ 226,856       51.3 %   $ 189,247       51.2 %   $ 170,127       53.0 %   $ 148,211       57.2 %
Second mortgages
    7,200       1.6 %     9,186       2.1 %     10,373       2.8 %     9,989       3.1 %     8,367       3.2 %
Multi-family and commercial
    196       0.0 %     174       0.0 %     180       0.0 %     215       0.1 %     240       0.1 %
Total fixed rate real estate loans
    259,664       56.9 %     236,216       53.4 %     199,800       54.0 %     180,331       56.2 %     156,818       60.5 %
Consumer loans
                    202,570               164,865               132,744               93,603          
Total fixed rate loans
    259,664       56.9 %     438,786       99.2 %     364,665       98.6 %     313,075       97.5 %     250,421       96.6 %
Adjustable Rate Loans:
                                                                               
Real estate
                                                                               
One to four-family first mortages
    2,553       0.6 %     3,556       0.8 %     4,711       1.3 %     7,154       2.2 %     8,024       3.1 %
Second mortgages
    474       0.1 %     453       0.1 %     401       0.1 %     472       0.1 %     794       0.3 %
Multi-family and commercial
    -       0.0 %     -       0.0 %     -       0.0 %     -       0.0 %     -