FFCO (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from                        to                      

Commission file number: 0-51153

FEDFIRST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

United States (State or other jurisdiction of incorporation or organization)		25-1828028 (I.R.S. Employer Identification No.)
Donner at Sixth Street, Monessen, Pennsylvania		15062
(Address of principal executive offices)		(Zip Code)

(724) 684-6800
(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o      No  þ

As of November 12, 2008, the issuer had 6,355,275 shares of common stock outstanding.

 

 

FORM 10-Q

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			1
Consolidated Statements of Financial Condition at September 30, 2008 (Unaudited) and December 31, 2007			1
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2008 and 2007			2
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive (Loss) Income for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)			3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)			4
Notes to the Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 5. Other Information			29
Item 6. Exhibits			29
SIGNATURES			30
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

		September 30,				December 31,
		2008				2007
(Dollars in thousands, except share data)		(UNAUDITED)
Assets:
Cash and cash equivalents:
Cash and due from banks		$	2,035			$	2,127
Interest-earning deposits			5,614				3,425
Total cash and cash equivalents			7,649				5,552
Securities available-for-sale			91,906				89,073
Loans, net			225,455				187,954
Federal Home Loan Bank (“FHLB”) stock, at cost			6,628				5,076
Accrued interest receivable — loans			1,090				966
Accrued interest receivable — securities			472				651
Premises and equipment, net			2,800				2,956
Bank-owned life insurance			7,741				7,538
Goodwill			1,080				1,080
Real estate owned			674				1,119
Other assets			351				366
Deferred tax assets			4,265				2,942
Total assets		$	350,111			$	305,273
Liabilities and Stockholders’ Equity:
Deposits:
Noninterest-bearing			13,655				8,918
Interest-bearing			159,430				146,640
Total deposits			173,085				155,558
Borrowings			131,508				101,074
Advance payments by borrowers for taxes and insurance			251				477
Accrued interest payable — deposits			892				1,116
Accrued interest payable — borrowings			550				413
Other liabilities			3,270				2,782
Total liabilities			309,556				261,420
Minority interest in subsidiary			89				80
Stockholders’ equity:
Preferred stock $0.01 par value; 10,000,000 shares authorized; none issued			—				—
Common stock $0.01 par value; 20,000,000 shares authorized; 6,707,500 shares issued and 6,380,275 and 6,518,200 shares outstanding			67				67
Additional paid-in-capital			29,169				29,084
Retained earnings — substantially restricted			18,474				18,520
Accumulated other comprehensive loss, net of deferred taxes of $(1,613) and $(45)			(2,501	)			(70	)
Unearned Employee Stock Ownership Plan (“ESOP”)			(1,944	)			(2,074	)
Common stock held in treasury, at cost (327,225 and 189,300 shares)			(2,799	)			(1,754	)
Total stockholders’ equity			40,466				43,773
Total liabilities and stockholders’ equity		$	350,111			$	305,273

See Notes to the Unaudited Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
(Dollars in thousands, except per share data)		2008				2007				2008				2007
Interest income:
Loans		$	3,218			$	2,689			$	8,937			$	7,764
Securities			1,315				1,005				4,074				2,999
Other interest-earning assets			69				131				252				408
Total interest income			4,602				3,825				13,263				11,171
Interest expense:
Deposits			1,149				1,372				3,688				3,789
Borrowings			1,273				804				3,516				2,569
Total interest expense			2,422				2,176				7,204				6,358
Net interest income			2,180				1,649				6,059				4,813
Provision for loan losses			260				395				539				470
Net interest income after provision for loan losses			1,920				1,254				5,520				4,343
Noninterest income:
Fees and service charges			132				108				352				304
Insurance commissions			373				397				1,486				1,328
Income from bank-owned life insurance			67				70				203				212
Net gain (loss) on sales of securities			—				(2	)			156				(1,412	)
Net gain on sale of real estate owned			3				—				—				—
Other			7				2				19				9
Total noninterest income			582				575				2,216				441
Noninterest expense:
Compensation and employee benefits			1,373				1,463				4,147				4,239
Occupancy			328				301				987				832
FDIC insurance premiums			9				6				20				17
Data processing			104				94				315				279
Other			566				462				1,501				1,378
Total noninterest expense			2,380				2,326				6,970				6,745
Minority interest in net income of consolidated subsidiary			5				15				61				53
Income (loss) before income tax expense (benefit)			117				(512	)			705				(2,014	)
Income tax expense (benefit)			51				(165	)			306				(640	)
Net income (loss)		$	66			$	(347	)		$	399			$	(1,374	)
Earnings (loss) per share:
Basic and diluted		$	0.01			$	(0.05	)		$	0.07			$	(0.21	)
Weighted-average shares outstanding:
Basic			5,905,927				6,438,228				5,968,648				6,442,220
Diluted			5,905,927				6,438,228				5,968,648				6,442,220

See Notes to the Unaudited Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

														Accumulated								Common
						Additional								Other								Stock				Total
		Common				Paid-in-				Retained				Comprehensive				Unearned				Held in				Stockholders’				Comprehensive
(Dollars in thousands)		Stock				Capital				Earnings				Loss				ESOP				Treasury				Equity				Loss
Balance at January 1, 2007		$	67			$	28,787			$	20,475			$	(737	)		$	(2,246	)		$	—			$	46,346
Comprehensive income:
Net loss			—				—				(1,374	)			—				—				—				(1,374	)		$	(1,374	)
Transfer of securities to held for trading, net of tax of $(552)			—				—				—				857				—				—				857				857
Unrealized loss on securities available-for-sale, net of tax of $(191)			—				—				—				(296	)			—				—				(296	)			(296	)
Purchase of common stock to be held in treasury (121,200 shares)			—				—				—				—				—				(1,125	)			(1,125	)
ESOP shares committed to be released (12,961 shares)			—				(10	)			—				—				129				—				119
Stock-based compensation expense			—				246				—				—				—				—				246
Stock awards granted			—				(51	)			—				—				—				51				—
Stock awards forfeited			—				29				—				—				—				(30	)			(1	)
Total comprehensive loss																														$	(813	)
Balance at September 30, 2007		$	67			$	29,001			$	19,101			$	(176	)		$	(2,117	)		$	(1,104	)		$	44,772

														Accumulated								Common
						Additional								Other								Stock				Total
		Common				Paid-in-				Retained				Comprehensive				Unearned				Held in				Stockholders’				Comprehensive
		Stock				Capital				Earnings				Loss				ESOP				Treasury				Equity				Loss
Balance at January 1, 2008		$	67			$	29,084			$	18,520			$	(70	)		$	(2,074	)		$	(1,754	)		$	43,773
Comprehensive income:
Net income			—				—				399				—				—				—				399			$	399
Unrealized loss on securities available-for-sale, net of tax of ($1,506)			—				—				—				(2,336	)			—				—				(2,336	)			(2,336	)
Reclassification adjustment on sales of securities available-for-sale, net of tax of $61			—				—				—				(95	)			—				—				(95	)			(95	)
Cumulative effect adjustment on benefit plan reserve			—				—				(445	)			—				—				—				(445	)
Purchase of common stock to be held in treasury (154,925 shares)			—				—				—				—				—				(1,194	)			(1,194	)
ESOP shares committed to be released (12,961 shares)			—				(33	)			—				—				130				—				97
Stock-based compensation expense			—				267				—				—				—				—				267
Stock awards granted			—				(149	)			—				—				—				149				—
Total comprehensive loss																														$	(2,032	)
Balance at September 30, 2008		$	67			$	29,169			$	18,474			$	(2,501	)		$	(1,944	)		$	(2,799	)		$	40,466

See Notes to the Unaudited Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		For the Period
		Ended September 30,
(Dollars in thousands)		2008				2007
Cash flows from operating activities:
Net income (loss)		$	399			$	(1,374	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Minority interest in net income of consolidated subsidiary			61				53
Provision for loan losses			539				470
Depreciation			376				299
Net (gain) loss on sales of securities			(156	)			1,412
Proceeds from sales of securities held for trading			—				40,483
Proceeds from principal repayments of securities held for trading			—				638
Net amortization of security premiums and loan costs			(379	)			(588	)
Non cash expense for ESOP			97				119
Non cash expense for stock-based compensation			267				246
Increase in bank-owned life insurance			(203	)			(212	)
Decrease in other assets			36				96
Increase in other liabilities			479				141
Net cash provided by operating activities			1,516				41,783
Cash flows from investing activities:
Net loan originations			(38,066	)			(13,281	)
Proceeds from sale of student loan portfolio			—				12
Proceeds from maturities of and principal repayments of securities available-for-sale			12,955				13,293
Proceeds from sales of securities available-for-sale			8,766				2,569
Purchases of securities available-for-sale			(28,352	)			(51,219	)
Purchases of premises and equipment			(220	)			(1,184	)
(Increase) decrease in FHLB stock, at cost			(1,552	)			365
Proceeds from sale of real estate owned			509				—
Net cash used in investing activities			(45,960	)			(49,445	)
Cash flows from financing activities:
Net increase (decrease) in borrowings			30,434				(1,717	)
Net increase in deposits			17,527				11,069
Increase in advance payments by borrowers for taxes and insurance			(226	)			(43	)
Purchases of common stock held in treasury			(1,194	)			(1,125	)
Net cash provided by financing activities			46,541				8,184
Net increase in cash and cash equivalents			2,097				522
Cash and cash equivalents, beginning of period			5,552				4,499
Cash and cash equivalents, end of period		$	7,649			$	5,021
Supplemental cash flow information:
Cash paid for:
Interest on deposits and borrowings		$	7,291			$	6,359
Income tax expense			44				36
Transfer of securities from available-for-sale to held for trading			—				42,531
Real estate acquired in settlement of loans			360				641

See Notes to the Unaudited Consolidated Financial Statements

Notes to the Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation/Nature of Operations

The accompanying unaudited Consolidated Financial Statements include the accounts of FedFirst Financial Corporation, a federally chartered holding company (“FedFirst Financial” or the “Company”), whose wholly owned subsidiaries are First Federal Savings Bank (the “Bank”), a federally chartered stock savings bank, and FedFirst Exchange Corporation (“FFEC”), a subsidiary of the Bank. FFEC has an 80% controlling interest in Exchange Underwriters, Inc. Exchange Underwriters, Inc. is an independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products. The Company is a majority owned subsidiary of FedFirst Financial Mutual Holding Company (“FFMHC”), a federally chartered mutual holding company. FFMHC has virtually no operations and assets other than an investment in the Company, and is not included in these financial statements. All significant intercompany transactions have been eliminated.

We operate as a community-oriented financial institution offering residential, multi-family and commercial mortgages, consumer loans and commercial business loans as well as a variety of deposit products for individuals and businesses from nine locations in southwestern Pennsylvania. We conduct insurance brokerage activities through Exchange Underwriters, Inc. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

The unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q and, therefore, do not include information or notes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary to make the consolidated financial statements not misleading have been included. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as amended. Certain items previously reported have been reclassified to conform with the current reporting period’s format. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the full year or any other interim period.

In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment and the valuation of deferred tax assets.

Note 2. Recent Accounting Pronouncements

The Hierarchy of Generally Accepted Accounting Principles. In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not anticipate this statement having a material effect on its financial condition or operations upon adoption.

Accounting for Financial Guarantee Insurance Contracts — an interpretation of SFAS No. 60. In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts – an interpretation of SFAS No. 60. This Statement clarifies how SFAS No. 60, Accounting and Reporting by

Insurance Enterprises , applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities, which are effective the first period (including interim periods) beginning after May 23, 2008. Except for the required disclosures, earlier application is not permitted. The Company does not anticipate this statement having a material effect on its financial condition or operations upon adoption.

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning after December 15, 2008. The Company does not anticipate this FSP having a material effect on its financial condition or operations upon adoption.

Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock. In June 2008, the FASB ratified EITF 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock . EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (“ARB”) No. 51. In December, 2007 the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 . SFAS 160 establishes standards related to the treatment of noncontrolling interests. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS No. 160 will require noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside permanent equity. The Statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This statement, which the Company does not anticipate having a material effect on its financial condition or operations upon adoption, is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Earlier application is prohibited.

The Fair Value Option for Financial Assets and Financial Liabilities: In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing certain entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets and liabilities to be carried at fair value. The Company adopted the standards but did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

Fair Value Measurements: In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, however, for some entities the application of this Statement will change current practice. This statement was adopted on January 1, 2008 and did not have a material effect on the Company’s financial condition or operations.

Effective Date of FASB Statement No. 157: In February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157 , that permits a one-year deferral in applying the measurement provisions of SFAS 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of SFAS No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applied SFAS No. 157 in interim or annual financial statements prior to the issuance of FSP 157-2. This FSP will not have a material effect on the Company’s financial condition or operations upon adoption.

Determination of the Useful Life of Intangible Assets. In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets . This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R, and other generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active: In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active , to clarify the application of the provisions of SFAS No. 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Company’s September 30, 2008 financial statements. The application of the provisions of FSP 157-3 affected the Company’s results of operations and financial condition as of and for the periods ended September 30, 2008. Refer to Note 3 for discussion on SFAS No. 157.

Staff Accounting Bulletin No. 110. Staff Accounting Bulletin (SAB) No. 110 amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based Payment , of the SAB series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB No. 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. SAB 110 was effective January 1, 2008.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. In June 2007, the EITF reached a consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards . EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid-in-capital. The amount recognized in additional paid-in-capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company expects that EITF 06-11 will not have an impact on its consolidated financial statements.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements: In March 2007, the EITF reached a consensus on Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements , stating that for an endorsement split-dollar life insurance arrangement, an employer should recognize a liability for future benefits based on the substantive agreement with the employee. The consensus is effective for fiscal years beginning after December 15, 2007. The Company recognized the effects of applying the consensus on this issue through a $445,000 cumulative-effect adjustment to retained earnings at January 1, 2008.

Note 3. Securities

The following table sets forth the amortized cost and fair value of securities available-for-sale at the dates indicated (dollars in thousands).

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
September 30, 2008		Cost				Gains				Losses				Value
Government-Sponsored Enterprises		$	14,712			$	71			$	146			$	14,637
Mortgage-backed			53,397				281				286				53,392
REMICs			23,867				75				3,031				20,911
Corporate debt			3,995				—				1,078				2,917
Equities			49				—				—				49
Total securities available-for-sale		$	96,020			$	427			$	4,541			$	91,906

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
December 31, 2007		Cost				Gains				Losses				Value
Government-Sponsored Enterprises		$	22,321			$	353			$	—			$	22,674
Mortgage-backed			34,948				242				37				35,153
REMICs			27,875				80				478				27,477
Corporate debt			3,995				—				275				3,720
Equities			49				—				—				49
Total securities available-for-sale		$	89,188			$	675			$	790			$	89,073

The Company adopted SFAS 157 on January 1, 2008. SFAS 157 establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Financial instruments are categorized based on the following characteristics or inputs to the valuation techniques:

	Level 1 —		Quoted prices for identical instruments in active markets.
	Level 2 —		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are active, and model derived valuations in which significant inputs or significant drivers are observable in active markets.
	Level 3 —		Valuations derived from valuation techniques in which one or more significant inputs or significant drivers are unobservable.

The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values were determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy.

At September 30, 2008, Level 3 includes 12 securities totaling $6.7 million. This balance is comprised of 9 mortgage-backed securities at $3.8 million and three corporate debt securities at $2.9 million, which are pooled trust preferred insurance corporation term obligations. The mortgage-backed securities which were AAA rated at purchase do not have an active market and as such the Company has used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. The corporate debt securities, which were rated A at purchase, could not be priced using quoted market prices, observable market activity or comparable trades, and the financial market was considered not active. The trust preferred market has been severely impacted by the lack of liquidity in the credit markets and concern over the banking industry. Fair values for trust preferred securities were obtained from pricing sources with reasonable pricing transparency, taking into account other unobservable inputs related to the risks for each issuer. The pooled trust preferred corporate term obligations owned are collateralized by the trust preferred securities of insurance companies in the U.S. There has been little or no active trading in these securities for approximately three months; therefore it was more appropriate to determine fair value using a discounted cash flow analysis. To determine the appropriate discount rate and cash flows, a review was completed for each of the issuer’s profitability, credit quality, operating efficiency, capital adequacy, leverage and liquidity position. These factors provided an assessment of the probability of default for each underlying piece of collateral for each year until maturity. Determining the appropriate discount rate for the discounted cash flow analysis combined current and observable market spreads for comparable structured credit products with specific risks identified within each issue. The observable market spreads incorporated both credit and liquidity premiums.

The following tables set forth the fair value hierarchy of securities at September 30, 2008.

Significant Other

Significant

(Dollars in thousands)

Observable Inputs

Unobservable Inputs

September 30, 2008

(Level 2)

(Level 3)

Total

Securities available-for-sale

$

85,246

$

6,660

$

91,906

		Significant
		Unobservable Inputs
(Dollars in thousands)		(Level 3)
December 31, 2007		$	6,390
Total unrealized losses			(858	)
Paydowns and maturities			(227	)
Net transfers in (out) of level 3			1,355
September 30, 2008		$	6,660
The amount of total unrealized losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains (losses) relating to assets still held at September 30, 2008		$	(858	)

The following table presents gross unrealized losses and fair value of securities aggregated by category and length of time that individual securities have been in a continuous loss position at the dates indicated (dollars in thousands).

		Less than 12 months												12 months or more												Total
		Number of				Fair				Unrealized				Number of				Fair				Unrealized				Number of				Fair				Unrealized
September 30, 2008		Securities				Value				Losses				Securities				Value				Losses				Securities				Value				Losses
Government-sponsored enterprises			2			$	3,854			$	146				—			$	—			$	—				2			$	3,854			$	146
Mortgage-backed			51				31,234				285				2				15				1				53				31,249				286
REMICs:
Private label issuer:
Prime fixed and adjustable rate			5				2,301				496				1				660				109				6				2,961				605
Alt-A fixed rate			10				7,507				2,063				1				1,317				275				11				8,824				2,338
Government-sponsored enterprises			7				1,501				88				—				—				—				7				1,501				88
Total REMICs			22				11,309				2,647				2				1,977				384				24				13,286				3,031
Corporate debt			—				—				—				3				2,917				1,078				3				2,917				1,078
Total securities temporarily impaired			75			$	46,397			$	3,078				7			$	4,909			$	1,463				82			$	51,306			$	4,541

		Less than 12 months												12 months or more												Total
		Number of				Fair				Unrealized				Number of				Fair				Unrealized				Number of				Fair				Unrealized
December 31, 2007		Securities				Value				Losses				Securities				Value				Losses				Securities				Value				Losses
Mortgage-backed			8			$	9,946			$	35				3			$	119			$	2				11			$	10,065			$	37
REMICs:
Private label issuer:
Prime fixed and adjustable rate			2				778				2				2				1,028				16				4				1,806				18
Alt-A fixed rate			7				8,390				380				1				766				57				8				9,156				437
Government-sponsored enterprises			3				3,277				22				5				130				1				8				3,407				23
Total REMICs			12				12,445				404				8				1,924				74				20				14,369				478
Corporate debt			—				—				—				3				3,720				275				3				3,720				275
Total securities temporarily impaired			20			$	22,391			$	439				14			$	5,763			$	351				34			$	28,154			$	790

The Company invests in and is subject to credit risk related to private label mortgage-backed securities that are directly supported by underlying mortgage loans. The Company’s private label mortgage-backed securities are credit-enhanced, senior tranches of securities in which the subordinate classes of the securities provide credit support for the senior class of securities. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the senior class of securities would experience any credit losses. The Company also invests in corporate debt and is subject to credit risk related to pooled Trust Preferred insurance corporation term obligations.

The Company has reviewed its available for sale investment securities at September 30, 2008 and has determined that all unrealized losses are temporary, based on an evaluation of the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable, and other facts and circumstances. The Company monitors the credit ratings of all securities for downgrades as well as placement on negative outlook or credit watch. Also, management evaluates other facts and circumstances that may be indicative of an other than temporary impairment condition. Additionally, the Company has the ability and the intent to hold such securities through to recovery of the unrealized losses. The ability and intent of the Company is demonstrated by the fact that the Company is well capitalized and has no need to sell these securities. As a result of this evaluation, management does not believe it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the individual securities. Therefore, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2008.

Note 4. Loans

The following table sets forth the composition of our loan portfolio at the dates indicated.

		September 30, 2008								December 31, 2007								September 30, 2007
(Dollars in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Real estate-mortgage:
One-to-four family residential		$	156,634				66.8	%		$	135,453				70.4	%		$	136,237				71.9	%
Multi-family			10,288				4.4				11,985				6.2				14,087				7.4
Commercial			20,988				9.0				14,483				7.5				13,143				6.9
Total real estate-mortgage			187,910				80.2				161,921				84.1				163,467				86.2
Real estate-construction:
Residential			11,131				4.8				6,671				3.5				4,127				2.2
Commercial			2,543				1.1				—				—				—				—
Total real estate-construction			13,674				5.9				6,671				3.5				4,127				2.2
Consumer:
Home equity			21,891				9.2				17,862				9.3				15,713				8.3
Loans on savings accounts			865				0.4				675				0.4				597				0.3
Home improvement			243				0.1				281				0.1				293				0.2
Other			617				0.3				592				0.3				655				0.3
Total consumer			23,616				10.0				19,410				10.1				17,258				9.1
Commercial business			9,099				3.9				4,341				2.3				4,821				2.5
Total loans		$	234,299				100.0	%		$	192,343				100.0	%		$	189,673				100.0	%
Net premiums on loans purchased			129								191								254
Net deferred loan costs			887								491								478
Loans in process			(8,214	)							(3,614	)							(2,537	)
Allowance for loan losses			(1,646	)							(1,457	)							(1,018	)
Loans, net		$	225,455							$	187,954							$	186,850

Nonperforming Assets. The following table provides information with respect to our nonperforming assets at the dates indicated.

		September 30,				December 31,				September 30,
(Dollars in thousands)		2008				2007				2007
Nonaccrual loans:
Real estate — mortgage		$	853			$	1,264			$	950
Real estate — construction			—				—				—
Consumer			5				17				161
Commercial business			—				—				—
Total			858				1,281				1,111
Accruing loans past due 90 days or more			—				—				—
Total of nonaccrual and 90 days or more past due loans (nonperforming loans)			858				1,281				1,111
Real estate owned			674				1,119				1,210
Total nonperforming assets		$	1,532			$	2,400			$	2,321
Troubled debt restructurings			—				—				—
Troubled debt restructurings and total nonperforming assets		$	1,532			$	2,400			$	2,321
Total nonperforming loans to total loans			0.37	%			0.67	%			0.59	%
Total nonperforming loans to total assets			0.25				0.42				0.38
Total nonperforming assets to total assets			0.44				0.79				0.80

Allowance for loan losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is recorded. The following table summarizes the activity in the allowance for loan losses for the periods indicated.

		Three Months Ended								Nine Months Ended								Year Ended
		September 30,								September 30,								December 31,
(Dollars in thousands)		2008				2007				2008				2007				2007
Allowance at beginning of period		$	1,516			$	941			$	1,457			$	866			$	866
Provision for loan losses			260				395				539				470				1,119
Charge-offs			(130	)			(318	)			(350	)			(318	)			(528	)
Recoveries			—				—				—				—				—
Net charge-offs			(130	)			(318	)			(350	)			(318	)			(528	)
Allowance at end of period		$	1,646			$	1,018			$	1,646			$	1,018			$	1,457

Note 5. Deposits

The following table sets forth the balances of our deposit products at the dates indicated.

		September 30, 2008								December 31, 2007								September 30, 2007
(Dollars in thousands)		Amount				Percent				Amount				Percent				Amount				Percent
Noninterest-bearing demand deposits		$	13,655				7.9	%		$	8,918				5.7	%		$	9,212				6.0	%
Interest-bearing demand deposits			11,233				6.5				11,864				7.6				12,675				8.2
Savings accounts			23,662				13.7				23,056				14.8				24,032				15.5
Money market accounts			39,935				23.1				13,676				8.8				13,590				8.8
Certificates of deposit			84,600				48.8				98,044				63.1				95,055				61.5
Total deposits		$	173,085				100.0	%		$	155,558				100.0	%		$	154,564				100.0	%

Note 6. Borrowings

We utilize borrowings as a supplemental source of funds for loans and securities. The primary source of borrowings are FHLB advances and, to a limited extent, repurchase agreements. The following table sets forth information concerning our borrowings for the periods indicated.

		Nine Months				Year				Nine Months
		Ended				Ended				Ended
		September 30,				December 31,				September 30,
(Dollars in thousands)		2008				2007				2007
Maximum amount outstanding at any month end during the period		$	131,508			$	101,074			$	89,663
Average amounts outstanding during the period			116,812				82,880				79,926
Weighted average rate during the period			4.01	%			4.32	%			4.29	%
Balance outstanding at end of period		$	131,508			$	101,074			$	87,606
Weighted average rate at end of period			3.95	%			4.30	%			4.37	%

Note 7. Earnings (Loss) Per Share

Basic earnings per common share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed in a manner similar to basic earnings per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Common stock equivalents include restricted stock awards and stock options. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. There was no dilution from stock options for the three or nine months ended September 30, 2008. Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share until they are committed to be released.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in thousands, except per share amounts)		2008				2007				2008				2007
Net income (loss)		$	66			$	(347	)		$	399			$	(1,374	)
Weighted-average shares outstanding:
Basic			5,905,927				6,438,228				5,968,648				6,442,220
Effect of dilutive stock options and restrictive stock awards			—				—				—				—
Diluted			5,905,927				6,438,228				5,968,648				6,442,220
Earnings (loss) per share:
Basic		$	0.01			$	(0.05	)		$	0.07			$	(0.21	)
Diluted		$	0.01			$	(0.05	)		$	0.07			$	(0.21	)

Note 8. Insurance Activities of Exchange Underwriters, Inc. and Related Information

Exchange Underwriters, Inc. is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters, Inc. is a full-service, independent insurance agency that offers property and casualty, commercial general liability, surety and other insurance products. The following table sets forth information for Exchange Underwriters, Inc. for the dates indicated.

		Three Months								Nine Months								Year
		Ended								Ended								Ended
		September 30,								September 30,								December 31,
(Dollars in thousands)		2008				2007				2008				2007				2007
Insurance commissions		$	373			$	397			$	1,486			$	1,328			$	1,639
Income before income tax expense			50				129				531				469				472