Edgar Filing: MALVERN FEDERAL BANCORP INC

t68036_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended: March 31, 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: 001-34051

MALVERN FEDERAL BANCORP, INC.
(Exact name of Registrant as specified in its charter)
United States		38-3783478
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

42 E. Lancaster Avenue, Paoli, Pennsylvania		19301
(Address of Principal Executive Offices)		(Zip Code)

(610) 644-9400

(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 and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

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 o 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		Smaller reporting company	x

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

YES o NO x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date: As of May 14, 2010, 6,102,500 shares of the Registrant’s common stock were issued and outstanding.

MALVERN FEDERAL BANCORP, INC.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of March 31, 2010 and September 30, 2009 (Unaudited)	2

	Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2009 (Unaudited)	3

	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended March 31, 2010 and 2009 (Unaudited)	4

	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009 (Unaudited)	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	43

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	(Removed and Reserved)	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

SIGNATURES		45

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Malvern Federal Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition (Unaudited)

	March 31, 2010			September 30, 2009

Assets

Cash and due from depository institutions	$	8,511,896		$	10,815,796
Interest bearing deposits in depository institutions		31,134,612			14,508,803
Cash and Cash Equivalents		39,646,508			25,324,599
Investment securities available for sale		30,741,658			27,097,590
Investment securities held to maturity (fair value of $4,859,210 and $4,942,102, respectively)		4,779,072			4,842,176
Restricted stock, at cost		6,566,973			6,566,973
Loans receivable, net of allowance for loan losses of $8,241,042 and $5,717,510, respectively		578,014,079			593,565,338
Other real estate owned		4,023,967			5,874,854
Accrued interest receivable		2,119,740			2,226,206
Property and equipment, net		8,327,659			8,381,962
Deferred income taxes, net		3,726,147			2,331,656
Bank-owned life insurance		13,926,868			13,649,585
Other assets		4,401,526			1,777,629

Total Assets	$	696,274,197		$	691,638,568

Liabilities and Shareholders’ Equity

Liabilities
Deposits:
Deposits-noninterest-bearing	$	17,763,175		$	19,314,263
Deposits-interest-bearing		524,963,640			497,196,415
Total Deposits		542,726,815			516,510,678
FHLB advances		81,527,869			99,621,045
Advances from borrowers for taxes and insurance		2,176,788			1,227,604
Accrued interest payable		445,515			706,895
Other liabilities		1,294,650			3,729,966
Total Liabilities		628,171,637			621,796,188

Commitments and Contingencies		-			-

Shareholders’ Equity

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued		-			-
Common stock, $0.01 par value, 40,000,000 shares authorized, issued and outstanding:
6,102,500 at March 31, 2010 and 6,150,500 at September 30, 2009		61,525			61,525
Additional paid-in capital		25,928,021			25,937,027
Retained earnings		44,909,424			46,285,949
Treasury stock—at cost, 50,000 shares at March 31, 2010 and 2,000 shares at September 30, 2009		(476,920	)		(19,000	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,371,800	)		(2,444,565	)
Accumulated other comprehensive income		52,310			21,444
Total Shareholders’ Equity		68,102,560			69,842,380

Total Liabilities and Shareholders’ Equity	$	696,274,197		$	691,638,568

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)

	Three Months Ended March 31,					Six Months Ended March 31,
	2010			2009		2010			2009

Interest and Dividend Income

Loans, including fees	$	7,951,817		$	8,243,278	$	16,361,946		$	16,921,765
Investment securities, taxable		239,088			205,642		485,243			416,088
Investment securities, tax-exempt		9,462			21,207		20,974			42,089
Interest-bearing cash accounts		9,245			19,451		14,944			24,957
Total Interest and Dividend Income		8,209,612			8,489,578		16,883,107			17,404,899

Interest Expense

Deposits		2,437,393			3,398,075		5,271,414			6,911,934
Short-term borrowings		6,267			7,418		7,794			8,699
Long-term borrowings		922,925			1,280,316		2,037,933			2,612,269
Total Interest Expense		3,366,585			4,685,809		7,317,141			9,532,902

Net Interest Income		4,843,027			3,803,769		9,565,966			7,871,997

Provision for Loan Losses		3,637,000			462,423		4,582,000			907,423
Net Interest Income after Provision for Loan Losses		1,206,027			3,341,346		4,983,966			6,964,574

Other Income

Service charges and other fees		374,940			326,018		759,434			656,410
Rental income		62,500			63,580		127,365			126,966
Gain on sale of investment securities available for sale, net		-			9,410		-			27,206
Gain on disposal of fixed assets		-			8,200		-			8,200
Loss on sale of other real estate owned, net		(33,929	)		-		(17,047	)		-
Earnings on bank-owned life insurance		136,350			149,690		277,283			236,160
Total Other Income		539,861			556,898		1,147,035			1,054,942

Other Expense

Salaries and employee benefits		1,466,308			1,525,717		3,133,027			3,084,017
Occupancy expense		487,657			513,584		940,397			956,489
Federal deposit insurance premium		229,886			86,653		867,726			168,330
Advertising		217,547			209,386		438,852			362,262
Data processing		380,861			278,356		775,400			585,101
Professional fees		275,699			224,758		518,308			506,421
Other real estate owned expense		365,512			57,799		793,251			59,760
Other operating expenses		414,106			510,099		832,207			1,060,009
Total Other Expenses		3,837,576			3,406,352		8,299,168			6,782,389

Income (loss) before Income tax (benefit) expense		(2,091,688	)		491,892		(2,168,167	)		1,237,127

Income tax (benefit) expense		(866,521	)		120,486		(954,759	)		349,737

Net Income (loss)	$	(1,225,167	)	$	371,406	$	(1,213,408	)	$	887,390

Basic Earnings (Loss) Per Share	$	(0.21	)	$	0.06	$	(0.21	)	$	0.15

Dividends Declared Per Share	$	0.03		$	0.04	$	0.06		$	0.08

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balance, October 1, 2008	$	61,525	$	25,959,169		$	45,663,389		$	-		$	(2,571,028	)	$	(277,356	)	$	68,835,699
Comprehensive Income:
Net Income		-		-			887,390			-			-			-			887,390
Net Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustment		-		-			-			-			-			27,197			27,197
Total Comprehensive Income		-		-			-			-			-			-			914,587
Cash dividends declared ($0.08 per share)		-		-			(221,489	)		-			-			-			(221,489	)
Committed to be released ESOP shares (6,701 shares)		-		(10,444	)		-			-			72,763			-			62,319
Balance, March 31, 2009	$	61,525	$	25,948,725		$	46,329,290		$	-		$	(2,498,265	)	$	(250,159	)	$	69,591,116

Balance, October 1, 2009	$	61,525	$	25,937,027		$	46,285,949		$	(19,000	)	$	(2,444,565	)	$	21,444		$	69,842,380
Comprehensive Income:
Net Loss		-		-			(1,213,408	)		-			-			-			(1,213,408	)
Net Change in unrealized gain on securities available for sale, net of taxes		-		-			-			-			-			30,866			30,866
Total Comprehensive Loss		-		-			-			-			-			-			(1,182,542	)
Treasury stock purchased (48,000 shares)		-		-			-			(457,920	)		-			-			(457,920	)
Cash dividends declared ($0.06 per share)		-		-			(163,117	)		-			-			-			(163,117	)
Committed to be released ESOP shares (6,702 shares)		-		(9,006	)		-			-			72,765			-			63,759
Balance, March 31, 2010	$	61,525	$	25,928,021		$	44,909,424		$	(476,920	)	$	(2,371,800	)	$	52,310		$	68,102,560

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended March 31,
	2010			2009

Cash Flows from Operating Activities
Net income (loss)	$	(1,213,408	)	$	887,390
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense		408,515			471,767
Provision for loan losses		4,582,000			907,423
Deferred income taxes (benefit)		(1,410,561	)		(244,916	)
ESOP expense		63,759			62,319
Amortization (accretion) of premiums and discounts on investments securities, net		(163,125	)		(76,451	)
Amortization of mortgage servicing rights		31,562			45,163
Net gain on sale of investment securities available for sale		-			(27,206	)
Net gain on disposal of fixed assets		-			(8,200	)
Loss on sale of other real estate owned		17,047			-
Write down of other real estate owned		671,782			-
Decrease in accrued interest receivable		106,466			250,268
(Decrease) increase in accrued interest payable		(261,380	)		244,650
(Decrease) increase in other liabilities		(2,435,316	)		94,364
Earnings on bank-owned life insurance		(277,283	)		(236,160	)
(Increase) decrease in other assets		363,784			1,142
Increase in prepaid FDIC assessment		(3,019,243	)		(95,141	)
Amortization of loan origination fees and costs		(342,649	)		(122,139	)
Net Cash (Used in) Provided by Operating Activities		(2,878,050	)		2,154,273

Cash Flows from Investing Activities
Proceeds from maturities and principal collections:
Investment securities held to maturity		99,463			146,621
Investment securities available for sale		6,669,630			5,829,924
Proceeds from sales, investment securities available for sale		-			1,143,619
Purchases of investment securities available for sale		(10,139,996	)		(7,682,027	)
Loan purchases		(11,017,456	)		(30,954,099	)
Loan originations and principal collections, net		22,329,364			2,980,080
Proceeds from sale of other real estate owned		1,162,058			-
Purchase of other real estate owned		-			(780,281	)
Purchases of bank-owned life insurance		-			(5,000,000	)
Net decrease in restricted stock		-			328,700
Purchases of property and equipment		(354,212	)		(249,069	)
Net Cash Provided by (Used in) Investing Activities		8,748,851			(34,230,388	)

Cash Flows from Financing Activities
Net increase in deposits		26,216,137			48,057,325
Net decrease in short-term borrowings		-			(8,500,000	)
Proceeds from long-term borrowings		3,000,000			5,000,000
Repayment of long-term borrowings		(21,093,176	)		(5,008,700	)
Increase in advances from borrowers for taxes and insurance		949,184			1,324,551
Cash dividends paid		(163,117	)		(221,489	)
Treasury stock purchased		(457,920	)		-
Net Cash Provided by Financing Activities		8,451,108			40,651,687

Net Increase in Cash and Cash Equivalents		14,321,909			8,575,572

Cash and Cash Equivalents - Beginning		25,324,599			12,922,297

Cash and Cash Equivalents - Ending		39,464,508		$	21,497,869

Supplementary Cash Flows Information
Interest paid	$	7,578,521		$	9,288,252
Income taxes paid	$	730,750		$	395,700
Non-cash transfer of loans to foreclosed real estate	$	-		$	3,818,469

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Organizational Structure and Nature of Operations

Malvern Federal Bancorp, Inc. (the “Company”) and its subsidiaries, Malvern Federal Holdings, Inc., a Delaware investment company, and Malvern Federal Savings Bank (the “Bank”) and the Bank’s subsidiaries, Strategic Asset Management Group, Inc. (“SAMG”) and Malvern Federal Investments, Inc., a Delaware investment company, provides various banking services, primarily the accepting of deposits and the origination of residential and commercial mortgage loans and consumer loans and other loans through the Bank’s seven full-service branches in Chester County, Pennsylvania. SAMG owns 50% of Malvern Insurance Associates, LLC. Malvern Insurance Associates, LLC offers a full line of business and personal lines of insurance products. As of March 31, 2010 and September 30, 2009, SAMG’s total assets were $34,709 and $34,709, respectively. There was no income reported for SAMG for the three and six months ended March 31, 2010 and 2009. The Company is subject to competition from various other financial institutions and financial services companies. The Company is also subject to the regulations of certain federal and state agencies and, therefore, undergoes periodic examinations by those regulatory agencies.

In 2008, Malvern Federal Savings Bank completed its reorganization to a two-tier mutual holding company structure and the sale by the mid-tier stock company, Malvern Federal Bancorp, Inc., of shares of its common stock. In the reorganization and offering, the Company sold 2,645,575 shares of common stock to certain members of the Bank and the public at a purchase price of $10.00 per share, issued 3,383,875 shares to Malvern Federal Mutual Holding Company and contributed 123,050 shares to the Malvern Federal Charitable Foundation. The Mutual Holding Company is a federally chartered mutual holding company. The Mutual Holding Company and the Company are subject to regulation and supervision of the Office of Thrift Supervision (“OTS”). Malvern Federal Mutual Holding Company became the owner of 55% of Malvern Federal Bancorp’s outstanding common stock immediately after the reorganization and must always own at least a majority of the voting stock of Malvern Federal Bancorp, Inc. In addition to the shares of Malvern Federal Bancorp, Inc. which it owns, Malvern Federal Mutual Holding Company was capitalized with $100,000 in cash. The offering resulted in approximately $26.0 million in net proceeds. An Employee Stock Ownership Plan (“ESOP”) was established and borrowed approximately $2.6 million from Malvern Federal Bancorp, Inc. to purchase 241,178 shares of common stock. Principal and interest payments on the loan are being made quarterly over a term of 18 years at a fixed interest rate of 5.0%.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements at March 31, 2010, and September 30, 2009 and for the three and six months ended March 31, 2010 and 2009 include the accounts of the Malvern Federal Bancorp, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all the information or footnotes necessary for a complete presentation of financial condition, statement of income, changes in shareholders’ equity, and cash flows in conformity with accounting principles generally accepted in the United States. However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of Malvern Federal Bancorp, Inc. and the accompanying notes thereto for the year ended September 30, 2009, which are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. The results for the three and six months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010, or any other period.

In accordance with the subsequent events topic of the FASB Accounting Standards Codification (the “Codification” or the “ASC”), the Company evaluates events and transactions that occur after the statement of financial condition date for potential recognition and disclosure in the financial statements. The effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date are recognized in the unaudited consolidated financial statements as of March 31, 2010.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the potential impairment of FHLB stock, the valuation of deferred tax assets, the evaluation of other-than-temporary impairment of investment securities and fair value measurements.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within Chester County, Pennsylvania. Note 5 discusses the types of investment securities that the Company invests in. Note 6 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer. Although the Company has a diversified portfolio, its debtors ability to honor their contracts is influenced by, among other factors, the region’s economy.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from depository institutions and interest bearing deposits.

The Company maintains cash deposits in other depository institutions that occasionally exceed the amount of deposit insurance available. Management periodically assesses the financial condition of these institutions and believes that the risk of any possible credit loss is minimal.

Investment Securities

Debt securities held to maturity are securities that the Company has the positive intent and the ability to hold to maturity; these securities are reported at amortized cost and adjusted for unamortized premiums and discounts. Securities held for trading are securities that are bought and held principally for the purpose of selling in the near term; these securities are reported at fair value, with unrealized gains and losses reported in current earnings. At March 31, 2010 and September 30, 2009, the Company had no investment securities classified as trading. Debt securities that will be held for indefinite periods of time and equity securities, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available for sale. Realized gains and losses are recorded on the trade date and are determined using the specific identification method. Securities held as available for sale are reported at fair value, with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (“AOCI”). Management determines the appropriate classification of investment securities at the time of purchase.

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Securities are evaluated on a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Loans Receivable

The Company, through the Bank, grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by residential and commercial mortgage loans throughout Chester County, Pennsylvania and surrounding areas. The ability of the Company’s debtors to honor their contracts is dependent upon, among other factors, the real estate and general economic conditions in this area.

Loans receivable that management has the intent and ability to hold until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans using the interest method. The Company is amortizing these amounts over the contractual lives of the loans.

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or sooner if management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

In addition to originating loans, the Company purchases consumer and mortgage loans from brokers in our market area. Such purchases are reviewed for compliance with our underwriting criteria before they are purchased, and are generally purchased without recourse to the seller.

Allowance for Loan Losses

The Company maintains allowances for loan losses at a level deemed sufficient to absorb probable losses. The allowance for loan losses is established through a provision for loan losses charged as an expense. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible based on evaluations of the collectibility of loans, and prior loss experience. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. The Company also maintains an allowance for losses on commitments to extend credit, which is included in other liabilities and is computed using information similar to that used to determine the allowance for loan, modified to take into account the probability of drawdown on the commitment as well as inherent risk factors on those commitments.

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and mortgage loans for impairment disclosures, unless they are subject to a restructuring agreement.

Troubled Debt Restructurings

Loans on accrual status whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. The accrual of interest income on troubled debt restructurings is generally discontinued if the loan is not current for six months subsequent to modification.

Loans Held For Sale

The Company does not originate any loans specifically for the purpose of being sold. Since loans are not originated for the purpose of being sold, the cash flows from the sale of such loans have been classified as an investing activity in the consolidated statements of cash flows.

There were no loans held for sale at March 31, 2010 or September 30, 2009.

Loan Servicing

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the previously established carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses from other real estate owned.

Restricted Stock

Restricted stock represents required investments in the common stock of a correspondent bank and is carried at cost. As of March 31, 2010 and September 30, 2009, restricted stock consists solely of the common stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”). In December 2008, the FHLB notified member banks that it was suspending dividend payments and the repurchase of capital stock.

Management’s evaluation and determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of an investment’s cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Property and Equipment

Property and equipment are carried at cost. Depreciation is computed using the straight-line and accelerated methods over estimated useful lives ranging from 3 to 39 years beginning when assets are placed in service. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank-Owned Life Insurance

The Company invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees. The Bank is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Earnings from the increase in cash surrender value of the policies are included in other income on the statement of income.

Employee Benefit Plans

The Bank’s 401(k) plan allows eligible participants to set aside a certain percentage of their salaries before taxes. The Company may elect to match employee contributions up to a specified percentage of their respective salaries in an amount determined annually by the Board of Directors. The Company’s matching contribution related to the plan resulted in expenses of $(1,885) and $41,956, for the three and six months ended March 31, 2010, respectively. The Company’s matching contribution related to the plan resulted in expenses of $8,153 and $53,843, for the three and six months ended March 31, 2009, respectively.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

The Company also maintains a Supplemental Executive and a Director Retirement Plan (the “Plans”). The accrued amount for the Plans included in other liabilities was $820,887and $749,317 at March 31, 2010 and September 30, 2009, respectively. The expense associated with the Plans for the three and six months ended March 31, 2010 was $40,435 and $80,870, respectively. The expense associated with the Plans for the three and six months ended March 31, 2009 was $37,302 and $74,604, respectively.

Advertising Costs

The Company follows the policy of charging the costs of advertising to expense as incurred.

Income Taxes

Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Malvern Federal Bancorp, Inc. and its subsidiaries file separate state income tax returns and a consolidated federal income tax return.

The Company adopted the provisions of Accounting Standards Codification (“ASC”) 740, Accounting for Uncertainty in Income Taxes, on October 1, 2008. Previously, the Company had accounted for tax contingencies in accordance with ASC 450, Accounting for Contingencies. As required by ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied ASC 740 to all tax positions for which the statute of limitations remained open. As a result of the adoption of ASC 740, there was no material effect on the Company’s consolidated financial position or results of operations and no adjustment to retained earnings.

Commitments and Contingencies

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the statement of financial condition when they are funded.

Segment Information

The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale investment securities, are reported as a separate component of the shareholders’ equity section of the statement of financial condition, such items, along with net income, are components of comprehensive income.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 2 – Summary of Significant Accounting Policies (Continued)

The components of other comprehensive income (loss) and related tax effects are as follows for the periods indicated below

	For the Three Months Ended						For the Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009

Unrealized holding gains (losses) on available for sale securities	$	48,610		$	(65,644	)	$	46,936		$	65,250
Reclassification adjustment for gains included in net income		-			9,410			-			27,206
Net Unrealized Gains (Losses)		48,610			(75,054	)		46,936			38,044
Income tax expense (benefit)		(16,527	)		113,212			(16,070	)		(10,847	)
Net of Tax Amount	$	32,083		$	38,158		$	30,866		$	27,197

Recent Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 810-10-25, the consolidation guidance related to variable interest entities (“VIEs”), was amended to modify the approach used to evaluate VIEs and add disclosure requirements about an enterprise’s involvement with VIEs. These provisions are effective at the beginning of an entity’s annual reporting period that begins after November 15, 2009 and for interim periods within that period. The Company does not expect the adoption of this consolidation guidance to have a material effect on its consolidated financial statements.

In December 2009, FASB ASC 860, “Transfers and Servicing”, was amended to eliminate the concept of a “qualifying special-purpose entity” and change the requirements for derecognizing financial assets. The amendment requires additional disclosures intended to provide greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This updated guidance is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 3: Fair Value Measurements. These new disclosure requirements were effective for the period ended March 31, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. There was no significant effect to the Company’s financial statement disclosure upon adoption of this ASU.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 3 – Earnings Per Share

Earnings Per Share

Basic earnings per common share is computed based on the weighted average number of shares outstanding reduced by unearned ESOP shares. Diluted earnings per share is computed based on the weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities reduced by unearned ESOP shares. As of March 31, 2010 and for the three and six months ended March 31, 2010 and March 31, 2009 the Company had not issued and did not have any outstanding CSEs and at the present time, the Bank’s capital structure has no potential dilutive securities. For the three and six months ended March 31, 2010 and 2009, basic earnings per share is shown below

The following table sets forth the composition of the weighted average shares (denominator) used in the earnings per share computations.

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009

Net Income (Loss)	$	(1,225,167	)	$	371,406		$	(1,213,408	)	$	887,390

Average common shares outstanding		6,122,756			6,152,500			6,122,533			6,152,500
Average unearned ESOP shares		(218,269	)		(231,701	)		(219,960	)		(233,375	)
Weighted average shares outstanding – basic		5,904,487			5,920,799			5,902,573			5,915,125

Earnings (Loss) per share – basic	($	0.21	)	$	0.06		($	0.21	)	$	0.15

Note 4 – Employee Stock Ownership Plan

In 2008, the Company established an employee stock ownership plan (“ESOP”) for substantially all of its full-time employees. Certain senior officers of the Bank have been designated as Trustees of the ESOP. Shares of the Company’s common stock purchased by the ESOP are held until released for allocation to participants. Shares released are allocated to each eligible participant based on the ratio of each such participant’s base compensation to the total base compensation of all eligible plan participants. As the unearned shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to additional paid-in capital. During the period from May 20, 2008 to September 30, 2008, the ESOP purchased 241,178 shares of the Company’s common stock for approximately $2.6 million, an average price of $10.86 per share which was funded by a loan from Malvern Federal Bancorp, Inc. The ESOP loan is being repaid principally from the Bank’s contributions to the ESOP. The loan, which bears an interest rate of 5%, is being repaid in quarterly installments through 2026. Shares are released to participants proportionately as the loan is repaid. During the three and six months ended March 31, 2010, there were 3,351 and 6,702 shares committed to be released, respectively, and ESOP expense was $31,861 and $63,759, respectively. During the three and six months ended March 31, 2009, there were 3,296 and 6,701 shares committed to be released, respectively, and ESOP expense was $29,134 and $62,319, respectively. At March 31, 2010, there were 216,606 unallocated shares held by the ESOP which had an aggregate fair value of approximately $2.1 million.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities

At March 31, 2010 and September 30, 2009, all of the Company’s mortgage-backed securities consisted solely of securities backed by residential mortgage loans. The Company held no mortgage-backed securities backed by commercial mortgage loans at either date.

Investment securities available for sale at March 31, 2010 and September 30, 2009 consisted of the following:

	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

U.S. government obligations	$	999,907	$	1,734	$	-		$	1,001,641
U.S. government agencies		6,947,149		11,101		(11,150	)		6,947,100
FHLB notes		4,997,068		32,146		(3,013	)		5,026,201
State and municipal obligations		1,200,493		6,196		(22,588	)		1,184,101
Single issuer trust preferred security		1,000,000		-		(219,490	)		780,510
Corporate debt securities		1,467,802		41,599		(896	)		1,508,505

		16,612,419		92,776		(257,137	)		16,448,058
Mortgage-backed securities:
FNMA:
Adjustable		3,888,854		145,003		-			4,033,857
Fixed		1,784,391		35,307		-			1,819,698
Balloon		317,546		4,019		-			321,565
FHLMC:
Adjustable		968,443		20,276		-			988,719
Fixed		554,664		43,055		-			597,719
GNMA, adjustable		178,571		3,299		-			181,870
CMO, fixed-rate		6,357,513		20,126		(27,467	)		6,350,172

		14,049,982		271,085		(27,467	)		14,293,600

	$	30,662,401	$	363,861	$	(284,604	)	$	30,741,658

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

	September 30, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

U.S. government obligations	$	999,480	$	11,457	$	-		$	1,010,937
U.S. government agencies		5,448,761		25,241		-			5,474,002
FHLB notes		3,496,874		71,251		-			3,568,125
State and municipal obligations		1,767,569		9,038		(17,363	)		1,759,244
Single issuer trust preferred security		1,000,000		-		(361,580	)		638,420
Corporate debt securities		1,288,429		37,236		-			1,325,665

		14,001,113		154,223		(378,943	)		13,776,393
Mortgage-backed securities:
FNMA:
Adjustable		4,545,602		151,558		(627	)		4,696,533
Fixed		2,093,663		40,543		-			2,134,206
Balloon		432,342		4,500		-			436,842
FHLMC:
Adjustable		1,105,739		11,059		(1,233	)		1,115,565
Fixed		667,911		46,362		-			714,273
GNMA, adjustable		203,378		2,199		-			205,577
CMO, fixed-rate		4,015,521		13,126		(10,446	)		4,018,201

		13,064,156		269,347		(12,306	)		13,321,197

	$	27,065,269	$	423,570	$	(391,249	)	$	27,097,590

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

Investment securities held to maturity at March 31, 2010 and September 30, 2009 consisted of the following:

	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Mortgage-backed securities:
GNMA, adjustable	$	279,668	$	7,828	$	-		$	287,496
GNMA, fixed		2,231		224		-			2,455
FNMA, fixed		4,497,173		96,249		(24,163	)		4,569,259

	$	4,779,072	$	104,301	$	(24,163	)	$	4,859,210

	September 30, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Mortgage-backed securities:
GNMA, adjustable	$	298,049	$	7,025	$	-	$	305,074
GNMA, fixed		2,236		166		-		2,402
FNMA, fixed		4,541,891		92,735		-		4,634,626

	$	4,842,176	$	99,926	$	-	$	4,942,102

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

The following tables summarize the aggregate investments at March 31, 2010 and September 30, 2009 that were in an unrealized loss position.

	March 31, 2010
	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Investment Securities Available for Sale
FHLB Notes	$	1,996,560	$	(3,013	)	$	-	$	-		$	1,996,560	$	(3,013	)
U.S. government agencies		4,136,278		(11,150	)		-		-			4,136,278		(11,150	)
State and municipal obligations		354,590		(4,588	)		27,000		(18,000	)		381,590		(22,588	)
Single issuer trust preferred security		-		-			780,510		(219,490	)		780,510		(219,490	)
Corporate debt security		186,041		(896	)		-		-			186,041		(896	)
Mortgage-backed securities:
CMO, fixed-rate		3,536,542		(27,467	)		-		-			3,536,542		(27,467	)

	$	10,210,011	$	(47,114	)	$	807,510	$	(237,490	)	$	11,017,521	$	(284,604	)

Investment Securities Held to Maturity
Mortgage-backed securities:
FNMA, fixed	$	2,326,830	$	(24,163	)	$	-	$	-		$	2,326,830	$	(24,163	)
	$	2,326,830	$	(24,163	)	$	-	$	-		$	2,326,830	$	(24,163	)

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

	September 30, 2009
	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Investment Securities Available for Sale
State and municipal obligations	$	184,877	$	(17,363	)	$	-	$	-		$	184,877	$	(17,363	)
Single issuer trust preferred security		-		-			638,420		(361,580	)		638,420		(361,580	)
Mortgage-backed securities:
FNMA:
Adjustable		301,396		(415	)		78,775		(212	)		380,171		(627	)
FHLMC:
Adjustable		349,060		(418	)		166,512		(815	)		515,572		(1,233	)
CMO, fixed-rate		1,658,480		(10,446	)		-		-			1,658,480		(10,446	)

	$	2,493,813	$	(28,642	)	$	883,707	$	(362,607	)	$	3,377,520	$	(391,249	)

The Company held no securities classified as held to maturity which were in an unrealized loss position at September 30, 2009.

As of March 31, 2010, the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates particularly given the negligible inherent credit risk associated with these securities. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service. Although the fair value will fluctuate as the market interest rates move, management believes that these fair values will recover as the underlying portfolios mature and are reinvested in market rate yielding investments. As of March 31, 2010, the Company held four FHLB agency, eight U.S. government agencies, three tax-free municipals, one corporate debt security, seven agency mortgage-backed securities, and one single issuer trust preferred security which were in an unrealized loss position. The Company does not intend to sell and it is not more likely than not that it will be required to sell these securities until such time as the value recovers or the securities mature. Management does not believe any individual unrealized loss as of March 31, 2010 represents other-than-temporary impairment.

During the six month ended March 31, 2010, the gross unrealized loss of the single issuer trust preferred security improved by $142,090 from an unrealized loss at September 30, 2009 of $361,580 to an unrealized loss of $219,490 as of March 31, 2010. The stability of the underlying credit and the financial markets has contributed to this improvement. The historic changes in the economy and interest rates have continued to cause the pricing of agency, mortgage-backed securities, and trust preferred securities to widen dramatically over U.S. Treasury securities into the March 2010 quarter, but slight signs of improvement are beginning to occur. Management will continue to monitor the performance of this security and the markets to determine the true economic value of this security.

At March 31, 2010 and September 30, 2009 the Company had no securities pledged to secure public deposits.

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 5 - Investment Securities (Continued)

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2010 follows:

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Within 1 year	$	4,297,828	$	4,336,393	$	-	$	-
Over 1 year through 5 years		11,112,436		11,149,479		-		-
After 5 years through 10 years		1,202,155		962,186		-		-
		16,612,419		16,448,058		-		-

Mortgage-backed securities		14,049,982		14,293,600		4,779,072		4,859,210

	$	30,662,401	$	30,741,658	$	4,779,072	$	4,859,210

Note 6 - Loans Receivable

Loans receivable consisted of the following for the periods indicated below:

	At March 31, 2010			At September 30, 2009

Mortgage Loans:
One-to four-family	$	243,299,327		$	252,307,828
Multi-family		7,975,303			9,613,184
Construction or development		38,025,413			37,507,536
Land loans		3,203,782			3,236,550
Commercial real estate		146,238,845			142,863,313
Total Mortgage Loans		438,742,670			445,528,411

Commercial Loans		13,043,975			15,647,219

Consumer loans:
Home equity lines of credit		19,680,206			19,149,135
Second mortgages		110,084,282			113,943,091
Other		1,091,344			1,142,967
Total Consumer Loans		130,855,832			134,235,193

Total Loans		582,642,477			595,410,823

Deferred loan costs, net		3,612,644			3,872,025
Allowance for loan losses		(8,241,042	)		(5,717,510	)

	$	578,014,079		$	593,565,338

TABLE OF CONTENTS

Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 6 - Loans Receivable (Continued)

Included in loans receivable are nonaccrual loans in the amount of $25,405,949 and $14,194,724 at March 31, 2010 and September 30, 2009, respectively. Interest income that would have been recognized on these nonaccrual loans had they been current in accordance with their original terms was $420,044 and $239,315 for the three months ended March 31, 2010 and 2009, respectively, and was $713,537 and $328,003 for the six-months ended March 31, 2010 and 2009, respectively. There were no loans past due 90 days or more and still accruing interest at March 31, 2010 or September 30, 2009.

The following is an analysis of the activity in the allowance for loan losses during the periods indicated:

	Six Months Ended			Six Months Ended			Year Ended
	March 31, 2010			March 31, 2009			September 30, 2009

Balance at beginning of period	$	5,717,510		$	5,504,512		$	5,504,512

Provision for loan losses		4,582,000			907,423			2,280,100

Charge-offs		(2,060,332	)		(1,566,769	)		(2,096,928	)
Recoveries		1,864			1,976			29,826
Net Charge-offs		(2,058,468	)		(1,564,793	)		(2,067,102	)
Balance at end of period	$	8,241,042		$	4,847,142		$	5,717,510

At March 31, 2010 and September 30, 2009, 100% of impaired loan balances were measured for impairment based on the fair value of the loan’s collateral. At March 31, 2010 of the $13.1 million of troubled debt restructurings, $4.3 million were considered impaired due to reduced collateral value of the properties securing the loans and a specific valuation allowance of $529,000 was established. The loans have been classified as trouble debt restructurings since we modified the payment terms from the original agreement and allowed the borrower to make interest only payments in order to relieve some of their overall cash flow burden.

	March 31, 2010		September 30, 2009

Impaired loans without an allocated valuation allowance	$	3,344,954	$	10,570,188
Impaired loans with an allocated valuation allowance		12,984,464		3,624,536

Total impaired loans	$	16,329,418	$	14,194,724
Valuation allowance allocated to impaired loans	$	3,085,908	$	2,057,318

	Six Months Ended		Year Ended
	March 31, 2010		September 30, 2009

Average impaired loans	$	11,905,253	$	14,285,848
Interest income recognized on impaired loans	$	226,234	$	698,270
Cash basis collections on impaired loans	$	105,002	$	859,681

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 7 - Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt correction action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted tangible assets (as defined) and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of March 31, 2010, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2010, the most recent notification from the regulators categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum tangible, core, and risk-based ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s status of “well-capitalized.”

The Bank’s actual capital amounts and ratios are also presented in the table:

Actual

For Capital Adequacy
Purposes

To be Well Capitalized
under Prompt
Corrective Action
Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2010

Tangible Capital (to tangible assets)

61,019,737

8.82

≥10,378,624

≥1.50

N/A

Core Capital (to adjusted tangible assets)

61,019,737

8.82

≥27,676,330

≥4.00

≥34,595,413

≥5.00

Tier 1 Capital (to risk-weighted assets)

61,019,737

11.86

≥20,572,542

≥4.00

≥30,858,812

≥6.00

Total risk-based Capital (to risk-weighted assets)

66,174,871

12.87

≥41,145,083

≥8.00

≥51,431,354

≥10.00

As of September 30, 2009:

Tangible Capital (to tangible assets)

62,247,317

9.07

≥10,297,204

≥1.50

N/A

Core Capital (to adjusted tangible assets)

62,247,317

9.07

≥27,459,211

≥4.00

≥34,324,014

≥5.00

Tier 1 Capital (to risk-weighted assets)

62,247,317

11.96

≥20,815,426

≥4.00

≥31,223,140

≥6.00

Total risk-based Capital (to risk-weighted assets)

65,907,510

12.67

≥41,630,853

≥8.00

≥52,038,566

≥10.00

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

Under FASB ASC Topic 820, “Fair Value Measurements”, the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1—

Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2—

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

Level 3—

Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

Under FASB ASC Topic 820, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820.

Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations.

FASB ASC 825 provides an option to elect fair value as an alternative measurement for selected financial assets and financial liabilities not previously recorded at fair value. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825, “Disclosures About Fair Value of Financial Instruments.” The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methods. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FASB ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2010 and September 30, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2010 and September 30, 2009 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following assumptions were used to estimate the fair value of the Company’s financial instruments:

Cash and Cash Equivalents—These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Investment Securities—Investment and mortgage-backed securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are measured at fair value on a recurring basis. Fair value measurements for these securities are typically obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. The Company had no Level 1 securities as of March 31, 2010 or September 30, 2009. Level 2 securities include corporate bonds, agency bonds, municipal bonds, mortgage-backed securities, and collateralized mortgage obligations.

Loans Receivable—We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 825 disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect partial write-downs for impairment or the full charge-off of the loan carrying value. The valuation of impaired loans is discussed below. The fair value estimate for FASB ASC 825 purposes differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by loan type and rate. The fair value of one-to four-family residential mortgage loans is estimated by discounting contractual cash flows using discount rates based on current industry pricing, adjusted for prepayment and credit loss estimates. The fair value of loans is estimated by discounting contractual cash flows using discount rates based on our current pricing for loans with similar characteristics, adjusted for prepayment and credit loss estimates.

Impaired Loans—Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client’s business. Impaired loans are reviewed and evaluated on a monthly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Accrued Interest Receivable—This asset is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Restricted Stock—Although restricted stock is an equity interest in the FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

Other Real Estate Owned—Other real estate owned includes foreclosed properties securing commercial, residential and construction loans. Real estate properties acquired through foreclosure are initially recorded at the fair value of the property at the date of foreclosure. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell. Fair value is generally based upon independent market prices or appraised value of the collateral. Our appraisals are typically performed by independent third party appraisers. For appraisals of commercial and construction properties, comparable properties within the area may not be available. In such circumstances, our appraisers will rely on certain judgments in determining how a specific property compares in value to other properties that are not identical in design or in geographic area. Our current portfolio of other real estate owned is comprised of such properties and, accordingly, we classify other real estate owned as Level 3.

Deposits—Deposit liabilities are carried at cost. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for FASB ASC 825 disclosure purposes. The fair value of deposits is discounted based on rates available for borrowings of similar maturities. A decay rate is estimated for non-time deposits. The discount rate for non-time deposits is adjusted for servicing costs based on industry estimates.

Long-Term Borrowings—Advances from the FHLB are carried at amortized cost. However, we are required to estimate the fair value of this debt under FASB ASC 825. The fair value is based on the contractual cash flows discounted using rates currently offered for new notes with similar remaining maturities.

Short-Term Borrowings—These liabilities are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Accrued Interest Payable—This liability is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Commitments to Extend Credit and Letters of Credit—The majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

Mortgage Servicing Rights—The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available. Assumptions, such as loan default rates, costs to service, and prepayment speeds significantly affect the estimate of future cash flows. Mortgage servicing rights are carried at the lower of cost or fair value.

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

The table below presents the balances of assets measured at fair value on a recurring basis:

	March 31, 2010
	Total		Level 1		Level 2		Level 3

Investment securities available for sale:
Debt securities:
U.S. government obligations	$	1,001,641	$	-	$	1,001,641	$	-
U.S. government agencies		6,947,100		-		6,947,100		-
FHLB notes		5,026,201		-		5,026,201		-
State and municipal obligations		1,184,101		-		1,184,101		-
Single issuer trust preferred security		780,510		-		780,510		-
Corporate debt securities		1,508,505		-		1,508,505		-
Total investment securities available for sale		16,448,058		-		16,448,058		-

Mortgage-backed securities available for sale:
FNMA:
Adjustable	$	4,033,857	$	-	$	4,033,857	$	-
Fixed		1,819,698		-		1,819,698		-
Balloon		321,565		-		321,565		-
FHLMC:
Adjustable		988,719		-		988,719		-
Fixed		597,719		-		597,719		-
GNMA, adjustable		181,870		-		181,870		-
CMO, fixed-rate		6,350,172		-		6,350,172		-
Total mortgage-backed securities available for sale		14,293,600		-		14,293,600		-

Total	$	30,741,658	$	-	$	30,741,658	$	-

	September 30, 2009
	Total		Level 1		Level 2		Level 3

Investment securities available for sale:
Debt securities:
U.S. government obligations	$	1,010,937	$	-	$	1,010,937	$	-
U.S. government agencies		5,474,002		-		5,474,002		-
FHLB notes		3,568,125		-		3,568,125		-
State and municipal obligations		1,759,244		-		1,759,244		-
Single issuer trust preferred security		638,420		-		638,420		-
Corporate debt securities		1,325,665		-		1,325,665		-
Total investment securities available for sale		13,776,393		-		13,776,393		-

Mortgage-backed securities available for sale:
FNMA:
Adjustable	$	4,696,533	$	-	$	4,696,533	$	-
Fixed		2,134,206		-		2,134,206		-
Balloon		436,842		-		436,842		-
FHLMC:
Adjustable		1,115,565		-		1,115,565		-
Fixed		714,273		-		714,273		-
GNMA, adjustable		205,577		-		205,577		-
CMO, fixed-rate		4,018,201		-		4,018,201		-
Total mortgage-backed securities available for sale		13,321,197		-		13,321,197		-

Total	$	27,097,590	$	-	$	27,097,590	$	-

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at March 31, 2010 and September 30, 2009:

	March 31, 2010
	Total		Level 1		Level 2		Level 3

Other real estate owned	$	4,023,967	$	-	$	-	$	4,023,967
Impaired loans		9,898,556		-		-		9,898,556

Total	$	13,922,523	$	-	$	-	$	13,922,523

	September 30, 2009
	Total		Level 1		Level 2		Level 3

Other real estate owned	$	5,874,854	$	-	$	-	$	5,874,854
Impaired loans		1,567,218		-		-		1,567,218

Total	$	7,460,072	$	-	$	-	$	7,460,072

The table below presents a summary of activity in our other real estate owned during the six months ended March 31, 2010:

	Balance as of								Balance as of
	September 30, 2009		Additions		Sales, net		Write-downs		March 31, 2010

One-to four-family	$	1,567,600	$	-	$	305,716	$	182,782	$	1,079,102
Commercial real estate		4,006,291		-		592,041		489,000		2,925,250
Commercial		19,615		-		-		-		19,615
Second mortgages		85,008		-		85,008		-		-
Construction and development		196,340		-		196,340		-		-

Total	$	5,874,854	$	-	$	1,179,105	$	671,782	$	4,023,967

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Malvern Federal Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 8 - Fair Value Measurements (Continued)

The carrying amount and estimated fair value of the Company’s financial instruments as of March 31, 2010 and September 30, 2009 are presented below:


	March 31, 2010				September 30, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	39,646,508	$	39,646,508	$	25,324,599	$	25,324,599
Investment securities available for sale		30,741,658		30,741,658		27,097,590		27,097,590
Investment securities held to maturity		4,779,072		4,859,210		4,842,176		4,942,102
Loans receivable		578,014,079		596,662,759		593,565,338		597,729,181
Accrued interest receivable		2,119,740		2,119,740		2,226,206		2,226,206
Restricted stock		6,566,973		6,566,973		6,566,973		6,566,973
Mortgage servicing rights		260,421		260,421		291,983		291,983

Financial liabilities:
Deposits		542,726,815		538,290,551		516,510,678		518,478,826
Long-term borrowings (FHLB advances)		81,527,869		84,044,027		99,621,045		100,713,237
Accrued interest payable		445,515		445,515		706,896		706,895

Note 9 – Income Taxes

The following is reconciliation between the statutory federal income tax rate of 34% and the effective income tax rate on income before income taxes:

	Six Months Ended March 31,
	2010			2009

At federal statutory rate	$	(737,177	)	$	420,623
Adjustments resulting from:
State tax, net of federal benefit		(121,468	)		41,403
Tax-exempt interest		(17,451	)		(24,946	)
Low-income housing credit		(20,450	)		(20,450	)
Earnings on bank-owned life insurance		(94,276	)		(80,294	)
Other		36,063			13,401
	$	(954,759	)	$	349,737

The Company’s effective tax rate was (44.04%), and 28.27% for the six months ended March 31, 2010 and 2009, respectively.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Malvern Federal Bancorp, Inc. and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward looking statements may be identified by the use of such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words of similar meaning, or future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumption, many of which are difficult to predict and generally are beyond the control of Malvern Federal Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Malvern Federal Bancorp, Inc. is or will be doing business, being less favorable than expected; (6) political and social unrest, including acts of war or terrorism; or (7) legislation or changes in regulatory requirements adversely affecting the business in which Malvern Federal Bancorp, Inc. is engaged. Malvern Federal Bancorp, Inc. undertakes no obligation to update these forward looking statements to reflect events or circumstances that occur after the date on which such statements were made.

As used in this report, unless the context otherwise requires, the terms “we,” “our,” “us,” or the “Company” refer to Malvern Federal Bancorp, Inc., a Federal corporation, and the term the “Bank” refers to Malvern Federal Savings Bank, a federally chartered savings bank and wholly owned subsidiary of the Company. In addition, unless the context otherwise requires, references to the operations of the Company include the operations of the Bank.

General

In 2008, Malvern Federal Savings Bank (“Malvern Federal Savings” or the “Bank”) completed its reorganization to the mutual holding company form of organization and formed Malvern Federal Bancorp, Inc. (the “Company”) to serve as the stock holding company for the Bank. In connection with the reorganization, the Company sold 2,645,575 shares of its common stock to certain members of the Bank and the public at a purchase price of $10.00 per share. In addition, the Company issued 3,383,875 shares, or 55% of the outstanding shares, of its common stock to Malvern Federal Mutual Holding Company, a federally chartered mutual holding company (the “Mutual Holding Company”), and contributed 123,050 shares (with a value of $1.2 million), or 2.0% of the outstanding shares, to the Malvern Federal Charitable Foundation, a newly created Delaware charitable foundation.

The Company is a federally chartered corporation which owns all of the issued and outstanding shares of the Bank’s common stock, the only shares of equity securities which the Bank has issued. Malvern Federal Bancorp does not own or lease any property, but instead uses the premises, equipment and furniture of the Bank. At the present time, the Company employs only persons who are officers of Malvern Federal Savings to serve as officers of the Company. The Company also uses the Bank’s support staff from time to time. These persons are not separately compensated by Malvern Federal Bancorp.

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Malvern Federal Savings is a federally chartered community-oriented savings bank which was originally organized in 1887 and is headquartered in Paoli, Pennsylvania. The Bank currently conducts its business from its headquarters and seven additional financial centers; with an eighth full-service financial center, which will be located in Concordville, Pennsylvania, is expected to open in the summer of 2010.

The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and investment securities. The Bank’s principal sources of funds are deposits, repayments of loans and investment securities, maturities of investments and interest-bearing deposits, other funds provided from operations and wholesale funds borrowed from outside sources such as the FHLB. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, commercial real estate mortgage loans, construction and development loans, home equity loans and lines of credit and other consumer loans. The Bank derives its income principally from interest earned on loans, investment securities and, to a lesser extent, from fees received in connection with the origination of loans and for other services. Malvern Federal Savings’ primary expenses are interest expense on deposits and borrowings and general operating expenses. Funds for activities are provided primarily by deposits, amortization of loans, loan prepayments and the maturity of loans, securities and other investments and other funds from operations.

Critical Accounting Policies

In reviewing and understanding financial information for Malvern Federal Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 2 of the notes to our unaudited consolidated financial statements included elsewhere herein. The accounting and financial reporting policies of Malvern Federal Bancorp, Inc. conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. The allowance for loan losses is increased by charges to the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectibility of loans. A management Asset Classification Committee meets on a quarterly basis to evaluate the adequacy of the allowance for loan losses. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our loan portfolio and general amounts for historical loss experience. All of these estimates may be susceptible to significant change.

The allowance consists of specific allowances for impaired loans, a general allowance, or in some cases a specific allowance, on all classified loans which are not impaired and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. An allowance for loan loss is created on certain impaired loans for the amount by which the discounted cash flows, observable market price or fair value of collateral, if the loan is collateral dependent, is lower than the carrying value of the loan. Fair value is generally based upon appraised value of the collateral or independent market prices. Once an evaluation identifies the possibility of impairment, current third party appraisals are obtained as soon as practicable, The third party appraisals with respect to impaired loans are updated at least every six months thereafter for the purpose of maintaining current collateral values especially during periods of significant fluctuations in values. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

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We segregate loans by category and create a general valuation allowance for each category on classified and criticized loans which are not impaired. The categories used by the Company include “special mention”, “substandard” and “doubtful”. For commercial real estate, construction or development, and consumer second mortgage loans, the determination of the category for each loan is based on qualitative periodic reviews of our lending officers and Asset Classification Committee, as well as an independent, third-party consultant. These reviews include a consideration of such factors as payment performance, current financial data and cash flow projections, aggregated customer debt, collateral evaluations, geographic trends, and current economic and business conditions. A similar review is performed to determine the category for mortgage and consumer loans, including home equity line of credit loans. Each category carries a general rate for the allowance percentage to be assigned to the loans within that category. A loan is classified within a category based on identified weaknesses. Each category is assigned a general rate for the allowance percentage which is allocated to the loans within that category. The general allowance percentage is based on the inherent losses associated with each type of lending by considering our loss history with each type of loan, current trends in credit quality and collateral values, and an evaluation of current economic and business conditions. However, the actual allowance percentage assigned to each loan within a category is adjusted for the specific circumstances of each classified loan, including an evaluation of the appraised value of the specific collateral for the loan, and will often differ from the general rate for the category. It is expected that more of these classified loans will prove to be uncollectible compared to loans in the general portfolio, since they represent an above-average credit risk.

A general allowance is created on non-classified loans to recognize the inherent losses associated with lending activities. Unlike classified loans, the allowance for non-classified loans is not established on a loan-by-loan basis. This general allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. The need to further segregate the loans within each category is determined after each category is further evaluated. Loans included in our residential loan portfolio typically have high credit scores and strong loan-to value ratios, generally 80% or below at origination. Loans in the home equity line of credit portfolio have a slightly higher risk than loans in the residential loan portfolio due to the second lien position of the majority of those loans, however these loans generally have high credit scores and combined (including the first lien) loan-to-value ratios up to a maximum of 80% at the time of origination. These portfolios have been slightly impacted by the recent depreciation in housing prices but not significantly enough to increase our loss percentage assumptions. A further analysis is performed on our commercial real estate, construction or development, and consumer second mortgage loans in which we segregated the loans based on the purpose of the loan and the collateral securing the loan. Risk factors considered for each type of loan include trends in collateral value and credit quality, the impact of current economic and business conditions, as well as historical loss experience. Residential housing price estimates are determined using regional economic quarterly reporting and forecasts provided by the Federal Reserve Bank of Philadelphia and the Federal Housing Finance Agency. Commercial real estate pricing trends and forecasts are obtained by the Federal Reserve Bank of Philadelphia’s economic and business forecast reports, as well as Robert Morris Associates’ reports and publications on commercial real estate in the local market area. Prior to the last eight quarters, our charge-off history was relatively insignificant. We had been using a five year time frame to evaluate historical loss experience. However, due to the recent decline in the overall economy and business conditions in general, we now consider our loss history for the eight most recent quarters in analyzing our historical losses. As a result of this analysis, we increased our historical loss factors for the commercial real estate and second mortgage loan portfolios, when compared to the five year time horizon that we previously used. The loss factors used for our other loan categories in establishing our allowance for loan losses at March 31, 2010 remained relatively consistent with our analysis used in prior periods.

The allowance is adjusted for other significant factors that affect the collectibility of the loan portfolio as of the evaluation date including changes in lending policy and procedures, loan volume and concentrations, seasoning of the portfolio, loss experience in particular segments of the portfolio, and bank regulatory examination results. Other factors include changes in economic and business conditions affecting our primary lending areas and credit quality trends. Loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment. We review key ratios such as the allowance for loan losses to total loans receivable and as a percentage of non-performing loans; however, we do not try to maintain any specific target range for these ratios.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan losses have not required significant adjustments from management’s initial estimates. In addition, the Office of Thrift Supervision (the “OTS”), as an integral part of its examination processes, periodically reviews our allowance for loan losses. The OTS may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

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Income Taxes. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Other-Than-Temporary Impairment of Securities – Securities are evaluated on a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether declines in their value are other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

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Comparison of Financial Condition at March 31, 2010 and September 30, 2009

The Company’s total assets amounted to $696.3 million at March 31, 2010 compared to $691.6 million at September 30, 2009. The primary reason for the increase in assets during first six months of fiscal 2010 was an increase in cash and cash equivalents by $14.3 million at March 31, 2010 compared to September 30, 2009. Total deposits increased $26.2 million, or 5.08%, to $542.7 million at March 31, 2010 compared to $516.5 million at September 30, 2009. Investment securities available for sale and held to maturity increased by an aggregate of $3.6 million, or 11.21%, at March 31, 2010 compared to September 30, 2009. The Company’s total other real estate owned (“REO”) amounted to $4.0 million at March 31, 2010 compared to $5.9 million at September 30, 2009. The $1.9 million decrease in REO at March 31, 2010 compared to September 30, 2009 was due primarily to $1.2 million in sales of REO, consisting of one construction or development property, two single-family residential properties and one commercial real estate property, as well as a $672,000 reduction in the fair value of one-to four-family and commercial real properties, which was reflected in other real estate owned expense for the first six months of fiscal year 2010. Two additional single-family residential properties are scheduled to be sold and settled in May 2010 and in June 2010 with no expected losses.

Our total liabilities at March 31, 2010, amounted to $628.2 million compared to $621.8 million at September 30, 2009. The $6.4 million, or 1.0% increase in total liabilities was due primarily to the increase in total deposits of $26.2 million in the first six months of fiscal 2010 and amounted to $542.7 million of deposits at March 31, 2010 compared to $516.5 million at September 30, 2009. There was an $18.1 million decrease in our FHLB advances, which are long-term borrowings. There was also a $2.4 million decrease in other liabilities at March 31, 2010 which was primarily due to a $2.3 million order to purchase certain investment securities which had not been settled as of September 30, 2009 and which settled in October 2009 upon delivery of the securities.

Shareholders’ equity decreased by $1.7 million to $68.1 million at March 31, 2010 compared to $69.8 million at September 30, 2009 primarily due to a decrease in retained earnings and $458,000 in repurchases of our common stock for treasury during first six months of fiscal 2010. We have repurchased a total of 50,000 shares under our share repurchase program that was announced on May 7, 2009, and which terminated on May 7, 2010. Retained earnings decreased by $1.4 million to $44.9 million at March 31, 2010 as a result of the $1.2 million net loss and the payment of $163,000 in cash dividends during the first six months of fiscal 2010.

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The table below sets forth the amounts and categories of non-performing assets and troubled debt restructurings in our portfolio. Loans are generally placed on non-accrual status when they are 90 days or more past due as to principal or interest or when the collection of principal and/or interest becomes doubtful. Troubled debt restructurings involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates when the borrower is experiencing financial difficulty.

	March 31, 2010			December 31, 2009			September 30, 2009
	(Dollars In thousands)

Non-accruing loans:
One-to four-family	$	9,125		$	7,631		$	3,809
Multi-family		1,982			445			-
Commercial real estate		4,040			961			785
Construction or development		6,286			7,051			7,086
Commercial		944			56			35
Home equity lines of credit		458			458			407
Second mortgages		2,567			2,153			2,072
Other		4			15			1
Total non-accruing loans		25,406			18,770			14,195
Other real estate owned and other foreclosed assets:
One-to four-family		1,079			1,373			1,568
Commercial real estate		2,925			3,055			4,006
Commercial		20			20			20
Second mortgages		-			-			85
Construction or development		-			-			196
Total		4,024			4,448			5,875
Total non-performing assets		29,430			23,218			20,070

Troubled debt restructurings:
One-to four-family		2,158			-			-
Multi-family		612			-			-
Commercial real estate		8,862			81			81
Land loans		1,170			-			-
Commercial		256			-			-
Second mortgages		-			-			-
Construction or development		-			-			-
Total		13,058			81			81
Total non-performing assets and troubled debt restructurings	$	42,488		$	23,299		$	20,151
Ratios:
Total non-accrual loans as a percent of gross loans		4.36	%		3.17	%		2.38	%
Total non-performing assets as a percent of total assets		4.23	%		3.40	%		2.90	%
Total non-performing assets and troubled debt restructurings as a percent of total assets		6.10	%		3.42	%		2.91	%

The Company’s total non-performing assets amounted to $29.4 million at March 31, 2010, a $6.2 million increase compared to total non-performing assets at December 31, 2009 and a $9.4 million increase compared to total non-performing assets at September 30, 2009. The increase in non-performing assets at March 31, 2010 was due to an increase in the amount of the Company’s non-accruing loans. There were no loans past due 90 days or more and still accruing interest at March 31, 2010, December 31, 2009 or September 30, 2009.

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At March 31, 2010, the Company had $9.1 million of non-accruing single-family mortgage loans, comprised of 21 loans, compared to 17 non-accruing single family mortgage loans with an aggregate carrying value of $7.6 million at December 31, 2009 and 12 non-accruing single-family mortgage loans with an aggregate carrying value of $3.8 million at September 30, 2009. The increase in non-accruing one-to four-family mortgage loans at March 31, 2010 compared to December 31, 2009 was due primarily to a $1.2 million loan to one borrower for a single-family residential mortgage which became more than 90 days delinquent during the quarter. At March 31, 2010, the Company had $4.0 million of non-accruing commercial real estate loans compared to $961,000 of non-accruing commercial real estate loans at December 31, 2009 and $785,000 of non-accruing commercial real estate loans at September 30, 2009. The Company’s non-accruing commercial real estate loans at March 31, 2010 were comprised of an aggregate of seven loans secured by properties located in Franklin County and the city of Philadelphia, Pennsylvania and surrounding areas. At March 31, 2010, the Company had $2.0 million of non-accruing multi-family loans compared to $445,000 of non-accruing multi-family loans at December 31, 2009 and no non-accruing multi-family loans at September 30, 2009. The increase in multi-family residential mortgage loans as of March 31, 2010 compared to December 31, 2009 was due to one loan with an outstanding balance of $1.5 million at March 31, 2010 on a 34-unit apartment complex located in Delaware County, Pennsylvania. At March 31, 2010, the Company had $6.3 million of non-accruing construction and development loans compared to $7.1 million at December 31, 2009 and at September 30, 2009. The decrease in construction and development loans as of March 31, 2010 compared to December 31, 2009 was due to a partial write-off of one loan in the amount of $800,000 made to a local builder to construct one home located in Chester County, Pennsylvania. This loan is expected to be recorded as real estate owned during the June 2010 quarter with no additional loss expected based on a recent appraisal. At March 31, 2010, the Company had $944,000 of non-accruing commercial loans comprised of three loans compared to one loan in the amount of $56,000 at December 31, 2009 and one loan in the amount of $35,000 at September 30, 2009. The increase in non-accruing commercial loans as of March 31, 2010 compared to December 31, 2010 was due to two loans to one borrower with an outstanding balance of $888,000 at March 31, 2010 on equipment which is also secured by real estate located in Franklin County and the city of Philadelphia, Pennsylvania. The increase in the amounts of the Company’s non-accruing loans primarily reflects the continuing effects of the recession in the Company’s market area. The Company is continuing its efforts to resolve its non-performing assets without additional loss. As a local community bank committed to helping the local community, we have been working diligently with customers to assist them during these difficult economic times and the financial difficulties they have incurred. As a result of this commitment, at March 31, 2010, we had $13.1 million of loans classified as troubled debt restructurings (“TDRs”). Our TDRs at March 31, 2010 reflect the restructuring of five relationships (28 loans) during the quarter, including an aggregate of $2.2 million of one-to four-family loans, $8.9 million of commercial real estate loans and $1.2 million of land loans. All of our TDRs were current and performing in accordance with their restructured terms at March 31, 2010, with the exception of one loan with an outstanding balance of $390,000 at March 31, 2010, which was 60 days past due at such date.

The Company’s total other real estate owned (“OREO”) amounted to $4.0 million at March 31, 2010 compared to $4.4 million at December 31, 2009 and $5.9 million at September 30, 2009. The $1.9 million decrease in OREO at March 31, 2010 compared to September 30, 2009 was due primarily to sales of a construction or development property, a one-to four-family residential property with a carrying value of $196,000 at the time of sale, and a commercial property with a carrying value of $592,000 at the time of sale, as well as a $672,000 reduction in the fair value of one commercial real estate property located in Pottstown, Pennsylvania, which was reflected in other real estate owned expense for the first six months of fiscal year 2010. An additional two single-family residential properties are scheduled to be sold and settled during June 2010 quarter with no expected losses.

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While the amount of its non-performing assets at March 31, 2010 increased compared to September 30, 2009, the amount of the Company’s performing but delinquent loans (loans delinquent 31 to 89 days) decreased to $4.7 million at March 31, 2010 from $8.5 million at September 30, 2009. The Company is attempting to work with its borrowers to bring these loans current, but no assurance can be given that there may not be further increases in the Company’s non-accruing loans in future periods.

Comparison of Our Operating Results for the Three and Six Months Ended March 31, 2010 and 2009

General. Our net loss was $1.2 million for the three months ended March 31, 2010 compared to net income of $371,000 for the three months ended March 31, 2009. On a per share basis, the net loss was $0.21 per share for the quarter ended March 31, 2010, compared to net income of $0.06 per share for the quarter ended March 31, 2009. The primary reason for the $1.6 million, or 429.9% decrease in our net income in the second quarter of fiscal 2010 compared to fiscal 2009 was an increase in the provision for loan losses of $3.2 million, as well as $431,000 increase in other expenses, which were partially offset by a $1.0 million increase in net interest income and a $987,000 decrease in income taxes. The increase in other expenses primarily was the result of a $143,000 increase in federal deposit insurance premium and a $308,000 increase in other real estate owned expense, along with smaller increases in professional services, advertising and data processing costs. Our interest rate spread of 2.80% and net interest margin of 2.99% for the three months ended March 31, 2010 increased when compared to a net interest spread of 2.08% and a net interest margin of 2.39% for the three months ended March 31, 2009.

Our net loss was $1.2 million for the six months ended March 31, 2010 compared to net income of $887,000 for the six months ended March 31, 2009. On a per share basis, the net loss was $0.21 per share for the six months ended March 31, 2010, compared to net income of $0.15 per share for the six months ended March 31, 2009. The primary reasons for the $2.1 million, or 236.7% decrease in the first six months of fiscal 2010 compared to fiscal 2009 were increases in the provision for loan losses of $3.7 million and $1.5 million in other expenses, which were partially offset by a $1.7 million increase in net interest income, a $92,000 increase in other income and a $1.3 million decrease in income taxes. The increase in other expenses primarily was the result of a $699,000 increase in federal deposit insurance premium and a $733,000 increase in other real estate owned expense, along with smaller increases in salaries and employee benefits expense, advertising and data processing costs. Our interest rate spread of 2.72% and net interest margin of 2.94% for the six months ended March 31, 2010 increased when compared to a net interest spread of 2.14% and a net interest margin of 2.48% for the three months ended March 31, 2009.

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Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following tables show for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

	Three Months Ended March 31,
	2010								2009
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
	(Dollars in Thousands)
Interest Earning Assets:
Loans receivable (1)	$	593,681		$	7,952		5.36	%	$	596,559		$	8,243		5.53	%
Investment securities		31,367			249		3.16			25,482			227		3.56
Deposits in other banks		15,793			9		0.24			8,540			20		0.92
FHLB stock		6,567			-		0.00			6,567			-		0.00
Total interest-earning assets		647,408			8,210		5.08			637,148			8,490		5.32	%
Non-interest-earning assets		37,473								34,701
Total assets	$	684,881							$	671,849

Interest Bearing Liabilities:
Demand and NOW accounts	$	86,712			208		0.96		$	63,295			229		1.45
Money market accounts		63,176			165		1.04			58,278			259		1.77
Savings accounts		40,024			28		0.28			38,438			29		0.30
Time deposits		311,769			2,037		2.60			311,649			2,881		3.70
Total deposits		501,681			2,438		1.96			471,660			3,398		2.88
FHLB borrowings		87,490			929		4.24			107,510			1,288		4.79
Total interest-bearing liabilities		589,171			3,367		2.28			579,170			4,686		3.24
Non-interest-bearing liabilities		24,839								24,684
Total liabilities		614,010								603,854
Shareholders’ Equity		70,871								67,994
Total liabilities and shareholders’ equity	$	684,881							$	671,849
Net interest-earning assets	$	58,237							$	57,978
Net interest income; average interest rate spread				$	4,843		2.80	%				$	3,804		2.08	%
Net interest margin (2)							2.99	%							2.39	%
Average interest-earning assets to average interest-bearing liabilities		109.88	%							110.01	%

(1) Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts and allowance for loan losses.

(2) Equals net interest income divided by average interest-earning assets.

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	Six Months Ended March 31,
	2010								2009
	Average Balance			Interest		Average Yield/Rate			Average Balance			Interest		Average Yield/Rate
	(Dollars in Thousands)
Interest Earning Assets:
Loans receivable (1)	$	599,305		$	16,362		5.46	%	$	594,035		$	16,922		5.70	%
Investment securities		31,231			506		3.24			25,916			458		3.53
Deposits in other banks		13,470			15		0.22			7,193			25		0.70
FHLB stock		6,567			-		0.00			6,459			-		0.00
Total interest-earning assets		650,573			16,883		5.20			633,603			17,405		5.49	%
Non-interest-earning assets		36,690								28,649
Total assets	$	687,263							$	662,252

Interest Bearing Liabilities:
Demand and NOW accounts	$	90,897			511		1.12		$	59,633			439		1.47
Money market accounts		62,397			326		1.04			58,835			602		2.05
Savings accounts		39,700			57		0.28			38,022			78		0.41
Time deposits		309,105			4,377		2.84			304,540			5,793		3.80
Total deposits		502,099			5,271		2.10			461,030			6,912		3.00
FHLB borrowings		90,215			2,046		4.54			107,611			2,621		4.87
Total interest-bearing liabilities		592,314			7,317		2.48			568,641			9,533		3.35
Non-interest-bearing liabilities		24,741								24,460
Total liabilities		617,055								593,101
Shareholders’ Equity		70,208								69,151
Total liabilities and shareholders’ equity	$	687,263							$	662,252
Net interest-earning assets	$	58,259							$	64,962
Net interest income; average interest rate spread				$	9,566		2.72	%				$	7,872		2.14	%
Net interest margin (2)							2.94	%							2.48	%
Average interest-earning assets to average interest-bearing liabilities		109.84	%							111.42	%

(1) Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts and allowance for loan losses.

(2) Equals net interest income divided by average interest-earning assets.

Interest and Dividend Income. The Company’s interest and dividend income decreased for the three months ended March 31, 2010 by $280,000 or 3.3% over the comparable 2009 period to $8.2 million. Interest income earned decreased in the three months ended March 31, 2010 over the prior comparable period in fiscal 2009 due primarily to declining yields on loans and investment securities. During the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009, the average yield on the Company’s loan portfolio decreased by 17 basis points to 5.36% from 5.53%. The average balance of loans receivable decreased by $2.9 million, or 0.5% in the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009, as a result of a temporary decline in general market demand as indicated in decreases in the Company’s one-to four-family residential and multi-family mortgage loans and consumer second mortgage loans. Average yields on investment securities decreased to 3.16% for the three months ended March 31, 2010 from 3.56% for the same period ended 2009 while the average balances of investment securities increased by $5.9 million during the three months ended March 31, 2010 compared to the comparable prior fiscal year period.

The Company’s interest and dividend income decreased for the six months ended March 31, 2010 by $522,000, or 3.0% over the comparable 2009 period to $16.9 million. Interest income earned decreased in the first half of fiscal 2010 over the prior comparable period in fiscal 2009 due primarily to declining yields on loans and investment securities. During the first six months of fiscal 2010 compared to the first six months of fiscal 2009, the average yield on the Company’s loan portfolio decreased by 24 basis points to 5.46% from 5.70%. However, the average balance of loans receivable increased by $5.3 million, or 0.9% in the first six months of fiscal 2010 compared to the first six month of fiscal 2009, due primarily to growth in the Company’s commercial real estate loans. Average yields on investment securities decreased to 3.24% for the six months ended March 31, 2010 from 3.53% for the same period ended 2009. The average balances of investment securities increased by $5.3 million during the six months ended March 31, 2010 compared to the comparable prior fiscal year period.

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Interest Expense. The Company’s interest expense for the three month period ended March 31, 2010 was $3.4 million, a decrease of $1.3 million from the three month period ended March 31, 2009. The Company had a $961,000 decrease in interest expense on total deposits and a $359,000 decrease in interest on FHLB borrowings during the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009. The average rate paid on total deposits decreased to 1.96% for the three months ended March 31, 2010 from 2.88% for the same period in fiscal 2009, and the average rate paid on borrowed funds decreased to 4.24% in the second quarter of fiscal 2010 compared to 4.79% in the second quarter of fiscal 2009 due primarily to the repayment of approximately $5.0 million in relatively higher-costing long-term FHLB borrowings. During the remaining two quarters of fiscal 2010, an additional $25.0 million of our FHLB advances, with a weighted average interest rate of 6.23%, are scheduled to mature.

The Company’s interest expense for the six month period ended March 31, 2010 was $7.3 million, a decrease of $2.2 million from the six month period ended March 31, 2009. The Company had a $1.6 million decrease in interest expense on total deposits and a $575,000 decrease in interest on FHLB borrowings during the first half of fiscal 2010 compared to the first half of fiscal 2009. The average rate paid on deposits decreased to 2.10% for the six months ended March 31, 2010 from 3.00% for the same period in fiscal 2009, and the average rate paid on borrowed funds decreased to 4.54% in the first half of fiscal 2010 compared to 4.87% in the first half of fiscal 2009 due primarily to the repayment of approximately $20.0 million in relatively higher-costing long-term FHLB borrowings.

Provision for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. This policy is significantly affected by our judgment and uncertainties and there is likelihood that materially different amounts would be reported under different, but reasonably plausible, conditions or assumptions. Our activity in the provision for loan losses is undertaken in order to maintain a level of total allowance for losses that management believes covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. Our evaluation process typically includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to make additional provisions for estimated loan losses based upon judgments different from those of management.

The provision for loan losses was $3.6 million for the quarter ended March 31, 2010, and our provision for loan losses amounted to $4.6 million for the six months ended March 31, 2010. Our provision for loan losses amounted to $462,000 for the three months ended March 31, 2009 and $907,000 for the six months ended March 31, 2009. The $3.2 million increase in our provision for loan losses for the quarter ended March 31, 2010 compared to the second quarter in fiscal 2009 was due primarily to an increased level of non-accruing loans and an increase in net charge-offs during the fiscal 2010 quarter. The Company’s net charge-offs to the allowance for loan losses amounted to $1.7 million and $2.1 million, respectively, for the three-months and six-months ended March 31, 2010. During the quarter ended March 31, 2010, two loans, a local single-family residential mortgage loan and a construction loan for one local single-family residence, accounted for $1.6 million of the charge-offs during the quarter. Subsequent to March 31, we foreclosed on the construction loan and we expect it to be classified as other real estate owned at no additional loss with a carrying value of $1.0 million at June 30, 2010. In addition to charge-offs, our provision for loan losses during the quarter ended March 31, 2010 reflects increased levels of non-accrual loans. At March 31, 2010, the Company’s total non-accrual loans amounted to $25.4 million, or 4.36% of total loans, compared to $18.8 million of non-accrual loans at December 31, 2009. The $6.6 million, or 35.4%, increase in non-accrual loans was due primarily to a $3.1 million increase in commercial real estate loans, a $1.5 million increase in non-accrual multi-family residential mortgage loans and a $1.5 million increase in single-family residential mortgage loans. The increase in non-accrual commercial real estate loans during the quarter was due primarily to six loans to one borrower with an aggregate balance of $3.1 million secured by commercial property located in Franklin County and the City of Philadelphia, Pennsylvania which was more than 90 days past due at March 31, 2010. The increase in multi-family residential mortgage loans was due primarily to one loan with an outstanding balance of $1.5 million at March 31, 2010 on a 34-unit apartment complex located in Delaware County, Pennsylvania. The increase in non-accrual single-family residential mortgage loans was due primarily to a $1.2 million loan to one borrower which became more than 90 days delinquent during the quarter. Loans aggregating $2.1 million to this borrower and secured by his residence were placed on non-accrual status during the quarter ended December 31, 2009. The increase in our provision for loan losses during the quarter ended March 31, 2010 also reflects our determination made during the quarter, based on a review of our loss experience and other factors with respect to the allowance for loan losses, to increase our coverage amounts for commercial real estate loans and consumer second mortgage loans.

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We will continue to monitor and modify our allowances for loan losses as conditions dictate. No assurances can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

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The following table sets forth an analysis of our allowance for loan losses for the periods indicated.

	For the Six Months Ended March 31,						For the Year Ended September 30,
	2010			2009			2009
	(Dollars in Thousands)

Balance at beginning of period	$	5,718		$	5,505		$	5,505
Provision for loan losses		4,582			907			2,280

Charge-offs:
Mortgage:
One-to four-family		824			121			124
Multi-family		-			-			-
Commercial real estate		-			-			-
Construction or development		960			-			-
Land loans		-			-			-
Commercial:
Real estate		-			1,349			1,760
Other		-			-			-
Consumer:
Home equity lines of credit		168			-			-
Second mortgages		93			78			153
Other		15			19			60
Total charge-offs		2,060			1,567			2,097
Recoveries:
Mortgage:
One-to four-family		-			-			-
Multi-family		-			-			-
Commercial real estate		-			-			25
Construction or development		-			-			-
Land loans		-			-			-
Commercial		-			-			-
Total recoveries		-			-			25
Consumer:
Home equity lines of credit		-			-			-
Second mortgages		-			-			-
Other		2			2			5
Total recoveries		2			2			30

Net charge-offs		2,058			1,565			2,067
Balance at end of period	$	8,242		$	4,847		$	5,718

Ratios:
Ratio of allowance for loan losses to non-accrual loans		32.44	%		49.35	%		40.28	%
Ratio of net charge-offs to average loans outstanding annualized		0.69	%		0.53	%		0.35	%
Ratio of net charge-offs to total allowance for loan losses annualized		49.95	%		64.58	%		36.15	%

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Other Income. Our total other, or non-interest income, was $540,000 for the three months ended March 31, 2010 compared to $557,000 for the three months ended March 31, 2009. The $17,000 decrease in other income was due to an aggregate decrease of $9,000 in net gains on the sale of investment securities, an $8,000 decrease in net gains on disposal of fixed assets, a $33,000 net loss reported on the sale of other real estate owned, as well as a $13,000 decrease in earnings on bank owned life insurance. These decreases were partially offset by a $48,000 increase in service charges and other fees and rental income.

Our total other, or non-interest income, was $1.15 million for the six months ended March 31, 2010 compared to $1.05 million for the six months ended March 31, 2009. The $93,000 increase in other income was due to an aggregate increase of $103,000 in service charges and other fees and rental income and a $41,000 increase in earnings on bank owned life insurance. These increases were partially offset by a $27,000 decrease in net gains on the sale of investment securities, an $8,000 decrease in net gains on disposal of fixed assets, as well as a $17,000 net loss in the sale of other real estate owned.

Other Expenses. Other, or non-interest, expenses of the Company increased by $431,000 in the quarter ended March 31, 2010 over the comparable prior year period. The increase in other operating expenses in the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 was due primarily to a $308,000 increase in other real estate owned expenses as well as increased federal deposit insurance premiums, advertising and data processing costs which were partially offset by reductions in salary and benefit expense, occupancy expenses and other operating expenses.

Other, or non-interest, expenses of the Company increased by $1.5 million in the six months ended March 31, 2010 over the comparable prior year period. Other expenses in the six months ended March 31, 2010 primarily reflect a $793,000 increase in other real estate owned expense as well as increased advertising and data processing costs which were partially offset by reductions in occupancy expenses and other operating expenses. Additionally, other expenses reflect a $699,000 increase in federal deposit insurance premiums, due primarily to the absence of a premium credit which was available during in the first six months of fiscal 2009 and an increase in assessment rates implemented in February 2009.

Income Tax Expense. Our income tax benefit was $867,000 for the three months ended March 31, 2010 compared to income tax expense of $120,000 for the three months ended March 31, 2009. The increase in tax benefit for the second quarter in fiscal 2010 was due a pre-tax loss in the current period along with the tax benefits from BOLI income and interest income on tax free municipal securities.

Our income tax benefit was $955,000 for the six months ended March 31, 2010 compared to income tax expense of $350,000 for the three months ended March 31, 2009. The increase in tax benefit for the first six months in fiscal 2010 was due a pre-tax loss in the current period along with the tax benefits from BOLI income and interest income on tax free municipal securities.

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Liquidity and Capital Resources

Our primary sources of funds are from deposits, FHLB borrowings, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At March 31, 2010, our cash and cash equivalents amounted to $39.6 million. In addition, at such date our available for sale investment securities amounted to $30.7 million.

In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. In recent years we have utilized borrowings as a cost efficient addition to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge residential mortgage loans and mortgage-backed securities as well as our stock in the Federal Home Loan Bank as collateral for such advances.

We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At March 31, 2010, we had certificates of deposit maturing within the next 12 months amounting to $184.5 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us. For the six months ended March 31, 2010, the average balance of our outstanding FHLB advances was $90.2 million. At March 31, 2010, we had $81.5 million in outstanding long-term FHLB advances and we had $257.3 million in additional FHLB advances available to us. In addition, at March 31, 2010, we had $50.0 million available pursuant to an existing line of credit with the FHLB.

The following table summarizes our contractual cash obligations at March 31, 2010.

	Payments Due by Period
	Less Than One Year		One To Three Years		Three To Five Years		More Than Five Years		Total
	(In Thousands)
Long-term debt obligations	$	30,937	$	2,591	$	-	$	48,000	$	81,528
Certificates of deposit		184,519		115,660		12,475		21,829		334,483
Operating lease obligations		84		168		168		-		420
Total contractual obligations	$	215,540	$	118,419	$	12,643	$	69,829	$	416,431

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

Impact of Inflation and Changing Prices

The financial statements, accompanying notes, and related financial data of the Company presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Most of our assets and liabilities are monetary in nature; therefore, the impact of interest rates has a greater impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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Item 3 - Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies as well as the methods used to manage its exposure to the risk of loss from adverse changes in market prices and rates market, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – How We Manage Market Risk” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. There has been no material change in the Company’s asset and liability position since September 30, 2009.

Item 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

There are no matters required to be reported under this item.

Item 1A - Risk Factors

See Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009.

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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not applicable

(b)	Not applicable

(c)	Purchases of Equity Securities

The Company’s repurchase of its common stock made during the quarter are set forth in the following table:

					Total Number
					of Shares		Maximum
					Purchased as Part of		Number of Shares
					Publicly		that May Yet
	Total Number		Average Price		Announced		be Purchased
	Of Shares		Paid per		Plans or		Under the
Period	Purchased		Share		Program		or Program (1)

January 1 – January 31, 2010		-	$	-		-		88,000
February 1 – February 28, 2010		-		-		-		88,000
March 1 – March 31, 2010		-		-		-		88,000

Total		-	$	-		-		88,000

(1) On May 7, 2009, the Company announced that its Board of Directors approved the repurchase of up to 138,000 shares or approximately 5% of the Company’s outstanding common stock held by shareholders other than Malvern Federal Mutual Holding Company. The repurchase program terminated as of May 7, 2010 in accordance with its terms.

Item 3 - Defaults Upon Senior Securities

There are no matters required to be reported under this item.

Item 4 - (Removed and Reserved)

Item 5 - Other Information

There are no matters required to be reported under this item.

Item 6 - Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Section 302 Certification of the Chief Financial Officer
32.1	Section 1350 Certification

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		MALVERN FEDERAL BANCORP, INC.

May 14, 2010	By:	/s/ Ronald Anderson
		Ronald Anderson
		President and Chief Executive Officer

May 14, 2010	By:	/s/ Dennis Boyle
		Dennis Boyle
		Senior Vice President and Chief Financial Officer