Edgar Filing: MSB FINANCIAL CORP.

f10q_093011-5468.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2011

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 001-33246

MSB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

UNITED STATES

34-1981437

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

1902 Long Hill Road, Millington, New Jersey

07946-0417

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code

(908) 647-4000

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

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

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

Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [X]

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 10, 2011:

$0.10 par value common stock 5,151,460 shares outstanding

MSB FINANCIAL CORP. AND SUBSIDIARIES

INDEX

		Page
		Number
PART I - FINANCIAL INFORMATION

Item 1:	Consolidated Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition
	at September 30, 2011 and June 30, 2011	2

	Consolidated Statements of Income and Comprehensive Income for the
	Three Months Ended September 30, 2011 and 2010	3

	Consolidated Statements of Cash Flows for the Three Months
	Ended September 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements (Unaudited)	5

Item 2:	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	27

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4:	Controls and Procedures	32


PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	33

Item 1A:	Risk Factors	33

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3:	Defaults Upon Senior Securities	33

Item 4:	[Removed and Reserved]	33

Item 5:	Other Information	33

Item 6:	Exhibits	34

SIGNATURES		35

CERTIFICATIONS

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	September 30,			June 30,
	2011			2011
	(Dollars in Thousands, except Per Share Amount)
Assets
Cash and due from banks	$	11,665		$	22,117
Interest-earning demand deposits with banks		7,925			8,859

Cash and Cash Equivalents		19,590			30,976

Trading securities		45			60
Securities held to maturity (fair value of $65,323 and $41,602, respectively)		64,613			41,693
Loans receivable, net of allowance for loan losses of $2,751 and $2,170, respectively		246,634			253,251
Other real estate owned		861			861
Premises and equipment		9,689			9,838
Federal Home Loan Bank of New York stock, at cost		1,384			1,384
Bank owned life insurance		5,964			5,913
Accrued interest receivable		1,445			1,334
Other assets		3,847			4,149

Total Assets	$	354,072		$	349,459

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	14,220		$	17,494
Interest bearing		273,510			268,681

Total Deposits		287,730			286,175

Advances from Federal Home Loan Bank of New York		20,000			20,000
Advance payments by borrowers for taxes and insurance		80			177
Other liabilities		5,422			2,427

Total Liabilities		313,232			308,779

Commitments and Contingencies		—			—
Stockholders’ Equity
Common stock, par value $0.10; 10,000,000 shares authorized; 5,620,625 issued; 5,164,804 and 5,166,503 shares outstanding, respectively		562			562
Paid-in capital		24,008			23,940
Retained earnings		21,936			21,880
Unallocated common stock held by ESOP (122,248 and 126,463 shares, respectively)		(1,222	)		(1,265	)
Treasury stock, at cost, 455,821 and 454,122 shares, respectively		(4,355	)		(4,345	)
Accumulated other comprehensive loss		(89	)		(92	)

Total Stockholders’ Equity		40,840			40,680

Total Liabilities and Stockholders’ Equity	$	354,072		$	349,459

See notes to consolidated financial statements.

MSB FINANCIAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended
	September 30,
	2011			2010
	(In Thousands, Except
	Per Share Amounts)
Interest Income:
Loans receivable, including fees	$	3,103		$	3,444
Securities held to maturity		485			432
Other		23			27
Total Interest Income		3,611			3,903

Interest Expense
Deposits		740			1,013
Borrowings		173			173

Total Interest Expense		913			1,186

Net Interest Income		2,698			2,717

Provision for Loan Losses		613			475

Net Interest Income after Provision for Loan Losses		2,085			2,242

Non-Interest Income
Fees and service charges		83			177
Income from bank owned life insurance		50			49
Unrealized (loss) gain on trading securities		(15	)		5
Other		26			26
Total Non-Interest Income		144			257

Non-Interest Expenses
Salaries and employee benefits		985			969
Directors compensation		115			109
Occupancy and equipment		410			385
Service bureau fees		108			99
Advertising		48			66
FDIC assessment		73			126
Other		321			399
Total Non-Interest Expenses		2,060			2,153

Income before Income Taxes		169			346
Income Taxes		58			131
Net Income		111			215
Amortization component of net periodic pension cost,
net of tax		3			1

Total Comprehensive Income	$	114		$	216
Weighted average number of shares of common stock
Outstanding basic and diluted		5,041			5,040
Earnings per share - basic and diluted	$	0.02		$	0.04

See notes to consolidated financial statements.

MSB Financial Corp and Subsidiaries

Consolidated Statements of Cash Flows

Unaudited

	Three Months Ended September 30,
	2011			2010
	(In Thousands)
Cash Flows from operating activities:
Net Income	$	111		$	215
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Net accretion of securities discounts and deferred loan fees and costs		(57	)		(20	)
Depreciation and amortization of premises and equipment		151			162
Stock based compensation and allocation of ESOP stock		111			118
Provision for loan losses		613			475
Loss on sale of other real estate owned		-			5
Earnings on bank owned life insurance		(50	)		(49	)
Unrealized (gain) loss on trading securities		15			(5	)
Increase in accrued interest receivable		(111	)		(52	)
Decrease in other assets		302			233
(Decrease) increase in other liabilities		(3	)		155
Net Cash Provided by Operating Activities		1,082			1,237

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases		(28,970	)		(16,247	)
Maturities, calls and principal repayments		9,092			17,772
Net decrease in loans receivable		6,019			1,451
Purchase of premises and equipment		(2	)		(15	)
Proceeds from the sale of other real estate owned		-			399
Net Cash Provided by (Used in) Investing Activities		(13,861	)		3,360

Cash Flows from Financing Activities:
Net (decrease) increase in deposits		1,555			(3,088	)
Decrease in advance payments by borrowers for taxes and insurance		(97	)		(138	)
Dividends paid to minority shareholders		(55	)		(63	)
Purchase of treasury stock		(10	)		(24	)

Net Cash Provided by (Used in) Financing Activities		1,393			(3,313	)

Net Increase (Decrease) in Cash and Cash Equivalents		(11,386	)		1,284
Cash and Cash Equivalents – Beginning		30,976			21,144
Cash and Cash Equivalents – Ending	$	19,590		$	22,428

Supplementary Cash Flows Information
Interest paid	$	910		$	1,186
Loan receivable transferred to other real estate owned	$	-		$	800
Securities held to maturity settled subsequent to period end	$	3,000		$	-

See notes to consolidated financial statements.

MSB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Organization and Business

MSB Financial Corp. (the “Company”) is a federally-chartered corporation organized in 2004 for the purpose of acquiring all of the capital stock that Millington Savings Bank (the “Savings Bank”) issued in its mutual holding company reorganization. The Company’s principal executive offices are located at 1902 Long Hill Road, Millington, New Jersey 07946-0417 and its telephone number at that address is (908) 647-4000.

A Registration Statement on Form S-1 (File No. 333-137294), as amended, was filed by the Company with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, relating to the offer for sale of up to 2,199,375 shares (subject to increase to 2,529,281 shares) of its common stock at $10.00 per share. The offering closed on January 4, 2007 and 2,529,281 shares were sold for gross proceeds of $25,292,810, including 202,342 shares sold to the Savings Bank’s newly established Employee Stock Ownership Plan (“ESOP”). Net proceeds of the offering totaled approximately $24.5 million. Concurrent with closing of the offering, the MHC received 3,091,344 shares of Company stock in exchange for the 10,000 shares previously owned by the MHC. The MHC is the majority stockholder of the Company owning 59.85% of the outstanding common stock at September 30, 2011.

MSB Financial, MHC (the “MHC”) is a federally-chartered mutual holding company that was formed in 2004 in connection with the mutual holding company reorganization. The MHC has not engaged in any significant business since its formation. So long as MHC is in existence, it will at all times own a majority of the outstanding stock of the Company.

The Savings Bank is regulated by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. The MHC and the Company are now regulated as savings and loan holding companies by the Board of Governors of the Federal Reserve System (“FRB”), as successor to the Office of Thrift Supervision (“OTS”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

Note 2 – Basis of Consolidated Financial Statement Presentation

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, the Savings Bank, and the Savings Bank’s wholly-owned subsidiary, Millington Savings Service Corp. All significant inter-company accounts and transactions have been eliminated in consolidation. These consolidated statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Millington Savings Service Corp. is inactive.

In the opinion of management, all adjustments, consisting of only normal recurring adjustments or accruals, which are necessary for a fair presentation of the consolidated financial statements have been made at September 30, 2011 and June 30, 2011 and for the three months ended September 30, 2011 and 2010. The results of operations for the three months ended September 30, 2011 are not necessarily indicative of the results which may be expected for an entire fiscal year or other interim periods.

The data in the consolidated statement of financial condition for June 30, 2011was derived from the Company’s audited consolidated financial statements for that date. That data, along with the interim financial information presented in the consolidated statements of financial position, income and comprehensive income, and cash flows should be read in conjunction with the audited consolidated financial statements as of and for the year ended June 30, 2011, including the notes thereto included in the Company’s Annual Report on Form 10-K.

The consolidated financial statements contained herein have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial position and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

A material estimate for the Company that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. The allowance for loan losses represents management’s best estimate of losses known and inherent in the portfolio that are both probable and reasonable to estimate. While management uses the most current information available to estimate losses on loans, actual losses are dependent on future events and, as such, increases in the allowance for loan losses may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Savings Bank’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examinations.

Note 3 – Subsequent Events

In accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (the “ASC”) Topic 855, Subsequent Events, management has evaluated potential subsequent events through the date the consolidated financial statements were issued.

Note 4 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, exclusive of the unallocated shares held by the Employee Stock Ownership Plan (“ESOP”) and unvested shares of restricted stock. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted earnings per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable (such as stock options) or which could be converted into common stock, if dilutive, using the treasury stock method. Diluted earnings per share did not differ from basic earnings per share for the three months ended September 30, 2011 and 2010, as the 275,410 weighted average number of outstanding stock options were all anti-dilutive.

Note 5 – Stock Based Compensation

On March 10, 2008 the Company’s stockholders approved the 2008 Stock Compensation and Incentive Plan. This plan permits the granting of up to 275,410 options to purchase Company common stock. Pursuant to this plan, on May 9, 2008, the Board of Directors granted 275,410 options having an exercise price of $10.75 per share, the fair market value of the shares on the grant date. The grant date fair value of the options was estimated to be $ 2.99 per share based on the Black-Scholes option pricing

model. Options are exercisable for 10 years from date of grant. At September 30, 2011, stock based compensation expense not yet recognized in income amounted to $261,000 which is expected to be recognized over a weighted average remaining period of 1.6 years. The Company recognized stock based compensation expense related to these awards of $41,000 along with income tax benefits of $16,000 for the three month periods ended September 30, 2011 and 2010, respectively.

On November 9, 2009 the Company’s stockholders approved an Amendment to the 2008 Stock Compensation and Incentive Plan. The primary purpose of the Amendment to the 2008 Plan was to increase the number of shares of Company common stock authorized for issuance under the 2008 Plan from 275,410 to 385,574; with such additional shares to be available for awards in the form of restricted stock awards. Such restricted stock awards may be granted to officers, employees and directors of the Company or its subsidiary, Millington Savings Bank. On November 24, 2009, the Company re-purchased 110,164 shares of the Company common stock for an aggregate purchase price of $932,000. On December 14, 2009, the Board of Directors granted the 110,164 shares to certain employees and directors. The restricted stock awards are to be vested over a five year period and expensed over that time based on the fair value of the Company’s common stock at the date of grant. For each of the three month periods ended September 30, 2011and 2010, the Company recognized stock based compensation expense related to these awards of $45,000 along with tax benefits of $18,000. As of September 30, 2011, $576,000 in stock based compensation expense related to these awards remains to be recognized.

Note 6 - Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and to determined fair value disclosures.

FASB ASC Topic 820, Fair Market Value Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in

active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

·	Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

·	Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2011 and June 30, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	September 30, 2011
	Level 1 Inputs			Level 2 Inputs			Level 3 Inputs			Total Fair Value
	(In Thousands)

Trading securities		$	45		$	—		$	—		$	45

	June 30, 2011
	Level 1 Inputs			Level 2 Inputs			Level 3 Inputs			Total Fair Value
	(In Thousands)

Trading securities		$	60		$	—		$	—		$	60

Securities classified as trading securities are reported at fair value utilizing Level 1 inputs. For these securities, the Company arrives at the fair value based upon the quoted market price at the close of business on the last business day on or prior to the statement of financial position date.

Certain financial and non-financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table summaries those assets measured at fair value on a non-recurring basis as of September 30, 2011 and June 30, 2011:

	September 30, 2011
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans	$	—	$	—	$	9,430	$	9,430

	June 30, 2011
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans	$	—	$	—	$	2,918	$	2,918

An impaired loan is measured for impairment at the time the loan is identified as impaired. Loans are considered impaired when based on current information and events it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the lower of cost or estimated fair value less estimated selling costs. Fair values are estimated through current appraisals and adjusted as necessary to reflect current market conditions and as such are classified as Level 3.

Other real estate owned is carried at the lower of cost or fair value less estimated selling costs. The fair value of other real estate is determined based upon independent third-party appraisals of the properties. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. As of September 30, 2011 and June 30, 2011 there was no further writedown in the other real estate owned balance below the cost basis established at the time the other real estate owned was originally recognized. Accordingly, the table above does not include other real estate owned.

The fair value of a financial instrument is defined above. Significant estimates were used for the purposes of disclosing fair values. Estimated fair values have been determined using the best available data and estimation methodology suitable for each category of financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and

liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

The carrying amounts and estimated fair values of financial instruments as of September 30, 2011 and June 30, 2011, were as follows:

	September 30, 2011				June 30, 2011
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	19,590	$	19,590	$	30,976	$	30,976
Trading securities		45		45		60		60
Securities held to maturity		64,613		65,323		41,693		41,602
Loans receivable (1)		246,634		254,604		253,251		259,165
Federal Home Loan Bank stock		1,384		1,384		1,384		1,384
Accrued interest receivable		1,445		1,445		1,334		1,334

Financial liabilities:
Deposits		287,730		290,502		286,175		282,191
Advances from Federal Home Loan Bank of New York		20,000		20,010		20,000		19,917
Accrued interest payable		71		71		68		68

(1) Includes impaired loans measured at fair value on a non-recurring basis as discussed above.

Methods and assumptions used to estimate fair values of financial assets and liabilities are as follows:

Cash and Cash Equivalents

For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Trading Securities

Securities Held to Maturity

The fair value for securities held to maturity is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar securities.

Loans Receivable

The fair value of loans is based upon a multitude of sources, including assumed current market rates by category and the Savings Bank’s current offering rates. Both fixed and variable rate loan fair values are derived at using a discounted cash flow methodology. For variable rate loans, repricing term, including next reprice date, reprice frequency and reprice rate are factored into the discounted cash flow formula.

Federal Home Loan Bank of New York Stock

The carrying amount of Federal Home Loan Bank of New York stock approximates fair value since the Company is generally able to redeem this stock at par.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest receivable and payable approximate fair value due to the short term nature of these instruments.

Deposits

Fair values for demand deposits, savings accounts and club accounts are, by definition, equal to the amount payable on demand at the reporting date. Fair values of fixed-maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.

Advances from Federal Home Loan Bank of New York

Fair values of advances are estimated using discounted cash flow analyses, based on rates currently available to the Company for advances from the Federal Home Loan Bank of New York with similar terms and remaining maturities.

Off-Balance Sheet Financial Instruments

Fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms, and the present credit worthiness of the counterparties. As of September 30, 2011 and June 30, 2011, the fair value of the commitments to extend credit was not considered to be material.

Note 7 - Loans Receivable and Allowance for Credit Losses

The composition of loans receivable at September 30, 2011 and June 30, 2011 was as follows:

	September 30, 2011			June 30, 2011
	(In Thousands)
Residential mortgage:
One-to-four family	$	144,583		$	149,399
Home equity		49,983			50,240

		194,566			199,639

Commercial real estate		33,841			32,559
Construction		13,527			16,633
Commercial and industrial		10,067			9,325

		57,435			58,517

Consumer:
Deposit accounts		540			491
Automobile		204			236
Personal		18			20
Overdraft protection		188			194

		950			941

		252,951			259,097

Loans in process		(3,342	)		(3,452	)
Deferred loan fees		(224	)		(224	)

	$	249,385		$	255,421

Loans are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan.

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Certain loans may remain on accrual status if they are in the process of collection and are 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 including impaired loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability 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 (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities, when required, on the consolidated balance sheet. The allowance for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. All, or part, of the principal balance of loans receivable that are deemed uncollectible are charged against the allowance when management determines that the repayment of that amount is highly unlikely. Any subsequent recoveries are credited to the allowance. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.

The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance calculation methodology includes segregation of the total loan portfolio into segments. The Savings Bank’s loans receivable portfolio is comprised of the following segments: residential mortgage, commercial real estate, construction, consumer and commercial and industrial. Some segments of the Savings Bank’s loan receivable portfolio are further disaggregated into classes which allows management to better monitor risk and performance.

The residential mortgage loan segment is disaggregated into two classes: one-to-four family loans, which are primarily first liens, and home equity loans, which consist of first and second liens. The commercial real estate loan segment consists of both owner and non owner occupied loans which have medium risk due to historical activity on these type loans. The construction loan segment is further disaggregated into two classes: One-to-four family owner occupied, which includes land loans, whereby the owner is known and there is less risk, and other, whereby the property is generally under development and tends to have more risk than the one-to-four family owner occupied loans. The commercial and industrial loan segment consists of loans made for the purpose of financing the activities of commercial customers. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts. The majority of commercial and industrial loans are secured by real estate and thus carry a lower risk than traditional commercial and industrial loans.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative factors. These qualitative risk factors include:

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.
2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.
3.	Nature and volume of the portfolio and terms of loans.
4.	Experience, ability, and depth of lending management and staff.

5.	Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications.
6.	Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.
7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.
8.	Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Impaired Loans

Management evaluates individual loans in all of the loan segments (including loans in residential mortgage and consumer segments) for possible impairment if the loan is greater than $200,000 and if the loan is either in nonaccrual status or is risk rated Substandard or worse. A loan is considered impaired when, based on current information and events, it is probable that the Savings Bank 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.

Loans whose terms are modified are classified as troubled debt restructurings (“TDRs”) 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 reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired until they are ultimately repaid in full or foreclosed and sold. The nature and extent of impairment of TDRs, including those which experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses.

Once the determination has been made that a loan is impaired, impairment is measured by comparing the recorded investment in the loan to one of the following: (a) present value of expected cash flows (discounted at the loan’s effective interest rate), (b) the loan’s observable market price or (c) the fair value of collateral adjusted for expected selling costs. The method is selected on a loan by loan basis with management primarily utilizing the fair value of collateral method.

The estimated fair values of the real estate collateral are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

The estimated fair values of the non-real estate collateral, such as accounts receivable, inventory and equipment, are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

The evaluation of the need and amount of the allowance for impaired loans and whether a loan can be removed from impairment status is made on a quarterly basis. The Savings Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a related allowance was required and those for which a related allowance was not necessary as of September 30, 2011 and June 30, 2011. The average recorded investment and interest income recognized is presented for the three month period ended September 30, 2011.

	As of September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no related allowance recorded:
Residential mortgage
One-to-four family	$	10,637	$	10,707	$	-	$	8,735	$	101
Home equity		2,806		2,814		-		1,940		31
Commercial real estate		3,555		3,570		-		3,586		39
Commercial and industrial		475		475		-		309		1
		17,473		17,566		-		14,570		172
With an allowance recorded:
Residential mortgage
One-to-four family		5,066		5,440		365		3,178		22
Home equity		1,265		1,694		299		1,025		2
Commercial real estate		459		459		23		229		-
Construction
Other		2,967		2,950		299		1,997		21
Commercial and industrial		754		754		95		627		-
		10,511		11,297		1,081		7,056		45
Total: (1)
Residential mortgage
One-to-four family		15,703		16,147		365		11,913		123
Home equity		4,071		4,508		299		2,965		33
Commercial real estate		4,014		4,029		23		3,815		39
Construction
Other		2,967		2,950		299		1,997		21
Commercial and industrial		1,229		1,229		95		936		1
	$	27,984	$	28,863	$	1,081	$	21,626	$	217

__________________

(1) As of September 30, 2011, impaired loans listed above included $15.1 million of loans previously modified in debt restructurings and as such considered impaired under GAAP. As of September 30, 2011, $10.0 million of these loans have been performing in accordance with their modified terms for an extended period of time and as such removed from non-accrual status and considered performing.

	As of June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
With no related allowance recorded:
Residential mortgage
One-to-four family	$	6,833	$	7,671	$	-
Home equity		1,074		1,267		-
Commercial real estate		3,618		3,633		-
Commercial and industrial		142		142		-
		11,667		12,713		-
With an allowance recorded:
Residential mortgage
One-to-four family		1,290		1,357		113
Home equity		786		1,031		149
Construction
Other		1,027		1,014		323
Commercial and industrial		500		500		100
		3,603		3,902		685
Total:
Residential mortgage
One-to-four family		8,123		9,028		113
Home equity		1,860		2,298		149
Commercial real estate		3,618		3,633		-
Construction
Other		1,027		1,014		323
Commercial and industrial		642		642		100
	$	15,270	$	16,615	$	685

Credit Quality Indicators

Management uses a ten point internal risk rating system to monitor the credit quality of the loans in the Savings Bank’s commercial real estate, construction and commercial and industrial loan segments. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually or when credit deficiencies, such as delinquent loan payments, arise. The criticized rating categories utilized by management generally follow bank regulatory definitions. The first six risk rating categories are considered not criticized, and are aggregated as “Pass” rated. The “Special Mention” category includes assets that are currently protected, but are potentially weak, resulting in increased credit risk and deserving management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified “Substandard” have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. These include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified “Doubtful” have all the weaknesses inherent in loans classified “Substandard” with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a “Loss” are considered uncollectible and subsequently charged off.

The following tables present the classes of the loans receivable portfolio summarized by the aggregate “Pass” and the criticized categories of “Special Mention”, “Substandard”, “Doubtful” and “Loss” within the internal risk rating system as of September 30, 2011 and June 30, 2011:

As of September 30, 2011	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Commercial real estate	$	29,314	$	1,700	$	2,306	$	474	$	23	$	33,817
Construction
One-to-four family owner occupied		4,360		-		-		-		-		4,360
Other		2,869		-		1,903		748		299		5,819
Commercial and Industrial		8,521		325		673		440		95		10,054

Total	$	45,064	$	2,025	$	4,882	$	1,662	$	417	$	54,050

As of June 30, 2011	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In Thousands)
Commercial real estate	$	28,017	$	900	$	3,144	$	474	$	-	$	32,535
Construction
One-to-four family owner occupied		7,113		-		-		-		-		7,113
Other		306		-		4,726		704		323		6,050
Commercial and Industrial		8,220		327		264		401		99		9,311

Total	$	43,656	$	1,227	$	8,134	$	1,579	$	422	$	55,018

Management further monitors the performance and credit quality of the loan receivable portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables represent the classes of the loans receivable portfolio summarized by aging categories of performing loans and non-accrual loans as of September 30, 2011 and June 30, 2011:

As of September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Nonaccrual Loans		Loans Receivable > 90 Days and Accruing
	(In Thousands)
Residential Mortgage
One-to-four family	$	3,445		1,993		7,467		12,905	$	131,497	$	144,402	$	9,142	$	982
Home equity		642		287		1,308		2,237		47,746		49,983		1,016		864
Commercial real estate		2,215		-		1,628		3,843		29,974		33,817		3,123		-
Construction
One-to-four family owner occupied		-		-		-		-		4,360		4,360		-		-
Other		-		-		1,027		1,027		4,792		5,819		1,026		-
Commercial and industrial		208		459		632		1,299		8,755		10,054		1,091		-
Consumer		-		-		-		-		950		950		-		-
Total	$	6,510	$	2,739	$	12,062	$	21,311	$	228,074	$	249,385	$	15,398	$	1,846

As of June 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Nonaccrual Loans		Loans Receivable > 90 Days and Accruing
	(In Thousands)
Residential Mortgage
One-to-four family	$	2,896		501		8,065		11,462	$	137,761	$	149,223	$	8,317	$	1,369
Home equity		594		42		1,315		1,951		48,288		50,239		950		934
Commercial real estate		1,856		-		1,628		3,484		29,051		32,535		3,132		-
Construction
One-to-four family owner occupied		-		-		-		-		7,113		7,113		-		-
Other		-		-		1,027		1,027		5,032		6,059		1,027		-
Commercial and industrial		165		-		642		807		8,504		9,311		642		-
Consumer		7		6		-		13		928		941		2		-
Total	$	5,518	$	549	$	12,677	$	18,744	$	236,677	$	255,421	$	14,070	$	2,303

In addition to internal reviews, the Savings Bank utilizes an external consultant to perform a stress test of its loan portfolio, at least annually, and the results are reviewed in conjunction with the overall evaluation of the adequacy of the allowance.

Allowance for Loan Losses

The following tables summarize the allowance for loan losses, by the portfolio segment segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2011 and June 30, 2011. The activity in the allowance for loan losses is presented for the three month period ended September 30, 2011 (in thousands):

	As of and for the three months ended September 30, 2011
	Residential Mortgage			Commercial Real Estate		Construction			Commercial and Industrial		Consumer			Total
Allowance for loan
losses:
Beginning Balance	$	1,130		$	303	$	514		$	211	$	12		$	2,170
Charge-offs		(21	)		-		-			-		(11	)	$	(32	)
Recoveries		-			-		-			-		-			-
Provisions		593			47		(53	)		14		12			613
Ending balance	$	1,702		$	350	$	461		$	225	$	13		$	2,751
Ending balance: individually evaluated for impairment	$	664		$	23	$	299		$	95	$	-		$	1,081
Ending balance: collectively evaluated for impairment	$	1,038		$	327	$	162		$	130	$	13		$	1,670

Loans receivables:
Ending balance	$	194,385		$	33,817	$	10,179		$	10,054	$	950		$	249,385
Ending balance: individually evaluated for impairment	$	11,664		$	3,606	$	2,967		$	1,091	$	-		$	19,328
Ending balance: collectively evaluated for impairment	$	182,721		$	30,211	$	7,212		$	8,963	$	950		$	230,057

	As of June 30, 2011
	Residential Mortgage		Commercial Real Estate		Construction		Commercial and Industrial		Consumer		Total
Allowance for loan
losses:
Ending Balance	$	1,130	$	303	$	514	$	211	$	12	$	2,170
Ending balance: individually evaluated for impairment	$	262	$	-	$	323	$	100	$	-	$	685
Ending balance: collectively evaluated for impairment	$	868	$	303	$	191	$	111	$	12	$	1,485

Loans receivables:
Ending balance	$	199,462	$	32,535	$	13,172	$	9,311	$	941	$	255,421
Ending balance: individually evaluated for impairment	$	9,983	$	3,618	$	1,027	$	642	$	-	$	15,270
Ending balance: collectively evaluated for impairment	$	189,479	$	28,917	$	12,145	$	8,669	$	941	$	240,151

Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Troubled Debt Restructurings

The recorded investment balance of TDRs totaled $15.1 million and $15.5 million at September 30, 2011 and June 30, 2011. The majority of the Savings Bank TDRs are on accrual status. TDRs on accrual status were $10.0 million and $12.3 million at September 30, 2011 and June 30, 2011, while TDRs on non-accrual status were $5.1 million and $3.2 million at these respective dates. At September 30, 2011 and June 30, 2011, the allowance for loan losses included specific reserves of $355,000 and $145,000 related to TDRs respectively.

The following table summarizes by class loans modified in troubled debt restructurings during the three month period ended September 30, 2011.

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
			(In Thousands)
Residential Mortgage
One-to-four family		4	$	1,334	$	1,334

Total		4	$	1,334	$	1,334

The following table summarizes loans modified in troubled debt restructuring during the previous 12 months and for which there was a subsequent payment default during the three months ended September 30, 2011. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The Savings Bank had four loans modified in troubled debt restructuring during the three month period ended September 30, 2011. Two of the loans were restructured as interest only for a one year period, while the remaining two loans were re-amortized, one over thirty years, the other over forty years.

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Pre-Modification Outstanding Recorded Investments

Residential Mortgage
One-to-four family		2	$	1,337	$	1,359
Commercial and industrial		1		205		205

Total		3	$	1,542	$	1,564

Note 8 - Securities Held to Maturity

The amortized cost of securities held to maturity and their estimated fair values as of September 30, 2011 and June 30, 2011, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2011	(In Thousands)

U.S U.S. Government Agencies:
Due after five through ten years	$	19	$	-	$	-	$	19
Due after ten years		58,259		484		44		58,699

		58,278		484		44		58,718


Mortgage-backed securities		6,335		270		-		6,605

	$	64,613	$	754	$	44	$	65,323

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2011	(In Thousands)

U.S U.S. Government Agencies:
Due after five years through ten years	$	9,020	$	-	$	84	$	8,936
Due after ten years		31,246		200		303		31,143

		40,266		200		387		40,079


Mortgage-backed securities		1,427		96		—		1,523

	$	41,693	$	296	$	387	$	41,602

All mortgage-backed securities at September 30, 2011 have been issued by FNMA, FHLMC or GNMA and are secured by one-to-four family residential real estate. The amortized cost and estimated fair value of securities held to maturity at September 30, 2011 and June 30, 2011, as shown above, are reported by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were no sales of trading securities or securities held to maturity during the three months ended September 30, 2011 or 2010. At September 30, 2011 and June 30, 2011, securities held to maturity with a fair value of approximately $831,000 and $1,094,0000, respectively, were pledged to secure public funds on deposit and the treasury, tax and loan account.

The following tables set forth the gross unrealized losses and estimated fair value of securities in an unrealized loss position as of September 30, 2011 and June 30, 2011, and the length of time that such securities have been in a continuous unrealized loss position:

Less than 12 Months

More than 12 Months

Total

Estimated

Fair

Value

Gross

Unrealized

Losses

Estimated Fair

Value

Gross

Unrealized

Losses

Estimated Fair

Value

Gross

Unrealized

Losses

(In Thousands)