Edgar Filing: MSB FINANCIAL CORP.

f10q_123112-5468.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

December 31, 2012

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: February 8, 2013:

$0.10 par value common stock 5,015,937 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 December 31, 2012 and June 30, 2012	2

	Consolidated Statements of Comprehensive (Loss) Income for the
	Three and Six Months Ended December 31, 2012 and 2011	3

	Consolidated Statements of Cash Flows for the Six Months
	Ended December 31, 2012 and 2011	5

	Notes to Consolidated Financial Statements (Unaudited)	6

Item 2:	Management’s Discussion and Analysis of	34
	Financial Condition and Results of Operations

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4:	Controls and Procedures	42


PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	42

Item 1A:	Risk Factors	42

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3:	Defaults Upon Senior Securities	43

Item 4:	Mine Safety Disclosures	43

Item 5:	Other Information	43

Item 6:	Exhibits	43

SIGNATURES		44

CERTIFICATIONS

ITEM 1 – CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MSB FINANCIAL CORP AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	December 31,			June 30,
	2012			2012
	(Dollars in thousands, except per share amount)

Cash and due from banks	$	11,924		$	21,090
Interest-earning demand deposits with banks		3,713			12,667

Cash and Cash Equivalents		15,637			33,757

Trading securities		-			52
Securities held to maturity (fair value of $70,878 and $51,540, respectively)		69,938			50,706
Loans receivable, net of allowance for loan losses of $5,320 and $3,065, respectively		233,752			240,520
Other real estate owned		784			—
Premises and equipment		9,140			9,400
Federal Home Loan Bank of New York stock, at cost		1,365			1,365
Bank owned life insurance		6,811			6,115
Accrued interest receivable		1,223			1,341
Other assets		4,987			4,091

Total Assets	$	343,637		$	347,347
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	17,829		$	17,251
Interest bearing		264,180			266,547

Total Deposits		282,009			283,798

Advances from Federal Home Loan Bank of New York		20,000			20,000
Advance payments by borrowers for taxes and insurance		72			97
Other liabilities		2,522			2,574

Total Liabilities		304,603			306,469

Commitments and Contingencies		—			—
Stockholders’ Equity
Common stock, par value $0.10; 10,000,000 shares authorized; 5,620,625 issued; 5,020,137 and 5,085,292 shares outstanding, respectively		562			562
Paid-in capital		24,353			24,214
Retained earnings		20,400			22,067
Unallocated common stock held by ESOP (101,171 and 109,602 shares, respectively)		(1,012	)		(1,096	)
Treasury stock, at cost, 600,488 and 535,333 shares, respectively		(5,176	)		(4,768	)
Accumulated other comprehensive loss		(93	)		(101	)

Total Stockholders’ Equity		39,034			40,878

Total Liabilities and Stockholders’ Equity	$	343,637		$	347,347

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2012			2011		2012			2011
	(In thousands, except share amounts)
Interest Income:
Loans receivable, including fees	$	2,618		$	3,010	$	5,368		$	6,113
Securities held to maturity		360			518		725			1,003
Other		22			21		49			44
Total Interest Income		3,000			3,549		6,142			7,160

Interest Expense
Deposits		517			710		1,072			1,450
Borrowings		172			172		344			345
Total Interest Expense		689			882		1,416			1,795

Net Interest Income		2,311			2,667		4,726			5,365

Provision for Loan Losses		2,973			375		3,719			988

Net Interest (Loss) Income after Provision for Loan Losses		(662	)		2,292		1,007			4,377

Non-Interest Income
Fees and service charges		78			82		161			165
Income from bank owned life insurance		56			51		108			101
Unrealized gain (loss) on trading securities		0			3		1			(12	)
Other		28			37		51			63
Total Non-Interest Income		162			173		321			317

Non-Interest Expenses
Salaries and employee benefits		986			957		1,921			1,942
Directors compensation		129			116		256			231
Occupancy and equipment		349			377		705			787
Service bureau fees		127			108		266			216
Advertising		32			48		72			96
FDIC assessment		72			75		146			148
Professional services		171			125		285			262
Other		256			253		475			437
Total Non-Interest Expenses		2,122			2,059		4,126			4,119

(Loss) Income before Income Taxes		(2,622	)		406		(2,798	)		575
Income Taxes		(1,047	)		182		(1,131	)		240
Net (Loss) Income		(1,575	)		224		(1,667	)		335
Weighted average number of common stock shares
outstanding - basic and diluted		4,940			5,015		4,950			5,028
(Loss) Earnings per common share - basic and diluted	$	(.32	)	$	.04	$	(.34	)	$	.07

See notes to unaudited consolidated financial statements.

MSB FINANCIAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

Consolidated Statements of Comprehensive (Loss) Income – (Continued)

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2012			2011		2012			2011
	(In thousands, except per share amounts)
Other comprehensive income, net of tax

Defined benefit pension plans:
Amortization of prior service cost included in net periodic	$	1		$	2	$	3		$	3
pension cost, net of tax of $1 and $1; and $2 and $3, for the
three and six months, respectively.

Less: amortization of unrecognized loss, net of tax of $2 and $1;
and $4 and $2 for the three and six months, respectively.		3			2		5			4

Other comprehensive income		4			4		8			7

Comprehensive (loss) income	$	(1,571	)	$	228	$	(1,659	)	$	342

See notes to unaudited consolidated financial statements.

MSB Financial Corp and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended December 31,
	2012			2011
	(In thousands)
Cash Flows from Operating Activities:
Net (Loss) Income	$	(1,667	)	$	335
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Net accretion of securities discounts and deferred loan fees and costs		(186	)		(65	)
Depreciation and amortization of premises and equipment		289			301
Stock based compensation and allocation of ESOP stock		223			220
Provision for loan losses		3,719			988
(Gain) loss on sale of other real estate owned		14			(9	)
Income from bank owned life insurance		(108	)		(101	)
Unrealized (gain) loss on trading securities		(1	)		12
Decrease (increase) in accrued interest receivable		118			(153	)
Increase in other assets		(902	)		(200	)
Increase (decrease) in other liabilities		(36	)		74
Net Cash Provided by Operating Activities		1,463			1,402

Cash Flows from Investing Activities:
Activity in held to maturity securities:
Purchases		(42,810	)		(39,970	)
Maturities, calls and principal repayments		23,656			17,421
Net decrease in loans receivable		1,840			7,610
Purchase of premises and equipment		(29	)		(59	)
Purchase of bank owned life insurance		(588	)		—
Proceeds from sale of other real estate owned		517			870
Proceeds from sale of trading securities		53			—
Net Cash Used in Investing Activities		(17,361	)		(14,128	)

Cash Flows from Financing Activities:
Net (decrease) increase in deposits		(1,789	)		915
Decrease in advance payments by borrowers for taxes and insurance		(25	)		(164	)
Cash dividends paid to minority shareholders		—			(109	)
Purchase of treasury stock		(408	)		(374	)
Net Cash (Used in) Provided by Financing Activities		(2,222	)		268

Net Decrease in Cash and Cash Equivalents		(18,120	)		(12,458	)
Cash and Cash Equivalents – Beginning		33,757			30,976
Cash and Cash Equivalents – Ending	$	15,637		$	18,518

Supplementary Cash Flows Information
Interest paid	$	1,417		$	1,789
Income taxes paid	$	150		$	—
Loan receivable transferred to other real estate owned	$	1,317		$	—

See notes to unaudited 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 business is the ownership and operation of the Savings Bank.

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 of the Savings Bank. The MHC has not engaged in any significant business other than its ownership interest in the Company since its formation. So long as the MHC is in existence, it will at all times own a majority of the outstanding stock of the Company. At December 31, 2012, the MHC owned 61.6% of the Company’s outstanding common shares.

The Savings Bank is a New Jersey chartered stock savings bank and its deposits are insured by the Federal Deposit Insurance Corporation. The primary business of the Savings Bank is attracting retail deposits from the general public and using those deposits together with funds generated from operations, principal repayments on securities and loans and borrowed funds, for its lending and investing activities. The Savings Bank’s loan portfolio primarily consists of one-to-four family residential loans, commercial loans, and consumer loans. It also invests in U.S. government obligations and mortgage-backed securities. The Savings Bank is regulated by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. The Board of Governors of the Federal Reserve System (the “Federal Reserve”) regulates the MHC and the Company as savings and loan holding companies.

The primary business of Millington Savings Service Corp (the “Service Corp”) was the ownership and operation of a single commercial rental property. This property was sold during the year ended June 30, 2007. Currently the Service Corp is inactive.

Note 2 – Basis of Consolidated Financial Statement Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Savings Bank, and the Savings Bank’s wholly owned subsidiary the Service Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X, and therefore, do not include all information or notes 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”).

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 December 31, 2012 and June 30, 2012 and for the three and six months ended December 31, 2012 and 2011. The results of operations for the three and six months ended December 31, 2012 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 at June 30, 2012 was derived from the Company’s audited consolidated financial statements as of and for the year then ended. That data, along with the interim financial information presented in the consolidated statements of financial condition, comprehensive (loss) income, and cash flows should be read in conjunction with the audited consolidated financial statements as of and for the year ended June 30, 2012, including the notes thereto included in the Company’s Annual Report on Form 10-K.

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 dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses all available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the Savings Bank’s market area. 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 Savings Bank 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 and six months ended December 31, 2012 and 2011, 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 (the “2008 Plan”). This plan permits the granting of up to 275,410 options to purchase Company common stock. Pursuant to the 2008 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 Company’s common stock at 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 December 31, 2012, stock based compensation expense not yet recognized in income amounted to $55,000 which is expected to be recognized over a weighted average remaining period of 0.3 years.

The Company recognized stock based compensation expense related to these awards of $41,000 and $82,000 for each of the three and six month periods ended December 31, 2012 and 2011, respectively.

On November 9, 2009 the Company’s 2008 Plan was amended. The primary purpose of the amendment 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. The Company repurchased 110,164 shares of the Company common stock for an aggregate purchase price of $932,000 and on December 14, 2009 granted the shares to certain employees and directors. The restricted stock awards vest 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. During each of the three and six month periods ended December 31, 2012 and 2011, the Company recognized stock based compensation expense related to these awards of $45,000 and $90,000 with a tax benefit of $18,000 and $36,000, respectively. As of December 31, 2012, $351,000 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.

Assets Measured at Fair Value on a Recurring Basis

The following table summarizes financial assets measured at fair value on a recurring basis at June 30, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	June 30, 2012
	Level 1 Inputs			Level 2 Inputs			Level 3 Inputs			Total Fair Value
	(In thousands)

Trading securities		$	52		$	—		$	—		$	52

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 condition date. There were no assets measured at fair value on a recurring basis at December 31, 2012.

Assets Measured at Fair Value on a Non-Recurring Basis

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 summarizes those assets measured at fair value on a non-recurring basis as of December 31, 2012 and June 30, 2012:

	December 31, 2012
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In thousands)
Impaired loans	$	—	$	—	$	9,579		$	9,579
Other real estate owned	$	—	$	—	$	784			784

	June 30, 2012
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In thousands)
Impaired loans	$	—	$	—	$	10,683	$	10,683

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 payments 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 June 30, 2012 there was no further impairment of the other real estate owned balance below the cost basis established at the time the other real estate owned was originally recognized.

For Level 3 assets measured at fair value on non-recurring basis as of December 31, 2012 and June 30, 2012, the significant unobservable inputs used in fair value measurements were as follows:

As of December 31, 2012

Fair Value
Estimate

Valuation
Techniques

Unobservable

Input

Range (Weighted
Average)

(Dollars in thousands)

Impaired loans

9,579

Appraisal of

Appraisal

collateral

adjustments

0% to - 18.4% (2.9%)

Liquidation

expense

4.8% to -18.8% (9.6%)

Other real estate owned

784

Appraisal of

Liquidation

collateral

expense

4.0% -5.0% (4.3%)

As of June 30, 2012

Fair Value
Estimate

Valuation
Techniques

Unobservable

Input

Range (Weighted
Average)

(Dollars in thousands)

Impaired loans

10,683

Appraisal of

Appraisal

collateral

adjustments

0% to - 19.5% (6.5%)

Liquidation

expense

4.6% to -28.2% (8.1%)

Disclosure about Fair Value of Financial Instruments

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 following presents the carrying amount and the fair value as of December 31, 2012 and June 30, 2012, and placement in the fair value hierarchy, of the Company’s financial instruments which are carried on the consolidated statement of financial condition at cost and are not measured or recorded at fair value on a recurring basis. This table excludes financial instruments for which the carrying amount approximates fair value, which includes cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable, interest and non-interest bearing demand, savings and club deposits, and accrued interest payable.

	Carrying		Fair		Level 1		Level 2		Level 3
As of December 31, 2012	Amount		Value		Inputs		Inputs		Inputs

Financial assets:
Securities held to maturity	$	69,938	$	70,878	$	-	$	70,878	$	-
Loans receivable (1)		233,752		239,994		-		-	$	239,994

Financial liabilities:
Certificate of deposits		114,716		116,740		-		116,740		-
Advances from Federal Home Loan Bank of New York		20,000		21,186		-		21,186		-

As of June 30, 2012
Financial assets:
Securities held to maturity		50,706		51,540		-		51,540		-
Loans receivable (1)		240,520		245,055		-				245,055

Financial liabilities:
Certificate of deposits		119,656		122,135		-		122,135		-
Advances from Federal Home Loan Bank of New York		20,000		22,455		-		22,455		-

(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 instruments not previously disclosed are as follows:

Cash and Cash Equivalents

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

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 Company’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 repricing date, repricing frequency and repricing 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 and savings and club accounts are, by definition, equal to the amount payable on demand at the reporting date. Fair values of 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 December 31, 2012 and June 30, 2012, 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 December 31, 2012 and June 30, 2012 was as follows:

	December 31, 2012			June 30, 2012
	(In thousands)
Residential mortgage:
One-to-four family	$	139,922		$	141,927
Home equity		46,169			49,224

		186,091			191,151

Commercial real estate		32,206			32,181
Construction		11,608			11,669
Commercial and industrial		10,529			10,092

		54,343			53,942
Consumer:
Deposit accounts		676			728
Automobile		165			194
Personal		26			23
Overdraft protection		175			162

		1,042			1,107

		241,476			246,200

Loans in process		(2,032	)		(2,261	)
Deferred loan fees		(372	)		(354	)

	$	239,072		$	243,585

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 fees, net of certain direct loan 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 statement of financial condition 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 statement of financial condition. 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 for loan losses 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 loan 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.

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 Savings Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.

The allowance calculation methodology includes segregation of the total loan portfolio into segments. The Company’s loans receivable portfolio is comprised of the following segments: residential mortgage, commercial real estate, construction, commercial and industrial and consumer. Some segments of the Company’s loan receivable portfolio are further disaggregated into classes which allows management to more accurately 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 includes owner and non-owner occupied loans which have medium risk based on historical experience with 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 majority of commercial and industrial loans are secured by real estate and thus carry a lower risk than traditional commercial and industrial loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

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 recorded investment in the loan is greater than $200,000 and if the loan is either in nonaccrual status or is risk rated Substandard or worse or has been modified in a troubled debt restructuring. 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.

Loans whose terms are modified are classified as a troubled debt restructuring (“TDR”) if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in interest rate, a below market rate given the associated credit risk, or an extension of a loan’s stated maturity date. Non-accrual TDRs 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 TDRs 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) the 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 Company’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 December 31, 2012 and June 30, 2012. The average recorded investment and interest income recognized is presented for the three and six month periods ended December 31, 2012 and 2011.

	December 31, 2012						June 30, 2012
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Residential mortgage
One-to-four family	$	11,316	$	11,835	$	-	$	10,622	$	10,980	$	-
Home equity		3,563		3,637		-		2,933		3,071		-
Commercial real estate		827		842		-		2,995		3,032		-
Construction
One-to-four family occupied		-		-				225		225
Other		-		-		-		-		-		-
Commercial and industrial		499		499		-		342		342		-
		16,205		16,813		-		17,117		17,650		-
With an allowance recorded:
Residential mortgage
One-to-four family		3,203		3,671		156		4,096		4,637		304
Home equity		904		1,362		107		719		988		264
Commercial real estate		2,498		2,726		307		459		459		41
Construction
One-to-four family occupied		1,708		1,937		17		1,940		1,940		147
Other		760		735		65		1,033		1,007		190
Commercial and industrial		605		689		178		722		722		153
		9,678		11,120		830		8,969		9,753		1,099
Total:
Residential mortgage
One-to-four family		14,519		15,506		156		14,718		15,617		304
Home equity		4,467		4,999		107		3,652		4,059		264
Commercial real estate		3,325		3,568		307		3,454		3,491		41
Construction
One-to-four family occupied		1,708		1,937		17		2,165		2,165		147
Other		760		735		65		1,033		1,007		190
Commercial and industrial		1,104		1,188		178		1,064		1,064		153
	$	25,883	$	27,933	$	830	$	26,086	$	27,403	$	1,099

As of December 31, 2012 and June 30, 2012, impaired loans listed above included $14.9 million and $15.4 million, respectively, of loans previously modified in TDRs and as such are considered impaired under GAAP. As of December 31, 2012 and June 30, 2012, $8.5 million and $8.3 million, respectively, of these loans have been performing in accordance with their modified terms for an extended period of time and as such remain in accrual status.

	Three Months Ended December 31, 2012				Three Months Ended December 31, 2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Residential
One-to-four family	$	11,034	$	83	$	10,710	$	67
Home equity		3,566		31		2,836		36
Commercial real estate		1,173		9		3,134		18
Construction
One-to-four family occupied		855		-		-		-
Other		382		-		-		-
Commercial and industrial		396		9		409		3
		17,406		132		17,089		124
With an allowance recorded:
Residential mortgage
One-to-four family		4,014		16		4,086		16
Home equity		587		-		1,182		-
Commercial real estate		2,174		12		459		13
Construction
One-to-four family occupied		854		21		970		21
Other		380		-		1,997		-
Commercial and industrial		611		2		747		7
		8,620		51		9,441		57
Total:
Residential mortgage
One-to-four family		15,048		99		14,796		83
Home equity		4,153		31		4,018		36
Commercial real estate		3,347		21		3,593		31
Construction
One-to-four family occupied		1,709		21		970		21
Other		762		-		1,997		-
Commercial and industrial		1,007		11		1,156		10
	$	26,026	$	183	$	26,530		181

	Six Months Ended December 31, 2012				Six Months Ended December 31, 2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Residential
One-to-four family	$	10,897	$	165	$	8,807	$	168
Home equity		3,355		69		1,970		67
Commercial real estate		1,780		16		3,165		57
Construction
One-to-four family occupied		645		-		-		-
Other		255		-		-		-
Commercial and industrial		378		15		243		4
		17,310		265		14,185		296
With an allowance recorded:
Residential mortgage
One-to-four family		4,041		41		2,198		38
Home equity		631		7		943		2
Commercial real estate		1,602		19		229		13
Construction
One-to-four family occupied		1,216		41		970		42
Other		598		-		1,027		-
Commercial and industrial		648		3		620		7
		8,736		111		5,987		102
Total:
Residential mortgage
One-to-four family		14,938		206		11,005		206
Home equity		3,986		76		2,913		69
Commercial real estate		3,382		35		3,394		70
Construction
One-to-four family occupied		1,861		41		970		42
Other		853		-		1,027		-
Commercial and industrial		1,026		18		863		11
	$	26,046	$	376	$	20,172		398

Credit Quality Indicators

Management uses a ten point internal risk rating system to monitor the credit quality of the loans in the Company’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 December 31, 2012 and June 30, 2012:

As of December 31, 2012	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
Commercial real estate	$	26,893	$	2,495	$	750	$	1,748	$	258	$	32,144
Construction
One-to-four family owner occupied		3,600		-		1,691		-		17		5,308
Other		2,339		1,150		-		695		66		4,250
Commercial and Industrial		9,062		358		347		559		178		10,504

Total	$	41,894	$	4,003	$	2,788	$	3,002	$	519	$	52,206

As of June 30, 2012	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
Commercial real estate	$	26,610	$	2,861	$	1,355	$	1,262	$	41	$	32,129
Construction
One-to-four family owner occupied		1,774		1,793		225		-		147		3,939
Other		3,322		1,150		-		791		190		5,453
Commercial and Industrial		8,767		68		207		874		153		10,069

Total	$	40,473	$	5,872	$	1,787	$	2,927	$	531	$	51,590

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 December 31, 2012 and June 30, 2012:

As of December 31, 2012	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	$	3,163		2,284		7,171		12,618	$	127,039	$	139,657	$	8,744	$	1,097
Home equity		1,363		70		1,336		2,769		43,398		46,167		1,482		185
Commercial real estate		1,912		-		1,468		3,380		28,764		32,144		2,687		-
Construction
One-to-four family owner occupied		-		-		-		-		5,308		5,308		-		-
Other		-		-		760		760		3,490		4,250		761		-
Commercial and industrial		445		58		502		1,005		9,499		10,504