CMS Bancorp, Inc. - FORM 10-Q

CMS Bancorp, Inc. - FORM 10-Q - May 13, 2011

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EX-32.1 - SECTION 906 CEO CERTIFICATION - CMS Bancorp, Inc.	dex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - CMS Bancorp, Inc.	dex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - CMS Bancorp, Inc.	dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - CMS Bancorp, Inc.	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from To

Commission File Number: 001-33322

CMS Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-8137247

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

123 Main Street, White Plains, New York 10601

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code 914-422-2700

(Former name, former address and former fiscal year, if changed since last report)

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 ¨ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of May 13, 2011 there were 1,862,803 shares of the registrant’s common stock, par value $.01 per share, outstanding.

CMS Bancorp, Inc.

INDEX


		Page Number
Part I - FINANCIAL INFORMATION

Item 1:	Financial Statements

	Consolidated Statements of Financial Condition as of March 31, 2011 and September 30, 2010 (Unaudited)		3

	Consolidated Statements of Operations for the Three Months and Six Months Ended March 31, 2011 and 2010 (Unaudited)		4

	Consolidated Statements of Comprehensive (Loss) for the Three Months and Six Months Ended March 31, 2011 and 2010 (Unaudited)		5

	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010 (Unaudited)		6

	Notes to Consolidated Financial Statements (Unaudited)		7

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3:	Quantitative and Qualitative Disclosures about Market Risk		35

Item 4:	Controls and Procedures		35

Part II - OTHER INFORMATION

Item 6:	Exhibits		36

SIGNATURES			37

Part I: Financial Information

Item 1. Financial Statements

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	March 31,			September 30,
	2011			2010
	(Dollars in thousands, except per share data)
ASSETS

Cash and amounts due from depository institutions	$	1,061		$	818
Interest-bearing deposits		4,156			2,616

Total cash and cash equivalents		5,217			3,434
Securities available for sale		54,483			56,336
Loans held for sale		393			557
Loans receivable, net of allowance for loan losses of $1,169 and $1,114, respectively		178,085			179,066
Premises and equipment		2,803			2,945
Federal Home Loan Bank of New York stock		1,952			1,956
Interest receivable		946			988
Other assets		2,469			2,103

Total assets	$	246,348		$	247,385


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	17,740		$	14,094
Interest bearing		169,426			174,212

Total deposits		187,166			188,306
Advances from Federal Home Loan Bank of New York		34,500			34,578
Advance payments by borrowers for taxes and insurance		1,670			849
Other liabilities		1,396			1,896

Total liabilities		224,732			225,629

Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding		—			—
Common stock, $.01 par value, authorized shares:
7,000,000; shares issued: 2,055,165; shares outstanding:
1,862,803		21			21
Additional paid-in capital		18,380			18,272
Retained earnings		6,641			6,511
Treasury stock, 192,362 shares		(1,660	)		(1,660	)
Unearned Employee Stock Ownership Plan (“ESOP”) shares		(1,425	)		(1,452	)
Accumulated other comprehensive income (loss)		(341	)		64

Total stockholders’ equity		21,616			21,756


Total liabilities and stockholders’ equity	$	246,348		$	247,385

See notes to consolidated financial statements.

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	2,558		$	2,512		$	5,100		$	5,016
Securities		236			231			492			540
Other interest-earning assets		36			52			84			92

Total interest income		2,830			2,795			5,676			5,648

Interest expense:
Deposits		469			456			975			1,009
Mortgage escrow funds		5			6			14			11
Borrowings, short term		—			5			—			13
Borrowings, long term		424			418			845			844

Total interest expense		898			885			1,834			1,877


Net interest income		1,932			1,910			3,842			3,771
Provision for loan losses		30			—			55			60

Net interest income after provision for loan losses		1,902			1,910			3,787			3,711

Non-interest income:
Fees and service charges		37			53			84			107
Net gain on sale of loans		37			90			178			176
Net gain on sale of securities		—			—			—			208
Other		3			5			4			7

Total non-interest income		77			148			266			498

Non-interest expense:
Salaries and employee benefits		1,058			1,037			2,103			2,080
Net occupancy		310			302			601			587
Equipment		180			177			362			350
Professional fees		104			239			273			375
Advertising		18			26			32			74
Federal insurance premiums		70			67			138			135
Directors’ fees		59			58			105			109
Other insurance		21			21			42			39
Bank charges		15			20			28			39
Other		157			159			312			289

Total non-interest expense		1,992			2,106			3,996			4,077

Income (loss) before income taxes		(13	)		(48	)		57			132
Income tax expense (benefit)		(53	)		(13	)		(73	)		65

Net income (loss)	$	40		$	(35	)	$	130		$	67

Net income (loss) per common share:
Basic and diluted	$	0.02		$	(0.02	)	$	0.08		$	0.04

Weighted average number of common shares outstanding:
Basic and diluted		1,703,956			1,698,019			1,703,495			1,697,327

See notes to consolidated financial statements.

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(Unaudited)


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(In thousands)
Net income (loss)	$	40		$	(35	)	$	130		$	67

Other comprehensive income (loss):
Gross unrealized holding gains (losses) on securities available for sale		(81	)		47			(668	)		(42	)
Gross unrealized holding gains on available for sale securities transferred to income on sale or call of securities		—			—			—			(199	)
Retirement plan		(3	)		(22	)		(5	)		(39	)

		(84	)		25			(673	)		(280	)
Deferred income taxes		33			(9	)		268			112

Other comprehensive income (loss) net of income taxes		(51	)		16			(405	)		(168	)

Comprehensive (loss)	$	(11	)	$	(19	)	$	(275	)	$	(101	)

See notes to consolidated financial statements.

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	March 31,
	2011			2010
	(In thousands)
Cash flows from operating activities:
Net income	$	130		$	67
Adjustments to reconcile net income to net cash provided by (used by) operating activities:
Depreciation of premises and equipment		185			188
Amortization and accretion, net		147			172
Provision for loan losses		55			60
Deferred income taxes (benefit)		(112	)		(94	)
ESOP expense		25			20
Stock option expense		44			43
Restricted stock award expense		66			64
Net gain on sale of securities		—			(208	)
Net gain on sale of loans		(178	)		(176	)
Loans originated for sale		(9,398	)		(8,663	)
Proceeds from sale of loans originated for sale		9,740			8,915
Decrease in interest receivable		42			36
Decrease (increase) in other assets		14			(1,058	)
(Decrease) in accrued interest payable		(58	)		(303	)
(Decrease) increase in other liabilities		(447	)		277

Net cash provided by (used by) operating activities		255			(660	)

Cash flows from investing activities:
Proceeds from sale of securities available for sale		—			10,114
Proceeds from sale of securities held to maturity		—			163
Purchases of securities available for sale		(4,000	)		(11,023	)
Principal repayments and calls on securities available for sale		5,125			19,236
Principal repayments on securities held to maturity		—			2
Net decrease (increase) in loans receivable		839			(6,793	)
Additions to premises and equipment		(43	)		(90	)
Redemption (purchase) of Federal Home Loan Bank of N.Y. stock		4			(253	)

Net cash provided by investing activities		1,925			11,356

Cash flows from financing activities:
Net (decrease) in deposits		(1,140	)		(22,472	)
Advances from Federal Home Loan Bank of N.Y.		—			5,700
Repayment of advances from Federal Home Loan Bank of N.Y.		(78	)		(73	)
Net increase in payments by borrowers for taxes and insurance		821			759

Net cash (used by) financing activities		(397	)		(16,086	)

Net increase (decrease) in cash and cash equivalents		1,783			(5,390	)
Cash and cash equivalents-beginning		3,434			7,304

Cash and cash equivalents-ending	$	5,217		$	1,914

Supplemental information
Cash paid during the period for:
Interest	$	1,892		$	2,180

Income taxes	$	60		$	18

See notes to consolidated financial statements.

CMS Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The consolidated financial statements include the accounts of CMS Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Community Mutual Savings Bank (the “Bank”). The Company’s business is conducted principally through the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current presentation.

2. Description of Operations

The Bank was originally chartered in 1887 as Community Savings and Loan, a New York State-chartered savings and loan association. In 1980, it converted to a New York State-chartered savings bank and changed its name to Community Mutual Savings Bank of Southern New York. In 1983, Community Mutual Savings Bank of Southern New York changed its name to Community Mutual Savings Bank. In 2007, the Bank reorganized to a federally-chartered mutual savings bank and simultaneously converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank, with the concurrent formation of the Company. The Company, a stock holding company for the Bank, conducted a public offering of its common stock in connection with the conversion. After the 2007 conversion and offering, all of the Bank’s stock is owned by the Company.

The Bank is a community and customer-oriented retail savings bank offering residential mortgage loans and traditional deposit products and, to a lesser extent, commercial real estate, small business and consumer loans in Westchester County, New York, and the surrounding areas. The Bank also invests in various types of assets, including securities of various government-sponsored enterprises and mortgage-backed securities. The Bank’s revenues are derived principally from interest on loans, interest and dividends received from its investment securities and fees for bank services. The Bank’s primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities, funds provided by operations and borrowings from the Federal Home Loan Bank of New York (“FHLB”).

3. Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and 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 (“US GAAP”). However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three months and six months ended March 31, 2011 are not necessarily indicative of the results which may be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2010, which are in the Company’s Annual Report for the fiscal year ended September 30, 2010, filed with the Securities and Exchange Commission on December 15, 2010.

The Company follows Financial Accounting Standards Board (“FASB”) guidance on subsequent events, which establishes general standards for accounting for and disclosure of events that occur after the statement of financial condition date but before the financial statements are issued. This guidance sets forth the period after the statement of financial condition date during which management of the reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the statement of financial condition date in its financial statements, and the disclosure that should be made about events or transactions that occur after the statement of financial condition date. In preparing these consolidated financial statements, the Company evaluated the events that occurred after March 31, 2011 and through the date these consolidated financial statements were issued.

4. Critical Accounting Policies

The consolidated financial statements included in this report have been prepared in conformity with accounting principles generally accepted in the United States of America. 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 statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

It is management’s opinion that accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the potential impairment of FHLB stock, the determination of other-than-temporary impairment on securities, and the assessment of whether deferred taxes are more likely than not to be realized.

Management believes that the allowance for loan losses represents its best estimate of losses known and inherent in the loan portfolio that are both probable and reasonable to estimate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in market and economic conditions in the Company’s market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’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 examination. Management’s determination of whether investments, including FHLB stock, are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Management’s assessment as to the amount of deferred taxes more likely than not to be realized is based upon future taxable income, which is subject to revision upon updated information.

5. Net Income Per Share

Basic net income per share was computed by dividing the net income by the weighted average number of shares of common stock outstanding, adjusted for unearned shares of the Company’s employee stock ownership plan, or “ESOP”. Stock options granted are considered common stock equivalents and are therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. All outstanding stock options were anti-dilutive and therefore excluded from the computation of diluted net income per share for the three month and six month periods ended March 31, 2011 and 2010.

6. Retirement Plan – Components of Net Periodic Pension Cost

The components of periodic pension expense were as follows:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(In thousands)
Service cost	$	—		$	28		$	—		$	91
Interest cost		57			73			133			123
Expected return on plan assets		(53	)		(48	)		(98	)		(83	)
Amortization of prior service cost		—			6			—			8
Amortization of unrecognized loss		3			16			5			31

Total	$	7		$	75		$	40		$	170

On January 28, 2010, the Board of Directors passed a resolution to suspend the accrual of benefits under the Company’s defined benefit pension plan and the suspension became effective during the three month period ended March 31, 2010.

7. Stock Based Compensation

In November 2009, the Company granted 8,300 options to purchase shares of the Company’s common stock at an exercise price of $7.25 per share. The stock options awarded vest over a five year service period based on the anniversary of the grant date. The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions for options granted in November 2009: risk-free interest rate of 3.37%; volatility factor of expected market price of the Company’s common stock of 24.1%; weighted average expected lives of the options of 7 years; and no cash dividends. The calculated weighted average fair value of options granted using these assumptions was $2.49 per option.

In May 2010, the Company granted 6,000 options to purchase shares of the Company’s common stock at an exercise price of $8.35 per share. The stock options awarded vest over a five year service period based on the anniversary of the grant date. The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions for options granted in May 2010: risk-free interest rate of 3.34%; volatility factor of expected market price of the Company’s common stock of 44.5%; weighted average expected lives of the options of 7 years; and no cash dividends. The calculated weighted average fair value of options granted using these assumptions was $4.25 per option.

The Company recorded compensation expense with respect to stock options of $22,000 during each of the three month periods ended March 31, 2011 and 2010, respectively, and $44,000 and $43,000 during the six month periods ended March 31, 2011 and 2010, respectively. Unrecognized compensation expense associated with stock option grants as of March 31, 2011 was $169,000.

The Company has a Management Recognition Plan (“MRP”). The shares of restricted stock awarded under the MRP vest over a five year service period based on the anniversary of the grant date. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of the shares covered under the MRP. The Company recognizes compensation expense for the fair value of the shares covered by the MRP on a straight line basis over the requisite service period. In November 2007, November 2009, May 2010 and January 2011, 61,701 shares, 4,150 shares, 2,000 shares and 3,008 shares, respectively, of restricted stock were awarded under the MRP, of which 32,609 were non-vested as of March 31, 2011.

The Company recorded compensation expense with respect to such restricted stock of $33,000 and $32,000 during the three month periods ended March 31, 2011 and 2010, and $66,000 and $64,000 during the six month periods ended March 31, 2011 and 2010, respectively. Unrecognized compensation associated with grants of restricted stock as of March 31, 2011 was $264,000.

In April 2011, the Company granted 8,300 options to purchase shares of the Company’s common stock at an exercise price of $8.66 per share. The stock options awarded vest over a five year service period based on the anniversary of the grant date. The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions for options granted in April 2011: risk-free interest rate of 3.39%; volatility factor of expected market price of the Company’s common stock of 39.1%; weighted average expected lives of the options of 7 years; and no cash dividends. The calculated weighted average fair value of options granted using these assumptions was $4.05 per option.

In April 2011, 4,150 shares of restricted stock were awarded under the MRP, which vest over a five year service period based on the anniversary of the grant date. The fair value of each share was $8.66 at the grant date.

8. Securities

Securities available for sale as of March 31, 2011 and September 30, 2010 were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
March 31, 2011
U.S. Government agencies:
Due after one but within five years	$	37,251	$	123	$	386	$	36,988
Due after five but within ten years		1,007		1		—		1,008
Mortgage-backed securities		16,315		219		47		16,487

	$	54,573	$	343	$	433	$	54,483


September 30, 2010
U.S. Government agencies:
Due after one but within five years	$	26,550	$	288	$	—	$	26,838
Due after five but within ten years		11,753		23		—		11,776
Mortgage-backed securities		17,455		267		—		17,722

	$	55,758	$	578	$	—	$	56,336

There were no securities with unrealized losses as of September 30, 2010. The age of unrealized losses and fair value of related securities available for sale as of March 31, 2011 were as follows:


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)

U.S. Government agencies	$	25,861	$	386	$	—	$	—	$	25,861	$	386
Mortgage-backed securities		5,228		47		—		—		5,228		47

	$	31,089	$	433	$	—	$	—	$	31,089	$	433

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether the Company has the intent to sell the securities prior to recovery and/or maturity and (ii) whether it is more likely than not that the Company will have to sell the securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company’s consolidated financial statements.

Management does not believe that any of the individual unrealized losses at March 31, 2011, represent an other-than-temporary impairment. All mortgage-backed securities are U.S. Government Agencies backed and collateralized by residential mortgages. The net unrealized loss reported on securities at March 31, 2011 relate to eight securities issued by U.S. Government Agencies and three mortgage-backed securities.

There were no sales of available for sale securities during the three months or six months ended March 31, 2011, or during the three months ended March 31, 2010. During the three months ended December 31, 2009, the Company sold, or had called, available for sale securities with a carrying value of $9.9 million, and recognized a gain of $199,000 on such sales and calls.

There were no sales of held to maturity securities during the three months or six months ended March 31, 2011, or during the three months ended March 31, 2010. During the three months ended December 31, 2009, proceeds from sales of securities held to maturity totaled $163,000, including gross gains of $9,000. The securities sold consisted of mortgaged-backed securities on which the Company had already collected more than eighty-five percent of the principal outstanding at the sale date.

9. Loans

Loans receivable are carried at unpaid principal balances and net deferred loan origination costs less the allowance for loan losses. The Company defers loan origination fees and certain direct loan origination costs and accretes net amounts as an adjustment of yield over the contractual lives of the related loans. Net deferred loan origination costs were $586,000 and $790,000 at March 31, 2011 and September 30, 2010, respectively. Unamortized net fees and costs are recognized if the loan is repaid before its stated maturity.

Recognition of interest income is discontinued and existing accrued interest receivable is reversed on loans that are more than ninety days delinquent and where management, through its loan review process, feels such loan should be classified as non-accrual. Income is subsequently recognized only to the extent that cash payments are received and until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is probable, in which case the loan is returned to an accrual status.

The following table summarizes the primary segments of the loan portfolio as of March 31, 2011:


	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(In thousands)

Real estate:
One-to-four-family	$	5,741	$	102,565	$	108,306
Multi-family		—		11,519		11,519
Non-residential		—		26,638		26,638
Construction		—		1,562		1,562
Home equity and second mortgages		605		9,870		10,475

		6,346		152,154		158,500

Commercial		73		20,583		20,656
Consumer		1		97		98


Total	$	6,420	$	172,834	$	179,254

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. Loans secured by real estate consist of one-to-four-family, multi-family, non-residential, construction and home equity and second mortgage loans. Substantially all of the commercial loans are secured and consumer loans are principally secured.

Management evaluates individual loans in all of the segments for possible impairment if the loan is either in nonaccrual status, or is risk rated Substandard or Doubtful. Loans are considered to be 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 evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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 any shortfall in relation to the principal and interest owed.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2011:


	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)

Real estate:
One-to-four-family	$	1,472	$	250	$	4,269	$	5,741	$	5,694
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Construction		—		—		—		—		—
Home equity and second mortgages		303		64		302		605		594

		1,775		314		4,571		6,346		6,288

Commercial		—		—		73		73		73
Consumer		—		—		1		1		1


Total	$	1,775	$	314	$	4,645	$	6,420	$	6,362

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2011:


	One-to- four- family		Home Equity and Second Mortgages		Commercial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	5,647	$	594	$	73	$	1	$	6,315
Interest income recognized on an accrual basis on impaired loans	$	—	$	—	$	—	$	—	$	—
Interest income recognized on a cash basis on impaired loans	$	20	$	2	$	—	$	—	$	22

Management uses a five category internal risk rating system to monitor the credit quality of the overall loan portfolio that generally follows bank regulatory definitions. Pass graded loans are considered to have average or better than average risk characteristics. They demonstrate satisfactory debt service capacity and coverage along with a generally stable financial position. These loans are performing in accordance with the terms of their loan agreement. The Watch category, a non bank regulatory category, includes assets that, while performing, demonstrate above average risk through a pattern of declining earning trends, strained cash flow, increasing leverage, and/or weakening market fundamentals. The Special Mention category includes assets that are currently protected but exhibit potential credit weakness or a downward trend which, if not checked or corrected, will weaken the Bank’s asset or inadequately protect the Bank’s position. Loans in the Substandard category have a well-defined weakness that jeopardizes the orderly liquidation of the debt. Normal repayment from the borrower is in jeopardy and there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. All loans greater than 90 days past due are considered Substandard. Loans in the Doubtful category have weaknesses inherent in those classified Substandard with the added provision that the weakness makes collection of debt in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the special valuation category. Loans that are deemed incapable of repayment where continuance as an active asset of the Bank is not warranted are charged off as a Loss. The classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Senior Lending Officer is responsible for the timely and accurate risk rating of the loans in the portfolios at origination and on an ongoing basis. The Bank has an experienced outsourced Loan Review function that quarterly, reviews and assesses loans within the portfolio and the adequacy of the Bank’s allowance for loan losses. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard or Doubtful on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass (including loans graded Watch) and the classified ratings of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2011:


	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)

Real estate:
One-to-four-family	$	103,099	$	469	$	4,738	$	—	$	108,306
Multi-family		11,519		—		—		—		11,519
Non-residential		26,638		—		—		—		26,638
Construction		1,562		—		—		—		1,562
Home equity and second mortgages		9,749		308		418		—		10,475

		152,567		777		5,156		—		158,500

Commercial		20,583		—		73		—		20,656
Consumer		96		—		2		—		98


Total	$	173,246	$	777	$	5,231	$	—	$	179,254

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2011:


	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Non- Accrual		Total Past Due		Total
	(In thousands)

Real estate:
One-to-four-family	$	102,729	$	1,642	$	221	$	372	$	3,342	$	5,577	$	108,306
Multi-family		11,519		—		—		—		—		—		11,519
Non-residential		26,638		—		—		—		—		—		26,638
Construction		1,562		—		—		—		—		—		1,562
Home equity and second mortgages		10,046		—		94		—		335		429		10,475

		152,494		1,642		315		372		3,677		6,006		158,500

Commercial		20,583		—		—		—		73		73		20,656
Consumer		92		—		—		6		—		6		98


Total	$	173,169	$	1,642	$	315	$	378	$	3,750	$	6,085	$	179,254

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALLL is based on the requirements of the FASB’s Accounting Standards Codification (“ASC”) Topic 450-20 for loans collectively evaluated for impairment, ASC Section 310-10-35 for loans individually evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses, and other bank regulatory guidance. The total of the two components represents the Bank’s ALLL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends and current Federal Deposit Insurance Corporation Uniform Bank Performance Report (“UBPR”) loss experience for the Bank’s Peer Group are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal Thrift Financial Report classifications, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the reporting class level. A historical charge-off factor is calculated utilizing a rolling seven year average. In addition, the UBPR Peer Group charge-off factor is determined. The Bank uses a 67% weighting of Bank charge-off experience and a 33% weighting of Peer Group charge-off experience to establish its historical charge-off factor.

“Pass” rated credits are segregated from “Classified” credits for the application of qualitative factors. Management has identified a number of additional qualitative factors that it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal,

regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL. Management utilizes an internally developed spreadsheet to track and apply the various components of the allowance. The following table summarizes the primary segments of the ALLL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2011:


	ALLL Balance		Collectively Evaluated for Impairment		Individually Evaluated for Impairment
	(In thousands)

Real estate:
One-to-four-family	$	566	$	316	$	250
Multi-family		—		—		—
Non-residential		19		19		—
Construction		38		38		—
Home equity and second mortgages		102		38		64

		725		411		314

Commercial		429		429		—
Consumer		15		15		—


Total	$	1,169	$	855	$	314

The following table summarizes activity in the primary segments of the allowance for loan losses for the three months ended March 31, 2011:


	Balance December 31, 2010		Charge- offs		Recoveries		Provision			Balance March 31, 2011
	(In thousands)

Real estate:
One-to-four-family	$	564	$	—	$	—	$	2		$	566
Multi-family		—		—		—					—
Non-residential		16		—		—		3			19
Construction		33		—		—		5			38
Home equity and second mortgages		96		—		—		6			102

		709		—		—		16			725

Commercial		368		—		—		61			429
Consumer		62		—		—		(47	)		15


Total	$	1,139	$	—	$	—	$	30		$	1,169

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALLL that is representative of the risk found in the components of the portfolio at any given date.

10. Fair Value Measurements

U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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 and counterparty creditworthiness, 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 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. In addition, the guidance requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy at March 31, 2011 and September 30, 2010 are summarized below:


Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
			(In thousands)
March 31, 2011
U.S. Government agencies	$	37,996	$	—	$	37,996	$	—
Mortgage-backed securities		16,487		—		16,487		—

Securities available for sale	$	54,483	$	—	$	54,483	$	—


September 30, 2010
U.S. Government agencies	$	38,614	$	—	$	38,614	$	—
Mortgage-backed securities		17,722		—		17,722		—

Securities available for sale	$	56,336	$	—	$	56,336	$	—

For financial assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy at March 31, 2011 and September 30, 2010 are summarized below:


Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
			(In thousands)
March 31, 2011
Impaired loans	$	1,461	$	—	$	—	$	1,461


September 30, 2010
Impaired loans	$	—	$	—	$	—	$	—

The following methods and assumptions were used to estimate the fair value of each class of financial instruments at March 31, 2011 and September 30, 2010:

Cash and Cash Equivalents, Interest Receivable and Interest Payable. The carrying amounts for cash and cash equivalents, interest receivable and interest payable approximate fair value because they mature in three months or less.

Securities. The fair value for debt securities, both available for sale and held to maturity are based on quoted market prices or dealer prices (Level 1), if available. If quoted market prices are not available, fair values are determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Loans Receivable. The fair value of loans receivable, excluding certain impaired loans, is estimated by discounting the future cash flows, using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans. The fair value of certain impaired loans is generally determined based on independent third party appraisals of the properties, or discounted cash flows based on the expected proceeds. These values are based upon the lowest level of input that is significant to the fair value measurements and are considered to be Level 3 fair values. The fair value consists of the loan balances less specific valuation allowances.

Loans Held for Sale. Loans held for sale are carried at estimated fair value in the aggregate, determined based on actual amounts subsequently realized after the balance sheet date, or estimates of amounts to be subsequently realized, based on actual amounts realized for similar loans.

Deposits. The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using market rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.

Advances from FHLB. Fair value is estimated using rates currently offered for advances of similar remaining maturities.

Commitments to Extend Credits. The fair value of commitments to fund credit lines and originate or participate in loans is estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest and the committed rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, was not considered material at March 31, 2011 or September 30, 2010.

The carrying amounts and estimated fair values of financial instruments are as follows:


	March 31, 2011				September 30, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	5,217	$	5,217	$	3,434	$	3,434
Securities available for sale		54,483		54,483		56,336		56,336
Loans held for sale		393		393		557		557
Loans receivable		178,085		193,205		179,066		201,882
Accrued interest receivable		946		946		988		988

Financial liabilities:
Deposits		187,166		187,732		188,306		196,898
FHLB Advances		34,500		37,019		34,578		38,121
Accrued interest payable		420		420		478		478

Off-balance sheet financial instruments		—		—		—		—

Limitations

The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all of the financial instruments were offered for sale.

In addition, the fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value the anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

11. Federal Home Loan Bank of New York Stock

The Company’s required investment in the common stock of the FHLB of New York is carried at cost as of March 31, 2011 and September 30, 2010. Management evaluates this common stock for impairment in accordance with the FASB guidance on accounting by certain entities that lend to or finance the activities of others. Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of the investment’s cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB, and (4) the liquidity position of the FHLB. Management believes no impairment charge was necessary related to the FHLB stock as of March 31, 2011 or September 30, 2010.

12. Recent Accounting Pronouncements

The FASB issued guidance (Accounting Standards Update (“ASU”) 2010-20) regarding disclosures about the credit quality of financing receivables including loans and the allowance for credit losses. This guidance requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The adoption of this new standard did not have a material impact on the Company’s consolidated financial statements.

In January 2011, the FASB issued guidance (ASU No. 2011-01) which indefinitely deferred disclosures about troubled debt restructures. In April 2011, the FASB issued guidance (ASU No. 2011-02) which provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring within the scope of ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. ASU 2011-02 changed the effective date of the disclosures from “indefinite” to interim and annual periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. It is not anticipated that this guidance will affect the Company’s consolidated financial position or results of operations.

The FASB issued guidance (ASU 2009-16) amending the Accounting Standards Codification to improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This guidance was effective at the start of our fiscal year beginning after October 1, 2010. The adoption of this guidance has not had any impact on the Company’s consolidated financial statements, but may have an impact in future periods.

12. Contingencies

The Company, in the ordinary course of business, becomes a party to litigation from time to time. In the opinion of management, the ultimate disposition of such litigation should not have a material adverse effect on the financial position or results of operations of the Company.

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

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and similar expressions that are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors including those set forth in Part 1, Item 1A– Risk Factors of our Form 10-K for the year ended September 30, 2010 which was filed with the Securities and Exchange Commission on December 15, 2010, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

•

changes in interest rates;

•

our allowance for loan losses may not be sufficient to cover actual loan losses;

•

the risk of loss associated with our loan portfolio;

•

lower demand for loans;

•

changes in our asset quality;

•

other-than-temporary impairment charges for investments;

•

the soundness of other financial institutions;

•

changes in liquidity;

•

changes in the Company’s reputation;

•

higher FDIC insurance premiums;

•

changes in the real estate market or local economy;

•

our ability to successfully implement our future plans for growth;

•

natural and man made disasters and public health issues;

•

our ability to retain our executive officers and other key personnel;

•

competition in our primary market area;

•

changes in laws and regulations to which we are subject;

•

the effects of new laws and regulations, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

•

recent developments affecting the financial markets;

•

changes in the Federal Reserve’s monetary or fiscal policies;

•

our ability to maintain effective internal controls over financial reporting;

•

the inclusion of certain anti-takeover provisions in our organizational documents; and

•

the low trading volume in our stock.

Any or all of our forward-looking statements in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

General

The Company’s results of operations depend primarily on its net interest income, which is the difference between the interest income it earns on its loans, investments and other interest-earning assets and the interest it pays on its deposits, borrowings and other interest-bearing liabilities. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. The Company’s operations are also affected by non-interest income, the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy costs, and other general and administrative expenses. In general, financial institutions such as the Company are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. The Company’s operations and lending activities are principally concentrated in Westchester County, New York, and its operations and earnings are influenced by the economics of the area in which it operates. Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences, and levels of personal income and savings in the Company’s primary market area.

The Company’s net interest income may be affected by market interest rate changes. Local market conditions and liquidity needs of other financial institutions can have a dramatic impact on the interest rates offered to attract deposits. In recent years, changes in short-term interest rates did not result in corresponding changes in long-term interest rates, and local market conditions resulted in relatively high certificate of deposit interest rates and lower interest rates on loans. The effect of this interest rate environment did, and could in the future, continue to decrease the Company’s ability to invest deposits and reinvest proceeds from loan and investment repayments at higher interest rates. During portions of the past two fiscal years, the Company’s cost of funds did not change proportionally to its yield on loans and investments, due to the longer-term nature of its interest-earning assets, the yield curve environment and higher interest rates on deposits resulting from liquidity needs of other financial institutions.

In order to grow and diversify, the Company seeks to continue to increase its multi-family, non-residential, construction, home equity and commercial loans by targeting these markets in Westchester County and the surrounding areas as a means to increase the yield on and diversify its loan portfolio as well as build transactional deposit account relationships. In addition, depending on market conditions, the Company may sell the fixed-rate residential real estate loan originations to a third party in order to diversify its loan portfolio, increase non-interest income and reduce interest rate risk.

To the extent the Company increases its investment in construction or development, consumer and commercial loans, which are considered greater risks than one-to-four-family residential loans, the Company’s provision for loan losses may increase to reflect this increased risk, which could cause a reduction in the Company’s income.

Business Strategy

The Company seeks to differentiate itself from its competition by providing superior, highly personalized and prompt service, local decision making and competitive fees and rates to its customers. Historically, the Bank has been a community-oriented retail savings bank offering residential mortgage loans and traditional deposit products and, to a lesser extent, commercial real estate, small business and consumer loans in Westchester County and the surrounding areas. The Company has adopted a strategic plan that focuses on growth in the loan portfolio into higher yield multi-family, non-residential, construction and commercial loan markets. The Company’s strategic plan also calls for increasing deposit relationships and broadening its product lines and services. The Company believes that this business strategy is best for its long-term success and viability, and complements its existing commitment to high quality customer service.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Major financial reform legislation, known as the Dodd-Frank Act, was signed into law by the President on July 21, 2010. Among other things, the Dodd-Frank Act dramatically impacts the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the legislation will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Many of the provisions of the Dodd-Frank Act affecting the Company and Bank have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the Dodd-Frank Act.

Given that many of the new laws mandated by the Dodd-Frank Act which affect the Company and Bank are not yet effective at this time and much of the details and substance of such new laws will be shaped through the rulemaking process, the full impact of the Dodd-Frank Act on the business and operations of the Company and Bank currently cannot be fully assessed. For example, the Dodd-Frank Act repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. The ultimate impact of this change in law on the operations of the Company and Bank has not yet been determined. Additionally, the Dodd-Frank Act provides that the functions of the OTS in regard to the Company and Bank will formally be transferred to the FRB and the OCC respectively on July 21, 2011 (or else by January 21, 2012 if a six-month extension is required). The Federal Reserve recently indicated its intent to apply certain parts of its current consolidated supervisory program for bank holding companies (including significantly enhanced reporting requirements) to savings and loan holding companies after assuming supervisory responsibility for savings and loan holding companies on the transfer date. Accordingly, we may see changes in the way we are supervised and examined sooner, and may experience operational challenges in the course of transition to our new regulators.

Like all other financial institutions and in particular, community thrift organizations the Company is continuing to closely monitor developments and is currently evaluating the potential impact of the Dodd-Frank Act on our business, financial condition, results of operations and prospects and expect that some provisions of the new law may have adverse effects on us, such as the cost of complying with the numerous new regulations and reporting requirements mandated by the Dodd-Frank Act.

Comparison of Financial Condition at March 31, 2011 to September 30, 2010

Total assets decreased by $1.0 million, or 0.4%, to $246.4 million at March 31, 2011 from $247.4 million at September 30, 2010. Proceeds received from calls and repayments of available for sale securities and loan payments were used to fund declines in retail deposits and an increase in cash and cash equivalents in the six months ended March 31, 2011.

Loans receivable were $178.1 million and $179.1 million at March 31, 2011 and September 30, 2010, respectively, representing a decrease of $981,000, or 0.5%. The decrease in loans resulted principally from normal amortization and prepayments of one-to-four-family mortgages, net of a $2.9 million increase in non-residential real estate loans and a $2.9 million increase in commercial loans.

While the banking industry has seen increases in loan delinquencies and defaults over the past year, particularly in the subprime sector, the Bank has not experienced significant losses in its loan portfolio due primarily to its conservative underwriting policies. As of March 31, 2011 and September 30, 2010, the Bank had $4.1 million and $3.0 million of non-performing loans, respectively, of which, $2.4 million in each period were in process of foreclosure, and have been placed on non-accrual status. The balance represents loans on which interest is accounted for on the cash basis and loans which have not been placed on non-accrual status due to pending modifications. The impaired loans resulted from general economic conditions, increased unemployment and the declines in the local real estate market. As of March 31, 2011 and September 30, 2010, the allowance for loan losses was 0.65% and 0.62% of loans outstanding, respectively. Despite a weak economy nationally as well as in our primary market area, there was no significant shift in the loan portfolio, loss experience, or other factors affecting the Bank, other than the planned growth in multi-family, non-residential real estate and commercial loans and the decline in one-to-four-family mortgage loans. As a result of the deterioration of economic conditions, continued high unemployment, declines in real estate values in the Bank’s primary market area, lower commercial real estate cash flows and a modest increase in delinquencies, $55,000 and $60,000 was provided for loan losses in the six months ended March 31, 2011 and 2010, respectively.

Securities available for sale decreased from $56.3 million at September 30, 2010 to $54.5 million at March 31, 2011. Principal payments and calls of securities available for sale of $5.1 million were partially offset by additional investments of $4.0 million.

Deposits decreased by $1.1 million, or 0.6%, from $188.3 million as of September 30, 2010 to $187.2 million as of March 31, 2011. The decrease in deposits was funded from calls and repayments of available for sale securities and net repayments of loans. The Bank participates in the Certificate of Deposit Account Registry Service, or “CDARS”

network. Under this network, the Bank can transfer deposits into the network (a one way sell transaction), request that the network deposit funds at the Bank (a one way buy transaction), or deposit funds into the network and receive an equal amount of deposits from the network (a reciprocal transfer). The network provides the Bank with an investment vehicle in the case of a one way sell, a liquidity or funding source in the case of a one way buy and the ability to access additional FDIC insurance for customers in the case of a reciprocal transfer. The Bank had $8.0 million of CDARS deposits as of March 31, 2011 and September 30, 2010.

Advance payments by borrowers for taxes and insurance increased by $821,000 from $849,000 at September 30, 2010 to $1.7 million at March 31, 2011 representing the normal seasonal buildup in these accounts.

Stockholders’ equity decreased from $21.8 million at September 30, 2010 to $21.6 million at March 31, 2011 as a result of the other comprehensive loss of $405,000, partially offset by the net income of $130,000 and by additions to equity resulting from accounting for stock-based compensation and the Company’s ESOP. The other comprehensive loss in the six months ended March 31, 2011 resulted from decreases in the fair value of available for sale securities.

Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010

General. The Company recorded net income of $40,000 for the three months ended March 31, 2011, compared to a net loss of $35,000 for the three months ended March 31, 2010. The change primarily reflects an increase in net interest income and a decrease in non-interest expense, partially offset by a decrease in non-interest income.

Average Balances, Interest and Average Yields/Costs. The following table sets forth certain information relating to the Company’s average balance sheets and reflects the average annual yield on interest-earning assets and average annual cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing annualized income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses.


	Three Months Ended March 31,
	2011							2010
	(Dollars in thousands)
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Interest-earning assets:
Loans receivable(1)	$	178,462	$	2,558		5.73	%	$	172,690	$	2,512		5.82	%
Securities(2)		51,009		236		1.85	%		39,234		231		2.36	%
Other interest-earning assets(3)		7,161		36		2.01	%		4,562		52		4.56	%

Total interest-earning assets		236,632		2,830		4.78	%		216,486		2,795		5.16	%

Non interest-earning assets		5,877							7,225

Total assets	$	242,509						$	223,711


Interest-bearing liabilities:
Demand deposits	$	30,256		56		0.74	%	$	30,005		70		0.93	%
Savings and club accounts		40,842		41		0.40	%		39,863		40		0.40	%
Certificates of deposit		98,277		372		1.51	%		78,363		346		1.77	%
Borrowed money(4)		35,519		429		4.83	%		39,532		429		4.34	%

Total interest-bearing liabilities		204,894		898		1.75	%		187,763		885		1.89	%

Non interest-bearing deposits		15,680							13,083
Other liabilities		587							2,139

Total liabilities		221,161							202,985
Total stockholders’ equity		21,348							20,726

Total liabilities and stockholders’ equity	$	242,509						$	223,711

Interest rate spread			$	1,932		3.03	%			$	1,910		3.27	%

Net interest-earning assets/net interest margin	$	31,738				3.27	%	$	28,723				3.53	%

Ratio of interest-earning assets to interest-bearing liabilities				1.15x							1.15x

(1)	Net of allowance for loan losses and net deferred costs and fees.

(2)	Held to maturity securities included at amortized cost and available for sale securities included at fair value.

(3)	Includes interest-earning cash equivalents, FHLB stock and loans held for sale, which are held for a short period of time.

(4)	Includes mortgage escrow funds, FHLB advances and securities sold under agreements to repurchase.

Interest Income. Interest income of $2.8 million for the three months ended March 31, 2011, was $35,000 higher than interest income for the three months ended March 31, 2010. The increase in interest income was primarily due to an increase of $46,000 in interest from loans and a $5,000 increase in interest from investments, partially offset by a decrease of $16,000 in interest income from other interest earning assets.

Interest income from loans increased by $46,000 in the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The increase was due to a $5.8 million, or 3.3%, increase in the average balance of loans to $178.5 million in the three months ended March 31, 2011 from $172.7 million in the three months ended March 31, 2010, offset in part by a nine basis point decrease in the average yield to 5.73% from 5.82%, reflecting changes in the composition of the loan portfolio and lower market interest rates. The increase in average loan balances includes loans in the commercial and non-residential real estate loan categories, net of normal amortization and prepayments of one-to-four-family mortgages. The Company continues to sell conventional one-to-four-family residential mortgage originations into the secondary market to generate non-interest income and reduce interest rate risk. Higher loan volume increased interest income by $85,000 while the lower interest rates decreased interest income by $39,000.

Interest income from securities increased by $5,000 to $236,000 for the three months ended March 31, 2011 from $231,000 for the three months ended March 31, 2010. The increase in interest income from securities was attributable to higher average balances which rose to $51.0 million in the three months ended March 31, 2011 compared to $39.2 million in the three months ended March 31, 2010, offset by lower yields on the securities portfolio which declined to 1.85% in the three months ended March 31, 2011 compared to 2.36% in the three months ended March 31, 2010. The decrease in the securities portfolio yield was due to an overall decline in market interest rates while the increase in the average balances of securities was due to funds from deposit inflows, including the CDARS deposit, which were invested in short to intermediate-term available-for-sale securities, principally notes, bonds and mortgage-backed securities of the U.S. Government and U.S. Government Agencies.

Overall declines in market interest rates reduced the average interest rate on interest-earning assets from 5.16% in the quarter ended March 31, 2010 to 4.78% in the comparable 2011 period. Of the $35,000 increase in interest income in the three months ended March 31, 2011 compared to the three months ended March 31, 2010, higher average balances of interest-earning assets caused an increase of $167,000 in interest income, while lower interest rates caused a decrease in interest income of $132,000.

Interest Expense. Interest expense increased by $13,000, or 1.5%, to $898,000 in the three months ended March 31, 2011 compared to $885,000 in the comparable 2010 period. Interest on demand deposits decreased $14,000 as a result of lower interest rates paid on those deposits, offset in part by the impact of higher average balances. Interest on savings and club accounts decreased slightly in the three months ended March 31, 2011 compared to the comparable 2010 period.

Interest expense on certificates of deposit increased by $26,000 in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 as a result of the impact of higher average balances in the 2011 period, offset in part by lower interest rates paid on those deposits. The average balance of certificates of deposit increased by $19.9 million to $98.3 million in the three months ended March 31, 2011 compared to $78.4 million for the three months ended March 31, 2010, while the interest rate on those deposits decreased from 1.77% in the three months ended March 31, 2010 to 1.51% in the comparable 2011 period. The increase in average balances in the 2011 period was the result of promotional certificate programs. As shown in the rate/ volume table which follows, interest expense on certificates of deposit declined by $55,000 in the three months ended March 31, 2011 compared to the three months ended March 31, 2010 as a result of lower interest rates, which was more than offset by an $81,000 increase in interest expense resulting from higher average balances in the three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.89% in the quarter ended March 31, 2010 to 1.75% in the comparable 2011 period. Of the $13,000 increase in interest expense in the three months ended March 31, 2011 compared to the three months ended March 31, 2010, declines in interest rates reduced interest expense by $24,000, while increases in volume of interest bearing liabilities caused a net increase in interest expense of $37,000.

Rate/Volume Analysis. The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It shows the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest rates. The effect of a change in volume is measured by applying the average rate during the first period to the volume change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period. Changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.


	Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
	(In thousands)
	Volume			Rate			Net
Interest-earning assets:
Loans receivable	$	85		$	(39	)	$	46
Securities		61			(56	)		5
Other interest-earning assets		21			(37	)		(16	)

Total interest-earning assets		167			(132	)		35


Interest-bearing liabilities:
Demand deposits		1			(15	)		(14	)
Savings and club accounts		1			—			1
Certificates of deposit		81			(55	)		26
Borrowed money		(46	)		46			—

Total interest-bearing liabilities		37			(24	)		13


Net interest income	$	130		$	(108	)	$	22

Net Interest Income. Net interest income increased $22,000, or 1.2%, to $1.9 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The increase in net interest income was primarily attributable to higher balances of average interest-earning assets, net of lower yields on those assets, and increases in interest-bearing liabilities, net of lower interest rates on those liabilities.

Provision for Loan Losses. The allowance for loan losses was $1.2 million, or 0.65% of gross loans outstanding, at March 31, 2011 compared to $1.1 million or 0.62% of gross loans outstanding at September 30, 2010. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. As of March 31, 2011 and September 30, 2010, the Bank had $4.1 million and $3.0 million of non-performing loans, respectively, of which, $2.4 million in each period were in process of foreclosure, and have been placed on non-accrual status. The balance represents loans on which interest is accounted for on the cash basis and loans which have not been placed on non-accrual status due to pending modifications. The impaired loans resulted from general economic conditions, increased unemployment and the declines in the local real estate market. Despite a weak economy nationally as well as in our primary market area, there was no significant shift in the loan portfolio, loss experience, or other factors affecting the Bank, other than the planned growth in multi-family, non-residential real estate and commercial loans and the decline in one-to-four-family mortgage loans. As a result of the deterioration of economic conditions, continued high unemployment, declines in real estate values in the Company’s primary market area, lower

commercial real estate cash flows, higher commercial loans and a modest increase in delinquencies, $30,000 was provided for loan losses in the three month period ended March 31, 2011. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.

Non-interest Income. Non-interest income of $77,000 in the three months ended March 31, 2011 was lower than the $148,000 in the comparable 2010 period primarily as a result of lower gains on loans originated for sale resulting from lower loan sales volume and lower fees and service charges.

Non-interest Expenses. Non-interest expenses decreased by $114,000, or 5.4% for the three months ended March 31, 2011, compared to the prior year period. Lower professional fees, which accounted for virtually all of the decrease, were $104,000 in the three months ended March 31, 2011 compared to the $239,000 in the three months ended March 31, 2010. The three month period ended March 31, 2010 included higher professional fees from corporate matter legal fees and higher internal and external audit fees associated with SOX compliance. The other components of non-interest expenses were comparable in the three months ended March 31, 2011 and 2010.

Income Tax Expense (Benefit). The income tax benefit was $53,000 in the three months ended March 31, 2011 compared to $13,000 in the comparable 2010 period. The income tax benefit in the three months ended March 31, 2011 includes a reduction in previously recorded tax expense of $55,000 resulting from the change in the Company’s tax year from March 31 to September 30. During the process of converting the Company’s tax year end to coincide with the financial reporting year end, the Company determined that taxes accrued in prior years were overstated by $220,000. This overstatement will be reversed at the rate of $55,000 per quarter during the fiscal year ending September 30, 2011. Income tax expense is recorded based on pretax income at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The effective tax rate in the three months ended March 31, 2011 and 2010 was different than the statutory rate as a result of certain non-deductible expenses.

Comparison of Operating Results for the Six Months Ended March 31, 2011 and 2010

General. The Company recorded net income of $130,000 for the six months ended March 31, 2011, compared to net income of $67,000 for the six months ended March 31, 2010. The change primarily reflects an increase in net interest income and lower non-interest expense, offset by a decrease in non-interest income.


	Six Months Ended March 31,
	2011							2010
	(Dollars in thousands)
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Interest-earning assets:
Loans receivable(1)	$	177,123	$	5,100		5.76	%	$	171,787	$	5,016		5.84	%
Securities(2)		53,413		492		1.84	%		45,926		540		2.35	%
Other interest-earning assets(3)		7,396		84		2.27	%		4,893		92		3.76	%

Total interest-earning assets		237,932		5,676		4.77	%		222,606		5,648		5.07	%

Non interest-earning assets		6,137							6,854

Total assets	$	244,069						$	229,460


Interest-bearing liabilities:
Demand deposits	$	30,535		118		0.77	%	$	29,344		143		0.97	%
Savings and club accounts		40,916		82		0.40	%		40,478		81		0.40	%
Certificates of deposit		98,698		775		1.57	%		80,904		785		1.94	%
Borrowed money(4)		35,762		859		4.80	%		41,834		868		4.15	%

Total interest-bearing liabilities		205,911		1,834		1.78	%		192,560		1,877		1.95	%

Non interest-bearing deposits		15,628							13,834
Other liabilities		1,071							2,354

Total liabilities		222,610							208,748
Total stockholders’ equity		21,549							20,712

Total liabilities and stockholders’ equity	$	244,069						$	229,460

Interest rate spread			$	3,842		2.99	%			$	3,771		3.12	%

Net interest-earning assets/net interest margin	$	32,021				3.23	%	$	30,046				3.39	%

Ratio of interest-earning assets to interest-bearing liabilities				1.16x							1.16x

(1)	Net of allowance for loan losses and net deferred costs and fees.

(2)	Held to maturity securities included at amortized cost and available for sale securities included at fair value.

(3)	Includes interest-earning cash equivalents, FHLB stock and loans held for sale, which are held for a short period of time.

(4)	Includes mortgage escrow funds, FHLB advances and securities sold under agreements to repurchase.

Interest Income. Interest income of $5.7 million for the six months ended March 31, 2011, was $28,000 higher than interest income for the six months ended March 31, 2010. The minor increase in interest income was primarily due to an increase of $84,000 in interest from loans, partially offset by decreases of $48,000 and $8,000 in interest income from securities and other interest earning assets, respectively.

Interest income from loans increased by $84,000 in the six months ended March 31, 2011 compared to the six months ended March 31, 2010. The increase was due to a $5.3 million, or 3.1%, increase in the average balance of loans to $177.1 million in the six months ended March 31, 2011 from $171.8 million in the six months ended March 31, 2010, offset in part by an eight basis point decrease in the average yield to 5.76% from 5.84%, reflecting changes in the composition of the loan portfolio and lower market interest rates. The increase in average loan balances includes loans in the commercial, non-residential real estate and multi-family mortgage loan categories, net of normal amortization and prepayments of one-to-four-family mortgages. The Company continues to sell conventional one-to-four-family residential mortgage originations into the secondary market to generate non-interest income and reduce interest rate risk. Higher loan volume increased interest income by $154,000 while the lower interest rates decreased interest income by $70,000.

Interest income from securities decreased by $48,000 to $492,000 for the six months ended March 31, 2011 from $540,000 for the six months ended March 31, 2010. The decrease in interest income from securities was attributable to lower yields on the securities portfolio which reduced interest income by $128,000, offset in part by higher average balances which rose to $53.4 million in the six months ended March 31, 2011 compared to $45.96 million in the six months ended March 31, 2010, resulting in an increase in interest income of $80,000. The decrease in the securities portfolio yield was due to an overall decline in market interest rates while the increase in the average balances of securities was due to funds from deposit inflows, including the CDARS deposit, which were invested in short to intermediate-term available-for-sale securities, principally notes, bonds and mortgage-backed securities of the U.S. Government and U.S. Government Agencies.

Overall declines in market interest rates reduced the average interest rate on interest-earning assets from 5.07% in the six months ended March 31, 2010 to 4.77% in the comparable 2011 period. Of the $28,000 increase in interest income in the six months ended March 31, 2011 compared to the six months ended March 31, 2010, higher average balances of interest-earning assets caused an increase of $271,000 in interest income, while lower interest rates caused a decrease in interest income of $243,000.

Interest Expense. Interest expense declined by $43,000, or 2.3%, to $1.8 million in the six months ended March 31, 2011 compared to $1.9 million in the comparable 2010 period. Interest on demand deposits decreased $25,000 as a result of lower interest rates paid on those deposits, offset in part by the impact of higher average balances. Interest on savings and club accounts decreased slightly in the six months ended March 31, 2011 compared to the comparable 2010 period.

Interest expense on certificates of deposit declined by a net amount of $10,000 in the six months ended March 31, 2011 compared to the six months ended March 31, 2010 as a result of lower market interest rates, offset in part by the impact of higher average balances in the 2011 period. The average balance of certificates of deposit increased by $17.8 million to $98.7 million in the six months ended March 31, 2011 compared to $80.9 million for the six months ended March 31, 2010, while the interest rate on those deposits decreased from 1.94% in the six months ended March 31, 2010 to 1.57% in the comparable 2011 period. The increase in average balances in the 2011 period was the result of promotional certificate programs.

Overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.95% in the quarter ended March 31, 2010 to 1.78% in the comparable 2011 period. Of the $43,000 decrease in interest expense in the six months ended March 31, 2011 compared to the six months ended March 31, 2010, declines in interest rates paid on deposits reduced interest expense by $70,000, while increases in interest bearing liabilities caused a net increase in interest expense of $27,000.


	Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010
	(In thousands)
	Volume			Rate			Net
Interest-earning assets:
Loans receivable	$	154		$	(70	)	$	84
Securities		80			(128	)		(48	)
Other interest-earning assets		37			(45	)		(8	)

Total interest-earning assets		271			(243	)		28


Interest-bearing liabilities:
Demand deposits		6			(31	)		(25	)
Savings and club accounts		1			—			1
Certificates of deposit		155			(165	)		(10	)
Borrowed money		(135	)		126			(9	)

Total interest-bearing liabilities		27			(70	)		(43	)


Net interest income	$	244		$	(173	)	$	71

Net Interest Income. Net interest income increased $71,000, or 1.9%, to $3.8 million for the six months ended March 31, 2011 compared to the six months ended March 31, 2010. The increase in net interest income was primarily attributable to higher balances of average interest-earning assets, net of lower yields on those assets, and decreases in the cost of interest-bearing liabilities.

conditions, continued high unemployment, declines in real estate values in the Company’s primary market area, lower commercial real estate cash flows, higher commercial loans and a modest increase in delinquencies, $55,000 and $60,000 was provided for loan losses in the six month periods ended March 31, 2011 and 2010, respectively. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.

Non-interest Income. Non-interest income of $266,000 in the six months ended March 31, 2011 was lower than the $498,000 in the comparable 2010 period primarily as a result of a $208,000 gain on the sale of securities in the 2010 period which did not recur in the 2011 period, and lower fees and service charges in the six months ended March 31, 2011 compared to the 2010 period.

Non-interest Expenses. Non-interest expenses decreased by $81,000, or 2.0% for the six months ended March 31, 2011, compared to the prior year period. Lower professional fees, which accounted for a large portion of the decrease, were $273,000 in the six months ended March 31, 2011 compared to the $375,000 in the six months ended March 31, 2010. The six month period ended March 31, 2010 included higher professional fees from corporate matter legal fees and higher internal and external audit fees associated with SOX compliance. Advertising was $42,000 lower in the six months ended March 31, 2011 compared to 2010 as a result of cost cutting measures adopted in the 2011 period. The other components of non-interest expenses were comparable in the six months ended March 31, 2011 and 2010.

Income Tax Expense (Benefit). The income tax benefit was $73,000 in the six months ended March 31, 2011 compared to a tax expense of $65,000 in the comparable 2010 period. The income tax benefit in the six months ended March 31, 2011 includes a reduction in previously recorded tax expense of $110,000 resulting from the change in the Company’s tax year from March 31 to September 30. During the process of converting the Company’s tax year end to coincide with the financial reporting year end, the Company determined that taxes accrued in prior years were overstated by $220,000. This overstatement will be reversed at the rate of $55,000 per quarter during the fiscal year ending September 30, 2011. Income tax expense is recorded based on pretax income at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The effective tax rate in the six months ended March 31, 2011 and 2010 was different than the statutory rate as a result of certain non-deductible expenses.

Management of Market Risk

As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a significant portion of its assets and liabilities. Fluctuations in interest rates will also affect the market value of interest-earning assets and liabilities, other than those which possess a short-term maturity. Interest rates are highly sensitive to factors that are beyond the Company’s control, including general economic conditions, inflation, changes in the slope of the interest rate yield curve, monetary and fiscal policies of the federal government and the regulatory policies of government authorities. Due to the nature of the Company’s operations, it is not subject to foreign currency exchange or commodity price risk. Instead, the Company’s loan portfolio, concentrated in Westchester County, New York, is subject to the risks associated with the economic conditions prevailing in its market area.

The primary goals of the Company’s interest rate management strategy are to determine the appropriate level of risk given the business strategy and then manage that risk so as to reduce the exposure of the Company’s net interest income to fluctuations in interest rates. Historically, the Company’s lending activities have been dominated by one-to-four family real estate mortgage loans, and in more recent periods, such activities have included increases in non-residential real estate mortgage loans, multi-family and secured commercial loans. The primary source of funds has been deposits, FHLB borrowings, CDARS transactions and brokered certificates of deposit, which have substantially shorter terms to maturity than the loan portfolio. As a result, the Company has employed certain strategies to manage the interest rate risk inherent in the asset/liability mix, including but not limited to limiting terms of fixed rate one-to-four-family mortgage loan originations which are retained in the Company’s portfolio, selling substantially all of the one-to-four family mortgage originations in the secondary market and emphasizing investments with short and intermediate term maturities and borrowing term funds from the FHLB.

In addition, the actual amount of time before mortgage loans are repaid can be significantly impacted by changes in mortgage prepayment rates and market interest rates. Mortgage prepayment rates will vary due to a number of factors,

including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition. The Company monitors interest rate sensitivity so that it can make adjustments to its asset and liability mix on a timely basis.

Net Interest Income at Risk

The Company uses a simulation model to monitor interest rate risk. This model reports the net interest income and net economic value at risk under different interest rate environments. Specifically, an analysis is performed related to changes in net interest income by assuming changes in interest rates, both up and down, from current rates over the three year period following the financial statements. The changes in interest income and interest expense related to changes in interest rates reflect the interest sensitivity of the Company’s interest-earning assets and interest-bearing liabilities.

The table below sets forth the latest available estimated changes in net interest income, as of December 31, 2010, that would result from various basis point changes in interest rates over a twelve month period.


Change in Interest Rates In Basis Points (Rate Shock)	Net Interest Income
Change in Interest Rates In Basis Points (Rate Shock)	Amount		Dollar Change			Percent Change
	(Dollars in thousands)
300	$	7,715	$	(272	)		-3.4	%
200		7,803		(184	)		-2.3	%
100		7,910		(77	)		-1.0	%
0		7,987		—			—
-100		7,754		(233	)		-2.9	%

Liquidity and Capital Resources

The Company is required to maintain levels of liquid assets sufficient to ensure the Company’s safe and sound operation. Liquidity is defined as the Company’s ability to meet current and future financial obligations of a short-term nature. The Company adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings and loan funding commitments. The Company also adjusts its liquidity level as appropriate to meet its asset/liability objectives.

The Company’s primary sources of funds are retail deposits, the CDARS network, brokered certificates of deposit, amortization and prepayments of loans, FHLB advances, repayments and maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities repayments are greatly influenced by market interest rates, economic conditions and competition. The Company’s liquidity, represented by cash and cash equivalents and investment securities, is a product of its operating, investing and financing activities. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds, available-for-sale securities or cash equivalents and other interest-earning assets. If the Company requires funds beyond its ability to generate them internally, the Company can acquire brokered certificates of deposit, CDARS deposits and draw upon existing borrowing agreements with the FHLB and the Federal Reserve which provide an additional source of funds. At March 31, 2011 and September 30, 2010, the Company had $34.5 million and $34.6 million of advances from the FHLB, respectively and CDARS deposits of $8.0 million as of both dates.

In the six months ended March 31, 2011, net cash provided by operating activities was $255,000 compared to net cash used by operating activities of $660,000 in the same period in 2010. In the six months ended March 31, 2011 and 2010, net income included non-cash expenses (consisting of depreciation, amortization, provision for loan losses, deferred taxes and stock-based compensation) of $410,000 and $453,000, respectively. Net proceeds from loans sold provided

$164,000 and $76,000 of cash in the six months ended March 31, 2011 and 2010, respectively. In order to reduce sensitivity to interest rate risk, provide for additional liquidity and enhance non-interest income, the Company continues to sell one-to-four-family loan originations. Net cash provided from operations included a $208,000 gain on the sale of securities in the 2010 period which did not recur in the 2011 period.

In the six months ended March 31, 2011, investing activities provided $1.9 million of cash, compared to $11.4 million of cash in the same period in 2010. In the six months ended March 31, 2011 and 2010, sales, calls and repayments of securities, net of purchases of investments provided $1.1 million and $18.5 million of cash, respectively. There were no sales of securities during the six month period ended March 31, 2011. Net changes in loans provided $839,000 of cash in the six months ended March 31, 2011 while net loan increases used $6.8 of cash in the six months ended March 31, 2010.

Net cash used by financing activities was $397,000 in the six months ended March 31, 2011 compared to net cash used by financing activities of $16.1 million in the six months ended March 31, 2010. In the six months ended March 31, 2011, changes in deposit balances used $1.1 million of cash, while using $22.5 million of cash in the six months ended March 31, 2010.

On February 7, 2011, the FDIC Board approved a final rule that implements a new deposit insurance assessment system for insured depository institutions, including a new pricing structure for institutions with more than $10 billion in assets. The new assessment structure modifies an institution’s current deposit insurance assessment base from adjusted domestic deposits to an institution’s average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. Pursuant to the final rule, Tier 1 capital would be used as the measure for tangible equity. Depository institutions with less than $1 billion in assets will report average weekly balances during the calendar quarter, unless they elect to report daily averages. Since the new assessment base would be larger than the current base, the new assessment structure includes revisions to the total base assessment rate schedule by lowering assessment rates, after adjustments, to a range between 2.5 and 9 basis points for depository institutions in the lowest risk category, and 30 to 45 basis points for institutions in the highest risk category. The various adjustments incorporated into the schedule take into account the heightened risk with respect to certain types of funding such as unsecured debt and brokered deposits. The final rule eliminates the secured liability adjustment and includes a new adjustment requirement for long-term debt held by an insured depository institution where the debt is issued by another insured depository institution. The final rule calls for the indefinite suspension of dividends whenever the fund reserve ratio exceeds 1.5%. In lieu of dividends, however, the final rule sets out additional rate schedules with progressively lower rates that would go into effect without further action by the FDIC Board when the fund reserve ratio reaches certain milestones. Importantly, the final rule retains the FDIC Board’s flexibility to adopt actual rates that are higher or lower than total base assessment rates without requiring further notice-and-comment rulemaking, but provides that: (1) the FDIC Board cannot increase or decrease rates from one quarter to the next by more than 2 basis points; and (2) cumulative increases and decreases cannot be more than 2 basis points higher or lower than the total base assessment rates.

The changes generally became effective as of April 1, 2011 and would be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011. The Company and Bank are currently evaluating the impact that the new assessment base final rule will have on our financial position and results of operations. While the final rule is expected to have a positive effect on small institutions (those with less than $10 billion in assets) given that, in the aggregate, the large bulk of such institutions are expected to see a decrease in assessments, the impact of the final rule, and/or additional FDIC special assessments or other regulatory changes affecting the financial services industry could negatively affect the Company’s liquidity and financial results in future periods.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of March 31, 2011, the Company had cash and cash equivalents of $5.2 million and available for sale securities of $54.5 million. At March 31, 2011, the Company had outstanding commitments to originate loans of $5.2 million and $10.8 million of undisbursed funds from approved lines of credit, homeowners’ equity lines of credit, and secured commercial lines of credit. Certificates of deposit scheduled to mature in one year or less at March 31, 2011, totaled $68.6 million. Historically, the Company’s deposit flow history has been that a significant portion of such deposits remain with the Company. A portion of the retail deposit decrease of $22.5 million in the six month period ended March 31, 2010 occurred from promotional certificate of deposit rates offered in connection with the Mount Kisco branch opening earlier in 2009 and the retention rate for these certificates of deposit was lower than the Company’s historical retention rates.

The Company has an Overnight Advance line of credit with the FHLB, which was not in use at March 31, 2011 or September 30, 2010. The Company’s overall credit exposure at the FHLB, including borrowings under the Overnight Advance line of credit and other term borrowings cannot exceed 50% of its total assets, subject to certain limitations based on the underlying loans and securities pledged as collateral.

In February 2011, the Company applied for $6.1 million of capital under the U.S. Department of the Treasury Small Business Lending Fund, which provides approved banks with capital by purchasing Tier 1-qualifying preferred stock or equivalents in each bank.

The dividend rate on SBLF funding will be reduced as a participating community bank increases its lending to small businesses. The initial dividend rate will be, at most, 5%. If a bank’s small business lending increases by 10% or more, then the rate will fall to as low as 1%. Banks that increase their lending by amounts less than 10% can benefit from rates set between 2% and 4%. If lending does not increase in the first two years, however, the rate will increase to 7%. After 4.5 years, the rate will increase to 9% if the bank has not already repaid the SBLF funding.

There can be no guarantee that the Company will be approved for this program, and if approved, that the Company will elect to participate in the program.

The following table sets forth the Bank’s capital position at March 31, 2011, compared to the minimum regulatory capital requirements:


	Actual					For Capital Adequacy Purposes					To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)

Total capital (to risk-weighted assets)	$	19,898		16.24	%	³	$9,799	³	8.00	%	³	$12,249	³	10.00	%
Core (Tier 1) capital (to risk-weighted assets)		19,043		15.55			N/A		N/A		³	7,349	³	6.00
Core (Tier 1) capital (to total adjusted assets)		19,043		7.74		³	9,839	³	4.00		³	12,299	³	5.00
Tangible capital (to total adjusted assets)		19,043		7.74		³	3,690	³	1.50			N/A		N/A

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to Smaller Reporting Companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is (i) recorded, processed, summarized and reported and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II: Other Information

Item 6. Exhibits


Exhibit No.		Description

10.1		Amended and Restated Employment Agreement between John Ritacco and CMS Bancorp, Inc.(1)

10.2		Amended and Restated Employment Agreement between John Ritacco and Community Mutual Savings Bank(1)

31.1		Rule 13a-14(a)/15d-14(a) Certification of principal executive officer*

31.2		Rule 13a-14(a)/15d-14(a) Certification of principal financial officer*

32.1		Section 1350 Certification of principal executive officer*

32.2		Section 1350 Certification of principal financial officer*

*	Filed herewith.

(1)	Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 4, 2011.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		CMS Bancorp, Inc.

Date: May 13, 2011		/s/ JOHN RITACCO
		John Ritacco
		President and Chief Executive Officer

Date: May 13, 2011		/s/ STEPHEN DOWD
		Stephen Dowd
		Chief Financial Officer

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