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EX-32.1 - EXHIBIT 32.1 - Magyar Bancorp, Inc.ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - Magyar Bancorp, Inc.ex31_1.htm
EX-32.2 - EXHIBIT 32.2 - Magyar Bancorp, Inc.ex32_2.htm
EX-31.2 - EXHIBIT 31.2 - Magyar Bancorp, Inc.ex31_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011

Commission File Number                                           000-51726

Magyar Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
20-4154978
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
     
     
400 Somerset Street, New Brunswick, New Jersey
 
08901
(Address of Principal Executive Office)
 
(Zip Code)
 
(732) 342-7600
(Issuer’s Telephone Number including area code)

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

Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes     o     No    o

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

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ

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

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
Outstanding at August 1, 2011
Common Stock, $0.01 Par Value
 5,798,831
 
 
 

 

MAGYAR BANCORP, INC.

Form 10-Q Quarterly Report


PART I. FINANCIAL INFORMATION

 
Page Number
       
Item 1.
 
1
Item 2.
 
23
Item 3.
 
34
Item 4.
 
34
       
 
PART II. OTHER INFORMATION
   
       
Item 1.
 
35
Item 1a.
 
35
Item 2.
 
35
Item 3.
 
35
Item 4.
 
35
Item 5.
 
35
Item 6.
 
35
       
 
36
 

PART I. FINANCIAL INFORMATION

Item 1.  
Financial Statements

MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)


   
June 30,
   
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
Assets
           
Cash
  $ 1,201     $ 1,126  
Interest earning deposits with banks
    6,505       19,960  
Total cash and cash equivalents
    7,706       21,086  
                 
Investment securities - available for sale, at fair value
    28,130       14,187  
Investment securities - held to maturity, at amortized cost (fair value of $40,006
               
and $45,398 at June 30, 2011 and September 30, 2010, respectively)
    39,613       44,479  
Federal Home Loan Bank of New York stock, at cost
    2,689       2,775  
Loans receivable, net of allowance for loan losses of $3,807 and $4,766 at
               
June 30, 2011 and September 30, 2010, respectively
    394,745       403,886  
Bank owned life insurance
    9,570       9,306  
Accrued interest receivable
    2,034       1,950  
Premises and equipment, net
    20,012       20,142  
Other real estate owned ("OREO")
    15,216       12,655  
Other assets
    6,765       7,483  
                 
Total assets
  $ 526,480     $ 537,949  
Liabilities and Stockholders' Equity
               
Liabilities
               
Deposits
  $ 418,363     $ 427,932  
Escrowed funds
    1,249       1,555  
Federal Home Loan Bank of New York advances
    43,591       45,769  
Securities sold under agreements to repurchase
    15,000       15,000  
Accrued interest payable
    374       418  
Accounts payable and other liabilities
    3,485       3,098  
                 
Total liabilities
    482,062       493,772  
                 
Stockholders' equity
               
Preferred stock: $.01 Par Value, 1,000,000 shares authorized; none issued
    -       -  
Common stock: $.01 Par Value, 8,000,000 shares authorized; 5,923,742
               
issued; 5,798,831 and 5,783,131 outstanding at June 30, 2011 and
               
September 30, 2010, respectively, at cost
    59       59  
Additional paid-in capital
    26,412       26,396  
Treasury stock: 124,911 and 140,611 shares at June 30, 2011 and
               
September 30, 2010, respectively, at cost
    (1,480 )     (1,704 )
Unearned Employee Stock Ownership Plan shares
    (1,257 )     (1,342 )
Retained earnings
    21,107       21,300  
Accumulated other comprehensive loss
    (423 )     (532 )
                 
Total stockholders' equity
    44,418       44,177  
                 
Total liabilities and stockholders' equity
  $ 526,480     $ 537,949  

The accompanying notes are an integral part of these statements.


MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)

   
For the Three Months
Ended June 30,
   
For the Nine Months
Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
 
Interest and dividend income
                       
Loans, including fees
  $ 5,076     $ 5,543     $ 15,228     $ 17,131  
Investment securities
                               
Taxable
    509       584       1,544       1,909  
Tax-exempt
    1       1       4       5  
Federal Home Loan Bank of New York stock
    31       33       118       124  
                                 
Total interest and dividend income
    5,617       6,161       16,894       19,169  
                                 
Interest expense
                               
Deposits
    1,233       1,596       3,927       5,080  
Borrowings
    579       675       1,786       2,090  
                                 
Total interest expense
    1,812       2,271       5,713       7,170  
                                 
Net interest and dividend income
    3,805       3,890       11,181       11,999  
                                 
Provision for loan losses
    402       494       1,238       1,644  
                                 
Net interest and dividend income after
                               
provision for loan losses
    3,403       3,396       9,943       10,355  
                                 
Other income
                               
Service charges
    261       240       837       740  
Other operating income
    113       126       329       374  
Gains on sales of loans
    35       40       494       155  
Gains on sales of investment securities
    39       105       74       455  
Gains (losses) on OREO
    (131 )     60       (423 )     158  
                                 
Total other income
    317       571       1,311       1,882  
                                 
Other expenses
                               
Compensation and employee benefits
    1,863       1,846       5,720       6,462  
Occupancy expenses
    671       699       2,047       1,951  
Advertising
    43       36       145       125  
Professional fees
    201       285       751       854  
Service fees
    138       144       427       434  
OREO expenses
    87       75       323       201  
FDIC deposit insurance premiums
    248       366       954       917  
Other expenses
    394       427       1,250       1,225  
                                 
Total other expenses
    3,645       3,878       11,617       12,169  
                                 
Income (loss) before income tax expense (benefit)
    75       89       (363 )     68  
                                 
Income tax expense (benefit)
    56       (3,446 )     (152 )     (3,768 )
                                 
Net income (loss)
  $ 19     $ 3,535     $ (211 )   $ 3,836  
                                 
Net income (loss) per share-basic and diluted
  $ 0.003     $ 0.61     $ (0.04 )   $ 0.66  

The accompanying notes are an integral part of these statements.


MAGYAR BANCORP, INC. AND SUBSIDIARY
 Consolidated Statement of Changes in Stockholders' Equity
 For the Nine Months Ended June  30, 2011
 (In Thousands, Except for Share Amounts)
 (Unaudited)

   
Common Stock
   
Additional
         
Unearned
         
Accumulated Other
       
   
Shares
   
Par
   
Paid-In
   
Treasury
   
ESOP
   
Retained
   
Comprehensive
       
   
Outstanding
   
Value
   
Capital
   
Stock
   
Shares
   
Earnings
   
Loss
   
Total
 
                                                 
Balance, September 30, 2010
    5,783,131     $ 59     $ 26,396     $ (1,704 )   $ (1,342 )   $ 21,300     $ (532 )   $ 44,177  
                                                                 
Comprehensive loss:
                                                               
Net loss
    -       -       -       -       -       (211 )     -       (211 )
Unrealized loss on securities available-
                                                               
for-sale, net of tax expense of $149
    -       -       -       -       -       -       230       230  
Reclassification adjustment for gains included
                                                               
in net loss, net of tax benefit of $30
    -       -       -       -       -       -       (44 )     (44 )
Unrealized loss on derivatives,
                                                               
net of tax benefit of $51
    -       -       -       -       -       -       (77 )     (77 )
Total comprehensive loss
                                                            (102 )
                                                                 
Treasury stock used for restricted stock plan
    15,700       -       (242 )     224       -       18       -       -  
ESOP shares allocated
    -       -       (44 )     -       85       -       -       41  
Stock-based compensation expense
    -       -       302       -       -       -       -       302  
                                                                 
Balance, June 30, 2011
    5,798,831     $ 59     $ 26,412     $ (1,480 )   $ (1,257 )   $ 21,107     $ (423 )   $ 44,418  

The accompanying notes are an integral part of this statement.

 
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands)
 
   
For the Nine Months
 Ended June 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
Operating activities
     
Net income (loss)
  $ (211 )   $ 3,836  
Adjustment to reconcile net income (loss) to net cash provided
               
by operating activities
               
Depreciation expense
    725       838  
Premium amortization on investment securities, net
    236       111  
Provision for loan losses
    1,238       1,644  
Provision for loss on other real estate owned
    347       -  
Proceeds from the sales of loans
    8,015       4,268  
Gains on sale of loans
    (494 )     (155 )
Gains on sales of investment securities
    (74 )     (455 )
Losses (gains) on the sales of other real estate owned
    76       (158 )
ESOP compensation expense
    41       40  
Stock-based compensation expense
    302       252  
Deferred income tax benefit
    -       (3,493 )
(Increase) decrease in accrued interest receivable
    (84 )     199  
Increase in surrender value bank owned life insurance
    (264 )     (330 )
Decrease (increase) in other assets
    522       (2,847 )
Decrease in accrued interest payable
    (44 )     (210 )
Increase in accounts payable and other liabilities
    387       690  
Net cash provided by operating activities
    10,718       4,230  
                 
Investing activities
               
Net (increase) decrease in loans receivable
    (3,199 )     12,834  
Purchases of investment securities held to maturity
    (7,747 )     (11,649 )
Purchases of investment securities available for sale
    (20,083 )     (8,101 )
Sales of investment securities held to maturity
    -       4,000  
Sales of investment securities available for sale
    4,047       12,782  
Principal repayments on investment securities held to maturity
    12,496       14,425  
Principal repayments on investment securities available for sale
    2,353       1,913  
Redemptions of bank owned life insurance
    -       2,111  
Purchases of premises and equipment
    (595 )     (518 )
Investment in other real estate owned
    (1,198 )     (575 )
Proceeds from the sale of other real estate owned
    1,795       1,747  
Redemption of Federal Home Loan Bank stock
    86       241  
Net cash (used) provided by investing activities
    (12,045 )     29,210  
                 
Financing activities
               
Net decrease in deposits
    (9,569 )     (20,430 )
Net decrease (increase) in escrowed funds
    (306 )     20  
Repayments of long-term advances
    (5,853 )     (5,758 )
Net change in short-term advances
    3,675       -  
Net cash used by financing activities
    (12,053 )     (26,168 )
Net (decrease) increase in cash and cash equivalents
    (13,380 )     7,272  
                 
Cash and cash equivalents, beginning of period
    21,086       7,921  
                 
Cash and cash equivalents, end of period
  $ 7,706     $ 15,193  
                 
Supplemental disclosures of cash flow information
               
Cash paid for
               
Interest
  $ 5,756     $ 7,381  
Income taxes
  $ 8     $ 4  
Non-cash investing activities
               
Real estate acquired in full satisfaction of loans in foreclosure
  $ 3,581     $ 9,108  
 
The accompanying notes are an integral part of these statements.


MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

NOTE A – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Magyar Bancorp, Inc. (the “Company”), its wholly owned subsidiary Magyar Bank, and the Bank’s wholly owned subsidiaries Magyar Service Corporation, Hungaria Urban Renewal, LLC, and MagBank Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

Operating results for the three and nine months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending September 30, 2011. The September 30, 2010 information has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the assessment of realizability of deferred income tax assets.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2011 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS

In connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (SEC) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on financial statements when they are adopted in the future.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets.  This Update amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. The amendments in this Update 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 Update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. The ASU did not have a material impact on the Company’s consolidated financial statements.
 
In October 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.  This Update amends the Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic


performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity.  The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. This Update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009.  The ASU did not have a material impact on the Company’s consolidated financial statements.

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require: (1) a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures: (1) for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The ASU did not have a material impact on the Company’s consolidated financial statements.

The FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, in an effort to help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. The amendments in this Update apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments. The amendments require disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The portions of the ASU that were not delayed by ASU 2011-01 (see below) did not have a material impact on the Company’s consolidated financial statements.

The FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring to clarify the accounting principles applied to loan modifications, as defined by FASB ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. The ASU clarifies guidance on a creditor’s evaluation of whether or not a concession has been granted, with an emphasis on evaluating all aspects of the modification rather than a focus on specific criteria, such as the effective interest rate test, to determine a concession. The ASU goes on to provide guidance on specific types of modifications such as changes in the interest rate of the borrowing, and insignificant delays in payments, as well as guidance on the creditor’s evaluation of whether or not a debtor is experiencing financial difficulties. For the Company, the amendments in the ASU are effective for the first interim or annual periods beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The entity should also disclose information required by ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which had previously been deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. The ASU did not have a material impact on the Company’s consolidated financial statements.

The FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The ASU clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity;


and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The ASU also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The ASU also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. This ASU is effective for interim and annual periods beginning after December 15, 2011. The Company is evaluating the updates to Topic 820 and does not expect their implementation to have a material impact on its consolidated financial statements.

The FASB issued ASU 2011-05, Presentation of Comprehensive Income to amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all 3 presentations were acceptable. Regardless of the presentation selected, the Reporting Entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 31, 2011. The Company is evaluating the updates to Topic 220 and does not expect their implementation to have a material impact on its consolidated financial statements.

  NOTE C - CONTINGENCIES

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

  NOTE D - EARNINGS PER SHARE

Basic and diluted earnings per share for the three and nine months ended June 30, 2011 and 2010 were calculated by dividing net income by the weighted-average number of shares outstanding for the period. All stock options and restricted stock awards were anti-dilutive for the three and nine months ended June 30, 2011 and the three and nine months ended June 30, 2010. The following table shows the Company’s earnings per share for the periods presented:

   
For the Three Months
 Ended June 30,
   
For the Nine Months
 Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands except for per share data)
 
                         
Income (loss) applicable to common shares
  $ 19     $ 3,535     $ (211 )   $ 3,836  
Weighted average number of common shares outstanding - basic
    5,805       5,786       5,800       5,782  
Stock options and restricted stock
    -       -       -       -  
Weighted average number of common shares
and common share equivalents - diluted
    5,805       5,786       5,800       5,782  
Basic earnings (loss) per share
  $ 0.003     $ 0.61     $ (0.04 )   $ 0.66  
Diluted earnings (loss) per share
  $ 0.003     $ 0.61     $ (0.04 )   $ 0.66  

Options to purchase 188,276 shares of common stock at a weighted average price of $14.61 and 20,964 shares of restricted shares at a weighted average price of $9.15 were outstanding and not included in the computation of diluted earnings per share for the three and nine months ended June 30, 2011 because the grant (or option strike) price was


greater than the average market price of the common shares during the periods. Options to purchase 188,276 shares of common stock at an average price of $14.61 and 46,390 restricted shares at a weighted average price of $11.30 were outstanding and not included in the computation of diluted earnings per share for the three and nine months ended June 30, 2010 because the grant (or option strike) price was greater than the average market price of the common shares during the periods.

NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM

The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

ASC 718 also requires the Company to realize as a financing cash flow rather than an operating cash flow, as previously required, the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, the Company classified share-based compensation for employees and outside directors within “compensation and employee benefits” in the consolidated statement of operations to correspond with the same line item as the cash compensation paid.

Stock options generally vest over a five-year service period and expire ten years from issuance. Management recognizes compensation expense for all option grants over the awards’ respective requisite service periods. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Since there was limited historical information on the volatility of the Company’s stock, management also considered the average volatilities of similar entities for an appropriate period in determining the assumed volatility rate used in the estimation of fair value. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The 7-year Treasury yield in effect at the time of the grant provided the risk-free rate for periods within the contractual life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Once vested, these awards are irrevocable. Shares will be obtained from either the open market or treasury stock upon share option exercise.

Restricted shares generally vest over a five-year service period on the anniversary of the grant date. Once vested, these awards are irrevocable. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s restricted stock plans. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.

The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the nine months ended June 30, 2011:

   
Number of Stock Options
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
 
Aggregate Intrinsic Value
 
                     
Balance at September 30, 2010
    188,276     $ 14.61          
Granted
    -       -          
Exercised
    -       -          
Forfeited
    -       -          
Balance at June 30, 2011
    188,276     $ 14.61  
5.7 years
  $ -  
                           
Exercisable at June 30, 2011
    154,561     $ 14.61  
5.7 years
  $ -  
 
The following is a summary of the Company’s non-vested stock awards as of June 30, 2011 and changes during the nine months ended June 30, 2011:


   
Number of Stock Awards
   
Weighted Average Grant Date Fair Value
 
Balance at September 30, 2010
    45,390     $ 11.45  
Granted
    -       -  
Vested
    (18,497 )     13.03  
Forfeited
    -       -  
Balance at June 30, 2011
    26,893     $ 10.36  

Stock option and stock award expenses included with compensation expense were $122,000 and $180,000, respectively, for the nine months ended June 30, 2011.

The Company announced in November 2007 its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares. Through June 30, 2011, the Company had repurchased a total of 66,970 shares of its common stock at an average cost of $9.39 per share under this program. No shares have been repurchased during the nine months ended June 30, 2011. Under the stock repurchase program, 62,954 shares of the 129,924 shares authorized remained available for repurchase as of June 30, 2011. The Company’s intended use of the repurchased shares is for general corporate purposes, including the funding of awards granted under the 2006 Equity Incentive Plan.

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meet the eligibility requirements as defined in the plan. The ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The Bank will make cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears a variable interest rate that adjusts annually every January 1st to the then published Prime Rate (3.25% at January 1, 2011) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.

As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheet. As shares are released from collateral, the Company reports compensation expense equal to the then current market price of the shares, and the shares become outstanding for earnings per share computations.

At June 30, 2011, shares allocated to participants totaled 91,100. Unallocated ESOP shares held in suspense totaled 126,763 at June 30, 2011 and had a fair market value of $524,799. The Company's contribution expense for the ESOP was $41,000 and $40,000 for the nine months ended June 30, 2011 and 2010, respectively.
 
NOTE F - COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) and the related income tax effects are as follows:

 
   
Three Months Ended June 30,
 
   
2011
   
2010
 
   
Before Tax Amount
   
Tax Benefit (Expense)
   
Net of Tax Amount
   
Before Tax Amount
   
Tax Benefit (Expense)
   
Net of Tax Amount
 
   
(Dollars in thousands)
 
Unrealized holding gains (losses) arising
during period on:
                                   
Available-for-sale investments
  $ 700     $ (256 )   $ 444     $ 254     $ (98 )   $ 156  
Less reclassification adjustment for
gains realized in net income
    (39 )     16       (23 )     (105 )     42       (63 )
Interest rate derivatives
    (27 )     11       (16 )     (76 )     30       (46 )
Other comprehensive income, net
  $ 634     $ (229 )   $ 405     $ 73     $ (26 )   $ 47  
 
 
                                     
   
Nine Months Ended June 30,
 
   
2011
   
2010
 
   
Before Tax Amount
   
Tax Benefit (Expense)
   
Net of Tax Amount
   
Before Tax Amount
   
Tax Benefit (Expense)
   
Net of Tax Amount
 
   
(Dollars in thousands)
 
Unrealized holding gains (losses) arising
                                   
during period on:
                                   
Available-for-sale investments
  $ 379     $ (149 )   $ 230     $ 360     $ (144 )   $ 216  
Less reclassification adjustment for
gains realized in net income
    (74 )     30       (44 )     (455 )     182       (273 )
                                                 
Interest rate derivatives
    (128 )     51       (77 )     (226 )     90       (136 )
                                                 
Other comprehensive income (loss), net
  $ 177     $ (68 )   $ 109     $ (321 )   $ 128     $ (193 )

NOTE G – FAIR VALUE DISCLOSURES

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

In accordance with ASC 820, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
 
 
Level 1-
Valuation is based upon quoted prices for identical instruments traded in active markets.
 
 
Level 2-
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
 
 
Level 2-
Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.
 

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

Securities available-for-sale
Our available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. Our securities available-for-sale portfolio consists of U.S government and government-sponsored enterprise obligations, municipal bonds, and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. Our independent pricing service provides us with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

Derivative financial instruments
The Company uses interest rate floors to manage its interest rate risk. The interest rate floors have been designated as cash flow hedging instruments. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis.

   
Fair Value at June 30, 2011
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
Securities available for sale:
                       
Obligations of U.S. government agencies:
                       
Mortgage backed securities - residential
  $ 3,464     $ -     $ 3,464     $ -  
Obligations of U.S. government-sponsored enterprises:
                               
Mortgage-backed securities-residential
    13,664       -       13,664       -  
Mortgage backed securities-commercial
    4,434       -       4,434       -  
Debt securities
    4,929       -       4,929       -  
Private label mortgage-backed securities-residential
    1,639       -       1,639       -  
Total securities available for sale
  $ 28,130     $ -     $ 28,130     $ -  
 

   
Fair Value at September 30, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
Securities available for sale:
                       
Obligations of U.S. government agencies:
                       
Mortgage backed securities - residential
  $ 3,878     $ -     $ 3,878     $ -  
Obligations of U.S. government-sponsored enterprises:
                               
Mortgage-backed securities-residential
    2,940       -       2,940       -  
Mortgage backed securities-commercial
    4,270       -       4,270       -  
Debt securities
    1,002       -       1,002       -  
Private label mortgage-backed securities-residential
    2,097       -       2,097       -  
Total securities available for sale
  $ 14,187     $ -     $ 14,187     $ -  
Derivatives
    51       -       51       -  
    $ 14,238     $ -     $ 14,238     $ -  

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

Mortgage Servicing Rights, net
Mortgage Servicing Rights (MSRs) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3.

Impaired Loans
Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral if the asset is collateral dependent. The regulatory agencies require this method for loans from which repayment is expected to be provided solely by the underlying collateral. Our impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3.

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

Other Real Estate Owned
The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3.


The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at June 30, 2011.

   
Fair Value at June 30, 2011
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
                         
Impaired loans
  $ 9,397     $ -     $ -     $ 9,397  
Other real estate owned
    3,108       -       -       3,108  
    $ 12,505     $ -     $ -     $ 12,505  
 
   
Fair Value at September 30, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
                         
Impaired loans
  $ 16,193     $ -     $ -     $ 16,193  
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments not already disclosed above for which it is practicable to estimate fair value:

Cash and interest earning deposits with banks:  The carrying amounts are a reasonable estimate of fair value.

Held to maturity securities:  The fair values of our held to maturity securities are obtained from an independent nationally recognized pricing service. Our independent pricing service provides us with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in our portfolio.

Loans:  Fair value for the loan portfolio, excluding impaired loans with specific loss allowances, is estimated based on discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

Federal Home Loan Bank of New York (“FHLB”) stock: The carrying amount of FHLB stock approximates fair value and considers the limited marketability of the investment.

Bank-owned life insurance:  The carrying amounts are based on the cash surrender values of the individual policies, which is a reasonable estimate of fair value.

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees.  The fair value of letters of credit is based on the amount of unearned fees plus the estimated costs to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letter of credit are considered immaterial.

Deposits: The fair value of deposits with no stated maturity, such as money market deposit accounts, interest-bearing checking accounts and savings accounts, is equal to the amount payable on demand.  The fair value of certificates of deposit is based on the discounted value of contractual cash flows.  The discount rate is equivalent to current market rates for deposits of similar size, type and maturity.

Accrued interest receivable and payable: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Federal Home Loan Bank of New York advances and securities sold under reverse repurchase agreements: The fair value of borrowings is based on the discounted value of contractual cash flows.  The discount rate is equivalent to the rate currently offered by the Federal Home Loan Bank of New York for borrowings of similar maturity and terms.

The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2011 and September 30, 2010 were as follows:


   
June 30, 2011
   
September 30, 2010
 
   
Carrying
Value
   
Fair
Value
   
Carrying
Value
   
Fair
Value
 
   
(Dollars in thousands)
 
                         
Financial assets
                       
Investment securities
  $ 67,743     $ 68,136     $ 58,666     $ 59,585  
Loans, net of allowance for loan losses
    394,745       401,220       403,886       408,790  
Bank owned insurance policies
    9,570       9,570       9,306       9,306  
                                 
Financial liabilities
                               
Deposits
                               
Demand, NOW and money market savings
  $ 240,089     $ 240,089     $ 239,917     $ 239,917  
Certificates of deposit
    178,274       181,981       188,015       191,636  
Total deposits
  $ 418,363     $ 422,070     $ 427,932     $ 431,553  
Borrowings
  $ 58,591     $ 61,776     $ 60,769     $ 64,068  
                                 
Interest rate derivatives
  $ -     $ -     $ 51     $ 51  

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.

Cash and cash equivalents, accrued interest receivable and accrued interest payable are not presented in the above table as the carrying amounts shown in the consolidated balance sheet equal fair value.

NOTE H - INVESTMENT SECURITIES

The following table is an analysis of the amortized cost and fair values of securities available for sale at June 30, 2011 and September 30, 2010:

   
At June 30, 2011
   
At September 30, 2010.
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(Dollars in thousands)
 
Securities available for sale:
                                               
Obligations of U.S. government agencies:
                                               
Mortgage backed securities - residential
  $ 3,422     $ 42     $ -     $ 3,464     $ 3,904     $ -     $ (26 )   $ 3,878  
Obligations of U.S. government-sponsored enterprises:
                                                               
Mortgage-backed securities-residential
    13,737       77       (150 )     13,664       2,833       107       -       2,940  
Mortgage backed securities-commercial
    4,157       277       -       4,434       4,274       -       (4 )     4,270  
Debt securities
    5,001       1       (73 )     4,929       1,001       1       -       1,002  
Private label mortgage-backed securities-residential
    1,696       -       (57 )     1,639       2,362       -       (265 )     2,097  
Total securities available for sale
  $ 28,013     $ 397     $ (280 )   $ 28,130     $ 14,374     $ 108     $ (295 )   $ 14,187  

 
The maturities of the debt securities and mortgage-backed securities available-for-sale at June 30, 2011 are summarized in the following table:


   
At June 30, 2011
 
   
Amortized
Cost
   
Fair
Value
 
   
(Dollars in thousands)
 
Due within 1 year
  $ -     $ -  
Due after 1 but within 5 years
    1,001       1,001  
Due after 5 but within 10 years
    4,000       3,928  
Due after 10 years
    -       -  
Total debt securities
    5,001       4,929  
                 
Mortgage-backed securities:
               
Residential
    18,855       18,767  
Commercial
    4,157       4,434  
Total
  $ 28,013     $ 28,130  

The following table is an analysis of the amortized cost and fair values of securities held to maturity at June 30, 2011 and September 30, 2010:

   
At June 30, 2011
   
At September 30, 2010
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(Dollars in thousands)
 
Securities held to maturity:
                                               
Obligations of U.S. government agencies:
                                               
Mortgage-backed securities-residential
  $ 15,622     $ 353     $ (138 )   $ 15,837     $ 18,407     $ 401     $ -     $ 18,808  
Mortgage-backed securities-commercial
    1,666       19       -       1,685       1,725       22       -       1,747  
Obligations of U.S. government-sponsored enterprises:
                                                               
Mortgage backed securities-residential
    15,119       288       (53 )     15,354       17,880       425       -       18,305  
Debt securities
    5,499       8       (24 )     5,483       4,499       35       -       4,534  
Private label mortgage-backed securities-residential
    1,635       50       (113 )     1,572       1,871       101       (70 )     1,902  
Obligations of state and political subdivisions
    72       3       -       75       97       5       -       102  
Total securities held to maturity
  $ 39,613     $ 721     $ (328 )   $ 40,006     $ 44,479     $ 989     $ (70 )   $ 45,398  

 
The maturities of the debt securities and the mortgage backed securities held to maturity at June 30, 2011 are summarized in the following table:

   
At June 30, 2011
 
   
Amortized
Cost
   
Fair
Value
 
   
(Dollars in thousands)
 
Due within 1 year
  $ -     $ -  
Due after 1 but within 5 years
    2,072       2,079  
Due after 5 but within 10 years
    1,500       1,476  
Due after 10 years
    1,999       2,003  
Total debt securities
    5,571       5,558  
                 
Mortgage-backed securities:
               
Residential
    32,376       32,763  
Commercial
    1,666       1,685  
Total
  $ 39,613     $ 40,006  
 

NOTE I – IMPAIRMENT OF INVESTMENT SECURITIES

 
The Company recognizes credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold are recognized in other comprehensive income (“OCI”).

 
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. We evaluate our intent and ability to hold debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.

 
Investment securities with fair values less than their amortized cost contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of June 30, 2011.

 
The following tables present the gross unrealized losses and fair value at June 30, 2011 and September 30, 2010 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

         
June 30, 2011
 
         
Less Than 12 Months
   
12 Months Or Greater
   
Total
 
   
Number of Securities
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
         
(Dollars in thousands)
 
Obligations of U.S. government agencies:
                                         
Mortgage-backed securities-residential
    2     $ 4,658     $ (138 )   $ -     $ -     $ 4,658     $ (138 )
Mortgage-backed securities-commercial
    1       -       -       22       -       22       -  
Obligations of U.S. government-sponsored
                                                       
enterprises:
                                                       
Mortgage-backed securities - residential
    7       12,287       (203 )     -       -       12,287       (203 )
Debt securities
    4       5,403       (97 )     -       -       5,403       (97 )
Private label mortgage-backed securities:
                                                       
Residential
    3       -       -       2,431       (170 )     2,431       (170 )
Total
    17     $ 22,348     $ (438 )   $ 2,453     $ (170 )   $ 24,801     $ (608 )

 
The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. At June 30, 2011, there were seventeen investment securities with unrealized losses. The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of June 30, 2011.


         
September 30, 2010
 
         
Less Than 12 Months
   
12 Months Or Greater
   
Total
 
   
Number of Securities
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
         
(Dollars in thousands)
 
Obligations of U.S. government agencies:
                                         
Mortgage-backed securities-residential
    2     $ 3,878     $ (26 )   $ -     $ -     $ 3,878     $ (26 )
Obligations of U.S. government-sponsored
                                                       
enterprises:
                                                       
Mortgage backed securities - commercial
    1       4,270       (4 )     -       -       4,270       (4 )
Private label mortgage-backed securities:
                                                       
Residential
    3       -       -       2,964       (335 )     2,964       (335 )
Total
    6     $ 8,148     $ (30 )   $ 2,964     $ (335 )   $ 11,112     $ (365 )

NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

 
Loans receivable, net were comprised of the following:

   
June 30,
2011
   
September 30,
2010
 
   
(Dollars in thousands)
 
             
One-to four-family residential
  $ 162,634     $ 165,462  
Commercial real estate
    130,088       116,222  
Construction
    36,217       57,086  
Home equity lines of credit
    22,337       22,823  
Commercial business
    34,896       33,676  
Other
    12,235       13,277  
                 
Total loans receivable
    398,407       408,546  
Net deferred loan costs
    145       106  
Allowance for loan losses
    (3,807 )     (4,766 )
                 
Total loans receivable, net
  $ 394,745     $ 403,886  
 
 
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens.  The commercial loan segment is further disaggregated into three classes. Commercial real estate loans include loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties.  The construction loan segment consists primarily of developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built.  Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan.  The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

 
Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 90 days past due.  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 the shortfall in relation to the principal and interest owed.  

 
Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared 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 securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.

 
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary for the period presented:

   
Impaired Loans with
Specific Allowance
   
Impaired Loans with No Specific
Allowance
   
Total Impaired Loans