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EX-31.1 - EXHIBIT 31.1 - Magyar Bancorp, Inc.ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Magyar Bancorp, Inc.ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Magyar Bancorp, Inc.ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Magyar Bancorp, Inc.ex32-2.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 December 31, 2010

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
(Do not check if a smaller reporting company)
   

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 February 1, 2011
Common Stock, $0.01 Par Value
5,783,131


 
 

 


MAGYAR BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents


PART I. FINANCIAL INFORMATION





PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
             
   
December 31,
   
September 30,
 
   
2010
   
2010
 
   
(Unaudited)
 
Assets
 
Cash
  $ 1,416     $ 1,126  
Interest earning deposits with banks
    5,199       19,960  
Total cash and cash equivalents
    6,615       21,086  
                 
Investment securities - available for sale, at fair value
    28,678       14,187  
Investment securities - held to maturity, at amortized cost (fair value of $42,970
         
and $45,398 at December 31, 2010 and September 30, 2010, respectively)
    42,752       44,479  
Federal Home Loan Bank of New York stock, at cost
    2,978       2,775  
Loans receivable, net of allowance for loan losses of $4,287 and $4,766 at
               
December 31, 2010 and September 30, 2010, respectively
    393,975       403,886  
Bank owned life insurance
    9,396       9,306  
Accrued interest receivable
    1,820       1,950  
Premises and equipment, net
    19,938       20,142  
Other real estate owned
    12,966       12,655  
Other assets
    7,351       7,483  
                 
Total assets
  $ 526,469     $ 537,949  
Liabilities and Stockholders' Equity
 
Liabilities
               
Deposits
  $ 411,503     $ 427,932  
Escrowed funds
    1,086       1,555  
Federal Home Loan Bank of New York advances
    50,291       45,769  
Securities sold under agreements to repurchase
    15,000       15,000  
Accrued interest payable
    407       418  
Accounts payable and other liabilities
    4,076       3,098  
                 
Total liabilities
    482,363       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; 5,783,131 outstanding
    59       59  
Additional paid-in capital
    26,480       26,396  
Treasury stock: 140,611 shares, at cost
    (1,704 )     (1,704 )
Unearned Employee Stock Ownership Plan shares
    (1,312 )     (1,342 )
Retained earnings
    21,427       21,300  
Accumulated other comprehensive loss
    (844 )     (532 )
                 
Total stockholders' equity
    44,106       44,177  
                 
Total liabilities and stockholders' equity
  $ 526,469     $ 537,949  
                 
The accompanying notes are an integral part of these statements.
 
 


MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
 
 
   
For the Three Months
 
   
Ended December 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
Interest and dividend income
           
Loans, including fees
  $ 5,148     $ 5,799  
Investment securities
               
Taxable
    502       695  
Tax-exempt
    1       2  
Federal Home Loan Bank of New York stock
    47       45  
                 
Total interest and dividend income
    5,698       6,541  
                 
Interest expense
               
Deposits
    1,416       1,817  
Borrowings
    610       717  
                 
Total interest expense
    2,026       2,534  
                 
Net interest and dividend income
    3,672       4,007  
                 
Provision for loan losses
    358       400  
                 
Net interest and dividend income after
               
provision for loan losses
    3,314       3,607  
                 
Other income
               
Service charges
    341       242  
Other operating income
    112       118  
Gains on sales of loans
    449       76  
Gains on sales of investment securities
    -       79  
Net losses on write-downs and sales of other real estate owned
    (135 )     -  
                 
Total other income
    767       515  
                 
Other expenses
               
Compensation and employee benefits
    1,870       2,719  
Occupancy expenses
    666       622  
Advertising
    53       43  
Professional fees
    247       227  
Service fees
    145       145  
REO expenses
    123       45  
FDIC deposit insurance premiums
    349       267  
Other expenses
    465       356  
                 
Total other expenses
    3,918       4,424  
                 
Income (loss) before income tax expense (benefit)
    163       (302 )
                 
Income tax expense (benefit)
    36       (323 )
                 
Net income
  $ 127     $ 21  
                 
Net income per share-basic and diluted
  $ 0.022     $ 0.004  
                 
The accompanying notes are an integral part of these statements.

 
 
 MAGYAR BANCORP, INC. AND SUBSIDIARY
 Consolidated Statement of Changes in Stockholders' Equity
 For the Three Months Ended December  31, 2010
 (In Thousands, Except for Share Amounts)
 (Unaudited)
 
 
                                       
Accumulated
       
   
Common Stock
   
Additional
         
Unearned
         
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 income
    -       -       -       -       -       127       -       127  
 Unrealized loss on securities available-
                                                               
 for-sale, net of tax benefit of $153
    -       -       -       -       -       -       (268 )     (268 )
 Unrealized loss on derivatives,
                                                               
net of tax benefit of $29
    -       -       -       -       -       -       (44 )     (44 )
 Total comprehensive loss
                                                            (185 )
                                                                 
 ESOP shares allocated
    -       -       (16 )     -       30       -       -       14  
 Stock-based compensation expense
    -       -       100       -       -       -       -       100  
                                                                 
Balance, December 31, 2010
    5,783,131     $ 59     $ 26,480     $ (1,704 )   $ (1,312 )   $ 21,427     $ (844 )   $ 44,106  
                                                                 

 
The accompanying notes are an integral part of this statement.


 
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands)
 
   
For the Three Months
 
   
Ended December 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
Operating activities
           
Net income
  $ 127     $ 21  
Adjustment to reconcile net income to net cash provided (used)
               
by operating activities
               
Depreciation expense
    247       279  
Premium amortization on investment securities, net
    74       44  
Proceeds from the sales of loans
    7,613       1,875  
Provision for loan losses
    358       400  
Provision for loss on other real estate owned
    292       -  
Gains on sale of loans
    (449 )     (76 )
Gains on sales of investment securities
    -       (79 )
Gains on sales of other real estate owned
    (157 )     -  
ESOP compensation expense
    14       10  
Stock-based compensation expense
    100       53  
Decrease in accrued interest receivable
    130       57  
Increase in surrender value bank owned life insurance
    (90 )     (114 )
Decrease (increase) in other assets
    240       (3,857 )
Decrease in accrued interest payable
    (11 )     (82 )
Decrease (increase) in accounts payable and other liabilities
    978       (153 )
Net cash provided (used) by operating activities
    9,466       (1,622 )
                 
Investing activities
               
Net decrease (increase) in loans receivable
    1,808       (1,592 )
Purchases of investment securities held to maturity
    (5,753 )     (3,069 )
Purchases of investment securities available for sale
    (16,109 )     -  
Sales of investment securities available for sale
    -       3,285  
Principal repayments on investment securities held to maturity
    7,442       5,257  
Principal repayments on investment securities available for sale
    1,161       666  
Purchases of premises and equipment
    (43 )     (53 )
Investment in other real estate owned
    (406 )     (81 )
Proceeds from the sale of other real estate owned
    542       246  
(Purchase) redemption of Federal Home Loan Bank stock
    (203 )     13  
Net cash (used) provided by investing activities
    (11,561 )     4,672  
                 
Financing activities
               
Net decrease in deposits
    (16,429 )     (6,629 )
Stock compensation tax benefit
    -       -  
Net decrease in escrowed funds
    (469 )     (41 )
Repayments of long-term advances
    (978 )     (273 )
Net change in short-term advances
    5,500       -  
Net cash used by financing activities
    (12,376 )     (6,943 )
Net decrease in cash and cash equivalents
    (14,471 )     (3,893 )
                 
Cash and cash equivalents, beginning of period
    21,086       7,921  
                 
Cash and cash equivalents, end of period
  $ 6,615     $ 4,028  
                 
Supplemental disclosures of cash flow information
               
Cash paid for
               
Interest
  $ 2,037     $ 2,615  
Income taxes
  $ -     $ 52  
Non-cash investing activities
               
Real estate acquired in full satisfaction of loans in foreclosure
  $ 581     $ 3,579  
                 
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 months ended December 31, 2010 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 December 31, 2010 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 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 to temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.
 
 
  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 months ended December 31, 2010 and 2009 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 months ended December 31, 2010 and the three months ended December 31, 2009. The following table shows the Company’s earnings per share for the periods presented:

   
For the Three Months Ended December 31,
 
   
2010
   
2009
 
         
Weighted
   
Per
         
Weighted
   
Per
 
         
average
   
share
         
average
   
share
 
   
Income
   
shares
   
Amount
   
Income
   
shares
   
Amount
 
   
(In thousands, except per share data)
 
Basic EPS
                                   
Net income available to common shareholders
  $ 127       5,795     $ 0.022     $ 21       5,779     $ 0.004  
                                                 
Effect of dilutive securities
                                               
Options and grants
    -       -       -       -       -       -  
                                                 
Diluted EPS
                                               
Net income available to common shareholders
plus assumed conversion
  $ 127       5,795     $ 0.022     $ 21       5,779     $ 0.004  
 
Options to purchase 188,276 shares of common stock at a weighted average price of $14.61 and 30,212 shares of restricted shares at a weighted average price of $11.45 were outstanding and not included in the computation of diluted earnings per share for the three months ended December 31, 2010 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 34,008 restricted shares at a weighted average price of $14.55 were outstanding and not included in the computation of diluted earnings per share for the three months ended December 31, 2009 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 three months ended December 31, 2010:

             
Weighted
     
         
Weighted
 
Average
 
Aggregate
 
   
Number of
   
Average
 
Remaining
 
Intrinsic
 
   
Stock Options
   
Exercise Price
 
 Contractual Life
 
Value
 
                     
Balance at September 30, 2010
    188,276     $ 14.61          
Granted
    -       -          
Exercised
    -       -          
Forfeited
    -       -          
Balance at December 31, 2010
    188,276     $ 14.61  
 6.2 years
  $ -  
                           
Exercisable at December 31, 2010
    120,846     $ 14.61  
 6.2 years
  $ -  

The following is a summary of the Company’s non-vested stock awards as of December 31, 2010 and changes during the three months ended December 31, 2010:

         
Weighted
 
         
Average
 
   
Number of
   
Grant Date
 
   
Stock Awards
   
Fair Value
 
Balance at September 30, 2010
    45,390     $ 11.45  
Granted
    -       -  
Vested
    -       -  
Forfeited
    -       -  
Balance at December 31, 2010
    45,390     $ 11.45  

Stock option and stock award expenses included with compensation expense were $40,000 and $60,000, respectively, for the three months ended December 31, 2010.

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 December 31, 2010, 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 three months ended December 31, 2010. Under the stock repurchase program, 62,954 shares of the 129,924 shares authorized remained available for repurchase as of December 31, 2010. 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 meets 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 Sheets. 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 December 31, 2010, shares allocated to participants totaled 76,904. Unallocated ESOP shares held in suspense totaled 140,959 at December 31, 2010 and had a fair market value of $563,836. The Company's contribution expense for the ESOP was $14,000 and $10,000 for the three months ended December 31, 2010 and 2009, respectively.


NOTE F - COMPREHENSIVE INCOME (LOSS)

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

   
Three Months Ended December 31,
 
   
2010
   
2009
 
         
Tax
   
Net of
         
Tax
   
Net of
 
   
Before Tax
   
Benefit
   
Tax
   
Before Tax
   
Benefit
   
Tax
 
   
Amount
   
(Expense)
   
Amount
   
Amount
   
(Expense)
   
Amount
 
   
(Dollars in thousands)
 
Unrealized holding losses arising
                                   
during period on:
                                   
                                     
Available-for-sale investments
  $ (421 )   $ 153     $ (268 )   $ (291 )   $ 109     $ (182 )
Less reclassification adjustment for
                                               
gains realized in net income
    -       -       -       (79 )     32       (47 )
Interest rate derivatives
    (73 )     29       (44 )     (78 )     31       (47 )
                                                 
Other comprehensive loss, net
  $ (494 )   $ 182     $ (312 )   $ (448 )   $ 172     $ (276 )

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 3 - 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 December 31, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
Investment securities available-for-sale
  $ 28,678     $ -     $ 28,678     $ -  
                                 
                                 
                                 
   
Fair Value at September 30, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
Investment 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 December 31, 2010.

   
Fair Value at December 31, 2010
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(Dollars in thousands)
 
Impaired loans
  $ 3,845     $ -     $ -     $ 3,845  
Other real estate owned
    2,610       -       -       2,610  
    $ 6,455     $ -     $ -     $ 6,455  
                                 
                                 
                                 
   
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 December 31, 2010 and September 30, 2010 were as follows:
             
   
Decemer 31, 2010
   
September 30, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Value
   
Value
   
Value
   
Value
 
   
(Dollars in thousands)
 
                         
Financial assets
                       
Investment securities
  $ 71,430     $ 71,648     $ 58,666     $ 59,585  
Loans, net of allowance for loan losses
    393,975       395,934       403,886       408,790  
Bank owned insurance policies
    9,396       9,396       9,306       9,306  
                                 
Financial liabilities
                               
Deposits
                               
Demand, NOW and money market savings
  $ 229,702     $ 229,702     $ 239,917     $ 239,917  
Certificates of deposit
    181,801       184,718       188,015       191,636  
                                 
Total deposits
  $ 411,503     $ 414,420     $ 427,932     $ 431,553  
                                 
Borrowings
  $ 65,291     $ 70,017     $ 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 December 31, 2010 and September 30, 2010:


   
At December 31, 2010
   
At September 30, 2010.
 
         
Gross
   
Gross
               
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
   
Cost
   
Gains
   
Losses
   
Value
 
   
(Dollars in thousands)
 
Securities available for sale:
                                               
Obligations of U.S. government agencies:
                                               
Mortgage backed securities - residential
  $ 3,714     $ 40     $ (27 )   $ 3,727     $ 3,904     $ -     $ (26 )   $ 3,878  
Obligations of U.S. government-sponsored enterprises:
                                                         
Mortgage-backed securities-residential
    14,440       97       (321 )     14,216       2,833       107       -       2,940  
Mortgage backed securities-commercial
    4,235       -       (41 )     4,194       4,274       -       (4 )     4,270  
Debt securities
    5,000       -       (167 )     4,833       1,001       1       -       1,002  
Private label mortgage-backed securities-residential
    1,897       -       (189 )     1,708       2,362       -       (265 )     2,097  
            Total securities available for sale
  $ 29,286     $ 137     $ (745 )   $ 28,678     $ 14,374     $ 108     $ (295 )   $ 14,187  
 
 
The maturities of the debt securities and mortgage-backed securities available-for-sale at December 31, 2010 are summarized in the following table:

   
At December 31, 2010
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(Dollars in thousands)
 
Due within 1 year
  $ -     $ -  
Due after 1 but within 5 years
    1,000       1,000  
Due after 5 but within 10 years
    4,000       3,833  
Due after 10 years
    -       -  
        Total debt securities
    5,000       4,833  
                 
Mortgage-backed securities:
               
Residential
    20,051       19,651  
Commercial
    4,235       4,194  
        Total
  $ 29,286     $ 28,678  
 
The following table is an analysis of the amortized cost and fair values of securities held to maturity at December 31, 2010 and September 30, 2010:

   
At December 31, 2010
   
At September 30, 2010
 
         
Gross
   
Gross
               
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
   
Cost
   
Gains
   
Losses
   
Value
 
   
(Dollars in thousands)
 
Securities held to maturity:
                                               
Obligations of U.S. government agencies:
                                               
Mortgage-backed securities-residential
  $ 17,179     $ 199     $ (80 )   $ 17,298     $ 18,407     $ 401     $ -     $ 18,808  
Mortgage-backed securities-commercial
    1,706       17       -       1,723       1,725       22       -       1,747  
Obligations of U.S. government-sponsored enterprises:
                                                         
Mortgage backed securities-residential
    17,475       244       (74 )     17,645       17,880       425       -       18,305  
Mortgage backed securities - commercial
    -       -       -       -       -       -       -       -  
Debt securities
    4,500       9       (108 )     4,401       4,499       35       -       4,534  
Private label mortgage-backed securities-residential
    1,795       87       (79 )     1,803       1,871       101       (70 )     1,902  
Obligations of state and political subdivisions
    97       3       -       100       97       5       -       102  
            Total securities held to maturity
  $ 42,752     $ 559     $ (341 )   $ 42,970     $ 44,479     $ 989     $ (70 )   $ 45,398  


 
  The maturities of the debt securities and the mortgage backed securities held to maturity at December 31, 2010 are summarized in the following table:

 
   
At December 31, 2010
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(Dollars in thousands)
 
Due within 1 year
  $ -     $ -  
Due after 1 but within 5 years
    97       100  
Due after 5 but within 10 years
    3,500       3,392  
Due after 10 years
    1,000       1,009  
        Total debt securities
    4,597       4,501  
                 
Mortgage-backed securities:
               
Residential
    36,449       36,746  
Commercial
    1,706       1,723  
        Total
  $ 42,752     $ 42,970  

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 December 31, 2010.

 
The following tables present the gross unrealized losses and fair value at December 31, 2010 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:


         
December 31, 2010
 
         
Less Than 12 Months
   
12 Months Or Greater
   
Total
 
   
Number of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Securities
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
         
(Dollars in thousands)
 
Obligations of U.S. government agencies:
                                         
Mortgage-backed securities-residential
    3     $ 5,384     $ (107 )   $ -     $ -     $ 5,384     $ (107 )
Obligations of U.S. government-
                                                       
sponsored enterprises:
                                                       
Mortgage-backed securities - residential
    11       17,301       (395 )     -       -       17,301       (395 )
Mortgage backed securities - commercial
    1       4,194       (41 )     -       -       4,194       (41 )
Debt securities
    6       8,225       (275 )     -       -       8,225       (275 )
Private label mortgage-backed securities:
                                                       
Residential
    3       -       -       2,553       (268 )     2,553       (268 )
Total
    24     $ 35,104     $ (818 )   $ 2,553     $ (268 )   $ 37,657     $ (1,086 )
                                                         
 
 
         
September 30, 2010
 
         
Less Than 12 Months
   
12 Months Or Greater
   
Total
 
   
Number of
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Securities
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
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:

   
December 31,
   
September 30,
 
   
2010
   
2010
 
   
(Dollars in thousands)
 
             
One-to four-family residential
  $ 159,148     $ 165,462  
Commercial real estate
    123,155       116,222  
Construction
    44,235       57,086  
Home equity lines of credit
    22,528       22,823  
Commercial business
    35,832       33,676  
Other
    13,284       13,277  
                 
Total loans receivable
    398,182       408,546  
Net deferred loan costs
    80       106  
Allowance for loan losses
    (4,287 )     (4,766 )
                 
Total loans receivable, net
  $ 393,975     $ 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
             
  <