UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20429

FORM 10-Q

(Mark One)

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

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

Commission file number 0-29709

HARLEYSVILLE SAVINGS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania		23-3028464
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

271 Main Street, Harleysville, Pennsylvania 19438

(215) 256-8828

N/A

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 definition 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $.01 Par Value, 3,731,991 shares outstanding as of May 13, 2011.

 

 

HARLEYSVILLE SAVINGS FINANCIAL CORPORATION

Index

		PAGE(S)
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of March 31, 2011, and September 30, 2010			1
Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2011 and 2010			2
Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2011 and 2010			3
Unaudited Consolidated Statements of Stockholders’ Equity for the Six Months Ended March 31, 2011 and 2010			4
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010			5
Notes to Unaudited Consolidated Financial Statements			6 - 26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26 - 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30 - 31
Item 4. Controls and Procedures			32
Part II OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults upon Senior Securities			33
Item 4. (Removed and Reserved)			33
Item 5. Other Information			33
Item 6. Exhibits			33
Signatures			34
Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

Harleysville Savings Financial Corporation

		March 31,				September 30,
(In thousands, except share data)		2011				2010
Assets
Cash and amounts due from depository institutions		$	4,476			$	4,052
Interest bearing deposits			19,484				16,138
Total cash and cash equivalents			23,960				20,190
Investments and mortgage-backed securities:
Available for sale (amortized cost — March 31, $10,774; September 30, $21,401)			10,860				21,413
Held to maturity (fair value — March 31, $275,116; September 30, $264,448)			271,744				256,088
Loans receivable (net of allowance for loan losses —
March 31, $2,795; September 30, $2,504)			501,180				510,093
Accrued interest receivable			3,167				3,210
Federal Home Loan Bank stock — at cost			14,526				16,096
Foreclosed real estate			372				186
Office properties and equipment, net			12,070				12,158
Prepaid expenses and other assets			18,599				17,706
TOTAL ASSETS		$	856,478			$	857,140
Liabilities and Stockholders’ Equity
Liabilities:
Deposits		$	531,272			$	528,100
Long-term debt			263,632				272,047
Accrued interest payable			1,333				1,407
Advances from borrowers for taxes and insurance			4,450				1,247
Accounts payable and accrued expenses			782				988
Total liabilities			801,469				803,789
Commitments and contingencies
Stockholders’ equity:
Preferred Stock: $.01 par value; 7,500,000 shares authorized; none issued			—				—
Common stock: $.01 par value; 15,000,000 shares authorized; 3,921,177 shares issued; outstanding March 31, 2011 3,731,574 shares September 30, 2010 3,687,409 shares			39				39
Additional paid-in capital			8,224				8,126
Treasury stock, at cost (March 31, 2011, 189,603 shares; September 30, 2010, 233,768 shares)			(2,777	)			(3,383	)
Retained earnings — partially restricted			49,466				48,562
Accumulated other comprehensive income			57				7
Total stockholders’ equity			55,009				53,351
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	856,478			$	857,140

See notes to unaudited consolidated financial statements.

Harleysville Savings Financial Corporation

		For the Three Months Ended								For the Six Months Ended
		March 31,								March 31,
(In thousands, except per share data)		2011				2010				2011				2010
Interest Income:
Interest on mortgage loans		$	4,688			$	4,992			$	9,491			$	10,076
Interest on commercial loans			1,246				976				2,482				1,915
Interest on mortgage-backed securities			1,329				1,772				2,734				3,677
Interest on consumer and other loans			1,008				1,090				2,060				2,227
Interest on other taxable investments			803				851				1,534				1,760
Interest on tax-exempt investments			216				262				419				543
Dividends on investment securities			1				1				2				2
Total interest income			9,291				9,944				18,722				20,200
Interest Expense:
Interest on deposits			1,895				2,273				3,912				4,808
Interest on borrowings			2,869				3,152				5,827				6,486
Total interest expense			4,764				5,425				9,739				11,294
Net Interest Income			4,527				4,519				8,983				8,906
Provision for loan losses			175				150				325				300
Net Interest Income after Provision for Loan Losses			4,352				4,369				8,658				8,606
Other Income:
Customer service fees			127				152				264				313
Income on bank-owned life insurance			121				121				244				243
Other income			184				185				425				404
Total other income			432				458				933				960
Other Expenses:
Salaries and employee benefits			1,895				1,762				3,624				3,431
Occupancy and equipment			368				336				714				629
Deposit insurance premiums			263				226				489				453
Data processing			163				169				330				322
Other			651				737				1,345				1,465
Total other expenses			3,340				3,230				6,502				6,300
Income before Income Taxes			1,444				1,597				3,089				3,266
Income tax expense			350				437				779				892
Net Income		$	1,094			$	1,160			$	2,310			$	2,374
Basic Earnings Per Share		$	0.29			$	0.32			$	0.62			$	0.65
Diluted Earnings Per Share		$	0.29			$	0.32			$	0.62			$	0.65
Dividends Per Share		$	0.19			$	0.19			$	0.38			$	0.38

See notes to unaudited consolidated financial statements.

Harleysville Savings Financial Corporation

		Three Months Ended
		March 31,
(In thousands)		2011				2010
Net Income		$	1,094			$	1,160
Other Comprehensive Income
Unrealized (loss) gain on securities available for sale, net of tax (benefit) expense 2011, ($10); 2010, $28 and reclassifications			(20	)(1)			56	(1)
Total Comprehensive Income		$	1,074			$	1,216

		2011				2010
(1) Disclosure of reclassification amount, net of tax for the three months ended:
Net unrealized (loss) gain arising during the three months ended		$	(30	)		$	84
Reclassification adjustment for net losses (gains) included in net income			—				—
			(30	)			84
Tax benefit (expense)			10				(28	)
Net unrealized (loss) gain on securities available for sale		$	(20	)		$	56

		Six Months Ended
		March 31,
(In thousands)		2011				2010
Net Income		$	2,310			$	2,374
Other Comprehensive Income
Unrealized (loss) gain on securities available for sale, net of tax (benefit) expense 2011, $25; 2010, $29 and reclassifications			(50	)(1)			57	(1)
Total Comprehensive Income		$	2,260			$	2,431

		2011				2010
(1) Disclosure of reclassification amount, net of tax for the three months ended:
Net unrealized gain arising during the three months ended		$	75			$	86
Reclassification adjustment for net losses (gains) included in net income			—				—
			75				86
Tax expense			(25	)			(29	)
Net unrealized gain on securities available for sale		$	50			$	57

See notes to unaudited consolidated financial statements.

Harleysville Savings Financial Corporation

		Common												Retained				Accumulated
		Stock								Additional				Earnings-				Other								Total
		Shares				Common				Paid-in				Partially				Comprehensive				Treasury				Stockholders’
(In thousands, except share and per share data)		Outstanding				Stock				Capital				Restricted				(Loss) / Income				Stock				Equity
Balance at October 1, 2010			3,687,409			$	39			$	8,126			$	48,562			$	7			$	(3,383	)		$	53,351
Net income															2,310												2,310
Dividends — $.38 per share															(1,406	)											(1,406	)
Stock option compensation											103																103
Treasury stock delivered under ESOP			10,000								10												137				147
Treasury stock delivered under reinvestment plan			20,380								26												280				306
Employee options exercised			13,785								(41	)											189				148
Change in unrealized holding gain on available-for-sale securities, net of reclassification and tax																			50								50
Balance at March 31, 2011			3,731,574			$	39			$	8,224			$	49,466			$	57			$	(2,777	)		$	55,009

		Common												Retained				Accumulated
		Stock								Additional				Earnings-				Other								Total
		Shares				Common				Paid-in				Partially				Comprehensive				Treasury				Stockholders’
(In thousands, except share and per share data)		Outstanding				Stock				Capital				Restricted				(Loss) / Income				Stock				Equity
Balance at October 1, 2009			3,627,696			$	39			$	8,002			$	46,329			$	(29	)		$	(4,202	)		$	50,139
Net income															2,374												2,374
Dividends — $.38 per share															(1,382	)											(1,382	)
Stock option compensation											81																81
Treasury stock purchase			(5,659	)																			(77	)			(77	)
Treasury stock delivered under ESOP			10,000																				137				137
Treasury stock delivered under reinvestment plan			20,939								(6	)											286				280
Employee options exercised			7,916								(38	)											109				71
Change in unrealized holding loss on available-for-sale securities, net of reclassification and tax																			57								57
Balance at March 31, 2010			3,660,892			$	39			$	8,039			$	47,321			$	28			$	(3,747	)		$	51,680

See notes to unaudited consolidated financial statements.

Harleysville Savings Financial Corporation

		Six Months Ended March 31,
(In thousands)		2011				2010
Operating Activities:
Net Income		$	2,310			$	2,374
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			309				259
Provision for loan losses			325				300
Loss on sale of foreclosed real estate			—				159
Amortization of deferred loan fees			126				58
Net (accretion) amortization of premiums and discounts			(86	)			65
Increase in cash surrender value of bank owned life insurance			(244	)			(243	)
Compensation charge on stock options			103				81
Changes in assets and liabilities which provided (used) cash:
Decrease in accounts payable and accrued expenses			(206	)			(489	)
Increase in prepaid expenses and other assets			(649	)			(3,277	)
Decrease in accrued interest receivable			43				108
Decrease in accrued interest payable			(74	)			(149	)
Net cash provided by (used in) operating activities			1,957				(754	)
Investing Activities:
Purchase of mortgage-backed securities held to maturity			(36,930	)			(1,571	)
Purchase of investment securities held to maturity			(39,228	)			(50,953	)
Purchase of investment securities available-for-sale			(33,114	)			(30,900	)
Net redemption FHLB stock			1,570				—
Proceeds from the redemption of investment securities available-for-sale			43,717				33,780
Proceeds from maturities of investment securities held to maturity			36,665				40,429
Proceeds from sale of foreclosed real estate			—				588
Principal collected on mortgage-backed securities held to maturity			23,923				22,125
Principal collected on long term loans			60,948				55,161
Long term loans originated or acquired			(52,672	)			(68,623	)
Purchases of premises and equipment			(221	)			(1,894	)
Net cash provided by (used in) investing activities			4,658				(1,858	)
Financing Activities:
Net increase in demand deposits, NOW accounts and savings accounts			9,196				44,219
Net decrease in certificates of deposit			(6,024	)			(19,246	)
Cash dividends			(1,090	)			(1,102	)
Repayment of long-term debt			(8,415	)			(18,648	)
Acquisition of treasury stock			—				(77	)
Treasury stock delivered under employee stock plans			285				208
Net increase in advances from borrowers for taxes and insurance			3,203				3,039
Net cash (used in) provided by financing activities			(2,845	)			8,393
INCREASE IN CASH AND CASH EQUIVALENTS			3,770				5,781
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			20,190				9,442
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	23,960			$	15,223
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (credited and paid)		$	9,813			$	11,444
Income taxes			1,020				925
Foreclosed real estate acquired in settlement of loans			186				—
Securities purchased and not settled		$	—			$	2,800

See notes to consolidated financial statements.

Harleysville Savings Financial Corporation

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation -The unaudited consolidated financial statements include the accounts of Harleysville Savings Financial Corporation (the “Company”) and its subsidiary. Harleysville Savings Bank (the “Bank”) is the wholly owned subsidiary of the Company. The accompanying consolidated financial statements include the accounts of the Company, the Bank, and the Bank’s wholly owned subsidiaries, HSB Inc, a Delaware corporation which was formed in order to hold certain assets, Freedom Financial LLC that allows the Company to offer non deposit products and HARL LLC that allows the Bank to invest in equity investments. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three and six months ended March 31, 2011 are not necessarily indicative of the results which may be expected for the entire fiscal year ending September 30, 2011 or any other period. The financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the period ended September 30, 2010.

Use of Estimates in Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. The most significant of these estimates is the allowance for loan losses, the determination of other-than-temporary impairment on securities and the valuation of deferred tax assets. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform with the current year’s classifications. The reclassifications had no effect on net income.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 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.

Recent Accounting Pronouncements — 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 Accounting Standards (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 adoption of this new guidance did not have an impact on our financial position or result of operations.

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 adoption of this new guidance did not have an impact on our financial position or result of operations.

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:

•

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

•

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:

•

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

•

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 adoption of this standard did not have an impact on our financial position or results of operations.

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will 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. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The 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 effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are 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. For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011. The Company has provided the required credit quality disclosures as of the end of the reporting periods December 31, 2010 and March 31, 2011 and disclosures about the activity for the three months ended March 31, 2011.

ASU 2011 — 01 Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update 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 was intended to allow FASB time to complete its deliberations on what constitutes a troubled debt restructuring. FASB issued this new standard as discussed in the following paragraph. The effective date of the new disclosures about troubled debt restructurings for public entities is coordinated with the adoption of this new standard.

In April 2011 the FASB issued Accounting Standard Update (ASU) No. 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. ASU No. 2011-02 was issued to address the recording of an impairment loss in FASB ASC 310, Receivables. ASU No. 2011-02 adds text to the scope guidance Section 310-40-15 that is meant to help determine when a lender has granted a concession on their terms of a loan. The added material also provides criteria that should be used to help determine when the loan restructuring delays a payment by a length of time that is considered insignificant and when the borrower is having financial problems. For public companies the effective date is for fiscal quarters and years that start June 15, 2011, or later with the retrospective application to the beginning of the fiscal year for loans that are restructured during the year in which the changes are adopted. The Company is in the process of evaluating the adoption of this update will have on their financial condition or statement of operations.

2. INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of the Company’s securities gross unrealized gains and losses, as of March 31, 2011 and September 30, 2010 are as follows:

Available for sale securities:

		March 31, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
Equity securities		$	355			$	72			$	(31	)		$	396
Collateralized mortgage obligations			785				45				—				830
U.S. Government money market funds			9,634				—				—				9,634
Total Available for Sale Securities		$	10,774			$	117			$	(31	)		$	10,860

		September 30, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
Equity securities		$	355			$	42			$	(54	)		$	343
Collateralized mortgage obligations			785				24				—				809
U.S. Government money market funds			20,261				—				—				20,261
Total Available for Sale Securities		$	21,401			$	66			$	(54	)		$	21,413

Held to maturity securities:

		March 31, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
Mortgage-backed securities- U.S. Government Sponsored Enterprises (GSE’s)		$	118,632			$	5,559			$	(48	)		$	124,143
Collateralized mortgage obligations			25,224				199				(4	)			25,419
Municipal bonds			20,067				487				(110	)			20,444
U.S. Government Agencies			107,821				198				(2,909	)			105,110
Total Held to Maturity Securities		$	271,744			$	6,443			$	(3,071	)		$	275,116

		September 30, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In Thousands)		Cost				Gains				Losses				Value
Mortgage-backed securities- U.S. Government Sponsored Enterprises (GSE’s)		$	110,732			$	6,755			$	—			$	117,487
Collateralized mortgage obligations			20,087				193				(37	)			20,243
Municipal bonds			16,462				773				(47	)			17,188
U.S. Government Agencies			108,807				768				(45	)			109,530
Total Held to Maturity Securities		$	256,088			$	8,489			$	(129	)		$	264,448

A summary of securities with unrealized losses, aggregated by category, at March 31, 2011 is as follows:

																		Total
		Less than 12 Months								12 Months or Longer												Total
						Unrealized								Unrealized				Total				Unrealized
(In Thousands)		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Collateralized mortgage obligations		$	7,571			$	(4	)		$	—			$	—			$	7,571			$	(4	)
Municipal bonds			2,944				(23	)			1,451				(87	)			4,395				(110	)
U.S. Government Agencies and GSE’s			102,496				(2,957	)			—				—				102,496				(2,957	)
Subtotal debt securities			113,011				(2,984	)			1,451				(87	)			114,462				(3,071	)
Equity securities			24				—				181				(31	)			205				(31	)
Total temporarily impaired securities		$	113,035			$	(2,984	)		$	1,632			$	(118	)		$	114,667			$	(3,102	)

At March 31, 2011, debt securities in a gross unrealized loss position consisted of 45 securities that at such date had an aggregate depreciation of 2.61% from the Company’s amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. Management evaluated the length of time and the extent to which the fair value has been less than cost; the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer. The Company has the ability and intent to hold these securities until maturity and the Company does not believe it will be required to sell such securities prior to the recovery of the amortized cost basis. Management does not believe any individual unrealized loss as of March 31, 2011 represents an other-than-temporary impairment.

As of March 31, 2011, there were three equity securities in an unrealized loss position. Management evaluated the length of time and the extent to which the market value has been less than cost; the financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may effect the future earnings potential. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss of March 31, 2011 represents an other-than-temporary impairment.

A summary of securities with unrealized losses, aggregated by category, at September 30, 2010 is as follows:

																		Total
		Less than 12 Months								12 Months or Longer												Total
						Unrealized								Unrealized				Total				Unrealized
(In Thousands)		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Collateralized mortgage obligations		$	8,262			$	(4	)		$	1,530			$	(33	)		$	9,792			$	(37	)
Municipal bonds			378				—				1,494				(47	)			1,872				(47	)
U.S. Government Agencies and GSE’s			6,955				(45	)			—				—				6,955				(45	)
Subtotal debt securities			15,595				(49	)			3,024				(80	)			18,619				(129	)
Equity Securities			55				(3	)			160				(51	)			215				(54	)
Total temporarily impaired securities		$	15,650			$	(52	)		$	3,184			$	(131	)		$	18,834			$	(183	)

The following table sets forth the stated maturities of the investment and mortgage-backed securities at March 31, 2011. Money market funds and equity securities are not included in the table based on lack of maturity.

		March 31, 2011
		Amortized
(In Thousands)		Cost				Fair Value
Available for sale:
Due in one year or less		$	785			$	830
Due after one year through five years			—				—
Due after five years through ten years			—				—
Due after ten years			—				—
Total		$	785			$	830
Held to maturity:
Due in one year or less		$	138,568			$	136,400
Due after one year through five years			117,678				123,117
Due after five years through ten years			14,672				14,658
Due after ten years			826				941
Total		$	271,744			$	275,116

Certain of the Company’s investment securities, totaling $9.3 million and $10.3 at March 31, 2011 and September 30, 2010, respectively, were pledged as collateral to secure deposit sweep accounts and public deposits as required or permitted by law.

3. LOANS RECEIVABLE

Loans receivable consists of the following:

(In Thousands)		March 31, 2011				September 30, 2010
Residential Mortgages		$	332,219			$	339,874
Construction			6,129				4,752
Home Equity			85,958				90,511
Commercial Mortgages			79,203				75,450
Commercial Business Loans			6,442				4,327
Consumer Non-Real Estate			1,125				1,980
Total			511,076				516,894
Undisbursed portion of loans in process			(6,129	)			(3,426	)
Deferred loan fees			(972	)			(871	)
Allowance for loan losses			(2,795	)			(2,504	)
Loans Receivable — net		$	501,180			$	510,093

The total amount of loans being serviced for the benefit of others was approximately $1.74 million and $1.76 million at March 31, 2011 and September 30, 2010, respectively.

The loans receivable portfolio is segmented into consumer and commercial loans. Consumer loans consist of the following classes: residential mortgage loans, construction loans, home equity loans and other consumer loans. Commercial loans consist of the following classes: commercial mortgages and commercial business loans. For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans including impaired loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

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

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.

Residential mortgage lending generally entails a lower risk of default than other types of lending. Other consumer loans and commercial real estate loans generally involve more risk of collectability because of the type and nature of the collateral and, in certain cases, the absence of collateral. It is the Company’s policy to establish specific reserves for losses on delinquent consumer loans and commercial loans when it determines that losses are probable.

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

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

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

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loan not classified are rated pass.

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

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2011 and December 31, 2010:

March 31, 2011

						Special
(In Thousands)		Pass				Mention				Substandard				Doubtful				Total
Residential Mortgages		$	329,425			$	—			$	2,428			$	366			$	332,219
Construction			6,129				—				—				—				6,129
Home Equity			85,746				—				147				65				85,958
Commercial Mortgages			76,760				2,211				—				232				79,203
Commercial Business Loans			6,342				100				—				—				6,442
Consumer Non-Real Estate			1,120				—				—				5				1,125
Total		$	505,522			$	2,311			$	2,575			$	668			$	511,076

December 31, 2010

						Special
(In Thousands)		Pass				Mention				Substandard				Doubtful				Total
Residential Mortgages		$	330,283			$	—			$	1,974			$	641			$	332,898
Construction			5,420				—				—				—				5,420
Home Equity			88,759				—				103				65				88,927
Commercial Mortgages			76,096				2,214				—				312				78,622
Commercial Business Loans			6,498				100				—				—				6,598
Consumer Non-Real Estate			1,194				—				—				6				1,200
Total		$	508,250			$	2,314			$	2,077			$	1,024			$	513,665

The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2011 and December 31, 2010 and for the three months then ended:

March 31, 2011

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
(In Thousands)		Investment				Balance				Allowance				Investment				Recognized
With no related allowance recorded:
Residential Mortgages		$	1,130			$	1,130			$	—			$	846			$	9
Construction			—				—				—				—				—
Home Equity			65				65				—				65				—
Commercial Mortgages			—				—				—				—				—
Commercial Business Loans			—				—				—				—				—
Consumer Non—Real Estate			—				—				—				—				—
With an allowance recorded:
Residential Mortgages		$	1,664			$	1,664			$	(317	)		$	1,653			$	2
Construction			—				—				—				—				—
Home Equity			147				147				(147	)			118				—
Commercial Mortgages			232				232				(105	)			259				—
Commercial Business Loans			—				—				—				—				—
Consumer Non—Real Estate			5				5				(5	)			5				—
Total:
Residential Mortgages		$	2,794			$	2,794			$	(317	)		$	2,499			$	11
Construction			—				—				—				—				—
Home Equity			212				212				(147	)			183				—
Commercial Mortgages			232				232				(105	)			259				—
Commercial Business Loans			—				—				—				—				—
Consumer Non—Real Estate			5				5				(5	)			5				—