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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from              To             

Commission File Number: 001-33322

 

 

CMS Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-8137247

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

123 Main Street, White Plains, New York 10601

(Address of principal executive offices) (Zip Code)

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

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company).    Smaller reporting company   x

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

As of May 14, 2012 there were 1,862,803 shares of the registrant’s common stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

CMS Bancorp, Inc.

INDEX

 

          Page
Number
 
Part I - FINANCIAL INFORMATION   
Item 1:   

Financial Statements

  
  

Consolidated Statements of Financial Condition as of March 31, 2012 and September  30, 2011 (Unaudited)

     3   
  

Consolidated Statements of Operations for the Three Months and Six Months Ended March  31, 2012 and 2011 (Unaudited)

     4   
  

Consolidated Statements of Comprehensive (Loss) for the Three Months and Six Months Ended March  31, 2012 and 2011 (Unaudited)

     5   
  

Consolidated Statements of Cash Flows for the Six Months Ended March  31, 2012 and 2011 (Unaudited)

     6   
  

Notes to Consolidated Financial Statements (Unaudited)

     7   
Item 2:   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   
Item 3:   

Quantitative and Qualitative Disclosures about Market Risk

     37   
Item 4:   

Controls and Procedures

     37   
Part II - OTHER INFORMATION   
Item 1A:   

Risk Factors

     38   
Item 6:   

Exhibits

     38   

SIGNATURES

     39   

 

2


Table of Contents

Part I: Financial Information

Item 1. Financial Statements

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

     March 31,
2012
    September 30,
2011
 
    

(Dollars in thousands, except

share data)

 

ASSETS

    

Cash and amounts due from depository institutions

   $ 745      $ 717   

Interest-bearing deposits

     4,109        3,587   
  

 

 

   

 

 

 

Total cash and cash equivalents

     4,854        4,304   

Securities available for sale

     49,494        59,762   

Loans held for sale

     362        2,200   

Loans receivable, net of allowance for loan losses of $1,545 and $1,200, respectively

     183,874        178,796   

Premises and equipment

     3,061        2,748   

Federal Home Loan Bank of New York stock

     999        1,904   

Interest receivable

     1,003        1,064   

Other assets

     3,511        2,998   
  

 

 

   

 

 

 

Total assets

   $ 247,158      $ 253,776   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits:

    

Non-interest-bearing

   $ 19,676      $ 17,183   

Interest-bearing

     188,521        177,559   
  

 

 

   

 

 

 

Total deposits

     208,197        194,742   

Advances from Federal Home Loan Bank of New York

     14,339        34,421   

Advance payments by borrowers for taxes and insurance

     1,548        774   

Other liabilities

     1,177        1,624   
  

 

 

   

 

 

 

Total liabilities

     225,261        231,561   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding

     —          —     

Common stock, $.01 par value, authorized shares:

    

7,000,000; shares issued: 2,055,165; shares outstanding:

    

1,862,803

     21        21   

Additional paid-in capital

     18,611        18,494   

Retained earnings

     6,500        6,740   

Treasury stock, 192,362 shares

     (1,660     (1,660

Unearned Employee Stock Ownership Plan (“ESOP”) shares

     (1,370     (1,398

Accumulated other comprehensive income (loss)

     (205     18   
  

 

 

   

 

 

 

Total stockholders’ equity

     21,897        22,215   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 247,158      $ 253,776   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months
Ended
March 31,
    Six Months
Ended
March 31,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share data)  

Interest income:

        

Loans

   $ 2,469      $ 2,558      $ 5,095      $ 5,100   

Securities

     240        236        480        492   

Other interest-earning assets

     28        36        62        84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     2,737        2,830        5,637        5,676   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     502        469        1,024        975   

Mortgage escrow funds

     6        5        16        14   

Borrowings, short term

     5        —          5        —     

Borrowings, long term

     260        424        679        845   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     773        898        1,724        1,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,964        1,932        3,913        3,842   

Provision for loan losses

     —          30        365        55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     1,964        1,902        3,548        3,787   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Fees and service charges

     43        37        86        84   

Net gain on sale of loans

     26        37        78        178   

Net gain on sale of securities

     539        —          539        —     

Other

     13        3        18        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     621        77        721        266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     1,077        1,058        2,166        2,103   

Net occupancy

     311        310        597        601   

Equipment

     193        180        381        362   

Professional fees

     117        104        295        273   

Advertising

     16        18        45        32   

Federal insurance premiums

     55        70        101        138   

Directors’ fees

     74        59        125        105   

Other insurance

     22        21        43        42   

Bank charges

     7        15        23        28   

Penalty assessed on early repayment of borrowings

     481        —          481        —     

Charter conversion

     69        —          92        —     

Other

     173        157        294        312   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     2,595        1,992        4,643        3,996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (10     (13     (374     57   

Income tax expense (benefit)

     3        (53     (134     (73
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (13   $ 40      $ (240   $ 130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

        

Basic and diluted

   $ (0.01   $ 0.02      $ (0.14   $ 0.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding:

        

Basic and diluted

     1,709,437        1,703,956        1,708,748        1,703,495   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(Unaudited)

 

     Three Months
Ended
March 31,
    Six Months
Ended
March 31,
 
     2012     2011     2012     2011  
     (In thousands)  

Net income (loss)

   $ (13   $ 40      $ (240   $ 130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Gross unrealized holding gains (losses) on securities available for sale, net of deferred income (tax) benefit of $(4), $32, $(73) and $266

     7        (49     110        (402

Gross unrealized holding gains on available for sale securities transferred to income on sale of securities, net of deferred income tax of $216, $0, $216, and $0

     (323     —          (323     —     

Retirement plan, net of deferred income tax of $3, $1, $6, and $2

     (5     (2     (10     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss)

     (321     (51     (223     (405
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss)

   $ (334   $ (11   $ (463   $ (275
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended
December 31,
 
     2012     2011  
     (In thousands)  

Cash flows from operating activities:

    

Net income (loss)

   $ (240   $ 130   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation of premises and equipment

     165        185   

Amortization and accretion, net

     295        147   

Provision for loan losses

     365        55   

Deferred income taxes

     (250     (112

ESOP expense

     22        25   

Stock option expense

     50        44   

Restricted stock award expense

     73        66   

Net gain on sale of securities

     (539     —     

Net gain on sale of loans

     (78     (178

Loans originated for sale

     (2,636     (9,398

Proceeds from sale of loans originated for sale

     4,552        9,740   

Decrease in interest receivable

     61        42   

(Increase) decrease in other assets

     (116     14   

(Decrease) in accrued interest payable

     (132     (58

(Decrease) in other liabilities

     (331     (447
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,261        255   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sale of securities available for sale

     21,177        —     

Purchases of securities available for sale

     (22,393     (4,000

Principal repayments and calls on securities available for sale

     11,425        5,125   

Net (increase) decrease in loans receivable

     (5,494     839   

Additions to premises and equipment

     (478     (43

Redemption of Federal Home Loan Bank of N.Y. stock

     905        4   
  

 

 

   

 

 

 

Net cash provided by investing activities

     5,142        1,925   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     13,455        (1,140

Repayment of advances from Federal Home Loan Bank of N.Y.

     (20,082     (78

Net increase in payments by borrowers for taxes and insurance

     774        821   
  

 

 

   

 

 

 

Net cash (used by) financing activities

     (5,853     (397
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     550        1,783   

Cash and cash equivalents-beginning

     4,304        3,434   
  

 

 

   

 

 

 

Cash and cash equivalents-ending

   $ 4,854      $ 5,217   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid during the period for:

    

Interest

   $ 1,856      $ 1,892   
  

 

 

   

 

 

 

Income taxes

   $ 10      $ 60   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

CMS Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

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

2. Description of Operations

The Bank was originally chartered in 1887 as Community Savings and Loan, a New York State-chartered savings and loan association. In 1980, it converted to a New York State-chartered savings bank and changed its name to Community Mutual Savings Bank of Southern New York. In 1983, Community Mutual Savings Bank of Southern New York changed its name to Community Mutual Savings Bank. In 2007, the Bank reorganized to a federally-chartered mutual savings bank and simultaneously converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank, with the concurrent formation of the Company. The Company, a stock holding company for the Bank, conducted a public offering of its common stock in connection with the conversion. After the 2007 conversion and offering, all of the Bank’s stock became owned by the Company. The Bank has filed an application with the New York State Department of Financial Services (“NYSDFS”) to convert from a federal savings bank to a New York State-chartered savings bank. See Note 14 below, titled “Subsequent Events”.

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

3. Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three months and six months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2011, which are in the Company’s Annual Report for the fiscal year ended September 30, 2011, filed with the Securities and Exchange Commission on December 22, 2011.

The Company follows Financial Accounting Standards Board (“FASB”) guidance on subsequent events, which establishes general standards for accounting for and disclosure of events that occur after the statement of financial condition date but before the financial statements are issued. This guidance sets forth the period after the statement of financial condition date during which management of the reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the statement of financial condition date in its financial statements, and the disclosure that should be made about events or transactions that occur after the statement of financial condition date. In preparing these consolidated financial statements, the Company evaluated the events that occurred after March 31, 2012 and through the date these consolidated financial statements were issued.

 

7


Table of Contents

4. Critical Accounting Policies

The consolidated financial statements included in this report have been prepared in conformity with U.S. GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

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

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

5. Net Income (Loss) Per Share

Basic net income (loss) per share was computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding, adjusted for unearned shares of the Company’s employee stock ownership plan, or “ESOP”. Stock options granted are considered common stock equivalents and are therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. All outstanding stock options were anti-dilutive and therefore excluded from the computation of diluted net income (loss) per share for the three month and six month periods ended March 31, 2012 and 2011.

6. Retirement Plan - Components of Net Periodic Pension Cost

The components of periodic pension expense were as follows:

 

    

Three Months

Ended

March 31,

   

Six Months

Ended

March 31,

 
     2012     2011     2012     2011  
     (In thousands)  

Service cost

   $ —        $ —        $ —        $ —     

Interest cost

     63        57        126        133   

Expected return on plan assets

     (55     (53     (109     (98

Amortization of unrecognized loss

     8        3        15        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 16      $ 7      $ 32      $ 40   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

7. Stock Based Compensation

At a special meeting of the stockholders of the Company held on November 9, 2007, the stockholders approved the CMS Bancorp, Inc. 2007 Stock Option Plan and the CMS Bancorp, Inc. 2007 Recognition and Retention Plan (collectively the “Plans”). The Plans authorize the award of up to 205,516 stock options and 82,206 shares of restricted stock. The stock options and restricted stock awarded under the Plans vest over a five year service period based on the anniversary of the grant date.

Under these plans, the Company has granted shares of restricted stock and options to purchase the Company’s common stock as shown in the following table. The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model and the assumptions shown in the following table:

 

     January
2011
     April
2011
    September
2011
 

Shares of restricted stock

     3,008         4,150        2,000   

Grant date fair value per share

   $ 9.20       $ 8.66      $ 8.10   

Number of stock options

     —           8,300        6,000   

Exercise price

     —         $ 8.66      $ 8.10   

Fair value per option

     —         $ 4.05      $ 3.55   

Risk free interest rate

     —           3.39 %     2.03 %

Volatility factor

     —           37.1 %     39.1 %

Expected life

     —           7 years        7 years   

Dividends

     —           none        none   

The Company recorded compensation expense with respect to stock options of $25,000 and $22,000 during the three month periods ended March 31, 2012 and 2011, respectively, and $50,000 and $44,000 during the six month periods ended March 31, 2012 and 2011, respectively. Unrecognized compensation expense associated with stock option grants as of March 31, 2012 was $121,000.

The Company recorded compensation expense with respect to restricted stock of $37,000 and $33,000 during the three month periods ended March 31, 2012 and 2011, respectively, and $73,000 and $66,000 during the six month periods ended March 31, 2012 and 2011, respectively. Unrecognized compensation expense associated with grants of restricted stock as of March 31, 2012 was $177,000.

 

9


Table of Contents

8. Securities

Securities available for sale as of March 31, 2012 and September 30, 2011 were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

March 31, 2012

           

U.S. Government Agencies:

           

Due after one but within five years

   $ 1,000       $ —         $ —         $ 1,000   

Due after five years but within ten years

     20,088         —           40         20,048   

Due after ten years but within fifteen years

     10,000         8         99         9,909   

Corporate bonds due after five years but within ten years

     4,126         190         29         4,287   

Municipal bonds:

           

Due after five years but within ten years

     2,466         68         30         2,504   

Mortgage-backed securities

     11,437         309         —           11,746   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,117       $ 575       $ 198       $ 49,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

           

U.S. Government Agencies:

           

Due after one but within five years

   $ 15,231       $ 192       $ 4       $ 15,419   

Due after five years but within ten years

     16,307         6         60         16,253   

Due after ten years but within fifteen years

     4,002         —           —           4,002   

Corporate bonds due after five years but within ten years

     3,664         141         —           3,805   

Municipal bonds:

           

Due after five years but within ten years

     246         —           —           246   

Due after ten years but within fifteen years

     884         33         —           917   

Mortgage-backed securities

     18,697         423         —           19,120   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 59,031       $ 795       $ 64       $ 59,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

The age of unrealized losses and fair value of related securities available for sale at March 31, 2012 and September 30, 2011 were as follows:

 

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

March 31, 2012

                 

U.S. Government Agencies

   $ 24,948       $ 139       $ —         $ —         $ 24,948       $ 139   

Corporate bonds

     2,032         29         —           —           2,032         29   

Municipal bonds

     1,308         30         —           —           1,308         30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,288       $ 198       $ —         $ —         $ 28,288       $ 198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

                 

U.S. Government Agencies

   $ 12,675       $ 64       $ —         $ —         $ 12,675       $ 64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

The unrealized losses reported on securities at March 31, 2012 relate to five securities issued by U.S. Government Agencies, one corporate security and one municipal security. The unrealized losses reported on securities at September 30, 2011 relate to three securities issued by U.S. Government Agencies. These unrealized losses were due to changes in market interest rates.

All mortgage-backed securities are U.S. Government Agencies backed and collateralized by residential mortgages. There were no sales of available for sale securities during the six months ended March 31, 2011, or during the three months ended December 31, 2011. During the three months ended March 31, 2012, the Company sold available for sale securities with a carrying value of $20.6 million, and recognized a gain of $539,000 on such sales.

9. Loans

Loans receivable are carried at unpaid principal balances and net deferred loan origination costs less the allowance for loan losses.

The Company defers loan origination fees and certain direct loan origination costs and accretes net amounts as an adjustment of yield over the contractual lives of the related loans. Unamortized net fees and costs are written off if the loan is repaid before its stated maturity date.

Recognition of interest income is discontinued and existing accrued interest receivable is reversed on loans that are more than ninety days delinquent and where management, through its loan review process, feels such loan should be classified as non-accrual. Income is subsequently recognized only to the extent that cash payments are received until the obligation has been 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, in which case the loan is returned to an accrual status. The past due status of all classes of loans receivable is determined based on the contractual due dates for loan payments.

Loan balances as of March 31, 2012 and September 30, 2011 consist of the following:

 

     March 31,
2012
    September 30,
2011
 
     (In thousands)  

Real estate:

    

One-to-four-family

   $ 94,983      $ 101,064   

Multi-family

     15,094        14,283   

Non-residential

     39,734        30,674   

Construction

     310        309   

Equity and second mortgages

     11,178        10,905   
  

 

 

   

 

 

 
     161,299        157,235   

Commercial

     23,700        22,207   

Consumer

     105        90   
  

 

 

   

 

 

 

Total Loans

     185,104        179,532   

Allowance for loan losses

     (1,545 )     (1,200 )

Net deferred loan origination fees and costs

     315        464   
  

 

 

   

 

 

 
   $ 183,874      $ 178,796   
  

 

 

   

 

 

 

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

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

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

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

 

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Table of Contents

“Pass” rated credits are segregated from “Classified” credits for the application of qualitative factors. Management has identified a number of additional qualitative factors that it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

An allowance for loan losses is maintained at a level that represents management’s best estimate of losses known and inherent in the loan portfolio that are both probable and reasonably estimable. The allowance is decreased by loan charge-offs, increased by subsequent recoveries of loans previously charged off, and then adjusted, via either a charge or credit to operations, to an amount determined by management to be necessary. Loans or portions thereof are charged off when, after collection efforts are exhausted, they are determined to be uncollectible. Management of the Company, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume inherent in its loan activities, along with the general economic and real estate market conditions. The total of the two components represents the Bank’s ALLL. The Company utilizes a two tier approach: (1) identification of impaired loans and establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Company maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans.

Such system takes into consideration, among other things, delinquency status, size of loans, and type of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. General loan losses are determined based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment. Although management believes that specific and general loan losses are established in accordance with management’s best estimate, actual losses are dependent upon future events and, as such, further additions to the level of loan loss allowances may be necessary.

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

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

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

Management evaluates individual loans in all of the segments for possible impairment if the loan is either in nonaccrual status, or is risk rated Substandard or Doubtful. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan

 

12


Table of Contents

agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of any shortfall in relation to the principal and interest owed.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. A loan evaluated for impairment is deemed to be 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 loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. A reserve for losses related to unfunded lending commitments is also maintained. This reserve represents management’s estimate of losses inherent in unfunded credit commitments.

The following table summarizes the primary segments of the loan portfolio as of March 31, 2012 and September 30, 2011:

 

March 31, 2012    Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 10,243       $ 84,901       $ 95,144   

Multi-family

     —           15,120         15,120   

Non-residential

     —           39,801         39,801   

Construction

     —           310         310   

Home equity and second mortgages

     791         10,407         11,198   
  

 

 

    

 

 

    

 

 

 
     11,034         150,539         161,573   

Commercial

     68         23,673         23,741   

Consumer

     18         87         105   
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,120       $ 174,299       $ 185,419   
  

 

 

    

 

 

    

 

 

 
September 30, 2011    Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 6,881       $ 94,446       $ 101,327   

Multi-family

     —           14,319         14,319   

Non-residential

     —           30,753         30,753   

Construction

     —           310         310   

Home equity and second mortgages

     660         10,273         10,933   
  

 

 

    

 

 

    

 

 

 
     7,541         150,101         157,642   

Commercial

     73         22,191         22,264   

Consumer

     5         85         90   
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,619       $ 172,377       $ 179,996   
  

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2012 and September 30, 2011:

 

     Impaired Loans with
Specific Allowance
     Impaired
Loans with
No Specific
Allowance
     Total Impaired Loans  
March 31, 2012    Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 2,489       $ 417       $ 7,754       $ 10,243       $ 10,183   

Multi-family

     —           —           —           —           —     

Non-residential

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Home equity and second mortgages

     —           —           791         791         777   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,489         417         8,545         11,034         10,960   

Commercial

     68         49        —           68         68   

Consumer

     14         3         4         18         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,571       $ 469       $ 8,549       $ 11,120       $ 11,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired Loans with
Specific Allowance
     Impaired
Loans with
No Specific
Allowance
     Total Impaired Loans  
September 30, 2011    Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 925       $ 330       $ 5,956       $ 6,881       $ 6,841   

Multi-family

     —           —           —           —           —     

Non-residential

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Home equity and second mortgages

     —           —           660         660         672   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     925         330         6,616         7,541         7,513   

Commercial

     73         49        —           73         73   

Consumer

     —           —           5         5         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 998       $ 379       $ 6,621       $ 7,619       $ 7,591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012 and September 30, 2011, the Company had loans in the amount of $11.1 million and $7.6 million, respectively, which were considered to be impaired, of which $2.6 million and $1.0 million, respectively, were subject to specific loss reserves of $469,000 and $379,000 at March 31, 2012 and September 30, 2011, respectively. The average balances of impaired loans outstanding during the three month periods ended March 31, 2012 and 2011 were $10.3 million and $6.3 million, respectively. The average balances of impaired loans outstanding during the six month periods ended March 31, 2012 and 2011 were $9.5 million and $5.3 million, respectively. During the three months ended March 31, 2012 and 2011, $38,000 and $51,000, respectively, of interest was collected and recognized on these loans and had all such loans been performing in accordance with their original terms, additional interest income of $131,000 and $51,000, respectively, would have been recognized. During the six months ended March 31, 2012 and 2011, $91,000 and $122,000, respectively, of interest was collected and recognized on these loans and had all such loans been performing in accordance with their original terms, additional interest income of $237,000 and $85,000, respectively, would have been recognized. The Company is not committed to lend additional funds on these loans.

 

14


Table of Contents

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2012 and 2011:

 

March 31, 2012    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 9,535       $ 731       $ 71       $ 12       $ 10,349   

Interest income recognized on an accrual basis on impaired loans

   $ 31       $ 3       $ —         $ —         $ 34   

Interest income recognized on a cash basis on impaired loans

   $ 4       $ —         $ —         $ —         $ 4   
March 31, 2011    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 5,647       $ 595       $ 73       $ 1       $ 6,316   

Interest income recognized on an accrual basis on impaired loans

   $ 41       $ 4       $ —         $ —         $ 45   

Interest income recognized on a cash basis on impaired loans

   $ 6       $ —         $ —         $ —         $ 6   

The following table presents the average recorded investment in impaired loans and related interest income recognized for the six months ended March 31, 2012 and 2011:

 

March 31, 2012    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 8,685       $ 701       $ 72       $ 9       $ 9,467   

Interest income recognized on an accrual basis on impaired loans

   $ 62       $ 7       $ —         $ —         $ 69   

Interest income recognized on a cash basis on impaired loans

   $ 22       $ —         $ —         $ —         $ 22   
March 31, 2011    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 4,737       $ 518       $ 55       $ 1       $ 5,311   

Interest income recognized on an accrual basis on impaired loans

   $ 106       $ 8       $ —         $ —         $ 114   

Interest income recognized on a cash basis on impaired loans

   $ 8       $ —         $ —         $ —         $ 8   

 

15


Table of Contents

The following table presents the classes of the loan portfolio summarized by the aggregate Pass (including loans graded Watch) and the classified ratings of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2012 and September 30, 2011:

 

March 31, 2012    Pass      Special
Mention
     Substandard      Doubtful      Total  
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 87,079       $ 607       $ 7,458       $ —         $ 95,144   

Multi-family

     15,120         —           —           —           15,120   

Non-residential

     39,801         —           —           —           39,801   

Construction

     310         —           —           —           310   

Home equity and second mortgages

     10,521         247         430         —           11,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     152,831         854         7,888         —           161,573   

Commercial

     22,384         1,289         68         —           23,741   

Consumer

     87         —           18         —           105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 175,302       $ 2,143       $ 7,974       $ —         $ 185,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
September 30, 2011    Pass      Special
Mention
     Substandard      Doubtful      Total  
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 96,294       $ 454       $ 4,579       $ —         $ 101,327   

Multi-family

     14,319         —           —           —           14,319   

Non-residential

     30,753         —           —           —           30,753   

Construction

     310         —           —           —           310   

Home equity and second mortgages

     10,323         212         398         —           10,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     151,999         666         4,977         —           157,642   

Commercial

     22,190         —           74         —           22,264   

Consumer

     85         —           5         —           90   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 174,274       $ 666       $ 5,056       $ —         $ 179,996   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the delinquency aging of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2012 and September 30, 2011:

 

March 31, 2012    Current      30-59
Days
Past
Due
     60-89
Days
Past
Due
     90 Days or
More Past
Due and
Accruing
     Non-
Accrual
     Total
Past
Due
     Total  
     (In thousands)  

Real estate:

                    

One-to-four-family

   $ 88,946       $ —         $ 149       $ —         $ 6,049       $ 6,198       $ 95,144   

Multi-family

     15,120         —           —           —           —           —           15,120   

Non-residential

     39,801         —           —           —           —           —           39,801   

Construction

     310         —           —           —           —           —           310   

Home equity and second mortgages

     10,718         74         —           —           406         480         11,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     154,895         74         149         —           6,455         6,678         161,573   

Commercial

     23,741         —           —           —           —           —           23,741   

Consumer

     87         —           —           —           18         18         105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 178,723       $ 74       $ 149       $ —         $ 6,473       $ 6,696       $ 185,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
September 30, 2011    Current      30-59
Days
Past
Due
     60-89
Days
Past
Due
     90 Days or
More Past
Due and
Accruing
     Non-
Accrual
     Total
Past
Due
     Total  
     (In thousands)  

Real estate:

                    

One-to-four-family

   $ 96,984       $ —         $ 534       $ —         $ 3,809       $ 4,343       $ 101,327   

Multi-family

     14,319         —           —           —           —           —           14,319   

Non-residential

     30,753         —           —           —           —           —           30,753   

Construction

     310         —           —           —           —           —           310   

Home equity and second mortgages

     10,403         —           124         —           406         530         10,933   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     152,769         —           658         —           4,215         4,873         157,642   

Commercial

     22,192         —           —           —           72         72         22,264   

Consumer

     60         —           5         6         19         30         90   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 175,021       $ —         $ 663       $ 6       $ 4,306       $ 4,975       $ 179,996   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012 and September 30, 2011, nonaccrual loans totaled $6.5 and $4.3 million, respectively and loans delinquent ninety days or more and accruing interest, consisting solely of student loans, totaled none and $6,000, respectively. The Company was not committed to lend additional funds on nonaccrual loans at March 31, 2012.

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

 

March 31, 2012    ALLL
Balance
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
 
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 732       $ 315       $ 417   

Multi-family

     30         30         —     

Non-residential

     119         119         —     

Construction

     4         4         —     

Home equity and second mortgages

     43         43         —     
  

 

 

    

 

 

    

 

 

 
     928         511         417   

Commercial

     612         563         49   

Consumer

     5         2         3   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,545       $ 1,076       $ 469   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
September 30, 2011    ALLL
Balance
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
 
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 583       $ 253       $ 330   

Multi-family

     29         29         —     

Non-residential

     92         92         —     

Construction

     3         3         —     

Home equity and second mortgages

     31         31         —     
  

 

 

    

 

 

    

 

 

 
     738         408         330   

Commercial

     459         410         49   

Consumer

     3         3         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,200       $ 821       $ 379   
  

 

 

    

 

 

    

 

 

 

The following table summarizes activity in the primary segments of the ALLL for the three months ended March 31, 2012 and 2011:

 

March 31, 2012    Balance
December 31,
2011
     Charge-
offs
     Recoveries      Provision     Balance
March 31,
2012
 
     (In thousands)  

Real estate:

             

One-to-four-family

   $ 811       $ 20       $ —         $ (59   $ 732   

Multi-family

     28         —           —           2        30   

Non-residential

     115         —           —           4        119   

Construction

     4         —           —           —          4   

Home equity and second mortgages

     44         —           —           (1     43   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     1,002         20         —           (54     928   

Commercial

     558         —           —           54        612   

Consumer

     5         —           —           —          5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,565       $ 20       $ —         $ —        $ 1,545   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

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

Real estate:

             

One-to-four-family

   $ 564       $ —         $ —         $ 2      $ 566   

Multi-family

     —           —           —           —          —     

Non-residential

     16         —           —           3        19   

Construction

     33         —           —           5        38   

Home equity and second mortgages

     96         —           —           6        102   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     709         —           —           16        725   

Commercial

     368         —           —           61        429   

Consumer

     62         —           —           (47     15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,139       $ —         $ —         $ 30      $ 1,169   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes activity in the primary segments of the ALLL for the six months ended March 31, 2012 and 2011:

 

March 31, 2012    Balance
September 30,
2011
     Charge-
offs
     Recoveries      Provision      Balance
March 31,
2012
 
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 583       $ 20       $ —         $ 169       $ 732   

Multi-family

     29         —           —           1         30   

Non-residential

     92         —           —           27         119   

Construction

     3         —           —           1         4   

Home equity and second mortgages

     31         —           —           12         43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     738         20         —           210         928   

Commercial

     459         —           —           153         612   

Consumer

     3         —           —           2         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,200       $ 20       $ —         $ 365       $ 1,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2011    Balance
September 30,
2010
     Charge-
offs
     Recoveries      Provision     Balance
March 31,
2011
 
     (In thousands)  

Real estate:

             

One-to-four-family

   $ 610       $ —         $ —         $ (44   $ 566   

Multi-family

     9         —           —           (9     —     

Non-residential

     —           —           —           19        19   

Construction

     22         —           —           16        38   

Home equity and second mortgages

     48         —           —           54        102   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     689         —           —           36        725   

Commercial

     410         —           —           19        429   

Consumer

     15         —           —           —          15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,114       $ —         $ —         $ 55      $ 1,169   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Effective October 1, 2011, the Company adopted ASU No. 2011-02, which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions that would otherwise not be granted to a borrower experiencing or expected to experience financial difficulties in order to maximize the ultimate recovery of a loan. The types of concessions granted generally include, but are not limited to interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal. In evaluating whether a restructuring constitutes a TDR, ASU No. 2011-02 requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. In conjunction with the Bank’s adoption of ASU No. 2011-02, it determined that no loans were TDRs other than those previously considered as such.

 

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Table of Contents

There were one and two TDRs during the three month and six month periods ended March 31, 2012, respectively. The concessions granted on these loans consisted of interest rate reductions. The following table summarizes the TDR during the three month and six month periods ended March 31, 2012:

 

Three month period ended March 31, 2012    Number
of

Loans
     Recorded
Investment
Before
Modification
     Recorded
Investment After
Modification
 
     (Dollars in thousands)  

One-to-four-family

     1       $ 963       $ 978   
Six month period ended March 31, 2012    Number
of
Loans
     Recorded
Investment
Before
Modification
     Recorded
Investment After
Modification
 
     (Dollars in thousands)  

One-to-four-family

     2       $ 1,373       $ 1,409   

A default on a troubled debt restructured loan for purposes of disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. During the three month and six month periods ended March 31, 2012, no defaults occurred on troubled debt restructured loans that were modified as a TDR within the previous 12 months.

10. Fair Value Measurements

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

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

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

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

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective value or reflective of future values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. In addition, the guidance requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis.

 

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Table of Contents

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy at March 31, 2012 and September 30, 2011 are summarized below:

 

Description

   Fair
Value
     (Level 1)
Quoted Prices  in
Active Markets for
Identical Assets
     (Level 2)
Significant Other

Observable Inputs
     (Level 3)
Significant
Unobservable Inputs
 
     (In thousands)  

March 31, 2012

           

Securities available for sale:

           

U.S. Government Agencies

   $ 30,957       $ —         $ 30,957       $ —     

Corporate bonds

     4,287         —           4,287         —     

Municipal bonds

     2,504         —           2,504         —     

Mortgage-backed securities

     11,746         —           11,746         —     

September 30, 2011

           

Securities available for sale:

           

U.S. Government Agencies

   $ 35,674       $ —         $ 35,674       $ —     

Corporate bonds

     3,805         —           3,805         —     

Municipal bonds

     1,163         —           1,163         —     

Mortgage-backed securities

     19,120         —           19,120         —     

For financial assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy at March 31, 2012 and September 30, 2011 are summarized below:

 

Description

   Fair
Value
     (Level 1)
Quoted Prices in
Active Markets for
Identical Assets
     (Level 2)
Significant Other
Observable
Inputs
     (Level 3)
Significant
Unobservable Inputs
 
            (In thousands)                

March 31, 2012

           

Impaired loans subject to specific valuation allowances

   $ 2,102       $ —         $ —         $ 2,102   
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

           

Impaired loans subject to specific valuation allowances

   $ 619       $ —         $ —         $ 619   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value:

 

(Dollars in thousands)

 
March 31, 2012    Fair value
estimate
    

Valuation

techniques

   Unobservable input    Range   Weighted
average
 

Impaired loans

   $  2,102       Appraisal of collateral (1)    Liquidation expenses (2)    0.0% to -14.3%     -7.6

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Includes estimated liquidation expenses.

 

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Table of Contents

The following methods and assumptions were used to estimate the fair value of each class of financial instruments at March 31, 2012 and September 30, 2011:

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

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

Loans Receivable. The fair value of loans receivable is estimated by discounting the future cash flows, using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans.

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

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

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

Commitments to Extend Credits. The fair value of commitments to fund credit lines and originate or participate in loans is estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest and the committed rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, was not considered material at March 31, 2012 or September 30, 2011.

The carrying amounts and estimated fair values of financial instruments at March 31, 2012 are summarized as follows:

 

Description

   Carrying
Amount
     Fair
Value
     (Level 1)
Quoted Prices in

Active Markets for
Identical Assets
     (Level 2)
Significant Other

Observable Inputs
     (Level 3)
Significant
Unobservable Inputs
 
     (In thousands)  

Financial assets:

              

Cash and due from banks

   $ 4,854       $ 4,854       $ 4,854       $ —         $ —     

Securities available-for-sale

     49,494         49,494         —           49,494         —     

Loans held for sale

     362         362         —           362         —     

Net loans

     183,874         204,916         —           —           204,916   

Accrued interest receivable

     1,003         1,003         1,003         —           —     

Financial liabilities:

              

Deposits

     208,197         209,999         94,225         115,774         —     

FHLB_NY advances

     14,339         16,196         —           16,196         —     

Accrued interest payable

     135         135         135         —           —     

 

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Table of Contents

The carrying amounts and estimated fair values of financial instruments as of September 30, 2011 are as follows:

 

     September 30, 2011  
     Carrying
Amount
    

Estimated
Fair

Value

 
     (In thousands)  

Financial assets:

     

Cash and cash equivalents

   $ 4,304       $ 4,304   

Securities available for sale

     59,762         59,762   

Loans held for sale

     2,200         2,200   

Loans receivable

     178,796         201,770   

Accrued interest receivable

     1,064         1,064   

Financial liabilities:

     

Deposits

     194,742         196,191   

FHLB-NY Advances

     34,421         36,980   

Accrued interest payable

     267         267   

Limitations

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

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

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

11. Federal Home Loan Bank of New York Stock

The Company’s required investment in the common stock of the FHLB-NY is carried at cost as of March 31, 2012 and September 30, 2011. Management evaluates this common stock for impairment in accordance with the FASB guidance on accounting by certain entities that lend to or finance the activities of others. Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of the investment’s cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB-NY as compared to the capital stock amount for the FHLB-NY and the length of time this situation has persisted, (2) commitments by the FHLB-NY to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB-NY, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB-NY, and (4) the liquidity position of the FHLB-NY. Management believes no impairment charge related to the FHLB-NY stock was necessary as of March 31, 2012 or September 30, 2011.

12. Recent Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update (ASU) 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” to indefinitely defer the effective date pertaining to the presentation of reclassification adjustments out of accumulated other comprehensive income provided for in ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

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Table of Contents

13. Contingencies

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

14. Subsequent Events

The Bank has filed an application with the NYSDFS to convert from a federal savings bank to a New York State-chartered savings bank to be known as CMS Bank. Consummation of the Bank’s conversion to a state savings bank is contingent upon the Bank’s receipt of regulatory approval from the NYSDFS and non-objection from the Office of the Comptroller of the Currency (“OCC”), the Bank’s current regulator. In connection with the conversion, the Bank also filed a “10(l) election” application letter with the FDIC advising the FDIC of the Bank’s election to be treated as a savings association for purposes of the continuing regulation of the Company as a savings and loan holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”) under Section 10(l) of the Home Owners’ Loan Act. To qualify to make the 10(l) election, the Bank must be and remain a “qualified thrift lender”. The Bank has submitted to the FDIC financial data supporting such qualification. As of May 14, 2012, the Bank has received the non-objection of the OCC and is waiting for the approvals from the NYSDFS and FDIC, which are expected in the third quarter of the Bank’s fiscal year, although such timing cannot be guaranteed.

 

24


Table of Contents

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

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and similar expressions that are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors including those set forth in Part 1, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2011 which was filed with the Securities and Exchange Commission on December 22, 2011, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

   

changes in interest rates;

 

   

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

 

   

the risk of loss associated with our loan portfolio;

 

   

lower demand for loans;

 

   

changes in our asset quality;

 

   

other-than-temporary impairment charges for investments;

 

   

the soundness of other financial institutions;

 

   

changes in liquidity;

 

   

changes in the real estate market or local economy;

 

   

our ability to successfully implement our future plans for growth;

 

   

operational challenges or increased compliance costs we may experience in the course of complying with new laws and regulations enacted or promulgated as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

   

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

 

   

potential disruptions with respect to our electronic business operations relating to the risk that cyber-related actions taken by third parties may affect our security controls over sensitive financial information;

 

   

competition in our primary market area;

 

   

changes in laws and regulations to which we are subject;

 

   

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

 

   

our ability to maintain effective internal controls over financial reporting;

 

   

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

 

   

the low trading volume in our stock; and

 

   

recent developments affecting the financial markets.

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

General

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

 

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Table of Contents

Executive Overview

The purpose of this overview is to provide a summary of the items management focuses on when evaluating the condition of the Company and our success in implementing our business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and community-oriented depository institution.

The profitability of the Company depends primarily on its level of net interest income, which is the difference between interest earned on the Company’s interest-earning assets and the interest paid on interest-bearing liabilities. The Company’s net interest income may be affected by market interest rate changes. Local market conditions and liquidity needs of other financial institutions can have a dramatic impact on the interest rates offered to attract deposits. In recent periods, interest rates have declined to historically low levels and changes in short-term interest rates did not result in corresponding changes in long-term interest rates, and local market conditions resulted in relatively high certificate of deposit interest rates and lower interest rates on loans. The effect of this interest rate environment did, and could in the future, continue to decrease the Company’s ability to invest deposits and reinvest proceeds from loan and investment repayments at higher interest rates. The primary goals of the Company’s interest rate management strategy are to determine the appropriate level of risk given the business strategy and then manage that risk so as to reduce the exposure of the Company’s net interest income to fluctuations in interest rates.

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

As a result of these ongoing efforts, we were able to increase our net interest income by maximizing the yield on interest-earning assets while minimizing the cost of our interest-bearing liabilities through our consistent in-depth market analysis and constant oversight of our liquidity and cash flow position. The continued weak economy, continued high unemployment, and declines in real estate values in the Bank’s primary market area and other factors led to an increase in the impaired loans and non-performing loans in the three months and six months ended March 31, 2012.

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

Business Strategy

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

From time to time, the Company is also presented with and considers opportunities to engage in strategic transactions with other financial institutions, including mergers, acquisitions, or the possible sale of the Company and/or Bank. The respective boards of the Company and the Bank will consider the merits of these opportunities as they arise.

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)

Major financial reform legislation, known as the Dodd-Frank Act, was signed into law by the President on July 21, 2010. Among other things, the Dodd-Frank Act impacts the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the legislation requires new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Many of the provisions of the Dodd-Frank Act affecting the Company and Bank have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the Dodd-Frank Act. Accordingly, as such laws and implementing regulations are developed and promulgated, the Company’s and Bank’s compliance costs have increased, and are likely to increase in the future. The Company and Bank are continuing to closely monitor and evaluate developments under the Dodd-Frank Act with respect to our business, financial condition, results of operations and prospects.

 

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Critical Accounting Policies

The consolidated financial statements included in this Report have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

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

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

Comparison of Financial Condition at March 31, 2012 to September 30, 2011

Total assets decreased by $6.6 million, or 2.6%, to $247.2 million at March 31, 2012 from $253.8 million at September 30, 2011. Proceeds from calls and sales of available for sale securities and increases in deposit balances were used to fund loan growth and the early repayment of FHLB-NY borrowings.

Securities available for sale decreased from $59.8 million at September 30, 2011 to $49.5 million at March 31, 2012. Available for sale securities consist principally of notes, bonds and mortgage-backed securities of the U.S. Government and U.S. Government Agencies, and to a lesser extent, corporate and municipal bonds. In February 2012, the Company sold $20.6 million of available for sale securities and realized a gain of $539,000 on the sale.

Loans receivable were $183.9 million and $178.8 million at March 31, 2012 and September 30, 2011, respectively, representing an increase of $5.1 million, or 2.8%. The increase in loans resulted principally from increases in non-residential real estate and commercial loans, net of normal amortization and prepayments of one-to-four-family mortgages.

As of March 31, 2012 and September 30, 2011, the Bank had $6.5 million and $4.3 million of non-performing loans, respectively, of which, $5.3 million and $3.2 million, respectively, were in process of foreclosure, and have been placed on non-accrual status. Non-performing loans at March 31, 2012 and September 30, 2011 also included $1.2 million and $1.1 million, respectively, of non-accrual loans not yet in the foreclosure process. At March 31, 2012 and September 30, 2011, the Bank had $11.1 million and $7.6 million, respectively, of loans classified as impaired. At March 31, 2012, $2.6 million of these impaired loans required specific loss allowances totaling $469,000. The remaining $8.5 million of impaired loans did not require specific loss allowances. At September 30, 2011, $1.0 million of these impaired loans required specific loss allowances totaling $379,000. The remaining $6.6 million of impaired loans did not require specific loss allowances. The impaired loans were primarily the result of continued difficult general economic conditions, increased unemployment and continued declines in the local real estate market. As of March 31, 2012 and September 30, 2011, the allowance for loan losses was 0.83% and 0.67% of loans outstanding, respectively. As a result of the continued weak economy, continued high unemployment, declines in real estate values in the Bank’s primary market area, and the increase in the impaired loans and non-performing loans, $365,000 was provided for loan losses in the six months ended March 31, 2012.

Deposits increased by $13.5 million, or 6.9%, from $194.7 million as of September 30, 2011 to $208.2 million as of March 31, 2012. The Bank participates in the Certificate of Deposit Account Registry Service, or “CDARS” network. Increases in retail demand deposits and money market accounts of $2.5 million and $3.2 million respectively, and an increase in CDARS deposits of $8.0 million accounted for the majority of the change. Under the CDARS network, the Bank can transfer deposits into the network (a one way sell transaction), request that the network deposit funds at the Bank (a one way buy transaction), or deposit funds into the network and receive an equal amount of deposits from the network (a reciprocal transfer). The network provides the Bank with an investment vehicle in the case of a one way sell, a liquidity or funding source in the case of a one way buy and the ability to access additional FDIC insurance for customers in the case of a reciprocal transfer. The Bank had $16.0 million and $8.0 million, respectively, of CDARS deposits as of March 31, 2012 and September 30, 2011 and $4.7 million and $5.0 million, respectively, of brokered deposits as of March 31, 2012 and September 30, 2011.

 

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In February 2012, the Company prepaid $20.0 million of FHLB-NY debt which was scheduled to mature in August 2012. In prepaying this debt, the Company paid a prepayment penalty of $481,000 and estimates that this prepayment and financing will be accretive to earnings for the fiscal year ending September 30, 2012 and thereafter.

Stockholders’ equity decreased by $318,000 from September 30, 2011 to March 31, 2012 as a result of the net loss of $240,000 and the other comprehensive loss of $223,000 offset by additions to equity resulting from accounting for stock-based compensation and the Company’s ESOP. The other comprehensive loss in the six months ended March 31, 2012 resulted primarily from the transfer of unrealized gains on available for sale securities to income as such securities were sold, and the gains were realized.

 

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Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011

General. The Company recorded a net loss of $13,000 for the three months ended March 31, 2012, compared to net income of $40,000 for the three months ended March 31, 2011. The change was primarily due to lower interest income ($2.7 million in the three months ended March 31, 2012 compared to $2.8 million in the three months ended March 31, 2011), the costs related to the New York State charter conversion application ($69,000 in the three months ended March 31, 2012) and the penalty assessed on the early repayment of borrowings ($481,000 in the three months ended March 31, 2012), offset in part by lower interest expense ($773,000 in the three months ended March 31, 2012 compared to $898,000 in the three months ended March 31, 2011) and the gain on sale of securities ($539,000 in the three months ended March 31, 2012).

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

 

     Three Months Ended March 31,  
     2012     2011  
     (Dollars in thousands)  
     Average
Balance
     Interest      Yield/
Cost
    Average
Balance
     Interest      Yield/
Cost
 

Interest-earning assets:

                

Loans receivable(1)

   $ 183,677       $ 2,469         5.38   $ 178,462       $ 2,558         5.73

Securities(2)

     55,363         240         1.73     51,009         236         1.85

Other interest-earning assets(3)

     6,811         28         1.64     7,161         36         2.01
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     245,851         2,737         4.45     236,632         2,830         4.78
     

 

 

    

 

 

      

 

 

    

 

 

 

Non interest-earning assets

     6,568              5,877         
  

 

 

         

 

 

       

Total assets

   $ 252,419            $ 242,509         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Demand deposits

   $ 31,944         40         0.50   $ 30,256         56         0.74

Savings and club accounts

     41,485         39         0.38     40,842         41         0.40

Certificates of deposit

     107,956         423         1.57     98,277         372         1.51

Borrowed money(4)

     27,561         271         3.93     35,519         429         4.83
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     208,946         773         1.48     204,894         898         1.75
     

 

 

    

 

 

      

 

 

    

 

 

 

Non interest-bearing deposits

     20,500              15,680         

Other liabilities

     1,033              587         
  

 

 

         

 

 

       

Total liabilities

     230,479              221,161         

Total stockholders’ equity

     21,940              21,348         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 252,419            $ 242,509         
  

 

 

         

 

 

       

Interest rate spread

      $ 1,964         2.97      $ 1,932         3.03
     

 

 

         

 

 

    

Net interest-earning assets/net interest margin

   $ 36,905            3.20   $ 31,738            3.27
  

 

 

         

 

 

       

Ratio of interest-earning assets to interest-bearing liabilities

        1.18x              1.15x      
     

 

 

         

 

 

    

 

(1) Net of allowance for loan losses and net deferred costs and fees.
(2) Available for sale securities included at fair value.
(3) Includes interest-earning cash equivalents, FHLB-NY stock and loans held for sale, which are held for a short period of time.
(4) Includes mortgage escrow funds and FHLB-NY advances.

Interest Income. Interest income of $2.7 million for the three months ended March 31, 2012, was $93,000 lower than interest income for the three months ended March 31, 2011. The decrease in interest income was primarily due to a decrease of $89,000 in interest from loans and a $4,000 decrease in interest from investments and other interest-earning assets.

Interest income from loans decreased by $89,000 in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The decrease was due to a 35 basis point decline in the average interest rate on loans, net of a $5.2 million, or 2.9%, increase in the average balance of loans to $183.7 million in the three months ended March 31, 2012 from $178.5 million in the three months ended

 

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March 31, 2011. The increase in average loan balances includes loans in the non-residential real estate and commercial loan categories, net of normal amortization and prepayments of one-to-four-family mortgages. The decrease in the average yield resulted principally from the write off of previously accrued interest on loans which became non accrual during the quarter ended March 31, 2012 and the higher write offs of deferred loan costs in the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011. The Company defers loan origination fees and direct loan origination costs and accretes net amounts as an adjustment of yield over the contractual lives of the related loans. Unamortized net fees and costs are written off if the loan is repaid before its stated maturity. Lower market interest rates also contributed to the decrease in the average interest rate on loans in the quarter ended March 31, 2012. The Company continues to sell a portion of conventional one-to-four-family residential mortgage originations into the secondary market to generate non-interest income and reduce interest rate risk. The volume of loans sold was lower in the three months ended March 31, 2012 compared to 2011 as a result of market conditions. Higher loan volume increased interest income by $72,000 while the effective lower interest rates decreased interest income by $161,000.

Interest income from securities increased by $4,000 in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Interest income from securities rose by $20,000 as a result of higher average balances in the three months ended March 31, 2012 compared to the three months ended March 31, 2011, and declined by $16,000 as a result of lower yields on the securities portfolio. Other interest-earning assets consist of cash equivalents, FHLB-NY stock and loans originated for resale. Interest on these assets declined by $8,000 in the three months ended March 31, 2012 compared to the three months ended March 31, 2011 principally due to lower FHLB-NY dividends.

Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.78% in the quarter ended March 31, 2011 to 4.45% in the comparable 2012 period. Of the $93,000 decrease in interest income in the three months ended March 31, 2012 compared to the three months ended March 31, 2011, higher average balances of interest-earning assets caused an increase of $90,000 in interest income, while lower interest rates caused a decrease in interest income of $183,000.

Interest Expense. Interest expense decreased by $125,000, or 13.9%, to $773,000 in the three months ended March 31, 2012 compared to $898,000 in the comparable 2011 period. Interest expense on demand deposits decreased by $16,000 in the three months ended March 31, 2012 compared to the three months ended March 31, 2011 principally due to lower interest rates paid on those deposits, offset in part by higher average balances. Interest on savings and club accounts was essentially unchanged in the three months ended March 31, 2012 compared to the comparable 2011 period.

Interest expense on certificates of deposit increased by $51,000 in the three months ended March 31, 2012 compared to the three months ended March 31, 2011 as a result of the impact of higher average balances and higher interest rates in the 2012 period. The average balance of certificates of deposit increased by $9.7 million to $108.0 million in the three months ended March 31, 2012 compared to $98.3 million for the three months ended March 31, 2011. The increase in average balances and rate in the 2012 period was the result of a $4.9 million, 15 year brokered certificate of deposit, with interest at 3.54% which was obtained to enable the Bank to offer longer term fixed rate loans to its commercial customers and reduce interest rate risk on those loans. CDARS deposits rose from $8.0 million as of December 31, 2011 to $16.0 million as of March 31, 2012 and were used to refinance the FHLB-NY borrowings as discussed below. The interest rate on certificates of deposit was 1.57% in the three months ended March 31, 2012 compared to 1.51% in the three months ended March 31, 2011 as a result of the brokered deposit, net of lower market interest rates on retail deposits.

In February 2012, the Company prepaid $20.0 million of FHLB-NY debt which was scheduled to mature in August 2012. In prepaying this debt, the Company paid a prepayment penalty of $481,000 and estimates that this prepayment and financing will be accretive to earnings for the fiscal year ending September 30, 2012 and thereafter. This prepayment reduced the average balance of borrowed money by $8.0 million and reduced the average interest rate from 4.86% to 3.93% in the three months ended March 31, 2012 compared to the three months ended March 31, 2011, reducing interest expense on borrowed money by $158,000.

This refinancing, and overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.75% in the quarter ended March 31, 2011 to 1.48% in the comparable 2012 period. Of the $125,000 decrease in interest expense in the three months ended March 31, 2012 compared to the three months ended March 31, 2011, declines in interest rates reduced interest expense by $78,000, while changes in volume of interest-bearing liabilities caused a decrease in interest expense of $47,000.

 

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Table of Contents

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

 

     Three Months Ended March 31, 2012
Compared to

Three Months Ended March 31, 2011
 
     (In thousands)  
     Volume     Rate     Net  

Interest-earning assets:

      

Loans receivable

   $ 72      $ (161   $ (89

Securities

     20        (16     4   

Other interest-earning assets

     (2     (6     (8
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     90        (183     (93
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Demand deposits

     3        (19     (16

Savings and club accounts

     —          (2     (2

Certificates of deposit

     36        15        51   

Borrowed money

     (86     (72     (158
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (47     (78     (125
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 137      $ (105   $ 32   
  

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income increased $32,000, or 1.7%, to $1.96 million for the three months ended March 31, 2012 compared to $1.93 million in the three months ended March 31, 2011. The increase in net interest income was primarily attributable to higher balances of average interest-earning assets, net of lower yields on those assets, and changes in the mix of interest-bearing liabilities, and lower interest rates on those liabilities.

Provision for Loan Losses. The allowance for loan losses was $1.5 million, or 0.83% of gross loans outstanding, at March 31, 2012 compared to $1.2 million or 0.67% of gross loans outstanding at September 30, 2011. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. As of March 31, 2012 and September 30, 2011, the Bank had $6.5 million and $4.3 million of non-performing loans, respectively, substantially all of which have been placed on non-accrual status. At March 31, 2012 and September 30, 2011, the Bank had $11.1 million and $7.6 million, respectively, in impaired loans. The increase in impaired loans resulted from general economic conditions, increased unemployment and the declines in the local real estate market. As a result of the continued weak economy, continued high unemployment, declines in real estate values in the Bank’s primary market area, and the increase in the impaired loans and non-performing loans, $365,000 and $55,000 was provided for loan losses in the six months ended March 31, 2012 and 2011, respectively. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.

Non-interest Income. Non-interest income of $621,000 in the three months ended March 31, 2012 was higher than the $77,000 in the comparable 2011 period primarily as a result of the gain on sale of securities of $539,000 in the 2012 period.

Non-interest Expenses. Non-interest expenses increased by $603,000, for the three months ended March 31, 2012, compared to the prior year period. Exclusive of the costs associated with the application for the conversion of the Bank’s charter to a New York State-chartered savings bank ($69,000) and the penalty assessed on early repayment of borrowings ($481,000), non-interest expense was comparable in the three months ended March 31, 2012 compared to 2011. In February 2012, the Company prepaid $20.0 million of FHLB-NY debt which was scheduled to mature in August 2012. In prepaying this debt, the company paid a prepayment penalty of $481,000 and estimates that this prepayment and financing will be accretive to earnings for the fiscal year ending September 30, 2012 and thereafter.

Income Tax Expense (Benefit). The income tax expense was $3,000 in the three months ended March 31, 2012 compared to a benefit of $53,000 in the comparable 2011 period. The income tax expense in the three months ended March 31, 2012 resulted from the pre-tax loss in that period, less certain non-deductible expenses which resulted in taxable income. The income tax benefit in the three months ended

 

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Table of Contents

March 31, 2011 includes a reduction in previously recorded tax expense of $55,000 resulting from the change in the Company’s tax year from December 31 to September 30. Income tax expense is recorded based on pretax income at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The effective tax rate in the three months ended March 31, 2012 and 2011 was different than the statutory rate as a result of certain non-deductible expenses.

Comparison of Operating Results for the Six Months Ended March 31, 2012 and 2011

General. The Company recorded a net loss of $240,000 for the six months ended March 31, 2012, compared to net income of $130,000 for the six months ended March 31, 2011. The change was primarily due to higher net interest income ($3.9 million in the six months ended March 31, 2012 compared to $3.8 million in the six months ended March 31, 2011), a higher provision for loan losses ($365,000 in the six months ended March 31, 2012 compared to $55,000 in the six months ended March 31, 2011), a $539,000 gain on sale of securities in the six months ended March 31, 2012, lower gain on sale of loans ($78,000 in the six months ended March 31, 2012 compared to $178,000 in the six months ended March 31, 2011) and higher non-interest expense, principally from the costs related to the New York State charter conversion application ($92,000 in the six months ended March 31, 2012) and the penalty assessed on the early repayment of borrowings ($481,000 in the six months ended March 31, 2012).

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

 

     Six Months Ended March 31,  
     2012     2011  
     (Dollars in thousands)  
     Average
Balance
     Interest      Yield/
Cost
    Average
Balance
     Interest      Yield/
Cost
 

Interest-earning assets:

                

Loans receivable(1)

   $ 181,540       $ 5,095         5.61   $ 177,123       $ 5,100         5.76

Securities(2)

     55,515         480         1.73     53,413         492         1.84

Other interest-earning assets(3)

     10,367         62         1.20     7,396         84         2.27
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     247,422         5,637         4.56     237,932         5,676         4.77
     

 

 

    

 

 

      

 

 

    

 

 

 

Non interest-earning assets

     6,137              6,137         
  

 

 

         

 

 

       

Total assets

   $ 253,559            $ 244,069         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Demand deposits

   $ 31,344         93         0.59   $ 30,535         118         0.77

Savings and club accounts

     41,147         80         0.39     40,916         82         0.40

Certificates of deposit

     106,460         851         1.60     98,698         775         1.57

Borrowed money(4)

     31,723         700         4.41     35,762         859         4.80
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     210,674         1,724         1.64     205,911         1,834         1.78
     

 

 

    

 

 

      

 

 

    

 

 

 

Non interest-bearing deposits

     20,161              15,628         

Other liabilities

     1,173              1,071         
  

 

 

         

 

 

       

Total liabilities

     232,008              222,610         

Total stockholders’ equity

     21,942              21,549         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 253,950            $ 244,069         
  

 

 

         

 

 

       

Interest rate spread

      $ 3,913         2.92      $ 3,842         2.99
     

 

 

         

 

 

    

Net interest-earning assets/net interest margin

   $ 36,748            3.16   $ 32,021            3.23
  

 

 

         

 

 

       

Ratio of interest-earning assets to interest-bearing liabilities

        1.17x              1.16x      
     

 

 

         

 

 

    

 

(1) Net of allowance for loan losses and net deferred costs and fees.
(2) Available for sale securities included at fair value.
(3) Includes interest-earning cash equivalents, FHLB-NY stock and loans held for sale, which are held for a short period of time.
(4) Includes mortgage escrow funds and FHLB-NY advances.

 

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Interest Income. Interest income of $5.6 million for the six months ended March 31, 2012, was $39,000 lower than interest income for the six months ended March 31, 2011. The decrease in interest income was primarily due to lower interest rates, offset in part by higher average balances of interest earning assets.

Interest income from loans declined by $5,000 in the six months ended March 31, 2012 compared to the six months ended March 31, 2011. The decrease was due to a 15 basis point decrease in the average yield to 5.76% from 5.61%, offset by a $4.4 million, or 2.5%, increase in the average balance of loans to $181.5 million in the six months ended March 31, 2012 from $177.1 million in the six months ended March 31, 2011. The increase in average loan balances includes loans in the non-residential real estate, multi-family and commercial loan categories net of normal amortization and prepayments of one-to-four-family mortgages. The decrease in the average yield resulted principally from the write off of previously accrued interest on loans which became non accrual during the six months ended March 31, 2012, net of lower write offs of deferred loan costs in the six months ended March 31, 2012 compared to the six months ended March 31, 2011. The Company defers loan origination fees and direct loan origination costs and accretes net amounts as an adjustment of yield over the contractual lives of the related loans. Unamortized net fees and costs are written off if the loan is repaid before its stated maturity. Lower market interest rates also contributed to the decrease in the average interest rate on loans in the six month period ended March 31, 2012. The Company continues to sell a portion of conventional one-to-four-family residential mortgage originations into the secondary market to generate non-interest income and reduce interest rate risk. The volume of loans sold was lower in the six months ended March 31, 2012 compared to 2011 as a result of market conditions. Higher loan volume increased interest income by $128,000 while the effective lower interest rates decreased interest income by $133,000.

Interest income from securities declined $12,000 in the six months ended March 31, 2012 compared to the six months ended March 31, 2011. Interest income from securities increased by $19,000 as a result of higher average balances in the six months ended March 31, 2012 compared to the six months ended March 31, 2011, and declined by $31,000 as a result of lower yields on the securities portfolio. Other interest-earning assets consist of cash equivalents, FHLB-NY stock and loans originated for resale. Interest on these assets declined by $22,000 in the six months ended March 31, 2012 compared to the six months ended March 31, 2011 principally due to lower FHLB-NY dividends.

Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.77% in the six months ended March 31, 2011 to 4.56% in the comparable 2012 period. Of the $39,000 decrease in interest income in the six months ended March 31, 2012 compared to the six months ended March 31, 2011, higher average balances of interest-earning assets caused an increase of $173,000 in interest income, while lower interest rates caused a decrease in interest income of $212,000.

Interest Expense. Interest expense declined by $110,000, or 6.0%, to $1.7 million in the six months ended March 31, 2012 compared to $1.8 million in the comparable 2011 period. Interest expense on demand deposits declined by $25,000 in the six months ended March 31, 2012 compared to the six months ended March 31, 2011 principally due to lower interest rates paid on those deposits. Interest on savings and club accounts was little changed in the six months ended March 31, 2012 compared to the comparable 2011 period.

Interest expense on certificates of deposit increased by $76,000 in the six months ended March 31, 2012 compared to the six months ended March 31, 2011 as a result of the impact of higher average balances and higher interest rates in the 2012 period. The average balance of certificates of deposit increased by $7.7 million to $106.5 million in the six months ended March 31, 2012 compared to $98.7 million for the six months ended March 31, 2011. The increase in average balances and rate in the 2012 period was the result of a $4.9 million, 15 year brokered certificate of deposit, with interest at 3.54% which was obtained to enable the Bank to offer longer term fixed rate loans to its commercial customers and reduce interest rate risk on those loans. CDARS deposits rose from $8.0 million as of September 30, 2011 to $ $16.0 million as of March 31, 2012 and were used to refinance the FHLB-NY borrowings as discussed below. The interest rate on certificates of deposit was 1.60% in the three months ended March 31, 2012 compared to 1.57% in the three months ended March 31, 2011 as a result of the brokered deposit, net of lower market interest rates on retail deposits.

In February 2012, the Company prepaid $20.0 million of FHLB-NY debt which was scheduled to mature in August 2012. In prepaying this debt, the Company paid a prepayment penalty of $481,000 and estimates that this prepayment and financing will be accretive to earnings for the fiscal year ending September 30, 2012 and thereafter. This prepayment reduced the average balance of borrowed money by $4.0 million and reduced the average interest rate from 4.80% to 4.41% in the six months ended March 31, 2012 compared to the six months ended March 31, 2011, reducing interest expense on borrowed money by $166,000.

This refinancing and overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.78% in the six months ended March 31, 2011 to 1.64% in the comparable 2012 period. Of the $110,000 decrease in interest expense in the six months ended March 31, 2012 compared to the six months ended March 31, 2011, declines in interest rates reduced interest expense by $82,000, while changes in volume of interest-bearing liabilities caused a decrease in interest expense of $28,000.

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

 

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     Six Months Ended March 31, 2012
Compared to

Six Months Ended March 31, 2011
 
     (In thousands)  
     Volume     Rate     Net  

Interest-earning assets:

      

Loans receivable

   $ 128      $ (133   $ (5

Securities

     19        (31     (12

Other interest-earning assets

     26        (48     (22
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     173        (212     (39
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Demand deposits

     3        (28     (25

Savings and club accounts

     —          (2     (2

Certificates of deposit

     61        15        76   

Borrowed money

     (92     (67     (159
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (28     (82     (110
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 201      $ (130   $ 71   
  

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income increased $71,000, or 1.8%, to $3.9 million for the six months ended March 31, 2012 compared to $3.8 million for the six months ended March 31, 2011. The increase in net interest income was primarily attributable to higher balances of average interest-earning assets, net of lower yields on those assets, and increases in interest-bearing liabilities, net of lower interest rates on those liabilities.

Provision for Loan Losses. The allowance for loan losses was $1.5 million, or 0.83% of gross loans outstanding, at March 31, 2012 compared to $1.2 million or 0.67% of gross loans outstanding at September 30, 2011. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. As of March 31, 2012 and September 30, 2011, the Bank had $6.5 million and $4.3 million of non-performing loans, respectively, substantially all of which have been placed on non-accrual status. At March 31, 2012 and September 30, 2011, the Bank had $11.1 million and $7.6 million, respectively, in impaired loans. The increase in impaired loans resulted from general economic conditions, increased unemployment and the declines in the local real estate market. As a result of the continued weak economy, continued high unemployment, declines in real estate values in the Bank’s primary market area, and the increase in the impaired loans and non-performing loans, $365,000 and $55,000 was provided for loan losses in the six months ended March 31, 2012 and 2011, respectively. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.

Non-interest Income. Non-interest income of $721,000 in the six months ended March 31, 2012 was higher than the $266,000 in the comparable 2011 period primarily as a result of the gain on sale of securities of $539,000 in the 2012 period, net of a $100,000 lower gain on sale of loans in the 2012 period resulting from lower loan sales volume.

Non-interest Expenses. Non-interest expenses increased by $647,000, for the six months ended March 31, 2012, compared to the prior year period. Exclusive of the costs associated with the application for the conversion of the Bank’s charter to a New York State-chartered savings bank ($92,000) and the penalty assessed on early repayment of borrowings ($481,000), most components of non-interest expense were comparable in the six months ended March 31, 2012 compared to 2011. In the six months ended March 31, 2012, salaries and employee benefits were $63,000 higher than the corresponding 2011 period due to higher employee benefit costs. In February 2012, the Company prepaid $20.0 million of FHLB-NY debt which was scheduled to mature in August 2012. In prepaying this debt, the company paid a prepayment penalty of $481,000 and estimates that this prepayment and financing will be accretive to earnings for the fiscal year ending September 30, 2012 and thereafter.

Income Tax (Benefit). The income tax benefit was $134,000 in the six months ended March 31, 2012 compared to a benefit of $73,000 in the comparable 2011 period. The income tax benefit in the six months ended March 31, 2012 resulted from the pre-tax loss in that period. The income tax benefit in the six months ended March 31, 2011 includes a reduction in previously recorded tax expense of $110,000 resulting from the change in the Company’s tax year from December 31 to September 30. Income tax expense is recorded based on pretax income at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The effective tax rate in the six months ended March 31, 2012 and 2011 was different than the statutory rate as a result of certain non-deductible expenses.

 

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Management of Market Risk

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

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

In addition, the actual amount of time before mortgage loans are repaid can be significantly impacted by changes in mortgage prepayment rates and market interest rates. Mortgage prepayment rates will vary due to a number of factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, demographic variables and the assumability of the underlying mortgages. However, the major factors affecting prepayment rates are prevailing interest rates, related mortgage refinancing opportunities and competition. The Company monitors interest rate sensitivity so that it can make adjustments to its asset and liability mix on a timely basis.

Net Interest Income at Risk

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

The table below sets forth the latest available estimated changes in net interest income, as of December 31, 2011, that would result from various basis point changes in interest rates over a twelve month period.

 

Change in Interest Rates In Basis Points (Rate Shock)

   Net Interest Income  
     Amount      Dollar
Change
    Percent
Change
 
     (Dollars in thousands)  

300

   $ 8,296       $ (184     -2.2

200

     8,360         (120     -1.4

100

     8,439         (41     -0.5

0

     8,480         —          —     

-100

     8,294         (186     -2.2

Liquidity and Capital Resources

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

The Company’s primary sources of funds are retail deposits, the CDARS network, brokered certificates of deposit, amortization and prepayments of loans, FHLB-NY advances, repayments and maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities repayments are greatly influenced by market interest rates, economic conditions and competition. The Company’s liquidity, represented by cash and cash equivalents and investment securities, is a product of its operating, investing and financing activities. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds, available-for-sale securities or cash equivalents and

 

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other interest-earning assets. If the Company requires funds beyond its ability to generate them internally, the Company can acquire brokered certificates of deposit, CDARS deposits and draw upon existing borrowing agreements with the FHLB-NY and the Federal Reserve which provide an additional source of funds. At March 31, 2012 and September 30, 2011, the Company had $14.3 million and $34.4 million of advances from the FHLB-NY, respectively and CDARS deposits of $16.0 million and $8.0 million, respectively. At March 31, 2012 and September 30, 2011, the Company also had $4.7 million and $5.0 million, respectively of brokered certificates of deposit which mature in June 2026.

In the six months ended March 31, 2012, net cash provided by operating activities was $1.3 million compared to net cash provided by operating activities of $255,000 in the same period in 2011. In the six months ended March 31, 2012 and 2011, net income (loss) included non-cash expenses (consisting of depreciation, amortization, provision for loan losses, deferred taxes and stock-based compensation) of $720,000 and $410,000, respectively. Net activity from loans originated for sale provided $1.8 million and $164,000 of cash in the six months ended March 31, 2012 and 2011, respectively.

In the six months ended March 31, 2012 and 2011, investing activities provided $5.1 million and $1.9 million, respectively, of cash. In the six months ended March 31, 2012 proceeds from the sale of securities provided $21.2 million of cash. In the six months ended March 31, 2012 and 2011, calls and repayments of securities provided $11.4 million and $5.1 million of cash, respectively, while purchases of securities used $22.4 million and $4.0 million of cash, respectively. Net changes in loans used $5.5 million of cash in the six months ended March 31, 2012 and provided $839,000 of cash in the six months ended March 31, 2011.

Net cash used by financing activities was $5.9 million in the six months ended March 31, 2012 compared to $397,000 in the six months ended March 31, 2011. In the six months ended March 31, 2012, repayment of FHLB-NY advances used $20.1 million of cash and changes in deposit balances provided $13.5 million in cash.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of March 31, 2012, the Company had cash and cash equivalents of $4.9 million and available for sale securities of $49.5 million. At March 31, 2012, the Company had outstanding commitments to originate loans of $1.2 million and $13.1 million of undisbursed funds from approved lines of credit, homeowners’ equity lines of credit, and secured commercial lines of credit. Retail certificates of deposit scheduled to mature in one year or less at March 31, 2012, totaled $61.0 million. Historically, the Company’s deposit flow history has been that a significant portion of such deposits remain with the Company.

The Company has an Overnight Advance line of credit with the FHLB-NY, which was unused at March 31, 2012 and September 30, 2011. The Company’s overall credit exposure at the FHLB-NY, including borrowings under the Overnight Advance line of credit and other term borrowings cannot exceed 50% of its total assets, subject to certain limitations based on the underlying loans and securities pledged as collateral

The following table sets forth the Bank’s capital position at March 31, 2012, compared to the minimum regulatory capital requirements:

 

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

Total capital (to risk-weighted assets)

   $ 20,846         15.88   ³ $  10,500       ³  8.00   ³ $  13,125       ³  10.00

Core (Tier 1) capital (to risk-weighted assets)

     19,301         14.71        N/A         N/A      ³ 7,878       ³ 6.00   

Core (Tier 1) capital (to total adjusted assets)

     19,301         7.82      ³ 9,870       ³ 4.00      ³ 12,338       ³ 5.00   

Tangible capital (to total adjusted assets)

     19,301         7.82      ³ 3,701       ³ 1.50        N/A         N/A   

 

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Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to Smaller Reporting Companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

 

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Part II: Other Information

Item 1A. Risk Factors

Except as discussed below, there have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended September 30, 2011.

The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks related to cybersecurity.

We are exposed to cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual property, or other sensitive information, including the information belonging to our banking customers. Cyber-attacks may also be directed at disrupting our operations.

While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.

Item 6. Exhibits

 

Exhibit
No.

  

Description

    3.1    Certificate of Incorporation of CMS Bancorp, Inc. (1)
    3.2    Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on February 20, 2009. (2)
    3.3    Bylaws of CMS Bancorp, Inc. (1)
    4.1    Form of Stock Certificate of CMS Bancorp, Inc. (1)
    4.2    Form of Option Agreement under the CMS Bancorp, Inc. 2007 Stock Option Plan. (3)
    4.3    Form of Restricted Stock Award Agreement under the CMS Bancorp, Inc. 2007 Recognition and Retention Plan. (3)
  31.1    Rule 13a-14(a)/15d-14(a) Certification of principal executive officer*
  31.2    Rule 13a-14(a)/15d-14(a) Certification of principal financial officer*
  32.1    Section 1350 Certification of principal executive officer*
  32.2    Section 1350 Certification of principal financial officer*
101    Interactive data files: (i) Consolidated Statements of Financial Condition as of March 31, 2012 and September 30, 2011 (unaudited), (ii) Consolidated Statements of Operations for the Three Months and Six Months Ended March 31, 2012 and 2011 (unaudited), (iii) Consolidated Statements of Comprehensive (Loss) for the Three Months and Six Months Ended March 31, 2012 and 2011 (unaudited), (iv) Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2012 and 2011, and (v) Notes to Consolidated Financial Statements.**

 

* Included herewith.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
(1) Incorporated by reference to the Registration Statement No. 333-139176 on Form SB-2 filed with the Commission on December 7, 2006, as amended.
(2) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on February 23, 2009.
(3) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on November 30, 2007.

 

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SIGNATURES

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

 

      CMS Bancorp, Inc.
Date: May 15, 2012      

/s/ JOHN RITACCO

      John Ritacco
      President and Chief Executive Officer
Date: May 15, 2012      

/s/ STEPHEN DOWD

      Stephen Dowd
      Chief Financial Officer

 

39