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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 June 30, 2014

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 August 8, 2014 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 June 30, 2014 and September 30, 2013 (Unaudited)

     3   
 

Consolidated Statements of Income for the Three Months and Nine Months Ended June  30, 2014 and 2013 (Unaudited)

     4   
 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended June  30, 2014 and 2013 (Unaudited)

     5   
 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013 (Unaudited)

     6   
 

Notes to Consolidated Financial Statements (Unaudited)

     7   

Item 2:

 

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

     23   

Item 3:

 

Quantitative and Qualitative Disclosures about Market Risk

     35   

Item 4:

 

Controls and Procedures

     35   

Part II—OTHER INFORMATION

  

Item 1:

 

Legal Proceedings

     36   

Item 1A:

 

Risk Factors

     36   

Item 6:

 

Exhibits

     36   

SIGNATURES

     37   

 

2


Table of Contents

Part I: Financial Information

Item 1. Financial Statements

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

     June 30, 2014     September 30, 2013  
    

(Dollars in thousands,

except per share data)

 

ASSETS

    

Cash and amounts due from depository institutions

   $ 1,536      $ 2,219   

Interest-bearing deposits

     1,282        258   
  

 

 

   

 

 

 

Total cash and cash equivalents

     2,818        2,477   

Securities available for sale

     40,172        40,420   

Loans held for sale

     —          337   

Loans receivable, net of allowance for loan losses of $695 and $923, respectively

     223,229        207,996   

Other real estate owned

     196        —     

Premises and equipment

     2,655        2,742   

Federal Home Loan Bank of New York stock, at cost

     1,141        1,262   

Accrued interest receivable

     1,006        954   

Other assets

     1,828        2,067   
  

 

 

   

 

 

 

Total assets

   $ 273,045      $ 258,255   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits

   $ 228,115      $ 212,312   

Advances from Federal Home Loan Bank of New York

     17,041        19,889   

Advance payments by borrowers for taxes and insurance

     1,925        1,221   

Other liabilities

     2,143        2,098   
  

 

 

   

 

 

 

Total liabilities

     249,224        235,520   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ equity:

    

Preferred stock, $.01 par value, 1,000,000 shares authorized, 1,500 shares issued and outstanding (liquidation preference value $1,000 per share)

     —          —     

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

     20,336        20,283   

Retained earnings

     7,466        7,007   

Treasury stock, 192,362 shares

     (1,660     (1,660

Unearned Employee Stock Ownership Plan (“ESOP”) shares

     (1,248     (1,288

Accumulated other comprehensive (loss)

     (1,094     (1,628
  

 

 

   

 

 

 

Total stockholders’ equity

     23,821        22,735   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 273,045      $ 258,255   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months
Ended
June 30,
    Nine Months
Ended
June 30,
 
     2014      2013     2014      2013  
     (Dollars in thousands, except per share data)  

Interest income:

          

Loans

   $ 2,683         2,620        7,858         7,792   

Securities

     179         196        541         647   

Other interest-earning assets

     16         20        51         69   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     2,878         2,836        8,450         8,508   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Deposits

     378         364        1,098         1,110   

Mortgage escrow funds

     6         12        22         40   

Borrowings, short term

     2         2        17         31   

Borrowings, long term

     170         177        512         524   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     556         555        1,649         1,705   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     2,322         2,281        6,801         6,803   

Provision for loan losses

     50         25        225         393   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,272         2,256        6,576         6,410   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest income:

          

Fees and service charges

     40         40        117         124   

Net gain on sale of loans

     3         52        74         229   

Other

     7         6        11         10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     50         98        202         363   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest expense:

          

Salaries and employee benefits

     977         981        2,891         3,061   

Net occupancy

     325         307        1,003         940   

Equipment

     202         189        594         575   

Professional fees

     216         (97     521         161   

Advertising

     15         6        54         21   

Federal insurance premiums

     52         57        158         167   

Directors’ fees

     61         57        163         159   

Other

     200         173        537         522   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expense

     2,048         1,673        5,921         5,606   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     274         681        857         1,167   

Income tax expense

     104         180        331         365   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     170         501        526         802   

Preferred stock dividends

     22         10        67         10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to common shareholders

   $ 148       $ 491      $ 459       $ 792   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income per common share:

          

Basic and diluted

   $ 0.09         0.28        0.26         0.46   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average number of common shares outstanding:

          

Basic

     1,738,123         1,732,642        1,736,747         1,731,267   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

     1,741,444         1,733,470        1,738,803         1,731,791   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months
Ended
June 30,
    Nine Months
Ended
June 30,
 
     2014     2013     2014     2013  
     (In thousands)  

Net income

   $ 170      $ 501      $ 526      $ 802   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Gross unrealized holding gains (losses) on securities available for sale, net of deferred income (tax) benefit of $(261), $629, $(379) and $753

     397        (955     576        (1,140

Retirement plan, net of deferred income tax of $9, $2, $27, and $6 (a)

     (14     (3     (42     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     383        (958     534        (1,149
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 553      $ (457   $ 1,060      $ (347
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Retirement plan amortization and related income tax are reflected in the consolidated statements of income within the salaries and benefits and income tax expense lines, respectively.

See notes to consolidated financial statements.

 

5


Table of Contents

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
June 30,
 
     2014     2013  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 526      $ 802   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of premises and equipment

     275        268   

Amortization and accretion, net

     156        95   

Provision for loan losses

     225        393   

Write down of other real estate owned

     43        —     

Deferred income taxes

     94        270   

ESOP expense

     36        35   

Stock option expense

     30        43   

Restricted stock award expense

     27        45   

Net gain on sale of loans

     (74     (229

Loans originated for sale

     (3,485     (5,817

Proceeds from sale of loans originated for sale

     3,896        8,472   

(Increase) in interest receivable

     (52     (50

(increase) decrease in other assets

     (207     3,155   

Increase in accrued interest payable

     1        1   

(Decrease) in other liabilities

     (25     (80
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,466        7,403   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Principal repayments and calls on securities available for sale

     1,137        5,183   

Net (increase) in loans receivable

     (15,787     (8,987

Additions to premises and equipment

     (188     (32

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

     121        723   
  

 

 

   

 

 

 

Net cash (used by) investing activities

     (14,717     (3,113
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     15,803        11,901   

Net repayment of advances from Federal Home Loan Bank of N.Y.

     (2,848     (16,181

Proceeds of sale of preferred stock

     —          1,455   

Net increase in payments by borrowers for taxes and insurance

     704        947   

Preferred stock dividends

     (67     (10
  

 

 

   

 

 

 

Net cash provided by (used by) financing activities

     13,592        (1,888
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     341        2,402   

Cash and cash equivalents-beginning

     2,477        1,841   
  

 

 

   

 

 

 

Cash and cash equivalents-ending

   $ 2,818      $ 4,243   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid during the period for:

    

Interest

   $ 1,648      $ 1,704   
  

 

 

   

 

 

 

Income taxes

   $ 134      $ 8   
  

 

 

   

 

 

 

Other:

    

Real estate owned acquired in settlement of loans

   $ 235      $ 518   
  

 

 

   

 

 

 

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, CMS 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 Business and Nature 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. In June 2012, the Bank completed its conversion from a federally-chartered savings bank to a New York state-chartered savings bank after receiving approval from the New York State Department of Financial Services (“NYSDFS”) and non-objection from the Office of the Comptroller of the Currency (“OCC”), and changed its name to CMS Bank. The Company will continue to be regulated as a savings and loan holding company by the Federal Reserve Bank of Philadelphia as long as the Bank continues to meet the requirements to remain a “qualified thrift lender” under the Home Owners’ Loan Act.

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”).

As previously announced, effective December 31, 2013, the Company terminated a merger agreement dated as of August 10, 2012 (amended effective as of April 22, 2013) by and between the Company and Customers Bancorp, Inc. (“Customers”) due to non-receipt by Customers of required government approvals to consummate the merger. The termination provisions of the merger agreement had called for a $1.0 million termination fee to be paid to CMS by Customers. To date, Customers has not paid the termination fee. On March 24, 2014, the Company filed suit in the Eastern District of Pennsylvania to recover the termination fee from Customers. The lawsuit is currently pending.

Notwithstanding the termination of the merger agreement, Customers continues to hold shares of the Company’s Series A Noncumulative Perpetual Preferred Stock (“Series A Preferred Stock”) pursuant to the terms of such preferred stock as set forth in the Certificate of Designations establishing the designations, powers, preferences, limitations, restrictions, and relative rights of the Series A Preferred Stock filed with the Secretary of State of Delaware on May 21, 2013. For additional information on the Series A Preferred Stock, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 24, 2013.

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 and nine months ended June 30, 2014 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 which are in the Company’s Annual Report for the fiscal year ended September 30, 2013, filed with the SEC on December 23, 2013.

4. Critical Accounting Policies

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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.

 

7


Table of Contents

It is management’s opinion that accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the potential impairment of FHLB stock, the determination of other-than-temporary impairment on securities, and the assessment of whether deferred taxes are more likely than not to be realized. Management believes that the allowance for loan losses represents its best estimate of losses known and inherent in the loan portfolio that are both probable and reasonable to estimate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in market and economic conditions in the Company’s market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Management’s determination of whether investments, including FHLB stock, are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Management’s assessment as to the amount of deferred taxes more likely than not to be realized is based upon estimates of future taxable income, which is subject to revision upon receipt of updated information.

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 balance sheet date but before the financial statements are issued. This guidance sets forth the period after the balance sheet date during which management of the reporting entity should evaluate events or transactions that occur for potential recognition in the financial statements. This guidance identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosure that should be made about events or transactions that occur after the balance sheet date. In preparing these consolidated financial statements, the Company evaluated the events that occurred after June 30, 2014 and through the date these consolidated financial statements were issued.

5. Net Income Per Share

Basic net income per share was computed by dividing the net income available to common stockholders 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. 157,879 of the 186,479 stock options outstanding were anti-dilutive and therefore excluded from the computation of diluted net income per share for the three months ended June 30, 2014. 166,179 of the 186,479 stock options outstanding were anti-dilutive and therefore excluded from the computation of diluted net income per share for the nine months ended June 30, 2014. 178,179 of the 186,479 stock options outstanding were anti-dilutive and therefore excluded from the computation of diluted net income per share for the three months and nine months ended June 30, 2013. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating both basic and diluted net income per share until they are committed to be released.

 

8


Table of Contents

6. Retirement Plan—Components of Net Periodic Pension Cost

The components of periodic pension expense were as follows:

 

     Three Months
Ended June 30,
    Nine Months
Ended June 30,
 
     2014     2013     2014     2013  
     (In thousands)  

Service cost

   $ —        $ —        $ —        $ —     

Interest cost

     62        64        186        192   

Expected return on plan assets

     (73     (66     (219     (198

Amortization of unrecognized loss

     23        5        69        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 12      $ 3      $ 36      $ 9   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

The Company recorded compensation expense with respect to stock options of $10,000 and $10,000 during the three month periods ended June 30, 2014 and 2013, respectively, and $30,000 and $43,000 during the nine month periods ended June 30, 2014 and 2013, respectively. Unrecognized compensation expense associated with stock option grants as of June 30, 2014 was $97,000.

The Company recorded compensation expense with respect to restricted stock of $9,000 and $9,000 during the three month periods ended June 30, 2014 and 2013, respectively, and $27,000 and $45,000 during the nine month periods ended June 30, 2014 and 2013, respectively. Unrecognized compensation expense associated with grants of restricted stock as of June 30, 2014 was $66,000.

8. Securities

Securities available for sale as of June 30, 2014 and September 30, 2013 were as follows:

 

June 30, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

U.S. Government Agencies:

           

Due after five but within ten years

   $ 14,991         —           372       $ 14,619   

Due after ten years but within fifteen years

     5,000         —           146         4,854   

Corporate bonds due after five years but within ten years

     4,369         43         1         4,411   

Municipal bonds:

              —     

Due after one but within five years

     1,284         8         —           1,292   

Due after five years but within ten years

     2,439         53         4         2,488   

Mortgage-backed securities

     12,326         218         36         12,508   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 40,409       $ 322       $ 559       $ 40,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, 2013    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

U.S. Government Agencies:

           

Due after five but within ten years

   $ 14,990       $ —         $ 760       $ 14,230   

Due after ten years but within fifteen years

     5,000         —           404         4,596   

Corporate bonds due after five years but within ten years

     4,384         —           78         4,306   

Municipal bonds:

              —     

Due within five years

     988         —           8         980   

Due after five years but within ten years

     2,753         32         38         2,747   

Mortgage-backed securities

     13,497         203         139         13,561   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 41,612       $ 235       $ 1,427       $ 40,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The age of unrealized losses and fair value of related securities available for sale at June 30, 2014 and September 30, 2013 were as follows:

 

     Less than 12 Months      12 Months or More      Total  
June 30, 2014    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (In thousands)  

U.S. Government Agencies

   $ —           —           19,473         518       $ 19,473       $ 518   

Corporate bonds

     —           —           977         1         977         1   

Municipal bonds

     —           —           1,324         4         1,324         4   

Mortgage-backed securities

     —           —           3,933         36         3,933         36   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $     —         $     —         $ 25,707       $ 559       $ 25,707       $ 559   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  
September 30, 2013    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (In thousands)  

U.S. Government Agencies

   $ 18,826       $ 1,164       $ —         $ —         $ 18,826       $ 1,164   

Corporate bonds

     4,306         78         —           —           4,306         78   

Municipal bonds

     2,625         46         —           —           2,625         46   

Mortgage-backed securities

     4,353         139         —           —           4,353         139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,110       $ 1,427       $     —         $     —         $ 30,110       $ 1,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

When the fair value of 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.

The unrealized losses reported on securities at June 30, 2014 relate to four securities issued by U.S. Government Agencies, one Corporate bond, one Municipal bond and one Mortgage-backed security. These unrealized losses were due to changes in interest rates. The unrealized losses reported on securities at September 30, 2013 relate to four securities issued by U.S. Government Agencies, three Corporate bonds, four Municipal bonds and one Mortgage-backed security. These unrealized losses were due to changes in interest rates.

All mortgage-backed securities are U.S. Government Agencies backed and collateralized by residential mortgages.

There were no sales of securities available for sale during the nine month periods ended June 30, 2013 or 2014, respectively.

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 nine 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.

 

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Table of Contents

Loan balances as of June 30, 2014 and September 30, 2013 consist of the following:

 

     June 30, 2014     September 30, 2013  
     (In thousands)  

Real estate:

    

One-to-four-family

   $ 91,599      $ 90,177   

Multi-family

     29,939        25,771   

Non-residential

     53,576        50,655   

Construction

     96        935   

Home equity and second mortgages

     9,196        8,169   
  

 

 

   

 

 

 
     184,406        175,707   

Commercial

     39,422        33,089   

Consumer

     69        103   
  

 

 

   

 

 

 

Total Loans

     223,897        208,899   

Allowance for loan losses

     (695     (923

Net deferred loan origination fees and costs

     27        20   
  

 

 

   

 

 

 
   $ 223,229      $ 207,996   
  

 

 

   

 

 

 

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 (“FDIC”) 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 below, 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 one year to five year averages, depending on the trend of losses and other factors. In addition, the UBPR Peer Group charge-off factor is determined. The Bank uses Bank specific charge-off experience adjusted for recent loss trends and economic conditions as well as Peer Group charge-off experience to establish its historical charge-off factor.

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

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

 

11


Table of Contents

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 nine 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 earnings 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 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.

 

12


Table of Contents

The following table summarizes the primary segments of the loan portfolio, including net deferred loan origination fees and costs, as of June 30, 2014 and September 30, 2013:

 

June 30, 2014    Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 5,750         85,860       $ 91,610   

Multi-family

     —           29,940         29,940   

Non-residential

     1,755         51,828         53,583   

Construction

     —           96         96   

Home equity and second mortgages

     384         8,814         9,198   
  

 

 

    

 

 

    

 

 

 
     7,889         176,538         184,427   

Commercial

     3,309         36,119         39,428   

Consumer

     —           69         69   
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,198       $ 212,726       $ 223,924   
  

 

 

    

 

 

    

 

 

 

 

September 30, 2013    Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 6,693       $ 83,493       $ 90,186   

Multi-family

     —           25,773         25,773   

Non-residential

     —           50,660         50,660   

Construction

     —           935         935   

Home equity and second mortgages

     471         7,699         8,170   
  

 

 

    

 

 

    

 

 

 
     7,164         168,560         175,724   

Commercial

     873         32,219         33,092   

Consumer

     —           103         103   
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,037       $ 200,882       $ 208,919   
  

 

 

    

 

 

    

 

 

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2014 and September 30, 2013:

 

     Impaired Loans with
Specific Allowance
     Impaired
Loans with
No Specific
Allowance
     Total Impaired Loans  
June 30, 2014    Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 
     (In thousands)  

Real estate:

              

One-to-four-family

   $ —         $ —         $ 5,750       $ 5,750       $ 5,894   

Multi-family

     —           —              —           —     

Non-residential

     —           —           1,755         1,755         2,085   

Construction

     —           —              —           —     

Home equity and second mortgages

     —           —           384         384         377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —           —           7,889         7,889         8,356   

Commercial

     —           —           3,309         3,309         3,316   

Consumer

     —           —              —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     —         $     —         $ 11,198       $ 11,198       $ 11,672   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Impaired Loans with
Specific Allowance
     Impaired
Loans with
No Specific
Allowance
     Total Impaired Loans  
September 30, 2013    Recorded
Investment
     Related
Allowance
     Recorded
Investment
     Recorded
Investment
     Unpaid
Principal
Balance
 
     (In thousands)  

Real estate:

              

One-to-four-family

   $ —         $ —         $ 6,693       $ 6,693       $ 6,658   

Multi-family

     —           —           —           —           —     

Non-residential

     —           —           —           —           —     

Construction

     —           —           —           —           —     

Home equity and second mortgages

     —           —           471         471         462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —           —           7,164         7,164         7,120   

Commercial

     —           —           873         873         873   

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     —         $     —         $ 8,037       $ 8,037       $ 7,993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three month periods ended June 30, 2014 and 2013:

 

                                                                             
June 30, 2014    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Non-
residential
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 5,967         388       $ 878         1,928             —         $ 9,161   

Interest income recognized on an accrual basis on impaired loans

     19         2         9         41         —           71   

Interest income recognized on a cash basis on impaired loans

     12         1         —           —           —           13   

 

                                                                             
June 30, 2013    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Non-
residential
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 8,908       $ 543             —         $     —         $ 11       $ 9,462   

Interest income recognized on an accrual basis on impaired loans

     34         3         —           —           —           37   

Interest income recognized on a cash basis on impaired loans

     16         3         —           —           —           19   

The following table presents the average recorded investment in impaired loans and related interest income recognized for the nine month periods ended June 30, 2014 and 2013:

 

                                                                             
June 30, 2014    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Non-
residential
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 6,273         410         439         1,317             —         $ 8,439   

Interest income recognized on an accrual basis on impaired loans

     61         8         9         41         —           119   

Interest income recognized on a cash basis on impaired loans

     40         1         —           3         —           44   

 

                                                                             
June 30, 2013    One-to-
four-
family
     Home Equity
and Second
Mortgages
     Non-
residential
     Commercial      Consumer      Total  
     (In thousands)  

Average investment in impaired loans

   $ 9,783       $ 580             —         $     —         $ 13       $ 10,376   

Interest income recognized on an accrual basis on impaired loans

     111         9         —           —           —           120   

Interest income recognized on a cash basis on impaired loans

     27         5         —           —           —           32   

 

14


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 June 30, 2014 and September 30, 2013:

 

June 30, 2014    Pass      Special
Mention
     Substandard      Doubtful      Total  
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 88,870       $ —           2,740       $ —         $ 91,610   

Multi-family

     29,193         747         —           —           29,940   

Non-residential

     52,368         —           1,215         —           53,583   

Construction

     96         —           —           —           96   

Home equity and second mortgages

     9,100         —           98         —           9,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     179,627         747         4,053         —           184,427   

Commercial

     35,425         149         3,854         —           39,428   

Consumer

     69         —           —           —           69   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 215,121       $ 896       $ 7,907       $     —         $ 223,924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, 2013    Pass      Special
Mention
     Substandard      Doubtful      Total  
     (In thousands)  

Real estate:

              

One-to-four-family

   $ 86,077       $ —         $ 4,109       $ —         $ 90,186   

Multi-family

     25,018         755         —           —           25,773   

Non-residential

     50,660         —           —           —           50,660   

Construction

     935         —           —           —           935   

Home equity and second mortgages

     7,999         —           171         —           8,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     170,689         755         4,280         —           175,724   

Commercial

     28,498         3,721         873         —           33,092   

Consumer

     103         —           —           —           103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 199,290       $ 4,476       $ 5,153       $     —         $ 208,919   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2014 and September 30, 2013:

 

June 30, 2014    Current      30-59
Days
Past
Due
     60-89
Days
Past Due
     90 Days or
More Past
Due and
Accruing
     90 Days
or More
Past Due
and Non-
Accrual
     Total
Past
Total
Due
     Total  
     (In thousands)  

Real estate:

                    

One-to-four-family

   $ 88,097       $ 773         —           —           2,740       $ 3,513       $ 91,610   

Multi-family

     29,940         —           —           —           —           —           29,940   

Non-residential

     53,045         —           —           —           538         538         53,583   

Construction

     96         —           —           —           —           —           96   

Home equity and second mortgages

     9,100         —           —           —           98         98         9,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     180,278         773         —           —           3,376         4,149         184,427   

Commercial

     39,264         —           —           —           164         164         39,428   

Consumer

     69         —           —           —           —           —           69   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 219,611       $ 773       $     —         $     —         $ 3,540       $ 4,313       $ 223,924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
September 30, 2013    Current      30-59
Days
Past
Due
     60-89
Days
Past
Due
     90 Days or
More Past
Due and
Accruing
     90 Days
or More
Past Due
and Non-
Accrual
     Total
Past
Due
     Total  
     (In thousands)  

Real estate:

                    

One-to-four-family

   $ 86,125       $ —         $ 237       $ —         $ 3,824       $ 4,061       $ 90,186   

Multi-family

     25,773         —           —           —           —           —           25,773   

Non-residential

     50,660         —           —           —           —           —           50,660   

Construction

     935         —           —           —           —           —           935   

Home equity and second mortgages

     8,098         —           —           —           72         72         8,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     171,591         —           237         —           3,896         4,133         175,724   

Commercial

     32,206         —           13         —           873         886         33,092   

Consumer

     103         —           —           —           —           —           103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203,900       $     —         $ 250       $     —         $ 4,769       $ 5,019       $ 208,919   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company was not committed to lend additional funds on nonaccrual loans at June 30, 2014.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL. Management utilizes an internally developed spreadsheet to track and apply the various components of the allowance.

The following table summarizes the primary segments of the ALLL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2014 and September 30, 2013:

 

June 30, 2014    ALLL
Balance
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
 
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 212       $ 212       $ —     

Multi-family

     45         45         —     

Non-residential

     253         253         —     

Construction

     —           —           —     

Home equity and second mortgages

     81         81         —     
  

 

 

    

 

 

    

 

 

 
     591         591         —     

Commercial

     101         101         —     

Consumer

     3         3         —     
  

 

 

    

 

 

    

 

 

 

Total

   $     695       $     695       $     —     
  

 

 

    

 

 

    

 

 

 

 

September 30, 2013    ALLL
Balance
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
 
     (In thousands)  

Real estate:

        

One-to-four-family

   $ 225       $ 225       $ —     

Multi-family

     48         48         —     

Non-residential

     374         374         —     

Construction

     7         7         —     

Home equity and second mortgages

     82         82         —     
  

 

 

    

 

 

    

 

 

 
     736         736         —     

Commercial

     187         187         —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $     923       $     923       $     —     
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes activity in the primary segments of the ALLL for the three month periods ended June 30, 2014 and 2013:

 

June 30, 2014    Balance
March 31, 2014
     Charge-
offs
    Recoveries      Provision     Balance
June 30, 2014
 
     (In thousands)  

Real estate:

            

One-to-four-family

   $ 242       $ (12   $ —         $ (18   $ 212   

Multi-family

     2         —          —           43        45   

Non-residential

     269         —          —           (16     253   

Construction

     —           —          —           —          —     

Home equity and second mortgages

     82         —          —           (1     81   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     595         (12     —           8        591   

Commercial

     59         —          —           42        101   

Consumer

     3         —          —           —          3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $     657       $ (12   $     —         $     50      $     695   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

June 30, 2013    Balance
March 31, 2013
     Charge-
offs
    Recoveries      Provision     Balance
June 30, 2013
 
     (In thousands)  

Real estate:

            

One-to-four-family

   $ 244       $ (13   $ 4       $ (1   $ 234   

Multi-family

     49         —          —           (5     44   

Non-residential

     358         —          —           (9     349   

Construction

     7         —          —           (2     5   

Home equity and second mortgages

     85         —          —           12        97   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     743         (13     4         (5     729   

Commercial

     76         —          —           24        100   

Consumer

     2         (7     —           6        1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $     821       $ (20   $     4       $     25      $     830   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following table summarizes activity in the primary segments of the ALLL for the nine month periods ended June 30, 2014 and 2013:

 

June 30, 2014    Balance
September 30, 2013
     Charge-
offs
    Recoveries      Provision     Balance
June 30,
2014
 
     (In thousands)  

Real estate:

            

One-to-four-family

   $ 225       $ (111   $ —         $ 98      $ 212   

Multi-family

     48         —          —           (3     45   

Non-residential

     374         (333     —           212        253   

Construction

     7         —          —           (7     —     

Home equity and second mortgages

     82         —          —           (1     81   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     736         (444     —           299        591   

Commercial

     187         (9     —           (77     101   

Consumer

     —           —          —           3        3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $     923       $ (453   $     —         $     225      $     695   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
June 30, 2013    Balance
September 30, 2012
     Charge-
offs
    Recoveries      Provision     Balance
June 30, 2013
 
     (In thousands)  

Real estate:

            

One-to-four-family

   $ 625       $ (527   $ 4       $ 132      $ 234   

Multi-family

     35         —          —           9        44   

Non-residential

     67         —          —           282        349   

Construction

     3         —          —           2        5   

Home equity and second mortgages

     71         —          —           26        97   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     801         (527     4         451        729   

Commercial

     164         —          —           (64     100   

Consumer

     2         (7     —           6        1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 967       $ (534   $ 4       $ 393      $ 830   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The Company has adopted Accounting Standards Update (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 prior to the adoption. The concessions granted on these loans consisted of interest rate reductions and/or extensions of the loan term. The following table summarizes the TDR during the three month and nine month periods ended June 30, 2014 and 2013:

 

     Number of Loans    Recorded Investment
Before Modification
     Recorded Investment
After Modification
 
Three Months Ended June 30, 2014    (Dollars in thousands)  

Commercial

   1    $ 167       $ 167   

Three Months Ended June 30, 2013

        
  

 

  

 

 

    

 

 

 

One-to-four-family

   1    $ 308       $ 381   

 

     Number of Loans    Recorded Investment
Before Modification
     Recorded Investment
After Modification
 
Nine Months Ended June 30, 2014    (Dollars in thousands)  

One-to-four-family

   4    $ 1,452       $ 1,571   

Non-residential

   1      532         549   

Commercial

   1      167         167   

Nine Months Ended June 30, 2013

        
  

 

  

 

 

    

 

 

 

One-to-four-family

   3    $ 821       $ 902   

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 nine month period ended June 30, 2014, one default occurred on troubled debt restructured loans that were modified as a TDR within the previous 12 months. During the other periods, 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.

 

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Table of Contents

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

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective value or reflective of future values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. In addition, the guidance requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis. For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy at June 30, 2014 and September 30, 2013 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)  

June 30, 2014

           

Securities available for sale:

           

U.S. Government Agencies

   $ 19,473       $     —         $ 19,473       $     —     

Corporate bonds

     4,411         —           4,411         —     

Municipal bonds

     3,780         —           3,780         —     

Mortgage-backed securities

     12,508         —           12,508         —     

September 30, 2013

           

Securities available for sale:

           

U.S. Government Agencies

   $ 18,826       $ —         $ 18,826       $ —     

Corporate bonds

     4,306         —           4,306         —     

Municipal bonds

     3,727         —           3,727         —     

Mortgage-backed securities

     13,561         —           13,561         —     

The Company had no financial assets measured on a non-recurring basis as of September 30, 2013.

 

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)                

June 30, 2014

        

Impaired loans

   $ 2,134      $ —         $ —         $ 2,134  

Other real estate owned

   $ 196       $ —         $ —         $ 196   

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)  
June 30, 2014    Fair value
estimate
    

Valuation

techniques

  

Unobservable

input

   Range    Weighted
average
 

Impaired loans

   $ 2,134       Appraisal (1)    Liquidation expenses (2)    -2.5% to -38.2%-      -18.8

Other real estate owned

   $ 196       Sales contract    Liquidation expenses (2)    -16.6%      -16.6

 

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Table of Contents
(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.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments at June 30, 2014 and September 30, 2013:

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

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

Loans Receivable. The fair value of loans receivable 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. 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 June 30, 2014 or September 30, 2013.

The carrying amounts and estimated fair values of financial instruments at June 30, 2014 and September 30, 2013 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)  

June 30, 2014

              

Financial assets:

              

Cash and cash equivalents

   $ 2,818       $ 2,818       $ 2,818       $ —         $ —     

Securities available-for-sale

     40,172         40,172         —           40,172         —     

Loans receivable

     223,229         246,559         —           —           246,559   

Accrued interest receivable

     1,006         1,006         —           1,006         —     

Financial liabilities:

              

Deposits

     228,115         229,360         —           229,360         —     

FHLB-NY advances

     17,041         17,194         —           17,194         —     

Accrued interest payable

     131         131         —           131         —     

 

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Table of Contents

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)  

September 30, 2013

              

Financial assets:

              

Cash and cash equivalents

   $ 2,477       $ 2,477       $ 2,477       $ —         $ —     

Securities available-for-sale

     40,420         40,420         —           40,420         —     

Loans held for sale

     337         337         —           337      

Loans receivable

     207,996         224,884         —           —           224,884   

Accrued interest receivable

     954         954         —           954         —     

Financial liabilities:

              

Deposits

     212,312         213,595         —           213,595         —     

FHLB-NY advances

     19,889         20,976         —           20,976         —     

Accrued interest payable

     130         130         —           130         —     

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 is carried at cost as of June 30, 2014 and September 30, 2013. Management evaluates this common stock for impairment in accordance with the FASB guidance on accounting by certain entities that lend to or finance the activities of others. Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of the investment’s cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB, and (4) the liquidity position of the FHLB. Management believes no impairment charge related to the FHLB stock was necessary as of June 30, 2014 or September 30, 2013.

12. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04 “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”. The amendments in this Update clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business

 

21


Table of Contents

entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. Under the modified retrospective transition method, an entity should apply the amendments in this Update by means of a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the amendments are effective. Assets reclassified from real estate to loans as a result of adopting the amendments in this Update should be measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate as a result of adopting the amendments in this Update should be measured at the lower of the net amount of loan receivable or the real estate’s fair value less costs to sell at the time of adoption. For prospective transition, an entity should apply the amendments in this Update to all instances of an entity receiving physical possession of residential real estate property collateralized by consumer mortgage loans that occur after the date of adoption. Early adoption is permitted. This update is not expected to have a material effect on the financial statements of the Company.

13. Commitments and Contingencies

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

As provided under the merger agreement, Customers was required to pay to the Company a termination fee of $1,000,000 (“Termination Fee”) when the merger agreement was terminated effective December 31, 2013. To date, the Company has not received the Termination Fee and on March 24, 2014, the Company filed suit in the Eastern District of Pennsylvania to recover the Termination Fee from Customers. Given that litigation is subject to inherent risk, there can be no assurances that the Termination fee will ultimately be collected or when the Termination fee will be collected.

 

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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, 2013 which was filed with the SEC on December 23, 2013, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

  risks relating to the collection of the Termination Fee owed to CMS by Customers;

 

  our allowance for loan losses may not be sufficient to cover actual loan losses; changes in interest rates;

 

  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;

 

  operational challenges or increased costs we may experience in the course of full transition to our new regulators as a result of the complete transfer of the OTS’s functions under the Dodd-Frank Act and the subsequent conversion of CMS Bank’s charter to that of a New York state-chartered savings bank;

 

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

 

  competition in our primary market area;

 

  risk of noncompliance with laws and regulations, including 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;

 

  recent developments affecting the financial markets, including the actual and threatened downgrade of U.S. government securities; and

 

  risks related to use of technology and cybersecurity.

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

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.

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 savings bank. 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

 

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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. Despite the challenges of the ever-changing banking and regulatory environment, we have continued to grow our assets through increases in our local deposits, particularly non-interest bearing commercial demand deposits and higher levels of non-residential loan originations. 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.

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 earnings.

Terminated Merger Agreement with Customers Bancorp

As previously announced, effective December 31, 2013, the Company terminated a merger agreement dated as of August 10, 2012 (amended effective as of April 22, 2013) by and between the Company and Customers Bancorp, Inc. (“Customers”) due to non-receipt by Customers of required government approvals to consummate the merger. The termination provisions of the merger agreement had called for a $1.0 million termination fee to be paid to CMS by Customers. To date, Customers has not paid the termination fee. On March 24, 2014, the Company filed suit in the Eastern District of Pennsylvania to recover the termination fee from Customers. The lawsuit is currently pending.

Litigation is subject to inherent risk, and therefore, the Company’s success as to the outcome of litigation cannot be guaranteed. For additional discussion about this risk factor, see Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, filed with the U.S. Securities and Exchange Commission on December 23, 2013.

 

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Business Strategy

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

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

All financial institutions, including the Company and the Bank, continue to experience the impact of major financial reform legislation, known as the Dodd-Frank Act, that 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.

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 (“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 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 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 receipt of updated information.

Comparison of Financial Condition at June 30, 2014 to September 30, 2013

Total assets increased by $14.8 million, or 5.7%, to $273.0 million at June 30, 2014 from $258.3 million at September 30, 2013. Increases in loan balances and decreases in advances from the FHLB were funded from increases in retail deposits.

Loans receivable were $223.2 million and $208.0 million at June 30, 2014 and September 30, 2013, respectively, representing an increase of $15.2 million, or 7.3%. The increase in loans resulted principally from increases in multi-family and commercial loans.

As of June 30, 2014 and September 30, 2013, the Bank had $3.5 million and $4.8 million of non-performing loans, respectively, which have been placed on non-accrual status. At June 30, 2014 and September 30, 2013, the Bank had $11.2 million and $8.0 million of loans classified as impaired. At June 30, 2014 and September 30, 2013, none of these impaired loans required specific loss allowances. The impaired loans were primarily the result of difficult general economic conditions, increased unemployment and declines in the local real estate market in prior years. As of June 30, 2014 and September 30, 2013, the allowance for loan losses was 0.31% and 0.44% of loans outstanding, respectively. The allowance for loan losses contains two components; the specific allowance for impaired loans individually evaluated, and the allowance for loans collectively evaluated for impairment. There was no need for any specific allowance for loans individually evaluated for impairment at June 30, 2014 or September 30, 2013. The allowance for loans collectively evaluated for impairment was $695,000 at June 30, 2014 compared to $923,000 at September 30, 2013. The decrease of $228,000 was the result of the write off of $453,000 of loans in the nine months ended June 30, 2014, net of a provision for loan losses of $225,000. The allowance allocation, or loss percentages are based on historical charge offs, adjusted for the trend of losses, current economic conditions including unemployment, real estate markets and other factors. Allowance allocation percentages can also be adjusted for trends as evidenced by the FDIC Uniform Bank Performance Report loss experience for the Bank’s Peer Group. As a result of decreases in actual loan losses in the proceeding periods, changes in the mix and volume of the loan portfolio, changing economic conditions, unemployment trends, and changing real estate values in the Bank’s primary market area, the allowance declined from September 30, 2013 to June 30, 2014.

 

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Deposits increased by $15.8 million, or 7.4%, from $212.3 million as of September 30, 2013 to $228.1 million as of June 30, 2014. The Bank participates in the Certificate of Deposit Account Registry Service, or “CDARS” network. Increases in retail deposits of $17.9 million, net of a decrease in CDARS deposits of $2.1 million accounted for the majority of the change. Increases in retail deposits resulted from a certificate of deposit promotion, the continued emphasis on developing commercial deposit relationships and local market conditions and higher savings balances, partially offset by money market decreases. 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 $7.7 million and $9.8 million, respectively, of CDARS deposits as of June 30, 2014 and September 30, 2013 and otherwise had no brokered deposits as of June 30, 2014 and September 30, 2013.

Stockholders’ equity increased by $1.1 million from September 30, 2013 to June 30, 2014 as a result of net income of $526,000, additions to equity resulting from accounting for stock-based compensation and the Company’s ESOP, and other comprehensive income of $534,000, net of dividends on preferred stock of $67,000. The other comprehensive income in the nine months ended June 30, 2014 resulted primarily from the decrease in unrealized losses on available for sale securities due to changes in market interest rates.

 

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Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013

General. The Company recorded net income of $170,000 for the three months ended June 30, 2014, compared to net income of $501,000 for the three months ended June 30, 2013. Net income per common share was $0.09 in the three months ended June 30, 2014 compared to $0.28 in the three months ended June 30, 2013. The change was primarily due to lower gains on loan sales due to market conditions in the three months ended June 30, 2014 compared to 2013, a $300,000 reimbursement of legal fees from Customers Bank in the three months ended June 30, 2013 which did not recur in 2014, and a loss on the contracted sales price of other real estate owned in the three months ended June 30, 2014 of $43,000. Net Income attributable to common shareholders in the three months ended June 30, 2014 also included a dividend on preferred stock of $22,000 compared to $10,000 in the three months ended June 30, 2013.

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 June 30,  
     2014     2013  
     (Dollars in thousands)  
     Average
Balance
     Interest     Yield/
Cost
    Average
Balance
     Interest     Yield/
Cost
 

Interest-earning assets:

              

Loans receivable(1)

   $ 219,842         2,683        4.88 %   $ 207,727       $ 2,620        5.05 %

Securities(2)

     39,647         179        1.81 %     43,103         196        1.82 %

Other interest-earning assets(3)

     9,189         16        0.70 %     3,453         20        2.32 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     268,678         2,878        4.28 %     254,283         2,836        4.46 %
     

 

 

   

 

 

      

 

 

   

 

 

 

Non interest-earning assets

     5,814             6,158        
  

 

 

        

 

 

      

Total assets

   $ 274,492           $ 260,441        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Demand deposits

   $ 46,954         35        0.30 %   $ 50,246         37        0.29 %

Savings and club accounts

     44,556         28        0.25 %     42,248         27        0.26 %

Certificates of deposit

     99,375         315        1.27 %     94,773         300        1.27 %

Borrowed money(4)

     18,509         178        3.85 %     22,996         191        3.32 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     209,394         556        1.06 %     210,263         555        1.06 %
     

 

 

   

 

 

      

 

 

   

 

 

 

Non interest-bearing deposits

     40,368             26,604        

Other liabilities

     1,636             866        
  

 

 

        

 

 

      

Total liabilities

     251,398             237,733        

Total stockholders’ equity

     23,094             22,708        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 274,492           $ 260,441        
  

 

 

        

 

 

      

Interest rate spread

      $ 2,322        3.22 %      $ 2,281        3.4 %
     

 

 

        

 

 

   

Net interest-earning assets/net interest margin

   $ 59,284           3.46 %   $ 44,020           3.59 %
  

 

 

        

 

 

      

Ratio of interest-earning assets to interest-bearing liabilities

        1.28          1.21  
     

 

 

        

 

 

   

 

(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 $2.9 million for the three months ended June 30, 2014, was $42,000 higher than interest income for the three months ended June 30, 2013. The increase in interest income was primarily due to an increase of $63,000 in interest from loans, partially offset by a decrease of $21,000 in interest income from securities and other interest earning assets.

Interest income from loans increased by $63,000 in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was due to a $12.1 million, or 5.8%, increase in the average balance of loans from $207.7 million in the three months

 

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ended June 30, 2013 to $219.8 million in the three months ended June 30, 2014, partially offset by a 17 basis point decrease in the average interest rate earned on those loans. The increase in average loan balances includes loans in the multi-family and commercial loan categories. The decrease in the average yield resulted principally from lower market interest rates. 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. Higher loan volume increased interest income by $152,000 while the effect of lower interest rates decreased interest income by $89,000.

Interest income from securities decreased by $17,000 in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Interest income from securities declined by $16,000 as a result of lower average balances in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, and declined by $1,000 as a result of lower yields on the securities portfolio. Other interest-earning assets consist of cash equivalents, FHLB stock and loans originated for resale. Interest on these assets declined by $4,000 in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, principally due to lower FHLB dividends.

Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.46% in the quarter ended June 30, 2013 to 4.28% in the quarter ended June 30, 2014. Of the $42,000 increase in interest income in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, higher average balances of interest-earning assets caused an increase of $153,000 in interest income, while lower interest rates caused a decrease in interest income of $111,000.

Interest Expense. Interest expense was essentially unchanged in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The decrease in average balances of interest bearing-liabilities in the 2014 period reduced interest expense by $27,000, while changes in the mix of borrowed money caused an overall increase in interest expense related to mix and rate 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.

 

     Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
 
     (In thousands)  
     Volume     Rate     Net  

Interest-earning assets:

      

Loans receivable

   $ 152        (89   $ 63   

Securities

     (16     (1     (17

Other interest-earning assets

     17        (21     (4
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     153        (111     42   
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Demand deposits

     (3     1        (2

Savings and club accounts

     2        (1     1   

Certificates of deposit

     15        —          15   

Borrowed money

     (41     28        (13
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (27     28        1   
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (180   $ 139      $ (41
  

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income increased $41,000, or 1.8%, to $2.3 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in net interest income was primarily attributable to higher balances of average interest-earning assets, net of lower yields on those assets, lower average balances of interest-bearing liabilities and changes in the mix of interest-bearing liabilities, and lower interest rates on those liabilities.

Provision for Loan Losses.

As of June 30, 2014 and March 31, 2014, the Bank had $3.5 million and $3.7 million of non-performing loans, respectively, which have been placed on non-accrual status. At June 30, 2014 and March 31, 2014, the Bank had $11.2 million and $7.1 million of loans classified as impaired. At June 30, 2014 and March 31, 2014, none of these impaired loans required specific loss allowances. The impaired loans were primarily the result of difficult general economic conditions, increased unemployment and declines in the local real estate market in

 

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prior years. As of June 30, 2014 and March 31, 2014, the allowance for loan losses was 0.31% and 0.30% of loans outstanding, respectively. The allowance for loan losses contains two components; the specific allowance for impaired loans individually evaluated, and the allowance for loans collectively evaluated for impairment. There was no need for any specific allowance for loans individually evaluated for impairment at June 30, 2014 or March 31, 2014. The allowance for loans collectively evaluated for impairment was $695,000 at June 30, 2014 compared to $657,000 at March 31, 2014. The increase of $38,000 was the result of the write off of $12,000 of loans in the three months ended June 30, 2014, net of a provision for loan losses of $50,000. The allowance allocation, or loss percentages are based on historical charge offs, adjusted for the trend of losses, current economic conditions including unemployment, real estate markets and other factors. Allowance allocation percentages can also be adjusted for trends as evidenced by the FDIC Uniform Bank Performance Report loss experience for the Bank’s Peer Group. As a result of changes in the expected recovery of non-performing loans and in the mix and volume of the loan portfolio, economic conditions, unemployment, changes in real estate values in the Bank’s primary market area, and an analysis commercial real estate cash flows, $50,000 and $268,000 was provided for loan losses in the three month periods ended June 30, 2014 and 2013, 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 $50,000 in the three months ended June 30, 2014 was lower than the $98,000 in the comparable 2013 period primarily as a result of lower gains on sale of loans due to market conditions in the three months ended June 30, 2014 compared to the comparable 2013 period.

Non-interest Expenses. Non-interest expenses increased by $375,000, for the three months ended June 30, 2014, compared to the comparable prior year period. Non-interest expense in the three months ended June 30, 2013 included a contractual reimbursement of expenses of $300,000 from Customers Bank, which did not recur in 2014. In the three month period ended June 30, 2014, the Company incurred a loss on the contracted sales price of other real estate owned of $43,000 which is included in other non-interest expense. The other components of other non-interest expense were comparable for the three month periods ended June 30, 2014 and 2013.

Income Tax Expense. The income tax expense was $104,000 in the three months ended June 30, 2014 compared to $180,000 in the comparable 2013 period. 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 June 30, 2014 and 2013 was different than the statutory rate as a result of certain non-taxable income and expense items. In the three months ended June 30, 2013, the reimbursement from Customers Bank was non-taxable as it represented a reimbursement of expenses which were not deductible for tax purposes when they were incurred in prior years.

 

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Comparison of Operating Results for the Nine Months Ended June 30, 2014 and 2013

General. The Company recorded net income of $526,000 for the nine months ended June 30, 2014, compared to net income of $802,000 for the nine months ended June 30, 2013. Net income per common share was $0.26 in the nine months ended June 30, 2014 compared to $0.46 in the nine months ended June 30, 2013. The change was primarily due to a lower provision for loan losses in the nine months ended June 30, 2014 compared to 2013 which was more than offset by lower gains on sale of loans in the 2014 period, and higher non-interest expenses in the nine months ended June 30, 2014, compared to the 2013 period. Higher non-interest expense resulted principally from a contractual reimbursement of expenses of $300,000 from Customers Bank in the nine months ended June 30, 2013, which did not recur in 2014, and a loss on the contracted sales price of other real estate owned in the nine months ended June 30, 2014 of $43,000. The nine months ended June 30, 2014 also included a dividend on preferred stock of $67,000 compared to $10,000 in the nine months ended June 30, 2013.

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.

 

     Nine Months Ended June 30,  
     2014     2013  
     (Dollars in thousands)  
     Average
Balance
     Interest     Yield/
Cost
    Average
Balance
     Interest     Yield/
Cost
 

Interest-earning assets:

              

Loans receivable(1)

   $ 214,814         7,858        4.88 %   $ 206,377       $ 7,792        5.03 %

Securities(2)

     39,689         541        1.82 %     45,968         647        1.88 %

Other interest-earning assets(3)

     5,222         51        1.30 %     3,981         69        2.31 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     259,725         8,450        4.34 %     256,326         8,508        4.43 %
     

 

 

   

 

 

      

 

 

   

 

 

 

Non interest-earning assets

     6,091             6,146        
  

 

 

        

 

 

      

Total assets

   $ 265,816           $ 262,472        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Demand deposits

   $ 47,626         106        0.30 %   $ 48,554         129        0.35 %

Savings and club accounts

     44,253         83        0.25 %     42,127         78        0.25 %

Certificates of deposit

     96,517         909        1.26 %     92,670         903        1.30 %

Borrowed money(4)

     20,807         551        3.53 %     28,448         595        2.79 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     209,203         1,649        1.05 %     211,799         1,705        1.07 %
     

 

 

   

 

 

      

 

 

   

 

 

 

Non interest-bearing deposits

     32,231             27,741        

Other liabilities

     1,641             713        
  

 

 

        

 

 

      

Total liabilities

     243,075             240,253        

Total stockholders’ equity

     22,741             22,218        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 265,816           $ 262,471        
  

 

 

        

 

 

      

Interest rate spread

      $ 6,801        3.29 %      $ 6,803        3.36 %
     

 

 

        

 

 

   

Net interest-earning assets/net interest margin

   $ 50,522           3.49 %   $ 44,527           3.54 %
  

 

 

        

 

 

      

Ratio of interest-earning assets to interest-bearing liabilities

        1.24          1.21  
     

 

 

        

 

 

   

 

(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 $8.5 million for the nine months ended June 30, 2014, was $58,000 lower than interest income for the nine months ended June 30, 2013. The decrease in interest income was primarily due to a decrease of $106,000 in interest from investments, partially offset by an increase in interest income from loans of $66,000.

 

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Interest income from loans increased by $66,000 in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. Interest income increased by $307,000, as a result of a $8.4 million increase in the average balance of loans to $214.8 million in the nine months ended June 30, 2014 from $206.4 million in the nine months ended June 30, 2013, net of a decrease of $241,000 due to a 15 basis point decline in the average interest rate on loans. The increase in average loan balances includes loans in the multi-family and commercial loan categories. The decrease in the average yield resulted principally from lower market interest rates. 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.

Interest income from securities decreased by $106,000 in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. Interest income from securities declined by $86,000 as a result of lower average balances in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 and declined by $20,000 as a result of lower yields on the securities portfolio. Average balances were lower in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 as the proceeds of security maturities were partially used to fund loan growth. The lower yields in the nine months ended June 30, 2014 compared to June 30, 2013 resulted from market conditions. Other interest-earning assets consist of cash equivalents, FHLB-NY stock and loans originated for resale. Interest on these assets declined by $18,000 in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 due to lower FHLB dividends and lower volume of loans held for sale.

Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.43% in the nine months ended June 30, 2013 to 4.34% in the nine months ended June 30, 2014. Of the $58,000 decrease in interest income in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013, higher average balances of interest-earning assets caused an increase of $239,000 in interest income, while lower interest rates caused a decrease in interest income of $297,000.

Interest Expense. Interest expense decreased by $56,000, or 3.3%, to $1.6 million in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. Interest expense on deposits decreased by $12,000 in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 principally due to lower interest rates paid on deposits, partially offset by higher interest costs on higher average balances of certificates of deposit in the 2014 period. Interest on certificates of deposit decreased by $29,000 in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013 due to lower interest rates paid on those deposits, offset by higher interest expense of $35,000 from higher average balances.

Interest expense on borrowed money decreased by $44,000 in the nine months ended June 30, 2014 compared to June 30, 2013. Decreases in the volume of borrowed money reduced interest expense on borrowed money by $181,000, offset in part by an increase in the average rate from 2.79% in the nine months ended June 30, 2013 to 3.53% in the nine months ended June 30, 2014. In the nine months ended June 30, 2013, borrowed money included a higher portion of low cost short term FHLB borrowings which reduced the overall interest rate on borrowed money. In the nine months ended June 30, 2014, borrowed money included a lower portion of low cost short term FHLB borrowings, effectively raising the interest rate on borrowed money in the 2014 period compared to 2013.

Overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.07% in the nine months ended June 30, 2013 to 1.05% in the nine months ended June 30, 2014. Of the $56,000 decrease in interest expense in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013, changes in the mix of borrowed money, net of market interest rate declines, increased interest expense by $88,000, while changes in volume and mix of interest-bearing liabilities caused an decrease in interest expense of $144,000.

 

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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.

 

     Nine Months Ended March 31, 2014
Compared to
Nine Months Ended March 31, 2013
 
     (In thousands)  
     Volume     Rate     Net  

Interest-earning assets:

      

Loans receivable

   $ 307        (241   $ 66   

Securities

     (86     (20     (106

Other interest-earning assets

     18        (36     (18
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     239        (297     (58
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Demand deposits

     (3     (20     (23

Savings and club accounts

     5        —          5   

Certificates of deposit

     35        (29     6   

Borrowed money

     (181     137        (44
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (144     88        (56
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 383      $ (385   $ (2
  

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income was essentially unchanged in the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. Higher average balances of interest-earning assets, net of lower yields on those assets, and lower average balances of interest-bearing liabilities and changes in the mix of interest-bearing liabilities, and lower interest rates on those liabilities accounted for the minimal change in net-interest income.

Provision for Loan Losses. As of June 30, 2014 and September 30, 2013, the Bank had $3.5 million and $4.8 million of non-performing loans, respectively, which have been placed on non-accrual status. At June 30, 2014 and September 30, 2013, the Bank had $11.2 million and $8.0 million of loans classified as impaired. At June 30, 2014 and September 30, 2013, none of these impaired loans required specific loss allowances. The impaired loans were primarily the result of difficult general economic conditions, increased unemployment and declines in the local real estate market in prior years. As of June 30, 2014 and September 30, 2013, the allowance for loan losses was 0.31% and 0.44% of loans outstanding, respectively. The allowance for loan losses contains two components; the specific allowance for impaired loans individually evaluated, and the allowance for loans collectively evaluated for impairment. There was no need for any specific allowance for loans individually evaluated for impairment at June 30, 2014 or September 30, 2013. The allowance for loans collectively evaluated for impairment was $695,000 at June 30, 2014 compared to $923,000 at September 30, 2013. The decrease of $228,000 was the result of the write off of $453,000 of loans in the nine months ended June 30, 2014, net of a provision for loan losses of $225,000. The allowance allocation, or loss percentages are based on historical charge offs, adjusted for the trend of losses, current economic conditions including unemployment, real estate markets and other factors. Allowance allocation percentages can also be adjusted for trends as evidenced by the FDIC Uniform Bank Performance Report loss experience for the Bank’s Peer Group. As a result of changes in the expected recovery of non-performing loans and in the mix and volume of the loan portfolio, economic conditions, unemployment, changes in real estate values in the Bank’s primary market area, and an analysis commercial real estate cash flows, $225,000 and $393,000 was provided for loan losses in the nine month periods ended June 30, 2014 and 2013, 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 $202,000 in the nine months ended June 30, 2014 was lower than the $363,000 in the comparable 2013 period primarily as a result of market conditions which caused lower gains on sale of loans due to lower volume in the nine months ended June 30, 2014.

Non-interest Expenses. Non-interest expenses increased by $315,000, for the nine months ended June 30, 2014, compared to the prior year period, principally from a contractual reimbursement of expenses of $300,000 from Customers Bank in the nine months ended June 30, 2013, which did not recur in 2014. Non-interest expense in the nine months ended June 30, 2014 included lower costs of salaries and benefits resulting from headcount reductions, lower incentive compensation costs and lower stock based compensation costs, net of higher costs related to occupancy, advertising and legal fees. In addition, in the nine months ended June 30, 2014, the Company incurred a loss on the contracted sales price of other real estate owned of $43,000 which is included in other non-interest expense.

 

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Income Tax Expense. The income tax expense was $331,000 in the nine months ended June 30, 2014 compared to $365,000 in the comparable 2013 period. 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 nine months ended June 30, 2014 and 2013 was different than the statutory rate as a result of certain non-taxable income and expense items. In the nine months ended June 30, 2013, the reimbursement from Customers Bank was non-taxable as it represented a reimbursement of expenses which were not deductible for tax purposes when they were incurred in prior years.

Management of Market Risk

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

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

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 March 31, 2014, 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)  

400

   $ 9,212       $ (523     -5.4 %

300

     9,388         (347     -3.6 %

200

     9,488         (247     -2.5 %

100

     9,613         (122     -1.3 %

0

     9,735         —          0.0 %

(100)

     9,633         (102     -1.0 %

Liquidity

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.

 

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The Company’s primary sources of funds are retail deposits, the CDARS network, brokered certificates of deposit, amortization and prepayments of loans, FHLB advances, repayments and maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities repayments are greatly influenced by market interest rates, economic conditions and competition. The Company’s liquidity, represented by cash and cash equivalents and investment securities, is a product of its operating, investing and financing activities. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds, available-for-sale securities or cash equivalents and other interest-earning assets. If the Company requires funds beyond its ability to generate them internally, the Company can acquire brokered certificates of deposit, CDARS deposits and draw upon existing borrowing agreements with the FHLB and the Federal Reserve which provide an additional source of funds. At June 30, 2014 and September 30, 2013, the Company had $17.0 million and $19.9 million of advances from the FHLB, respectively, and CDARS deposits of $7.7 million and $9.8 million, respectively and otherwise had no brokered certificates of deposit as of either date.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of June 30, 2014, the Company had cash and cash equivalents of $2.8 million and available for sale securities of $40.2 million. At June 30, 2014, the Company had outstanding commitments to originate loans of $3.4 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 June 30, 2014, totaled $35.2 million. Historically, the Company’s deposit flow history has been that a significant portion of such deposits remain with the Company.

Cash Flows and Capital Resources

In the nine months ended June 30, 2014, net cash provided by operating activities was $1.5 million compared to $7.4 million in the same period in 2013. In the nine months ended June 30, 2014 and 2013, the net income included non-cash expenses (consisting of depreciation, amortization, provision for loan losses, deferred taxes and stock-based compensation) of $886,000 and $1.1 million, respectively. Net activity from loans originated for sale provided $337,000 and $2.4 million of cash in the nine months ended June 30, 2014 and 2013, respectively.

In the nine months ended June 30, 2014 and 2013, investing activities used $14.7 million and $3.1 million of cash, respectively. In the nine months ended June 30, 2014 and 2013, securities repayments provided $1.1 million and $5.2 million of cash, respectively. Net additions to loan balances used $15.7 million and $9.0 million of cash in the nine months ended June 30, 2014 and 2013, respectively.

Net cash provided by financing activities was $13.6 million in the nine months ended June 30, 2014 compared to net cash used by financing activities of $1.9 million in the nine months ended June 30, 2013. In the nine months ended June 30, 2014 and 2013, repayment of FHLB-NY advances used $2.8 million and $16.2 million of cash, respectively, and increases in deposit balances provided $15.8 million and $11.9 million of cash, respectively. In the nine months ended June 30, 2013, the sale of preferred stock to Customers provided $1.5 million of cash.

The Company’s overall credit exposure at the FHLB, including borrowings under the Overnight Advance line of credit and other term borrowings cannot exceed 50% of its total assets, subject to certain limitations based on the underlying loans and securities pledged as collateral. The Company also has a $4.5 million Fed Funds line of credit with Zions Bank, which was not drawn upon.

The following table sets forth the Bank’s capital position at June 30, 2014, 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)

   $ 23,386         12.20   ³ $15,330       ³ 8.00   ³ $19,162       ³ 10.00

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

     22,691         11.84     N/A         N/A      ³ 11,497       ³ 6.00

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

     22,691         8.31   ³ 10,923       ³ 4.00   ³ 13,654       ³ 5.00

Tangible capital (to total adjusted assets)

     22,691         8.31   ³ 4,096       ³ 1.50   ³ 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 1. Legal Proceedings

On March 24, 2014, the Company commenced an action in the United States District Court for the Eastern District of Pennsylvania against Customers Bancorp, Inc. to recover compensation owed to the Company—including payment of a $1 million termination fee and reimbursement of attorney’s fees—by Customers under the now-terminated merger agreement with Customers. As previously announced, the merger agreement was terminated by the Company effective December 31, 2013 due to non-receipt of required government approvals by Customers pursuant to the Merger Agreement’s terms.

The Company asserts that Customers is required to pay the termination fee pursuant to the terms of the merger agreement. The Company continues to vigorously pursue its claims in the pending litigation.

Item 1A. Risk Factors

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, 2013.

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    Amended and Restated Bylaws of CMS Bancorp, Inc. (3)
    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. (4)
    4.3    Form of Restricted Stock Award Agreement under the CMS Bancorp, Inc. 2007 Recognition and Retention Plan. (4)
    4.4    Form of Series A Preferred Stock Certificate of CMS Bancorp, Inc. (5)
  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 June 30, 2014 and September 30, 2013 (unaudited), (ii) Consolidated Statements of Operations for the Three Months Ended June 30, 2014 and 2013 (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2014 and 2013 (unaudited), (iv) Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2014 and 2013, 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 Form 8-K filed with the Commission on February 28, 2014.
(4) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on November 30, 2007.
(5) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on May 24, 2013.

 

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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: August 8, 2014       /s/ JOHN RITACCO
      John E. Ritacco
      President and Chief Executive Officer
Date: August 8, 2014       /s/ STEPHEN DOWD
      Stephen E. Dowd
      Chief Financial Officer

 

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