ITEM 1.
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DESCRIPTION OF BUSINESS
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General
CMS Bancorp, Inc. (CMS Bancorp or the Company)
is a Delaware corporation formed in 2007. CMS Bank (CMS or the Bank), a New York state-chartered savings bank, is a wholly-owned subsidiary of CMS Bancorp. CMS Bancorp is regulated by the Board of Governors of the Federal Reserve
System (Federal Reserve) as a savings and loan holding company. CMS Bank is regulated by the New York State Department of Financial Services (NYSDFS) and the Federal Deposit Insurance Corporation (FDIC) as a New
York state-chartered savings bank. CMS Bancorps common stock is listed on the Nasdaq Capital Market under the symbol CMSB.
CMS Bancorp is headquartered in White Plains, New York and its principal business is to operate CMS, which conducts its operations mainly through its corporate administrative office in White Plains, New
York and five retail banking offices located in Westchester County, New York. CMSs deposits are insured by the FDIC up to the applicable legal limits under the Deposit Insurance Fund (DIF). CMSs principal business is
accepting deposits from the general public and using those deposits to make residential loans, as well as commercial real estate loans and loans to individuals and small businesses primarily in Westchester County and the neighboring areas in New
York State. CMS also uses funds from deposits to invest in short- and medium-term marketable securities and other liquid investments.
Unless otherwise indicated, the information presented in this Annual Report on Form 10-K represents the consolidated activity of CMS Bancorp and the Bank for the fiscal year ended September 30, 2012.
At September 30, 2012, total assets were $264.7 million, deposits were $203.5 million and total stockholders
equity was $22.0 million.
Pending Merger with Customers Bancorp
On August 10, 2012, the Company announced that it entered into a definitive merger agreement with Customers Bancorp, Inc.,
headquartered in Wyomissing, Pennsylvania (Customers) whereby through a series of transactions, the Company will be merged into Customers, and the Bank will be merged into Customers wholly-owned bank subsidiary, Customers Bank, a
Pennsylvania state-chartered bank headquartered in Phoenixville, Pennsylvania (the Merger). Upon completion of the Merger, Customers will have acquired all outstanding shares of CMS Bancorps common stock in exchange for shares of
Customers common stock. Any fractional shares that result due to this exchange of shares will be paid in cash. As of the date of the merger announcement, the total transaction value was approximately $20.8 million, and the Merger Agreement
provides for CMS Bancorps stockholders to receive shares of Customers voting common stock based upon an exchange ratio determined at the closing of the transaction, with fractional shares to be cashed out. The exchange ratio formula
provides that CMS Bancorp stock will be valued at 95% CMS Bancorps common stockholders equity as of the month end prior to the closing, while Customers stock will be valued at 125% of Customers modified stockholder equity as
of the month end prior to closing. Modified stockholders equity is defined as June 30, 2012 common stockholders equity plus additions to retained earnings through the month-end prior to closing. If, however, the closing occurs on or
after April 30, 2013, the valuation date will be fixed as of March 31, 2013. Shares issued by Customers in capital raises and purchase accounting adjustments from any other acquisitions will not be included in calculating modified
stockholders equity.
The Merger Agreement has been unanimously approved by CMS Bancorps Board of Directors and
the transactions contemplated by the Merger Agreement are subject to various conditions including, among other things, (i) approval of the Merger by the holders of a majority of the outstanding shares of CMS Bancorps common stock;
(ii) the receipt of all required regulatory approvals; (iii) the non-occurrence of any event that has
1
a material adverse effect on CMS Bancorp and its subsidiaries; and (iv) as of the closing date (before giving effect to the Merger), CMS Bancorp and its subsidiaries shall have, on a
consolidated basis, nonperforming assets (as defined in the Merger Agreement) less than or equal to $12 million, as well as other conditions to closing that are customary in transactions such as the Merger. In addition, Customers is currently in the
process of seeking regulatory approval related to its acquisition of Acacia Federal Savings Bank, headquartered in Falls Church, Virginia (the Acacia Transaction). Customers is not required to seek regulatory approval with respect to the
Merger until after regulatory approval is received for the Acacia Transaction. Assuming the satisfaction of such conditions, it is currently expected that the Merger will be completed in the first half of calendar year 2013. For additional
information about the Merger announcement, see the Companys Form 8-K and press release exhibit filed with the U.S. Securities and Exchange Commission (SEC) on August 10, 2012.
Business Strategy
The mission of CMS Bancorp is to operate and grow CMS as a profitable community-oriented financial institution serving primarily individual customers and small businesses through retail operations in our
market area. Subject to completion of the anticipated pending Merger with Customers, CMSs overall growth strategy is generally to:
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capitalize on its knowledge of the local banking market;
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continue to originate traditional one-to-four-family real estate loans for resale, as well as continue to diversify the loan portfolio into higher
yield multi-family, non-residential, construction and commercial loan markets and provide a variety of deposit products to its customer base;
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provide superior, highly personalized and prompt service to its customers;
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offer competitive rates and develop customer relationships to attract new deposits and maintain its existing deposit base;
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maintain strong asset and capital quality;
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build its brand identity and strengthen its bonds to the community by unifying its retail banking office appearance; and
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meet the needs of its customers through a service-oriented approach to banking, which emphasizes delivering a consistent and quality level of
professional service in the communities that CMS serves.
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Under its current management team, CMS Bancorp and
CMS are committed to making CMSs operations more efficient, controlling non-interest expense and implementing an aggressive sales and marketing culture to enhance productivity and loan originations and improve the operations of its retail
banking office network. In addition, management continues to monitor the loan portfolio, the real estate market and loan underwriting standards to minimize the impact of any volatility in the financial markets or decline in the economy generally as
well as in our market area.
Market Area
CMSs primary market area is Westchester County, New York, a northern suburb of New York City. CMS conducts its retail banking
operations from its corporate administrative office located in White Plains, the county seat for Westchester, and five retail banking offices located in Eastchester, Greenburgh, Mount Kisco, Mount Vernon and East White Plains, New York.
The Westchester market area is characterized by a thriving, vibrant and affluent suburban economy. Based on data provided by the U.S.
Bureau of Economic Analysis as of 2010, Westchester continues to be one of the states wealthiest counties, with a population of approximately 950,000 and an estimated per capita personal income of $73,159. Westchester County is the
headquarters location of numerous large and small businesses, including household names like Pepsico, Inc. and IBM Corporation. Current economic conditions, including but
2
not limited to unemployment and declines in home values have had a negative impact on the local economy, and have had a negative impact on CMS.
Competition
CMS faces intense competition in its market area both in making loans and attracting deposits. New York has a high concentration of financial institutions, many of which are branches of large money center
and regional banks that have resulted from the consolidation of the banking industry in New York and surrounding states. The Westchester County deposit market is highly competitive and includes the largest banks in the country. Some of these
competitors have more resources, capital, extensive branch and automated teller machine networks and established customer bases and may offer additional services that CMS does not offer. For example, CMS does not provide trust or investment services
or credit cards. Therefore, customers who seek one-stop shopping may be drawn to CMSs competitors for their depth of product offerings. CMS faces additional competition for deposits from short-term money market funds, corporate and
government securities funds, and from brokerage firms, mutual funds, and insurance companies.
Lending Activities
Regulations require savings banks to adopt and maintain a written policy that establishes appropriate limits and
standards for all extensions of credit that (i) are secured by liens on or interests in real estate, or (ii) are made for the purpose of financing the construction of a building or other improvements to real estate. The regulations also
require CMS to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending
activities. The standards also must be consistent with accompanying guidelines, which include loan-to-value ratios for the different types of real estate loans. CMS is also permitted to make a limited amount of loans that do not conform to the
proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. CMS has established and
implemented these required policies regarding its real estate lending activities.
Loan Portfolio Composition.
CMS has a long-standing commitment of originating residential loans and, in recent years, multi-family, non-residential and commercial loans. In late 2008, CMS began to sell most of its one-to-four family loan originations to the secondary market.
In the fiscal years ended September 30, 2012 and 2011, CMS originated $8.6 million and $13.6 million, respectively, of loans for resale. At September 30, 2012, CMS had total loans of $202.2 million, of which $96.4 million, or 47.7%, were
one-to-four-family residential mortgages. Of the one-to-four-family residential mortgage loans outstanding at September 30, 2012, 82.6% were fixed-rate loans and 17.4% were adjustable-rate mortgage loans. CMSs residential loan origination
activity is primarily concentrated in Westchester County, New York. At September 30, 2012, 68.7% of the dollar amount of its residential loan portfolio consisted of loans secured by property located in Westchester County, 16.4% of the dollar
amount of its residential loan portfolio consisted of loans secured by property located in Putnam, Rockland, Dutchess and the Bronx counties of New York and 14.9% of the dollar amount of its residential loan portfolio consisted of loans secured by
property located in other counties in New York and outside of the state of New York.
CMS also originates multi-family,
non-residential, construction, home equity and second mortgage and commercial loans both within and outside of Westchester County, New York. At September 30, 2012, CMS had $105.8 million, or 52.3% of total loans, in these loan categories,
including commercial loans comprising $30.6 million, or 15.1% of total loans.
3
The following table sets forth the composition of CMSs mortgage and other loan
portfolios in dollar amounts and in percentages at the dates indicated.
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At September 30,
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2012
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2011
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2010
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2009
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2008
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars in thousands)
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Real estate mortgages:
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One-to-four-family
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$
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96,449
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47.7
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%
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$
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101,064
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56.3
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%
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$
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123,116
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68.6
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%
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$
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135,580
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80.2
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%
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$
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156,519
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86.8
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%
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Multi-family
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21,220
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10.5
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%
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14,283
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8.0
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%
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9,124
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5.1
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%
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4,021
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2.4
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%
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2,435
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1.4
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%
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Non-residential
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43,361
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21.4
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%
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30,674
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17.1
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%
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22,259
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12.4
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%
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10,170
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6.0
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%
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9,819
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5.5
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%
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Construction
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398
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0.2
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%
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309
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0.2
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%
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796
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0.4
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%
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667
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0.4
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%
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2,409
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1.3
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%
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Home equity and second mortgages
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10,111
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5.0
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%
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10,905
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6.0
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%
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9,454
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5.3
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%
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9,245
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5.5
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%
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8,147
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4.5
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%
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Total real estate loans
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171,539
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84.8
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%
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157,235
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87.6
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%
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164,749
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91.8
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%
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159,683
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94.5
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%
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179,329
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99.5
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%
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Commercial loans
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30,618
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15.2
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%
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22,207
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12.4
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%
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14,255
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8.0
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%
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8,985
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5.3
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%
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600
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0.3
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%
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Consumer
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83
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0.0
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%
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90
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0.0
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%
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386
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0.2
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%
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333
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0.2
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%
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406
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0.2
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%
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Total loans
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202,240
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100.0
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%
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179,532
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100.0
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%
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179,390
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100.0
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%
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169,001
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100.0
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%
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180,335
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100.0
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%
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Allowance for loan losses
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(967
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)
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(1,200
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(1,114
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)
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(749
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)
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(516
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Net deferred origination costs and fees
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189
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464
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790
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1,041
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1,314
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Total loans receivable, net
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$
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201,462
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$
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178,796
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$
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179,066
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$
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169,293
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$
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181,133
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Loan Maturity.
The following tables present the contractual maturity of CMSs loans,
the aggregate dollar amounts of the loans, and whether these loans had fixed or adjustable interest rates at September 30, 2012. The table does not include the effect of prepayments or scheduled principal amortization.
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At September 30, 2012
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One- to
four-
family
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Multi-
family
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Non-
residential
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Commercial
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Home
Equity and
second
mortgages
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Construction
and
Consumer
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Total
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(Dollars in thousands)
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Amount due:
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One year or less
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$
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32
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$
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822
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$
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1,188
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$
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4,037
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$
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$
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425
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$
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6,504
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More than one year to three years
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308
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287
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5,538
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2,091
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31
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8,255
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More than three years to five years
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1,558
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2,123
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2,160
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24
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25
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5,890
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More than five years to ten years
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9,267
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8,800
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19,999
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9,952
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48,018
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More than ten years to twenty years
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18,803
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4,583
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8,412
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6,899
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6,204
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44,901
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More than twenty years
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66,481
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6,728
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6,101
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5,479
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3,883
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88,672
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Total due after one year
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96,417
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20,398
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42,173
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26,581
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10,111
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56
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195,736
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Total due:
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$
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96,449
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$
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21,220
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$
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43,361
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$
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30,618
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$
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10,111
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$
|
481
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202,240
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Allowance for loan losses
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|
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|
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(967
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)
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Net deferred origination costs and fees
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|
189
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
79,665
|
|
|
$
|
7,880
|
|
|
$
|
11,758
|
|
|
$
|
11,674
|
|
|
$
|
2,731
|
|
|
$
|
56
|
|
|
$
|
113,764
|
|
Adjustable rate
|
|
$
|
16,752
|
|
|
$
|
12,518
|
|
|
$
|
30,415
|
|
|
$
|
14,907
|
|
|
$
|
7,380
|
|
|
$
|
|
|
|
$
|
81,972
|
|
4
The following table presents CMSs loan originations, purchases, sales and principal
repayments for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
Loans receivable, net at beginning of period
|
|
$
|
179,532
|
|
|
$
|
179,390
|
|
|
|
|
|
|
|
|
|
|
Originations by type:
|
|
|
|
|
|
|
|
|
One-to-four-family
|
|
|
22,807
|
|
|
|
2,479
|
|
Multi-family
|
|
|
9,320
|
|
|
|
4,947
|
|
Non-residential
|
|
|
14,531
|
|
|
|
11,861
|
|
Commercial
|
|
|
9,690
|
|
|
|
11,932
|
|
Home equity net increase (decrease) and other
|
|
|
(822
|
)
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,26
|
|
|
|
32,707
|
|
Principal repayments
|
|
|
(32,818
|
)
|
|
|
(32,565
|
)
|
|
|
|
|
|
|
|
|
|
Loans receivable, net at end of period
|
|
$
|
202,240
|
|
|
$
|
179,532
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale at beginning of period
|
|
$
|
2,200
|
|
|
$
|
557
|
|
Originations of one-to-four-family
|
|
|
8,575
|
|
|
|
13,599
|
|
Loans sold
|
|
|
(8,349
|
)
|
|
|
(11,956
|
)
|
|
|
|
|
|
|
|
|
|
Loans held for sale at end of period
|
|
$
|
2,426
|
|
|
$
|
2,200
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage Lending.
CMS has historically emphasized the origination of mortgage
loans secured by one-to-four-family properties that serve as the primary residence of the owner. In late 2008, CMS began to sell or refer most of its one-to-four-family loan originations to the secondary market, which resulted in realized gains of
$183,000 and $256,000 in the fiscal years ended September 30, 2012 and 2011, respectively. In the years ended September 30, 2012 and 2011, CMS originated $8.6 million and $13.6 million of loans for resale. As of September 30, 2012,
loans on one-to-four-family residential properties accounted for $96.4 million, or 47.7%, of CMSs total loan portfolio. Of residential mortgage loan balances outstanding on that date, 82.6% were fixed rate loans and 17.4% were adjustable-rate
loans.
Most of CMSs loan originations are from existing or past customers, members of its local communities or
referrals from local real estate agents, attorneys, brokers and builders. CMS believes that its retail banking offices and on-line mortgage application service are a significant source of new loan generation.
CMSs mortgage loan originations are generally for terms of 15 to 30 years, amortized on a monthly basis with interest and principal
due each month. Residential real estate loans may remain outstanding for significantly shorter periods than their contractual terms as borrowers may refinance or prepay loans at their option without penalty, generally after the first year of the
loan. Conventional residential mortgage loans granted by CMS customarily contain due-on-sale clauses, which permit CMS to accelerate the indebtedness of the loan upon transfer of ownership of the mortgage property.
CMS offers conventional mortgage loans for terms of up to 30 years using standard documents. CMS generally lends up to a maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties of 80% of the lesser of the appraised value or purchase price of the property.
CMS also offers adjustable-rate mortgage loans with a maximum term of 30 years. Adjustable-rate loans offered by CMS include loans that provide for an interest rate based on the interest paid on U.S.
Treasury securities of corresponding terms plus a margin of up to 2.75%. At times, CMS offers adjustable-rate loans with initial rates below those that would prevail under the foregoing computations, based upon its determination of market factors
and competitive rates for adjustable-rate loans in its market area. Borrowers of adjustable-rate loans are qualified at the fully indexed rate at the time of origination.
5
CMSs adjustable-rate mortgages include limits on increases or decreases in the
interest rate of the loan. The interest rate generally may increase or decrease by a maximum of 2.0% per adjustment with a ceiling rate over the life of the loan. The retention of adjustable-rate mortgage loans in CMSs loan portfolio
helps reduce exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of the pricing of adjustable-rate mortgage loans. During periods of rising
interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower.
Multi-family Loans.
CMS actively seeks opportunities to make loans secured by real estate improved with multi-family (five or more units) buildings. These loans are structured with repayment
terms of up to 30 years. Interest rates are generally reset every five years during the term of the loan based on an established index and spread. Multi-family loans represented 10.5% of total loans at September 30, 2012.
Construction Loans.
CMS offers short-term construction loans to well-established builders for projects that are
substantially preleased or presold, where a takeout commitment is in place through CMS or another lender. For these types of loans, CMS generally obtains the personal guarantee of the builder. Construction real estate loans represented 0.2% of total
loans at September 30, 2012.
Home Equity Loans and Lines of Credit.
CMS offers home equity loans and lines
of credit that are secured by the borrowers primary residence. CMSs home equity loans can be structured as loans that are disbursed in full at closing or as lines of credit. Home equity loans and lines of credit are offered with terms up
to 25 years. CMSs home equity loans and home equity lines of credit are originated with either fixed or adjustable interest rates tied to the prime rate. Home equity loans and lines of credit are underwritten under the same criteria that CMS
uses to underwrite one-to-four-family loans. Home equity loans and lines of credit may be underwritten with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing mortgage loan. At the time that CMS closes a home
equity loan or line of credit, it records a mortgage to perfect its security interest in the underlying collateral. At September 30, 2012, the outstanding balances of home equity loans and lines of credit totaled $10.1 million, or 5.0% of its
loan portfolio. Of these loans, $7.4 million had adjustable rates of interest and $2.7 million were at fixed interest rates.
Non-Residential Real Estate Loans.
In underwriting non-residential real estate loans, consideration is given to the
propertys historic and projected future cash flow, current and projected occupancy, location and physical condition. At September 30, 2012, CMSs non-residential real estate loan portfolio totaled $43.4 million, or 21.4% of total
loans. The non-residential real estate portfolio consists of loans that are collateralized by properties in CMSs normal lending area. CMS lends up to a maximum loan-to-value ratio of 80% on commercial properties and usually requires the net
operating income generated by the property to cover the debt service by a minimum of 1.2 times.
Non-residential real estate
lending involves additional risks compared to one-to-four-family residential lending. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the
collateral value of the commercial real estate securing the loan, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. Also, non-residential real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. CMSs loan policies limit the amount of loans to a single borrower or group of borrowers in order to reduce this risk.
Because of increased risks associated with non-residential real estate loans, these loans generally have a higher interest rate and
shorter term than residential mortgage loans. Non-residential real estate loans are generally offered at variable rates tied to the prime rate or the Federal Home Loan Bank rate.
Commercial Loans.
In addition to non-residential real estate loans, CMS also engages in small business commercial lending,
including business installment loans, lines of credit and other commercial loans. At September 30, 2012, CMSs commercial loan portfolio totaled $30.6 million or 15.2% of its loan portfolio.
6
Unless otherwise structured as a mortgage on commercial real estate, such loans generally
are limited to terms of five years or less and have variable interest rates tied to the prime rate. Whenever possible, CMS collateralizes these loans with a lien on commercial real estate, or alternatively, with a lien on business assets and
equipment and personal guarantees from principals of the borrower. Interest rates on commercial loans generally have higher yields than residential mortgages.
Commercial loans are generally considered to involve a higher degree of risk than residential mortgage loans. Commercial loans may also involve relatively large loan balances to single borrowers or groups
of related borrowers, with the repayment of such loans typically dependent on the successful operation and cash flow of the borrower. Such risks can be significantly affected by economic conditions. In addition, commercial business lending generally
requires substantially greater oversight efforts compared to residential real estate lending. CMS utilizes the services of an outside consultant to conduct on-site reviews of the commercial loan portfolio to ensure adherence to underwriting
standards and policy requirements.
Consumer Loans.
CMS offers a variety of consumer loans to meet customer
demand and the needs of the community and to increase the yield on its loan portfolio. At September 30, 2012, the consumer loan portfolio totaled $83,000 of total loans. Consumer loans generally are offered for terms of up to five or 10 years,
depending on the collateral, at fixed interest rates. CMS expects that installment consumer loans will continue to account for the major portion of its consumer lending volume.
Consumer loans are generally originated at higher interest rates than residential mortgage loans but also tend to have a higher credit
risk than residential loans due to the loan being unsecured or secured by rapidly depreciable assets. Despite these risks, CMSs level of consumer loan delinquencies generally has been low. No assurance can be given, however, that CMSs
delinquency rate on consumer loans will continue to remain low in the future, or that CMS will not incur future losses on these activities.
Loan Approval Procedures and Authority.
CMSs lending policies provide that the maximum mortgage amount is 90% of the CMSs legal lending limit ($4.5 million for loans not secured
by readily marketable collateral as of September 30, 2012), with minimum mortgage amounts generally of $100,000. Once CMS receives a completed application, depending upon the size of the requested loan and its conformity with CMSs lending
policy, each qualifying application is presented to the Senior Lending Officer and the President and Chief Executive Officer; the Loan Committee (which consists of CMS directors and officers); or the Board of Directors for approval.
The following describes CMSs current lending procedures. Upon receipt of a completed loan application from a prospective borrower
and compliance with applicable disclosure requirements, CMS orders a credit report, verifies certain other information, and obtains additional financial or credit related information. CMS requires an appraisal for all mortgage loans, including loans
made to refinance existing mortgage loans at higher loan amounts. Appraisals are performed by licensed or certified third-party appraisal firms that have been approved by CMSs management, Loan Committee and Board of Directors. CMS requires
title insurance on all mortgage loans. CMS also requires borrowers to obtain hazard insurance, and if applicable, will require borrowers to obtain flood insurance and environmental inspections prior to closing. Borrowers are generally required to
pay on a monthly basis together with each payment of principal and interest into a mortgage escrow account from which CMS makes disbursements for items such as real estate taxes, flood insurance, and private mortgage insurance premiums, as required.
Asset Quality.
One of CMSs key operating objectives has been and will continue to be to maintain a high
level of asset quality. Through a variety of strategies, including, but not limited to, borrower workout arrangements and aggressive marketing of foreclosed properties (as applicable), CMS has been proactive in addressing problem and non-performing
assets. These strategies, as well as CMSs high proportion of one-to-four-family mortgage loans, maintenance of sound credit standards for new loan originations and loan administration procedures, have resulted in historically low delinquency
ratios and, in recent years, insignificant amounts of non-performing assets. These factors have helped strengthen CMSs financial condition.
7
At September 30, 2012, the Company had loans in the amount of $11.4 million or 5.7% of
total loans that were considered to be impaired. Interest income recorded on impaired loans during the year ended September 30, 2012 was $178,000 and had all such loans been performing in accordance with their original terms, additional
interest income of $461,000 would have been recognized.
Delinquent Loans and Foreclosures.
When a borrower
fails to make required payments on a loan, CMS takes a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. In the case of mortgage loans, CMSs mortgage servicer is responsible for collection
procedures pursuant to timetables that are in conformity with industry guidelines, including those of the Federal National Mortgage Association, Federal Housing Association, and Veterans Administration and applicable law and regulation. CMS
encourages borrowers who are delinquent to utilize the loss mitigation counseling services provided by the servicer. When a borrower has suffered some type of financial hardship that has caused them to become delinquent, CMS offers various workout
options to assist the borrower in bringing the loan current. It has been CMSs experience that the application of these procedures results in most loan delinquencies being cured with minimal expense or loss.
In situations where a borrower fails to bring a loan current or enter into an acceptable remediation plan, the loan will be recommended
for foreclosure when it becomes 90 days past due. The Senior Lending Officer will review this recommendation and, if in concurrence, will send the loan to CMSs Loan Committee for approval to proceed with the foreclosure action. If a
foreclosure action is commenced and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, CMS either sells the real property securing the loan at the foreclosure sale or sells the property as soon thereafter as
practical. In the event a deficiency balance remains after the sale of the foreclosed property, CMS will seek collection of the deficiency balance. The collection procedures for consumer, commercial, and other loans, excluding student loans, follow
similar guidelines. If collection activity is unsuccessful after 120 days, CMS may charge-off the loan and/or refer the matter to its legal counsel for further collection effort. Loans deemed uncollectable are proposed for charge-off. All loan
charge-offs regardless of amount are approved by the Senior Lending Officer or the President. Charge-offs in excess of $2,500 must be approved by a second officer and reported to the Loan Committee at its next scheduled meeting. The collection
procedures for guaranteed student loans follow those specified by federal and state guidelines.
CMSs policies require
that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate and CMSs actions and plans to cure
the delinquent status of the loans and to dispose of the real estate.
The following table presents information regarding
non-accrual mortgage and consumer and other loans, accruing loans delinquent 90 days or more, and foreclosed real estate as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans, including home equity
|
|
$
|
6,086
|
|
|
$
|
3,809
|
|
|
$
|
2,447
|
|
|
$
|
1,667
|
|
|
$
|
1
|
|
Home equity and second mortgage
|
|
|
129
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,197
|
|
|
|
4,306
|
|
|
|
2,447
|
|
|
|
1,667
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more but still accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
525
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
6,197
|
|
|
$
|
4,312
|
|
|
$
|
2,972
|
|
|
$
|
1,671
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
CMS stops accruing income on loans when interest or principal payments are 90 days in
arrears or earlier when the timely collectibility of such interest or principal is doubtful. CMS designates loans on which it stops accruing income as non-accrual loans and it reverses outstanding interest that it previously credited. CMS may
recognize income in the period that CMS collects it, when the ultimate collectibility of principal is no longer in doubt. CMS returns a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist. Impaired loans
are individually assessed to determine whether a loans carrying value is not in excess of the fair value of the collateral or the present value of the loans cash flows. Loans which are not impaired are collectively evaluated for reserve
purposes. CMS had loans totaling $8.8 million and $5.1 million at September 30, 2012 and 2011, respectively, which were classified as substandard.
Foreclosed real estate consists of property acquired through foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties are initially recorded at the lower of the recorded investment in
the loan or fair value. While CMS has had to place loans in the process of foreclosure, CMS had no foreclosed real estate during the fiscal years ended September 30, 2012 or 2011.
Allowance for Loan Losses.
The following table sets forth activity in CMSs allowance for loan losses and other ratios
at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period:
|
|
$
|
1,200
|
|
|
$
|
1,114
|
|
|
$
|
749
|
|
|
$
|
516
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four-family
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
4
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,124
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs)/recoveries
|
|
|
(1,124
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions charged to operations
|
|
|
891
|
|
|
|
86
|
|
|
|
366
|
|
|
|
230
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
967
|
|
|
$
|
1,200
|
|
|
$
|
1,114
|
|
|
$
|
749
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
$
|
187,835
|
|
|
$
|
178,102
|
|
|
$
|
174,634
|
|
|
$
|
177,239
|
|
|
$
|
160,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs during the period to average loans outstanding during the period
|
|
|
0.60
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
The allowance for loan losses is a valuation account that reflects CMSs evaluation of the losses
inherent in its loan portfolio. CMS maintains the allowance through provisions for loan losses that it charges to income. CMS charges losses on loans against the allowance for loan losses when it believes that the collection of loan principal is
unlikely. During the year ended September 30, 2012, $1.1 million of loans were charged off against the allowance for loan losses, and $891,000 was added to the allowance for loan losses through a provision charged to operations.
The allowance for loan losses was $967,000, or 0.48%, of gross loans outstanding, at September 30, 2012 compared to $1.2 million, or
0.67% of gross loans outstanding, at September 30, 2011. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a
quarterly basis, at a minimum, and establishes the
9
provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan
portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. 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. The specific allowance for loans individually evaluated for impairment was $48,000 at
September 30, 2012, compared to $379,000 at September 30, 2011. The decrease of $331,000 was due principally to the write off of specific loans against the allowance during the year ended September 30, 2012. The allowance for loans
collectively evaluated for impairment was $919,000 at September 30, 2012 compared to $821,000 at September 30, 2011. The increase of $98,000 was the result of changes in the size and mix of the loan portfolio as well as changes in the
allowance allocation percentages applied to the loan categories. The allowance allocation, or loss percentages are based on one to five year 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 Federal Deposit Insurance Corporation Uniform Bank Performance Report (UBPR) loss experience for
the Banks Peer Group. As of September 30, 2012 and 2011, CMS had $6.2 million and $4.3 million of non-performing loans, respectively, substantially all of which are in process of foreclosure and are considered impaired and have been
placed on non-accrual status. At September 30, 2012 and 2011, the Bank had $11.4 million and $7.6 million of loans classified as impaired. At September 30, 2012, $1.5 million of these impaired loans required specific loss allowances
totaling $48,000. The remaining $9.9 million of impaired loans did not require specific loss allowances. At September 30, 2011, $1.0 million of impaired loans required specific loss allowances of $379,000. The impaired loans were primarily the
result of continued difficult general economic conditions, increased unemployment and continued declines in the local real estate market.
In addition, the FDIC and NYSDFS, as an integral part of their examination process, will periodically review CMSs loan and foreclosed real estate portfolios and the related allowance for loan losses
and valuation allowance for foreclosed real estate. The FDIC and NYSDFS may require CMS to increase the allowance for loan losses or the valuation allowance for foreclosed real estate based on the examiners judgments of information available
to them at the time of their examination. An increase in the allowance for loan losses would adversely affect CMSs results of operations.
CMS believes that its allowance for loan losses adequately reflects the level of risk in its loan portfolio. Through normal internal credit review procedures, management identifies potential problem
loans. These problem loans are defined as loans not included as non-performing loans, but about which management has developed information regarding possible credit problems, which may cause the borrowers to experience difficulties in the future in
complying with loan repayments.
10
The following table presents CMSs allocation of the allowance for loan losses by loan
category and the percentage of loans in each category to total loans at the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amount of
Loan Loss
Allowance
|
|
|
Loan
Amounts
by
Category
|
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
|
Amount of
Loan Loss
Allowance
|
|
|
Loan
Amounts
by
Category
|
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
|
Amount of
Loan Loss
Allowance
|
|
|
Loan
Amounts
by
Category
|
|
|
Percent
of Loans
in Each
Category
to Total
Loans
|
|
|
|
(Dollars in thousands)
|
|
One-to-four-family
|
|
$
|
625
|
|
|
$
|
96,449
|
|
|
|
47.7
|
%
|
|
$
|
583
|
|
|
$
|
101,064
|
|
|
|
56.3
|
%
|
|
$
|
604
|
|
|
$
|
123,116
|
|
|
|
68.6
|
%
|
Multi-family
|
|
|
35
|
|
|
|
21,220
|
|
|
|
10.5
|
%
|
|
|
29
|
|
|
|
14,283
|
|
|
|
8.0
|
%
|
|
|
9
|
|
|
|
9,124
|
|
|
|
5.1
|
%
|
Non-Residential
|
|
|
67
|
|
|
|
43,361
|
|
|
|
21.4
|
%
|
|
|
92
|
|
|
|
30,674
|
|
|
|
17.1
|
%
|
|
|
52
|
|
|
|
22,259
|
|
|
|
12.4
|
%
|
Construction
|
|
|
3
|
|
|
|
398
|
|
|
|
0.2
|
%
|
|
|
3
|
|
|
|
309
|
|
|
|
0.2
|
%
|
|
|
21
|
|
|
|
796
|
|
|
|
0.4
|
%
|
Equity & Second
|
|
|
71
|
|
|
|
10,111
|
|
|
|
5.0
|
%
|
|
|
31
|
|
|
|
10,905
|
|
|
|
6.0
|
%
|
|
|
53
|
|
|
|
9,454
|
|
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
801
|
|
|
|
171,539
|
|
|
|
84.8
|
%
|
|
|
738
|
|
|
|
157,235
|
|
|
|
87.6
|
%
|
|
|
739
|
|
|
|
164,749
|
|
|
|
91.8
|
%
|
Commercial
|
|
|
164
|
|
|
|
30,618
|
|
|
|
15.2
|
%
|
|
|
459
|
|
|
|
22,207
|
|
|
|
12.4
|
%
|
|
|
364
|
|
|
|
14,255
|
|
|
|
8.0
|
%
|
Consumer
|
|
|
2
|
|
|
|
83
|
|
|
|
0.0
|
%
|
|
|
3
|
|
|
|
90
|
|
|
|
0.0
|
%
|
|
|
11
|
|
|
|
386
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
967
|
|
|
$
|
202,240
|
|
|
|
100.0
|
%
|
|
$
|
1,200
|
|
|
$
|
179,592
|
|
|
|
100.0
|
%
|
|
$
|
1,114
|
|
|
$
|
179,390
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount of
Loan Loss
Allowance
|
|
|
Loan
Amounts by
Category
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Amount of
Loan Loss
Allowance
|
|
|
Loan
Amounts by
Category
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
|
(Dollars in thousands)
|
|
One-to-four-family
|
|
$
|
545
|
|
|
$
|
135,580
|
|
|
|
80.2
|
%
|
|
$
|
198
|
|
|
$
|
156,519
|
|
|
|
86.8
|
%
|
Multi-family
|
|
|
3
|
|
|
|
4,021
|
|
|
|
2.4
|
%
|
|
|
1
|
|
|
|
2,435
|
|
|
|
1.4
|
%
|
Non-Residential
|
|
|
22
|
|
|
|
10,170
|
|
|
|
6.0
|
%
|
|
|
127
|
|
|
|
9,819
|
|
|
|
5.5
|
%
|
Construction
|
|
|
8
|
|
|
|
667
|
|
|
|
0.4
|
%
|
|
|
117
|
|
|
|
2,409
|
|
|
|
1.3
|
%
|
Equity & Second
|
|
|
125
|
|
|
|
9,245
|
|
|
|
5.5
|
%
|
|
|
15
|
|
|
|
8,147
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
159,683
|
|
|
|
94.5
|
%
|
|
|
458
|
|
|
|
179,329
|
|
|
|
99.5
|
%
|
Commercial
|
|
|
36
|
|
|
|
8,985
|
|
|
|
5.3
|
%
|
|
|
44
|
|
|
|
600
|
|
|
|
0.3
|
%
|
Consumer
|
|
|
10
|
|
|
|
333
|
|
|
|
0.2
|
%
|
|
|
14
|
|
|
|
406
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
749
|
|
|
$
|
169,001
|
|
|
|
100.0
|
%
|
|
$
|
516
|
|
|
$
|
180,335
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Activities
CMSs Board of Directors reviews and approves CMSs asset liability and investment policy on an annual basis. The Chief
Executive Officer and Chief Financial Officer, as authorized by the Board of Directors, implement this policy based on established guidelines. CMSs asset liability policy is designed primarily to manage the interest rate sensitivity of its
assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement its lending activities and to provide and maintain liquidity within established guidelines. In establishing its investment
strategies, CMS considers its interest rate sensitivity, the types of securities to be held, liquidity and other factors. CMS has the authority to invest in various types of assets, including securities of various government-sponsored enterprises,
mortgage-backed securities, certain time deposits of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks and municipal and corporate debt instruments.
Securities Portfolio.
CMS classifies securities as held to maturity or available for sale at the date of purchase. Held to
maturity securities are reported at cost, adjusted for amortization of premium and accretion of
11
discount. Available for sale securities are reported at fair market value. At September 30, 2012, CMS did not have any held to maturity securities and available for sale investments totaled
$48.4 million, or 18.3%, of CMSs total assets. During the fiscal year ended September 30, 2012, CMS purchased $50.2 million of available for sale securities and received proceeds of $38.6 million from the repayment of available for sale
securities and proceeds from the sale of securities of $23.5 million. The balance of securities consisted of other interest earning deposits and Federal Home Loan Bank of New York (FHLB-NY) stock.
CMSs investment securities consist of fixed-rate and adjustable-rate government-sponsored enterprise securities and mortgage-backed
securities, all of which are directly or indirectly insured or guaranteed by the issuing agency, and to a smaller degree, corporate and municipal bonds. The following table sets forth the composition of CMSs securities and interest-earning
assets portfolios at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Carrying
Value
|
|
|
Percent
of Total
|
|
|
Carrying
Value
|
|
|
Percent
of Total
|
|
|
Carrying
Value
|
|
|
Percent
of Total
|
|
|
|
|
(Dollars in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Corporation
|
|
$
|
|
|
|
|
|
%
|
|
$
|
4,469
|
|
|
|
6.9
|
%
|
|
$
|
4,635
|
|
|
|
7.6
|
%
|
Federal Home Loan Mortgage Corporation
|
|
|
8,662
|
|
|
|
17.0
|
%
|
|
|
4,049
|
|
|
|
6.2
|
%
|
|
|
5,803
|
|
|
|
9.5
|
%
|
Small Business Administration
|
|
|
7,120
|
|
|
|
14.0
|
%
|
|
|
10,602
|
|
|
|
16.2
|
%
|
|
|
7,284
|
|
|
|
12.0
|
%
|
U.S. Government Agencies
|
|
|
24,088
|
|
|
|
47.3
|
%
|
|
|
35,674
|
|
|
|
54.7
|
%
|
|
|
38,614
|
|
|
|
63.4
|
%
|
Corporate bonds
|
|
|
4,599
|
|
|
|
9.0
|
%
|
|
|
3,805
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
3,892
|
|
|
|
7.7
|
%
|
|
|
1,163
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
48,361
|
|
|
|
95.0
|
%
|
|
|
59,762
|
|
|
|
91.6
|
%
|
|
|
56,336
|
|
|
|
925
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank of New York stock
|
|
|
2,032
|
|
|
|
4.0
|
%
|
|
|
1,904
|
|
|
|
2.9
|
%
|
|
|
1,956
|
|
|
|
3.2
|
%
|
Interest-earning deposits
|
|
|
501
|
|
|
|
1.0
|
%
|
|
|
3,587
|
|
|
|
5.5
|
%
|
|
|
2,616
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other interest-earning assets
|
|
|
2,533
|
|
|
|
5.0
|
%
|
|
|
5,491
|
|
|
|
8.4
|
%
|
|
|
4,572
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,894
|
|
|
|
100.0
|
%
|
|
$
|
65,253
|
|
|
|
100.0
|
%
|
|
$
|
60,908
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Portfolio Maturities.
The following table sets forth the scheduled maturities
and weighted average yields for CMSs available for sale investment securities at September 30, 2012. Actual maturities could differ. At September 30, 2012, there were no securities with maturities of less than five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After Five
Years
Through
Ten Years
|
|
|
% of
Total
|
|
|
Weighted
Average
Yield
|
|
|
Over
Ten
Years
|
|
|
% of
Total
|
|
|
Weighted
Average
Yield
|
|
|
Total
|
|
|
% of
Total
|
|
|
Weighted
Average
Yield
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
19,059
|
|
|
|
39.4
|
%
|
|
|
2.3
|
%
|
|
$
|
5,029
|
|
|
|
10.4
|
%
|
|
|
3.0
|
%
|
|
$
|
24,088
|
|
|
|
49.8
|
%
|
|
|
2.4
|
%
|
Corporate bonds
|
|
|
4,599
|
|
|
|
9.5
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,599
|
|
|
|
9.5
|
%
|
|
|
2.6
|
%
|
Municipal bonds
|
|
|
3,892
|
|
|
|
8.0
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,892
|
|
|
|
8.0
|
%
|
|
|
2.2
|
%
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration
|
|
|
1,368
|
|
|
|
2.9
|
%
|
|
|
2.0
|
%
|
|
|
5,752
|
|
|
|
11.9
|
%
|
|
|
0.9
|
%
|
|
|
7,120
|
|
|
|
14.8
|
%
|
|
|
1.1
|
%
|
Federal Home Loan Mortgage Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,662
|
|
|
|
17.9
|
%
|
|
|
2.3
|
%
|
|
|
8,662
|
|
|
|
17.9
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,918
|
|
|
|
59.8
|
%
|
|
|
2.3
|
%
|
|
$
|
19,443
|
|
|
|
40.2
|
%
|
|
|
2.1
|
%
|
|
$
|
48,361
|
|
|
|
100.0
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Deposit Activity and Sources Of Funds
General.
CMSs primary sources of funds for use in lending, investing and for other general purposes are derived from
retail deposits, scheduled amortization and prepayments of loan principal, maturities and calls of investments securities, borrowings, brokered certificates of deposit, the Certificate of Deposit Registry Service, or CDARS network and
funds generated from operations.
Deposits.
CMS offers a variety of deposit accounts with a range of interest
rates and terms. CMS currently offers regular savings deposits (consisting of passbook and statement savings accounts), interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts and time deposits. CMS has also
used brokered certificates of deposit to fund liquidity.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of deposits and competition. CMSs deposits are primarily obtained from the areas surrounding its offices. CMS relies primarily on paying competitive rates, service and
long-standing relationships with customers to attract and retain these deposits.
When CMS determines its deposit rates, it
considers local competition, U.S. Treasury securities offerings and the rates charged on other sources of funds. Core deposits (defined as savings deposits, money market accounts and demand accounts) represented 57.4% of total deposits as of
September 30, 2012. Also at September 30, 2012, time deposits with remaining terms to maturity of less than one year amounted to $35.3 million.
Deposit Distribution Weighted Average.
The following table presents the distribution of CMSs deposit accounts at the dates indicated by dollar amount and percent of portfolio, and the
weighted average nominal interest rate on each category of deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
27,749
|
|
|
|
13.6
|
%
|
|
|
0.00
|
%
|
|
$
|
17,183
|
|
|
|
8.85
|
%
|
|
|
0.00
|
%
|
|
$
|
14,094
|
|
|
|
7.5
|
%
|
|
|
0.00
|
%
|
Interest bearing
|
|
|
47,365
|
|
|
|
23.3
|
%
|
|
|
0.39
|
%
|
|
|
29,395
|
|
|
|
15.1
|
%
|
|
|
0.71
|
%
|
|
|
32,761
|
|
|
|
17.4
|
%
|
|
|
0.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,114
|
|
|
|
36.9
|
%
|
|
|
0.24
|
%
|
|
|
46,578
|
|
|
|
23.9
|
%
|
|
|
0.45
|
%
|
|
|
46,855
|
|
|
|
24.9
|
%
|
|
|
0.56
|
%
|
Savings and club
|
|
|
41,791
|
|
|
|
20.5
|
%
|
|
|
0.25
|
%
|
|
|
40,284
|
|
|
|
20.7
|
%
|
|
|
0.40
|
%
|
|
|
41,320
|
|
|
|
21.9
|
%
|
|
|
0.40
|
%
|
Certificates of deposit
|
|
|
86,611
|
|
|
|
42.6
|
%
|
|
|
1.41
|
%
|
|
|
107,880
|
|
|
|
55.4
|
%
|
|
|
1.57
|
%
|
|
|
100,131
|
|
|
|
53.2
|
%
|
|
|
1.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
203,516
|
|
|
|
100.0
|
%
|
|
|
0.74
|
%
|
|
$
|
194,742
|
|
|
|
100.0
|
%
|
|
|
1.06
|
%
|
|
$
|
188,306
|
|
|
|
100.0
|
%
|
|
|
1.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposit Maturities.
At September 30, 2012, CMS had $37.1 million in time deposits
with balances of $100,000 and over maturing as follows:
|
|
|
|
|
Maturity Period
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
Three months or less
|
|
$
|
6,024
|
|
Over three months through six months
|
|
|
8,437
|
|
Over six months through 12 months
|
|
|
15,862
|
|
Over 12 months
|
|
|
6,743
|
|
|
|
|
|
|
Total
|
|
$
|
37,066
|
|
|
|
|
|
|
13
Time Deposit Balances by Rates.
The following table presents, by interest rate
ranges, information concerning CMSs time deposit accounts outstanding as of September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
|
|
Period to Maturity
|
|
|
|
Less than
One Year
|
|
|
One to Two
Years
|
|
|
Two to
Three Years
|
|
|
More than
Three Years
|
|
|
Total
|
|
|
Percent of
Total
|
|
|
|
(Dollars in thousands)
|
|
1.00% and under
|
|
$
|
30,589
|
|
|
$
|
7,023
|
|
|
$
|
449
|
|
|
$
|
|
|
|
$
|
38,061
|
|
|
|
43.9
|
%
|
1.01% to 2.00%
|
|
|
2,493
|
|
|
|
1,071
|
|
|
|
962
|
|
|
|
18,722
|
|
|
|
23,248
|
|
|
|
26.9
|
%
|
2.01% to 3.00%
|
|
|
1,736
|
|
|
|
708
|
|
|
|
2,859
|
|
|
|
19,212
|
|
|
|
24,515
|
|
|
|
28.3
|
%
|
3.01% to 4.00%
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
%
|
4.01% to 5.00%
|
|
|
504
|
|
|
|
231
|
|
|
|
16
|
|
|
|
29
|
|
|
|
780
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,329
|
|
|
$
|
9,033
|
|
|
$
|
4,286
|
|
|
$
|
37,963
|
|
|
$
|
86,611
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings.
CMS currently borrows funds from the Federal Home Loan Bank of New York, or
FHLB-NY, to finance its lending and investing activities, and may continue to borrow funds in the future. We are a member of the FHLB-NY and have the ability to borrow on an overnight or term basis. CMSs overall credit exposure at the FHLB-NY
cannot exceed 50% of its total assets, subject to certain limitations based on the underlying loan and securities pledged as collateral. Borrowings from the FHLB-NY as of September 30, 2012 were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(Dollars in
thousands)
|
|
Short term advances, maturing in October, 2012, with interest payable quarterly at 0.39%
|
|
$
|
17,300
|
|
One year advance, maturing July 12, 2013, with interest payable monthly at 0.34%
|
|
|
5,575
|
|
Seven year advance, maturing December 29, 2014, with interest payable quarterly at 3.56%
|
|
|
5,000
|
|
Seven year fixed rate advance with interest at 5.57%, payable in monthly installments of principal and interest of $57,000 with a
balloon payment of $8,925,000 on August 8, 2014
|
|
|
9,255
|
|
|
|
|
|
|
Total
|
|
$
|
37,130
|
|
|
|
|
|
|
Employees
At September 30, 2012, CMS Bancorp and CMS had 41 full-time and 5 part-time employees. None of CMS Bancorps or CMSs employees is represented by a collective bargaining agreement.
Management believes that it enjoys excellent relations with its personnel.
FEDERAL AND STATE TAXATION
Federal Taxation
General.
The following discussion is intended only as a summary and does not purport to be a comprehensive description of
the tax rules applicable to CMS Bancorp or CMS. For federal income tax purposes, CMS reports its income on the basis of a taxable year ending September 30, using the accrual method of accounting, and is generally subject to federal income
taxation in the same manner as other corporations. CMS Bancorp and CMS constitute an affiliated group of corporations and, therefore, report their income on a consolidated basis. CMS is not currently under audit by the Internal Revenue Service
and has not been audited by the IRS during the past five years.
Bad Debt Reserves.
CMS, as a small
bank (one with assets having an adjusted tax basis of $500 million or less), is permitted to maintain a tax reserve for bad debts based on the experience method. Under the Small Business Job Protection Act of 1996, CMS has recaptured (taking
into income) over a multi-year period a portion
14
of the balance of its tax bad debt reserve as of December 31, 1995. The tax liability associated with the recapture has been adequately provided for in CMSs financial statements.
Distributions.
To the extent that CMS makes non-dividend distributions to its stockholders, such
distributions will be considered to result in distributions from CMSs unrecaptured tax bad debt reserve base year reserve (i.e., its reserve as of December 31, 1987), to the extent thereof and then from its supplemental
reserve for losses on loans, and an amount based on the amount distributed will be included in CMSs taxable income. Non-dividend distributions include distributions in excess of CMSs current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of CMSs current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute
non-dividend distributions and, therefore, will not be included in CMSs income.
The amount of additional taxable income
created from a non-dividend distribution is equal to the lesser of CMSs base year reserve and supplemental reserve for losses on loans or an amount that, when reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, in certain situations, approximately one and one-half times the non-dividend distribution would be includable in gross income for federal income tax purposes, assuming a combined state and federal corporate income tax rate of
40.0%. CMS does not intend to pay dividends that would result in the recapture of any portion of its bad debt reserves.
Elimination of Dividends; Dividends Received Deduction.
CMS Bancorp may exclude from its income 100% of dividends received
from CMS as a member of the same affiliated group of corporations.
State Taxation
New York State Taxation.
CMS is subject to the New York State franchise tax on banking corporations in an annual amount
equal to the greater of (1) 7.5% of CMSs entire net income allocable to New York State during the taxable year, or (2) the applicable alternative minimum tax. The alternative minimum tax is generally the greatest of
(a) 0.01% of the value of the taxable assets allocable to New York State with certain modifications, (b) 3% of CMSs alternative entire net income allocable to New York State or (c) $250. Entire net income is similar
to federal taxable income, subject to certain modifications, and alternative entire net income is equal to entire net income without certain adjustments. For purposes of computing its entire net income, CMS is permitted a deduction for an addition
to the reserve for losses on qualifying real property loans. CMS is currently using a six-year average experience method, similar to the federal method to compute their New York State bad debt deduction.
New York State passed legislation in August 1996 that incorporated into New York State tax law provisions for the continued use of bad
debt reserves in a manner substantially similar to the provisions that applied under federal law prior to the enactment of the 1996 Act discussed above. This legislation enabled CMS to avoid the recapture of the New York State tax bad debt reserves
that otherwise would have occurred as a result of the changes in federal law and to continue to utilize the reserve method for computing its bad debt deduction. However, the New York State bad debt reserve is subject to recapture for
non-dividend distributions in a manner similar to the recapture of federal bad debt reserves for such distributions. Also, the New York State bad debt reserve is subject to recapture in the event that CMS fails to satisfy certain
definitional tests relating to its assets and the nature of its business.
Delaware State Taxation.
As a
Delaware holding company not earning income in Delaware, CMS Bancorp is exempted from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.
15
REGULATION
General
CMS Bancorp is a savings and loan holding company that is
regulated, examined and supervised by the Federal Reserve. As a New York state-chartered savings bank, CMS is subject to regulation, examination and supervision by the NYSDFS, as well as by the FDIC as the federal safety and soundness regulator for
all state-chartered banks that are not members of the Federal Reserve System. The FDIC also administers the laws and regulations applicable to all insured depository institutions. As a result of such federal and state regulation, CMS Bancorp
and CMS must file reports with their primary regulators concerning their activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of or by, other
financial institutions. CMS Bancorp is also required to file reports with, and otherwise comply with the rules and regulations of, the SEC under the federal securities laws.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
Major financial reform legislation, known as the Dodd-Frank Act, was signed into law by the President on July 21, 2010. The Dodd-Frank Act continues to impact the rules governing the provision of
consumer financial products and services, and implementation of the many requirements of the legislation will require 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 CMS Bancorp and CMS have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the Dodd-Frank Act. Of particular significance to federal savings
associations (as applicable to CMS prior to June 29, 2012) and to savings and loan holding companies, is that, as a result of regulatory restructuring implementing the Dodd-Frank Act, both CMS Bancorp and CMS transitioned from the joint
supervision and regulation jurisdiction of the Office of Thrift Supervision (OTS) to the jurisdiction of new and separate primary federal regulators for federal savings associations and their holding companies on July 21, 2011.
Conversion of CMS from a federal savings association to a New York state-chartered savings bank; Resulting status of CMS Bancorp and
CMS
Effective at the close of business on Friday, June 29, 2012, CMS completed its conversion from a federal
savings association to a New York state-chartered savings bank after receiving approval from the NYSDFS and non-objection from the OCC (the Charter Conversion). In connection with the Charter Conversion, the Bank changed its name from
Community Mutual Savings Bank to CMS Bank.
As a result of the Charter Conversion, the Bank is now a
New York state-chartered savings bank and is no longer regulated by the Office of the Comptroller of the Currency (OCC) as a federal savings association. However, because CMS has elected to be treated as a savings
association, under Section 10(l) of the Home Owners Loan Act or HOLA for purposes of the regulation of its holding company, CMS Bancorp will continue to be regulated as a savings and loan holding company by the Federal
Reserve as long as CMS continues to meet the requirements to remain a qualified thrift lender or QTL under the HOLA. If CMS fails to remain a QTL, CMS Bancorp must register with the Federal Reserve as a bank holding company
(versus remaining a savings and loan holding company) and be treated as such, although treatment as a bank holding company would not be expected to have any significant impact on the degree and manner of holding company regulation that CMS Bancorp
is already subject to as a savings and loan holding company.
The primary business of CMS Bancorp is to operate its
wholly-owned banking subsidiary, CMS. The following discussion is intended to provide a summary of the material statutes and regulations applicable to savings and loan holding companies and New York state-chartered savings banks as they are to be
administered and enforced by the applicable federal and state regulators, and does not purport to be a comprehensive description of all such statutes and regulations.
16
Regulation of New York State-Chartered Savings Banks
GeneralPrimary Regulation by the NYSDFS and FDIC.
As a New York state-chartered savings bank, CMS is subject to
regulation, examination and supervision by the NYSDFS, as the Banks state regulator, as well as the FDIC, as the Banks primary federal regulator (for state nonmember banks) and as insurer of deposits placed at CMS. As such, CMS is
required to file reports with, and otherwise comply with, the rules and regulations of the NYSDFS administered pursuant to the New York Banking Law, and the rules and regulations of the FDIC applicable to all insured depository institutions and
state nonmember banks.
Business Activities
. The activities of New York state-chartered savings banks are
governed by Article 6 of the New York Banking Law and the rules and regulations of the NYSDFS. The business activities that are permissible for a New York state-chartered savings bank generally are as broad as the permissible activities for a
federal savings association. Therefore, the Charter Conversion has not had any significant adverse impact or limitation on the business activities of CMS in this regard. Federal law restricts and prohibits insured state banks and their subsidiaries
from engaging in activities and investments that are not permissible for national banks and their subsidiaries.
Lending
and Investment Authority.
In general, CMSs lending and investment powers are derived under the New York Banking Law and the NYSDFSs implementing rules and regulations. Under these laws and regulations, CMS may invest in real
estate mortgages, consumer and commercial loans, certain types of debt securities (including certain corporate debt securities, and obligations of federal, state, and local governments and agencies), certain types of corporate equity securities, and
certain other assets. The lending powers of New York State-chartered savings banks and commercial banks are generally not subject to percentage-of-assets or capital limitations like laws applicable to federal savings associations, although limits
applicable to loans to individual borrowers remain. See the discussion on Loans-to-One-Borrower Limitations below.
As a condition for CMS Bancorps continued regulation by the Federal Reserve as a savings and loan holding company, CMS must be and remain a qualified thrift lender or QTL. To
comply with this requirement, CMS is required to maintain at least 65% of its portfolio assets in certain qualified thrift investments (primarily residential mortgages and related investments, including certain
mortgage-backed securities, credit card loans, student loans and small business loans) in at least nine months of the most recent 12-month period. Portfolio assets means, in general, CMSs total assets less the sum of:
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specified liquid assets up to 20% of total assets;
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goodwill and other intangible assets; and
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the value of property used to conduct business.
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As of September 30, 2012, CMS held 95.1% of its portfolio assets in qualified thrift investments and had more than 85.0% of its portfolio assets in qualified thrift investments for each of the
12 months ending September 30, 2012. Therefore, CMS qualified, and continues to qualify, as a qualified thrift lender under the QTL test.
If CMS fails to remain a QTL, CMS Bancorp must register with the Federal Reserve as a bank holding company (versus remaining a savings and loan holding company) and be treated as such.
Loans-to-One-Borrower Limitations.
Under the New York Banking Law, with specified exceptions, CMSs total loans or
extensions of credit to a single borrower or group of related borrowers cannot exceed 15% of CMSs capital stock, surplus fund and undivided profits. CMS may lend additional amounts up to 10% if the loans or extensions of credit are fully
secured by readily-marketable collateral. CMS currently complies with these loans-to-one-borrower limitations. At September 30, 2012, CMSs largest aggregate amount of loans to one borrower was $3,015,000. This loan for the largest
borrower was non-performing and is in the process of foreclosure.
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Real Estate Lending Standards.
The FDIC and the other federal banking agencies
have adopted regulations that prescribe standards for extensions of credit that (i) are secured by real estate, or (ii) are made for the purpose of financing construction or improvements on real estate. The FDIC regulations require each
institution to establish and maintain written internal real estate lending policies that are consistent with safe and sound banking practices, and are appropriate to the size of the institution and the nature and scope of its real estate lending
activities. The standards also must be consistent with accompanying interagency guidelines, which include loan-to-value limitations for the different types of real estate loans. Institutions are also permitted to make a limited amount of loans that
do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The interagency guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are
justified.
Regulatory Capital Requirements
. FDIC regulations require state nonmember banks including CMS to
meet three minimum capital standards:
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(1)
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a minimum tangible capital ratio requirement of 1.5% of tangible capital to adjusted total assets;
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(2)
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a general minimum leverage ratio requirement of 4% of core capital to such adjusted total assets (minimum of 3% for certain banks that have been assigned the highest
composite rating under the Uniform Financial Institutions Ratings System); and
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(3)
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a minimum risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets, provided that the amount of supplementary capital
used to satisfy this requirement may not exceed 100% of core capital.
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In assessing a state banks capital
adequacy, the FDIC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual banks where necessary. CMS, as a matter of prudent management,
targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with CMSs risk profile.
At September 30, 2012, CMS exceeded each of its capital requirements with a tangible capital ratio of 7.36%, leverage capital ratio of 7.36% and total risk-based capital ratio of 11.77%.
Liquidity
. All insured depository institutions, including CMS, are required to maintain a sufficient amount of liquid
assets to ensure its safe and sound operation. For a discussion of what CMS includes in liquid assets, see Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
Community Reinvestment Act.
Under the Community Reinvestment Act (CRA), as implemented by FDIC
regulations, CMS has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for CMS nor does it limit its discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of CMS, to assess CMSs record of meeting the credit needs of its community and to take the record into account in its evaluation of certain applications by CMS.
The CRA regulations establish an assessment system that bases an institutions rating on its actual performance in meeting community
needs. The rules establish a streamlined examination approach to evaluate the CRA performance of smaller institutions. The FDIC evaluates small banks such as CMS using the following lending criteria:
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the banks loan-to-deposit ratio, adjusted for seasonal variation and, as appropriate, other lending-related activities, such as loan originations
for sale to the secondary markets, community development loans or qualified investments;
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the percentage of loans and, as appropriate, other lending-related activities located in the banks assessment areas;
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the banks record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and
business sizes;
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the geographic distribution of the banks loans; and
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the banks record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its
assessment areas.
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The CRA also requires all institutions to make public disclosure of their CRA ratings.
CMS received a Satisfactory CRA rating in its most recent CRA examination as of February 14, 2011.
Assessments.
As a New York state-chartered savings bank, CMS is required to pay to the NYSDFS a general assessment fee in
connection with the NYSDFS regulation and supervision (including examination) of CMS. Each state institution is billed five times per each fiscal year, with four estimated quarterly assessments set as approximately 25% of the annual amount
based on the NYSDFS estimated annual budget at the time of the billing, and a final assessment, or true-up, based on the NYSDFS actual expenses for the fiscal year. Assessments imposed by the NYSDFS on a New York
state-chartered savings bank are significantly less than what the OTS imposed, and what the OCC currently imposes on national banks and federal savings associations. The FDIC does not charge a state bank for supervision, although as discussed below,
the FDIC charges all insured depository institutions deposit insurance assessments in connection with its administration of the Deposit Insurance Fund.
Transactions with Affiliates.
CMSs authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act (the
FRA) and Regulation W issued by the Federal Reserve, as made applicable to state nonmember banks under the Federal Deposit Insurance Act. Under the FRA and Regulation W, the aggregate amount of covered transactions that an institution
may engage in with any individual affiliate is limited to 10% of the unimpaired capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the institutions unimpaired
capital and surplus. Loans and other specified transactions with affiliates are required to be secured by collateral in an amount and of a type described under federal law. The purchase of low-quality assets from affiliates is permitted only under
certain circumstances. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliates.
In addition, by electing to be treated as a savings association under Section 10(l) of the HOLA for purposes of the
continued regulation of CMS Bancorp as a savings and loan holding company, CMS is subject to the additional rules governing transactions with affiliates for savings associations under Section 11 of the HOLA. Such additional restrictions
prohibit a savings association from making a loan to an affiliate that is engaged in activities that are not permitted for bank holding companies under the Bank Holding Company Act (BHCA) and prohibit a savings association from
purchasing or investing in securities issued by an affiliate that is not a subsidiary.
Loans to Insiders.
CMSs authority to extend credit to insiders, which specifically include its directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and
22(h) of the FRA, as amended by the Dodd-Frank act, and Regulation O issued by the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders: (a) be made on terms that are substantially the same as, and
follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and
(b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are
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based, in part, on the amount of CMSs capital. In addition, extensions of credit in excess of certain limits must be approved by CMSs Board of Directors. As provided under the
Dodd-Frank Act, effective July 21, 2012, in addition to other forms of extensions of credit set forth in the statute and Regulation O, a bank extends credit to a person by having credit exposure to the person arising from a derivative
transaction (as defined in the national bank lending limit), repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction between the bank and the person.
Section 402 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) prohibits the extension of personal loans to
directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as CMS, that is subject to the insider lending restrictions
of Section 22(h) of the FRA.
Limitation on Dividends and Other Capital Distributions.
The principal source
of cash flow to CMS Bancorp is derived from dividends that CMS pays to CMS Bancorp as its sole shareholder. Federal regulations govern the permissibility of capital distributions by a savings association to its holding company. As a state savings
bank that has elected to be treated as a savings association for purposes of regulation of its holding company, CMS continues to be subject to the requirement to file advance notices of dividend declarations with the Federal Reserve.
Savings associations that are part of a savings and loan holding company structure must file with the Federal Reserve (previously this notice was required to be filed with the OTS) a notice at least 30 days prior to declaring a dividend. The Federal
Reserve may disapprove of a notice if:
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the savings association would be undercapitalized following the distribution;
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the proposed distribution raises safety and soundness concerns; or
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the proposed distribution violates a prohibition contained in any statute, regulation, enforcement action or agreement between the savings association
(or its holding company, in the case of the Federal Reserve) and the entitys primary federal regulator, or a condition imposed on the savings association (or its holding company, in the case of the Federal Reserve) in an application or notice
approved by the entitys primary federal regulator.
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Branching.
As a result of the
Dodd-Frank Act, state nonmember banks now enjoy the same broad branching authority as previously enjoyed only by federal savings associations due to differences in the statutes under which they are regulated. Currently, the FDIC is authorized to
approve applications by insured state nonmember banks to establish new branches in states other than the banks home state if the law of the state in which the branch is located, or is to be located, would permit establishment of the
branch, if the bank were a state bank chartered by such state, subject to all standard regulatory reviews and approvals.
Enforcement.
The NYSDFS and FDIC each have primary enforcement responsibility over New York state-chartered nonmember
banks. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices, and can result in, among other things, assessments of civil money penalties, issuance of cease and
desist orders and removal of directors and officers.
Standards for Safety and Soundness.
The FDIC has adopted a
set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings standards, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer,
employee, director or principal stockholder.
In addition, FDIC regulations require an institution that has been given notice
by the FDIC that it is not satisfying applicable safety and soundness standards to submit a compliance plan. If, after being so notified, an
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institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the prompt corrective action provisions of federal law. If an institution fails to comply with such an
order, the FDIC may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Prompt
Corrective Action Regulations.
Under prompt corrective action regulations implemented by the FDIC, the FDIC is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations,
including restrictions on growth of assets and other forms of expansion. For this purpose, a state nonmember bank is placed in one of the following five categories based on the banks capital:
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adequately capitalized;
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significantly undercapitalized; or
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critically undercapitalized.
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As an institutions capital decreases within the three undercapitalized categories listed above, the severity of the action that is authorized or required to be taken by the FDIC for state nonmember
banks under the prompt corrective action regulations increases. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an undercapitalized institution and to restrict the growth of its assets.
An undercapitalized state nonmember bank is required to file a capital restoration plan with the FDIC within 45 days (or other timeframe prescribed by the FDIC) of the date the bank receives notice
that it is within any of the three undercapitalized categories, and the plan must be guaranteed by any parent holding company. The aggregate liability of a holding company is limited to the lesser of (i) an amount equal to 5% of the banks
total assets at the time it was notified that it became undercapitalized; and (ii) the amount that is necessary to restore the banks capital ratios to the levels required to be classified as adequately classified, as those
ratios and levels are defined as of the time the bank failed to comply with the plan. If the bank fails to submit an acceptable plan, it is treated as if it were significantly undercapitalized. Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and restrictions.
Insurance of Deposit
Accounts
.
CMS is a member of, and pays deposit insurance assessments to, the DIF, which is administered by the FDIC. All deposit accounts are currently insured up to $250,000 per depositor for each account ownership category.
FDIC insurance of deposits is backed by the full faith and credit of the U.S. government. In order to maintain the DIF, the
FDIC imposes deposit insurance premiums on insured institutions and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious risk to the DIF, or to initiate enforcement actions against a state nonmember bank and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
All insured depository institutions are generally
required to pay deposit insurance assessments to the DIF on a quarterly basis. In December 2009, along with each institutions deposit insurance assessment for the third quarter of 2009, all non-exempt insured depository institutions were
required to prepay their quarterly
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assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. For purposes of calculating the prepaid amount, the base assessment rate in effect at September 30, 2009 was
used for 2010. That rate was increased by an annualized 3 basis points for 2011 and 2012 assessments. The prepayment calculation also assumes a five percent annual deposit growth rate, increased quarterly, through the end of 2012. As provided for in
the final rule implementing the prepaid assessment requirement, institutions were instructed to account for the prepayment by recording the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 31, 2009.
Subsequently, each institution records an expense (charge to earnings) for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the asset is exhausted. Once the asset is exhausted, the institution will resume
paying and accounting for quarterly deposit insurance assessments as they would normally. On December 30, 2009, CMS Bancorp paid $1,037,000 which was recorded as a prepaid asset and is being expensed as used over future periods. At
September 30, 2012, the remaining balance recorded as a prepaid asset was $331,000.
CMSs quarterly assessment rate
utilized for the final quarter of fiscal year ending September 30, 2012, was 0.02023% and the premium paid for fiscal 2012 was $210,000. The FDIC has authority to increase deposit insurance assessments. A significant increase in DIF insurance
premiums would have an adverse effect on the operating expenses and results of operations of CMS.
Under federal law,
insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. The management of CMS does not know of any practice, condition or violation that might lead to termination of deposit insurance.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.007% of insured deposits to fund interest payments on bonds issued by the
Financing Corporation (FICO), an agency of the federal government established in 1987 to recapitalize the predecessor to the DIF. These assessments, which are adjusted quarterly, will continue until the FICO bonds mature in 2017 through
2019.
Federal Home Loan Bank System.
CMS is a member of the Federal Home Loan Bank of New York or
FHLB-NY, which is one of 12 regional FHLBs. Each FHLB provides a central credit facility primarily for its member institutions. As a member of the FHLB-NY, CMS is required to acquire and hold shares of FHLB-NY capital stock. The capital
stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The capital stock has two subclasses, one for membership stock purchase requirements and the other for activity-based stock purchase
requirements. The minimum stock investment requirement in the FHLB-NY capital stock is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase
requirement, determined on a daily basis. For CMS, the membership stock purchase requirement is 0.2% of the Mortgage-Related Assets, as defined by the FHLB-NY, which consists principally of residential mortgage loans and mortgage-backed securities
held by CMS. The activity-based stock purchase requirement for CMS is dependent on the outstanding borrowings of CMS, and is generally equal to 4.50% of the dollar amount of any outstanding advances under the credit agreement, or a specified formula
as defined by the FHLB-NY. At September 30, 2012, CMS was in compliance with the foregoing minimum stock purchase requirements with an investment in FHLB-NY stock of $2.0 million.
FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs.
These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and also could result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced or interest on
future FHLB advances were increased, CMSs net interest income would be adversely affected.
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Federal Reserve System.
The FRA and Regulation D of the Federal Reserve
regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). The Federal Reserve Banks are authorized to pay interest on such reserves. The FRA provides that,
before December 31 of each year, the Federal Reserve shall issue a regulation adjusting the reserve requirement exemption amount for the next calendar year if total reservable liabilities held at all depository institutions increase from one
year to the next.
For all depository institutions, required reserves are computed by applying the reserve requirement ratios
set forth in the chart below (subject to adjustment by the FRB), to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities of the institution during the computation period.
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Reservable liability
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Reserve requirement ratio
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NET TRANSACTION ACCOUNTS:
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$0 to reserve requirement exemption amount ($12.4 million)
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0 percent of amount.
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Over reserve requirement exemption amount ($12.4 million) and up to low reserve tranche ($79.5 million)
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3 percent of amount.
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Over low reserve tranche ($79.5 million)
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$2,013,000 plus
10 percent of amount over $79.5 million.
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Nonpersonal time deposits
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0 percent.
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Eurocurrency liabilities
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0 percent.
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Since required reserves must be maintained in the form of either vault cash, an account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve, the effect of this reserve requirement is to reduce CMSs interest-earning assets.
Prohibitions Against Tying Arrangements.
Subject to certain statutory and regulatory exceptions, depository institutions are generally prohibited from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of credit or service, on the condition or requirement that the customer obtain (or provide) some additional service from the institution or its affiliate or not obtain services
of a competitor of the institution or its affiliate.
Anti-Money Laundering and Customer Identification
.
CMS is subject to FDIC and Financial Crimes Enforcement Network regulations implementing the Bank Secrecy Act (BSA), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the USA PATRIOT Act). The USA PATRIOT Act gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and
increased information sharing and broadened anti-money laundering requirements. Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act and related FDIC regulations impose the following
obligations on financial institutions:
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Establishment of anti-money laundering programs;
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Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying
the identity of customers within a reasonable period of time;
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Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and
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Prohibitions on correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country) and compliance with
recordkeeping obligations with respect to correspondent accounts of foreign banks.
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Bank regulators are
directed to consider a holding companys effectiveness in combating money laundering when ruling on applications to acquire bank shares or assets and other applications under the Bank Merger Act.
Through the Federal Financial Institutions Examination Council, the FDIC and other federal bank regulatory agencies have established
uniform examination procedures and implemented their Statement on Enforcement of Bank Secrecy Act/Anti-Money Laundering Requirements, which describes the circumstances under which the agencies will issue a cease and desist order and clarifies that
the agencies may take formal or informal enforcement actions to address other concerns related to BSA or anti-money laundering, depending on the facts.
Privacy Regulations.
CMS is subject to FDIC regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act (the GLB Act). These regulations require CMS
to disclose its privacy policy, including identifying with whom it shares nonpublic personal information, to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require CMS to
provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, CMS is required to provide its customers with the ability to opt-out of having it share their personal
information with unaffiliated third parties and not to disclose account numbers or access codes to nonaffiliated third parties for marketing purposes.
CMS is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLB Act. The guidelines describe the
agencies expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the
nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or
integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Federal guidelines also impose certain customer disclosures and other
actions in the event of unauthorized access to customer information.
In addition, pursuant to section 114 of the Fair and
Accurate Credit Transactions Act (the FACT Act) and the implementing regulations of the federal banking agencies and Federal Trade Commission, CMS is required to have in place an identity theft red flags program to detect,
prevent and mitigate identity theft. CMS has implemented an identity theft red flags program designed to meet the requirements of section 114 of the FACT Act and the joint final rules.
Consumer Protection and Compliance Provisions.
CMS is subject to various laws and regulations dealing generally with
consumer protection matters. CMS may be subject to potential liability under these laws and regulations for material violations, in the form of litigation by governmental and consumer groups, the FDIC and other federal regulatory agencies including
the Department of Justice. Moreover, the Consumer Financial Protection Bureau (CFPB), a new agency created under the Dodd-Frank Act, has broad rule-making authority for a wide range of consumer protection laws that apply to all
depository institutions, as well as the authority to prohibit unfair, deceptive or abusive acts and practices. The CFPB has examination and enforcement authority over all banks and savings associations with more than $10 billion in
assets. Banks and savings institutions with
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$10 billion or less in assets, such as CMS, will continue to be examined by their applicable primary bank regulators. CMSs loan operations are also subject to federal laws applicable to
credit transactions, such as the:
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Federal Truth in Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act of 1978, as amended by the FACT Act, governing the use and provision of information to credit reporting agencies,
and requiring certain identity theft protections and certain credit and other disclosures;
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Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;
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Real Estate Settlement Procedures Act, governing disclosures of fee estimates that would be incurred by a borrower during the mortgage
process;
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Servicemembers Civil Relief Act; and
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Rules and regulations of the federal agencies, primarily the CFPB, charged with the responsibility of implementing these federal laws.
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CMSs deposit operations are also subject to federal laws applicable to deposit transactions, such as
the:
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Truth in Savings Act, which imposes disclosure obligations to enable consumers to make informed decisions about their deposit accounts at
depository institutions;
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
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Electronic Fund Transfer Act, which governs automatic deposits to and withdrawals from deposit accounts and customers rights and
liabilities arising from the use of automated teller machines and other electronic banking services; and
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Rules and regulations of the federal agencies, primarily the CFPB, charged with the responsibility of implementing these federal laws.
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Holding Company Regulation
CMS has made an election under Section 10(l) of the HOLA to be treated as a savings association for purposes of the
regulation of CMS Bancorp. As a result of such election by CMS, CMS Bancorp continues (
i.e.
, after the Charter Conversion) to be registered with the Federal Reserve as a savings and loan holding company and is subject to Federal Reserve
examination, enforcement and supervision, as well as reporting requirements applicable savings and loan holding companies. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a
serious risk to the safety, soundness or stability of a subsidiary depository institution.
As noted above, pursuant to the
Dodd-Frank Act, the Federal Reserve assumed responsibility for the primary supervision and regulation of all savings and loan holding companies, including CMS Bancorp, on July 21, 2011. Given the extensive transfer of former OTS authority to
multiple agencies, the Dodd-Frank Act required the Federal Reserve to identify and publish in the
Federal Register
separate lists of the OTS regulations
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that the Federal Reserve will continue to enforce for savings and loan holding companies after the transfer date. In carrying out this mandate, and in connection with its assumption of
responsibility for the ongoing examination, supervision, and regulation of savings and loan holding companies, the Federal Reserve published an interim final rule which became effective on September 13, 2011, that provided for the corresponding
transfer from the OTS to the Federal Reserve of the regulations necessary for the Federal Reserve to administer the statutes governing savings and loan holding companies. The Federal Reserves regulations supersede OTS regulations for purposes
of Federal Reserve supervision and regulation of savings and loan holding companies. In December 2011, the Federal Reserve issued a final notice for a two-year phase-in period for most savings and loan holding companies to file Federal Reserve
regulatory reports.
If CMS fails the QTL test (discussed above), CMS Bancorp must change its status with the Federal Reserve
as a savings and loan holding company and register as a bank holding company under the BHCA.
Activities Restrictions
Applicable to CMS Bancorp.
Under the GLB Act, all unitary savings and loan holding companies organized after May 4, 1999, such as CMS Bancorp, are prohibited from engaging in non-financial activities. Accordingly, CMS Bancorps
activities are generally restricted to:
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furnishing or performing management services for a savings institution subsidiary;
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conducting an insurance agency or escrow business;
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holding, managing, or liquidating assets owned or acquired from a savings institution subsidiary;
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holding or managing properties used or occupied by a savings institution subsidiary;
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acting as trustee under a deed of trust;
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purchasing, holding or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock is approved;
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any activity that the Federal Reserve, by regulation, has determined to be permissible for bank holding companies under Section 4(c)(8) of the
BHCA, subject to receipt of the Federal Reserves prior approval;
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any activity in which multiple savings and loan holding companies were authorized by regulation to directly engage on March 5, 1987, subject to
compliance with the prior notice requirements applicable to such activities; and
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any activity permissible for financial holding companies under Section 4(k) of the BHCA.
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Effective July 21, 2011, both a savings and loan holding company and its depository institution subsidiary(ies) must be well
capitalized and well managed in order for the company to engage in financially related activities that are permitted for financial holding companies under the BHCA. Permissible activities which are deemed to be financial in nature or incidental
thereto under Section 4(k) of the BHCA include:
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lending, exchanging, transferring, investing for others or safeguarding money or securities;
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insurance activities or providing and issuing annuities, and acting as principal, agent or broker;
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financial, investment or economic advisory services;
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issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;
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underwriting, dealing in or making a market in securities;
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activities previously determined by the Federal Reserve to be closely related to banking;
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activities that bank holding companies are permitted to engage in outside of the United States;
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merchant banking activities; and
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portfolio investments made by an insurance company.
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If the Federal Reserve believes that an activity of a savings and loan holding company or a nonbank subsidiary constitutes a serious risk to the financial safety, soundness, or stability of a subsidiary
savings association and is inconsistent with the principles of sound banking, the purposes of HOLA or other applicable statutes, the Federal Reserve may require the savings and loan holding company to terminate the activity or divest control of the
nonbanking subsidiary.
Source of Strength and Capital Requirements.
The Dodd-Frank Act and implementing
regulations require all depository institution holding companies, including savings and loan holding companies, to serve as a source of financial and managerial strength to its subsidiary depository institution. Moreover, pursuant to the Dodd-Frank
Act, savings and loan holding companies will for the first time become subject to the same capital and activity requirements as those applicable to bank holding companies.
In June 2012, the FDIC and other federal banking agencies issued notices of proposed rulemakings that revise each agencys risk-based and leverage capital requirements consistent with agreements
reached by the Basel Committee on Banking Supervision (Basel III), including implementation of a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement. Additionally, consistent with Basel
III, the FDIC and other federal banking agencies propose to apply limits on a banking organizations capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified buffer of
common equity tier 1 capital in addition to the minimum risk-based capital requirements. The proposed rulemaking also would revise the agencies prompt corrective action framework by incorporating the new regulatory capital minimums and
updating the definition of tangible common equity. Such proposed capital requirements were originally proposed to be phased in beginning in January 2013 for all depository institution holding companies, including savings and loan holding companies,
however in November 2012, the agencies issued guidance indicating that they do not expect the regulatory capital rules to actually become effective on such date, due to the volume of comments received and the wide range of views expressed during the
comment period. While the start of the phase-in period for minimum capital requirements for savings and loan holding companies is uncertain given the lack of final rules at this time, the fully-phased in capital requirements will generally not
become effective until January 2015 at the earliest.
Examination.
In connection with its assumption of
responsibility for the ongoing supervision and examination of savings and loan holding companies, the Federal Reserve issued a supervisory letter in July 2011 that describes the supervisory approach the Federal Reserve will use during the first
supervisory cycle and going forward generally for savings and loan holding companies. To help facilitate the transition of savings and loan holding companies to the supervisory jurisdiction of the Federal Reserve, the Federal Reserve noted in its
letter that the first cycle of savings and loan holding company inspections will be instructive to both the Federal Reserve and savings and loan holding company management in terms of practical issues that arise in the supervision of a savings and
loan holding company. In particular, examiners will be using the first supervisory cycle to inform savings and loan holding companies how their operations compare to the Federal Reserves supervisory expectations, which is expected to allow for
savings and loan holding company management to make operational changes in response to the Federal Reserves supervisory expectations, if necessary. Also, the Federal Reserve plans to use the first inspections for the Federal Reserve
supervisory staff to better understand a savings and loan holding companys operations and business model and how the Federal Reserves holding company supervision framework can most effectively be implemented at these companies.
Accordingly, the Federal Reserves focus for inspection activities during the first supervisory cycle is to gain an understanding of the structure and operations of each savings and loan holding company.
After the first supervisory cycle and going forward, the Federal Reserve intends, to the greatest extent possible taking into account any
unique characteristics of savings and loan holding companies and the
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requirements of the HOLA, to assess the condition, performance, and activities of savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal
Reserves established risk-based approach regarding bank holding company supervision. As with bank holding companies, the Federal Reserves objective will be to ensure that a savings and loan holding company and its nondepository
subsidiaries are effectively supervised and can serve as a source of strength for, and do not threaten the soundness of, its subsidiary depository institution(s).
In accordance with its goal to assess the condition, performance, and activities of savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal
Reserves established risk-based approach regarding bank holding company supervision, the Federal Reserve indicated that it anticipates transitioning savings and loan holding companies to the Federal Reserves RFI/C(D) rating
system (commonly referred to as RFI).
Restrictions on Investments in CMS Bancorp or By CMS Bancorp in Other
Depository Institutions.
Federal law prohibits all savings and loan holding companies, and investors in general, directly or indirectly, from:
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acquiring control (as defined under the HOLA) of another depository institution (or a holding company parent) without prior Federal Reserve approval;
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for existing depository institution holding companies, acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary depository
institution or holding company, or a non-subsidiary company engaged in impermissible activities without prior Federal Reserve approval;
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acquiring through merger, consolidation or purchase of assets, another depository institution or a holding company thereof, or acquiring all or
substantially all of the assets of such institution (or a holding company) without prior Federal Reserve approval; or
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acquiring control of any depository institution not insured by the FDIC (except through a merger with and into the holding companys savings
institution subsidiary that is approved by the Federal Reserve) without prior Federal Reserve approval.
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The
definition of control found in the HOLA is similar to that found in the BHCA for bank holding companies. Both statutes apply a similar three-prong test for determining when a company controls a bank or savings association. Specifically, a company
has control over either a bank or savings association if the company:
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(1)
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directly or indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more of the voting securities of a company;
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(2)
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controls in any manner the election of a majority of the directors (or any individual who performs similar functions in respect of any company, including a trustee
under a trust) of the board; or
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(3)
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directly or indirectly exercises a controlling influence over the management or policies of the bank.
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The Federal Reserve has issued regulations which, among other things, implement the HOLA to govern the operations of savings and loan
holding companies. The new rule, known as Regulation LL, includes a specific definition of control similar to the statutory definition, with certain additional provisions. Notwithstanding the general 25% investment threshold for control
noted above, an existing bank holding company or savings and loan holding company is required to obtain the Federal Reserves approval before acquiring more than 5% of CMS Bancorps voting stock.
Additionally, Regulation LL modifies the regulations previously used by the OTS for purposes of determining when a company or natural
person acquires control of a savings association or savings and loan holding company under the HOLA or the Change in Bank Control Act (CBCA). In light of the similarity between the statutes governing bank holding companies and savings
and loan holding companies, the Federal Reserve has indicated that it intends to use its established rules and processes with respect to control
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determinations under HOLA and the CBCA to ensure consistency between equivalent statutes administered by the same agency.
Under the CBCA, a notice must be submitted to the Federal Reserve if any person (including a company), or group acting in concert, seeks to acquire 10% or more of CMS Bancorps shares of outstanding
common stock, unless the Federal Reserve has found that the acquisition will not result in a change in control of the company. Under the CBCA, the Federal Reserve generally has 60 days within which to act on such notices, taking into consideration
certain factors, including the financial and managerial resources of the acquirer; the convenience and needs of the communities served by CMS Bancorp and CMS; and the anti-trust effects of the acquisition.
Federal Securities Laws
.
CMS Bancorps common stock is registered with the SEC under Section 12(b) of the
Securities Exchange Act of 1934, as amended (the Exchange Act). Accordingly, CMS Bancorp is subject to the periodic reporting, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.
As a public company, we are subject to the Sarbanes-Oxley Act, which implements a broad range of disclosure, corporate governance and
accounting measures for public companies designed to promote honesty and transparency and to protect investors from corporate wrongdoing. Furthermore, our common stock is listed on The Nasdaq Capital Market and therefore we are subject to Nasdaq
rules as a condition of listing. The Nasdaq rules include, among other things, corporate governance rules that implement some of the mandates of the Sarbanes-Oxley Act and other requirements to ensure that a majority of the Board of Directors are
independent of management, as well as general requirements establishing and publishing a code of conduct for directors, officers and employees, and calling for stockholder approval of all new stock option plans and all material modifications.
Delaware Corporation Law
.
CMS Bancorp is incorporated under the laws of the State of Delaware, and is
therefore subject to regulation by the State of Delaware. In addition, the rights of CMS Bancorps shareholders are governed by the Delaware General Corporation Law.
New statutes, regulations and guidance are regularly proposed that contain wide-ranging potential changes to the statutes, regulations and competitive relationships of financial institutions operating and
doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
An investment in our common stock involves certain risks. This section describes material risks that our management believes are specific to us and our business. Before making an investment decision, you
should read carefully and consider the risk factors below in conjunction with the other information in this Form 10-K and information incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes
which are set forth in Part II, Item 8 Financial Statements and Supplementary Data of this Form 10-K. Additional risks and uncertainties not presently known to us at this time or that we currently deem immaterial could also
materially and adversely affect our business and operations. The value or market price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. The risks discussed below also include
forward-looking statements and our actual results could differ substantially from those discussed in these forward-looking statements.
The following are certain material risks that our management believes are specific to us and our business. You should understand that it is not possible to predict or identify all such potential risks
and, as such, this list of risk factors should not be viewed as all-inclusive or in any particular order.
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Risks Related to the Pending Merger
The pending Merger and related transactions involving CMS Bancorp and CMS with Customers Bancorp and Customers Bank are not certain
to occur. Failure to comply with terms of the Merger Agreement in the interim prior to closing of the Merger could adversely affect our business. If the Merger and related transactions do not occur, our business, results of operations and our stock
price could be materially adversely affected.
On August 10, 2012, CMS Bancorp announced that it had entered into
a definitive Agreement and Plan of Merger (Merger Agreement) with Customers Bancorp, Inc. (Customers), whereby through a series of transactions, CMS Bancorp will be merged into Customers and CMS will be merged into
Customers wholly-owned bank subsidiary, Customers Bank (the Merger). Upon completion of the Merger, Customers is to acquire all outstanding shares of CMS Bancorps common stock in exchange for shares of Customers common
stock based on an exchange ratio to be determined using a valuation date prior to the closing of the transaction. Any fractional shares that result due to this exchange of shares will be paid in cash.
Consummation of the Merger is subject to the satisfaction of a number of conditions, including but not limited to: (i) approval of
the Merger by the holders of a majority of the outstanding shares of CMS Bancorps common stock; (ii) the receipt of all required regulatory approvals and non-objections; (iii) the non-occurrence of any event that has a material
adverse effect on CMS Bancorp and its subsidiaries; and (iv) as of the closing date (before giving effect to the Merger), CMS and its subsidiaries shall have, on a consolidated basis, nonperforming assets (as defined in the Merger
Agreement) less than or equal to $12 million, as well as other conditions to closing as are customary in transactions such as the Merger. In addition, Customers is not required to seek regulatory approval with respect to the Merger until after
regulatory approval is received by Customers for another bank merger transaction previously announced by Customers involving Acacia Federal Savings Bank, headquartered in Falls Church, Virginia (the Acacia Transaction). Assuming the
satisfaction of such conditions, it is currently expected that the Merger will become effective in the first half of calendar year 2013. However, external factors that are beyond the control of CMS Bancorp, such as the failure to obtain stockholder
approval, regulatory approval or non-objection, delay relating to the Acacia Transaction, or potential shareholder litigation, could cause a delay or inability of CMS Bancorp to consummate the Merger or the other related transactions.
As a result of the pending Merger: (i) the attention of management and employees could be diverted from day-to-day operations as
they focus on matters relating to preparation for integration of CMSs operations with those of Customers Bank; (ii) the restrictions and limitations on the conduct of CMS Bancorps business pending the Merger and other related
transactions could disrupt or otherwise adversely affect our business and relationships with our customers, and could not be in the best interests of CMS Bancorp if it were to have to act as an independent entity following a termination of the
Merger Agreement; (iii) CMS Bancorps ability to retain its existing employees could be adversely affected due to the uncertainties created by the Merger; and (iv) CMS Bancorps ability to maintain existing customer
relationships, or to establish new ones, could be adversely affected. Any delay in consummating the Merger could exacerbate these issues.
There can be no assurance that all of the conditions to closing will be satisfied, or where possible, waived, or that the Merger and/or related transactions will become effective. If the Merger and
related transactions do not become effective because conditions to closing are not satisfied, or because one of the parties, or all of the parties mutually, terminate the Merger Agreement, the following adverse effects are possible: (i) CMS
Bancorps stockholders will not receive the Customers common stock in exchange for Company comment stock which Customers has agreed to pay based on an exchange ratio; (ii) CMS Bancorps stock price could decline; (iii) CMS
Bancorps business could be adversely affected; (iv) CMS Bancorp will have incurred significant transaction costs related to negotiating and working towards the Merger, which may or may not be reimbursable up to $300,000 by Customers; and
(v) under certain circumstances, the Company could have to pay Customers a termination fee of up to $1,000,000. For further information regarding the Merger, see the Companys Form 8-K filed with the SEC on August 10, 2012.
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Risks Related to Our Industry and Business
Difficult economic and market conditions have adversely affected our industry.
We are operating in a challenging and uncertain economic environment, including generally uncertain world, national and local conditions.
The capital and credit markets have been experiencing volatility and disruption. Since 2008, dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit
performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions across the United States. General downward economic trends, reduced availability of commercial credit and increasing
unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial
institutions to their customers and to each other. This market turmoil and tightening of credit led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general
business activity. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we could face the following risks in
connection with these events:
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We face increased regulation of our industry. Compliance with such regulation could increase our costs and limit our ability to pursue business
opportunities.
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Customer demand for loans secured by real estate could be further reduced due to weaker economic conditions, an increase in unemployment, a decrease in
real estate values or an increase in interest rates, all of which factors could lower our profitability.
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The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of
economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions could adversely affect the accuracy of our estimates which could, in turn,
impact the reliability of the process.
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The value of the portfolio of investment securities that we hold could be adversely affected.
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Determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires
significant estimates, and actual losses could vary from current estimates.
CMS maintains an allowance for loan losses
to provide for loans in its portfolio that may not be repaid in their entirety. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us and CMS to make significant estimates
of current credit risks and future trends, all of which could undergo material changes.
In evaluating the adequacy of
CMSs allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and
classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we consider many
qualitative factors, including general and economic business conditions, duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by
nature subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding borrowers abilities to successfully execute their business models through changing
economic environments, competitive challenges and other factors. In considering information about specific borrower situations, our analysis is subject to the risk that we are provided inaccurate or incomplete information. Because of the degree of
uncertainty and susceptibility of these factors to change, CMSs actual losses could vary from our current estimates.
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Additionally, bank regulators periodically review CMSs allowance for loan losses and
could require an increase in the provision for loan losses or recognize loan charge-offs based upon their judgments, which could be different from ours. While we believe that the current amount of allowance for loan losses is sufficient to absorb
inherent losses in our loan portfolio, any increase in CMSs allowance for loan losses or loan charge-offs required by these regulatory authorities could adversely affect our operating results.
Until economic and market conditions improve, CMS could continue to incur additional losses relating to an increase in nonperforming
loans. CMS does not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting its income, and increasing its loan administration costs. When CMS takes collateral in foreclosures and similar proceedings, it
is required to mark the related loan to the then fair market value of the collateral, which could result in a loss. These loans and other real estate owned also increase its risk profile and the capital its regulators believe is appropriate in light
of such risks. As a result of current economic conditions, additional provisions for loan losses could be necessary.
We
are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our
business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and
caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.
The repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.
Federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed
as part of the Dodd-Frank Act. If market conditions warrant us to begin offering interest on demand deposits to attract new customers or maintain current customers, our interest expense will increase and our net interest margin will decrease, which
could have a material adverse effect on our business, financial condition and results of operation.
Changes in interest
rates could adversely affect our results of operations and financial condition.
Our profitability, like that of most
financial institutions, depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. We also are
subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and investment securities. Increases in interest rates may decrease loan demand and make it more difficult for
borrowers to repay adjustable-rate loans. Decreases in interest rates can result in increased prepayments of loans and investment securities as borrowers refinance to reduce borrowing costs. In a decreasing interest rate environment, we are subject
to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. In an increasing interest rate environment, we are subject to the
risk that interest costs on deposits and borrowings could rise more quickly than interest income from loans and investments.
While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities and pricing of our assets and
liabilities, our efforts may not be effective in a changing rate environment and our financial condition and results of operations could suffer.
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Our loan portfolio includes loans with a higher risk of loss.
While the majority of CMSs loan portfolio consists of residential mortgage loans, it also originates other types of loans including
commercial loans. Commercial loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial
loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate because repayment is generally dependent upon the successful operation of
the borrowers business.
The current downturn in the real estate market, unemployment and local economy could adversely
affect the value of the properties securing the loans or revenues from the borrowers business thereby increasing the risk of non-performing loans. The national and local real estate markets generally remain stagnant, with a continued slowdown
in the general housing market that is evidenced by reports of reduced levels of new and existing home sales, increasing inventories of houses on the market, stagnant to declining property values and an increase in the length of time houses remain on
the market. No assurances can be given that these conditions will improve or will not worsen.
A significant portion of
our loan portfolio is secured by real estate; therefore we have a high degree of risk from a downturn in our real estate markets and the local economy and face risks that are unique to holding foreclosed real estate.
A further downturn in the real estate market and local economy in Westchester County could hurt our business because a significant portion
of our loans are secured by real estate located in Westchester County. Real estate values and real estate markets are generally affected by, among other things, changes in regional or local economic conditions, fluctuations in interest rates, and
the availability of loans to potential purchasers. If real estate values decline in Westchester County, the value of real estate collateral securing our loans could be significantly reduced. Our ability to recover on defaulted loans by foreclosing
and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.
Additionally, CMS faces certain risks that are unique to holding foreclosed real estate, such as the risk that hazardous or toxic substances are found on the foreclosed property, which could require CMS
to incur substantial expenses to remediate or materially reduce the propertys value. Although CMS has policies and procedures in place to ensure that an environmental review is performed before initiating any foreclosure action on real
property, these reviews could turn out to be insufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard in connection with foreclosed real estate
could have a material adverse effect on our financial condition and results of operations. At September 30, 2012, CMS had no foreclosed real estate.
Changes in our asset quality could adversely affect our results of operations and financial condition.
When we discuss asset quality, we generally mean the likelihood that a borrower will repay a loan, with interest, on time. We think our overall asset quality is good, and has been that way for
several years. We cannot predict whether our asset quality will change because changes in the economy can impact asset quality. If our asset quality were to deteriorate, it could expose us to greater credit risk and adversely affect our financial
condition.
The results of our operations may be adversely affected if asset valuations cause other-than-temporary
impairment charges.
CMS may be required to record future impairment charges on our investment securities if such
securities suffer declines in value that are considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities,
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adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future
periods. If an impairment charge is significant enough it could affect the ability of CMS to upstream dividends to CMS Bancorp, which could have a material adverse effect on our liquidity and could also negatively impact our regulatory capital
ratios and result in CMS not being classified as well capitalized for regulatory purposes.
The soundness of
other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could
be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even
rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these
transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover
the full amount of the financial instrument exposure. There can be no assurance that any such losses would not materially and adversely affect our results of operations.
Liquidity risks could affect operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources to accommodate our existing and future lending and investment
activities could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is retail deposits gathered through our network of branch offices. Our alternative funding sources
include, without limitation, brokered certificates of deposit, federal funds purchased, Federal Reserve Discount Window borrowings, FHLB-NY advances and short and long-term debt.
CMS has historically obtained funds principally through local deposits and it has a base of lower cost transaction deposits. Generally,
we believe local deposits are a cheaper and more stable source of funds than other borrowings, because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect
a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits.
Our costs of
funds, profitability and liquidity will be adversely affected to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth
could adversely affect our profitability and the ability to expand our loan portfolio.
We may look to sell production assets,
such as mortgage loans, into the secondary market as a means to manage the size of our balance sheet and manage the use of our capital. The demand for these products in the capital markets is not driven by us and may not benefit us at the time we
look to sell the loans.
Our liquidity, on a parent only basis, could be adversely affected by certain restrictions on
receiving dividends from the Bank without prior regulatory approval.
Our financial success is dependent on the
prevailing economic, political and business conditions as well as the population growth in Westchester County, New York.
Our success and growth is dependent on the income levels, deposits and population growth in our primary market area, which is Westchester
County, New York. If the communities in which we operate do not grow or if prevailing economic conditions locally are unfavorable, our business will be negatively affected.
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Additionally, there are inherent risks associated with our lending activities, including
credit risk, which is the risk that borrowers may not repay outstanding loans or the value of the collateral securing loans decreases. Our business operations and activities are predominantly concentrated in Westchester County and most of our credit
exposure is in that area, so we are specifically at risk from adverse economic, political and business conditions that affect Westchester County. Accordingly, economic and business conditions in Westchester County, such as increases in unemployment,
commercial and consumer delinquencies and real estate foreclosures, as well as decreases in real gross domestic product, home and land prices or home sales, will each adversely impact our credit risk.
The downturn in our local economy may negatively affect our future growth possibilities by limiting funds available for deposit and
our borrowers ability to repay their loans on a timely basis.
Our current primary market area is principally
located in Westchester County, New York. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand our market area. The current economic downturn could cause significant increases in
non-performing loans, which would hurt our profits. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. A decline in real
estate values could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss.
We depend on our executive officers and key personnel to continue the implementation of our business strategy towards closing of the Merger and could be harmed by the loss of their services.
We believe that our growth and future success will depend in large part upon the skills of our management team. The
competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract
additional qualified personnel. We have an employment agreement with our President and Chief Executive Officer and change in control agreements with several other senior executive officers which are intended to incentivize such senior executive
officers to remain with CMS during the pendency of the Merger. The loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to implement our business strategy towards closing of the Merger.
In particular, regulatory restrictions could be imposed on our ability to compensate our key executive officers, which would adversely impact our ability to retain key personnel.
Our financial success is dependent on our ability to compete effectively in highly competitive markets.
We operate in the highly competitive market of Westchester County, New York. Our growth and success depends on our ability to compete
effectively in this market. Through CMS, we compete for loans, deposits and other financial services in geographic markets with other local, regional and national commercial banks, credit unions, savings and loan associations, mortgage banking
firms, consumer financial companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and international financial institutions. Many of our competitors offer products and
services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. Larger competitors may be able to price loans and deposits more aggressively than we
can and have broader customer and geographic bases to draw upon.
Competitors that are not depository institutions are
generally not subject to the extensive regulations that apply to us. Through CMS, we compete with these institutions both in attracting deposits and in making loans. In addition, we must attract our customer base from other existing financial
institutions and from new residents. There is a risk that we will not be able to compete successfully with these other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits or charge lower
interest rates to obtain loan volume, resulting in reduced profitability.
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Changes in the Federal Reserves monetary or fiscal policies could adversely
affect our results of operations and financial condition.
Our earnings will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power
to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve affects the levels of bank loans, investments and deposits through its control over the issuance of United States
government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal
policies.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able
to accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to
attract additional deposits, which could jeopardize the closing of the Merger.
We are required to include in our
annual reports filed with the SEC a report from our management regarding internal control over financial reporting. As a result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual management report on our internal control over financial reporting, including, among other matters, managements assessment of the effectiveness
of internal control over financial reporting. If we fail to identify and correct any significant deficiencies in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential
stockholders and depositors could lose confidence in our financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits,
which could jeopardize the closing of the Merger.
Negative developments in the financial industry and the credit
markets may subject us to additional regulation.
As a result of ongoing challenges facing the U.S. economy, the
potential exists for the promulgation of new laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in
examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and credit markets, and the impact of new legislation and agency rulemakings in response to those developments, may
negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and may adversely impact our financial performance.
Provisions of our charter, bylaws and certain laws containing antitakeover provisions, as well as the Merger Agreement, may prevent transactions you might favor, including a sale or merger of CMS
Bancorp with a party other than Customers Bancorp pursuant to the previously announced merger plans.
Provisions of our
charter and bylaws may make it more difficult for companies or persons from gaining control of us through a tender offer, business combination, proxy contest or some other method, even though you might be in favor of the transaction. These
anti-takeover provisions include:
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limitations on voting rights of the beneficial owners of more than 10% of our common stock;
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supermajority voting requirements for certain business combinations and changes to some provisions of the charter and bylaws;
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the election of directors to staggered terms of three years; and
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provisions regarding the timing and content of stockholder proposals and nominations.
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Furthermore, federal law requires Federal Reserve approval prior to any direct or indirect
acquisition of control (as defined in Federal Reserve regulations) of CMS, including any acquisition of control of CMS Bancorp. By statute, a company would be found to control CMS if the company: (1) directly or
indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more of the voting securities of CMS Bancorp or CMS; (2) controls in any manner the election of a majority of the directors of CMS
Bancorps or CMSs board; or (3) directly or indirectly exercises a controlling influence over the management or policies of CMS Bancorp and CMS. The Federal Reserves implementing regulations provide a specific definition of
control similar to the statutory definition, with certain additional provisions. In addition to the rebuttable presumptions of control set forth in the implementing regulations, the Federal Reserves supervision manual for
supervised institutions provides that there are a number of other circumstances that are indicative of control and may call for further investigation to uncover facts that support a determination of control. Moreover, under the Merger Agreement, CMS
Bancorp is subject to covenants relating to its communications with potential merger partners and is restricted from actively seeking a merger transaction with a party other than Customers Bancorp.
The downgrade of U.S. government securities by the credit rating agencies could have a material adverse effect on CMS
Bancorps operations, earnings, and financial condition.
The recent debate in Congress regarding the national
debt ceiling, federal budget deficit concerns, and overall weakness in the economy resulted in actual and threatened downgrades of U.S. government securities by the various major credit ratings agencies, including Standard and Poors and Fitch
Ratings. While the federal banking agencies including the Federal Reserve and the FDIC have issued guidance indicating that, for risk-based capital purposes, the risk weights for U.S. Treasury securities and other securities issued or guaranteed by
the U.S. government, government agencies, and government-sponsored entities will not be affected by the downgrade, the downgrade of U.S. government securities by Standard and Poors and the possible future downgrade of the federal
governments credit rating by one or both of the other two major rating agencies (which has been forewarned by Fitch Ratings), could create uncertainty in the U.S. and global financial markets and cause other events which, directly or
indirectly, could adversely affect CMS Bancorps operations, earnings, and financial condition.
We are subject to
security and operational risks relating to our use of technology that could damage our reputation and our business.
We
rely heavily on communications and information systems to conduct our business. Furthermore, we have access to large amounts of confidential financial information and control substantial financial assets, including those belonging to our customers,
to whom we offer remote access, and we regularly transfer substantial financial assets by electronic means. Any failure, interruption or breach in security of our systems could damage our reputation, result in a loss of customer business, subject us
to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. We rely on standard Internet and other
security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures.
We also face the risk of operational disruption, failure, termination or capacity constraints caused by third parties that facilitate our
business activities by providing technology such as software applications, as well as financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure.
Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance
coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or
exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.
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The operations of our business, including our interaction with customers, are
increasingly done via electronic means, and this has increased our risks related to cybersecurity.
We are exposed to
the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused on cyber-attacks that
include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner
that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to
electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. The objectives of cyber-attacks vary widely and can include
theft of financial assets, intellectual property, or other sensitive information, including the information belonging to our banking customers. Cyber-attacks may also be directed at disrupting our operations.
While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents
as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen
assets or information and repairing system damage that may have been caused; increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and
engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting
customer or investor confidence.
We are subject to extensive regulations that could limit or restrict our activities,
and the cost of compliance is high.
We operate in a highly regulated industry and are subject to examination,
supervision and comprehensive regulation by various regulatory agencies, currently including the NYSDFS, Federal Reserve and the FDIC. Banking regulations are primarily intended to protect the DIF and depositors, not stockholders. Our compliance
with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also
subject to regulatory capital requirements, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance could be
materially and adversely affected, which could jeopardize the Merger.
Non-compliance with the USA PATRIOT Act, Bank
Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.
Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities.
Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Departments Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to
establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by
regulators, and costly litigation or expensive additional controls and systems, which could jeopardize the closing of the Merger. In recent years, several banking institutions have received large fines for non-compliance with these laws and
regulations. In addition, the federal government has imposed and is expected to expand laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. We have developed
policies and continue to augment
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procedures and systems designed to assist in compliance with these laws and regulations, however it is possible for such safeguards to fail or prove deficient during the implementation phase to
avoid non-compliance with such laws.
We and CMS are currently undergoing changes in the way we are supervised and
examined as a result of the consolidation of federal banking regulators called for by the Dodd-Frank Act, and as a result of the Charter Conversion of CMS, and could possibly experience operational challenges or increased costs in the course of full
transition to our new regulators.
As a result of regulatory restructuring called for by the Dodd-Frank Act, effective
July 21, 2011, the Federal Reserve became the primary federal regulator of CMS Bancorp. The Federal Reserve has already begun to apply certain parts of its current consolidated supervisory program for bank holding companies, including
significantly enhanced reporting requirements, to savings and loan holding companies. Accordingly, CMS Bancorp is currently transitioning to the jurisdiction of our new regulator and expects that some aspects of the regulatory restructuring process
could result in increased costs, which could have an adverse impact on our results of operations. We also expect to become subject to new examination, regulatory and reporting requirements.
As a result of the Charter Conversion in June 2012, CMS became a New York state-chartered savings bank subject to the primary supervision
and regulation of the NYSDFS and FDIC. Prior to the Charter Conversion, CMS had been subject to the primary supervision and regulation of the OCC, which had assumed such jurisdiction over federal savings associations from the OTS as a result of the
Dodd-Frank Act. Accordingly, CMS is currently transitioning to the jurisdictions of our new state and federal regulators and expects that some aspects of the regulatory restructuring process could result in increased costs, which could have an
adverse impact on our results of operations. CMS could also become subject to new examination, regulatory and reporting requirements.
The Dodd-Frank Act also created a new government agency, the Consumer Financial Protection Bureau or CFPB with broad powers to supervise and enforce consumer protection laws. The CFPB has
primary enforcement authority for banking institutions with more than $10 billion in assets and has broad rule-making authority for a wide range of consumer protection laws applicable to all banks and savings institutions, including the authority to
prohibit unfair, deceptive or abusive acts and practices. The CFPB recently announced several enforcement actions taken against various large banking institutions in this regard.
We are continuing to closely monitor and evaluate developments under the Dodd-Frank Act, which could adversely affect our financial
condition and results of operations through significant increases in our regulatory compliance costs.
The Dodd-Frank
Act will, among other things, result in increased capital standards, and further new laws and regulations, which create regulatory uncertainty and which are expected to continue to significantly increase our regulatory compliance costs.
The Dodd-Frank Act requires the Federal Reserve to set minimum capital levels for depository institution holding
companies (including savings and loan holding companies) that are as stringent as those required for insured depository institutions. Moreover, pursuant to the Dodd-Frank Act, savings and loan holding companies will for the first time become subject
to the same capital and activity requirements as those applicable to bank holding companies. The Dodd-Frank Act and implementing regulations also require that all companies that directly or indirectly control an insured depository institution,
including savings and loan holding companies, serve as a source of financial and managerial strength to their subsidiary savings associations depository institution(s). All of these regulatory actions that implement the Dodd-Frank Act are
expected to further increase our regulatory compliance costs.
On June 12, 2012, the federal banking agencies, including
the Federal Reserve and FDIC issued notices of proposed rulemakings that revise each agencys risk-based and leverage capital requirements consistent with
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agreements reached by the Basel Committee on Banking Supervision, including implementation of a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital
requirement. Additionally, consistent with Basel III, the federal banking agencies propose to apply limits on a banking organizations capital distributions and certain discretionary bonus payments if the banking organization does not hold a
specified buffer of common equity tier 1 capital in addition to the minimum risk-based capital requirements. The proposed rulemaking also would revise the agencies prompt corrective action framework by incorporating the new
regulatory capital minimums and updating the definition of tangible common equity. These capital requirements were originally proposed to be phased in beginning in January 2013, however in November 2012, the agencies issued guidance indicating that
they do not expect the regulatory capital rules to actually become effective on such date, due to the volume of comments received and the wide range of views expressed during the comment period. There can be no assurance when, and in what form, such
rules will be finalized. We cannot predict the impact that such proposals, once adopted, would have upon our financial condition or results of operations.
Risks Relating to Our Common Stock
The price of our common stock
could fluctuate significantly, and this could make it difficult for you to resell shares of our common stock at times or at prices you find attractive.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility during the recent economic downturn. In some cases, the markets have produced
downward pressure on stock prices for certain issuers without regard to those issuers underlying financial strength. As a result, the trading volume in our common stock could fluctuate more than usual and cause significant price variations to
occur. This could make it difficult for you to resell shares of our common stock at times or at prices you find attractive.
The trading price of the shares of our common stock will depend on many factors that could change from time to time and could be beyond
our control. Among the factors that could affect our stock price are those identified in the section entitled Special Cautionary Note Regarding Forward-Looking Statements and as follows:
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actual or anticipated quarterly fluctuations in our operating results and financial condition;
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changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with
respect to our common stock or those of other financial institutions;
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failure to meet analysts revenue or earnings estimates;
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speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services
industry in general;
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strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;
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actions by our current stockholders, including sales of common stock by existing stockholders and/or directors and executive officers;
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fluctuations in the stock price and operating results of our competitors;
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proposed or adopted regulatory changes or developments;
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anticipated or pending investigations, proceedings or litigation that involve or affect us;
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trading activities in our common stock, including short-selling;
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domestic and local economic factors unrelated to our performance; and
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general market conditions and, in particular, developments related to market conditions for the financial services industry.
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A significant decline in our stock price could result in substantial losses for individual
stockholders and could lead to costly and disruptive securities litigation.
The trading volume in our common stock has
been low, and the sale of a substantial number of shares of our common stock in the public market could depress the price of our common stock and make it difficult for you to sell your shares.
Our common stock is listed to trade on the Nasdaq Capital Market, but is thinly traded. As a result, you may not be able to sell your
shares of common stock on short notice. Additionally, thinly traded stock can be more volatile than stock trading in an active public market. The sale of a substantial number of shares of our common stock at one time could temporarily depress the
market price of our common stock, making it difficult for you to sell your shares and impairing our ability to raise capital.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We are required by regulatory agencies to maintain adequate levels of capital to support our operations and such
levels could be increased by legislative and regulatory developments. Our ability to raise additional capital, if needed, is significantly limited under the Merger Agreement and also depend in part on conditions in the capital markets at that time,
which are outside our control. We are limited under the Merger Agreement from, without the prior written consent of Customers, incurring indebtedness in excess of $100,000 except in the ordinary course of business and from issuing additional shares
of CMS Bancorp common stock or other securities. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our financial position could deteriorate, which
could impact the Merger.