Cms Bancorp, Inc. - Quarterly Report of Financial Condition (10QSB)

Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-QSB

 

 

(Mark One)

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

For the quarterly period ended June 30, 2008

OR

 

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

For the transition period from              To             

Commission File Number 001-33322

 

 

CMS Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		20-8137247
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

123 Main Street, White Plains, New York 10601

(Address of principal executive offices) (Zip Code)

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

 

 

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

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

As of August 11, 2008 there were 1,887,459 shares of the registrant’s common stock, par value $.01 per share, outstanding.

Traditional Small Business Disclosure.    Yes   ¨     No   x

 

 

 

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CMS Bancorp, Inc.

INDEX

 

				Page Number
Part I - FINANCIAL INFORMATION
Item 1:		Financial Statements
		Consolidated Statements of Financial Condition At June 30, 2008 and September 30, 2007 (Unaudited)		3
		Consolidated Statements of Operations for the Three Months And Nine Months Ended June 30, 2008 and 2007 (Unaudited)		4
		Consolidated Statements of Comprehensive Loss for the Three Months And Nine Months Ended June 30, 2008 and 2007 (Unaudited)		5
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2008 and 2007 (Unaudited)		6
		Notes to Consolidated Financial Statements (Unaudited)		7
Item 2:		Management’s Discussion and Analysis Or Plan of Operation		11
Item 3:		Controls and Procedures		24
Part II - OTHER INFORMATION
Item 1:		Legal Proceedings		25
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 4:		Submission of Matters to a Vote of Security Holders		25
Item 6:		Exhibits		25
SIGNATURES				26

 

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Part I: Financial Information

Item 1. Financial Statements

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

		June 30, 2008				September 30, 2007
		(Dollars in thousands, except per share data)
ASSETS
Cash and amounts due from depository institutions		$	1,356			$	1,164
Interest-bearing deposits			1,306				3,276
Federal funds sold			510				13,100
Total cash and cash equivalents			3,172				17,540
Securities available for sale			10,452				2,116
Securities held to maturity, estimated fair value of $232 and $2,463, respectively			212				2,449
Loans receivable, net of allowance for loan losses of $384 and $269, respectively			163,367				146,701
Premises and equipment			2,037				1,326
Federal Home Loan Bank of New York stock			1,874				1,550
Interest receivable			724				795
Other assets			894				1,029
Total assets		$	182,732			$	173,506
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits		$	122,541			$	117,500
Securities sold under repurchase agreements			317				—
Advances from Federal Home Loan Bank of New York			34,901				30,000
Advance payments by borrowers for taxes and insurance			884				366
Other liabilities			1,408				1,286
Total liabilities			160,051				149,152
Stockholders’ equity
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding			—				—
Common stock, $.01 par value, 14,000,000 shares authorized, 2,055,165 shares issued; 1,928,459 (2008) and 2,055,165 (2007) shares outstanding, respectively			21				21
Additional paid in capital			18,656				18,535
Retained earnings			7,184				7,641
Treasury stock, 126,706 shares (2008)			(1,308	)			—
Unearned Employee Stock Ownership Plan (ESOP) shares			(1,576	)			(1,617	)
Accumulated other comprehensive (loss)			(296	)			(226	)
Total stockholders’ equity			22,681				24,354
Total liabilities and stockholders’ equity		$	182,732			$	173,506

See notes to consolidated financial statements.

 

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CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2008				2007				2008				2007
		(Dollars in thousands, except per share data)
Interest income
Loans		$	2,412			$	1,603			$	7,044			$	4,491
Securities			79				96				148				394
Federal funds sold			35				220				179				265
Other interest-earning assets			41				41				160				92
Total interest income			2,567				1,960				7,531				5,242
Interest expense
Deposits			714				712				2,209				1,930
Mortgage escrow funds			3				3				10				8
Borrowings			426				—				1,237				100
Total interest expense			1,143				715				3,456				2,038
Net interest income			1,424				1,245				4,075				3,204
Provision for loan losses			65				30				115				30
Net interest income after provision for loan losses			1,359				1,215				3,960				3,174
Non-interest income
Fees and service charges			73				63				205				204
Other			1				1				64				8
Total non-interest income			74				64				269				212
Non-interest expense
Salaries and employee benefits			943				696				2,593				1,969
Net occupancy			210				156				624				457
Equipment			132				109				362				332
Professional fees			169				75				558				201
Advertising			34				27				73				58
Federal insurance premium			3				3				10				10
Directors’ fees			40				30				134				91
Other insurance			11				16				46				60
Bank charges			18				16				55				48
Contributions			—				777				—				794
Other			132				80				396				187
Total non-interest expense			1,692				1,985				4,851				4,207
(Loss) before income taxes			(259	)			(706	)			(622	)			(821	)
Income tax (benefit) expense			(81	)			27				(165	)			(8	)
Net (loss)		$	(178	)		$	(733	)		$	(457	)		$	(813	)
Net (loss) per common share
Basic and diluted		$	(0.10	)		$	(0.39	)		$	(0.25	)		$	(0.43	)
Weighted average number of common shares outstanding
Basic and diluted			1,801,868				1,891,437				1,837,412				1,891,026

See notes to consolidated financial statements.

 

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CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(Unaudited)

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
Net (loss)		$	(178	)		$	(733	)		$	(457	)		$	(813	)
Other comprehensive income (loss) net of income taxes
Gross unrealized holding gain (loss) on securities available for sale			(130	)			6				(112	)			17
Amortization of prior service cost			(4	)			—				(4	)			—
Deferred income taxes			53				2				46				7
Other comprehensive income (loss)			(81	)			4				(70	)			10
Comprehensive (loss)		$	(259	)		$	(729	)		$	(527	)		$	(803	)

See notes to consolidated financial statements.

 

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CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended June 30,
		2008				2007
		(In thousands)
Cash flows from operating activities
Net (loss)		$	(457	)		$	(813	)
Adjustments to reconcile net (loss) to net cash provided by operating activities
Depreciation of premises and equipment			111				96
Amortization and accretion, net			27				56
Provision for loan losses			115				30
Deferred income taxes			84				(19	)
Stock contributed to The Community Mutual Charitable Foundation			—				714
ESOP expense			41				15
Stock based compensation expense			121				—
Decrease (increase) in interest receivable			71				(27	)
Decrease in other assets			96				389
Increase in accrued interest payable			47				177
Increase (decrease) in other liabilities			71				(117	)
Net cash provided by operating activities			327				501
Cash flows from investing activities
Proceeds from maturities of securities available for sale			2,046				—
Proceeds from maturities of securities held to maturity			2,200				11,500
Purchases of securities available for sale			(10,792	)			—
Principal repayments on securities available for sale			302				10
Principal repayments on securities held to maturity			37				25
Net (increase) in loans receivable			(16,811	)			(23,523	)
Additions to premises and equipment			(822	)			(662	)
(Purchase) redemption of Federal Home Loan Bank of N.Y. stock			(324	)			151
Net cash (used for) investing activities			(24,164	)			(12,499	)
Cash flows from financing activities
Net increase in deposits			5,041				6,762
Net increase in securities sold under repurchase agreements			317
Proceeds from issuance of common stock			—				18,657
Stock issued to ESOP			—				(1,644	)
Advances from Federal Home Loan Bank of N.Y.			5,000				—
Repayment of advances from Federal Home Loan Bank of N.Y.			(99	)			(4,204	)
Net increase in payments by borrowers for taxes and insurance			518				340
Purchase of treasury stock			(1,308	)			—
Net cash provided by financing activities			9,469				19,911
Net (decrease) increase in cash and cash equivalents			(14,368	)			7,913
Cash and cash equivalents - beginning			17,540				3,061
Cash and cash equivalents - ending		$	3,172			$	10,974
Supplemental information
Cash paid during the period for
Interest		$	3,409			$	1,861
Income taxes		$	—			$	9
Transfer of reorganization expenses to additional paid in capital		$	—			$	817

See notes to consolidated financial statements.

 

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CMS Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation, Reorganization and Initial Public Offering

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

On April 3, 2007, the Bank reorganized from a New York State-chartered mutual savings bank to a federally-chartered mutual savings bank and simultaneously converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank, with the concurrent formation of a stock holding company which conducted a subscription offering with depositors of the Bank receiving first priority in the offering. After the conversion and offering, all of the Bank’s stock is owned by the Company. In connection with the conversion and offering, the Company issued 2,055,165 shares of common stock, consisting of 164,413 shares to the ESOP, 71,415 shares to The Community Mutual Charitable Foundation (the “Foundation”) and 1,819,337 shares sold to the public at a purchase price of $10.00 per share. The net proceeds from the sale of shares to the public amounted to $16,196,000 ($18,193,000 of proceeds, net of reorganization expenses of $1,997,000). The management and business operations of the Bank continued unchanged after the conversion and offering.

2. Description of Operations

The Bank was originally chartered in 1887 as Community Savings and Loan, a New York State-chartered savings and loan association. In 1980, it converted to a New York State-chartered savings bank and changed its name to Community Mutual Savings Bank of Southern New York. In 1983, Community Mutual Savings Bank of Southern New York changed its name to Community Mutual Savings Bank.

The Bank is a community and customer oriented retail savings bank offering residential mortgage loans and traditional deposit products and, to a lesser extent, commercial real estate, small business and consumer loans in Westchester County, New York, and surrounding areas. The Bank currently retains substantially all of the loans that it originates. The Bank also invests in various types of assets, including securities of various government-sponsored enterprises and mortgage-backed securities.

The Bank’s revenues are derived principally from interest on loans, interest and dividends received from its investment securities and fees for bank services. The Bank’s primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by operations and borrowings from the Federal Home Loan Bank of New York.

3. Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three months and nine months ended June 30, 2008 are not necessarily indicative of the results which may be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended September 30, 2007 which are in the Company’s Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on December 28, 2007.

 

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4. Critical Accounting Policies

It is management’s opinion that accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the assessment of whether deferred taxes are more likely than not to be realized. Management believes that the allowance for loan losses represents its best estimate of losses known and inherent in the loan portfolio that are both probable and reasonable to estimate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in market and economic conditions in the Company’s market area. Management’s assessment as to the amount of deferred taxes more likely than not to be realized is based upon future taxable income, which is subject to revision upon updated information.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

5. Net (Loss) Per Share

Basic net loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding, adjusted for unearned shares of the ESOP. Stock options and restricted stock awards granted are considered common stock equivalents and are therefore considered in diluted net income (loss) per share calculations, if dilutive, using the treasury stock method.

6. Retirement Plans – Components of Net Periodic Pension Cost

The components of periodic pension expense were as follows:

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2008				2007				2008				2007
		(In thousands)
Service cost		$	26			$	23			$	78			$	69
Interest cost			51				40				156				120
Expected return on plan assets			(58	)			(42	)			(170	)			(127	)
Amortization of prior service cost			4				1				4				2
Amortization of unrecognized loss			—				8				—				26
Total		$	23			$	30			$	68			$	90

7. Stock Repurchase Program

On April 17, 2008, the Board of Directors of CMS Bancorp, Inc. approved a stock buy back plan that authorizes the Company to buy back as much as 98,647 shares of the outstanding stock of the Company over the next year. The buy back is being administered as a 10b5-1 plan by Stifel Nicolaus, the Company’s investment banker. Through June 30, 2008, 44,500 shares had been repurchased at an aggregate cost of $451,825, or $10.15 per share. Through August 6, 2008, 85,500 shares had been repurchased at an aggregate cost of $866,775, or $10.14 per shares and 13,147 shares remain to be purchased under the plan.

 

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8. Stock Based Compensation

The fair value of each stock option grant is established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions for options granted in November 2007: risk-free interest rate of 4.03%; volatility factor of expected market price of the Company’s common stock of 11.3%; weighted average expected lives of the options of 7 years; and no cash dividends. The calculated weighted average fair value of options granted using these assumptions was $2.73 per option. During the nine months ended June 30, 2008, the Company granted 152,154 options to purchase shares of the Company’s common stock at an exercise price of $10.12 per share. The Company recorded compensation expense of $21,000 and $48,000 during the three and nine months ended June 30, 2008, respectively.

The Company has a Management Recognition Plan (“MRP”). The shares awarded under the MRP vest over a five year service period on the anniversary of the grant date. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of the shares covered under the MRP. The Company recognizes compensation expense for the fair value of the shares covered by the MRP on a straight line basis over the requisite service period. As of June 30, 2008, 61,701 shares have been awarded under the MRP, all of which were non-vested. The Company recorded compensation expense of $31,000 and $73,000 during the three and nine months ended June 30, 2008, respectively.

9. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 will have a material impact on its consolidated financial position, results of operations and cash flows.

In February 2008, FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company does not expect the adoption of FSP 157-2 will have a material impact on its consolidated financial position, results of operations and cash flows.

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the fiscal years beginning after November 15, 2007, with the opportunity to early adopt SFAS No. 159 as of the beginning of a fiscal year that begins on or before November 15, 2007, as long as certain additional conditions are met. The Company does not believe that the adoption of SFAS No. 159 will have a material impact on its consolidated financial position, results of operations and cash flows.

Staff Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section D.2 of Topic 14, “ Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. The Company does not expect SAB 110 will have a material impact on its consolidated financial position, results of operations and cash flows.

 

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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

 

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Item 2. - Management’s Discussion and Analysis or Plan of Operation

Forward-Looking Statements

This Form 10-QSB contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and similar expressions that are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

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changes in the real estate market or local economy;

 

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changes in interest rates;

 

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changes in laws and regulations to which we are subject; and

 

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competition in our primary market area.

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

General

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

The Company’s net interest income may be affected by market interest rate changes. During portions of the last two years, increases in short-term interest rates without a corresponding increase in long-term interest rates, resulted in an increase in interest expense and reduction in net interest income. The effect of a flat or inverted interest rate yield curve did, and could in the future decrease the Company’s ability to reinvest proceeds from loan and investment repayments at higher interest rates. During portions of 2007 and 2008, the Company’s cost of funds increased faster than its yield on loans and investments, due to the longer-term nature of its interest-earning assets and the yield curve environment.

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

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

 

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Overview

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

Comparison of Financial Condition at June 30, 2008 to September 30, 2007

Total assets increased by $9.2 million, or 5.3%, to $182.7 million at June 30, 2008 from $173.5 million at September 30, 2007. Cash and cash equivalents, deposit growth and borrowing from the Federal Home Loan Bank of N.Y. (“FHLB”) were used to fund loan growth and purchase investments in securities.

In the nine months ended June 30, 2008, cash and cash equivalents declined by $14.4 million, or 81.9%, and were used to fund loan growth and investments in available for sale securities.

In the nine months ended June 30, 2008, securities available for sale increased by $8.3 million as maturities of held to maturity investments and Federal funds sold were invested in available for sale securities to improve the yield on these investments and provide for liquidity.

Loans receivable were $163.4 million and $146.7 million at June 30, 2008 and September 30, 2007, respectively, representing an increase of $16.7 million, or 11.4%. The increase in loans resulted principally from originations of one-to-four family mortgage loans, non-residential real estate loans, multi-family housing loans and residential construction loans. While the banking industry has seen increases in loan delinquencies and defaults over the past year, particularly in the subprime sector, the Company has not experienced losses in its loan portfolio due primarily to its conservative underwriting policies. As of June 30, 2008 and September 30, 2007, the Company had no non-performing loans and the allowance for loan losses was 0.23% and 0.18% of loans outstanding, respectively. There were no loans charged off or recoveries in the nine month period ended June 30, 2008 or 2007. Despite a weakening economy, there has been no material shift in the loan portfolio, delinquency levels, loss experience, or other factors affecting the Bank. Loans grew by $16.7 million during the nine months ended June 30, 2008 and as a result of loan growth and the deterioration of economic conditions in the Company’s primary market area, $115,000 was added to the allowance for loan losses.

Additions to premises and equipment related principally to the cost of the new Eastchester branch which opened in April 2008 and the new Greenburgh branch which is scheduled to open in September 2008.

Deposits increased by $5.0 million, or 4.3%, from $117.5 million as of September 30, 2007 to $122.6 million as of June 30, 2008. The increase in deposits resulted from offering more competitive interest rates on money market accounts and short term certificates of deposit, offset in part by decreases in savings balances as customers shifted savings into higher yielding certificates of deposit.

Borrowed money increased to $35.2 million as of June 30, 2008 from $30.0 million as of September 30, 2007 and was used to fund loan demand. The increase in advance payments by borrowers for taxes and insurance resulted from the seasonal aspect of customers making such deposits in advance of the payment of taxes and insurance.

Stockholders’ equity decreased from $24.4 million at September 30, 2007 to $22.7 million at June 30, 2008 as a result of the net loss incurred during the period and the purchase, by the plan’s independent trustee, of 82,206 shares of the Company’s common stock to fund the Management Recognition Plan (“MRP”), for $856,000 and the purchase of 44,500 shares of the Company’s common stock under the previously announced stock buy back program for $452,000.

 

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Comparison of Operating Results for the Three Months Ended June 30, 2008 and 2007

General. The Company incurred a net loss of $178,000 for the three months ended June 30, 2008, compared to a net loss of $733,000 for the three months ended June 30, 2007. The decrease in the net loss primarily reflects an increase in net interest income and a reduction in non-interest expenses. Non-interest expense declined in the three month period ended June 30, 2008 as compared to 2007 as a result of not having a contribution to the Community Mutual Charitable Foundation in the 2008 period, offset in part by increases in salaries and benefits and other operating expenses in the 2008 period.

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

 

		Three Months Ended June 30,
		2008										2007
		(Dollars in thousands)
		Average Balance			Interest				Yield/ Cost			Average Balance			Interest				Yield/ Cost
Interest-earning assets
Loans		$	160,683		$	2,412			6.00	%		$	108,932		$	1,603			5.89	%
Securities			7,090			79			4.46	%			9,368			96			4.10	%
Federal funds sold			6,774			35			2.07	%			16,736			220			5.26	%
Other interest-earning assets			3,430			41			4.78	%			3,121			41			5.25	%
Total interest-earning assets			177,977			2,567			5.77	%			138,157			1,960			5.67	%
Non interest-earning assets			4,999										3,791
Total assets		$	182,976									$	141,948
Interest-bearing liabilities
Demand deposits		$	11,958			60			2.01	%		$	7,079			65			3.67	%
Savings and club accounts			40,055			40			0.40	%			43,356			43			0.40	%
Certificates of deposit			59,482			614			4.13	%			51,071			604			4.73	%
Borrowed money			35,526			429			4.83	%			457			3			2.63	%
Total interest-bearing liabilities			147,021			1,143			3.11	%			101,963			715			2.80	%
Non interest-bearing deposits			11,721										15,040
Other liabilities			1,204										811
Total liabilities			159,946										117,814
Total stockholders’ equity			23,030										24,134
Total liabilities and stockholders’ equity		$	182,976									$	141,948
Interest rate spread					$	1,424			2.66	%					$	1,245			2.87	%
Net interest-earning assets/net interest margin		$	30,956						3.20	%		$	36,194						3.60	%
Ratio of interest earning assets to interest bearing liabilities						1.21	x									1.35	x

 

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Interest Income. Interest income increased $607,000, or 31.0%, to $2.6 million for the three months ended June 30, 2008 from $2.0 million for the three months ended June 30, 2007. The increase in interest income was due to an increase of $809,000 in interest income from loans offset by a $202,000 decrease in interest income from securities, Federal funds sold and other interest-earning assets.

Interest income from loans increased by $809,000, or 50.5%, to $2.4 million for the three months ended June 30, 2008 from $1.6 million for the three months ended June 30, 2007. The increase was due to a $51.8 million, or 47.5%, increase in the average balance of loans to $160.7 million in the three months ended June 30, 2008 from $108.9 million in the three months ended June 30, 2007 and an associated increase in the average yield to 6.00% from 5.89%, because additions to the loan portfolio were made at interest rates that were higher than the interest rate on the overall portfolio. The increase in average loan balances was principally from originations of conventional one-to-four-family residential mortgages, and to a lesser degree from originations of non-residential real estate loans, multi-family housing loans and residential construction loans. Higher loan volume contributed $772,000 of the $809,000 increase in interest income, while the higher interest rates contributed $37,000 of such increase.

Interest income from securities decreased by $17,000 to $79,000 for the three months ended June 30, 2008 from $96,000 for the three months ended June 30, 2007. The decrease in interest income from securities was due to maturities of U.S. Government Agency bonds which caused the average balance to decrease by $2.3 million in the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The impact of the bond maturities was partially offset by an increase in the average yield on securities to 4.46% for the quarter ended June 30, 2008 compared to 4.10% for the quarter ended June 30, 2007, as the result of maturities of bonds with lower yields and reinvestment of maturities in securities with higher yields. Interest income from Federal funds sold declined from $220,000 in the three months ended June 30, 2007 to $35,000 in the three months ended June 30, 2008 due to decreases in both the average balances invested and the Federal funds interest rates. Average balances invested declined from $16.7 million in the three months ended June 30, 2007 to $6.8 million in the comparable 2008 period and the average interest rate declined from 5.26% in the three months ended June 30, 2007 to 2.07% in the comparable 2008 period. Interest income from other interest-earning assets was $41,000 in the three months ended June 30, 2007 and 2008 as an increase in the average balances was offset by lower yields on those investments.

Interest Expense. Interest expense increased by $428,000, or 59.9%, to $1.1 million in the three month period ended June 30, 2008 compared to $715,000 in the comparable 2007 period. More competitive pricing of interest bearing demand deposit accounts resulted in an increase in the average balance of $4.9 million, from $7.1 million in the three months ended June 30, 2007 to $12.0 million in the comparable 2008 period, offset by a decrease in the average rate on interest bearing demand deposits from 3.67% in the three months ended June 30, 2007 to 2.01% in the comparable 2008 period. The decrease in the average rate on these deposits resulted from decreases in market interest rates following reductions in the Federal funds rate which was 5.25% as of June 30, 2007 and 2.00% as of June 30, 2008. Interest on savings and clubs declined by $3,000 as a result of the average balances declining from $43.4 million in the three months ended June 30, 2007 to $40.1 in the comparable 2008 period. More competitive market rates offered on certificates of deposit resulted in an increase in the average balance of $8.4 million, to $59.5 million for the quarter ended June 30, 2008. Overall declines in market interest rates reduced the average interest rate on these deposits from 4.73% in the quarter ended June 30, 2007 to 4.13% in the comparable 2008 period. Interest expense on certificates of deposit increased by $10,000 in the three months ended June 30, 2008 compared to the comparable 2007 period, with a $94,000 increase due to higher volume being offset by an $84,000 decrease due to interest rates. FHLB borrowings which were used to fund loan demand increased to $35.5 million in the quarter ended June 30, 2008 at an average interest rate on these borrowings of 4.83%.

 

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

 

		Three Months Ended June 30, 2008 Compared to 2007
		Volume				Rate				Net
		(In thousands)
Interest-earning assets
Loans receivable		$	772			$	37			$	809
Securities			13				(30	)			(17	)
Federal funds sold			(108	)			(77	)			(185	)
Other interest-earning assets			(1	)			1				—
Total interest-earning assets			676				(69	)			607
Interest bearing liabilities
Demand deposits			13				(18	)			(5	)
Savings and club accounts			(3	)			—				(3	)
Certificates of deposit			94				(84	)			10
Borrowed money			421				5				426
Total interest-bearing liabilities			525				(97	)			428
Net interest income		$	151			$	28			$	179

Net Interest Income. Net interest income increased $179,000, or 14.4%, to $1.4 million for the three months ended June 30, 2008 from $1.2 million for the three months ended June 30, 2007. Increases in both average interest-earning assets and the yield on those assets in the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 were offset by increases in the average deposit and borrowing balances, and an increase in the cost of interest-bearing liabilities.

The Federal funds rate increased throughout 2005 and 2006, to 5.25% in June 2006 and remained at that level until September 2007, at which time it began to decline. As of June 30, 2008, the Federal funds rate was 2.00%. The interest rate on 10-year Treasury notes, from which the Company generally prices conventional mortgages, remained relatively flat during the period when the Federal funds rate was increasing. The negative impact on net interest income of the flattening, and at times inverted interest rate yield curve was mitigated by reinvesting the proceeds of maturing lower yielding securities and other interest-earning assets into higher yielding loans, as well as diversifying the loan portfolio into higher yielding multi-family, non-residential, construction, home equity and commercial real estate loans. Increases in short-term interest rates without a corresponding increase in long-term interest rates have resulted, and may continue to result in an increase in interest expense and a reduction in net interest income in the future.

 

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Provision for Loan Losses. The allowance for loan losses was $384,000, or 0.23%, of gross loans outstanding at June 30, 2008 compared to $319,000, or 0.20%, of gross loans outstanding at March 31, 2008. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. Despite a weakening economy, there has been no material change in the delinquency levels, loss experience, or other factors affecting the Bank. The Bank had no charge offs or recoveries during the quarter ended June 30, 2008 Loans grew by $4.4 million during the quarter ended June 30, 2008, including additions in non-residential mortgages, and as a result of loan growth and the deterioration of economic conditions in the Company’s primary market area, $65,000 was added to the allowance for loan losses in the quarter ended June 30, 2008. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.

Non-interest Income. Non-interest income of $74,000 in the three months ended June 30, 2008 increased from $64,000 in the comparable 2007 period as a result of fees earned from originating loans for other lenders.

Non-interest Expenses. Non-interest expenses were $1.7 million and $2.0 million for the three months ended June 30, 2008 and 2007, respectively, representing a decrease of $293,000, or 14.8%. An increase of $247,000 during the three months ended June 30, 2008 in salaries and employee benefits resulted from additions to staff in the branches, in lending, compliance and operations, raises and incentive compensation, and higher benefit costs, including the cost of the employee stock ownership plan and stock based compensation. Higher net occupancy costs ($54,000) and equipment costs ($23,000) resulted principally from the lease on the new Eastchester branch location. Professional fees were $75,000 in the quarter ended June 30, 2007 and $169,000 in the quarter ended June 30, 2008. The increase resulted from the Compensation Committee’s engagement of outside compensation consultants and attorneys to review employment contracts and to a lesser degree, costs of documenting internal controls as required by the Sarbanes-Oxley Act. Contributions in the three month ended June 30, 2007 included the contribution to The Community Mutual Charitable Foundation which was made in conjunction with the public offering of the Company’s common stock. There was no contribution to the Foundation in the three months ended June 30, 2008. Other non-interest expense increased by $52,000 principally as a result of costs associated with operating as a public company.

Income Tax Expense (Benefit). The income tax benefit was $81,000 in the three month period ended June 30, 2008 compared to an expense of $27,000 in the comparable 2007 period. The tax provision (benefit) is recorded based on pretax income (loss), at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The effective tax rate in the three month periods ended June 30, 2008 and 2007 was different than the statutory rate as a result of providing for New York State minimum taxes. The tax (benefit) expense in the three months ended June 30, 2007 was different than the benefit which would be expected from applying the statutory rate because deductions for contributions are limited to 10% of pre-tax income before the contribution and any unused charitable contribution can be carried forward for five years. The ability to realize sufficient future profits to utilize the contribution carryforward cannot be assured and as a result, the tax benefit of the contribution carryforward was not recognized by the Company by providing for a valuation allowance.

 

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Comparison of Operating Results for the Nine Months Ended June 30, 2008 and 2007

General. The Company incurred a net loss of $457,000 for the nine months ended June 30, 2008, compared to a net loss of $813,000 for the nine months ended June 30, 2007. The decrease in the net loss primarily reflects an increase in net interest income, offset by an increase in non-interest expenses. Non-interest expense increased in the nine month period ended June 30, 2008 as compared to the comparable 2007 period as a result of higher salaries and benefits, higher occupancy costs and professional fees, partially offset by the fact that there was no contribution to the Community Mutual Charitable Foundation in the 2008 period.

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

 

		Nine Months Ended June 30,
		2008										2007
		(Dollars in thousands)
		Average Balance			Interest				Yield/ Cost			Average Balance			Interest				Yield/ Cost
Loans		$	156,469		$	7,044			6.00	%		$	102,982		$	4,491			5.81	%
Securities			4,481			148			4.40	%			14,367			394			3.66	%
Federal funds sold			6,880			179			3.47	%			6,735			265			5.25	%
Other interest-earning assets			4,766			160			4.48	%			2,434			92			5.04	%
Total interest-earning assets			172,596			7,531			5.82	%			126,518			5,242			5.52	%
Non interest-earning assets			4,034										4,640
Total assets		$	176,630									$	131,158
Interest-bearing liabilities
Demand deposits		$	10,550			233			2.94	%		$	5,995			160			3.56	%
Savings and club accounts			40,666			121			0.40	%			45,225			135			0.40	%
Certificates of deposit			56,007			1,855			4.42	%			50,620			1,635			4.31	%
Borrowed money			34,015			1,247			4.89	%			2,840			108			5.07	%
Total interest-bearing liabilities			141,238			3,456			3.26	%			104,680			2,038			2.60	%
Non interest-bearing deposits			10,827										12,346
Other liabilities			965										553
Total liabilities			153,030										117,579
Total stockholders’ equity			23,600										13,579
Total liabilities and stockholders’ equity		$	176,630									$	131,158
Interest rate spread					$	4,075			2.56	%					$	3,204			2.93	%
Net interest-earning assets/net interest margin		$	31,358						3.15	%		$	21,838						3.38	%
Ratio of interest earning assets to interest bearing liabilities						1.22	x									1.21	x

 

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Interest Income. Interest income increased $2.3 million, or 43.7%, to $7.5 million for the nine months ended June 30, 2008 from $5.2 million for the nine months ended June 30, 2007. The increase in interest income was due to increases of $2.6 million in interest income from loans, offset by a decrease of $264,000 in interest income from securities, Federal funds sold and other interest-earning assets.

Interest income from loans increased by $2.6 million, or 56.8%, to $7.0 million for the nine months ended June 30, 2008 from $4.5 million for the nine months ended June 30, 2007. The increase was due to a $53.5 million, or 51.9%, increase in the average balance of loans to $156.5 million in the nine months ended June 30, 2008 from $103.0 million in the nine months ended June 30, 2007 and an increase in the associated average yields to 6.00% for the 2008 period from 5.81% for the 2007 period, as additions to the loan portfolio were made at interest rates that were higher than the interest rate on the overall portfolio. The $53.5 million increase in average loan balances in the nine months ended June 30, 2008 was principally from originations of conventional one-to-four-family residential mortgages, and to a lesser degree from originations and higher usage of home equity lines, originations of non-residential real estate loans, multi-family housing loans and residential construction loans. Higher loan volume contributed $2.4 million of the $2.6 million increase in interest income from loans, while the higher interest rates contributed $151,000 of such increase.

Interest income from securities decreased by $246,000 to $148,000 for the nine months ended June 30, 2008 from $394,000 for the nine months ended June 30, 2007. The decrease in interest income from securities was due to maturities of U.S. Government Agency bonds which caused the average balance to decrease by $10.0 million in the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007. The impact of the bond maturities was partially offset by an increase in the average yield on securities to 4.40% for the nine months ended June 30, 2008 compared to 3.66% for the nine months ended June 30, 2007, as the result of maturities of bonds with lower yields and reinvestment of maturities into securities with higher yields. Interest income on Federal funds sold decreased by $86,000 to $179,000 in the nine month period ended June 30, 2008 from $265,000 in the comparable 2007 period as a result of lower average balances invested and lower interest rates earned. Interest income on other interest-earning assets increased by $68,000 to $160,000 in the nine month period ended June 30, 2008 from $92,000 in the comparable 2007 period as a result of higher average balances invested, offset by lower interest rates earned.

Interest Expense. Interest expense increased by $1.4 million, or 69.6%, to $3.4 million in the nine month period ended June 30, 2008 compared to $2.0 million in the comparable 2007 period. More competitive pricing of interest bearing demand deposit accounts resulted in an increase in the average balance of $4.6 million, from $6.0 million in the nine months ended June 30, 2007 to $10.6 million in the comparable 2008 period, offset by a decrease in the average rate on interest bearing demand deposits from 3.56% in the nine months ended June 30, 2007 to 2.94% in the comparable 2008 period. The decrease in the average rate on these deposits resulted from decreases in market interest rates following reductions in the Federal funds rate, which was 5.25% as of June 30, 2007 and 2.00% as of June 30, 2008. Interest on savings and clubs declined by $14,000 as a result of the average balances declining from $45.2 million in the nine months ended June 30, 2007 to $40.7 in the comparable 2008 period. More competitive market rates offered on certificates of deposit resulted in an increase in the average balance of $5.4 million, to $56.0 million for the nine months ended June 30, 2008. Interest expense on certificates of deposit increased by $220,000 in the nine months ended June 30, 2008 compared to 2007, with an $83,000 increase due to higher volume and a $127,000 increase due to higher interest rates. The average balance of borrowed money, which was used to fund loan demand, increased to $34.0 million in the nine months ended June 30, 2008 compared to $2.8 million in the comparable 2007 period, at an average interest rate on these borrowings of 4.89% in the nine months ended June 30, 2008 compared to 5.07% in the comparable 2007 period.

 

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

 

		Nine Months Ended June 30, 2008 Compared to 2007
		Volume				Rate				Net
		(In thousands)
Interest-earning assets
Loans receivable		$	2,402			$	151			$	2,553
Securities			(272	)			26				(246	)
Federal funds sold			2				(88	)			(86	)
Other interest-earning assets			73				(5	)			68
Total interest-earning assets			2,205				84				2,289
Interest bearing liabilities
Demand deposits			90				(17	)			73
Savings and club accounts			(14	)			—				(14	)
Certificates of deposit			177				43				220
Borrowed money			1,140				(1	)			1,139
Total interest-bearing liabilities			1,393				25				1,418
Net interest income		$	812			$	59			$	871

Net Interest Income. Net interest income increased $871,000, or 27.2%, to $4.1 million for the nine months ended June 30, 2008 from $3.2 million for the nine months ended June 30, 2007. Increases in both average interest-earning assets and the yield on those assets in the nine months ended June 30, 2008 as compared to 2007 were offset by increases in the cost of interest-bearing liabilities and increases in average demand deposit, certificate of deposit and borrowing balances. The average rate on deposit liabilities rose in response to local market conditions and from the change in the composition of deposits in 2008 from savings to certificates of deposit.

Provision for Loan Losses. The allowance for loan losses was $384,000, or 0.23%, of gross loans outstanding at June 30, 2008 compared to $269,000, or 0.18%, of gross loans outstanding at September 30, 2007. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. Despite a weakening economy, there has been no material change in the delinquency levels, loss experience, or other factors affecting the Bank. Loans grew by $16.7 million during the nine months ended June 30, 2008, including additions in non-residential mortgages and multifamily construction mortgages, and, as a result of loan growth and the deterioration of economic conditions in the Company’s primary market area, $115,000 was added to the allowance for loan losses in the nine month period ended June 30, 2008. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.

 

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Non-interest Income. Non-interest income of $269,000 in the nine months ended June 30, 2008 was higher than the comparable 2007 amount of $212,000 as a result of fees earned from referring a loan which was outside the Bank’s lending parameters to another lender and loans originated for other lenders.

Non-interest Expenses. Non-interest expenses were $4.9 million and $4.2 million for the nine months ended June 30, 2008 and 2007, respectively, representing an increase of $644,000, or 15.3%. Higher salaries and benefits ($624,000) resulted from additions to staff in branches, lending, compliance and operations, as well as raises and incentive compensation, and higher benefit costs, including the cost of the employee stock ownership plan and stock based compensation. Higher net occupancy costs ($167,000) and equipment costs ($30,000) resulted principally from the lease on the new Eastchester branch location. Professional fees were $558,000 in the nine months ended June 30, 2008 and $201,000 in the nine months ended June 30, 2007. The increase resulted from costs associated with the proxy statements and the special shareholders meeting and annual shareholders’ meeting, the cost of preparing and filing the first annual report and Form 10-KSB and the cost of the Registration Statement on Form S-8 for the stock option and management recognition programs and other costs associated with operating as a public company. In addition, professional fees were higher due to the Compensation Committee’s engagement of outside compensation consultants and attorneys to review employment contracts and to a lesser degree, costs of documenting internal controls as required by the Sarbanes-Oxley Act. Director’s fees increased by $43,000 in the nine months ended June 30, 2008 as a result of additional board and committee meetings and stock based compensation. Other non-interest expense increased by $209,000 in the nine months ended June 30, 2008 principally as a result of costs associated with operating as a public company.

Contributions in the nine month ended June 30, 2007 included the contribution to The Community Mutual charitable Foundation which was made in conjunction with the public offering of the Company’s common stock. No such contributions were made in the comparable 2008 period. Other non-interest expense includes the cost of proxy solicitation and printing the proxy statement, franchise taxes and other costs associated with operating as a public company.

Income Tax Expense (Benefit). The income tax benefit was $165,000 in the nine month period ended June 30, 2008 compared to $8,000 in the comparable 2007 period. The tax provision (benefit) is recorded based on pretax income (loss), at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The effective tax rate in the nine month periods ended June 30, 2008 and 2007 was different than the statutory rate as a result of providing for New York State minimum taxes. The tax benefit in the nine months ended June 30, 2007 was different than the benefit which would be expected from applying the statutory rate because deductions for contributions are limited to 10% of pre-tax income before the contribution and any unused charitable contribution can be carried forward for five years. The ability to realize sufficient future profits to utilize the contribution carryforward cannot be assured and as a result, the tax benefit of the contribution carryforward was not recognized by the Company by providing for a valuation allowance.

Management of Market Risk

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

The primary goals of the Company’s interest rate management strategy are to determine the appropriate level of risk given the business strategy and then manage that risk so as to reduce the exposure of the Company’s net interest income to fluctuations in interest rates. Historically, the Company’s lending activities have been dominated by one- to four-family real estate mortgage loans. The primary source of funds has been deposits and FHLB borrowings which have substantially shorter terms to maturity than the loan portfolio, and as a result, the Company has employed certain

 

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strategies to manage the interest rate risk inherent in the asset/liability mix, including but not limited to limiting terms of fixed rate one- to four-family mortgage loan originations which are retained in the Company’s portfolio, emphasizing investments with short- and intermediate-term maturities of less than five years and borrowing term funds from FHLB.

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

Net Interest Income at Risk

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

The table below sets forth the changes in net interest income, as of March 31, 2008, the latest information available, that would result from various basis point changes in interest rates over a twelve-month period.

 

Change in Interest Rates In Basis Points (Rate Shock)		Net Interest Income
		Amount			Dollar Change				Percent Change
		(Dollars in Thousands)
300		$	5,390		$	(218	)		-3.9	%
200			5,467			(141	)		-2.5	%
100			5,543			(65	)		-1.2	%
0			5,608			—			0.0	%
-100			5,646			38			0.7	%
-200			5,612			4			0.1	%

Liquidity and Capital Resources

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

The Company’s primary sources of funds are deposits, brokered certificates of deposit, amortization and prepayments of loans, FHLB advances and loans, maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition. The Company’s liquidity, represented by cash and cash equivalents and investment securities, is a product of its operating, investing and financing activities. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as Federal funds and other interest-earning assets. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB which provide an additional source of funds. At June 30, 2008, the Company had $35.2 million of borrowed money.

 

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In the nine months ended June 30, 2008, net cash provided by operating activities was $327,000, compared to $501,000 in the comparable 2007 period. In the nine months ended June 30, 2008, the net loss of $457,000 was offset by non-cash expenses of $499,000.

In the nine months ended June 30, 2008, investing activities used $24.2 million of cash, compared to $12.5 million in the 2007 period. In the nine months ended June 30, 2008, net investments in securities used $6.5 million of cash, loan growth used $16.8 million of cash and additions to premises and equipment used $822,000 of cash. In the nine months ended June 30, 2007, maturities of U.S. Government bonds provided cash of $11.5 million and loan growth used $23.5 million.

Net cash provided by financing activities was $9.5 million and $19.9 million in the nine month periods ended June 30, 2008 and 2007, respectively. In the 2008 period, increases in deposits provided $5.0 million of cash and borrowings from FHLB provided $5.0 million of cash, while purchases of stock under the buyback program and to fund the management recognition plan used $1.3 million of cash. In the 2007 period, higher deposits provided cash of $6.8 million, and net proceeds from the sale of common stock of the Company provided cash of $16.2 million while repayment of FHLB borrowing used $4.2 million of cash.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of June 30, 2008, the Company had cash and cash equivalents of $3.2 million and securities of $10.7 million. At June 30, 2008, the Company has outstanding commitments to originate loans of $10.0 million and $8.9 million of undisbursed funds from approved lines of credit, principally under a homeowners’ equity line of credit lending program. Certificates of deposit scheduled to mature in one year or less at June 30, 2008, totaled $53.6 million. Management believes that, based upon its experience and the Company’s deposit flow history, a significant portion of such deposits will remain with the Company.

During the nine months ended June 30, 2008, an independent trustee purchased 82,206 shares of the Company’s common stock to fund the Management Recognition Plan, for $856,000 and are included in treasury stock at June 30, 2008.

On April 17, 2008, the Company’s Board of Directors approved a stock buy back plan that authorizes the Company to buy back up to 98,647 shares of the outstanding stock of the Company over the next year. The buy back is being administered as a 10b5-1 plan by Stifel Nicolaus, the Company’s investment banker. Through June 30, 2008, 44,500 shares of the Company’s common stock had been repurchased at an average price of $10.15 per share. Through August 11, 2008, 85,500 shares of the Company’s common stock had been repurchased at an average price of $10.14 per share and 13,147 shares remain to be purchased under the original authorization. The Company had an unused overnight line of credit and an unused one month overnight repricing line of credit commitment with the Federal Home Loan Bank of New York totaling $18.6 million, which expire on July 31, 2009.

 

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The following table sets forth the Bank’s capital position at June 30, 2008, compared to the minimum regulatory capital requirements:

 

		Actual						For Capital Adequacy Purposes						To be Well Capitalized under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
		(Dollars in Thousands)
Total capital (to risk-weighted assets)		$	15,681		16.77	%		$	³ 7,482		³ 8.00	%		$	³ 9,352		³ 10.00	%
Core (Tier 1) capital (to risk-weighted assets)			15,297		16.36				—		—				³ 5,611		³ 6.00
Core (Tier 1) capital (to total assets)			15,297		8.46				³ 7,248		³ 4.00				³ 9,044		³ 5.00
Tangible capital (to total assets)			15,297		8.46				³ 2,713		³ 1.50				—		—

Off-Balance Sheet Arrangements

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

 

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Item 3.

Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is (i) recorded, processed, summarized and reported and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II: Other Information

 

Item 1.

Legal Proceedings

Community Mutual Savings Bank has been named as a defendant in a lawsuit brought by two former employees, filed on August 2, 2007 in the United States District Court, Southern District of New York. The plaintiffs claim the Bank violated sections of Title VII of the Civil Rights Act of 1964, the New York State Human Rights Law, the New York Executive Law, the Age Discrimination in Employment Act of 1967 and the Fair Labor Relations Act. The plaintiffs are seeking compensatory and punitive damages, liquidated damages, overtime compensation and fees and costs totaling $3.75 million. The plaintiffs previously filed a complaint with the Equal Employment Opportunity Commission (the “EEOC”) and the EEOC returned a “no-cause” determination in the Bank’s favor on April 27, 2007. At this time, management does not believe that the resolution of this action will have a material effect on the consolidated financial statements of the Company.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table reports information regarding repurchases by the Company of its common stock in each month of the quarter ended June 30, 2008:

 

Period		Total number of shares purchased		Average price paid per share			Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs
April 1 through April 30		-0-			-0-		-0-		98,647
May 1 through May 31		22,000		$	10.05		22,000		76,617
June 1 through June 30		22,500		$	10.25		22,500		54,147
Total		44,500		$	10.15		44,500		54,147

 

Item 6.

Exhibits

The following Exhibits are filed as part of this report.

 

Exhibit No.		Description
10.1		Amended and Restated Employment Agreement between Registrant and Mr. Ritacco was filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated July 31, 2008 and is incorporated by reference.
10.2		Amended and Restated Employment Agreement between the Bank and Mr. Ritacco was filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated July 31, 2008 and is incorporated by reference
31.1		Rule 13a-14(a)/15d-14(a) Certification of principal executive officer.
31.2		Rule 13a-14(a)/15d-14(a) Certification of principal financial officer.
32.1		Section 1350 Certification of principal executive officer.
32.2		Section 1350 Certification of principal financial officer.

 

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SIGNATURES

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

 

				CMS Bancorp, Inc
Date: August 13, 2008				/s/ JOHN RITACCO
				John Ritacco
				President and Chief Executive Officer
Date: August 13, 2008				/s/ STEPHEN DOWD
				Stephen Dowd
				Chief Financial Officer

 

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