ITEM 1. DESCRIPTION OF BUSINESS
General
CMS Bancorp, Inc. (“CMS Bancorp”) is a Delaware corporation that completed its initial public offering on April 3, 2007 in connection with the reorganization of Community Mutual Savings Bank (“Community Mutual”) from a New York state-chartered mutual savings bank into a federal stock savings bank form of organization. Community Mutual is a wholly-owned subsidiary of CMS Bancorp. CMS Bancorp’s common stock is listed on the Nasdaq Capital Market under the symbol “CMSB.”
CMS Bancorp’s principal business is its investment in Community Mutual. CMS Bancorp is headquartered in White Plains, New York and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) and by the Deposit Insurance Fund (“DIF”) up to the applicable legal limits. As a federal stock savings bank, Community Mutual is currently regulated, supervised and examined by the Office of Thrift Supervision (the “OTS”). Community Mutual 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. Community Mutual’s principal business is accepting deposits from the general public and using those deposits to make residential loans, as well as, to a lesser extent, commercial real estate loans and consumer loans to individuals and small businesses primarily in Westchester County and the neighboring areas in New York State. Community Mutual also currently invests 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 Community Mutual for the fiscal year ended September 30, 2010.
At September 30, 2010, total assets were $247.4 million, deposits were $188.3 million and total stockholders’ equity was $21.8 million.
Business Strategy
The mission of CMS Bancorp is to operate and grow Community Mutual as a profitable community-oriented financial institution serving primarily individual customers and small businesses through retail operations in our market area. CMS Bancorp and Community Mutual believe that this business strategy is best for our long-term success and viability, and complements our existing commitment to high quality customer service. In connection with Community Mutual’s overall growth strategy, it seeks 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 Community Mutual serves.
Under its current management team, CMS Bancorp and Community Mutual are committed to making Community Mutual’s 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
Community Mutual’s primary market area is Westchester County, New York, a northern suburb of New York City. Community Mutual 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 West Harrison, 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 2008, Westchester continues to be one of the state’s wealthiest counties, with a population of approximately 950,000 and an estimated per capita personal income of $77,192. Westchester County is the headquarters location of more than 170 businesses, including household names like Pepsico, Inc. and IBM Corporation. While current economic conditions, including but not limited to unemployment and declines in home values have had a negative impact on the local economy, these factors have not had a significant negative impact on Community Mutual to date.
Competition
Community Mutual 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 Community Mutual does not offer. For example, Community Mutual does not provide trust or investment services or credit cards. Therefore, customers who seek “one-stop shopping” may be drawn to Community Mutual’s competitors for their depth of product offerings. Community Mutual 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
OTS 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 OTS regulations also require Community Mutual 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 OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Community Mutual 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. Community Mutual has established and implemented these required policies regarding its real estate lending activities.
Loan Portfolio Composition. Community Mutual has a long standing commitment of originating residential loans and, in recent years, multi-family, non-residential and commercial loans. In late 2008, Community Mutual
began to sell most of its one-to-four-family loan originations to the secondary market. In the years ended September 30, 2010 and 2009, Community Mutual originated $16.9 million and $12.5 million of loans for resale. At September 30, 2010, Community Mutual had total loans of $179.4 million, of which $123.1 million, or 68.6%, were one-to-four-family residential mortgages. Of the one-to-four-family residential mortgage loans outstanding at September 30, 2010, 86.6% were fixed-rate loans and 13.4% were adjustable-rate mortgage loans. Community Mutual’s residential loan origination activity is primarily concentrated in Westchester County, New York. At September 30, 2010, 69.8% of the dollar amount of its residential loan portfolio consisted of loans secured by property located in Westchester County, 17.0% 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 13.2% 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.
Community Mutual 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, 2010, Community Mutual had $55.9 million, or 31.2% of total loans, in these loan categories.
As of September 30, 2010, non-real estate consumer loans comprised $386,000, or 0.2%, of Community Mutual’s loan portfolio.
The following table sets forth the composition of Community Mutual’s mortgage and other loan portfolios in dollar amounts and in percentages at the dates indicated.
Loan Maturity. The following tables present the contractual maturity of Community Mutual’s loans, the aggregate dollar amounts of the loans, and whether these loans had fixed or adjustable interest rates at September 30, 2010. The table does not include the effect of prepayments or scheduled principal amortization.
The following table presents Community Mutual’s loan originations, purchases, sales and principal repayments for the periods indicated.
Residential Mortgage Lending. Community Mutual 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, Community Mutual began to sell or refer most of its one-to-four-family loan originations to the secondary market, which resulted in realized gains of $361,000 and $270,000 in the years ended September 30, 2010 and 2009, respectively. In the years ended September 30, 2010 and 2009, Community Mutual originated $16.9 million and $12.5 million of loans for resale. As of September 30, 2010, loans on one-to-four-family residential properties accounted for $123.1 million, or 68.6%, of Community Mutual’s total loan portfolio. Of residential mortgage loan balances outstanding on that date, 86.6% were fixed rate loans and 13.4% were adjustable-rate loans.
Most of Community Mutual’s loan originations are from existing or past customers, members of its local communities or referrals from local real estate agents, attorneys, brokers and builders. Community Mutual believes that its retail banking offices are a significant source of new loan generation.
Community Mutual’s 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 Community Mutual customarily contain “due-on-sale” clauses, which permit Community Mutual to accelerate the indebtedness of the loan upon transfer of ownership of the mortgage property.
Community Mutual offers conventional mortgage loans for terms of up to 30 years using standard documents. Community Mutual 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.
Community Mutual also offers adjustable-rate mortgage loans with a maximum term of 30 years. Adjustable-rate loans offered by Community Mutual 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, Community Mutual 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.
Community Mutual’s 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 Community Mutual’s 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.
During the year ended September 30, 2010, Community Mutual originated $1.0 million in adjustable-rate mortgage loans and $3.6 million in fixed-rate loans. Community Mutual does not conduct any sub-prime residential mortgage lending activities.
Multi-family Loans. Community Mutual 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 5.1% of total loans at September 30, 2010.
Construction Loans. Community Mutual 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 Community Mutual or another lender. For these types of loans, Community Mutual generally obtains the personal guarantee of the builder. Construction real estate loans represented 0.4% of total loans at September 30, 2010.
Home Equity Loans and Lines of Credit. Community Mutual offers home equity loans and lines of credit that are secured by the borrower’s primary residence. Community Mutual’s 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. Community Mutual’s 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 Community Mutual 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 Community Mutual 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, 2010, the outstanding balances of home equity loans and lines of credit totaled $9.5 million, or 5.3% of its loan portfolio. Of these loans, $6.1 million had adjustable rates of interest and $3.4 million were at fixed interest rates.
Non-Residential Real Estate Loans. In underwriting non-residential real estate loans, consideration is given to the property’s historic and projected future cash flow, current and projected occupancy, location and physical condition. At September 30, 2010, Community Mutual’s non-residential real estate loan portfolio consisted of 21 loans totaling $22.3 million, or 12.4% of total loans. The non-residential real estate portfolio consists of loans that are collateralized by properties in Community Mutual’s normal lending area. Community Mutual 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 with 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. Community Mutual’s 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, Community Mutual also engages in small business commercial lending, including business installment loans, lines of credit and other commercial loans. At September 30, 2010, Community Mutual’s commercial loan portfolio consisted of 39 loans, totaling $14.3 million.
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, Community Mutual 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. Community Mutual 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. Community Mutual 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, 2010, the consumer loan portfolio totaled $386,000, or 0.2%, 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. Community Mutual expects consumer lending to be an area of gradual lending growth, with installment loans continuing 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, Community Mutual’s level of consumer loan delinquencies generally has been low. No assurance can be given, however, that Community Mutual’s delinquency rate on consumer loans will continue to remain low in the future, or that Community Mutual will not incur future losses on these activities.
Loan Approval Procedures and Authority. Community Mutual’s lending policies provide that the maximum mortgage amount is 90% of the Community Mutual’s legal lending limit ($2.9 million for loans not secured by readily marketable collateral as of September 30, 2010), with minimum mortgage amounts generally limited to $100,000. Once Community Mutual receives a completed application, depending upon the size of the requested loan and its conformity with 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 bank directors and officers); or the Board of Directors for approval.
The following describes Community Mutual’s current lending procedures. Upon receipt of a completed loan application from a prospective borrower, Community Mutual orders a credit report, verifies certain other information, and obtains additional financial or credit related information. Community Mutual 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 Community Mutual’s management, Loan Committee and Board of Directors. Community Mutual requires title insurance on all mortgage loans. Community Mutual 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 Community Mutual makes disbursements for items such as real estate taxes, flood insurance, and private mortgage insurance premiums, as required.
Asset Quality. One of Community Mutual’s 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, Community Mutual has been proactive in addressing problem and non-performing assets. These strategies, as well as Community Mutual’s 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 Community Mutual’s financial condition.
At September 30, 2010, the Company had one-to-four family mortgage loans in the amount of $2.4 million or 1.36% of total loans that were considered to be impaired. Interest income recorded on impaired loans during the year ended September 30, 2010 was $43,000 and had all such loans been performing in accordance with their original terms, additional interest income of $105,000 would have been recognized.
Delinquent Loans and Foreclosures. When a borrower fails to make required payments on a loan, Community Mutual 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, Community Mutual’s 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. Community Mutual 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, Community Mutual offers various workout options to assist the borrower in bringing the loan current. It has been Community Mutual’s 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 Community Mutual’s 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, Community Mutual 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, Community Mutual seeks 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, Community Mutual 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.
Community Mutual’s 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 Community Mutual’s 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.
Community Mutual 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. Community Mutual designates loans on which it stops accruing income as non-accrual loans and it reverses outstanding interest that it previously credited. Community Mutual may recognize income in the period that Community Mutual collects it, when the ultimate collectibility of principal is no longer in doubt. Community Mutual 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 loan’s carrying value is not in excess of the fair value of the collateral or the present value of the loan’s cash flows. Loans which are not impaired are collectively evaluated for reserve purposes. Community Mutual had 9 and 7 loans totaling $2.4 million and $1.7 million at September 30, 2010 and 2009, respectively, which were classified as substandard, placed on non-accrual status and which were in various stages of foreclosure.
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. Community Mutual had no foreclosed real estate at September 30, 2010 or 2009.
Allowance for Loan Losses. The following table sets forth activity in Community Mutual’s allowance for loan losses and other ratios at or for the dates indicated.
The allowance for loan losses is a valuation account that reflects Community Mutual’s evaluation of the losses inherent in its loan portfolio. Community Mutual maintains the allowance through provisions for loan losses that it charges to income. Community Mutual charges losses on loans against the allowance for loan losses when it believes that the collection of loan principal is unlikely.
The allowance for loan losses was $1.1 million, or 0.62%, of gross loans outstanding at September 30, 2010 compared to $749,000, or 0.44%, of gross loans outstanding at September 30, 2009. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other
factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. As of September 30, 2010 and 2009, Community Mutual had $2.4 million and $1.7 million of non-accruing loans, substantially all of which are in process of foreclosure and are considered impaired. In addition, $523,000 of residential mortgage loans and $2,000 of student loans were 90 days or more delinquent, but still accruing interest. These loans had not been placed on nonaccrual status because of payment or finalization of loan modification shortly after September 30, 2010 in the case of the residential mortgages and because of guarantees by New York State in the case of the student loans. The increase in impaired loans resulted from general economic conditions, increased unemployment and the declines in the local real estate market. As of September 30, 2010 and 2009, the allowance for loan losses was 0.62% and 0.44% of loans outstanding, respectively. There were $3,000 of loans charged off in the year ended September 30, 2010 and $2,000 and $3,000 of recoveries in the years ended September 30, 2010 and 2009 respectively. Despite a weak economy nationally as well as in our primary market area, there was no material shift in the loan portfolio, loss experience, or other factors affecting Community Mutual, other than growth in non-residential real estate and commercial loans. As a result of the deterioration of economic conditions, continued high unemployment, declines in real estate values in CMS Bancorp’s primary market area, lower commercial real estate cash flows, higher commercial loans and a modest increase in delinquencies, $366,000 and $230,000 was added to the allowance for loan losses in the years ended September 30, 2010 and 2009, respectively. Community Mutual has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end date.
In addition, the OTS, as an integral part of its examination process, periodically reviews Community Mutual’s loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OTS may require Community Mutual 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 Community Mutual’s results of operations.
Community Mutual 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.
The following table presents Community Mutual’s 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.
Investment Activities
Community Mutual’s Board of Directors reviews and approves Community Mutual’s 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.
Community Mutual’s 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, Community Mutual considers its interest rate sensitivity, the types of securities to be held, liquidity and other factors. Federally chartered savings banks have 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 corporate debt instruments.
Securities Portfolio. Community Mutual 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 discount. Available for sale securities are reported at fair market value. At September 30, 2010, Community Mutual did not have any held to maturity securities and available for sale investments totaled $56.3 million, or 23.2%, of Community Mutual’s total assets. During the year ended September 30, 2010, Community Mutual purchased $44.9 million of available for sale securities and received proceeds of $47.4 million from the repayment, sale, and calls of available for sale securities. The balance of securities consisted of other interest earning deposits and Federal Home Loan Bank of New York (“FHLB-NY”) stock.
Community Mutual’s 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. The following table sets forth the composition of Community Mutual’s securities and interest-earning assets portfolios at the dates indicated.
Securities Portfolio Maturities. The following table sets forth the scheduled maturities and weighted average yields for Community Mutual’s available for sale investment securities at September 30, 2010. Actual maturities could differ.
Deposit Activity and Sources Of Funds
General. Community Mutual’s 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. Community Mutual offers a variety of deposit accounts with a range of interest rates and terms. Community Mutual 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. Community Mutual 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. Community Mutual’s deposits are primarily obtained from the areas surrounding its offices. Community Mutual relies primarily on paying competitive rates, service and long-standing relationships with customers to attract and retain these deposits.
When Community Mutual 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 46.8% of total deposits as of September 30, 2010. Also at September 30, 2010, time deposits with remaining terms to maturity of less than one year amounted to $85.9 million.
Deposit Distribution Weighted Average. The following table presents the distribution of Community Mutual’s 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.
Time Deposit Maturities. At September 30, 2010, Community Mutual had $40.8 million in time deposits with balances of $100,000 and over maturing as follows:
Time Deposit Balances by Rates. The following table presents, by interest rate ranges, information concerning Community Mutual’s time deposit accounts outstanding as of September 30, 2010.
Borrowings. Community Mutual 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. Community Mutual’s 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, 2010 were as follows:
Employees
At September 30, 2010, CMS Bancorp and Community Mutual had 42 full-time and 2 part-time employees. None of CMS Bancorp’s or Community Mutual’s 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 Community Mutual. For federal income tax purposes, Community Mutual 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 Community Mutual constitute an affiliated group of corporations and, therefore, report their income on a consolidated basis. Community Mutual 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. Community Mutual, 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, Community Mutual has recaptured (taking into income) over a multi-year period a portion 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 Community Mutual’s financial statements.
Distributions. To the extent that Community Mutual makes “non-dividend distributions” to its stockholders, such distributions will be considered to result in distributions from Community Mutual’s 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 Community Mutual’s taxable income. Non-dividend distributions include distributions in excess of Community Mutual’s current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of Community Mutual’s 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 Community Mutual’s income.
The amount of additional taxable income created from a non-dividend distribution is equal to the lesser of Community Mutual’s 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%. Community Mutual 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 Community Mutual as a member of the same affiliated group of corporations.
State Taxation
New York State Taxation. Community Mutual 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 Community Mutual’s “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 Community Mutual’s “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, Community Mutual is permitted a deduction for an addition to the reserve for losses on qualifying real property loans. Community Mutual 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 Community Mutual 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 Community Mutual 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.
REGULATION
General
CMS Bancorp, as a unitary savings and loan holding company, is regulated, examined and supervised by the OTS. Community Mutual, as a federal stock savings bank, is also subject to regulation, examination and supervision by the OTS, as its chartering agency and primary regulator, and by the FDIC, as its deposit insurer. CMS Bancorp
and Community Mutual must file reports with the OTS concerning their activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions. CMS Bancorp is also required to file reports with, and otherwise comply with the rules and regulations of, the Securities and Exchange Commission (the “SEC”) under the federal securities laws.
As discussed below under “Developments in Regulation of the Financial Sector,” both CMS Bancorp and Community Mutual will be transitioning to the jurisdictions of new and separate primary federal regulators on July 21, 2011, and the OTS will be abolished 90 days thereafter. Any change in the laws and regulations applicable to CMS Bancorp or Community Mutual, whether by the OTS, the FDIC or through legislation, including changes mandated by the recently enacted financial reform legislation discussed below, could have a material adverse impact on CMS Bancorp and Community Mutual and our operations and shareholders.
Federal Savings Bank Regulation
Primary Regulation by the OTS. The OTS has extensive authority over the operations of federal savings banks, including Community Mutual. This regulation and supervision establishes a comprehensive framework of activities in which a federal savings bank can engage and is intended primarily for the protection of the DIF and depositors, and to assure the ongoing safety and soundness of institutions regulated by the OTS. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such laws and regulations or interpretations thereof, whether by the OTS, the FDIC or through legislation, could have a material adverse impact on Community Mutual, and its operations and on us and our stockholders.
Community Mutual is required to file periodic reports with the OTS and is subject to periodic examinations primarily by the OTS, but also to examination and oversight by the FDIC.
Lending and Investment Authority. Community Mutual derives its lending and investment powers from the Home Owners’ Loan Act, as amended (the “HOLA”), and the regulations of the OTS thereunder. Under these laws and regulations, Community Mutual and any operating subsidiary may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. Community Mutual may also establish service corporations that may engage in activities not otherwise permissible for Community Mutual, including certain real estate equity investments and securities and insurance brokerage activities. Community Mutual’s authority to make certain types of loans or other investments is limited by law and regulation.
Loans-to-One-Borrower Limitations. Under the HOLA, Community Mutual is generally subject to the same limits on loans to one borrower as a national bank. Subject to certain exceptions for residential real estate development loans, Community Mutual’s total loans or extensions of credit to a single borrower or group of related borrowers cannot exceed 15% of Community Mutual’s unimpaired capital and surplus. Community Mutual may lend additional amounts up to 10% of its unimpaired capital and surplus if the loans or extensions of credit are fully secured by readily-marketable collateral. Community Mutual currently complies with these loans-to-one-borrower limitations. At September 30, 2010, Community Mutual’s largest aggregate amount of loans to one borrower totaled $2,432,000. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with Community Mutual.
Qualified Thrift Lender Test. Under the HOLA, Community Mutual must comply with the qualified thrift lender, or “QTL,” test. Under the QTL test, Community Mutual 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, Community Mutual’s 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.
As of September 30, 2010, Community Mutual held 96.7% 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, 2010. Therefore, Community Mutual qualified under the QTL test.
A savings bank that fails to meet the QTL test and is unable to demonstrate a reasonable likelihood of meeting it in the future may be required to convert to a commercial bank charter and will generally be prohibited from: (i) engaging in any new activity not permissible for a national bank, (ii) paying dividends not permissible under national bank regulations, and (iii) establishing any new branch office in a location not permissible for a national bank. In addition, if the institution does not re-qualify under the QTL test within three years after failing the test, the institution would be prohibited from engaging in any activity not permissible for a national bank.
In addition, if the institution fails to regain the QTL status within one year after failing the test, then its holding company will be deemed to be a bank holding company and will be required to register with the Federal Reserve Board (“FRB”) as such.
Capital Requirements. OTS regulations require federally chartered savings banks to meet three minimum capital standards:
(1) a tangible capital ratio requirement of 1.5% of tangible capital to adjusted total assets;
(2) a leverage ratio requirement of 3% of core capital to such adjusted total assets for savings banks that have been assigned the highest composite rating under the Uniform Financial Institutions Ratings System (4% or more for savings banks that have not been assigned the highest composite rating); and
(3) a 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.
In assessing an institution’s capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. Community Mutual, 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 Community Mutual’s risk profile. At September 30, 2010, Community Mutual exceeded each of its capital requirements with a tangible capital ratio of 7.60%, leverage capital ratio of 7.60% and total risk-based capital ratio of 17.13%.
Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, Community Mutual 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 Community Mutual 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 OTS, in connection with its examination of Community Mutual, to assess Community Mutual’s record of meeting the credit needs of its community and to take the record into account in its evaluation of certain applications by Community Mutual.
The CRA regulations establish an assessment system that bases an institution’s 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 OTS evaluates small savings institutions with less than $250 million in assets, such as Community Mutual, using the following criteria:
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the savings bank’s 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 savings bank’s assessment areas;
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the savings bank’s 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 savings bank’s loans; and
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the savings bank’s record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment areas.
The CRA also requires all institutions to make public disclosure of their CRA ratings. Community Mutual received a “Satisfactory” CRA rating in its most recent CRA examination as of December 31, 2005. OTS regulations also require that federal savings banks publicly disclose certain agreements that are in fulfillment of the CRA. We have no such agreements in place at this time.
Transactions with Affiliates. Community Mutual’s 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 FRB, as well as additional limitations as adopted by the Director of the OTS. 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 institution’s 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.
OTS regulations regarding transactions with affiliates conform to Regulation W. In general, transaction with affiliates (which, for Community Mutual, would include CMS Bancorp and its nondepository subsidiaries) must be on terms which are as favorable to Community Mutual as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of Community Mutual’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from Community Mutual. In addition, the OTS regulations prohibit a savings bank from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. The OTS regulations also include certain specific exemptions from these prohibitions. The FRB and the OTS require each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the OTS regulations regarding transactions with affiliates.
Loans to Insiders. Community Mutual’s 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 and Regulation O issued by the FRB. 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 based, in part, on the amount of Community Mutual’s capital. In addition, extensions of credit in excess of certain limits must be approved by Community Mutual’s Board of Directors.
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 Community Mutual, that is subject to the insider lending restrictions of Section 22(h) of the FRA.
Limitation on Capital Distributions. The OTS imposes various restrictions or requirements on Community Mutual’s ability to make capital distributions, including cash dividends. As a subsidiary of a savings and loan holding company, Community Mutual must file a notice with the OTS at least 30 days before making a capital distribution. In addition, Community Mutual must file an application for the OTS’s prior approval of the proposed capital distribution if the total amount of all capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to Community Mutual’s net income for that year plus Community Mutual’s retained net income for the previous two years.
The OTS may disapprove a notice or application if:
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Community Mutual would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
Liquidity. Community Mutual is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation, in accordance with OTS regulations.
Branching. Subject to certain limitations, the HOLA and the OTS regulations authorize federally chartered savings banks to branch nationwide. This permits federal savings banks with interstate networks to more easily diversify their loan portfolios and lines of business geographically. OTS authority preempts any state law purporting to regulate branching by federal savings banks.
Enforcement. The OTS has primary enforcement responsibility over federal savings banks, including Community Mutual. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. Under the Federal Deposit Insurance Act (“FDIA”), the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings bank. If action is not taken by the OTS, the FDIC may take action under certain circumstances.
Standards for Safety and Soundness. As required by federal law, the OTS has adopted a set of guidelines prescribing safety and soundness standards. These 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 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, OTS regulations require an institution that has been given notice by the OTS that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OTS 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 bank is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Prompt Corrective Action Regulations. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings banks, including restrictions on growth of assets and other forms of expansion. For this purpose, a savings bank would be placed in one of the following five categories based on the savings bank’s capital:
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well capitalized;
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adequately capitalized;
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undercapitalized;
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significantly undercapitalized; or
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critically undercapitalized.
An undercapitalized savings bank is required to file a capital restoration plan with the OTS within 45 days of the date the bank receives notices that it is within any of the three undercapitalized categories, and the plan must be guaranteed by any parent holding company, within aggregate liability limits equaling the lesser of (i) an amount equal to 5% of the savings bank’s total assets at the time it was notified that it was undercapitalized; and (ii) the amount necessary to restore the savings bank’s capital ratios to the levels required to be classified as “adequately classified,” as those ratios and levels were 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.” Savings banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions.
Under the OTS regulations, generally, a federally chartered savings bank is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of September 30, 2010, Community Mutual met the criteria for being considered “well capitalized” by the OTS, with a total risk-based capital ratio of 17.13%, Tier 1 risk-based capital ratio of 7.60% and leverage ratio of 7.60%.
Insurance of Deposit Accounts. Community Mutual is a member of, and pays deposit insurance assessments to, the DIF, which is administered by the FDIC. The DIF was formed on March 31, 2006, following the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Deposit Insurance Fund Act”). In addition to merging the insurance funds, the Deposit Insurance Fund Act established a statutory minimum and maximum designated reserve ratio range for the DIF between 1.15% and 1.50% and granted the FDIC greater flexibility in establishing the required reserve ratio. Market developments have significantly depleted the DIF and reduced the ratio of reserves to insured deposits. Recently enacted financial reform legislation discussed below establishes a minimum designated reserve ratio of 1.35% and requires the FDIC to take steps to reach this goal for estimated insured deposits by September 30, 2020.
All deposit accounts are insured up to $250,000 per depositor, per institution for each account ownership category. This standard maximum deposit insurance coverage was raised from $100,000 first on a temporary basis under the Emergency Economic Stabilization Act of 2008 and then made permanent under the Dodd-Frank Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is discussed below. In order to maintain the DIF, member institutions are assessed an insurance premium. The amount of each institution’s premium has historically generally been based on the balance of insured deposits and the degree of risk the institution poses to the DIF. Under the current assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two sub-categories based on the institution’s most recent supervisory and capital evaluations, designed to measure risk.
On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009. For purposes of calculating the prepaid amount, the base assessment rate in effect at September 30, 2009 was used for 2010. That rate would be increased by an annualized 3 basis points for 2011 and 2012 assessments. The prepayment calculation would also assume a 5% annual growth rate, increased quarterly, through the end of 2012. Under the final rule, an institution would account for the prepayment by recording the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 30, 2009. Subsequently, each institution
would record 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 would resume paying and accounting for quarterly deposit insurance assessments as they do currently.
On November 9, 2010, the FDIC Board issued a proposed rule to change the deposit insurance assessment base from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity. The proposal defines tangible equity as Tier 1 capital. Since the new base would be larger than the current base, the FDIC also proposed to revise the initial base assessment rate schedule by lowering assessment rates to a range between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. In connection with the proposed changes to the assessment base, the FDIC also proposed to modify or eliminate the adjustments made to an institution’s initial base assessment rate for unsecured debt, secured liabilities, and brokered deposits, and to add a new adjustment for holding unsecured debt issued by another insured depository institution. The changes would generally take effect as of April 1, 2011 and would be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011. In a separate rulemaking, the FDIC Board re-proposed changes for the deposit insurance assessment system for large institutions with $10 billion or more in assets (changes were first proposed in April 2010), given the assessment base changes required under the Dodd-Frank Act.
The impact of the proposed rules and any additional FDIC assessments, including for the FDIC’s separate guarantee program for noninterest-bearing transaction accounts (discussed below), or other regulatory changes impacting the financial services industry could negatively effect CMS Bancorp’s liquidity and financial results in future periods.
FDIC insurance of deposits is backed by the full faith and credit of the U.S. government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It may also 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. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate federal 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.
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 or the OTS. The management of Community Mutual does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. Community Mutual is a member of the Federal Home Loan Bank (the “FHLB”) System, which consists of 12 regional FHLBs. Each FHLB provides a central credit facility primarily for its member institutions. Community Mutual, as a member of the FHLB of New York, or FHLB-NY, is currently required to acquire and hold shares of FHLB-NY Class B stock. The Class B stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The Class B 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 Class B 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 Community Mutual, 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, including CMOs and REMICs, held by Community Mutual. The activity-based stock purchase requirement for Community Mutual is equal to the sum of: (1) 4.5% of outstanding borrowing from the FHLB-NY; (2) 4.5% of the outstanding principal balance of Acquired Member Assets, as defined by the FHLB-NY, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which currently is zero; and (4) a specified percentage ranging
from 0 to 5% of the carrying value on the FHLB-NY’s balance sheet of derivative contracts between the FHLB-NY and its members, which currently is also zero. The FHLB-NY can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLB-NY capital plan. At September 30, 2010, Community Mutual 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, Community Mutual’s net interest income would be adversely affected.
Federal Reserve System. The FRA and Regulation D of the FRB regulations require depository institutions including federally chartered savings banks 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 FRB 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. On October 26, 2010, the FRB issued a final rule amending Regulation D to provide that, for net transaction accounts in 2011, the first $10.7 million, unchanged from its level in 2010, will be exempt from reserve requirements. The FRB final rule also provides that a 3% reserve ratio will be assessed on net transaction accounts over $10.7 million up to and including $58.8 million, up from $55.2 million in 2010. Finally, a 10% reserve ratio will be assessed on net transaction accounts in excess of $58.8 million. The final rule became effective on November 26, 2010.
For all depository institutions, required reserves are computed by applying the current reserve requirement ratios set forth in the chart below to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities of the institution during the computation period.
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 FRB, the effect of this reserve requirement is to reduce Community Mutual’s interest-earning assets.
Prohibitions Against Tying Arrangements. Federal savings banks are subject to the prohibitions of 12 U.S.C. § 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, 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 that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Anti-Money Laundering and Customer Identification. Community Mutual is subject to OTS 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 OTS 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.
Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on applications to acquire bank shares or assets under the Bank Holding Company Act of 1956, as amended (“BHCA”), and applications under the Bank Merger Act.
Through the Federal Financial Institutions Examination Council, the OTS 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 Protection. Community Mutual is subject to OTS regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act (the “GLB Act”). These regulations require Community Mutual 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 Community Mutual to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not exempted, Community Mutual is required to provide its customers with the ability to “opt-out” of having Community Mutual share their nonpublic personal information with unaffiliated third parties. The federal regulatory agencies including the OTS have adopted a final rule that requires financial institutions to provide initial and annual privacy notices to their customers. The agencies also adopted a model privacy form that financial institutions may rely on as a safe harbor to provide disclosures under the privacy rules of the GLB Act.
Community Mutual 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 Fair and Accurate Credit Transactions Act (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade Commission, Community Mutual is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft. Community Mutual 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. Community Mutual is subject to various laws and regulations dealing generally with consumer protection matters. Community Mutual may be subject to potential liability under these laws and regulations for material violations. Community Mutual’s 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 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 various federal agencies charged with the responsibility of implementing these federal laws.
Community Mutual’s 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 Funds 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 various federal agencies charged with the responsibility of implementing these federal laws.
Holding Company Regulation. CMS Bancorp is a unitary savings and loan holding company within the meaning of the HOLA. As such, CMS Bancorp is registered with the OTS and is subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over CMS Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies and until changes mandated by recently enacted financial reform legislation discussed below take effect, federal savings and loan holding companies are not currently subject to regulatory capital requirements or general supervision by the FRB.
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 Bancorp’s 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 by the Director of the OTS;
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any activity that the FRB, by regulation, has determined to be permissible for bank holding companies under Section 4(c)(8) of the BHCA, subject to receipt of the OTS’s 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.
Effective July 21, 2011 (or else by January 2012 if a six-month extension is required), both a savings and loan holding company and its depository institution subsidiary(ies) must be well capitalized and well managed in order for the holding 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 FRB 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.
In addition, CMS Bancorp cannot be acquired or acquire a company unless the acquirer or target (as the case may be) is engaged solely in financial activities or agrees to limit its activities to conform to this requirement within a designated transition period.
On December 20, 2007, the OTS amended its regulations to permit savings and loan holding companies, with the prior approval of the OTS, to engage in all activities that bank holding companies may engage in under any regulation that the FRB has promulgated under Section 4(c) of the BHCA. In addition, the amended OTS regulations provide that if any of such Section 4(c) activities are permissible under other provisions of the HOLA or are permissible for bank holding companies without prior FRB approval, then such activities are preapproved by the OTS.
Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits all savings and loan holding companies, directly or indirectly, from:
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acquiring control (as defined under the HOLA) of another savings institution (or a holding company parent) without prior OTS approval;
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acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings bank or holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA;
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acquiring through merger, consolidation or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company) without prior OTS 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 company’s savings institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except:
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in the case of certain emergency acquisitions approved by the FDIC;
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if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or
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if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located.
The HOLA also prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings bank, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA, except with the prior written approval of the OTS. In evaluating applications by holding companies to acquire savings banks, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk of loss to the DIF, the convenience and needs of the community to be served and competitive factors.
Federal Securities Laws. CMS Bancorp’s 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 Bancorp’s shareholders are governed by the Delaware General Corporation Law.
Developments in Regulation of the Financial Sector
In response to volatility in the U.S. financial system, the Obama Administration, Congress and federal banking agencies have taken various actions in recent years as part of a comprehensive strategy to stabilize the financial system and housing markets, and to strengthen U.S. financial institutions. The following discussion is intended to provide a general summary of major events generally taking place within the last year that are specifically applicable to financial institutions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the President signed the Dodd-Frank Act into law. Among other things, the Dodd-Frank Act dramatically impacts the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the new law will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. The new law significantly affects the operations of federal savings associations (including Community Mutual) and their holding companies as, among other things, the Dodd-Frank Act: (1) abolishes our primary federal regulator, the OTS, effective 90 days after the transfer of the OTS’s supervisory and other functions to the FRB, FDIC, and the OCC; (2) creates the Bureau of Consumer Financial Protection, a new independent consumer watchdog agency housed within the FRB that will have primary rulemaking authority with respect to all federal consumer financial laws; (3) requires that formal capital requirements be imposed on savings and loan holding companies generally commencing July 2015; (4) codifies the “source of strength” doctrine for all depository institution holding companies; (5) grants to the U.S. Department of the Treasury, FDIC and the FRB broad new powers to seize, close and wind down “too big to fail” financial (including non-bank) institutions in an orderly fashion; (6) establishes a new Financial Stability Oversight Council that is charged with identifying and responding to emerging risks throughout the financial system, composed primarily of federal financial services regulators and chaired by the Secretary of the Treasury Department; (7) adopts new standards and rules for the mortgage industry; (8) adopts new bank, thrift and holding company regulation; (9) permanently increases the standard maximum deposit insurance limit to $250,000 per depositor, per institution for each account ownership category; (10) temporarily provides for unlimited deposit insurance coverage for “noninterest-bearing transaction accounts;” (11) repeals the long-standing statutory prohibition on the payment of interest on demand deposits including commercial transaction accounts; (12) adopts new federal regulation of the derivatives market; (13) adopts the so-called Volcker Rule, which substantially restricts proprietary trading by depository institutions and their holding companies; (14) imposes requirements for “funeral plans” by large, complex financial companies; (15) establishes new regulation of the asset securitization market through “skin in the game” and enhanced disclosure requirements; (16) establishes new regulation of interchange fees; (17) establishes new and enhanced compensation and corporate governance oversight for the financial services industry; (18) provides enhanced oversight of municipal securities; (19) provides a specific framework for payment, clearing and settlement regulation; (20) tasks the federal banking agencies with adopting new and enhanced capital standards for all depository institutions; and (21) significantly narrows the scope of federal preemption for national banks and federal savings associations.
The full impact of the Dodd-Frank Act on the business and operations of CMS Bancorp currently cannot be fully assessed, given that much of the details and substance of the new laws will be determined through agency rulemaking. We are evaluating the potential impact of the Dodd-Frank Act on our business, financial condition, results of operations and prospects and expect that some provisions of the new law may have adverse effects on us, such as the cost of complying with the numerous new regulations and reporting requirements mandated by the Dodd-Frank Act. Additionally, given that the supervisory functions of the OTS in regard to CMS Bancorp and Community Mutual will formally be transferred to the FRB and the OCC respectively on July 21, 2011 (or else by January 21, 2012 if a six-month extension is required), we may see changes in the way we are supervised and examined sooner, and may experience operational challenges in the course of transition to our new regulators.
Temporary Liquidity Guarantee Program. Various recovery programs implemented in connection with earlier legislative and agency efforts in response to deteriorating economic conditions during 2007-2009 have either been phased out in 2010 or are in the course of being phased-out. For example, the FDIC established a
Temporary Liquidity Guarantee Program (“TLGP”) in October 2008, (i) guaranteeing certain debt issued by FDIC-insured institutions and certain holding companies on or after October 14, 2008 through June 30, 2009, which was extended to October 31, 2009, and (ii) providing unlimited insurance coverage for non-interest bearing transaction accounts through December 31, 2009, which was extended to December 31, 2010.
The Debt Guarantee Program (“DGP”) component of the TLG program provides liquidity to the inter-bank lending market and promotes stability in the unsecured funding market. Under the DGP, the FDIC temporarily guarantees all newly issued senior unsecured debt up to prescribed limits. In general, the maximum amount of outstanding debt that is guaranteed under the DGP for each participating entity at any time is limited to 125% of the par value of the participating entity’s senior unsecured debt. The DGP ensures that such debt would be fully protected in the event the issuing institution subsequently fails or its holding company files for bankruptcy. Entities that did not wish to participate in the DGP had to opt out by December 5, 2008. CMS Bancorp did not opt out of the DGP however has not, at any time since the inception of the program, issued any FDIC-guaranteed debt.
Under the Transaction Account Guarantee Program (“TAGP”) component of the TLG program, non-interest bearing transaction accounts are fully insured through December 31, 2010. Non-interest bearing transaction accounts are generally defined as any deposit accounts with respect to which interest is neither accrued nor paid and on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal, including traditional demand deposit checking accounts that allow for an unlimited number of deposits and withdrawals at any time. Transaction accounts generally do not include interest-bearing money market deposit accounts or sweep arrangements that result in funds being placed in an interest-bearing account as the result of the sweep. However, for purposes of the TAGP, the FDIC included in the definition of noninterest-bearing transaction account: (i) accounts commonly known as Interest on Lawyers Trust Accounts (“IOLTAs”) and functionally equivalent accounts; and (ii) Negotiable Order of Withdrawal accounts (“NOW accounts”) with interest rates no higher than 0.50 percent through June 30, 2010 and 0.25 percent after June 30, 2010 for which the insured depository institution at which the account is held has committed to maintain the interest rate at or below 0.50 percent through June 30, 2010 and 0.25 percent after June 30, 2010.
The unlimited guarantee under the TAGP is in addition to, and separate from, the general deposit insurance coverage provided for under the DIF which, as noted above, is $250,000 per depositor, per institution for each account ownership category. Community Mutual opted to participate in the TAGP and as such is bound by the requirements of the program, including the payment of applicable assessments that are in addition to general deposit insurance assessments.
The Dodd-Frank Act enacted in July 2010 amends the FDIA to provide full deposit insurance coverage for noninterest-bearing transaction accounts beginning December 31, 2010, for a two-year period. This new law applies to all insured depository institutions and, unlike the TAGP, no opt outs are permitted and neither low-interest NOW accounts nor IOLTAs are covered. There is no separate assessment applicable on these covered accounts but all institutions will be required to report qualifying accounts beginning on December 31, 2010, for purposes of quantifying the FDIC’s exposure under this program. As a result of the Dodd-Frank Act provision, the FDIC has decided to not extend its TAGP which will end on December 31, 2010.
Truth in Lending Act Amendments. The FRB has made various amendments to Regulation Z, which implements the Truth in Lending Act and pertains to disclosure requirements and advertising matters applicable to both closed-end and open-end loans, that became effective in 2010 or have effective dates in 2011. For example, three phases of rulemakings amending Regulation Z that were required under the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“Credit CARD Act”) became effective at different stages throughout 2010, and generally established requirements concerning fair and transparent practices for open-end consumer credit plans and requirements protecting credit card users from unreasonable penalty fees as well as requirements for credit card issuers to reevaluate increases in interest rates. The FRB also made an annual adjustment to the dollar amount that triggers additional disclosure requirements for certain home mortgage loans bearing fees above a certain amount, which becomes effective on January 1, 2011. The FRB also issued an
interim rule, effective October 25, 2010 with comments due at a later date, that revised the disclosure requirements for closed-end mortgage loans under Regulation Z by requiring lenders to disclose how borrowers’ regular mortgage payments can change over time. Other recent amendments to Regulation Z include an amendment requiring that consumers receive notice of the sale or transfer of their mortgage loans (effective January 1, 2011) and an amendment to protect consumers from unfair or abusive lending practices that can arise from certain loan originator compensation practices (effective April 1, 2011). Finally, the FRB also announced an interim final rule amending Regulation Z that becomes effective December 27, 2010 with requirements to ensure that real estate appraisals are based on the appraiser’s independent professional judgment and that creditors and their agents pay customary and reasonable fees to appraisers. Additional proposed rules to amend the Truth-in-Lending Act are currently being considered by the FRB.
Truth in Savings Act Regulatory Amendments. The FRB also made other regulatory amendments that became effective in 2010, including to Regulation DD, which implements the Truth in Savings Act governing disclosure and advertising matters relating to deposit accounts. For example, amendments addressing depository institutions’ disclosure practices related to overdraft services became effective January 1, 2010, with clarification amendments subsequently made.
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.
ITEM 1A.
ITEM 1A. RISK FACTORS
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.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
Community Mutual’s loan customers may not repay their loans according to the terms of the loans, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results.
Material additions to our allowance for loan losses also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, which may have a material adverse effect on our financial condition and results of operations. We believe that the current amount of allowance for loan losses is sufficient to absorb inherent losses in our loan portfolio.
Our loan portfolio includes loans with a higher risk of loss.
While the majority of Community Mutual’s loan portfolio consists of residential mortgage loans, it also originates commercial and consumer loans. Commercial and consumer 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 for the following reasons:
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Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business.
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Consumer Loans. Consumer loans (such as personal lines of credit) may or may not be collateralized with assets that provide an adequate source of payment of the loan due to depreciation, damage, or loss.
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 borrower’s business thereby increasing the risk of non-performing loans. During the 2010 and 2009 fiscal years, the national real estate market declined compared to fiscal year 2008. This decline was also apparent in CMS Bancorp’s primary market area. The slowdown in the general housing market 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.
Low demand for real estate loans may lower our profitability.
Making loans secured by real estate is our primary business and primary source of revenue. If customer demand for real estate loans decreases, our profits may decrease because our alternative investments, primarily securities, generally earn less income than real estate loans. Customer demand for loans secured by real estate could be reduced due to weaker economic conditions, an increase in unemployment, a decrease in real estate values or an increase in interest rates.
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 stay as strong as it has been 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.
Community Mutual may be required to record future impairment charges on our investment securities, including the FHLB stock we are required to hold as a condition to membership in the FHLB-NY, if they 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, 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 Community Mutual to upstream dividends to CMS Bancorp, which could have a material adverse effect on our liquidity and ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios and result in Community Mutual 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 is 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, FRB Discount Window borrowings, FHLB-NY advances and short and long-term debt.
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 may 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 may be materially adversely affected.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
Market developments have significantly depleted the DIF and reduced the ratio of reserves to insured deposits. The FDIC is currently soliciting comments on a proposed rulemaking that changes the deposit insurance assessment base from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. The proposal defines tangible equity as Tier 1 capital. Since the new base would be larger than the current base, the FDIC also proposed to revise the initial base assessment rate schedule by lowering assessment rates to a range between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. In connection with the proposed changes to the assessment base, the FDIC also proposed to modify or eliminate the adjustments made to an institution’s initial base assessment rate for unsecured debt, secured liabilities, and brokered deposits, and to add a new adjustment for holding unsecured debt issued by another insured depository institution. The changes, if finalized substantially as proposed, would generally take effect as of April 1, 2011 and would be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011. The impact of any final rules resulting or differing from those proposed and any additional FDIC assessments, including for the FDIC’s separate guarantee program for noninterest-bearing transaction accounts, or other regulatory changes impacting the financial services industry could negatively effect CMS Bancorp’s liquidity and financial results in future periods.
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 may not be able to successfully implement our future plans for growth.
As a component of our business plan, we will consider expansion opportunities such as the acquisition of branches and other financial institutions, although we do not have any current understandings, agreements or arrangements for expansion by the acquisition of any branches or other financial institutions. There can be no assurance, however, that we will experience operational expansion in the near future. Significant changes in interest rates or the competition we face may make it difficult to attract the level of customer deposits needed to fund our internal growth at projected levels. Accordingly, there can also be no assurance that we will be able to adequately and profitably implement our possible future growth or that we will not have to incur additional expenditures beyond current projections to support such growth.
Natural and/or man-made disasters or public health issues such as the H1N1 flu outbreak could disrupt the implementation of our short-term or long-term business strategy and could adversely affect our financial condition or results of operations.
CMS Bancorp’s operations and lending activities conducted through Community Mutual are principally concentrated in Westchester County, New York. Accordingly, our operations and earnings are highly dependent on the centralized community and environment in which we operate. We are thus vulnerable to business interruption from any natural or man made disasters or public health issues, such as a H1N1 flu outbreak, affecting our centralized community and market area. Any such interruption could adversely affect our business and operating results.
We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy 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 or an inability to continue to attract, retain and motivate 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. The loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop our business strategy. In particular, regulatory restrictions imposed on our ability to compensate our key executive officers could adversely impact our ability to retain key personnel.
Competition in our primary market area may reduce our ability to attract and retain deposits and originate loans.
We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for deposits has come from savings and commercial banks in Westchester County, New York and surrounding areas. Our competition for loans comes principally
from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. We also face additional competition from internet-based institutions, brokerage firms and insurance companies. 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. Competition for loan originations and deposits may limit our future growth and earnings prospects.
Competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. Through Community Mutual, 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. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.
We operate in a highly regulated environment, and changes in laws and regulations to which we are subject may adversely affect our results of operations.
Community Mutual is subject to extensive regulation, supervision and examination by the OTS, as its chartering authority, and by the FDIC as the insurer of its deposits up to certain limits. In addition, the OTS currently regulates and oversees CMS Bancorp. We also belong to the Federal Home Loan Bank System and, as a member of such system, we are subject to certain limited regulations promulgated by the FHLB-NY. This regulation and supervision limits the activities in which we may engage. The purpose of regulation and supervision is primarily to protect our depositors and borrowers and, in the case of FDIC regulation, the DIF. Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution’s allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, and the Real Estate Settlement Procedures Act. In addition to the changes discussed herein that are mandated by the Dodd-Frank Act, any change in the laws or regulations applicable to us, or in banking regulators’ supervisory policies or examination procedures, whether by the OTS, the FDIC, other state or federal regulators, or the United States Congress could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The full impact of the Dodd-Frank Act on the operations of CMS Bancorp and Community Mutual are currently unknown given that much of the details and substance of the new laws will be determined through agency rulemaking.
The Dodd-Frank Act is comprehensive financial reform legislation that significantly impacts, among other things, the provision of consumer financial products and services by all financial institutions. Implementation of the many provisions of the Dodd-Frank Act will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Accordingly, the compliance burden and full impact on the operations and profitability of CMS Bancorp and Community Mutual with respect to the Dodd-Frank Act are currently unknown. Based on the provisions of the Dodd-Frank Act and anticipated implementing regulations, however, it is highly likely that CMS Bancorp and Community Mutual, as well as all other banks or thrifts and their holding companies will be subject to significantly increased regulation and compliance obligations.
The elimination of the OTS and transfer of the OTS’s supervisory and rulemaking functions to various federal banking agencies will change the way that CMS Bancorp and Community Mutual are regulated.
As a result of changes mandated by the Dodd-Frank Act to the federal supervisory and regulatory framework for savings associations and their holding companies, both CMS Bancorp and Community Mutual will be
transitioning to the jurisdiction of new primary federal regulators, which will change the way that we are regulated. Specifically, the OTS’s supervisory and rulemaking functions (except for consumer protection) relating to all federal savings associations will be transferred to the OCC, while the OTS’s supervisory and rulemaking functions relating to savings and loan holding companies and their non-depository institution subsidiaries (excluding subsidiaries of the federal savings association) will be transferred to the FRB. While the OCC and FRB are directed to implement existing OTS regulations, orders, resolutions, determinations and agreements for federal savings associations and their holding companies under the HOLA, the transition of supervisory functions from the OTS to the OCC (with respect to Community Mutual) and the FRB (with respect to CMS Bancorp), could alter the operations of CMS Bancorp and Community Mutual so as to be more closely aligned with the OCC’s and FRB’s respective supervision of national banks and bank holding companies. While the functions of the OTS pertaining to CMS Bancorp and Community Mutual will formally be transferred to the OCC and FRB in July 2011 (or else by January 2012 if a six-month extension is required), we may see changes in the way we are supervised and examined sooner, and may experience operational challenges in the course of transition to our new regulators.
The new Bureau of Consumer Financial Protection, or BCFP, may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive practices, which may directly impact the business operations of financial institutions offering consumer financial products or services including Community Mutual.
The BCFP has broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The BCFP is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAP authority”). Given that the designated transfer date for the formal transfer of rulemaking functions from each of the various federal banking agencies in regard to the federal consumer financial laws is scheduled for July 21, 2011, the potential reach of the BCFP’s broad new rulemaking powers and UDAP authority on the operations of financial institutions offering consumer financial products or services including Community Mutual is currently unknown.
Changes in the FRB’s 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 FRB 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 FRB 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.
Beginning with our annual report for the fiscal year ended September 30, 2008, we were 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, management’s 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.
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.
Our charter, bylaws and certain laws contain antitakeover provisions that may prevent transactions you might favor, including a sale or merger of CMS Bancorp.
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 antitakeover provisions include:
•
limitations on voting rights of the beneficial owners of more than 10% of our common stock;
•
supermajority voting requirements for certain business combinations and changes to some provisions of the charter and bylaws;
•
the election of directors to staggered terms of three years; and
•
provisions regarding the timing and content of stockholder proposals and nominations.
Furthermore, federal law requires OTS approval prior to any direct or indirect acquisition of “control” (as defined in OTS regulations) of Community Mutual, including any acquisition of control of CMS Bancorp.
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.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
CMS Bancorp conducts its business primarily through its corporate office and five retail banking offices. As of September 30, 2010, properties, furnishings and equipment and leasehold improvements owned by CMS Bancorp and Community Mutual had an aggregate net book value of $209 million.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
CMS Bancorp’s common stock is listed on the Nasdaq Capital Market under the symbol “CMSB.” The table below reflects the stock trading price and dividend payment frequency of CMS Bancorp’s common stock for the years ended September 30, 2010 and 2009. The quotations reflect inter-dealer prices, without mark-up, mark-down or commissions, and may not represent actual transactions.
See Part I, Item 1. “Description of Business-Regulation” for a discussion of certain limitations imposed on CMS Bancorp’s ability to declare and pay dividends.
As of December 15, 2010 there were approximately 277 record holders of CMS Bancorp’s common stock.
Set forth below is information as of September 30, 2010 regarding compensation plans under which equity securities of CMS Bancorp are authorized for issuance.
[1] Includes shares available for issuance under the CMS Bancorp, Inc. 2007 Stock Option Plan, which allows for the granting of stock options to directors, officers and other key employees of CMS Bancorp and its affiliates. Excludes 14,355 shares of restricted stock, held by an independent trustee, which are available for grant under the CMS Bancorp, Inc. 2007 Recognition and Retention Plan.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to smaller reporting companies.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required for this item is incorporated herein by reference to the information under the caption “Management’s Discussion and Analysis or Plan of Operation” in the CMS Bancorp, Inc. 2010 Annual Report to Shareholders attached hereto as Exhibit 13.1.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are incorporated herein by reference to the indicated pages of the CMS Bancorp, Inc. 2010 Annual Report to Shareholders attached hereto as Exhibit 13.1.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for CMS Bancorp. CMS Bancorp’s internal control over financial reporting is a process designed under the supervision of its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has made a comprehensive review, evaluation, and assessment of CMS Bancorp’s internal control over financial reporting as of September 30, 2010. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on that assessment, management concluded that, as of September 30, 2010, CMS Bancorp’s internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of CMS Bancorp’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by CMS Bancorp’s registered public accounting firm pursuant to temporary relief rules of the SEC that permit the provision of only management’s report in this Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
Management, including CMS Bancorp’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of CMS Bancorp’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, CMS Bancorp’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports CMS Bancorp files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in CMS Bancorp’s internal control over financial reporting identified in connection with the evaluation that occurred during CMS Bancorp’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, CMS Bancorp’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to directors and executive officers of the CMS Bancorp is incorporated herein by reference to CMS Bancorp’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by reference to CMS Bancorp’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to CMS Bancorp’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information relating to directors certain relationships and related transactions is incorporated herein by reference to CMS Bancorp’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information relating to accounting fees and services is incorporated herein by reference to CMS Bancorp’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) Incorporated by reference to the amendment to Registration Statement No. 333-139176 on Form SB-2 filed with the Commission on February 2, 2007, as amended.
(2) Incorporated by reference to the Registration Statement No. 333-139176 on Form SB-2 filed with the Commission on December 7, 2006, as amended.
(3) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on February 23, 2009.
(4) Incorporated by reference to the amendment to Registration Statement No. 333-139176 on Form SB-2 filed with the Commission on January 19, 2007, as amended.
(5) Incorporated by reference to the amendment to Registration Statement No. 333-139176 on Form SB-2 filed with the Commission on January 19, 2007, as amended.
(6) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on July 31, 2008.
(7) Incorporated by reference to the Registrant’s Proxy Statement filed with the Commission on September 21, 2007.
(8) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB filed with the Commission on December 28, 2007.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
/S/ JOHN E. RITACCO
John E. Ritacco
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.