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Table of Contents

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-K

 

 

(Mark one)

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

For the fiscal year ended September 30, 2014

or

 

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

For the transition period from              to             .

Commission file No. 001-33322

 

 

CMS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-8137247
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

123 Main Street

White Plains, New York

  10601
(Address of principal executive offices)   (Zip Code)

(914) 422-2700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   Nasdaq Capital Market

Securities registered pursuant to section 12(g) of the Act:

None.

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

 

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the average bid and asked prices of the common stock as of March 31, 2014 was $10.3 million.

As of December 19, 2014, the registrant had 1,862,803 shares of common stock, par value $0.01 per share, outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s 2014 Annual Report to stockholders are incorporated by reference into Part II.

 

 

 


Table of Contents

CMS Bancorp, Inc.

INDEX

 

         Page
Number
 

FORWARD-LOOKING STATEMENTS

     i   

PART I

    
  Item 1. Description of Business      1   
  Item 1A. Risk Factors      19   
  Item 1B. Unresolved Staff Comments      28   
  Item 2. Properties      28   
  Item 3. Legal Proceedings      28   
  Item 4. Mine Safety Disclosures      29   

PART II

  
  Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      30   
  Item 6. Selected Financial Data      30   
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   
  Item 7A. Quantitative and Qualitative Disclosures About Market Risk      30   
  Item 8. Financial Statements and Supplementary Data      31   
  Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      31   
  Item 9A. Controls and Procedures      31   
  Item 9B. Other Information      32   

PART III

  
  Item 10. Directors, Executive Officers and Corporate Governance      33   
  Item 11. Executive Compensation      37   
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      43   
  Item 13. Certain Relationships and Related Transactions, and Director Independence      46   
  Item 14. Principal Accounting Fees and Services      47   

PART IV

  
  Item 15. Exhibits and Financial Statement Schedules      48   

SIGNATURES

     50   


Table of Contents

FORWARD-LOOKING STATEMENTS

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

 

    risks relating to the pending merger with Putnam County Savings Bank;

 

    collecting the termination fee owed to CMS Bancorp by Customers Bancorp, Inc. pursuant to the now-terminated merger agreement between the parties;

 

    changes in interest rates;

 

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

 

    the risk of loss associated with our loan portfolio;

 

    lower demand for loans;

 

    changes in our asset quality;

 

    other-than-temporary impairment charges for investments;

 

    the soundness of other financial institutions;

 

    changes in liquidity;

 

    changes in the real estate market or local economy;

 

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

 

    competition in our primary market area;

 

    risk of noncompliance with laws and regulations, including changes in laws and regulations to which we are subject;

 

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

 

    our ability to maintain effective internal controls over financial reporting;

 

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

 

    the low trading volume in our stock;

 

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

 

    risks related to use of technology and cybersecurity.

Forward-looking statements speak only as of the date they are made. Any or all of our forward-looking statements in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. Based upon changing conditions, should any one or more of the above risks or uncertainties materialize, or should any of our underlying beliefs or assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statement.

References in this Form 10-K to “we,” “our,” “us” and other similar references are to CMS Bancorp, Inc. unless otherwise expressly stated or the context requires otherwise.

 

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Table of Contents

PART I

 

ITEM 1. DESCRIPTION OF BUSINESS

General

CMS Bancorp, Inc. (“CMS Bancorp” or the “Company”) is a Delaware corporation formed in 2007. CMS Bank (“CMS” or the “Bank”), a New York state-chartered savings bank, is a wholly-owned subsidiary of CMS Bancorp. CMS Bancorp is regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve”) as a savings and loan holding company. CMS Bank is regulated by the New York State Department of Financial Services (“NYSDFS”) and the Federal Deposit Insurance Corporation (“FDIC”) as a New York state-chartered savings bank. CMS Bancorp’s common stock is listed on the Nasdaq Capital Market under the symbol “CMSB.”

CMS Bancorp is headquartered at 123 Main Street, White Plains, New York, NY 10601 and its principal business is to operate CMS, which conducts its operations mainly through its corporate administrative office in White Plains, New York and five retail banking offices located in Westchester County, New York. CMS’s deposits are insured by the FDIC up to the applicable legal limits under the Deposit Insurance Fund (“DIF”). CMS’s principal business is accepting deposits from the general public and using those deposits to make residential loans, as well as commercial real estate loans, commercial and industrial loans, loans to individuals and loans to small businesses primarily in Westchester County and neighboring areas in New York State. CMS also uses funds from deposits to invest in short- and medium-term marketable securities and owns Federal Home Loan Bank of New York member shares.

Unless otherwise indicated, the information presented in this Annual Report on Form 10-K represents the consolidated activity of CMS Bancorp and the Bank for the fiscal year ended September 30, 2014.

At September 30, 2014, total assets were $273.3 million, deposits were $226.8 million and total stockholders’ equity was $23.9 million.

Pending Merger Agreement with Putnam County Savings Bank

On September 25, 2014, CMS Bancorp and the Bank entered into an Agreement and Plan of Merger dated as of September 25, 2014 (“Merger Agreement”) by and among Putnam County Savings Bank, a New York mutual savings bank (“Putnam”), Putnam County Acquisition Corporation, (“Acquisition Corporation”), CMS Bancorp and CMS Bank. Under the terms of the Merger Agreement, and subject to the terms and conditions thereof, Putnam will acquire CMS Bancorp and the Bank through a series of transactions by which the Acquisition Corporation will merge with and into CMS Bancorp, immediately thereafter followed by the mergers of CMS Bancorp and the Bank with and into Putnam, which shall be the surviving bank (collectively, the “Merger”). The combined organization will be operated under the name of “Putnam County Savings Bank.”

Upon effectiveness of the Merger, each share of CMS Bancorp common stock issued and outstanding immediately prior to the effective time of the Merger shall be converted into the right to receive a cash payment of $13.25 per share and each option issued and outstanding immediately prior to the effective time of the Merger shall be cancelled and converted into the right to receive a cash payment in an amount determined in the manner set forth in the Merger Agreement equal to the difference between $13.25 and the exercise price of the option.

In accordance with the terms of the Merger Agreement, CMS Bancorp and Bank and their advisors are not permitted to solicit alternative acquisition proposals from third parties. The Merger Agreement provides that CMS Bancorp is required to pay to Putnam a termination fee equal to one million dollars ($1,000,000) in the event CMS Bancorp terminates the Merger Agreement to accept an alternative acquisition proposal that is determined to be a “Superior Proposal” or CMS Bancorp’s Board otherwise fails to call and hold a shareholders meeting for approval of the Merger Agreement or recommend that CMS Bancorp’s shareholders approve the Merger Agreement. In the event that either party commits willful conduct or gross negligence resulting in a breach of a representation or warranty or failure to perform or comply with a covenant or agreement that leads to the termination of the Merger Agreement, the breaching party is liable to the non-breaching party for up to $350,000 of documented reasonable out-of-pocket costs and expenses.

The Merger Agreement was unanimously approved by CMS Bancorp’s Board of Directors. The Merger Agreement contains various conditions, and assuming satisfaction or waiver of such conditions, it is currently expected that the Merger will be completed in the second quarter of calendar year 2015. The transactions contemplated by the Merger Agreement are subject to, among other things, approval of the Merger Agreement by the shareholders of the Company, the receipt of requisite bank regulatory approvals, a provision that not more than 10% of CMS Bancorp’s shareholders express dissent to the Merger terms by invoking applicable state law with respect to appraisal rights, and other customary conditions. In accordance with the terms of the Merger Agreement, all outstanding shares of CMS Bancorp’s preferred stock will be redeemed immediately prior to closing of the Merger.

Each director and executive officer of CMS Bancorp as of the date of the Merger Agreement has entered into a voting and lock-up agreement with Putnam, pursuant to which each such person has agreed to vote in favor of approval of the Merger Agreement and related transactions, including the Merger, until such time as the Voting Agreement is terminated in accordance with its terms. For additional information about the Merger Agreement with Putnam, see CMS Bancorp’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on September 25, 2014.

 

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Table of Contents

Terminated Merger Agreement with Customers Bancorp

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

Notwithstanding the termination of the merger agreement, Customers continues to hold shares of CMS Bancorp’s Series A Noncumulative Perpetual Preferred Stock (“Series A Preferred Stock”) pursuant to the terms of such preferred stock as set forth in the Certificate of Designations establishing the designations, powers, preferences, limitations, restrictions, and relative rights of the Series A Preferred Stock filed with the Secretary of State of Delaware on May 21, 2013. For additional information specific to the Series A Preferred Stock, see CMS Bancorp’s Form 8-K filed with the SEC on May 24, 2013. The terms of the Merger Agreement with Putnam require CMS Bancorp to redeem all shares of the Series A Preferred Stock prior to consummation of the merger with Putnam.

Business Strategy

The mission of CMS Bancorp is to operate and grow CMS as a profitable community-oriented financial institution serving primarily individual customers, corporations and small businesses through retail operations in our market area. To achieve this mission, CMS’s overall growth strategy is generally to:

 

    capitalize on its knowledge of the local banking market;

 

    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;

 

    provide superior, highly personalized and prompt service to its customers;

 

    offer competitive rates and develop customer relationships to attract new deposits while maintaining its existing depositor base and deposit levels;

 

    maintain strong asset and capital quality;

 

    build its brand identity and strengthen its bonds to the community by unifying its retail banking office appearance; and

 

    meet the needs of its customers through a service-oriented approach to banking, which emphasizes delivering a consistent and quality level of professional service in the communities that CMS serves.

Under its current management team, CMS Bancorp and CMS are committed to making CMS’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

CMS’s primary market area is Westchester County, New York, a suburb located to the north and outside of New York City. CMS conducts its retail banking operations from its corporate administrative office located in White Plains, the county seat for Westchester, and five retail banking offices located in Eastchester, Greenburgh, Mount Kisco, Mount Vernon and East White Plains, New York.

The Westchester market area is characterized by a thriving, vibrant and affluent suburban economy. Based on latest available data provided by the U.S. Census Bureau, Westchester continues to be one of the state’s wealthiest counties, with a population estimate approaching 970,000 and with median household income for years 2008-2012 of $81,000. Westchester County is the headquarters location of numerous large and small businesses, including household names like Pepsico, Inc. and IBM Corporation. Continuing economic conditions including but not limited to unemployment and declines in home values from the most recent financial crisis, however, have had a negative impact on the local economy, and have had a negative financial impact on CMS.

 

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Table of Contents

Competition

CMS faces intense competition in its market area both in making loans and attracting deposits. New York has a high concentration of financial institutions, many of which are branches of large money center and regional banks that have resulted from the consolidation of the banking industry in New York and surrounding states. The Westchester County deposit market is highly competitive and includes the largest banks in the country. Some of these competitors have more resources, capital, extensive branch and automated teller machine networks and established customer bases and may offer additional services that CMS does not offer. For example, CMS does not provide trust or investment services or credit cards. Therefore, customers who seek “one-stop shopping” may be drawn to CMS’s competitors for their depth of product offerings. CMS faces additional competition for deposits from short-term money market funds, corporate and government securities funds, and from brokerage firms, mutual funds, and insurance companies. In particular, a challenge that is unique to small banks like CMS Bank operating in Westchester County is that they operate at a disadvantage relative to many larger competitors with far greater lending capacity and well developed programs designed to attract low- to moderate-income borrowers for loans in a wider market area.

Lending Activities

Regulations require savings banks to adopt and maintain a written policy that establishes appropriate limits and standards for all extensions of credit that (i) are secured by liens on or interests in real estate, or (ii) are made for the purpose of financing the construction of a building or other improvements to real estate. The regulations also require CMS to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying guidelines, which include loan-to-value ratios for the different types of real estate loans. CMS is also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which value ratios for the different types of real estate loans. CMS is also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. CMS has established and implemented these required policies regarding its real estate lending activities.

Loan Portfolio Composition. CMS has a long-standing commitment of originating residential loans and, in recent years, multi-family, non-residential and commercial property loans. CMS sells large portions of its one-to-four family loan originations to the secondary market. In the fiscal years ended September 30, 2014 and 2013, CMS originated $5,682 and $10,136 respectively, of loans for resale. At September 30, 2014, CMS had total loans of $224.5 million of which $90.6 million or 40.3%, were one-to-four-family residential mortgages. Of the one-to-four-family residential mortgage loans outstanding at September 30, 2014, 89.7% were fixed-rate loans and 10.3% were adjustable-rate mortgage loans. CMS’s residential loan origination activity is primarily concentrated in Westchester County, New York.

The following table sets forth the composition of CMS’s mortgage and other loan portfolios in dollar amounts and in percentages at the dates indicated.

 

     At September 30,  
     2014     2013     2012     2011     2010    

 

 
     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
     (Dollars in thousands)  

Real estate mortgages:

                    

One-to-four-family

   $ 90,567        40.3 %   $ 90,177        43.2 %   $ 96,449        47.7 %   $ 101,064        56.3 %   $ 123,116        68.6 %

Multi-family

     28,659        12.8 %     25,771        12.3 %     21,220        10.5 %     14,283        8.0 %     9,124        5.1 %

Non-residential

     56,076        25.0 %     50,655        24.3 %     43,361        21.4 %     30,674        17.1 %     22,259        12.4 %

Construction

     174        0.1 %     935        0.4 %     398        0.2 %     309        0.2 %     796        0.4 %

Home equity and second mortgages

     8,653        3.9 %     8,169        3.9 %     10,111        5.0 %     10,905        6.0 %     9,454        5.3 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     184,129        82.0 %     175,707        84.1 %     171,539        84.8 %     157,235        87.6 %     164,749        91.8 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial & Industrial

     40,346        18.0 %     33,089        15.9 %     30,618        15.2 %     22,207        12.4 %     14,255        8.0 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer

     55        0.0 %     103        0.0 %     83        0.0 %     90        0.0 %     386        0.2 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     224,530        100.0 %     208,899        100.0 %     202,240        100.0 %     179,532        100.0 %     179,390        100.0 %
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Allowance for loan losses

     (740       (923       (967       (1,200       (1,114  

Net deferred origination costs and fees

     (4       20          189          464          790     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total loans receivable, net

   $ 223,786        $ 207,996        $ 201,462        $ 178,796        $ 179,066     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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Table of Contents

Loan Maturity. The following tables present the contractual maturity of CMS’s loans, the aggregate dollar amounts of the loans, and whether these loans had fixed or adjustable interest rates at September 30, 2014.

 

     At September 30, 2014  
     One- to
four-
family
     Multi-
family
     Non-
residential
     Commercial
& Industrial
     Home
Equity and
second
mortgages
     Construction
and
Consumer
     Total  
     (Dollars in thousands)  

Amount due:

                    

One year or less

   $ 3       $ 0       $ 2,361       $ 8,793       $ 0       $ 203       $ 11,360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

More than one year to three years

     493         0         0         2,985         0         0         3,478   

More than three years to five years

     2,119         272         0         3,240         4         26         5,661   

More than five years to ten years

     3,948         17,826         39,852         6,606         0            68,232   

More than ten years to twenty years

     22,766         4,082         8,659         12,490         4,573            52,570   

More than twenty years

     61,238         6,479         5,204         6,232         4,076            83,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total due after one year

     90,564         28,659         53,715         31,553         8,653         26         213,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total due:

   $ 90,567       $ 28,659       $ 56,076       $ 40,346       $ 8,653       $ 229         224,530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

                       (740

Net deferred origination costs and fees

                       (4
                    

 

 

 

Loans receivable, net

                     $ 223,786   
                    

 

 

 

Amount due after one year:

                    

Fixed rate

   $ 72,736       $ 5,300       $ 16,918       $ 20,033       $ 4,881       $ 26       $ 119,894   

Adjustable rate

   $ 17,828       $ 23,359       $ 36,797       $ 11,520       $ 3,772       $ 0       $ 93,276   

The following table presents CMS’s loan originations, purchases, sales and principal repayments for the periods indicated.

 

     For the Year Ended
September 30,
 
             2014                     2013          
     (Dollars in thousands)  

Loans receivable, gross at beginning of period

   $ 208,899      $ 202,240   
  

 

 

   

 

 

 

Originations by type:

    

One-to-four-family

     14,872        19,074   

Multi-family

     4,625        5,485   

Non-residential

     12,103        12,017   

Commercial & Industrial

     8,654        2,697   

Home equity net increase (decrease) and other

     651        (1,942
  

 

 

   

 

 

 
     40,905        37,331   

Principal repayments and net charge-offs

     (25,274     (30,672
  

 

 

   

 

 

 

Loans receivable, gross at end of period

   $ 224,530      $ 208,899   
  

 

 

   

 

 

 

Loans held for sale at beginning of period

   $ 337      $ 2,426   

Originations of one-to-four-family

     6,157        8,050   

Loans sold

     (6,145     (10,139
  

 

 

   

 

 

 

Loans held for sale at end of period

   $ 349      $ 337   
  

 

 

   

 

 

 

Residential Mortgage Lending. Traditionally, CMS has primarily originated mortgage loans secured by 1-to-4-family properties that serve as the primary residence of the owner in Westchester communities

CMS’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. Residential mortgage loans granted by CMS customarily contain “due-on-sale” clauses, which permit CMS to accelerate the indebtedness of the loan upon transfer of ownership of the mortgage property.

CMS offers 1-4 family mortgage loans for terms of up to 30 years. CMS generally lends up to a maximum loan-to-value ratio on these mortgage loans, secured by owner-occupied properties of 80% of the appraised value or the purchase price of the property whichever is less, unless mortgage insurance is provided. CMS also offers adjustable-rate mortgage loans with a maximum term of 30 years.

Multi-family Loans. CMS actively seeks opportunities to make loans secured by real estate with multi-family (five or more units) per building. These loans are structured with repayment terms of up to 30 years.

 

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Construction Loans. CMS offers short-term construction loans to well-established builders for projects that are substantially preleased or presold, where a takeout commitment is in place through CMS or another lender.

Home Equity Loans and Lines of Credit. CMS offers home equity loans and lines of credit that are generally secured by the borrower’s primary residence. CMS’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

Commercial Property Real Estate Loans. In underwriting commercial property real estate loans, consideration is given to the property’s historic and projected future cash flow, current and projected occupancy, location and physical condition. The commercial property real estate portfolio consists of loans that are collateralized by properties in CMS’s normal lending area.

Commercial Property real estate lending involves additional risks compared to 1-4 family residential lending. Since payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the property, and/or the collateral value of the commercial real estate securing the loan.

Commercial and Industrial Commercial Property Loans. In addition to commercial property real estate loans, CMS also offers small business commercial lending, including business installment loans, lines of credit and other commercial loans.

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.

Consumer Loans. CMS offers various unsecured consumer loan products to meet customer demand and needs.

Asset Quality. One of CMS’s key operating objectives is 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, CMS has been proactive in addressing problem loans and non-performing assets. These strategies, as well as CMS’s high proportion of residential 1-4 family mortgage loans, maintaining sound credit and underwriting standards for new originations have resulted in historically low delinquency ratios and low dollar amounts of non-performing assets. These factors have helped strengthen CMS’s overall financial condition.

At September 30, 2014, the Company had loans in the amount of $11.2 million or 5.0% of total loans that were considered to be impaired. Interest income recorded on impaired loans during the year ended September 30, 2014 was $274,000 and had all such loans been performing in accordance with their original terms, additional interest income of $210,000 would have been recognized.

Delinquencies and Foreclosures. When a borrower fails to make the required payments on a loan, CMS takes a number of steps to try and cure the delinquency and restore the loan to a current status. With residential 1-4 mortgage loans, CMS’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 laws and regulations. CMS encourages borrowers who are delinquent to utilize the loss mitigation counseling services provided by the servicer

In a situation where a borrower fails to bring a loan current or enter into an acceptable remediation plan, the loan will generally be recommended for foreclosure when it becomes 90 days past due. CMS’s policies require that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis.

The following table presents information regarding non-accrual mortgage and consumer and other loans, accruing loans delinquent 90 days or more, and foreclosed real estate as of the dates indicated.

 

     At September 30,  
     2014      2013      2012      2011      2010  
     (Dollars in thousands)  

Nonaccrual loans:

              

Residential mortgage loans, including home equity

   $ 2,021       $ 3,824       $ 6,068       $ 3,809       $ 2,447   

Home equity and second mortgage

     187         72         129         406         —    

Commercial & Industrial

     157         873         —           72         —     

Consumer loans

     —           —           —           19         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,365         4,769         6,197         4,306         2,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans past due 90 days or more but still accruing:

              

Residential mortgage loans

     —           —           —           —           523   

Consumer loans

     4         —           —           6         —     

Student loans

     —           —           —           —           2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     4         —           —           6         525   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-performing loans

   $ 2,369       $ 4,769       $ 6,197       $ 4,312       $ 2,972   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CMS normally stops accruing income on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectability of such interest and/ principal is doubtful. CMS designates loans on which it stops accruing interest income, as non-accrual loans and it reverses outstanding interest that it previously credited. CMS may recognize income in the period that CMS collects it, when the ultimate collectability of principal is no longer in doubt and the borrower has demonstrated a number of consecutive months of interest payments to bring loan current. CMS would normally return a non-accrual loan to accrual status when the collection no longer exists. 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. CMS had loans totaling $7.9 million and $5.2 million at September 30, 2014 and 2013, respectively, which were classified as substandard.

Foreclosed real estate consists of property acquired through foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties are initially recorded at the lower of the recorded investment in the loan or fair value. CMS had foreclosed real estate at September 30, 2014 and 2013 of $221,000 and $-0- respectively.

Allowance for Loan Losses. The following table sets forth activity in CMS’s allowance for loan loss (ALL) account for the past 5 years ended September 30, 2014:

 

     For the Years Ended September 30,  
     2014     2013     2012     2011     2010  
     (Dollars in thousands)  

Balance at beginning of period:

   $ 923      $ 967      $ 1,200      $ 1,114      $ 749   

Charge-offs:

          

One-to-four-family

     142        562        810        —          —     

Non-residential

     333        —          50        —          —     

Home equity

       —          260        —          —     

Commercial & Industrial

     9           

Consumer

       7        4        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     484        569        1,124        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

          

One-to-four-family

       82        —          —          —     

Commercial & Industrial

     1           

Consumer

       —          —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1        82       —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)/recoveries

     (483     (487     (1,124     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provisions charged to operations

     300        443        891        86        366   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 740      $ 923      $ 967      $ 1,200      $ 1,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans outstanding

   $ 217,428      $ 206,957      $ 187,835      $ 178,102      $ 174,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

     0.22 %     0.24 %     0.60 %     0.00 %     0.00 %

The ALL is a valuation account that estimates of the losses inherent in its loan portfolio. CMS maintains the allowance through provisions for loan losses that it charges to current operating expenses. CMS charges losses on loans against the allowance for loan loss account (ALL) when it believes that the collection of loan principal is unlikely.

The ALL was $740,000, or 0.33%, of gross loans outstanding, at September 30, 2014 compared to $923,000, or 0.44% of gross loans outstanding, at September 30, 2013. As of September 30, 2014 and 2013, CMS had $2.4 million and $4.8 million of non-performing loans, respectively. At September 30, 2014 and 2013, the Bank had $11.2 million and $8.0 million of loans classified as impaired. At September 30, 2014, one impaired loan for $4,000 required a specific loss allowance. The impaired loans were primarily the result of the continued difficult general economic conditions and only a partial recovery in the local real estate market.

The ALL adequately reflects the level of inherent risk in the loan portfolio. Through normal internal credit review procedures management identifies potential problem loans. These potential problem loans are placed on a loan “Watch List” which contains information that has been developed on the borrower regarding possible credit problems, which may cause the borrowers to experience difficulties in the future in complying with loan repayments.

 

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Table of Contents

The following table presents CMS’s allocation of the ALL by loan category and the percentage of loans in each category to total loans at the periods indicated.

 

     At September 30,  
     2014     2013     2012  
     Amount of
Loan Loss
Allowance
     Loan
Amounts
by
Category
     Percent
of Loans
in Each
Category
to Total
Loans
    Amount of
Loan Loss
Allowance
     Loan
Amounts
by
Category
     Percent
of Loans
in Each
Category
to Total
Loans
    Amount of
Loan Loss
Allowance
     Loan
Amounts
by
Category
     Percent
of Loans
in Each
Category
to Total
Loans
 
     (Dollars in thousands)  

One-to-four-family

   $ 257       $ 90,567         40.3 %   $ 225       $ 90,177         43.2 %   $ 625       $ 96,449         47.7 %

Multi-family

     83         28,659         12.8 %     48         25,771         12.3 %     35         21,220         10.5 %

Non-Residential

     266         56,076         25.0 %     374         50,655         24.3 %     67         43,361         21.4 %

Construction

     —           174         0.1 %     7         935         0.4 %     3         398         0.2 %

Equity & Second

     26         8,653         3.9 %     82         8,169         3.9 %     71         10,111         5 %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     632         184,129         82.0 %     736         175,707         84.1 %     801         171,539         84.8 %

Comm. & Ind.

     100         40,346         18.0 %     187         33,089         15.9 %     164         30,618         15.2 %

Consumer

     8         55         0.0 %     —           103         —   %     2         83         —   %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 740       $ 224,530         100.0 %   $ 923       $ 208,899         100 %   $ 967       $ 202,240         100 %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     At September 30,  
     2011     2010  
     Amount of
Loan Loss
Allowance
     Loan
Amounts by
Category
     Percent of
Loans in Each
Category to
Total Loans
    Amount of
Loan Loss
Allowance
     Loan
Amounts by
Category
     Percent of
Loans in Each
Category to
Total Loans
 
     (Dollars in thousands)  

One-to-four-family

   $ 583       $ 101,064         56.3 %   $ 604       $ 123,116         68.6 %

Multi-family

     29         14,283         8 %     9         9,124         5.1 %

Non-Residential

     92         30,674         17.1 %     52         22,259         12.4 %

Construction

     3         309         0.2 %     21         796         0.4 %

Equity & Second

     31         10,905         6 %     53         9,454         5.3 %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     738         157,235         87.6 %     739         164,749         91.8 %

Commercial

     459         22,207         12.4 %     364         14,255         8 %

Consumer

     3         90         —   %     11         386         0.2 %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 1,200       $ 179,592         100 %   $ 1114       $ 179,390         100 %
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Investment Activities

CMS’s Board of Directors reviews and approves CMS’s asset liability and investment policy on an annual basis. The Chief Executive Officer and Chief Financial Officer are authorized by the Board of Directors to implement this policy, based on established guidelines. CMS’s asset liability policy is designed primarily to manage the interest rate risk and interest sensitivity of its assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk and serves to complement its lending activities and provides liquidity all within established guidelines. In establishing its investment strategies, CMS considers interest rate sensitivity, the types of securities to be held, liquidity and other factors. CMS has the authority to invest in various types of assets, including securities of various government-sponsored enterprises, mortgage-backed securities, certain time deposits of insured financial institutions, repurchase agreements, overnight and short-term loans to other banks and municipal and corporate debt instruments.

Securities Portfolio. CMS has classified all its currently owned securities as Available-for-Sale. Securities may also be purchased and classified as Held to Maturity. Available for sale securities are reported at fair market value. The balance of other investments consists of demand balances due from domestic correspondent banks and the investment in Federal Home Loan Bank of New York (“FHLB-NY”) member stock.

 

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Table of Contents

CMS’s investment securities consist primarily of fixed-rate and adjustable-rate balances at government-sponsored enterprise securities and U.S mortgage-backed securities and a lesser amount of corporate and municipal bonds. The following table sets forth the composition of CMS’s available-for-securities:

 

     At September 30,  
     2014     2013     2012  
     Carrying      Percent     Carrying      Percent     Carrying      Percent  
     Value      of Total     Value      of Total     Value      of Total  
     (Dollars in thousands)  

Securities available-for-sale:

               

Mortgage-backed securities:

               

Federal Home Loan Mortgage Corporation

   $ 6,373         16.2 %   $ 7,317         18.1 %   $ 8,662         17.9 %

Small Business Administration

     5,213         13.2 %     6,244         15.4 %     7,120         14.7 %

U.S. Government Agencies

     19,573         49.7 %     18,826         46.6 %     24,088         49.8 %

Corporate bonds

     4,417         11.2 %     4,306         10.7        4,599         9.5 %

Municipal bonds

     3,789         9.6 %     3,727         9.2        3,892         8.0 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available-for-sale

     39,365         100.0 %     40,420         100.0 %     48,361         100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Securities Portfolio Maturities. The following table sets forth the scheduled maturities and weighted average yields for CMS’s available for sale investment securities at September 30, 2014. Actual maturities could differ. At September 30, 2014 there were no securities with maturities of less than one year.

 

    After One
Year
Through
Five Years
    % of
Total
    Weighted
Average
Yield
    After Five
Years
Through
Ten Years
    Total
% of
Total
    Weighted
Average
Yield
    Over
Ten
Years
    % of
Total
    Weighted
Average
Yield
    Total     % of
Total
    Weighted
Average
Yield
 

Securities available for sale

                       

U.S. Government Agencies

  $ 4,967        12.62 %     0.24 %   $ 9,754        24.78 %     0.47 %   $ 4,852        12.33 %     0.24 %   $ 19,573        49.72 %     0.95 %

Corporate bonds

          4,417        11.22 %     0.21 %           4,417        11.22 %     0.21 %

Municipal bonds

    1,298        3.30 %     0.06 %     2,491        6.33 %     0.12 %           3,789        9.63 %     0.18 %

Mortgage-backed securities:

                       

Small Business Administration

          1,006        2.56 %     0.05 %     4,207        10.69 %     0.20 %     5,213        13.24 %     0.25 %

Federal Home Loan Mortgage Corporation

                6,373        16.19 %     0.31 %     6,373        16.19 %     0.31 %
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6,265        15.92 %     0.30 %   $ 17,668        44.88 %     0.86 %   $ 15,432        39.20 %     0.75 %   $ 39,365        100.00 %     1.91 %
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposit Activity and Sources of Funds

General. CMS’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. CMS offers a variety of deposit accounts with a range of interest rates and terms. CMS currently offers regular savings deposits (consisting of passbook and statement savings accounts), interest-bearing demand accounts, non-interest-bearing demand accounts, money market accounts and time deposits. CMS has also used brokered certificates of deposit to fund liquidity.

Deposit flows are influenced significantly by general and local economic conditions, changes in prevailing interest rates, pricing of deposits and competition. CMS’s deposits are primarily obtained from the areas surrounding its offices. CMS relies primarily on paying competitive rates, service and long-standing relationships with customers to attract and retain these deposits.

When CMS determines its deposit rates, it considers local competition, U.S. Treasury securities offerings and the rates charged on other sources of funds. Core deposits (defined as savings deposits, money market accounts and demand accounts) represented 35.7% of total deposits as of September 30, 2014. Also at September 30, 2014, time deposits with remaining terms to maturity of less than one year amounted to $37.7 million.

 

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Table of Contents

Deposit Distribution Weighted Average. The following table presents the distribution of CMS’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.

 

     At September 30,  
     2014     2013     2012  
     Amount      Percent     Weighted
Average
Rate
    Amount      Percent     Weighted
Average
Rate
    Amount      Percent     Weighted
Average
Rate
 
     (Dollars in thousands)  

Demand deposits:

                     

Non-interest bearing

   $ 35,451         15.6 %     0 %   $ 28,488         13.4 %     0 %   $ 27,749         13.6 %     0 %

Interest bearing

     41,675         18.4 %     0.32 %     50,275         23.7 %     0.3 %     47,365         23.3 %     0.39 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     77,126         34.0 %     0.17 %     78,763         37.1 %     0.19 %     75,114         36.9 %     0.24 %

Savings and club

     44,230         19.5 %     0.27 %     43,050         20.3 %     0.25 %     41,791         20.5 %     0.25 %

Certificates of deposit

     105,426         46.5 %     1.17 %     90,499         42.6 %     1.37 %     86,611         42.6 %     1.41 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

   $ 226,782         100.0 %     0.66 %   $ 212,312         100 %     0.71 %   $ 203,516         100 %     0.83 %
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Time Deposit Maturities. At September 30, 2014, CMS had $60.2 million in time deposits with balances of $100,000 and over maturing as follows:

 

Maturity Period    Amount  
     (Dollars in thousands)  

Three months or less

   $ 20,086   

Over three months through 12 months

     15,363   

Over 12 months

     24,761   
  

 

 

 

Total

   $ 60,210   
  

 

 

 

Time Deposit Balances by Rates. The following table presents, by interest rate ranges, information concerning CMS’s time deposit accounts outstanding as of September 30, 2014.

 

     At September 30, 2014  
     Period to Maturity  
     Less than
One Year
     One to Two
Years
     Two to
Three Years
     More than
Three Years
     Total      Percent of
Total
 
     (Dollars in thousands)  

1.00% and under

   $ 54,238       $         $         $         $ 54,238         51.45 %

1.01% to 2.00%

        31,217         14,849         5,122         51,188         48.55 %

2.01% to 3.00%

                    %  

3.01% to 4.00%

                    %  

4.01% to 5.00%

                    %  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,238       $ 31,217       $ 14,849       $ 5,122       $ 105,426         100.00 %
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings. CMS currently borrows funds from the Federal Home Loan Bank of New York, or FHLB-NY, to finance its lending and investing activities, and may continue to borrow funds in the future. We are a member of the FHLB-NY and have the ability to borrow on an overnight or term basis. CMS’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, 2014 were as follows:

 

    Amount  
    (Dollars in thousands)  

Short term advances, maturing in less than one year, with interest at 0.39%

  $ 11,600   

One year advance, maturing February 12, 2015, with interest payable monthly at 0.27%

    2,350   

Seven year advance, maturing December 29, 2014, with interest payable quarterly at 3.56%

    5,000   
 

 

 

 

Total

  $ 18,950   
 

 

 

 

Employees

At September 30, 2014, CMS Bancorp and CMS had 37 full-time and 5 part-time employees. None of CMS Bancorp’s or CMS’s employees is represented by a collective bargaining agreement. Management believes that it enjoys excellent relations with its personnel.

 

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Table of Contents

FEDERAL AND STATE TAXATION

Federal Taxation

General. The following discussion is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to CMS Bancorp or CMS. For federal income tax purposes, CMS reports its income on the basis of a taxable year ending September 30, using the accrual method of accounting, and is generally subject to federal income taxation in the same manner as other corporations. CMS Bancorp and CMS constitute an affiliated group of corporations and, therefore, report their income on a consolidated basis. CMS is not currently under audit by the Internal Revenue Service and has not been audited by the IRS during the past five years.

Bad Debt Reserves. CMS, as a “small bank” (one with assets having an adjusted tax basis of $500 million or less), is permitted to maintain a tax reserve for bad debts based on the experience method. Under the Small Business Job Protection Act of 1996, CMS has recaptured (taking into income) over a multi-year period a portion 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 CMS’s financial statements.

Distributions. To the extent that CMS makes “non-dividend distributions” to its stockholders, such distributions will be considered to result in distributions from CMS’s uncaptured 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 CMS’s taxable income. Non-dividend distributions include distributions in excess of CMS’s current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of CMS’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 CMS’s income.

The amount of additional taxable income created from a non-dividend distribution is equal to the lesser of CMS’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%. CMS does not intend to pay dividends that would result in the recapture of any portion of its bad debt reserves.

Elimination of Dividends; Dividends Received Deduction. CMS Bancorp may exclude from its income 100% of dividends received from CMS as a member of the same affiliated group of corporations.

State Taxation

New York State Taxation. CMS is subject to the New York State franchise tax on banking corporations in an annual amount equal to the greater of (1) 7.5% of CMS’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 CMS’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, CMS is permitted a deduction for an addition to the reserve for losses on qualifying real property loans. CMS is currently using a six-year average experience method, similar to the federal method to compute their New York State bad debt deduction.

New York State passed legislation in August 1996 that incorporated into New York State tax law provisions for the continued use of bad debt reserves in a manner substantially similar to the provisions that applied under federal law prior to the enactment of the 1996 Act discussed above. This legislation enabled CMS to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of the changes in federal law and to continue to utilize the reserve method for computing its bad debt deduction. However, the New York State bad debt reserve is subject to recapture for “non-dividend distributions” in a manner similar to the recapture of federal bad debt reserves for such distributions. Also, the New York State bad debt reserve is subject to recapture in the event that CMS fails to satisfy certain definitional tests relating to its assets and the nature of its business.

Delaware State Taxation. As a Delaware holding company not earning income in Delaware, CMS Bancorp is exempted from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.

REGULATION

General

CMS Bancorp is a savings and loan holding company that is regulated, examined and supervised by the Federal Reserve. As a New York state-chartered savings bank, CMS is subject to regulation, examination and supervision by the NYSDFS, as well as by the FDIC as the federal safety and soundness regulator for all state-chartered banks that are not members of the Federal Reserve System. The FDIC also administers the laws and regulations applicable to all insured depository institutions. As a result of such federal and state regulation, CMS Bancorp and CMS must file reports with their primary regulators concerning their activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of or by, other financial institutions. CMS Bancorp is also required to file reports with, and otherwise comply with the rules and regulations of, the SEC under the federal securities laws.

 

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

Major financial reform legislation, known as the Dodd-Frank Act, was signed into law by the President in July 2010. The Dodd-Frank Act continues to impact the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the legislation will require new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Many of the provisions of the Dodd-Frank Act affecting CMS Bancorp and CMS have effective dates ranging from the enactment date of the legislation to several years following enactment of the Dodd-Frank Act.

Conversion of CMS from a federal savings association to a New York state-chartered savings bank; Resulting status of CMS Bancorp and CMS

Effective at the close of business on Friday, June 29, 2012, CMS completed its conversion from a federal savings association to a New York state-chartered savings bank after receiving approval from the NYSDFS and non-objection from the OCC (the “Charter Conversion”). In connection with the Charter Conversion, the Bank changed its name from “Community Mutual Savings Bank” to “CMS Bank.”

As a result of the Charter Conversion, the Bank is now a New York state-chartered savings bank and is no longer regulated by the Office of the Comptroller of the Currency (“OCC”) as a federal savings association. However, because CMS has elected to be treated as a “savings association,” under Section 10(l) of the Home Owners’ Loan Act or “HOLA” for purposes of the regulation of its holding company, CMS Bancorp will continue to be regulated as a savings and loan holding company by the Federal Reserve as long as CMS continues to meet the requirements to remain a “qualified thrift lender” or “QTL” under the HOLA. If CMS fails to remain a QTL, CMS Bancorp must register with the Federal Reserve as a bank holding company (versus remaining a savings and loan holding company) and be treated as such, although treatment as a bank holding company would not be expected to have any significant impact on the degree and manner of holding company regulation that CMS Bancorp is already subject to as a savings and loan holding company.

The primary business of CMS Bancorp is to operate its wholly-owned banking subsidiary, CMS. The following discussion is intended to provide a summary of the material statutes and regulations applicable to savings and loan holding companies and New York state-chartered savings banks with activity and size profiles that are similar to those of CMS Bancorp and the Bank, respectively, as they are to be administered and enforced by the applicable federal and state regulators, and does not purport to be a comprehensive description of all such statutes and regulations.

Regulation of New York State-Chartered Savings Banks

General – Primary Regulation by the NYSDFS and FDIC. As a New York state-chartered savings bank, CMS is subject to regulation, examination and supervision by the NYSDFS, as the Bank’s state regulator, as well as the FDIC, as the Bank’s primary federal regulator (for state nonmember banks) and as insurer of deposits placed at CMS. As such, CMS is required to file reports with, and otherwise comply with the rules and regulations of the NYSDFS administered pursuant to the New York Banking Law, and the rules and regulations of the FDIC applicable to all insured depository institutions and state nonmember banks.

Business Activities. The activities of New York state-chartered savings banks are governed by Article 6 of the New York Banking Law and the rules and regulations of the NYSDFS. The business activities that are permissible for a New York state-chartered savings bank generally are as broad as the permissible activities for a federal savings association. Therefore, the Charter Conversion has not had any significant adverse impact or limitation on the business activities of CMS in this regard. Federal law restricts insured state banks and their subsidiaries from engaging in activities and investments that are not permissible for national banks and their subsidiaries.

Lending and Investment Authority. In general, CMS’s lending and investment powers are derived under the New York Banking Law and the NYSDFS’s implementing rules and regulations. Under these laws and regulations, CMS may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities (including certain corporate debt securities, and obligations of federal, state, and local governments and agencies), certain types of corporate equity securities, and certain other assets. The lending powers of New York State-chartered savings banks and commercial banks are generally not subject to percentage-of-assets or capital limitations like laws applicable to federal savings associations, although limits applicable to loans to individual borrowers remain. See the discussion on “––Loans-to-One-Borrower Limitations” below.

As a condition for CMS Bancorp’s continued regulation by the Federal Reserve as a savings and loan holding company, CMS must be and remain a “qualified thrift lender” or “QTL.” To comply with this requirement, CMS is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans and small business loans) in at least nine months of the most recent 12-month period. “Portfolio assets” means, in general, CMS’s total assets less the sum of:

 

    specified liquid assets up to 20% of total assets;

 

    goodwill and other intangible assets; and

 

    the value of property used to conduct business.

As of September 30, 2014, CMS held 85.45% of its portfolio assets in qualified thrift investments and had more than 87.75 % of its portfolio assets in qualified thrift investments for each of the 12 months ending September 30, 2014. Therefore, CMS qualified, and continues to qualify, as a qualified thrift lender under the QTL test.

If CMS fails to remain a QTL, CMS Bancorp must register with the Federal Reserve as a bank holding company (versus remaining a savings and loan holding company) and be treated as such.

 

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Loans-to-One-Borrower Limitations. Under the New York Banking Law, with specified exceptions, CMS’s total loans or extensions of credit to a single borrower or group of related borrowers cannot exceed 15% of CMS’s capital stock, surplus fund and undivided profits. CMS may lend additional amounts up to 10% if the loans or extensions of credit are fully secured by readily-marketable collateral. CMS currently complies with these loans-to-one-borrower limitations. At September 30, 2014, CMS’s largest aggregate amount of loans to one borrower was $4,747,236.

Real Estate Lending Standards. The FDIC and the other federal banking agencies have adopted regulations that prescribe standards for extensions of credit that (i) are secured by real estate, or (ii) are made for the purpose of financing construction or improvements on real estate. The FDIC regulations require each institution to establish and maintain written internal real estate lending policies that are consistent with safe and sound banking practices, and are appropriate to the size of the institution and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying interagency guidelines, which include loan-to-value limitations for the different types of real estate loans. Institutions are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The interagency guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified.

In early 2013, the Consumer Financial Protection Bureau, or CFPB, issued final rules concerning the regulation of mortgage markets in the U.S. pursuant to the Dodd-Frank Act. The rules became effective mostly in 2014 and amended several existing regulations, including Regulation Z (Truth in Lending), X (Real Estate Settlement Procedures Act), and B (Equal Credit Opportunity Act).

With respect to the Regulation Z amendments, the final rule implements provisions of the Dodd-Frank Act which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establish certain protections from liability under this requirement for “qualified mortgages.” The final rule also implements a provision of the Dodd-Frank Act which limits prepayment penalties. In addition, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. In July 2014, the CFPB issued a final interpretive rule to clarify that when a borrower dies, the name of the borrower’s heir generally may be added to the mortgage without triggering the CFPB’s ability-to-repay rule.

The CFPB also issued a final rule that amends Regulation Z to implement statutory changes made by the Dodd-Frank Act that lengthen the time for which a mandatory escrow account established for a higher-priced mortgage loan must be maintained. The rule also exempts certain transactions from the statute’s escrow requirement. The primary exemption applies to mortgage transactions extended by creditors that operate predominantly in rural or underserved areas, together with their affiliates originate a limited number of first-lien covered transactions, have assets below a certain threshold, and together with their affiliates do not maintain escrow accounts on extensions of consumer credit secured by real property or a dwelling that are currently serviced by the creditors or their affiliates (subject to certain exceptions).

The CFPB also issued a final rule amending Regulation Z by expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (“HOEPA”), revising and expanding the tests for coverage under HOEPA, and imposing additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement. This final rule also amends Regulation Z and Regulation X by imposing certain other requirements related to homeownership counseling, including a requirement that consumers receive information about homeownership counseling providers.

The CFPB also issued a joint final rule with the federal banking agencies to amend Regulation Z by implementing new appraisal provisions in the Truth in Lending Act that were added by the Dodd-Frank Act. The rule requires creditors to obtain a full interior appraisal by a certified or licensed appraiser for non-exempt “higher-risk mortgage loans” (“HPMLs”). HPMLs are mortgages with annual percentage rates that exceed the average prime offer rate by a specified percentage. The rule also requires a second such appraisal at the creditor’s expense for certain properties held for less than 180 days. Exemptions include qualified mortgages, reverse mortgages, bridge loans, construction loans and certain manufactured homes. In addition, the rule requires creditors to provide the consumer a copy of all written appraisals performed in connection with the HPML at least 3 days prior to closing.

The CFPB also issued a final rule amending Regulation Z to implement requirements and restrictions imposed by the Dodd-Frank Act concerning loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance. The final rule revises or provides additional commentary on Regulation Z’s restrictions on loan originator compensation, including application of these restrictions to prohibitions on dual compensation and compensation based on the term of a transaction or a proxy for the term of a transaction, and to recordkeeping requirements. The final rule also establishes tests for when loan originators can be compensated through certain profits-based compensation arrangements.

The CFPB also amended the mortgage servicing rules under both Regulation X and Regulation Z. The Regulation X final rule implements Dodd-Frank Act sections addressing servicers’ obligations to correct errors asserted by mortgage loan borrowers; to provide certain information requested by such borrowers; and to provide protections to such borrowers in connection with force-placed insurance. Additionally, the final rule addresses servicers’ obligations to establish reasonable policies and procedures to achieve certain delineated objectives; to provide information about mortgage loss mitigation options to delinquent borrowers; to establish policies and procedures for providing delinquent borrowers with continuity of contact with servicer personnel capable of performing certain functions; and to evaluate borrowers’ applications for available loss mitigation options. Further, the final rule modifies and streamlines certain existing servicing-related provisions of Regulation X. The Regulation Z final rule implements Dodd-Frank Act sections addressing initial rate adjustment notices for

 

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adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts. The final rule also amends current rules governing the scope, timing, content, and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions.

The CFPB also amended Regulation B to implement an amendment to the Equal Credit Opportunity Act concerning appraisals and other valuations that was enacted as part of the Dodd-Frank Act. In general, the revisions to Regulation B require creditors to provide to applicants free copies of all appraisals and other written valuations developed in connection with an application for a loan to be secured by a first lien on a dwelling, and require creditors to notify applicants in writing that copies of appraisals will be provided to them promptly.

Regulatory Capital Requirements. Current FDIC regulations require state nonmember banks including CMS to meet three minimum capital standards:

 

  (1) a minimum tangible capital ratio requirement of 1.5% of tangible capital to adjusted total assets;

 

  (2) a general minimum leverage ratio requirement of 4% of core capital to such adjusted total assets (minimum of 3% for certain banks that have been assigned the highest composite rating under the Uniform Financial Institutions Ratings System); and

 

  (3) a minimum risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets, provided that the amount of supplementary capital used to satisfy this requirement may not exceed 100% of core capital.

On July 9, 2013, the FDIC Board of Directors approved an interim final rule that amends the regulatory capital rules for state nonmember banks effective January 1, 2015. The interim final rule was approved by the FDIC in coordination with, and is substantively identical to, final rules approved by the Federal Reserve and OCC for other types of banking organizations. In general, the new capital rules revise regulatory capital definitions and minimum ratios; redefine Tier 1 Capital as two components (common equity tier 1 capital and additional tier 1 capital); create a new “common equity tier 1 risk-based capital ratio”; implements a capital conservation buffer; revises prompt corrective action (PCA) thresholds and adds the new ratio to PCA framework; and changes risk weights for certain assets and off-balance sheet exposures.

The new minimum capital requirements generally become effective for all banking organizations (except for the largest internationally active banking organizations) on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital phase in over time, beginning on January 1, 2016. The new capital rules implement a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement of 4.5%, and a higher minimum Tier 1 capital requirement of 6.0% (which is an increase from 4.0%). Under the new rules, the total capital ratio remains at 8.0%, and the minimum leverage ratio (Tier 1 capital to total assets) for all banking organizations, regardless of supervisory rating, is 4.0%.

Additionally, under the new capital rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. The final rules also enhance risk sensitivity address weaknesses identified by the regulators over recent years with the measure of risk-weighted assets, including by adding new measures of creditworthiness to replace references to credit ratings, consistent with the requirements of the Dodd-Frank Act.

In assessing a state bank’s capital adequacy, the FDIC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual banks where necessary. CMS, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with CMS’s risk profile. At September 30, 2014, CMS exceeded each of its capital requirements with a tangible capital ratio of 8.4%, leverage capital ratio of 8.4% and total risk-based capital ratio of 12.36%.

Liquidity. All insured depository institutions, including CMS, are required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. For a discussion of what CMS includes in liquid assets, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, CMS has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for CMS nor does it limit its discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of CMS, to assess CMS’s record of meeting the credit needs of its community and to take the record into account in its evaluation of certain applications by CMS.

 

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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 FDIC evaluates “small banks” such as CMS using the following lending criteria:

 

    the 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;

 

    the percentage of loans and, as appropriate, other lending-related activities located in the bank’s assessment areas;

 

    the bank’s record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and business sizes;

 

    the geographic distribution of the bank’s loans; and

 

    the 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 requires all institutions to make public disclosure of their CRA ratings. CMS received an overall CRA rating of “Satisfactory” in its most recent CRA examination as of June 20, 2014.

Assessments. As a New York state-chartered savings bank, CMS is required to pay to the NYSDFS a general assessment fee in connection with the NYSDFS’ regulation and supervision (including examination) of CMS. Each state institution is billed five times per each fiscal year, with four estimated quarterly assessments set as approximately 25% of the annual amount based on the NYSDFS’ estimated annual budget at the time of the billing, and a final assessment, or “true-up,” based on the NYSDFS’ actual expenses for the fiscal year. The FDIC does not charge a state bank for supervision, although as discussed below, the FDIC charges all insured depository institutions deposit insurance assessments in connection with its administration of the Deposit Insurance Fund.

Transactions with Affiliates. CMS’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 Federal Reserve, as made applicable to state nonmember banks under the Federal Deposit Insurance Act. Under the FRA and Regulation W, the aggregate amount of covered transactions that an institution may engage in with any individual affiliate is limited to 10% of the unimpaired capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the 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 transfer of low-quality assets to a bank from its affiliates is generally restricted. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliates.

In addition, by electing to be treated as a “savings association” under Section 10(l) of the HOLA for purposes of the continued regulation of CMS Bancorp as a savings and loan holding company, CMS is subject to the additional rules governing transactions with affiliates for savings associations under Section 11 of the HOLA. Such additional restrictions prohibit a savings association from making a loan to an affiliate that is engaged in activities that are not permitted for bank holding companies under the Bank Holding Company Act (“BHCA”) and prohibit a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary.

Loans to Insiders. CMS’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, as amended by the Dodd-Frank Act, and Regulation O issued by the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders: (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of CMS’s capital. In addition, extensions of credit in excess of certain limits must be approved by CMS’s Board of Directors. As provided under the Dodd-Frank Act, in addition to other forms of extensions of credit set forth in the statute and Regulation O, a bank extends credit to a person by having credit exposure to the person arising from a derivative transaction (as defined in the national bank lending limit), repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction between the bank and the person.

Section 402 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) prohibits the extension of personal loans to directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as CMS, that is subject to the insider lending restrictions of Section 22(h) of the FRA.

 

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Limitation on Dividends and Other Capital Distributions. The principal source of cash flow to CMS Bancorp is derived from dividends that CMS pays to CMS Bancorp as its sole shareholder. Federal regulations govern the permissibility of capital distributions by a savings association to its holding company. As a state savings bank that has elected to be treated as a “savings association” for purposes of regulation of its holding company, CMS continues to be subject to the requirement to file advance notices of dividend declarations with the Federal Reserve. Savings associations that are part of a savings and loan holding company structure must file with the Federal Reserve (previously this notice was required to be filed with the OTS) a notice at least 30 days prior to declaring a dividend. The Federal Reserve may disapprove of a proposed dividend distribution if:

 

    the savings association would be undercapitalized following the distribution;

 

    the proposed distribution raises safety and soundness concerns; or

 

    the proposed distribution violates a prohibition contained in any statute, regulation, enforcement action or agreement between the savings association (or its holding company, in the case of the Federal Reserve) and the entity’s primary federal regulator, or violates a condition imposed on the savings association (or its holding company, in the case of the Federal Reserve) in an application or notice approved by the entity’s primary federal regulator.

Enforcement. The NYSDFS and FDIC each have primary enforcement responsibility over New York state-chartered nonmember banks. In general, enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices, and can result in, among other things, assessments of civil money penalties, issuance of cease and desist orders and removal of directors and officers.

Standards for Safety and Soundness. The FDIC has adopted a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder.

In addition, FDIC regulations require an institution that has been given notice by the FDIC that it is not satisfying applicable safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the FDIC may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Prompt Corrective Action Regulations. Under current prompt corrective action regulations implemented by the FDIC, the FDIC is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations, including restrictions on growth of assets and other forms of expansion. For this purpose, a state nonmember bank is placed in one of the following five categories based on the bank’s capital:

 

    well capitalized;

 

    adequately capitalized;

 

    undercapitalized;

 

    significantly undercapitalized; or

 

    critically undercapitalized.

The new capital rules due to become effective generally on January 1, 2015 maintain the general structure of the current prompt corrective action framework while increasing certain thresholds for the prompt corrective action capital categories and introducing a common equity tier 1 capital ratio as a new prompt corrective action capital category threshold.

As an institution’s capital decreases within the three undercapitalized categories listed above, the severity of the action that is authorized or required to be taken by the FDIC for state nonmember banks under the prompt corrective action regulations increases. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. The FDIC is required to monitor closely the condition of an undercapitalized institution and to restrict the growth of its assets.

An undercapitalized state nonmember bank is required to file a capital restoration plan with the FDIC within 45 days (or other timeframe prescribed by the FDIC) of the date the bank receives notice that it is within any of the three undercapitalized categories, and the plan must be guaranteed by its parent holding company, subject to a cap on the guarantee that is the lesser of (i) an amount equal to 5% of the bank’s total assets at the time it was notified that it became undercapitalized; and (ii) the amount that is necessary to restore the bank’s capital ratios to the levels required to be classified as “adequately classified,” as those ratios and levels are defined as of the time the bank failed to comply with the plan. If the bank fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions.

 

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Insurance of Deposit Accounts. CMS is a member of, and pays deposit insurance assessments to, the DIF, which is administered by the FDIC. All deposit accounts are currently insured up to $250,000 per depositor for each account ownership category.

FDIC insurance of deposits is backed by the full faith and credit of the U.S. government. In order to maintain the DIF, the FDIC imposes deposit insurance premiums on insured institutions and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity that 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 a state nonmember bank and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition.

The FDIC has authority to increase deposit insurance assessments. A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of CMS.

Under federal law, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of CMS does not know of any practice, condition or violation that might lead to termination of deposit insurance.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate based on a percentage of insured deposits to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the federal government established in 1987 to recapitalize the predecessor to the DIF. These assessments, which are adjusted quarterly, will continue until the FICO bonds mature in 2017 through 2019.

Federal Home Loan Bank System. CMS is a member of the Federal Home Loan Bank of New York or “FHLB-NY”, which is one of 12 regional FHLBs. Each FHLB provides a central credit facility primarily for its member institutions. As a member of the FHLB-NY, CMS is required to acquire and hold shares of FHLB-NY capital stock. The capital stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The capital stock has two subclasses, one for membership stock purchase requirements and the other for activity-based stock purchase requirements. The minimum stock investment requirement in the FHLB-NY capital stock is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. At September 30, 2014, CMS was in compliance with the minimum stock purchase requirements with an investment in FHLB-NY stock of $1.2 million.

The 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, CMS’s net interest income would be adversely affected.

Federal Reserve System. The FRA and Regulation D of the Federal Reserve regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). For all depository institutions, reserve requirements are established by the Federal Reserve and updated on an annual basis, as set forth in the Federal Reserve’s regulations.Since required reserves must be maintained in the form of either vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve, the general effect of the reserve requirement is to reduce CMS’s interest-earning assets.

Anti-Money Laundering and Customer Identification. CMS is subject to the regulations of the FDIC and Financial Crimes Enforcement Network which implement 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 imposes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act and related FDIC regulations impose the following obligations on financial institutions:

 

    Establishment of anti-money laundering programs;

 

    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;

 

    Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and

 

    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 and other applications under the Bank Merger Act.

 

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Through the Federal Financial Institutions Examination Council, the FDIC and other federal bank regulatory agencies have established uniform examination procedures and implemented their Statement on Enforcement of Bank Secrecy Act/Anti-Money Laundering Requirements, which describes the circumstances under which the agencies will issue a cease and desist order and clarifies that the agencies may take formal or informal enforcement actions to address other concerns related to BSA or anti-money laundering, depending on the facts.

Privacy Regulations. CMS is subject to FDIC regulations implementing the privacy protection provisions of the Gramm-Leach Bliley Act (the “GLB Act”). These regulations require CMS to disclose its privacy policy, including identifying with whom it shares “nonpublic personal information,” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require CMS to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, CMS is required to provide its customers with the ability to “opt-out” of having CMS share their personal information with unaffiliated third parties.

CMS is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLB Act. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Federal guidelines also impose certain customer disclosure requirements and other actions that financial institutions are required to take in the event of unauthorized access to customer information.

In addition, pursuant to section 114 of the Fair and Accurate Credit Transactions Act (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade Commission, CMS is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft. CMS has implemented an identity theft red flags program designed to meet the requirements of section 114 of the FACT Act and the joint final rules.

Consumer Protection and Compliance Provisions. CMS is subject to various laws and regulations dealing generally with consumer protection matters. CMS may be subject to potential liability under these laws and regulations for material violations, in the form of litigation by governmental and consumer groups, the FDIC and other federal regulatory agencies including the Department of Justice. Moreover, the CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all depository institutions, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings associations with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as CMS, will continue to be examined by their applicable primary bank regulators. CMS’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

 

    Federal “Truth in Lending Act,” governing disclosures of credit terms to consumer borrowers;

 

    “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;

 

    “Equal Credit Opportunity Act,” prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

    “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;

 

    “Fair Debt Collection Practices Act,” governing the manner in which consumer debts may be collected by collection agencies;

 

    “Real Estate Settlement Procedures Act,” governing disclosures of fee estimates that would be incurred by a borrower during the mortgage process;

 

    “Servicemembers Civil Relief Act”; and

 

    Rules and regulations of the federal agencies, primarily the CFPB, charged with the responsibility of implementing these federal laws.

CMS’s deposit operations are also subject to federal laws applicable to deposit transactions, such as the:

 

    “Truth in Savings Act,” imposing disclosure obligations to enable consumers to make informed decisions about their deposit accounts at depository institutions;

 

    “Right to Financial Privacy Act,” imposing a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

    “Electronic Fund Transfer Act,” governing 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

 

    Rules and regulations of the federal agencies, primarily the CFPB, charged with the responsibility of implementing these federal laws.

Holding Company Regulation

CMS has made an election under Section 10(l) of the HOLA to be treated as a “savings association” for purposes of the regulation of CMS Bancorp. As a result of such election by CMS, CMS Bancorp continues (i.e., after the Charter Conversion) to be registered with the Federal Reserve as a savings and loan holding company and is subject to Federal Reserve examination, enforcement and supervision, as well as reporting requirements applicable to savings and loan holding companies. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to the safety, soundness or stability of a subsidiary depository institution.

 

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Pursuant to the Dodd-Frank Act, the Federal Reserve assumed responsibility for the primary supervision and regulation of all savings and loan holding companies, including CMS Bancorp, on July 21, 2011. Given the extensive transfer of former OTS authority to multiple agencies, the Dodd-Frank Act required the Federal Reserve to identify and publish in the Federal Register separate lists of the OTS regulations that the Federal Reserve will continue to enforce for savings and loan holding companies after the transfer date. In carrying out this mandate, and in connection with its assumption of responsibility for the ongoing examination, supervision, and regulation of savings and loan holding companies, the Federal Reserve published an interim final rule that provided for the corresponding transfer from the OTS to the Federal Reserve of the regulations necessary for the Federal Reserve to administer the statutes governing savings and loan holding companies. The Federal Reserve’s regulations supersede OTS regulations for purposes of Federal Reserve supervision and regulation of savings and loan holding companies. In December 2011, the Federal Reserve issued a final notice for a two-year phase-in period for most savings and loan holding companies to file Federal Reserve regulatory reports.

If CMS fails the QTL test (discussed above), CMS Bancorp must change its status with the Federal Reserve as a savings and loan holding company and register as a bank holding company under the BHCA.

Activities Restrictions Applicable to CMS Bancorp. All unitary savings and loan holding companies organized after May 4, 1999, such as CMS Bancorp, are generally prohibited from engaging in non-financial activities. Accordingly, CMS Bancorp’s activities are generally restricted to operating CMS and other financially related activities as set forth in Federal Reserve regulations. Effective July 21, 2011, both a savings and loan holding company and its depository institution subsidiary must be well capitalized and well managed in order for the company to engage in financial activities beyond banking activities that are permitted for “financial holding companies” under the BHCA.

If the Federal Reserve believes that an activity of a savings and loan holding company or a nonbank subsidiary constitutes a serious risk to the financial safety, soundness, or stability of a subsidiary savings association and is inconsistent with the principles of sound banking, the purposes of HOLA or other applicable statutes, the Federal Reserve may require the savings and loan holding company to terminate the activity or divest control of the nonbanking subsidiary.

Source of Strength and Capital Requirements. The Dodd-Frank Act and implementing regulations require all depository institution holding companies, including savings and loan holding companies, to serve as a source of financial and managerial strength to its subsidiary depository institution. Moreover, pursuant to the Dodd-Frank Act, savings and loan holding companies will for the first time, generally beginning on January 1, 2015, become subject to the same capital and activity requirements as those applicable to bank holding companies.

The Dodd-Frank Act requires the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. These requirements must be no less than those to which insured depository institutions are currently subject to. As noted above, in July 2013, the Federal Reserve and other federal banking agencies issued a final rule revising regulatory capital rules applicable to all insured depository institutions and their holding companies (except for certain savings and loan holding companies that are “substantially engaged” in commercial or insurance underwriting activities). As a result, no later than January 1, 2015, savings and loan holding companies including CMS Bancorp will become subject to consolidated capital requirements that we have not been subject to previously, which are: (i) a minimum common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a minimum Tier 1 risk-based capital ratio of 6.0%; (iii) a minimum total risk-based capital ratio of 8.0%; and (iv) a minimum leverage ratio (Tier 1 capital to total assets) of 4.0%.

Examination. In connection with its assumption of responsibility for the ongoing supervision and examination of savings and loan holding companies, the Federal Reserve has indicated that it intends, to the greatest extent possible taking into account any unique characteristics of savings and loan holding companies and the requirements of the HOLA, to assess the condition, performance, and activities of savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal Reserve’s established risk-based approach regarding bank holding company supervision. As with bank holding companies, the Federal Reserve’s objective will be to ensure that a savings and loan holding company and its nondepository subsidiaries are effectively supervised and can serve as a source of strength for, and do not threaten the soundness of, its subsidiary depository institution(s).

In accordance with its goal to assess the condition, performance, and activities of savings and loan holding companies on a consolidated basis in a manner that is consistent with the Federal Reserve’s established risk-based approach regarding bank holding company supervision, the Federal Reserve indicated that it anticipates transitioning savings and loan holding companies to the Federal Reserve’s “RFI/C(D)” rating system (commonly referred to as “RFI”).

Restrictions on Investments in CMS Bancorp or By CMS Bancorp in Other Depository Institutions. Federal law prohibits all savings and loan holding companies, and investors in general, directly or indirectly, from taking any of the following actions without prior Federal Reserve approval:

 

    acquiring control (as defined under the HOLA) of another depository institution (or a holding company parent);

 

    for existing depository institution holding companies, acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary depository institution or holding company, or a non-subsidiary company engaged in impermissible activities;

 

    acquiring through merger, consolidation or purchase of assets, another depository institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company); or

 

    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 Federal Reserve).

 

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The definition of control found in the HOLA is similar to that found in the BHCA for bank holding companies. Both statutes apply a similar three-prong test for determining when a company controls a bank or savings association. Specifically, a company has control over either a bank or savings association if the company:

 

  (1) directly or indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more of the voting securities of a company;

 

  (2) controls in any manner the election of a majority of the directors (or any individual who performs similar functions in respect of any company, including a trustee under a trust) of the board; or

 

  (3) directly or indirectly exercises a controlling influence over the management or policies of the bank.

The Federal Reserve has issued regulations which, among other things, implement the HOLA to govern the operations of savings and loan holding companies. The rule, known as Regulation LL, includes a specific definition of “control” similar to the statutory definition, with certain additional provisions. Notwithstanding the general 25% investment threshold for control noted above, an existing bank holding company or savings and loan holding company is required to obtain the Federal Reserve’s approval before acquiring more than 5% of CMS Bancorp’s voting stock.

Additionally, under the Change in Bank Control Act (“CBCA”), a notice must generally be submitted to the Federal Reserve if any person (including a company), or group acting in concert, seeks to acquire 10% or more of CMS Bancorp’s shares of outstanding common stock. Under the CBCA, the Federal Reserve generally has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer; the convenience and needs of the communities served by CMS Bancorp and CMS; and the anti-trust effects of the acquisition. Acquisitions of control subject to approval under the HOLA or Bank Merger Act are generally exempt from the CBCA prior notice requirement.

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.

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. RISK FACTORS

An investment in our common stock involves certain risks. This section describes material risks that our management believes are specific to us and our business. Before making an investment decision, you should read carefully and consider the risk factors below in conjunction with the other information in this Form 10-K and information incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes which are set forth in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. Additional risks and uncertainties not presently known to us at this time or that we currently deem immaterial could also materially and adversely affect our business and operations. The value or market price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements and our actual results could differ substantially from those discussed in these forward-looking statements.

The following are certain material risks that our management believes are specific to us and our business. You should understand that it is not possible to predict or identify all such potential risks and, as such, this list of risk factors should not be viewed as all-inclusive or in any particular order.

 

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Risk Related to the Pending Merger Agreement with Putnam County Savings Bank

The pending Merger and related transactions with Putnam County Savings Bank are not certain to occur. Failure to comply with terms of the Merger Agreement in the interim prior to closing of the Merger could adversely affect our business. If the Merger and related transactions do not occur, our business, results of operations and our stock price could be materially adversely affected.

On September 25, 2014, CMS Bancorp and CMS Bank entered into an agreement and plan of merger (the “Merger Agreement”) with Putnam County Savings Bank (“Putnam”) and Putnam County Acquisition Corporation (“Acquisition Corporation”). The Merger Agreement provides that, subject to the terms and conditions thereof, through a series of transactions CMS Bancorp and CMS will merge with and into Putnam, with Putnam as the surviving bank (collectively, the “Merger”). Following the consummation of the Merger, each issued and outstanding share of common stock of CMS Bancorp will be converted into the right to receive $13.25 per share in cash, without interest and subject to any applicable tax withholding, and the separate corporate existence of CMS Bancorp and CMS Bank will cease to exist.

The transactions contemplated by the Merger Agreement are subject to a number of closing conditions that include, among other things, approval of the Merger Agreement by the shareholders of CMS Bancorp, redemption by CMS Bancorp of all shares of its Series A Preferred Stock, receipt of requisite bank regulatory approvals by Putnam, a requirement that not more than 10% of CMS shareholders express dissent to the Merger terms by invoking applicable state law with respect to appraisal rights, and other customary conditions.

As a result of the pending Merger: (i) the attention of management and employees could be diverted from day-to-day operations as they focus on matters relating to preparation for integration of CMS’s operations with those of Putnam; (ii) the restrictions and limitations on the conduct of CMS Bancorp’s business pending the Merger and other related transactions could disrupt or otherwise adversely affect our business and relationships with our customers, and could not be in the best interests of CMS Bancorp if it were to have to act as an independent entity following a termination of the Merger Agreement; (iii) CMS Bancorp’s ability to retain its existing employees could be adversely affected due to the uncertainties created by the Merger; and (iv) CMS Bancorp’s ability to maintain existing customer relationships, or to establish new ones, could be adversely affected. Any delay in consummating the Merger could exacerbate these issues.

There can be no assurance that all of the conditions to closing will be satisfied, or where possible, waived, or that the Merger and/or related transactions will become effective. If the Merger and related transactions do not become effective because conditions to closing are not satisfied, or because the parties mutually terminate the Merger Agreement, the following adverse effects are possible: (i) CMS Bancorp’s stockholders will not receive the cash merger consideration of $13.25 per share; (ii) CMS Bancorp’s stock price could decline; (iii) CMS Bancorp’s business could be adversely affected; (iv) CMS Bancorp will have incurred significant transaction costs related to negotiating and working towards the Merger, which may or may not be reimbursable up to $350,000 by Putnam; and (v) under certain circumstances, CMS Bancorp could have to pay Putnam a termination fee of up to $1,000,000. For further information regarding the Merger, see CMS Bancorp’s Form 8-K filed with the SEC on September 25, 2014.

 

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Risk Related to the Terminated Merger Agreement with Customers

Given Customers’ public misstatement that the Merger Agreement had been terminated prior to December 31, 2013 by mutual consent of the parties, the Company is currently involved in pending litigation to enforce its right to collect a One Million Dollar termination fee from Customers. While the Company believes it will succeed on the merits to collect the termination fee from Customers, litigation is subject to inherent risk, and therefore, the Company’s success as the outcome of litigation cannot be guaranteed.

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

Risks Related to Our Industry and Business

Difficult economic and market conditions have adversely affected our industry.

From December 2007 to June 2009, the United States experienced the worst economic downturn since the Great Depression. This period was marked by reduced business activity across a wide range of industries and regions, significant increases in unemployment, volatility and disruption in the capital and credit markets, and dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, which negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions across the United States. The recession was also marked by tightening of the credit markets and steep declines in the stock markets, which resulted in a difficult loan environment and decreased the value of our portfolio of investment securities.

Although the domestic economy continued its modest recovery during our 2014 fiscal year, the recovery is weak and there can be no assurance that the economy will not enter into another recession, whether in the near or long term future. Furthermore, real estate values and the demand for commercial real estate loans have not fully recovered, and reduced availability of commercial credit and continuing unemployment have negatively impacted the credit performance of commercial and consumer credit. Additional market developments such as a relapse or worsening of economic conditions in other parts of the world would likely exacerbate the lingering effects of the difficult market conditions experienced by us and others in the financial services industry and could further slow, stall or reverse the slow recovery in the U.S.

Increased regulation of our industry continues to increase our regulatory compliance costs, impact our sources of revenue, and create regulatory uncertainty.

Implementation of the 2010 Dodd-Frank Act and other legislative and regulatory initiatives taken by Congress and the federal banking regulators has changed and will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of banking institutions and their holding companies, which is expected to continue to significantly increase our regulatory compliance costs.

Our regulators continue to propose rules and implement provisions of the Dodd-Frank Act. For example, the Dodd-Frank Act required the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. In July 2013, the federal banking agencies issued new capital rules revising regulatory capital rules applicable to all insured depository institutions and their holding companies (except for certain savings and loan holding companies engaged in commercial activities). The new rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. In addition to the minimum leverage ratio (Tier 1 capital to total assets) of 4.0%, the minimum capital to risk-weighted assets requirements under the revised capital rules are a common equity Tier 1 risk-based capital ratio of 4.5%; a Tier 1 risk-based capital ratio of 6.0%, which is an increase from 4.0%; and a total risk-based capital ratio that remains at 8.0%. The new minimum capital requirements are anticipated to become effective on January 1, 2015. As a result, no later than January 2015, CMS Bancorp will become subject to consolidated capital requirements which we have not been subject to previously.

Many other provisions of the Dodd-Frank Act still require extensive rulemaking, guidance and interpretation by regulatory agencies. Accordingly, in many respects, the ultimate impact of the legislation and its effects on the U.S. financial system and CMS Bancorp remain uncertain. We are continuing to closely monitor and evaluate regulatory developments. Such developments could adversely affect our financial condition and results of operations through significant increases in our regulatory compliance costs.

We are subject to extensive regulations that could limit or restrict our activities, and the cost of compliance is high.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies, currently including the NYSDFS, Federal Reserve and the FDIC. Banking regulations are primarily intended to protect the DIF and

 

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depositors, not stockholders. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to regulatory capital requirements, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance could be materially and adversely affected.

Determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires significant estimates, and actual losses may vary from current estimates.

CMS maintains an allowance for loan losses to provide for loans in its portfolio that may not be repaid in their entirety. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us and CMS to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

In evaluating the adequacy of CMS’s allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we consider many qualitative factors, including general and economic business conditions, duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding CMS’ borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. In considering information about specific borrower situations, our analysis is subject to the risk that we are provided inaccurate or incomplete information. Because of the degree of uncertainty and susceptibility of these factors to change, CMS’s actual losses may vary from our current estimates.

Additionally, bank regulators periodically review CMS’s allowance for loan losses and may require an increase in the provision for loan losses or recognize loan charge-offs based upon their judgments, which may be different from ours. Any increase in CMS’s allowance for loan losses or loan charge-offs required by these regulatory authorities may adversely affect our operating results.

Until there is significant improvement in economic and market conditions, CMS could incur additional losses relating to an increase in nonperforming loans. CMS does not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting its income, and increasing its loan administration costs. When CMS takes collateral in foreclosures and similar proceedings, it is required to mark the related loan to the then fair market value of the collateral, which could result in a loss. These loans and other real estate owned also increase its risk profile and the capital its regulators believe is appropriate in light of such risks. As a result of current economic conditions, additional provisions for loan losses could be necessary.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.

The repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.

Federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. If market conditions warrant us to begin offering interest on demand deposits to attract new customers or maintain current customers, our interest expense will increase and our net interest margin will decrease, which could have a material adverse effect on our business, financial condition and results of operation.

Changes in interest rates could adversely affect our results of operations and financial condition.

Our profitability, like that of most financial institutions, depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and investment securities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. Decreases in interest rates can result in increased prepayments of loans and investment securities as borrowers refinance to reduce borrowing costs. In a decreasing interest rate environment, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. In an increasing interest rate environment, we are subject to the risk that interest costs on deposits and borrowings could rise more quickly than interest income from loans and investments.

While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities and pricing of our assets and liabilities, our efforts may not be effective in a changing interest rate environment and our financial condition and results of operations could suffer.

 

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Changes in market interest rates or other conditions may have an adverse impact on the fair value of CMS Bancorp’s available-for-sale securities, stockholders’ equity and profits.

GAAP requires CMS Bancorp to carry its available-for-sale securities at fair value on its balance sheet. Unrealized gains or losses on these securities, reflecting the difference between the fair market value and the amortized cost, net of its tax effect, are included as a component of stockholders’ equity. When market rates of interest increase, the fair value of CMS Bancorp’s securities available-for-sale generally decreases and equity correspondingly decreases. When rates decrease, fair value generally increases and stockholders’ equity correspondingly increases. However, due to significant disruptions in global financial markets, such as those which occurred in 2008, this usual relationship can be disrupted.

Prices and volumes of transactions in the nation’s securities markets can be affected suddenly by economic crises, such as that experienced in the United States and internationally in 2008, or by other national or international crises, such as national disasters, acts of war or terrorism, changes in commodities markets, or instability in foreign governments. Disruptions in securities markets may detrimentally affect the value of securities that we hold in our investment portfolio, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that declines in market value associated with these disruptions will not result in other than temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

Our loan portfolio includes loans with a higher risk of loss.

While the majority of CMS’s loan portfolio consists of residential mortgage loans, CMS also originates other types of loans including commercial loans. Commercial loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate because repayment is generally dependent upon the successful operation of the borrower’s business.

The current downturn in the real estate market, unemployment and local economy could adversely affect the value of the properties securing the loans or revenues from the borrower’s business thereby increasing the risk of non-performing loans. The national and local real estate markets generally remain stagnant, with a continued slowdown in the general housing market that is evidenced by reports of reduced levels of new and existing home sales, increasing inventories of houses on the market, stagnant to declining property values and an increase in the length of time houses remain on the market. No assurances can be given that these conditions will improve or will not worsen.

A significant portion of our loan portfolio is secured by real estate; therefore we have a high degree of risk from a downturn in our real estate markets and the local economy and face risks that are unique to holding foreclosed real estate.

A further downturn in the real estate market and local economy in Westchester County, New York could hurt our business because a significant portion of our loans are secured by real estate located in Westchester County. Real estate values and real estate markets are generally affected by, among other things, changes in regional or local economic conditions, fluctuations in interest rates, and the availability of loans to potential purchasers. If real estate values decline in Westchester County, the value of real estate collateral securing our loans could be significantly reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.

Additionally, CMS faces certain risks that are unique to holding foreclosed real estate, such as the risk that hazardous or toxic substances are found on the foreclosed property, which could require CMS to incur substantial expenses to remediate or materially reduce the property’s value. Although CMS has policies and procedures in place to ensure that an environmental review is performed before initiating any foreclosure action on real property, these reviews could turn out to be insufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard in connection with foreclosed real estate could have a material adverse effect on our financial condition and results of operations. At September 30, 2014, CMS had $183,000 of foreclosed real estate.

Changes in our asset quality could adversely affect our results of operations and financial condition.

When we discuss “asset quality,” we generally mean the likelihood that a borrower will repay a loan, with interest, on time. We believe our overall asset quality is good, and has been that way for several years. However, we cannot predict whether our asset quality will change because changes in the economy can impact asset quality. If our asset quality were to deteriorate, it could expose us to greater credit risk and adversely affect our financial condition.

The results of our operations may be adversely affected if asset valuations cause other-than-temporary impairment charges.

CMS may be required to record future impairment charges on our investment securities if such securities suffer declines in value that are considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of CMS to upstream dividends to CMS Bancorp, which could have a material adverse effect on our liquidity and could also negatively impact our regulatory capital ratios and result in CMS not being classified as “well capitalized” for regulatory purposes.

 

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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, could lead to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There can be no assurance that any such losses would not materially and adversely affect our results of operations.

Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, or the sale of loans and other sources to accommodate our existing and future lending and investment activities could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is retail deposits gathered through our network of branch offices. Our alternative funding sources include, without limitation, brokered certificates of deposit, federal funds purchased, Federal Reserve Discount Window borrowings, FHLB-NY advances and short and long-term debt.

CMS has historically obtained funds principally through local deposits and it has a base of lower cost transaction deposits. Generally, we believe local deposits are a cheaper and more stable source of funds than other borrowings, because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits.

Our costs of funds, profitability and liquidity will be adversely affected to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.

We may look to sell production assets, such as mortgage loans, into the secondary market as a means to manage the size of our balance sheet and manage the use of our capital. The demand for these products in the capital markets is not driven by us and may not benefit us at the time we look to sell the loans.

Our liquidity, on a parent only basis, could be adversely affected by certain restrictions on receiving dividends from the Bank without prior regulatory approval.

Our financial success is dependent on the prevailing economic, political and business conditions as well as the population growth in Westchester County, New York.

Our success and growth is dependent on the income levels, deposits and population growth in our primary market area, which is Westchester County, New York. If the communities in which we operate do not grow or if prevailing economic conditions locally are unfavorable, our business will be negatively affected.

Additionally, there are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or the value of the collateral securing loans decreases. Our business operations and activities are predominantly concentrated in Westchester County and most of our credit exposure is in that area, so we are specifically at risk from adverse economic, political and business conditions that affect Westchester County. Accordingly, economic and business conditions in Westchester County, such as increases in unemployment, commercial and consumer delinquencies and real estate foreclosures, as well as decreases in real gross domestic product, home and land prices or home sales, will each adversely impact our credit risk.

We depend on our executive officers and key personnel to continue the implementation of our 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 could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. We have an employment agreement with our President and Chief Executive Officer and change in control agreements with several other senior executive officers which are intended to incentivize such senior executive officers to remain with CMS during the pendency of a change in control. The loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to implement our business strategy. In addition, if regulatory restrictions are imposed on our ability to compensate our key executive officers, this would likely adversely impact our ability to retain key personnel.

Our financial success is dependent on our ability to compete effectively in highly competitive markets.

We operate in the highly competitive market of Westchester County, New York. Our growth and success depends on our ability to compete effectively in this market. Through CMS, we compete for loans, deposits and other financial services in geographic markets with other local, regional and national commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer financial companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national and international financial institutions. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. Larger competitors may be able to price loans and deposits more aggressively than we can and have broader customer and geographic bases to draw upon.

 

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Competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us. Through CMS, we compete with these institutions both in attracting deposits and in making loans. In addition, we must attract our customer base from other existing financial institutions and from new residents. There is a risk that we will not be able to compete successfully with these other financial institutions in our markets, and that we may have to pay higher interest rates to attract deposits or charge lower interest rates to obtain loan volume, resulting in reduced profitability. In new markets that we may enter, we will also compete against well-established community banks that have developed relationships within the community.

Changes in the Federal Reserve’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 Federal Reserve has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock, and our ability to attract additional deposits.

We are required to include in our annual reports filed with the SEC a report from our management regarding internal control over financial reporting. As a result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual management report on our internal control over financial reporting, including, among other matters, 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.

Provisions of our charter, bylaws and certain laws containing antitakeover provisions may prevent transactions you might favor, including a sale or merger of CMS Bancorp with or to a particular party.

Provisions of our charter and bylaws may make it more difficult for companies or persons to gain control of us through a tender offer, business combination, proxy contest or some other method, even though you might be in favor of the transaction. These anti-takeover provisions include:

 

    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 Federal Reserve approval prior to any direct or indirect acquisition of “control” (as defined in Federal Reserve regulations) of CMS, including any acquisition of control of CMS Bancorp. By statute, a company would be found to “control” CMS if the company: (1) directly or indirectly or acting in concert with one or more persons, owns, controls, or has the power to vote 25% or more of the voting securities of CMS Bancorp or CMS; (2) controls in any manner the election of a majority of the directors of CMS Bancorp’s or CMS’s board; or (3) directly or indirectly exercises a controlling influence over the management or policies of CMS Bancorp and CMS. The Federal Reserve’s implementing regulations provide a specific definition of “control” similar to the statutory definition, with certain additional provisions. In addition to the rebuttable presumptions of control set forth in the implementing regulations, the Federal Reserve’s supervision manual for supervised institutions provides that there are a number of other circumstances that are indicative of control and may call for further investigation to uncover facts that support a determination of control.

The downgrade of U.S. government securities by the credit rating agencies could have a material adverse effect on CMS Bancorp’s operations, earnings, and financial condition.

The continuing debates in Congress regarding the national debt ceiling, federal budget deficit concerns, and overall weakness in the economy resulted in actual and threatened downgrades of U.S. government securities by the various major credit ratings agencies, including Standard and Poor’s and Fitch Ratings. While the federal banking agencies including the Federal Reserve and the FDIC have issued guidance indicating that, for risk-based capital purposes, the risk weights for U.S. Treasury securities and other securities issued or guaranteed by the

 

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U.S. government, government agencies, and government-sponsored entities will not be affected by the downgrade, the downgrade of U.S. government securities by Standard and Poor’s and the possible future downgrade of the federal government’s credit rating by one or both of the other two major rating agencies (which has been forewarned by Fitch Ratings), could create uncertainty in the U.S. and global financial markets and cause other events which, directly or indirectly, could adversely affect CMS Bancorp’s operations, earnings, and financial condition.

We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.

We rely heavily on communications and information systems to conduct our business. Furthermore, we have access to large amounts of confidential financial information and control substantial financial assets, including those belonging to our customers, to whom we offer remote access, and we regularly transfer substantial financial assets by electronic means. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any failure, interruption or breach in security of our systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, our security measures may not be successful.

In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations. We also face the risk of operational disruption, failure, termination or capacity constraints caused by third parties that facilitate our business activities by providing technology such as software applications, as well as financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure.

We also face the potential risk of loss due to fraud, including commercial checking account fraud, automated teller machine (“ATM”) skimming and trapping, write-offs necessitated by debit card fraud, and other forms of online banking fraud, which are becoming more sophisticated and present new challenges as mobile banking increases, as well as employee fraud. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

 

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We are subject to extensive regulations that could limit or restrict our activities, and the cost of compliance is high.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies, currently including the NYSDFS, Federal Reserve and the FDIC. Banking regulations are primarily intended to protect the DIF and depositors, not stockholders. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to regulatory capital requirements, which require us to maintain adequate capital to support our growth. If we fail to meet these capital and other regulatory requirements, our ability to grow, our cost of funds and FDIC insurance could be materially and adversely affected.

Non-compliance with key banking laws and regulations designed to prevent money-laundering and terrorist financing activities could result in fines, sanctions or other adverse consequences.

Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators, and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the federal government has imposed and is expected to expand laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations, however it is possible for such safeguards to fail or prove deficient during the implementation phase to avoid non-compliance with such laws.

Risks Relating to Our Common Stock

The price of our common stock could fluctuate significantly, and this could make it difficult for you to resell shares of our common stock at times or at prices you find attractive.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility during the recent economic downturn. In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength. As a result, the trading volume in our common stock could fluctuate more than usual and cause significant price variations to occur. This could make it difficult for you to resell shares of our common stock at times or at prices you find attractive.

The trading price of the shares of our common stock will depend on many factors that could change from time to time and could be beyond our control. Among the factors that could affect our stock price are those identified in the section entitled “Special Cautionary Note Regarding Forward-Looking Statements” and as follows:

 

    actual or anticipated quarterly fluctuations in our operating results and financial condition;

 

    changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;

 

    failure to meet analysts’ revenue or earnings estimates;

 

    speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general;

 

    strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;

 

    actions by our current stockholders, including sales of common stock by existing stockholders and/or directors and executive officers;

 

    fluctuations in the stock price and operating results of our competitors;

 

    future sales of our equity, equity-related or debt securities;

 

    changes in the frequency or amount of dividends or share repurchases;

 

    proposed or adopted regulatory changes or developments;

 

    anticipated or pending investigations, proceedings or litigation that involve or affect us;

 

    trading activities in our common stock, including short-selling;

 

    domestic and local economic factors unrelated to our performance; and

 

    general market conditions and, in particular, developments related to market conditions for the financial services industry.

A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

 

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The trading volume in our common stock has been low, and the sale of a substantial number of shares of our common stock in the public market could depress the price of our common stock and make it difficult for you to sell your shares.

Our common stock is listed to trade on the Nasdaq Capital Market, but is thinly traded. As a result, you may not be able to sell your shares of common stock on short notice. Additionally, thinly traded stock can be more volatile than stock trading in an active public market. The sale of a substantial number of shares of our common stock at one time could temporarily depress the market price of our common stock, making it difficult for you to sell your shares and impairing our ability to raise capital.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We are required by regulatory agencies to maintain adequate levels of capital to support our operations and such levels could be increased by legislative and regulatory developments. Our ability to raise additional capital, if needed, may depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our financial position could deteriorate.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable

 

ITEM 2. PROPERTIES

Through CMS, CMS Bancorp conducts its business primarily through its corporate office and five retail banking offices. As of September 30, 2014, properties, furnishings and equipment and leasehold improvements owned by CMS Bancorp and CMS had an aggregate net book value of $2.6 million.

 

Location

           Ownership              Year
        Opened        
         Year of Lease    
         Expiration         
 

Corporate Office:

        

123 Main Street

White Plains, NY

     Leased         2004         2015   

Retail Banking Offices:

        

478 White Plains Road

Eastchester, NY

     Leased         2008         2017   

441 Tarrytown Road

White Plains, NY

     Leased         2008         2018   

40 East First Street

Mount Vernon, NY

     Owned         1941         N/A   

29 Taylor Square

East White Plains, NY

     Leased         1995         2026   

12 South Bedford Road

Mount Kisco, NY

     Leased         2009         2023   

 

ITEM 3. LEGAL PROCEEDINGS

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

CMS Bancorp may from time to time also be involved in routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to CMS Bancorp’s financial condition and results of operations.

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

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 each quarter of the years ended September 30, 2014 and 2013. The quotations reflect inter-dealer prices, without mark-up, mark-down or commissions, and may not represent actual transactions.

 

Quarter Ended    High Price      Low Price      Average Price      Dividends per share  

December 31, 2012

   $ 8.30       $ 7.50       $ 7.95       $ 0   

March 31, 2013

   $ 10.44       $ 7.27       $ 8.44       $ 0   

June 30, 2013

   $ 9.55       $ 7.88       $ 8.69       $ 0   

September 30, 2013

   $ 9.33       $ 8.54       $ 8.94       $ 0   

December 31, 2013

   $ 9.65       $ 7.68       $ 8.54       $ 0   

March 31, 2014

   $ 9.70       $ 8.95       $ 9.32       $ 0   

June 30, 2014

   $ 11.14       $ 9.27       $ 9.79       $ 0   

September 30, 2014

   $ 12.95       $ 10.35       $ 11.72       $ 0   

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. CMS Bancorp has historically not paid cash dividends on its common stock and does not intend to do so for the foreseeable future.

As of December 19, 2014 there were approximately 240 record holders of CMS Bancorp’s common stock.

Set forth below is information as of September 30, 2014 regarding compensation plans under which equity securities of CMS Bancorp are authorized for issuance.

 

Plan category   Number of Securities to
be Issued upon Exercise
of Outstanding Options
and Rights
    Weighted Average
Exercise Price

of Outstanding Options
and Rights
    Number of Securities
Remaining Available for
Issuance under Equity
Compensation Plans
 

Equity compensation plans approved by security holders

    186,479      $ 9.56        19,037  [1] 

Equity compensation plans not approved by security holders

     
 

 

 

     

 

 

 

Total

    186,479      $ 9.56        19,037   
 

 

 

     

 

 

 

 

[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.

 

ITEM 6. SELECTED FINANCIAL DATA

Not applicable to smaller reporting companies.

 

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 of Financial Condition and Results of Operations” in the CMS Bancorp, Inc. 2014 Annual Report to Shareholders attached hereto as Exhibit 13.1.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

 

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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. 2014 Annual Report to Shareholders attached hereto as Exhibit 13.1.

 

     Page(s) in
Annual Report
 

Report of Independent Registered Public Accounting Firm

     16   

Consolidated Statements of Financial Condition, As of September 30, 2014 and 2013

     17   

Consolidated Statements of Income, Years Ended September 30, 2014 and 2013

     18   

Consolidated Statements of Comprehensive Income, Years Ended September 30, 2014 and 2013

     19   

Consolidated Statements of Changes in Stockholders’ Equity, Years Ended September 30, 2014 and 2013

     20   

Consolidated Statements of Cash Flows, Years Ended September 30, 2014 and 2013

     21   

Notes to Consolidated Financial Statements

     22   

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

As previously reported, on July 9, 2013, CMS Bancorp, after review and recommendation of the Audit Committee of the Board of Directors, appointed BDO USA, LLP (“BDO”) as CMS Bancorp’s new independent registered public accounting firm for and with respect to CMS Bancorp’s fiscal year ending September 30, 2013, and dismissed ParenteBeard LLC (“ParenteBeard”) from that role. CMS Bancorp’s decision to engage BDO and dismiss ParenteBeard was made in connection with the resignation of CMS Bancorp’s principal audit personnel at ParenteBeard from ParenteBeard to join BDO.

During CMS Bancorp’s two most recent fiscal years prior to the dismissal of ParenteBeard and the subsequent interim period preceding ParenteBeard’s dismissal, there were: (i) no disagreements with ParenteBeard on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure; and (ii) no “reportable events” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K). For more information about the change in CMS Bancorp’s independent registered public accounting firm, see CMS Bancorp’s Current Report on Form 8-K filed with the SEC on July 10, 2013.

 

ITEM 9A. 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, 2014. 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 (1992). Based on that assessment, management concluded that, as of September 30, 2014, CMS Bancorp’s internal control over financial reporting was effective based on this criteria.

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 rules of the SEC applicable to smaller reporting companies.

 

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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.

Evaluation of Disclosure Controls and Procedures

Management has conducted an evaluation, with the participation of CMS Bancorp’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, of 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 within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

 

ITEM 9B. OTHER INFORMATION

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

General

CMS Bancorp’s Board of Directors currently consists of ten members. CMS Bancorp’s charter provides that the Board of Directors is divided into three classes, as nearly equal in number as possible. The Board of Directors oversees our business and monitors the performance of our management. In accordance with our corporate governance procedures, the Board of Directors does not involve itself in our day-to-day operations. Our executive officers and management oversee our day-to-day operations. Our directors fulfill their duties and responsibilities by attending meetings of the Board of Directors. Our directors also discuss business and other matters with the Chairman of the Board of Directors, other key executives, and our principal external advisers, including legal counsel, auditors, financial advisors, and other consultants.

Director and Officer Biographical Information

The following table sets forth the names and ages (as of September 30, 2014) of all directors and executive officers of the Company, as well as each individual’s position with the Company or Bank and each director’s term of office (as applicable).

 

Director or Officer

  

Age(1)

  

Position with CMS Bancorp or
CMS Bank

  

Director Since(2)

  

Directorship

Term Expires

Cheri R. Mazza

   56    Director    2006    2016

John E. Ritacco

   60   

President, Chief Executive Officer, Interim CFO and Director

   2005    2016

Mauro C. Romita

   75    Director    2011    2016

William M. Mooney, Jr.

   74    Chairman    2011    2017

Gerry Ryan

   50    Director    2011    2017

Robert P. Weisz

   61    Director    2010    2017

William V. Cuddy, Jr.

   55    Director    1994    2017

William P. Harrington

   57    Director    2009    2015

Susan A. Massaro

   58    Director    1998    2015

Matthew G. McCrosson

   64    Director    2004    2015

Christopher Strauss

   71   

Senior Vice President, Senior Lending Officer and Compliance Officer

   N/A    N/A

Diane E. Cocozzo

   50   

Senior Vice President, Corporate Secretary and Retail Bank Manager

   N/A    N/A

 

(1) As of September 30, 2014.
(2) Includes service as a trustee of CMS Bank prior to the formation of CMS Bancorp in 2007, if applicable.

The principal occupation and business experience of each director are set forth below. Unless otherwise indicated, each of the following persons has held his or her present position for the last five years. Moreover, unless otherwise indicated, no company or organization at which a director is principally employed is a parent, subsidiary or affiliate of CMS Bancorp.

Cheri R. Mazza, Ph.D. is a consultant and former Associate Professor of Accounting for the John F. Welch School of Business at Sacred Heart University in Fairfield, CT. Prior to joining Sacred Heart, she was a professor at Fordham University (2000-2009) and a project manager (1994-2000) for the Financial Accounting Standards Board (FASB). Dr. Mazza also has experience in the corporate taxation area of public accounting. She is a Certified Public Accountant (CPA) and a Certified Management Accountant (CMA).

Dr. Mazza’s research encompasses issues in contemporary financial reporting, standard setting, and quality of earnings. She has published numerous articles in academic and professional journals including The Accounting Review, Accounting Horizons, Journal of Behavioral Finance, Journal of Accountancy, Financial Analyst’s Journal, and The Journal of Corporate Accounting and Finance. In addition, she co-authored three financial accounting portfolios for The Bureau of National Affairs.

Dr. Mazza is a highly educated and experienced accounting professional who brings a wealth of knowledge to the Board of Directors in the financial accounting area. Her extensive experience in teaching, research, and standard setting provides CMS Bancorp and CMS Bank with a high level of expertise in matters related to financial reporting and the application of generally accepted accounting principles all of which enhance her leadership as Chairperson of the Audit Committee. Dr. Mazza’s significant experience gained through, among other qualifications, six years with FASB in standard setting, her Ph.D. in accounting, and academic experience in both teaching and research make Dr. Mazza an invaluable member of the Board of Directors.

 

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John E. Ritacco’s banking career spans more than three decades serving in various management and executive positions for major financial institutions. Mr. Ritacco has served as the President and Chief Executive Officer of CMS Bank since 2005 and serves as a member of the Board of Directors of both CMS Bancorp and CMS Bank. Mr. Ritacco is actively involved in numerous Westchester County charitable organizations, having served on the Board of the March of Dimes and Junior Achievement of Hudson Valley where he was the Chairman of the Board from 2003-2005. Currently Mr. Ritacco serves on the Board of the Westchester County Association, the largest business association in Westchester County. Mr. Ritacco is a graduate of the University of Rhode Island where he earned a Bachelor of Arts Degree in History/Political Science in 1976.

Mr. Ritacco possesses a far-ranging depth of experience in the financial services industry, having worked for several financial institutions in various capacities including retail banking, small business and corporate lending, corporate finance and sales management. His extensive knowledge of the industry and strong leadership skills provide CMS Bancorp and CMS Bank with invaluable leadership, insight and guidance into the business and regulatory requirements of today’s banking environment.

Mauro C. Romita is President and Chief Operating Officer of Castle Oil Corporation (“Castle”). He joined Castle in 1968 after practicing law in New York City. The company is the largest independent owner-operator of petroleum terminals and distributor of fuel oil in the New York metropolitan area. Mr. Romita oversees the operations of all domestic and international areas of Castle and its subsidiaries, including product supply and marketing, sales, terminals, trucking operations, service, and administrative functions. Mr. Romita earned his Bachelor of Arts degree in 1961 from Iona College, where he majored in Spanish language and literature with a minor concentration in Italian literature. In 1965, he received his Juris Doctor degree from New York Law School. He is admitted to practice law in the State of New York. In addition to his responsibilities at Castle, Mr. Romita is a dedicated participant in diverse educational and charitable organizations and has been a recipient of numerous awards and accolades.

Mr. Romita’s vast business experience and contacts in Westchester County, the primary target area for CMS Bancorp, and his high level of participation in numerous charitable, educational and civic organizations has enabled Mr. Romita to develop personal relationships throughout the region with significant business leaders, and has allowed Mr. Romita to also develop an enhanced knowledge of the local community which is necessary for CMS Bank’s growth and success. Mr. Romita’s strong financial analytical skills regarding business management, stability and growth make him a valued member of the Board of Directors.

William V. Cuddy, Jr. serves as Executive Vice President of CBRE Group, Inc., providing commercial real estate brokerage and consulting services to regional and national clients for over 29 years. He leads a team of professionals in providing corporate real estate services including tenant representation (regional and national), as well as agency sales and leasing. CB Group, Inc. has recognized Mr. Cuddy as its top producing broker numerous times and he was awarded the NAIOP Deal of the Year six times for various sales and lease transactions.

Mr. Cuddy’s present and past leadership positions have included serving as a director of The Burke Hospital Foundation since 2009; director of The Burke Research Institute since 2006; and Director (2001-2009) and Past President of The Burke Rehabilitation Hospital (2007-2009); Member, Board of Stewards and Past President (2007) with the Friendly Sons of St. Patrick in Westchester County; Board member at Mercy College (1996-2005); and Director of the Westchester County Association (WCA) since 2010. Mr. Cuddy is also currently serving as Chairman of the WCA Economic Development Task Force.

The Board of Directors values the depth of Mr. Cuddy’s background and expertise in real estate matters. In particular, Mr. Cuddy provides CMS Bancorp and CMS Bank with an extensive knowledge of the regional commercial real estate market, and provides valuable assistance in fostering relationships with owners, investors, developers and the corporate community. Mr. Cuddy is also valued for his marketing and transaction skills.

William P. Harrington is a Partner and Chairman of the Management Committee of Bleakley Platt & Schmidt, LLP, a full service law firm with offices in White Plains, New York and Greenwich, Connecticut. Mr. Harrington has been employed with Bleakley Platt & Schmidt, LLP since August of 1983. He is also the head of the Litigation and Toxic Tort/Complex Litigation Practice Groups, member of the Environmental Practice Group, and member of the firm’s Executive Committee. Mr. Harrington is the Chairman of the Westchester County Association and a member of the Board of Trustees of Elizabeth Seton Pediatric Center, St. Joseph’s Seminary and College, The Friendly Sons of St. Patrick in the County of Westchester, Inner City Scholarship Fund of the Archdiocese of New York, Dominican Sisters of Hope Health System, Capuchin Franciscans of the Province of St. Mary, and Knights of St. Patrick. He is also a member of the Board of Directors of TBS International, Ltd (“TBSI”), a NASDAQ-listed company, and serves as TBSI’s Lead Independent Director and the Chair of its Governance Committee.

The Board of Directors values Mr. Harrington’s depth of legal experience as an attorney for over 27 years representing significant regional and national clients in commercial, environmental, labor and land use litigation, which has provided Mr. Harrington with a strong familiarity with CMS Bank’s target market, its constituents and potential clients. Mr. Harrington’s extensive participation as a member of the various charitable and business organizations mentioned above has enabled Mr. Harrington to develop personal relationships throughout the region with significant business leaders, and has allowed Mr. Harrington to also develop an enhanced knowledge of the local community which is necessary for CMS Bank’s growth and success. Mr. Harrington’s strong financial analytical skills regarding business management, stability and growth make him a valuable member of the Board of Directors.

 

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Susan A. Massaro has been Executive Vice President, Professional Services of Scivantage, Inc. a provider of brokerage solutions, and predecessor company Nova Corporation since 2001; and Senior Vice President, Internet Solutions of Qwest Communications and predecessor company Icon CMT Corp. from 1996 to 2001. Ms. Massaro also worked for Data General Corporation from 1979 to 1996 in various information technology technical and management capacities, ending as Director of U.S. Professional Services. Ms. Massaro is an information technology professional with extensive executive-level business and financial operations leadership and management experience in IT service delivery and consulting services.

The Board of Directors values Ms. Massaro’s experience in leveraging software solutions and technologies to practically, efficiently and economically manage and grow business, which enables her to advise CMS Bancorp in the areas of operations, compliance and IT security. With her significant experience in managing large organizations, corporate compensation, staff evaluation and human resources, Ms. Massaro provides leadership to the Board of Directors’ Compensation Committee. Combining these skills with the experience she brings with emerging company environments and in leading due diligence efforts for potential acquisitions with several completed transactions and assimilations, Ms. Massaro contributes considerably to the strategic matters and risk management issues that are subjects of focus for the Board of Directors.

Matthew G. McCrosson is a partner in charge of consulting for O’Connor, Davies LLP (“ODPKE”) Accountants and Consultants, where he has been employed since 2000. Mr. McCrosson provides performance improvement based advisory services in addition to organizational and operational reviews. He has assisted many clients in reviewing their technology platforms in terms of alternative systems and system selection and implementation coordination. He also leads ODMD Internal Audit practice initiatives. Prior to joining ODMD in 2000, Mr. McCrosson was with KPMG Consulting, in the firm’s Public Services line of business. Earlier in his career, Mr. McCrosson served as chief financial officer or chief operating officer of several national and regional not-for-profit organizations. He holds a BS in accounting and MBA in finance with a second MBA concentration in information systems from Manhattan College, where he serves in the Mentor Program. Mr. McCrosson serves on the Boards of the Business Council of Westchester and Westchester Community College Foundation.

The Board of Directors values Mr. McCrosson’s financial expertise and diversity of business experience in the technological arena, among other qualities. Mr. McCrosson is a member of the audit committee and has been designated by the Board of Directors as an “audit committee financial expert,” as that term is defined by SEC regulations. Mr. McCrosson’s unique combination of financial and accounting expertise and knowledge of technology matters makes him an invaluable member of the Board of Directors.

William M. Mooney, Jr., is President of The Westchester County Association, a business-based membership organization committed to addressing public policy issues with respect to business advocacy and economic development on behalf of the region’s corporate and not-for-profit organizations. Under Mr. Mooney’s leadership, The Westchester County Association has been an effective advocate for business on important issues including healthcare reform and property taxes. He was recently selected by Governor Andrew M. Cuomo to serve on the Mandate Relief Redesign Team. Mr. Mooney has been a director of Debt Resolve, Inc., a NASDAQ-listed company, since April 2003.

Before being elected as President of The Westchester County Association in 2004, Mr. Mooney had a long and distinguished career in the banking industry, most recently at Independence Community Bank where he was responsible for all business activities in Westchester and Connecticut. Prior to that he held senior executive positions with Union State Bank, where he managed retail banking activities and business development, and Chase Manhattan Bank and Chemical Bank, where he was responsible for all retail and small business activities in the New York metropolitan area. He also served as President and CEO of Hudson Valley Bank. He began his banking career with Citibank.

Mr. Mooney is a valued member of the Board of Directors, and as Chairman, his contributions as an experienced business leader in the banking sector as well as his deep-rooted community ties are invaluable to the Board. In addition to his business leadership experience, Mr. Mooney is deeply committed to the community through his many philanthropic activities with not-for-profit and educational organizations. He has served as a chairman of the board of numerous organizations including United Way of Westchester and Putnam Counties, St. Thomas Aquinas College, The Westchester County Association, American Heart Walk, Westchester Partnership for Economic Development, CYO Rockland County, Red Cross Rockland County and Rockland Center for the Arts.

Gerry Ryan is President/CEO of DGC Capital Contracting Corp., a premier contracting company serving the retail and commercial sectors, based in Mount Vernon, NY. He is also the CEO of Aris Renewable Energy and Managing Partner of many real estate holdings in the New York area.

Born and raised in Ireland, Mr. Ryan immigrated to the U.S. in 1985. Mr. Ryan is actively involved in the local community. He founded the Fulfilling a Dream Fund in 1995 to serve children in need. He served for four years as Chairman of the Mount Vernon Chamber of Commerce and continues to serve on the Executive Board. Mr. Ryan has been the Treasurer of the Mount Vernon Police Foundation since its inception in 2007. He also serves on the Board of Directors for the MAWF of the Hudson Valley. In 2002, Mr. Ryan was recognized by Ernst & Young with the Entrepreneur of the Year Award, for his work with the Fulfilling a Dream Fund and a second award for Business Services Category.

The Board of Directors values the depth of Mr. Ryan’s leadership skills as well as background and diverse viewpoint regarding real estate construction matters. In particular, Mr. Ryan provides the Company and Bank with an extensive knowledge of the real estate construction market, and provides valuable assistance in building relationships with owners, investors, developers and the corporate community. Mr. Ryan is also valued by the Board of Directors for his marketing and transaction skills.

 

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Robert Weisz is Chairman and Chief Executive Officer of the RPW Group, Inc., the largest private owner of Class “A” office buildings in Westchester County, as well as one of the largest land holders in Westchester, NY. RPW Group, Inc. was founded in 1979 by Mr. Weisz and is a fully integrated real estate organization providing ownership, in-house management, construction, and maintenance of all of its buildings. Mr. Weisz serves on the Board of Directors of the Westchester County Association, New Rochelle Police Foundation, Arts of Westchester, and Mount Vernon Chamber of Commerce. He is also Chairman of the Board of Reaching U, a non-profit organization located in the U.S. which works for low-income mothers and children in Uruguay.

In addition to Mr. Weisz’s expertise in property development and construction management, the Board of Directors values the extensive leadership and business experience that Mr. Weisz brings to the Board of Directors, in large part due to Mr. Weisz’s current role as Chairman and Chief Executive Officer of the RPW Group, Inc. Mr. Weisz has evaluated the credit of over 300 tenants and has been involved in acquisitions in excess of half a billion dollars in assets, the knowledge and experience of which is immediately pertinent to the work and focus of the Board of Directors.

Executive Officers Who Are Not Directors

Biographical information and the business experience of each non-director executive officer of CMS Bancorp are set forth below.

Christopher Strauss has served as Senior Vice President and Senior Lending Officer, and Compliance Officer of CMS Bancorp and CMS Bank since October 2005. Mr. Strauss was promoted to the position of Executive Vice President of CMS Bank in June 2011. From March 2004 to September 2005, Mr. Strauss was Vice President of Credit Administration at Union State Bank, where he managed the credit underwriting process in the bank’s Westchester Loan Center originating commercial and industrial and commercial real estate loans. From 2001 to March 2004, Mr. Strauss was Senior Vice President and Senior Lending Officer at Reliance Bank in White Plains, New York, where he managed all aspects of the bank’s lending, including underwriting and credit decisions on all new and renewing loans, pricing and structuring on new and renewing loans, loan servicing, credit grading, and loan collection. In addition, he acted as Reliance Bank’s Compliance Officer, managing the bank’s compliance program to include all lending, branch operations and BSA requirements.

Diane Cocozzo has been with CMS Bank since 1993. Ms. Cocozzo is the Senior Vice President, Retail Bank Manager, Human Resources and Employee Benefits Administrator and Information Technology Security Officer of CMS Bank. Most recently, Ms. Cocozzo was appointed to the position of Senior Vice President and Corporate Secretary of CMS Bancorp in September 2014. Ms. Cocozzo’s primary responsibilities at the Bank include overseeing the management, internal audit, compliance, marketing and sales functions of CMS Bank’s five branch offices. Additional responsibilities include the Bank’s Human Resource department functions and employee benefits administration. Ms. Cocozzo came to CMS Bank as the assistant treasurer of the Accounting department before heading the Operations and Checking departments of the Bank in addition to taking on the role as Human Resources Director. Her 28 years of banking experience includes prior employment with Peoples Westchester Savings Bank from 1987 to 1993, where she held positions in various departments spanning the accounting, operations and retail bank functions culminating in the role of Investment Accountant Specialist before coming to CMS Bank.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires CMS Bancorp’s directors and executive officers, and persons who own more than 10% of CMS Bancorp’s common stock, to report to the SEC their initial ownership of CMS Bancorp’s common stock, on Form 3, and any subsequent changes in that ownership, on Form 4. Reports on Form 3 must be filed within 10 days of becoming a beneficial owner, director or officer. Reports on Form 4 must be filed before the end of the second business day following the day on which the transaction effecting a change in ownership occurred. CMS Bancorp is required to disclose in this annual report any late filings or failures to file.

To CMS Bancorp’s knowledge, based solely on its review of the copies of such reports furnished to CMS Bancorp and written representations that no other reports were required during the fiscal year ended September 30, 2014, all Section 16(a) filing requirements applicable to CMS Bancorp’s executive officers and directors during fiscal year 2014 were met.

 

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Code of Ethics

CMS Bancorp has adopted a Code of Ethics that is applicable to all officers, directors and employees of CMS Bancorp and its affiliates. The Code of Ethics has been filed with the SEC and is also available on our website, www.cmsbk.com, under the Management Team tab. You may also send a request for a free copy of the Code of Ethics to our principal executive office located at: CMS Bancorp, Inc., Attn: Corporate Secretary, 123 Main Street, White Plains, New York 10601.

Audit Committee Information

CMS Bancorp has a separately-designated standing Audit Committee of its Board of Directors established under Section 3(a)(58) of the Exchange Act, on which Directors Mazza (chair), Massaro and McCrosson serve. The Audit Committee oversees and monitors our financial reporting process and internal control system, reviews and evaluates the audit performed by our independent auditors, and internal auditors, and reports any substantive issues found during the audits to the Board of Directors. The Audit Committee is directly responsible for the appointment, compensation, and oversight of the work of our independent auditors. The Audit Committee reviews and approves all transactions with affiliated parties. The Board of Directors has adopted a written charter for the Audit Committee. Directors Mazza, Massaro and McCrosson meet applicable independence standards and are thus deemed “independent” and each qualify as an “audit committee financial expert,” as that term is defined by SEC regulations, and the Board of Directors has designated them as such. A copy of the current Audit Committee charter is available on our website at www.cmsbk.com, under the Investor Relations tab. The Committee met four times in the fiscal year ended September 30, 2014.

 

ITEM 11. EXECUTIVE COMPENSATION

The following table provides information about the compensation paid in fiscal years 2014 and 2013 to CMS Bancorp and CMS Bank’s President and Chief Executive Officer (who also served as interim Chief Financial Officer at September 30, 2014); Senior Vice President, Senior Lending Officer and Compliance Officer; and Senior Vice President, Corporate Secretary and Retail Bank Manager (collectively, the “named executive officers”). Except for its current Senior Vice President and Chief Financial Officer, who began his employment with CMS Bancorp in October 2014, CMS Bancorp has no other executive officers.

SUMMARY COMPENSATION TABLE FOR FISCAL YEARS

ENDED SEPTEMBER 30, 2014 AND 2013

 

Name and

Principal

Positions

   Year     Salary(1)
($)
     Bonus(1)
($)
    Stock
Awards(2)

($)
     Option
Awards(3)

($)
     All Other
Compensation(4)
($)
     Total
($)
 

John E. Ritacco,
President and Chief Executive Officer

    

 

2014

2013

  

  

   

 

331,250

325,000

  

  

    

 

177,692

170,000

(5) 

(5) 

   

 

—  

—  

  

  

    

 

—  

—  

  

  

    

 

34,854

33,856

  

  

    

 

543,796

528,856

  

  

Stephen Dowd,
Senior Vice President and Chief Financial Officer (7)

    
 
2014
2013
  
  
   
 
170,331
167,900
  
  
    
 
—  
41,975
  
  
   

 

—  

—  

  

  

    

 

—  

—  

  

  

    

 

10,427

9,921

  

  

    
 
180,758
219,796
  
  

Christopher Strauss,
Senior Vice President, Senior Lending Officer and Compliance Officer

    

 

2014

2013

  

  

   

 

177,288

162,840

  

  

    

 

52,500

40,710

  

  

   

 

—  

—  

  

  

    

 

—  

—  

  

  

    

 

9,629

9,503

  

  

    

 

239,416

213,053

  

  

Diane Cocozzo,
Senior Vice President, Corp. Secretary, Retail Bank Manager

    

 

2014

2013

  

(6) 

   

 

120,515

—  

  

  

    

 

36,761

—  

  

  

   

 

—  

—  

  

  

    

 

—  

—  

  

  

    

 

6,889

—  

  

  

    

 

164,165

—  

  

  

 

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(1) The figures shown for salary and bonus represent amounts earned for the fiscal year, whether paid as of September 30, of such year, or accrued as of September 30, and paid thereafter. Mr. Ritacco, while serving as President and Chief Executive Officer, does not receive any additional compensation for serving as a director. Bonus in the 2014 year represents bonus paid in December 2014 based on calendar year 2014 performance. Bonus in the 2013 year represents bonus paid in January and February 2014 based on calendar year 2013 performance. See discussion in “Non-Equity Incentive Compensation Plans” for additional information.
(2) The amounts shown in this column represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures, based on the number of shares of restricted stock granted and the per share price on the date of grant. Each grant of restricted stock vests over five years.
(3) The amounts shown in this column represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. For more information concerning the assumptions used in making these calculations, please refer to Note 15 to the audited financial statements included in the 2014 Annual Report. Options vest over five years.
(4) For 2014, amounts represent (a) 401(k) contributions made by CMS Bank for Mr. Ritacco, Mr. Dowd, Mr. Strauss, and Ms. Cocozzo in the amounts of $8,500, $6,716, $6,514, and $4,668, respectively, (b) the allocation of shares of CMS Bancorp’s common stock under the ESOP to the accounts of Mr. Ritacco, Mr. Dowd, Mr. Strauss and Ms. Cocozzo in the amounts of $4,713, $3,711, $3,115, and $2,221, respectively; and (c) the $21,641 representing the value of the company car provided to Mr. Ritacco. For 2013, amounts represent (a) 401(k) contributions made by CMS Bank for Mr. Ritacco, Mr. Dowd, and Mr. Strauss in the amounts of $8,750, $6,716, and $6,388, respectively, and (b) the allocation of shares of CMS Bancorp’s common stock under the ESOP to the accounts of Mr. Ritacco, Mr. Dowd, and Mr. Strauss in the amounts of $4,713, $3,205, and $3,115, respectively, and (c) the $20,393 representing the value of the company car provided to Mr. Ritacco. The named executive officers also participate in certain group life, health, disability insurance and medical reimbursement plans, not disclosed in the Summary Compensation Table, that are generally available to salaried employees and do not discriminate in scope, terms or operation. We provide certain non-cash perquisites and personal benefits to each named executive officer that do not exceed $10,000 in the aggregate for any individual, and are not included in the reported figures.
(5) Includes a contractual bonus amount of $45,000 under Mr. Ritacco’s employment agreements with CMS Bancorp and CMS Bank. See the discussion below for additional information regarding Mr. Ritacco’s employment agreements with CMS Bancorp and CMS Bank.
(6) Given that Ms. Cocozzo was not a named executive officer in fiscal year 2013, only fiscal year 2014 information is provided.
(7) As previously reported, Mr. Dowd unexpectedly passed away on August 13, 2014.

On December 29, 2010, CMS Bancorp and CMS each entered into separate, parallel, amended and restated employment agreements (the “Employment Agreements”) with Mr. Ritacco. The Employment Agreements, effective as of January 1, 2011, amended and restated employment agreements between each of CMS Bancorp and CMS and Mr. Ritacco that were entered into on July 30, 2008, effective as of January 1, 2008.

The Employment Agreements are substantially similar to the employment agreements they replaced, except that the Employment Agreements: (i) provide that CMS Bancorp and CMS will employ Mr. Ritacco until December 31, 2012, subject to one-year extensions as described below, (ii) provide for Mr. Ritacco to receive an annual base salary of $325,000 while maintaining the same bonus structure whereby Mr. Ritacco will receive an annual bonus of $45,000 and be eligible to receive an additional bonus if he achieves certain performance objectives set by CMS, and (iii) provide for one year extensions of each agreement’s term only through affirmative action by the Board of Directors of each of CMS Bancorp and CMS on or before March 31st of the year in which expiration would otherwise occur, provided that automatic extension for an additional year will occur if Mr. Ritacco notifies each Board of Directors between March 1st and March 15th of the year in which the agreement’s term is scheduled to end, and the Board does not notify Mr. Ritacco by March 31st of such year that the Board is renewing or not renewing the agreement.

Additionally, as previously disclosed, effective October 6, 2014, CMS Bancorp and CMS Bank appointed Mr. Michael Volpe to the position of Senior Vice President and Chief Financial Officer following the unexpected death of the companies’ former chief financial officer, Stephen E. Dowd, in August 2014. Mr. Volpe’s service is expected to continue through the anticipated closing of the Merger with Putnam. In connection with the new Chief Financial Officer’s appointment, CMS Bank entered in a letter agreement with the new Chief Financial Officer outlining the terms of Mr. Volpe’s at-will employment, including but not limited to, (i) annual salary compensation of $165,000; (ii) eligibility for an annual discretionary performance bonus that will be prorated for the remainder of the 2014 calendar year, and is subject to the Compensation Committee’s sole discretion and approval; (iii) eligibility for a severance payment of up to a maximum total of six months’ salary, in the event Mr. Volpe’s employment is terminated (other than for cause) at the effective time of the Merger, or within six months following the Merger. The severance payment is also subject to other terms and conditions that may be set forth in a separate release-of-claims agreement with Putnam; and (iv) eligibility to participate in the health insurance, 401(k) and all other employee benefit plans made available to other employees of CMS Bank in accordance with its Human Resources Policy.

 

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The following table provides information about the outstanding equity awards held by the named executive officers as of September 30, 2014.

Outstanding Equity Awards at September 30, 2014

 

Name

   Grant
Date of
Award
     Number of
securities
underlying
unexercised
options(1) (3)
(#)
     Option
exercise
price

($)
     Option
expiration
date
     Number of
shares or units
of stock that
have not vested

(#)(2)
     Market value of
shares of units
of stock that
have not vested

($)
 

John E. Ritacco

     11/28/07         51,379       $ 10.12         11/28/2017         —           —     

Christopher Strauss

    

 

 

 

11/28/07

11/23/09

1/26/11

4/27/11

  

  

  

  

    

 

 

 

22,000

2,500

—  

2,500

  

  

  

  

   $

$

 

$

10.12

7.25

—  

8.66

  

  

  

  

    

 

 

 

11/28/2017

11/23/2019

—  

4/27/2021

  

  

  

  

    

 

 

 

—  

—  

401

500

  

  

  

  

    

 

 

 

—  

—  

3,208

4,330

  

  

  

  

Diane Cocozzo

    

 

 

 

11/28/07

11/23/09

1/26/11

4/27/11

  

  

  

  

    

 

 

 

7,000

1,500

616

1,500

  

  

  

  

   $

$

 

$

10.12

7.25

—  

8.66

  

  

  

  

    

 

 

 

11/28/2017

11/23/2019

—  

4/27/2021

  

  

  

  

    

 

 

 

—  

—  

246

600

  

  

  

  

    

 

 

 

—  

—  

1,968

5,196

  

  

  

  

 

(1) Stock option awards reported in this column are the total options awarded to each named executive officer on the date specified in the previous column. Stock option awards are subject to a vesting schedule of 20% per year, starting one year after the award date. At 9/30/2014, the vesting dates of unvested options awarded to Mr. Strauss and Ms. Cocozzo on 11/23/2009 is 11/23/2015. At 9/30/2014, the vesting dates of unvested options awarded to Mr. Strauss and Ms. Cocozzo on 4/27/2011 are 4/27/2015 and 4/27/2016.
(2) Restricted stock options reported in this column represent the unvested shares of restricted stock awarded to each named executive officer on the date specified in the second column. The restricted stock is subject to a vesting schedule of 20% per year, starting one year after the award date. At 9/30/2014, the vesting dates of the unvested restricted stock awarded to Mr. Strauss on 11/23/2009 are is 11/23/2014. At 9/30/2014, the vesting dates of the unvested restricted stock awarded to Mr. Strauss and Ms. Cocozzo on 1/26/2011 are 1/26/2015 and 1/26/2016.
(3) The Merger Agreement with Putnam provides, among other things, that each option issued and outstanding immediately prior to the effective time of the Merger shall be cancelled and converted (after giving effect to any accelerated vesting of equity awards) into the right to receive a lump-sum cash payment, the amount of which is to be determined in the manner set forth in Section 3.1 the Merger Agreement (i.e., each holder will be entitled the difference between $13.25 and the exercise price of each option).

PENSION BENEFITS

Tax Qualified Defined Benefit Pension Plan. CMS Bank maintains a tax-qualified pension plan that covers substantially all employees hired on or before June 30, 2008(1) who are age 18 or older and had at least one year of service at the time of qualification for participation in the plan. The following table shows the estimated aggregate benefits payable under the tax-qualified pension plan upon retirement at age 65 with various years of service and average compensation combinations.

 

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       Years of Benefit Service(2)  
Average
Compensation(3)
     10      15      20      25      30  
$ 125,000         41,667         62,500         62,500         62,500         62,500   
  150,000         50,000         75,000         75,000         75,000         75,000   
  175,000         58,333         87,500         87,500         87,500         87,500   
  200,000         66,667         100,000         100,000         100,000         100,000   
  225,000         68,333         102,500         102,500         102,500         102,500   
  250,000         68,333         102,500         102,500         102,500         102,500   

 

(1) Employees hired after June 30, 2008 are not eligible for the plan.
(2) Benefit service after February 28, 2010 is not recognized for purposes of calculation of benefits.
(3) Average compensation is average base salary, as reported in the “Salary” column of the Summary Compensation Table, for the highest three consecutive years of employment within the final 10 years of employment. Tax laws impose a limit ($255,000 for individuals retiring in 2013) on the average compensation that may be counted in computing benefits under the tax-qualified pension plan. Compensation after February 28, 2010 is not recognized for purposes of calculation of average compensation.

The benefits shown in the preceding table are annual benefits payable in the form of a single life annuity and are not subject to any deduction for Social Security benefits or other offset amounts.

401(k) Plan. CMS Bank maintains a tax-qualified 401(k) defined contribution plan for employees who have attained age 18 and have at least one year of service. Eligible employees may make pre-tax contributions to the plan through salary reduction elections from annual compensation, subject to limitations of the Internal Revenue Code (the “Code”). CMS Bank may make a discretionary matching contribution to the plan equal to a fixed percentage of annual compensation contributed to the plan on a pre-tax basis by the eligible employee.

Employee Stock Ownership Plan (“ESOP”). This plan is a tax-qualified plan that covers substantially all employees who have at least one year of service and have attained age 18. Although contributions to this plan are discretionary, CMS Bank intends to contribute enough money each year to make the required principal and interest payments on the loan from CMS Bancorp. The loan is for a term of up to 30 years and calls for level annual payments of principal plus interest. The plan initially pledged the shares it purchases as collateral for the loan and holds them in a suspense account.

The employee stock ownership plan does not distribute the pledged shares right away. Instead, it releases a portion of the pledged shares annually. The employee stock ownership plan allocates the shares released each year among the accounts of participants in proportion to their salary for the year. For example, if a participant’s salary for a year represents 1.0% of the total salaries of all participants for the year, the plan allocates to that participant 1.0% of the shares released for the year. Participants direct the voting of shares allocated to their accounts. Shares in the suspense account will usually be voted in a way that mirrors the votes which participants cast for shares in their individual accounts.

The employee stock ownership plan may purchase additional shares in the future, and may do so using borrowed funds, cash dividends, periodic employer contributions or other cash flow.

NON-EQUITY INCENTIVE COMPENSATION PLANS

The Company did not have a formal non-equity incentive compensation plan for calendar years 2013 and 2014. However, the Compensation Committee may make discretionary bonus payments to the named executive officers based on CMS Bancorp’s, CMS Bank’s and individual performance during the calendar year. In November/December 2014, the Compensation Committee determined that the relevant performance measures for calendar year 2014 were satisfied, and CMS Bancorp paid awards of $177,692 to Mr. Ritacco (which amount includes a contractual bonus amount of $45,000 under Mr. Ritacco’s employment contracts with CMS Bancorp and CMS Bank), $52,500 to Mr. Strauss, and $36,761 to Ms. Cocozzo, the named executive officers for 2014, in recognition of their achievement of these goals. These amounts are recorded as bonuses earned by the named executive officers in the 2014 year in the Summary Compensation Table above. In January/February 2014, the Compensation Committee determined that the relevant performance measures for calendar year 2013 were satisfied, and CMS Bancorp paid awards of $170,000 to Mr. Ritacco (which amount includes a contractual bonus amount of $45,000 under Mr. Ritacco’s employment contracts with CMS Bancorp and CMS Bank), $41,975 to Mr. Dowd, and $40,710 to Mr. Strauss, the named executive officers for 2013, in recognition of their achievement of these goals. These amounts are recorded as bonuses earned by the named executive officers in the 2013 year in the Summary Compensation Table above. Subject to the anticipated consummation of the merger with Putnam, the Compensation Committee plans to make awards to the aforementioned individuals consistent with past practice based on CMS Bancorp’s, CMS Bank’s and individual performance for the 2015 calendar year performance period and future years.

EQUITY COMPENSATION PLANS

CMS Bancorp, Inc. 2007 Stock Option Plan. CMS Bancorp has a Stock Option Plan in effect that was approved by the shareholders and became effective on November 9, 2007. The purpose of the Stock Option Plan is to encourage the retention of key employees and directors by facilitating their purchase of a stock interest in CMS Bancorp. The Stock Option Plan is not subject to ERISA and is not a tax-qualified plan.

 

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CMS Bancorp has reserved an aggregate of 205,516 shares of common stock for issuance upon the exercise of stock options granted under the plan. Such shares may be unissued shares or shares previously issued and subsequently reacquired by CMS Bancorp. Any shares subject to grants under the plan which expire or are terminated, forfeited or canceled without having been exercised or vested in full shall be available for new option grants. During the year ended September 30, 2008, stock options to purchase an aggregate of 152,154 shares of common stock were granted to directors and officers of CMS Bank. In November 2009, stock options to purchase an aggregate of 8,300 shares of common stock were granted to officers of CMS Bank, and in May 2010, stock options to purchase 2,000 shares of common stock were granted to a director. In April 2011, stock options to purchase an aggregate of 8,300 shares of common stock were granted to officers of CMS Bank, in September 2011, stock options to purchase 6,000 shares of common stock were granted to a director and in September 2012, stock options to purchase 22,000 shares of common stock were granted to three directors. As of December 19, 2014, 19,037 options remain available for future grant. Options are granted based on the conclusions of the Compensation Committee, after considering factors including, but not limited to the person’s individual performance, level of achievement of personal goals, contribution to corporate performance and achievement of corporate goals, overall compensation compared to a peer group and other factors.

CMS Bancorp, Inc. 2007 Recognition and Retention Plan. CMS Bancorp’s Recognition and Retention Plan was approved by shareholders and became effective on November 9, 2007. Like the Stock Option Plan, the Recognition and Retention Plan functions as a long-term incentive compensation program for eligible officers, employees and outside directors of CMS Bancorp and CMS Bank. The Recognition and Retention Plan is not subject to ERISA and is not a tax-qualified plan. The members of the Board of Directors’ Compensation Committee administer the Recognition and Retention Plan, and CMS Bancorp pays all costs and expenses of administering the Recognition and Retention Plan. During the fiscal year ended September 30, 2008, 61,701 shares of restricted stock were granted to directors and officers of CMS Bank. In November 2009, 4,150 shares of restricted stock were granted to officers of CMS Bank, and in May 2010, 6,000 shares of restricted stock were granted to a director. In January and April 2011, 3,008 and 4,150 shares, respectively, of restricted stock were granted to officers of CMS Bank, and in September 2012 and 2011, 6,019 and 2,000 shares, respectively, of restricted stock were granted to directors. As of December 19, 2014, no shares remain available for future grants. No contribution by participants is permitted. Stock is granted based on the conclusions of the Compensation Committee, after considering factors including, but not limited to the person’s individual performance, level of achievement of personal goals, contribution to corporate performance and achievement of corporate goals, overall compensation compared to a peer group and other factors.

TERMINATION AND CHANGE IN CONTROL BENEFITS

Employment Agreement. On December 29, 2010, CMS Bank entered into an amended and restated employment agreement with Mr. Ritacco, effective January 1, 2011. The agreement has an initial term of two years, ending December 31, 2012, and will be reviewed on the one-year anniversary of the agreement, upon such time the Board may extend the agreement for one additional year. Upon termination for Good Reason, without Cause, or upon a Change of Control (as each term is defined in the employment agreement), Mr. Ritacco would be entitled to: (1) the unpaid portion of any compensation earned up until the date of termination; (2) any benefits to which he is entitled to as a former employee under the employee benefit plans and programs maintained by CMS Bank; (3) continued health and welfare benefits until the earliest date he becomes eligible for such benefits maintained by a subsequent employer or the date of the remaining unexpired employment period; (4) a lump sum payment equal to the greater of his annual salary at the rate in effect immediately prior to his termination of employment, or the salary that he would have earned through the Remaining Unexpired Employment Term (as defined in the employment agreement); and (5) an amount equal to the highest annual cash bonus achieved during the three years preceding the year of termination. The employment agreement with CMS Bank does not provide for 280G indemnification.

Also on December 29, 2010, CMS Bancorp entered into a parallel and amended and restated employment agreement with Mr. Ritacco with terms substantially identical but non-duplicative to the employment agreement between CMS Bank and Mr. Ritacco. However, under the employment agreement with CMS Bancorp, the Remaining Unexpired Employment Term shall be deemed to equal three (3) years for the purpose of determining the severance payments that would be payable to Mr. Ritacco upon a termination of employment following a Change in Control. Additionally, if upon a Change in Control Mr. Ritacco receives any severance payments under the employment agreement that would constitute an excess parachute payment within the meaning of Section 280G of the Code, then CMS Bancorp will provide him with an additional payment to make him whole for any excise taxes that may be imposed under that Code Section.

In addition to any earned but unpaid compensation, and benefits, if any, available to former employees pursuant to the employee benefit plans and programs maintained by CMS Bancorp or CMS Bank, Mr. Ritacco’s employment agreements entitle him to a special severance benefit package in the event of a qualifying termination of employment at any time following a change-in-control, consisting of:

(i) a lump sum payment equal to three (3) times his base pay;

(ii) a bonus payment equal to the highest annual cash bonus achieved during the three year period ending immediately prior to the date of termination; and

(iii) benefit continuation coverage for a period of three (3) years.

Change of Control Agreements. CMS Bancorp and CMS Bank have entered into reciprocal two-year change of control agreements with each of Christopher Strauss, Diane Cocozzo and Laura Caruolo. Mr. Strauss and Ms. Cocozzo are officers of CMS Bancorp and CMS Bank, while Ms. Caruolo is an officer of CMS Bank only. The term of these agreements is perpetual until CMS Bank gives notice of non-extension, at which time the term is fixed for two years. Each agreement is intended to provide the relevant officer with assurance that his or her compensation will be continued for a minimum of two (2) years following any qualifying termination of employment in connection with a change of control of CMS Bancorp or CMS Bank.

 

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Generally, CMS Bank may terminate the employment of any officer covered by these agreements, with or without cause, at any time prior to a change of control without any obligation for severance benefits other than any earned but unpaid compensation accrued to the date of termination, plus the benefits, if any, due to the officer under the employee benefit plans and programs maintained for all CMS Bank employees and officers. However, if CMS Bancorp or CMS Bank sign a merger or other business combination agreement, or if a third party makes a tender offer or initiates a proxy contest, CMS Bank may not terminate an officer’s employment without cause and without incurring liability for severance benefits. Under these conditions, the severance benefits payable by CMS Bank will be triggered by any without cause termination of an officer’s employment that occurs at any time following a change in control of CMS Bancorp or CMS Bank. If triggered, CMS Bank will be obligated to provide the following severance benefits:

(i) two-years of continuation coverage under the employee benefit plans and programs maintained by CMS Bank on substantially the same terms and conditions in effect immediately prior to termination of employment; and

(ii) a lump sum cash payment equal to two (2) times the value of the salary, bonus, short-term and long-term compensation that the officer received during the calendar year preceding that in which termination of employment occurs.

CMS Bank will be obligated to pay the same severance benefits discussed in (i) and (ii) above if an officer resigns for “good reason” after a change of control, with “good reason” defined to include: a loss of title or office, material reduction in duties, functions, compensation or responsibilities, involuntary relocation of his or her principal place of employment to a location over 35 miles from CMS Bank’s principal office on the day before the change of control and over 35 miles from the officer’s principal residence or other material breach of contract which is not cured within 30 days.

Finally, if CMS Bancorp and CMS Bank experience a change in ownership, a change in effective ownership or control or a change in the ownership of a substantial portion of their assets as contemplated by Section 280G of the Code, a portion of any severance payments authorized under the change of control agreements might constitute an “excess parachute payment” under current federal tax laws. Under the change in control agreements, any severance payments made which are subject to Section 280G of the Code would be reduced to the extent necessary to avoid the imposition of an excise tax and related non-deductibility under Section 280G of the Code.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended September 30, 2014, there were no interlocks between members of the Compensation Committee or our executive officers and corporations with respect to which such persons are affiliated.

Compensation of Directors

The following table sets forth information regarding compensation earned by the non-employee directors of CMS Bancorp during the last fiscal year.

DIRECTOR COMPENSATION TABLE FOR FISCAL YEAR ENDED SEPTEMBER 30, 2014

 

Name

   Fees Earned or
Paid in Cash
($)(1)
     Stock
Awards
($)(2)
     Option
Awards
($)(3)
     All Other
Compens-
ation
   Total
($)
 

William V. Cuddy, Jr.

     19,400         —           —              19,400   

William P. Harrington

     13,300         —           —              13,300   

Susan A. Massaro

     19,400         —           —              19,400   

Cheri R. Mazza

     24,800         —           —              24,800   

Matthew G. McCrosson

     19,600         —           —              19,600   

William M. Mooney, Jr. (Chairman)

     37,800         —           —              37,800   

Gerry Ryan

     10,400         —           —              10,400   

Robert Weisz

     11,600         —           —              11,600   

Mauro C. Romita

     9,600         —           —              9,600   

 

(1) Includes retainer payments, meeting fees, and committee and/or chairmanship fees earned during the fiscal year, whether such fees were paid currently or deferred.
(2)

The amounts shown in this column represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures, based on the number of shares of restricted stock granted and the per share price

 

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  on the date of grant. Each grant of restricted stock vests over five years. At 9/30/2014, the aggregate amount of outstanding restricted stock granted on 11/15/2007 to each of the following Directors was as follows: Ms. Massaro – 2,000 shares; Ms. Mazza – 2,000; Mr. Cuddy – 2,000 shares; and Mr. McCrosson – 2,000 shares. At 9/30/2014, the aggregate amount of outstanding restricted stock granted on 5/27/2010 to Mr. Harrington was 2,000 shares and the aggregate amount of outstanding restricted stock granted to Mr. Weisz on 9/28/2011 was 2,000 shares. At 9/30/2014, the aggregate amount of outstanding restricted stock granted during the fiscal year ended 9/30/2012 to Mr. Mooney and Ryan was 3,019 and 1,500 shares, respectively. At 9/30/2014, the aggregate amount of restricted stock granted to Mr. Romita was of 1,500 shares, which was approved by the Board on 9/26/2012 with a grant date of 10/31/2012. The grant to Mr. Romita was previously reported along with the grants to Messrs. Mooney and Ryan in the Director Compensation Table for the fiscal year ended 9/30/2012.
(3) The amounts shown in this column represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. For more information concerning the assumptions used in these calculations, please refer to Note 15 to the audited financial statements included in the 2014 Annual Report. Options vest over five years. At 9/30/2014, the aggregate amount of outstanding stock options granted on 11/15/2007 to each of the following Directors was as follows: Ms. Massaro – 6,000; Ms. Mazza – 6,000; Mr. Cuddy – 6,000; and Mr. McCrosson – 6,000 shares. At 9/30/2014, the aggregate amount of outstanding stock options granted on 5/27/2010 to Mr. Harrington was 6,000 shares and the aggregate amount of outstanding stock options granted on 9/28/2011 to Mr. Weisz was 6,000 shares. At 9/30/2014, the aggregate amount of outstanding stock options granted during the fiscal year ended 9/30/2012 to Mr. Mooney and Ryan was 10,000 shares and 6,000 shares, respectively. At 9/30/2014, the aggregate amount of outstanding stock options granted to Mr. Romita was 6,000 shares, which was approved by the Board on 9/26/2012 with a grant date of 10/31/2013. The grant to Mr. Romita was previously reported along with the grants to Messrs. Mooney and Ryan in the Director Compensation Table for the fiscal year ended 9/30/2012.

Meeting Fees. Each non-employee director of CMS Bancorp receives a fee of $1,000 for attendance at each board meeting and $400 for attendance at each meeting of a committee of which they are members. The Chairman of the Board of Directors also receives an annual retainer of $25,000. Effective, January 1, 2011 each Committee Chairperson receives annual retainers as follows: Audit, $10,000; Loan, $5,000; Compensation, $5,000; Strategic Planning and Budget, $2,500; and Corporate Governance & Compliance, $2,500. Committee Chairpersons did not receive annual retainers at any time prior to January 1, 2011. Mr. Ritacco, while serving as President and Chief Executive Officer, does not receive any additional compensation for serving as a director.

See above for a discussion of the CMS Bancorp, Inc. 2007 Stock Option Plan and CMS Bancorp, Inc. 2007 Recognition and Retention Plan, which are equity compensation plans of CMS Bancorp in which the directors also participate.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

See Item 5 above for equity compensation plan information with respect to compensation plans under which equity securities of the Company are authorized for issuance.

Principal Shareholders of CMS Bancorp

The following table contains common stock ownership information for persons known to CMS Bancorp, based on Schedule 13D and 13G filings submitted to the SEC by third parties, to “beneficially own” 5% or more of CMS Bancorp’s common stock as of December 1, 2014. In general, beneficial ownership includes those shares that a person has the power to vote, sell or otherwise dispose of. Beneficial ownership also includes that number of shares that an individual has the right to acquire within 60 days (such as stock options) after December 1, 2014. Two or more persons may be considered the beneficial owner of the same shares. CMS Bancorp obtained the information provided in the following table from filings with the SEC and from its corporate records.

 

Title of Class

  

Name and Address of

Beneficial Owner

  

Amount and Nature of

Beneficial Ownership

  

Percent of Class

Common Stock, par value $0.01 per share

  

Roger Feldman and Harvey Hanerfeld 1919 Pennsylvania Ave., NW Suite 725 Washington, DC 20006

   170,188(1)    9.14%

Common Stock, par value $0.01 per share

  

Employee Stock Ownership Plan of CMS Bancorp, Inc. 123 Main Street White Plains, NY 10601

   162,983(2)    8.75%

Common Stock, par value $0.01 per share

  

Cross River Capital Management LLC 456 Main Street, 2nd Fl. Ridgefield, CT 06877

   193,637(3)    10.39%

Common Stock, par value $0.01 per share

  

M3 Funds, LLC 10 Exchange Place, Suite 510 Salt Lake City, UT 84111

   153,102(4)    8.20%

 

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(1) Based on information reported by Roger Feldman and Harvey Hanerfeld on a Schedule 13G/A filed with the SEC on February 13, 2009. As sole owners and managing members of West Creek Capital, LLC, a Delaware limited liability company (formerly West Creek Capital, L.P., a Delaware limited partnership) that is the investment adviser to (i) West Creek Partners Fund L.P., a Delaware limited partnership (“Partners Fund”), and (ii) WC Select L.P., a Delaware limited partnership (“Select”), Mr. Feldman and Mr. Hanerfeld may be deemed to have the shared power to direct the voting and disposition of the 53,680 shares of Common Stock owned by Partners Fund, and the 114,299 shares of Common Stock owned by Select. In addition to the shared beneficial ownership amount of 167,979 shares, the amount reported in the table above also includes the shares held by each of Roger Feldman and Harvey Hanerfeld individually where each person has sole dispositive power. Specifically, Roger Feldman has the sole power to vote or direct the voting of and to dispose and to direct the disposition of the 1,104 shares beneficially owned by him as an individual, and Harvey Hanerfeld has the sole power to vote or direct the voting of and to dispose and to direct the disposition of the 1,105 shares beneficially owned by him as an individual.
(2) Based on information reported by First Bankers Trust Services, Inc. as Trustee of Employee Stock Ownership Plan of CMS Bancorp, Inc. First Bankers Trust Services, Inc. on a Schedule 13G filed with the SEC on January 23, 2014. The Employee Stock Ownership Plan of CMS Bancorp, Inc. (the “ESOP”) is a tax qualified employee stock ownership plan under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), with individual accounts for the accrued benefits of participating employees and their beneficiaries. The ESOP’s assets are held in trust by First Bankers Trust Services, Inc., as plan trustee (the “Plan Trustee”). The number of shares listed as beneficially owned represents the entire number of shares of CMS Bancorp common stock held by the Plan Trustee as of December 31, 2013. As of December 31, 2013, 36,933 shares of CMS Bancorp common stock had been allocated to individual accounts established for participating employees and their beneficiaries, and 120,050 shares were held, unallocated, for allocation in future years. In general, participating employees and their beneficiaries have the power and authority to direct the voting of shares of CMS Bancorp common stock allocated to their individual accounts. The ESOP, through the Plan Trustee, has shared voting power over unallocated CMS Bancorp common stock. Any unallocated CMS Bancorp common stock is generally required to be voted by the Plan Trustee in the same proportion as CMS Bancorp common stock which has been allocated to Participants is directed to be voted. The reporting person, through the Plan Trustee shares dispositive power over all unallocated CMS Bancorp common stock held by the ESOP. The ESOP, acting through the Plan Trustee shares dispositive power over allocated CMS Bancorp common stock with participating employees and their beneficiaries, who have the right to determine whether CMS Bancorp common stock allocated to their respective accounts will be tendered in response to a tender offer but otherwise have no dispositive power. Any unallocated CMS Bancorp common stock is generally required to be tendered by the Plan Trustee in the same proportion as CMS Bancorp common stock which has been allocated to Participants is directed to be tendered. In limited circumstances, ERISA may confer upon the Plan Trustee the power and duty to control the voting and tendering of CMS Bancorp common stock allocated to the accounts of participating employees and beneficiaries who fail to exercise their voting and/or tender rights. The ESOP disclaims voting power with respect to such allocated CMS Bancorp common stock.
(3) Based on information reported by Cross River Capital Management LLC, Cross River Partners LP and Richard Murphy on a Schedule 13G/A filed with the SEC on February 14, 2013, which reported shared voting power with respect to 193,637 shares.
(4) Based on information reported by M3 Funds, LLC on a Schedule 13G filed with the SEC on February 12, 2014. All of the reported shares are owned directly by M3 Partners, L.P., whose general partner is M3 Funds, LLC and whose investment adviser is M3F, Inc. Jason A. Stock and William C. Waller are the managers of the General Partner and the managing directors of the Investment Adviser, and could be deemed to share such indirect beneficial ownership with the General Partner, the Investment Adviser and M3 Partners.

As previously announced, on September 25, 2014, CMS Bancorp and CMS Bank entered into a Merger Agreement with Putnam County Savings Bank (“Putnam”) and Putnam County Acquisition Corporation, pursuant to which, through a series of transactions, CMS Bancorp, Inc. and CMS Bank will merge with and into Putnam, with Putnam as the surviving bank. Each director and executive officer of CMS Bancorp as of the date of the Merger Agreement has entered into a shareholder agreement with Putnam, pursuant to which each such director and executive officer has agreed to vote in favor of the Merger Agreement and related transactions, including the Merger, until such time as the shareholder agreement is terminated in accordance with its terms (each, a “Shareholder Agreement”). These persons collectively beneficially own approximately 19.98% of the outstanding shares of CMS Bancorp common stock. Putnam’s interest pursuant to the Shareholder Agreements is not reflected in the table above with respect to principal shareholders of CMS Bancorp.

 

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Security Ownership of Directors and Management

The following table shows the number of shares of CMS Bancorp’s common stock beneficially owned by each director, each named executive officer appearing in the “Summary Compensation Table,” and all directors and executive officers of CMS Bancorp as a group, as of December 1, 2014. In general, beneficial ownership includes those shares that a person has the power to vote, sell or otherwise dispose of. Beneficial ownership also includes that number of shares that an individual has the right to acquire (such as upon the exercise of stock options) within 60 days after December 1, 2014. Except as otherwise indicated, each person and each group shown in the table has sole voting and investment power with respect to the shares of common stock listed next to his or her name.

 

Title of Class

 

Name of Beneficial Owner and Position with

CMS Bancorp

 

Amount and Nature of

Beneficial Ownership(1)(2)

 

Percent of Common

Stock Outstanding

Common Stock, par value $0.01 per share

  William V. Cuddy, Jr., Director   42,350(3)   2.27%

Common Stock, par value $0.01 per share

  William P. Harrington, Director   15,792   *

Common Stock, par value $0.01 per share

  Susan A. Massaro, Director   23,295   1.25%

Common Stock, par value $0.01 per share

  Cheri R. Mazza, Director   16,800(6)   *

Common Stock, par value $0.01 per share

  Matthew G. McCrosson, Director   20,104(7)   1.08%

Common Stock, par value $0.01 per share

  William M. Mooney, Jr., Chairman   7,019   *

Common Stock, par value $0.01 per share

 

John E. Ritacco, President, Chief Executive Officer and Director

  85,160(8)   4.57%

Common Stock, par value $0.01 per share

  Gerry Ryan, Director   9,019   *

Common Stock, par value $0.01 per share

 

Christopher Strauss, Senior Vice President and Senior Lending Officer

  40,283(9)   2.16%

Common Stock, par value $0.01 per share

  Robert P. Weisz, Director   83,083(10)   4.46%

Common Stock, par value $0.01 per share

  Mauro C. Romita, Director   9,647(5)   *

Common Stock, par value $0.01 per share

 

Dianne E. Cocozzo, Senior Vice President and Corporate Secretary

  17,089(4)   *
 

All Executive Officers and Directors as a Group (12 Persons)

  372,155   19.98%

 

* Less than 1.0% of the total outstanding shares of common stock.
(1) Based on a total of 1,862,803 shares of CMS Bancorp’s common stock outstanding (including shares held for the CMS Bancorp, Inc. 2007 Recognition and Retention Plan (the “RRP”) by the trustee) as of December 1, 2014.
(2)

Includes unvested shares of restricted stock awards held in trust as part of the RRP, with respect to which the beneficial owner has voting but not investment power as follows: Mr. Harrington – 400 shares; Mr. Weisz 800 shares; Mr. Mooney 1,811 shares; Mr. Ryan 900 shares ; Mr. Romita 900 shares; Mr. Strauss – 901 shares and Ms. Cocozzo—546 shares. Includes vested options to purchase shares of common stock at $10.12 per share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Mr. Cuddy – 6,000 shares; Ms. Massaro – 6,000 shares; Ms. Mazza – 6,000 shares; Mr. McCrosson – 6,000 shares; Mr. Ritacco – 51,379 shares; Mr. Strauss – 22,000 shares and Ms. Cocozzo – 7,000 shares. Includes vested options to purchase shares of common stock at $7.25 per

 

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  share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Mr. Strauss – 2,500 shares and Ms. Cocozzo – 1,500 shares. Includes vested options to purchase shares of common stock at $8.66 per share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Ms. Cocozzo – 900 shares; and Mr. Strauss – 1,500 shares. Includes vested options to purchase shares of common stock at $8.35 per share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Mr. Harrington – 4,800 shares. Includes vested options to purchase shares of common stock at $8.10 per share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Mr. Weisz – 3,600 shares. Includes vested options to purchase shares of common stock at $8.04 per share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Mr. Mooney – 4,000 shares and Mr. Ryan – 2,400 shares. Includes vested options to purchase shares of common stock at $8.00 per share as part of the CMS Bancorp, Inc. 2007 Stock Option Plan as follows: Mr. Romita – 2,400 shares.
(3) Includes 24,350 shares owned for the benefit of Mr. Cuddy and 10,000 shares held in the name of Mr. Cuddy’s spouse.
(4) Includes 600 shares for the benefit of Ms. Cocozzo, 973 shares held in an IRA for the benefit of Ms. Cocozzo and 500 shares for each of two minor sons with Ms. Cocozzo as custodian.
(5) Held in the name of Mauro C. Romita Revocable Trust dated May 13, 2011. Mr. Romita is the sole trustee and has sole voting and investment control over the trust, and can benefit from the trust in its entirety.
(6) Includes 4,800 shares held in an IRA for the benefit of Ms. Mazza.
(7) Includes 3,750 shares held in a SEP for the benefit of Mr. McCrosson.
(8) Includes 13,230 shares held in an IRA for the benefit of Mr. Ritacco, in an IRA for the benefit of spouse and shares held in the name of his daughter and son.
(9) Includes 1,230 shares held in an IRA for the benefit of Mr. Strauss and 5,800 shares are pledged as collateral for a loan.
(10) Includes 77,483 shares held in the name of 800-60 Westchester Avenue LLC, a company owned by Mr. Weisz.
(11) Held in the name of Mauro C. Romita Revocable Trust dated May 13, 2011. Mr. Romita is the sole trustee and has sole voting and investment control over the trust, and can benefit from the trust in its entirety.

CMS Bancorp and CMS Bank have entered into reciprocal two-year change of control agreements with Christopher Strauss, Diane Cocozzo and Laura Caruolo. Mr. Strauss and Ms. Cocozzo are officers of the Company and the Bank, while Ms. Caruolo is an officer of the Bank only. These agreements are guaranteed by CMS Bancorp. See Item 11 above for a discussion about these change in control agreements.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Certain Related Persons

CMS Bank’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 subject to the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O issued by the Federal Reserve. Pursuant to CMS Bank’s Insider Loan Policy, the bank will not extend credit to any insider unless: (a) the loan is made on substantially the same terms (including interest rates, collateral, repayment and loan maturity) as those prevailing at the time for comparable transactions to persons not covered by this regulation and (b) the extension does not involve more than the normal risk of repayment or present other unfavorable features. Any extension of credit to an insider or related interest must be preceded by the submission of a detailed financial statement. The policy further provides that if a loan request involving an insider exceeds the lesser of $20,000 or one-half of one percent of CMS Bank’s net worth, the extension of credit must be approved in advance by a majority of the Board of Directors, with the interested party abstaining from participating directly or indirectly in the voting, and such abstention will be noted in the meeting minutes of the Board of Directors. The insider is precluded from participating in discussion or any attempt to influence the voting by the Board of Directors. CMS Bank will treat any transactions with an insider or their related interest at arm’s length.

As of September 30, 2014, CMS Bank had $714,887 in loans outstanding to director William P. Harrington and a company with which he is affiliated, $2,579,919 in loans to director Gerry Ryan and a company with which he is affiliated, and $667,077 in loans to director Mauro Romita. CMS Bank did not have any other outstanding loans to directors and officers at September 30, 2014; however, we do have outstanding loans to members of certain of these individuals’ families, as well as to certain employees. These loans are made in the ordinary course of our business and are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to customers who do not have a personal or familial relationship with us. Such loans do not involve more than the normal risk of collectibility or present other unfavorable features to CMS Bank.

William P. Harrington, a director, is a partner with Bleakley Platt & Schmidt, LLP (“Bleakley Platt”), a law firm which provides legal services to CMS Bank from time to time, principally involving employment and transactional matters. For the fiscal year ended September 30, 2014, Bleakley Platt received $6,575 for legal services it rendered to CMS Bank. The fees received by Bleakley Platt for professional services rendered to CMS Bank during the year ended September 30, 2014 did not exceed 5% of the firm’s gross revenues.

 

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Gerry Ryan, a director, is an owner of DGC Capital Contracting Corp. (“DGC”), a contracting firm which provides construction services to CMS Bank from time to time. For the fiscal year ended September 30, 2014, DGC received $24,414 for services it rendered to CMS Bank. The fees received by DGC for professional services rendered to CMS Bank during the year ended September 30, 2014 did not exceed 5% of the firm’s gross revenues.

Director Independence

CMS Bancorp uses The NASDAQ Stock Market’s definition of “independence” to determine the independence of its directors. The Board of Directors has determined that each person who served as a director during fiscal year 2014 except for Mr. Ritacco qualified as an “independent” director under The NASDAQ Stock Market’s rules during his or her term of service. In making determinations regarding director independence, the Board of Directors considers the corporate governance standards for independence set forth in The NASDAQ Stock Market Listing Rules (including the more stringent requirements for audit committee members) and all relevant facts and circumstances related to the director, including any transactions between CMS Bancorp or CMS Bank and the director or a related interest of the director, including the following:

 

    whether the director has accepted, or has a family member who has accepted, any compensation from CMS Bancorp or CMS Bank in excess of $120,000 within the preceding three years; and

 

    whether the director is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which CMS Bancorp or CMS Bank made, or from which CMS Bancorp or CMS Bank received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of CMS Bancorp’s or CMS Bank’s consolidated gross revenues for that year, or $200,000, whichever is more.

The NASDAQ Stock Market’s rules, as well as SEC rules, impose additional independence standards for all members of the Audit Committee. CMS Bancorp’s Board of Directors has determined that the current members of the Audit Committee meet these additional, more stringent standards for independence.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

During each of the fiscal years ended September 30, 2014 and 2013, CMS Bancorp retained BDO USA, LLP, to provide audit and other services and incurred fees as follows:

 

     Audit Fees(1)      Audit-Related Fees      Tax Fees(2)      All Other Fees      Total  

2014

   $ 116,800         —         $ 9,900       $ —         $ 126,700   

2013

   $ 113,442         —         $ 15,000       $ —         $ 128,442   

 

(1) Includes (a) professional services rendered for the audit of CMS Bancorp’s annual financial statements and review of financial statements included in Forms 10-Q and (b) services provided annually in connection with statutory and regulatory filings, including filing of Forms 10-K and 10Q. Also includes out-of-pocket expenses.
(2) Tax fees consisted of fees related to the preparation of CMS Bancorp’s income tax returns.

Preapproval Policies and Procedures

The Audit Committee, or a designated member of the Audit Committee, shall pre-approve all auditing services and permitted non-audit services (including the fees and terms) to be performed for CMS Bancorp by its independent auditor, subject to the de minimis exceptions for non-audit services that are approved by the Audit Committee prior to completion of the audit, provided that: (1) the aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues paid by CMS Bancorp to its auditor during the fiscal year in which the services are provided; (2) such services were not recognized by CMS Bancorp at the time of the engagement to be non-audit services; and (3) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the Board of Directors to whom authority to grant such approvals has been delegated by the Audit Committee. Of the services set forth in the table above, all were pre-approved by the Audit Committee.

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following financial statements are incorporated herein by reference to the indicated pages of the CMS Bancorp, Inc. 2014 Annual Report to Shareholders attached hereto as Exhibit 13.1 in the Exhibit Index below.

 

     Page(s) in
Annual Report
 

Report of Independent Registered Public Accounting Firm

     16   

Consolidated Statements of Financial Condition, As of September 30, 2014 and 2013

     17   

Consolidated Statements of Operations, Years Ended September 30, 2014 and 2013

     18   

Consolidated Statements of Comprehensive Income (Loss), Years Ended September 30, 2014 and 2013

     19   

Consolidated Statements of Changes in Stockholders’ Equity, Years Ended September 30, 2014 and 2013

     20   

Consolidated Statements of Cash Flows, Years Ended September 30, 2014 and 2013

     21   

Notes to Consolidated Financial Statements

     22   

Exhibit Index

 

Exhibit No.

  

Description

  2.1    Amended and Restated Plan of Conversion and Stock Issuance of CMS Bank. (1)
  3.1    Certificate of Incorporation of CMS Bancorp, Inc. (2)
  3.2    Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on February 20, 2009. (9)
  3.3    Certificate of Designations Establishing the Designations, Powers, Preferences, Limitations, Restrictions, and Relative Rights of Series A Preferred Stock of CMS Bancorp, Inc. filed with the Delaware Secretary of State on May 21, 2013 (10)
  3.4    Bylaws of CMS Bancorp, Inc. (2)
  4.1    Form of Common Stock Certificate of CMS Bancorp, Inc. (2)
  4.2    Form of Series A Preferred Stock Certificate of CMS Bancorp, Inc. (10)
  4.3    Form of Option Agreement under the CMS Bancorp, Inc. 2007 Stock Option Plan. (3)
  4.4    Form of Restricted Stock Award Agreement under the CMS Bancorp, Inc. 2007 Recognition and Retention Plan. (3)
10.1    Form of Employee Stock Ownership Plan of CMS Bancorp, Inc. (4)
10.2    Amended and Restated Employment Agreement between John E. Ritacco and CMS Bancorp, Inc. (5)
10.3    Amended and Restated Employment Agreement between John E. Ritacco and CMS Bank. (5)
10.4    Form of Updated Two-Year Change of Control Agreement by and among certain officers, CMS Bank and CMS Bancorp, Inc. (August 2012) (6)
10.5    CMS Bancorp, Inc. 2007 Stock Option Plan. (7)
10.6    CMS Bancorp, Inc. 2007 Recognition and Retention Plan. (7)
10.7    Agreement and Plan of Merger By and Among Putnam County Savings Bank, Putnam County Acquisition Corporation, CMS Bancorp, Inc. and CMS Bank, dated as of September 25, 2014 (8)
13.1    CMS Bancorp, Inc. 2014 Annual Report to Shareholders.*
14.1    Code of Ethics. (11)
21.1    Subsidiaries of the Registrant*
23.1    Independent Registered Public Accounting Firm’s Consent.*
31.1    Rule 13a-14(a)/15d-14(a) Certification.*
31.2    Rule 13a-14(a)/15d-14(a) Certification.*
32.1    Section 1350 Certification.*
32.2    Section 1350 Certification.*

 

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101    Interactive data files: (i) Consolidated Statements of Financial Condition, as of September 30, 2014 and 2013, (ii) Consolidated Statements of Operations, Years Ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income, Years Ended September 30, 2014 and 2013, (iv) Consolidated Statements of Changes in Stockholders’ Equity, Years Ended September 30, 2014 and 2013, (v) Consolidated Statements of Cash Flows, Years Ended September 30, 2014 and 2013, and (vi) Notes to Consolidated Financial Statements

 

* Included herewith.
(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 Registration Statement on Form S-8 filed with the Commission on November 30, 2007.
(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 Registrant’s Form 8-K filed with the Commission on January 4, 2011.
(6) Incorporated by reference to the Registrant’s Form 10-K filed with the Commission on December 28, 2012.
(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 Forms 8-K filed with the Commission on September 25, 2014.
(9) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on February 23, 2009.
(10) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on May 24, 2013.
(11) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB filed with the Commission on December 28, 2007.

 

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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
Date:   December 19, 2014

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.

 

Name

  

Title

 

Date

/S/    WILLIAM M. MOONEY, JR.

William Mooney

  

Chairman of the Board of Directors

  December 19, 2014

/S/    JOHN E. RITACCO

John E. Ritacco

  

President, Chief Executive Officer and Director (Principal Executive Officer)

  December 19, 2014

/S/    MICHAEL A. VOLPE

Michael A. Volpe

  

Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

  December 19, 2014

/S/    WILLIAM V. CUDDY

William V. Cuddy

  

Director

  December 19, 2014

/S/    WILLIAM P. HARRINGTON

William P. Harrington

  

Director

  December 19, 2014

/S/    SUSAN A. MASSARO

Susan A. Massaro

  

Director

  December 19, 2014

/S/    CHERI R. MAZZA

Cheri R. Mazza

  

Director

  December 19, 2014

/S/    MATTHEW G. MCCROSSON

Matthew G. McCrosson

  

Director

  December 19, 2014

/S/    ROBERT P. WEISZ

Robert P. Weisz

  

Director

  December 19, 2014

/S/    GERRY RYAN

Gerry Ryan

  

Director

  December 19, 2014

/S/    MAURO C. ROMITA

Mauro C. Romita

  

Director

  December 19, 2014

 

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