CMS Bancorp, Inc.

Exhibit 13.1

To the Stockholders of CMS Bancorp, Inc.:

On September 25, 2014, CMS Bancorp, Inc. (the “Company”) entered into a definitive Merger Agreement (the “Merger Agreement”) to be acquired by ▇▇▇▇▇▇ County Savings Bank (“▇▇▇▇▇▇”) of Brewster, NY in an all cash transaction for $13.25 per share of common stock. The total value of the transaction is approximately $25.4 million. The closing of this transaction is expected to occur during the second quarter of 2015.

In the year Company’s fiscal year ended September 30, 2014, we continued to implement our conservative investment strategy and prudent use of CMS Bank (“Bank”) assets and capital. Total assets were $273.3 million as of September 30, 2014 as compared to $258.3 million at September 30, 2013, an increase of $15.0 million or 5.8%. Loans, net of the loan loss allowance totaled $223.8 million as of September 30, 2014 compared to $208.0 million at September 30, 2013 and grew by $15.8 million, which represented an increase of 7.6% during this period. Overall lending growth occurred largely in multi-family mortgages, non-residential mortgages and commercial and industrial loans which generally carry a higher interest rate and shorter final maturities than the one-to-four-family loan component of our loan portfolio. This growth in high quality loans continued not withstanding a period of low economic growth, marginal demand and an extremely competitive mortgage lending environment.

Credit quality continued to improve in 2014 as evidenced by a decline in delinquent loans and reduced non-accrual loan balances. Loans more than one payment delinquent at September 30, 2014 were $3.2 million, 1.4% of total loans, a decrease of $1.8 million from September 30, 2013 when delinquencies were $5.0 million, 2.4% of total loans. In addition, non-accrual loans showed substantial improvement in 2014 decreasing to $2.4 million at September 30, 2014, which represented a 50% decline from the September 30, 2013 amount of $4.8 million. Non-accrual loan balances represented 0.87% of total assets at September 30, 2014 compared with 1.85% at September 30, 2013. Improved credit quality along with the overall continuing strength of the portfolio resulted in a decrease in our additions to the provision for loan losses in 2014. During the year ended September 30, 2014 we contributed $300,000 to the allowance for loan losses as compared with a contribution of $443,000 in the year ended September 30, 2013.

Total deposits increased $14.5 million during the year ended September 30, 2014 or by approximately 7%. Deposit increases were as a result of increases in retail deposits recorded throughout the year as well as wholesale funding from CDARS deposits, which increased by approximately $8.4 million during the year ended September 30, 2014. Advances from the Federal Home Loan Bank of New York (“FHLB”) decreased by $939,000.

In the year ended September 30, 2014, our net interest income increased to $9.12 million from $9.08 million in 2013, an increase of approximately $46,000. The Federal Reserve Bank’s continued support of a low interest rate policy has continued to place stress on the interest rate margins, however, the Bank was able to maintain stable net interest margins in 2014.

Our total non-interest expenses of approximately $8.1 million reflected an increase for the year ended September 30, 2014 due, in part, to the legal costs associated with the merger with ▇▇▇▇▇▇ and reflective of a onetime $300,000 legal reimbursement paid to the Company by a prior merger partner which reduced the Company’s non-interest expense costs for the fiscal year ended September 30, 2013.

Net income attributable to common shareholders was $567,000 for the year ended September 30, 2014 as compared to $906,000 for the year ended September 30, 2013.

We look forward to consummating the merger with ▇▇▇▇▇▇ in 2015, which is exciting news for our stockholders, customers and employees as the Company looks to leverage the capital, size and profitability of ▇▇▇▇▇▇. Our stockholders will benefit from the all-cash terms of the Merger Agreement. Our customers will gain access to a deeper level of products and quality services provided by a strong and committed local community bank, and CMS Bank will serve as a platform for ▇▇▇▇▇▇’▇ deeper expansion in the Westchester market. The combined organization will continue to have the same great quality service provided by the dedicated people who are committed to being involved in the local community, and with the added resources of a larger and stronger community banking organization.

On behalf of the Board of Directors, we wish to thank our shareholders for your continued confidence and support.




▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President and CEO				▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇., Chairman of the Board

The following information is derived from the audited consolidated financial statements of CMS Bancorp, Inc., (the “Company”). For additional information about the Company and CMS Bank (the “Bank”), please see the detailed presentation contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and footnotes of the Company which are included in this Annual Report.


Selected Financial Condition Data	At September 30,
(in thousands)	2014		2013		2012
Total assets	$	273,344	$	258,255	$	264,666
Loans receivable, net		223,786		207,996		201,462
Investment securities		39,365		40,420		48,361
Cash and cash equivalents		3,147		2,477		1,841
Deposits		226,782		212,312		203,516
FHLB Advances		18,950		19,889		37,130
Stockholders’ equity		23,876		22,735		21,958


Selected Operating Data	Years Ended September 30,
(in thousands, except per share data)	2014		2013		2012
Interest income	$	11,298	$	11,332	$	11,320
Interest expense		2,176		2,256		2,995

Net interest income		9,122		9,076		8,325
Provision for loan losses		300		443		891
Non-interest income		294		439		1,159
Non-interest expense		8,123		7,681		9,407
Income tax expense (benefit)		336		452		(175	)

Net income (loss)		657		939		(639	)
Preferred stock dividends		90		33		—

Net income (loss) attributable to common shareholders	$	567	$	906	$	(639	)

Net income (loss) per common share basic and diluted	$	0.33	$	0.52	$	(0.37	)


Selected Financial Ratios and Other Data	At or for the Years Ended September 30,
	2014			2013			2012
Performance Ratios:
Return on average assets		0.25	%		0.36	%		(0.25	)%
Return on average equity		2.82	%		4.04	%		(2.93	)%
Yield on average interest-earning assets		4.33	%		4.44	%		4.58	%
Net interest rate spread		3.29	%		3.37	%		3.14	%
Net interest margin		3.50	%		3.55	%		3.37	%
Average interest-earning assets to average interest-bearing liabilities		1.25	%		1.21	%		1.19	%
Capital Ratios
Average stockholders’ equity to average assets		8.74	%		8.56	%		8.60	%
Tier 1 core ratio		8.40	%		8.49	%		7.36	%
Total risk based capital ratio		12.36	%		12.91	%		11.77	%
Asset Quality Ratios
Allowance for loan losses to gross loans		0.33	%		0.44	%		0.48	%
Non-performing loans to total assets		0.87	%		1.85	%		2.34	%

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

Forward-Looking Statements

This Annual Report contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and similar expressions that are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors including those set forth in Part 1, Item 1—Description of Business—Risk Factors of our Form 10-K for the year ended September 30, 2014, 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 Agreement with ▇▇▇▇▇▇ County Savings Bank;

•

collecting the termination fee owed to the Company 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;

•

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

•

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

•

competition in our primary market area;

•

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

•

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

•

our ability to maintain effective internal controls over financial reporting;

•

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

•

the low trading volume in our stock;

•

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

•

risks related to use of technology and cybersecurity.

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 Report to “we,” “our,” “us” and other similar references are to CMS Bancorp, Inc. unless otherwise expressly stated or the context requires otherwise.

General

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

Executive Overview

The purpose of this overview is to provide a summary of the items management focuses on when evaluating the condition of the Company and our success in implementing our business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and community-oriented savings bank.

The profitability of the Company depends primarily on its level of net interest income, which is the difference between interest earned on the Company’s interest-earning assets and the interest paid on interest-bearing liabilities. The Company’s net interest income may be affected by market interest rate changes. Local market conditions and liquidity needs of other financial institutions can have a dramatic impact on the interest rates offered to attract deposits. In recent periods, interest rates have declined to historically low levels and changes in short-term interest rates did not result in corresponding changes in long-term interest rates, and local market conditions resulted in relatively high certificate of deposit interest rates and lower interest rates on loans. The effect of this interest rate environment did, and could in the future, continue to decrease the Company’s ability to invest deposits and reinvest proceeds from loan and investment repayments at higher interest rates. The primary goals of the Company’s interest rate management strategy are to determine the appropriate level of risk given the business strategy and then manage that risk so as to reduce the exposure of the Company’s net interest income to fluctuations in interest rates.

Despite the challenges of the ever-changing banking and regulatory environment, we have continued to manage our assets through increases in our local deposits, particularly non-interest bearing commercial demand deposits and higher levels of non-residential loan originations. In order to grow and diversify, the Company seeks to continue to increase its multi-family, non-residential, construction, home equity and commercial loans by targeting these markets in Westchester County and the surrounding areas as a means to increase the yield on and diversify its loan portfolio as well as build transactional deposit account relationships. In addition, depending on market conditions, the Company may sell the fixed-rate residential real estate loan originations to a third party in order to diversify its loan portfolio, increase non-interest income and reduce interest rate risk.

As a result of these ongoing efforts, we were able to increase our net interest income by maximizing the yield on interest earning assets while minimizing the cost of our interest bearing liabilities through our consistent in-depth market analysis and constant oversight of our liquidity and cash flow position.

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

Pending Merger Agreement with ▇▇▇▇▇▇ County Savings Bank

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

Upon effectiveness of the Merger, each share of Company 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, the Company and Bank and their advisors are not permitted to solicit alternative acquisition proposals from third parties. The Merger Agreement provides that the Company is required to pay to ▇▇▇▇▇▇ a termination fee equal to $1,000,000 in the event the Company terminates the Merger Agreement to accept an alternative acquisition proposal that is determined to be a “Superior Proposal” or the Company’s Board otherwise fails to call and hold a shareholders meeting for approval of the Merger Agreement or recommend that the Company’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 the Company’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 the Company’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 the Company’s preferred stock will be redeemed immediately prior to closing of the Merger.

Each director and executive officer of the Company as of the date of the Merger Agreement has entered into a voting and lock-up agreement with ▇▇▇▇▇▇, 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 ▇▇▇▇▇▇, see the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on September 25, 2014.

Terminated Merger Agreement with Customers Bancorp

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

Notwithstanding the termination of the merger agreement, Customers continues to hold shares of the Company’s Series A Noncumulative Perpetual Preferred Stock (“Series A Preferred Stock”) pursuant to the terms of such preferred stock as set forth in the Certificate of Designations establishing the designations, powers, preferences, limitations, restrictions, and relative rights of the Series A Preferred Stock filed with the Secretary of State of Delaware on May 21, 2013. In accordance with the Certificate, among other terms, the Series A Preferred Stock:

•

consists of 1,500 authorized shares with a par value of $0.01 per share and an original issuance price of $1,000 per share;

•

is designated as “Series A Noncumulative Perpetual Preferred Stock”;

•

is nonvoting and holders shall not have any conversion rights;

•

ranks, with respect to rights on dividends, distributions, liquidation, dissolution and winding up, senior to all classes of the Company’s common stock, $0.01 par value per share, and junior to all the Company’s indebtedness and other non-equity claims on the Company;

•

when and if declared by the Board of Directors of the Company, may pay dividends semi-annually in arrears on June 30 and December 31 of each year at the rate of six percent (6%) per annum. Such dividends are discretionary and noncumulative;

•

provides for optional redemption under certain circumstances at the sole option of the Company; and

•

upon liquidation, dissolution, or winding up of the Company, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Company available for distribution to holders of the Company’s capital stock of all classes, before any sums shall be paid or any assets distributed among the holders of the Common Stock, an amount of $1,000 per share, together with any declared but unpaid dividends thereon.

Additional information specific to the Series A Preferred Stock is included in a Form 8-K filed with the SEC on May 24, 2013. The terms of the Merger Agreement with ▇▇▇▇▇▇ require the Company to redeem all shares of the Series A Preferred Stock prior to consummation of the merger with ▇▇▇▇▇▇.

Business Strategy

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

▇▇▇▇-▇▇▇▇▇ ▇▇▇▇ Street Reform and Consumer Protection Act (“▇▇▇▇-▇▇▇▇▇ Act”)

All financial institutions, including the Company and the Bank, continue to experience the impact of major financial reform legislation, known as the ▇▇▇▇-▇▇▇▇▇ Act that was signed into law by the President on July 21, 2010. Among other things, the ▇▇▇▇-▇▇▇▇▇ Act impacts the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the legislation requires new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Many of the provisions of the ▇▇▇▇-▇▇▇▇▇ Act affecting the Company and Bank have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the ▇▇▇▇-▇▇▇▇▇ Act.

Critical Accounting Policies

The consolidated financial statements included in this Report have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

Management believes that the allowance for loan losses represents its best estimate of losses known and inherent in the loan portfolio that are both probable and reasonable to estimate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in market and economic conditions in the Company’s market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Management’s determination of whether investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. Management’s assessment as to the amount of deferred tax assets that are more likely than not to be realized is based upon future taxable income, which is subject to revision upon receipt of updated information.

Average Balances, Interest and Average Yields

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


	At September 30, 2014					For the Year Ended September 30, 2014
	Actual Balance		Yield/ Rate			Average Balance		Interest Income Expense		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	223,786		4.68	%	$	217,428	$	10,479		4.82	%
Securities (2)		39,365		1.91	%		39,747		751		1.89	%
Other interest-earning assets (3)		3,303		2.06	%		3,583		68		1.90	%

Total interest-earning assets		266,454		4.24	%		260,758		11,298		4.33	%

Non-interest earning assets		6,890					5,826

Total assets	$	273,344				$	266,584

Interest bearing-liabilities:
Demand deposits	$	41,675		0.32	%	$	44,481		135		0.30	%
Savings and club accounts		44,230		0.27	%		47,567		118		0.25	%
Certificates of deposit		105,426		1.17	%		97,529		1,229		1.26	%
Borrowed money (4)		20,234		3.42	%		19,621		694		3.54	%

Total interest-bearing liabilities		211,565		1.03	%		209,198		2,176		1.04	%

Non-interest bearing liabilities:
Non-interest bearing deposits		35,451					33,185
Other		2,452					891

Total non-interest bearing liabilities		37,903					34,076

Total liabilities		249,468					243,272

Total equity		23,876					23,310

Total liabilities and equity	$	273,344				$	266,584

Interest rate spread								$	9,122		3.29	%

Net interest-earning assets/net interest margin	$	54,889				$	52,876				3.50	%

Ratio of interest-earning assets to interest-bearing liabilities		1.26x					1.25x

(1)	Includes all loans, including non-accrual loans, net of allowance for loan losses and net deferred costs and fees.

(2)	Available for sale securities included at fair value.

(3)	Includes stock of the FHLB and loans held for sale, which are held for a short period of time.

(4)	Includes mortgage escrow funds.


	For the Year Ended September 30, 2013							For the Year Ended September 30, 2012
	Average Balance		Interest Income Expense		Yield/ Rate			Average Balance		Interest Income Expense		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets
Loans receivable (1)	$	206,957	$	10,406		5.03	%	$	187,835	$	10,268		5.47	%
Securities (2)		44,715		840		1.88	%		51,670		946		1.83	%
Other interest-earning assets (3)		3,773		86		2.28	%		7,501		106		1.41	%

Total interest-earning assets		255,445		11,332		4.44	%		247,006		11,320		4.58	%

Non-interest earning assets		6,236							6,655

Total assets	$	261,681						$	253,661

Interest bearing-liabilities
Demand deposits	$	48,908		166		0.34	%	$	34,417		184		0.53	%
Savings and club accounts		42,357		106		0.25	%		41,652		136		0.33	%
Certificates of deposit		92,541		1,200		1.30	%		103,419		1,592		1.54	%
Borrowed money (4)		27,110		784		2.89	%		28,475		1,083		3.80	%

Total interest-bearing liabilities		210,916		2,256		1.07	%		207,963		2,995		1.44	%

Non-interest bearing liabilities:
Non-interest bearing deposits		27,606							22,687
Other		756							1,188

Total non-interest bearing liabilities		28,362							23,872

Total liabilities		239,278							231,835

Total equity		22,403							21,826

Total liabilities and equity	$	261,681						$	253,661

Interest rate spread			$	9,076		3.37	%			$	8,325		3.14	%

Net interest-earning assets/net interest margin	$	44,529				3.55	%	$	39,043				3.37	%

Ratio of interest-earning assets to interest-bearing liabilities		1.21x							1.19x

(1)	Includes all loans, including non-accrual loans, net of allowance for loan losses and net deferred costs and fees.

(2)	Held to maturity securities included at amortized cost and available for sale securities included at fair value.

(3)	Includes stock of the FHLB and loans held for sale, which are held for a short period of time.

(4)	Includes mortgage escrow funds.

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


	Year Ended September 30, 2014 Compared to 2013
	Volume			Rate			Net
	(In thousands)
Interest-earning assets:
Loans receivable	$	526		$	(453	)	$	73
Securities		(93	)		4			(89	)
Other interest-earning assets		(4	)		(14	)		(18	)

Total interest-earning assets		429			(463	)		(34	)

Interest-bearing liabilities:
Demand deposits		(15	)		(16	)		(31	)
Savings and club accounts		13			(1	)		12
Certificates of deposit		65			(36	)		29
Borrowed money		(217	)		127			(90	)

Total interest-bearing liabilities		(154	)		74			(80	)

Net interest income	$	583		$	(537	)	$	46


	Year Ended September 30, 2013 Compared to 2012
	Volume			Rate			Net
	(In thousands)
Interest-earning assets:
Loans receivable	$	1,000		$	(862	)	$	138
Securities		(131	)		25			(106	)
Other interest-earning assets		(67	)		47			(20	)

Total interest-earning assets		802			(790	)		12

Interest-bearing liabilities:
Demand deposits		61			(79	)		(18	)
Savings and club accounts		2			(32	)		(30	)
Certificates of deposit		(158	)		(234	)		(392	)
Borrowed money		(50	)		(249	)		(299	)

Total interest-bearing liabilities		(145	)		(594	)		(739	)

Net interest income	$	947		$	(196	)	$	751

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

Total assets increased by $15.0 million, or 5.8%, to $273.3 million at September 30, 2014 from $258.3 million at September 30, 2013. An increase in loans in 2014 of $15.8 million coupled with a decrease in FHLB advances of $939,000, were primarily funded by an increase in total deposits of $14.5 million with both retail deposits and CDARS deposits having increased during the year.

Cash and cash equivalents increased by $0.7 million to $3.2 million at September 30, 2014 from $2.5 million at September 30, 2013.

Securities available for sale decreased by $1.06 million or 2.6% to $39.4 million as of September 30, 2014 from $40.4 million at September 30, 2013 as a result of payments received on securities held as available-for sale. Unrealized losses on the same securities held in the available for sale securities portfolio improved by $1.0 million from an unrealized loss of $1.2 million at September 30, 2013 to an unrealized loss of $0.2 million at September 30, 2014. Available-for-sale securities consist principally of notes, bonds and mortgage-backed securities of U.S. Government Agencies, and corporate and municipal bonds.

Loans receivable were $223.8 million and $208.0 million at September 30, 2014 and 2013, respectively, representing an increase of $15.8 million, or 7.6%, primarily funded by an increase in deposits of $14.5 million and payments of principal received from securities available –for –sale of approximately $1.9 million. The increase in loans resulted principally from additions of $2.9 million of multi-family mortgage loans, $5.4 million of non-residential mortgage loans and additions to commercial and industrial loans of $7.3 million, along with a net addition of $0.2 million as a result of an increase in one-to-four family mortgage loans of $0.9 million offset by a reduction of ($0.7) million in construction loans.

The banking industry as a whole has seen increases in loan delinquencies and defaults in recent years. As of September 30, 2014 and September 30, 2013, the Bank had $2.4 million and $4.8 million of non-performing loans, respectively, substantially all of which were in the process of foreclosure and were placed in a non-accrual status. 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 required a specific loan loss allowance of $4,000. The remaining $11.2 million of impaired loans did not require any specific loan loss allowance. At September 30, 2013, no impaired loans required a specific loan loss allowance. As of September 30, 2014 and 2013, the allowance for loan losses was 0.33% and 0.44% of loans outstanding, respectively. The allowance for loan losses contains two components; the specific allowance for impaired loans individually evaluated, and the allowance for loans collectively evaluated for impairment. The specific allowance for loans individually evaluated for impairment was $4,000 at September 30, 2014 compared to $-0- at September 30, 2013. The allowance for loans collectively evaluated for impairment was $736,000 at September 30, 2014 compared to $923,000 at September 30, 2013. The allowance allocation, or loss percentages are based on one year to five year historical charge-offs, adjusted for the trend of losses, current economic conditions inclusive of unemployment, real estate market valuations and other factors. Allowance allocation percentages can also be adjusted for trends as evidenced by the Federal Deposit Insurance Corporation, Uniform Bank Performance Report (“UBPR”) loss experience for the Bank’s Peer Group. While the economy nationally, as well as in our primary market area, has shown overall signs of improvement during the year ended September 30, 2014, changes in the mix and volume of the loan portfolio, weak conditions in certain sectors of the economy, declines in real estate values in the Bank’s primary market area, and lower commercial real estate cash flows, has resulted in provisions for loan losses of $300,000 and $443,000 being recorded in the years ended September 30, 2014 and 2013, respectively.

Deposits increased by $14.5 million in the year ended September 30, 2014 or approximately 7%, to $226.8 million from $212.3 million at September 30, 2013 principally from higher CDARS deposits of $8.4 million along with a significant increase in retail deposits of approximately $6.1 million. The Bank participates in the Certificate of Deposit Account Registry Service, or the “CDARS” network. Under this network, the Bank can transfer deposits into the network (a one way sell transaction), request that the network deposit funds at the Bank (a one way buy transaction), or deposit funds into the network and receive an equal amount of deposits from the network (a reciprocal transfer). The network provides the Bank with an investment vehicle in the case of a one way sell, a liquidity or funding source in the case of a one way buy and the ability to access additional FDIC insurance for customers in the case of a reciprocal transfer. As of September 30, 2014, the Bank had $18.2 million of CDARS deposits.

Advances from FHLB declined by $0.9 million from $19.9 million at September 30, 2013 to $19.0 million at September 30, 2014. Higher use of CDARS deposits, an increase in customer retail deposits and a decrease in securities were used to fund the decrease in FHLB advances.

Stockholders’ equity increased from $22.7 million at September 30, 2013 to $23.9 million at September 30, 2014 as a result of net income attributable to common shareholders of $567,000 and the improvement in accumulated other comprehensive loss, net of approximately $0.5 million.

Comparison of Operating Results for the Fiscal Years Ended September 30, 2014 and 2013

General. The Company had net income attributable to common shareholders of $567,000 for the year ended September 30, 2014, compared to $906,000 for the year ended September 30, 2013. Net interest income was relatively flat in the year ended September 30, 2014 compared to 2013 and reflected a small increase in the year 2014 of $46,000 over the amount reported in the year ended September 30, 2013. In the year ended September 30, 2014, the Company recorded a reduced provision for loan loss expense amount of $300,000, compared to $443,000 in 2013. In the year ended September 30, 2013, the Company received a reimbursement of $300,000 of legal expenses incurred by the Company in fiscal 2012 in connection with the merger agreement with Customers Bank. Overall non-interest expenses increased by $442,000 in the year ended September 30, 2014 compared to 2013, principally in the area of increased legal expense costs associated with the Definitive Merger Agreement with ▇▇▇▇▇▇ County Savings Bank (PCSB) announced on September 25, 2014 and, the associated legal costs with the Customers Bank termination fee litigation, partially offset by the aforementioned reimbursement.

Interest Income. Total interest income decreased by $34,000, or 0.30%, to $11.0 million for the year ended September 30, 2014 from $11.3 million the year ended September 30, 2013.

Interest income from loans increased by $73,000, or 0.70%, to $10.5 million for the year ended September 30, 2014 compared to the year ended September 30, 2013. The increase was due to an increase in the average balance of loans to $217.4 million in the year ended September 30, 2014 from $207.0 million in the year ended September 30, 2013, partially offset by a 21 basis point decrease in the average yield to 4.82% in the 2014 fiscal year from 5.03% in the 2013 fiscal year, reflecting lower market rates, decreases in interest rates on adjustable rate loans and the prepayments of loans in the low interest rate environment. The impact of lower yields reduced interest on loans by $453,000 while higher average balances contributed additional interest income of $526,000.

Interest income from securities decreased by $89,000 in the year ended September 30, 2014 compared to the year ended September 30, 2013. The yield on securities rose by 1 basis point, from 1.88% in the year ended September 30, 2013 to 1.89% in the year ended September 30, 2014 as a result of changes of short term interest rate fluctuations in current market rates. The average balance of securities declined from $44.7 million in the year ended September 30, 2013 to $39.7 million in the year ended September 30, 2014 as redemptions/called securities were used to fund loan growth. While the average interest rate earned on the securities portfolio remained flat with only a 1 basis point increase, the decrease in interest earned on securities is attributable to the decrease in average securities volume of $5.0 million. Interest income from other interest-earning assets decreased by $18,000 for the year ended September 30, 2014, due to the impact of lower average balances and lower interest rates. Other interest-earning assets consist of the investment in the FHLB shares, loans held for sale and cash equivalents.

Interest Expense. Total interest expense decreased by $80,000, or 3.5%, to $2.2 million in the year ended September 30, 2014 compared to $2.3 million in 2013. Interest on demand deposits decreased $31,000 as a result of the impact of lower market interest rates in the 2014 fiscal year, along with lower average balances which decreased by $4.4 million, or 9.1%% in the year ended September 30, 2014, compared to 2013. Interest on savings and club accounts increased by $12,000 all as a result of an increase in average volume in savings and club account balances in the year ended September 30, 2014 of $5.2 million compared to 2013. Interest expense on certificates of deposit increased by $29,000 as a result of a $5.0 million increase in the average balances of CDs in the year ended September 30, 2014, compared to 2013, while the average rate paid on CDs decreased by 4 basis points in year 2014 vs. 2013. Interest expense on borrowed money decreased by $90,000 in the year ended September 30, 2014 compared to 2013 as a result of a reduction in the average balances borrowed from $27.1 million in the year ended September 30, 2013 to $$19.6 million in 2014, partially offset by an increase in average rate.

Moderating FHLB borrowing rates coupled with one remaining high cost borrowing, which will mature in fiscal 2015, caused the average interest rate paid on all FHLB borrowings to increase to 3.54% for the year ended September 30, 2014 compared to 2.89% in the year ended September 30, 2013.

Net Interest Income. Net interest income increased $46,000, or 0.5%, to $9.2 million for the year ended September 30, 2013 from a similar amount for the year ended September 30, 2013. Increases in average interest-earning assets and lower rates on interest-bearing liabilities in the year ended September 30, 2014 as compared to the tear ended September 30, 2013 were the primary reasons that net interest income increased in 2014 when compared to 2013.

Provision for Loan Losses. The allowance for loan losses 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. During the year ended September 30, 2014, the Company charged $300,000 to expense to provide for loan losses, recovered $1,000 of a previously written off loan and had a write off $484,000 against the allowance. The level of the allowance for loan losses is based on estimates and ultimate losses may vary from these estimates. Management reviews the level of the allowance for loan losses on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management regularly evaluates various risk factors related to the loan portfolio, such as type of loan, underlying collateral and payment status, and the corresponding allowance allocation percentages. As of September 30, 2014 and September 30, 2013, the Bank had $2.4 million and $4.8 million of non-performing loans, substantially all of which were in process of foreclosure and have been placed on non-accrual status. 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 of these impaired loans required specific loss allowance of $4,000. At September 30, 2013, no loan required a specific loan loss allowance. The impaired loans were primarily the result of continued difficult general economic conditions, continued high unemployment and continued declines in the local real estate market.

The improving but still weak economy nationally and general weaknesses in our primary market lending area contributed to the Company having to provide $300,000 in the provision for loan loss expense in the year ended September 30, 2014, an improvement compared to the $443,000 provided in the year ended September 30, 2013. The reduced provision was the result of changes in the mix and volume of the loan portfolio, modestly improving economic conditions, declining unemployment and slowly recovering real estate values in the Bank’s primary market area coupled with improved commercial real estate cash flows. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each reporting period end date.

Non-interest Income. Non-interest income of $0.3 million in the year ended September 30, 2014 included gains on sale of loans in the 2014 fiscal year of $124,000 compared to $267,000 in fiscal 2013 due to a higher loan volume being sold in 2013.

Non-interest Expenses. Non-interest expenses were $8.1 million for the year ended September 30, 2014 compared to $7.7 million in 2013 an increase of approximately $442,000. Non-interest expenses in 2014 included $300,000 in legal expenses primarily attributable to the PCSB 2014 announced Definitive Merger Agreement and the legal costs associated with the Customers Bank termination fee litigation, 2013 included a legal expense reimbursement of $300,000 from Customers Bank in conjunction with their 2012 merger agreement with the Company which the Company terminated in December 2013 for Customers’ failure to secure the appropriate Federal and New York State approvals.

Salaries and benefits decreased by $272,000, or 6.57%, from $4.1 million in the year ended September 30, 2014 to $3.9 million in the year ended September 30, 2014 as a result of a reduced employee headcount and benefit costs.

Professional fees were $898,000 in the year ended September 30, 2014 and $346,000 in the year ended September 30, 2013, an increase of $552,000. Due to merger related activity in 2014 with ▇▇▇▇▇▇ County Savings Bank (PCSB) and the legal costs associated with the Customers Bank termination fee litigation, the Company experienced a significant increase in legal expenses. The other components of non-interest expense were comparable between the two years.

Income Tax Expense. Income tax expense was $336,000 in the year ended September 30, 2014 compared to $452,000 in 2013. The effective tax rate in the years ended September 30, 2014 and 2013 were 33.8% and 32.5%, respectively and are different than the statutory rates as a result of certain non-taxable income on municipal bond holdings and non-deductible expense items.

Management of Market Risk

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

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

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

Interest Rate Risk

The Company uses a simulation model to monitor interest rate risk. This model reports the net interest income and net economic value at risk under different interest rate environments. Specifically, an analysis is performed of changes in net interest income assuming changes in interest rates, both up and down, from current rates over the five year period following the current financial statements. The changes in interest income and interest expense due to changes in interest rates reflect the interest rate sensitivity of the Company’s interest-earning assets and interest-bearing liabilities. The table below sets forth the latest available estimated changes in net interest income, as of September 30, 2014, that would result from various basis point changes in interest rates over a 12 month period.


Change in Interest Rates In Basis Points (Rate Shock)	Net Interest Income
	Amount		Dollar Change			Percent Change
	(Dollars in thousands)
300	$	9,458	$	(585	)		(6.19	)%
200		9,678		(388	)		(4.01	)%
100		9,886		(192	)		(1.94	)%
0		10,082		—			0.00	%
(100)		9,996		(85	)		(0.85	)%

Liquidity and Capital Resources

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

The Company’s primary sources of funds are deposits, the Certificate of Deposit Account Registry Service, or CDARS network, brokered certificates of deposit, amortization and prepayments of loans, FHLB advances, repayments and maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities repayments are greatly influenced by market interest rates, economic conditions and competition. The Company’s liquidity, represented by cash and cash equivalents and investment securities, is a product of its operating, investing and financing activities. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds, available-for-sale securities or cash equivalents and other interest-earning assets. If the Company requires funds beyond its ability to generate them internally, the Company can acquire brokered certificates of deposit, CDARS deposits and draw upon existing borrowing agreements with the FHLB and the Federal Reserve which provide an additional source of funds. At September 30, 2014 and 2013, the Company had $19.0 million and $19.9 million of advances from the FHLB, respectively, brokered deposits from CDARS of $18.2 million and $9.8 million, respectively, and no other brokered deposits.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of September 30, 2014, the Company had cash and cash equivalents of $3.1 million and available for sale securities of $39.4 million. At September 30, 2014, the Company has outstanding commitments to originate loans of $13.5 million and $10.7 million of undisbursed funds from approved lines of credit, including a homeowners’ equity line of credit lending program. Certificates of deposit scheduled to mature in one year or less at September 30, 2014, totaled $54.2 million. Historically, the Company’s deposit flow history has been that a significant portion of such deposits remain with the Company.

Capital Resources. In the year ended September 30, 2014, net cash provided by operating activities was $1.7 million, compared to cash provided of $7.7 million in 2013. In the years ended September 30, 2014 and 2013, the net income of $657,000 and $939,000, respectively, included non-cash expenses (consisting of depreciation, amortization, provision for loan losses, deferred taxes and stock-based compensation) of $0.9 million and $1.4 million, respectively. Loans originated for resale used $12,000 of cash in 2014 and provided $2.1 million of cash in 2013.

Net cash provided by financing activities was $13.5 million compared to $6.6 million used by financing activities in the years ended September 30, 2014 and 2013, respectively. In the 2014 and 2013 fiscal years, increases in deposits provided $14.5 million of cash in 2014 and in 2013 deposits provided cash of $8.8 million. In the year ended September 30, 2014, net advances from FHLB used $939,000, while net advances from FHLB used $17.2 million in the year ended September 30, 2013. In the year ended September 30, 2013, the Company sold $1.5 million of preferred stock to Customers Bank.

The Company has a borrowing agreement with the FHLB, of which $18.95 million was in use at September 30, 2014. The Company’s overall credit exposure at the FHLB cannot exceed 50% of its total assets, subject to certain limitations based on the underlying loans and securities pledged as collateral.

The following table sets forth the Bank’s capital position at September 30, 2014, compared to the minimum regulatory capital requirements:


	Actual					For Capital Adequacy Purposes						To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
	(Dollars in thousands)
Total capital (to risk-weighted assets)	$	23,699		12.36	%	$	15,338	³		8.00	%	$	19,173	³		10.00	%
Core (Tier 1) capital (to risk-weighted assets)		22,959		11.97			—			—			11,504	³		6.00
Core (Tier 1) capital (to total adjusted assets)		22,959		8.40			10,930	³		4.00			13,662	³		5.00
Tangible capital (to total adjusted assets)		22,959		8.40			4,099	³		1.50			—			—

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

There are currently no recently issued accounting pronouncements that are considered significant to the Company’s consolidated financial statements.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes of the Company have been prepared in accordance with GAAP which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, the Company’s assets and liabilities are primarily monetary in nature. As a result, the effect of changes in interest rates will have a more significant impact on the Company’s performance than will the effect of changing prices and inflation in general.

To the Stockholders and Board of Directors

CMS Bancorp, Inc.

White Plains, New York

We have audited the accompanying consolidated statements of financial condition of CMS Bancorp, Inc. and subsidiaries (collectively the “Company”) as of September 30, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CMS Bancorp, Inc. and subsidiaries as of September 30, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLC

Woodbridge, New Jersey

December 19, 2014

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	September 30,
	2014			2013
	(Dollars in thousands, except per share data)
ASSETS
Cash and amounts due from depository institutions	$	1,343		$	2,219
Interest-bearing deposits		1,804			258

Total cash and cash equivalents		3,147			2,477
Securities available for sale		39,365			40,420
Loans held for sale		349			337
Loans receivable, net of allowance for loan losses of $740 and $923, respectively		223,786			207,996
Premises and equipment		2,593			2,742
Federal Home Loan Bank of New York stock, at cost		1,150			1,262
Accrued interest receivable		925			954
Other assets		2,029			2,067

Total assets	$	273,344		$	258,255

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	226,782		$	212,312
Advances from Federal Home Loan Bank of New York		18,950			19,889
Advance payments by borrowers for taxes and insurance		1,284			1,221
Other liabilities		2,452			2,098

Total liabilities		249,468			235,520

Commitments and Contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 1,500 shares issued and outstanding (liquidation preference value $1,000 per share)		—			—
Common stock, $.01 par value, authorized shares: 7,000,000; shares issued: 2,055,165; shares outstanding: 1,862,803		21			21
Additional paid-in capital		20,358			20,283
Retained earnings		7,574			7,007
Treasury stock, 192,362 shares		(1,660	)		(1,660	)
Unearned Employee Stock Ownership Plan (“ESOP”) shares		(1,233	)		(1,288	)
Accumulated other comprehensive (loss)		(1,184	)		(1,628	)

Total stockholders’ equity		23,876			22,735

Total liabilities and stockholders’ equity	$	273,344		$	258,255

See notes to consolidated financial statements.

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended September 30,
	2014		2013
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	10,479	$	10,406
Securities		751		840
Other interest-earning assets		68		86

Total interest income		11,298		11,332

Interest expense:
Deposits		1,482		1,472
Mortgage escrow funds		29		52
Borrowings, short term		28		36
Borrowings, long term		637		696

Total interest expense		2,176		2,256

Net interest income		9,122		9,076
Provision for loan losses		300		443

Net interest income after provision for loan losses		8,822		8,633

Non-interest income:
Fees and service charges		152		159
Net gain on sale of loans		124		267
Other		18		13

Total non-interest income		294		439

Non-interest expense:
Salaries and employee benefits		3,867		4,139
Net occupancy		1,343		1,282
Equipment		796		754
Professional fees		898		346
Advertising		69		29
Federal insurance premiums		209		223
Directors’ fees		198		213
Other		743		695

Total non-interest expense		8,123		7,681

Income before income taxes		993		1,391
Income tax expense		336		452

Net income		657		939
Preferred stock dividends		90		33

Net income attributable to common shareholders	$	567	$	906

Net income per common share:
Basic and diluted	$	0.33	$	0.52

Weighted average number of common shares outstanding:
Basic		1,737,438		1,734,007

Diluted		1,740,913		1,735,252

See notes to consolidated financial statements.

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Years Ended September 30,
	2014			2013
	(In thousands)
Net income	$	657		$	939

Other comprehensive income (loss):
Net unrealized holding gains (losses) on securities available for sale, net of deferred income tax of $(394,000) and $792,000		598			(1,202	)
Retirement plan loss, net of deferred income tax of $137,000 and $361,000, respectively		(209	)		(548	)
Retirement plan amortization, net of deferred income tax of $(36,000) and $(7,000), respectively		55			11

Other comprehensive income (loss)		444			(1,739	)

Comprehensive income (loss)	$	1,101		$	(800	)

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

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended September 30, 2014 and 2013

(Dollars in thousands)


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total
Balance October 1, 2012	$	—	$	21	$	18,728		$	6,101		$	(1,660	)	$	(1,343	)	$	111		$	21,958
Net loss									939												939
Other comprehensive loss																		(1,739	)		(1,739	)
ESOP shares committed for release						(7	)								55						48
Stock option expense						53															53
Restricted stock award expense						54															54
Preferred stock dividends									(33	)											(33	)
Proceeds of sale of preferred stock						1,455															1,455

Balance September 30, 2013		—		21		20,283			7,007			(1,660	)		(1,288	)		(1,628	)		22,735
Net income									657												657
Other comprehensive income																		444			444
ESOP shares committed for release						(5	)								55						50
Stock option expense						44															44
Restricted stock award expense						36															36
Preferred stock dividends									(90	)											(90	)

Balance September 30, 2014	$	—	$	21	$	20,358		$	7,574		$	(1,660	)	$	(1,233	)	$	(1,184	)	$	23,876

See notes to consolidated financial statements.

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended September 30,
	2014			2013
	(In thousands)
Cash flows from operating activities:
Net income	$	657		$	939
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment		371			357
Amortization and accretion, net		78			125
Provision for loan losses		300			443
Provision for loss on other real estate		77			—
Deferred income taxes		(8	)		314
ESOP expense		50			48
Stock option expense		44			53
Restricted stock award expense		36			54
Net gain on sale of loans		(124	)		(267	)
Loans originated for resale		(6,157	)		(8,050	)
Proceeds from loans sold		6,269			10,406
Decrease in interest receivable		29			52
(Increase) decrease in other assets		(65	)		3,250
(Decrease) increase in accrued interest payable		(21	)		37
Increase (decrease) in other liabilities		119			(50	)

Net cash provided by operating activities		1,655			7,711

Cash flows from investing activities:
Principal repayments, calls and maturities on securities available for sale		1,891			5,853
Net (increase) in loans receivable		(16,468	)		(7,525	)
Proceeds from sale of other real estate owned		196			518
Additions to premises and equipment		(222	)		(45	)
Redemption of FHLB stock		112			770

Net cash used by investing activities		(14,491	)		(429	)

Cash flows from financing activities:
Net increase in deposits		14,472			8,796
Net increase (decrease) in short-term advances from Federal Home Loan Bank of N.Y.		7,040			(12,740	)
Proceeds of long-term advances from Federal Home Loan Bank of N.Y.		2,350			1,250
Repayment of long-term advances from Federal Home Loan Bank of N.Y.		(10,329	)		(5,751	)
Net increase in payments by borrowers for taxes and insurance		63			377
Proceeds of sale of preferred stock		—			1,455
Dividend on preferred stock		(90	)		(33	)

Net cash (used by) financing activities		13,506			(6,646	)

Net increase in cash and cash equivalents		670			636
Cash and cash equivalents-beginning		2,477			1,841

Cash and cash equivalents-ending	$	3,147		$	2,477

Supplemental information:
Cash paid during the period for:
Interest	$	2,197		$	2,219
Income taxes	$	314		$	14
Other:
Other real estate owned acquired in settlement of loans	$	456		$	518

See notes to consolidated financial statements.

CMS Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Principles of Consolidation

The consolidated financial statements include the accounts of CMS Bancorp, Inc. (the “Company”) a Delaware Corporation and its wholly owned subsidiary, CMS Bank (the “Bank”). The Company’s business is conducted principally through the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current presentation.

Note 2—Description of Business, Nature of Operations and Pending Merger Agreement with ▇▇▇▇▇▇ County Savings Bank

The Bank was originally chartered in 1887 as Community Savings and Loan, a New York State-chartered savings and loan association. In 1980, it converted to a New York State-chartered savings bank and changed its name to Community Mutual Savings Bank of Southern New York. In 1983, Community Mutual Savings Bank of Southern New York changed its name to Community Mutual Savings Bank. In 2007, the Bank reorganized to a federally-chartered mutual savings bank and simultaneously converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank, with the concurrent formation of the Company. The Company, a stock holding company for the Bank, conducted a public offering of its common stock in connection with the conversion. After the 2007 conversion and offering, all of the Bank’s stock became owned by the Company. In June 2012, the Bank completed its conversion from a federally-chartered savings bank to a New York state-chartered savings bank after receiving approval from the New York State Department of Financial Services (“NYSDFS”) and non-objection from the Office of the Comptroller of the Currency (“OCC”), and changed its name to CMS Bank. The Company will continue to be regulated as a savings and loan holding company by the Federal Reserve Bank of Philadelphia as long as the Bank continues to meet the requirements to remain a “qualified thrift lender” under the Home Owners’ Loan Act.

The Bank is a community and customer-oriented retail savings bank offering residential mortgage loans and traditional deposit products and commercial real estate, small business and consumer loans in Westchester County, New York, and the surrounding areas. The Bank also invests in various types of assets, including securities of various government-sponsored enterprises, corporations, municipalities and mortgage-backed securities. The Bank’s revenues are derived principally from interest on loans, interest and dividends received from its investment securities and fees for bank services. The Bank’s primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities, funds provided by operations and borrowings from the Federal Home Loan Bank of New York (“FHLB”).

Note 3—Transaction and Litigation – Customers Bancorp, Inc.

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

In accordance with the Certificate, among other terms, the Series A Preferred Stock:

•

consists of 1,500 authorized shares with a par value of $0.01 per share and an original issuance price of $1,000 per share;

•

is designated as “Series A Noncumulative Perpetual Preferred Stock”;

•

is nonvoting and holders shall not have any conversion rights;

•

provides for optional redemption under certain circumstances at the sole option of the Company; and

•

Additional information specific to the Series A Preferred Stock is included in a Form 8-K filed with the SEC on May 24, 2013.

The terms of the Merger Agreement with ▇▇▇▇▇▇ require the Company to redeem all shares of the Series A Preferred Stock prior to consummation of the merger with ▇▇▇▇▇▇.

Note 4—Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

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

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

The Company follows Financial Accounting Standards Board (“FASB”) guidance on subsequent events, which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. This guidance sets forth the period after the balance sheet date during which management of the reporting entity should evaluate events or transactions that occur for potential recognition in the financial statements. This guidance identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosure that should be made about events or transactions that occur after the balance sheet date. In preparing these consolidated financial statements, the Company evaluated the events that occurred after September 30, 2014 and through the date these consolidated financial statements were issued.

Cash and Cash Equivalents

Cash and cash equivalents include cash and amounts due from depository institutions, interest-earning deposits and federal funds sold, all with original maturities of three months or less.

Securities

Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt securities not classified as trading securities or as held to maturity securities, are classified as available for sale securities and reported at fair value, with unrealized holding gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. The Company has no securities classified as held to maturity or trading securities.

Premiums and discounts on all debt securities are amortized or accreted to income by use of the interest method over the estimated remaining period to contractual maturity, or the security call date.

Gains or losses on sales of securities are recognized on the specific identification method.

Individual securities are considered impaired when the fair value of such security is less than its amortized cost. The Company evaluates all securities with unrealized losses quarterly to determine if such impairments are temporary or “other-than-temporary” in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification as either available for sale or held to maturity. Temporary impairments on available for sale securities are recognized on a tax-effected basis, through other comprehensive income (loss) with offsetting entries adjusting the carrying value of the securities and the balance of deferred income taxes. Temporary impairments of held to maturity securities are not recognized in the consolidated financial statements; however information concerning the amount and duration of impairments on held to maturity securities is disclosed in the notes to the consolidated financial statements.

Other-than-temporary impairments on securities that the Company has decided to sell or will more likely than not be required to sell prior to the full recovery of their fair value to a level to or exceeding amortized cost are recognized in earnings. Otherwise, the other-than-temporary impairment is bifurcated into credit related and noncredit-related components. The credit related impairment generally represents the amount by which the present value of the cash flows expected to be collected on a debt security falls below its amortized cost. The noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. Credit-related other-than-temporary impairments are recognized in earnings while noncredit-related other-than-temporary impairments are recognized, net of deferred income taxes, in other comprehensive income (loss).

The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, and the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer. The Company also assesses its intent with regard to selling or holding each security as well as any conditions which may require it to sell the security prior to the recovery of fair value to a level which equals or exceeds amortized cost.

Loans Receivable

Loans receivable are carried at unpaid principal balances and net deferred loan origination costs less the allowance for loan losses.

The Company defers loan origination fees and certain direct loan origination costs and accretes net amounts as an adjustment of yield over the contractual lives of the related loans. Unamortized net fees and costs are written off if the loan is repaid before its stated maturity.

Recognition of interest income is discontinued and existing accrued interest receivable is reversed on loans that are more than ninety days delinquent and where management, through its loan review process, feels such loan should be classified as non-accrual. Income is subsequently recognized only to the extent that cash payments are received until the obligation has been brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt, in which case the loan is returned to an accrual status. The past due status of all classes of loans receivable is determined based on the contractual due dates for loan payments.

Allowance for Loan Losses

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALLL is based on the requirements of the FASB’s Accounting Standards Codification (“ASC”) Sub-Topic 450-20 for loans collectively evaluated for impairment, ASC Section ▇▇▇-▇▇-▇▇ for loans individually evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses, and other bank regulatory guidance. The total of the two components represents the Bank’s ALLL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends and current Federal Deposit Insurance Corporation Uniform Bank Performance Report (“UBPR”) loss experience for the Bank’s Peer Group are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described below, which are based on the Consolidated Reports of Condition and Income (Call Report) classifications, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the reporting class level. A historical charge-off factor is calculated utilizing a rolling one year to five year average. In addition, the UBPR Peer Group charge-off factor is determined. The Bank uses Bank specific charge-off experience adjusted for recent loss trends and economic conditions as well as Peer Group charge-off experience to establish its historical charge-off factor.

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

An allowance for loan losses is maintained at a level that represents management’s best estimate of losses known and inherent in the loan portfolio that are both probable and estimable. The allowance is decreased by loan charge-offs, increased by subsequent recoveries of loans previously charged off, and then adjusted, via either a charge or credit to operations, to an amount determined by management to be necessary. Loans or portions thereof are charged off when, after collection efforts are exhausted, they are determined to be uncollectible. Management of the Company, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume inherent in its loan activities, along with the general economic and real estate market conditions. The Company utilizes a two tier approach: (1) identification of impaired loans and establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Company maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans.

Such system takes into consideration, among other things, delinquency status, size of loans, and type of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. General loan losses are determined based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment. Although management believes that specific and general loan losses are established in accordance with management’s best estimate, actual losses are dependent upon future events and, as such, further additions to the level of loan loss allowances may be necessary.

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. Loans secured by real estate consist of one-to-four-family, multi-family, non-residential, construction and home equity and second mortgage loans. Substantially all of the commercial loans are secured and consumer loans are principally secured.

Management uses a six category internal risk rating system to monitor the credit quality of the overall loan portfolio that generally follows bank regulatory definitions. Pass graded loans are considered to have average or better than average risk characteristics. They demonstrate satisfactory debt service capacity and coverage along with a generally stable financial position. These loans are performing in accordance with the terms of their loan agreement. The Watch category, a non bank regulatory category, includes assets that, while performing, demonstrate above average risk through a pattern of declining earning trends, strained cash flow, increasing leverage, and/or weakening market fundamentals. The Special Mention category includes assets that are currently protected but exhibit potential credit weakness or a downward trend which, if not checked or corrected, will weaken the Bank’s asset or inadequately protect the Bank’s position. Loans in the substandard category have a well-defined weakness that jeopardizes the orderly liquidation of the debt. For loans in this category, normal repayment from the borrower is in jeopardy and there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. All loans greater than 90 days past due are considered Substandard. Loans in the Doubtful category have weaknesses inherent in those classified Substandard with the added provision that the weakness makes collection of debt in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the special valuation category. Loans that are deemed incapable of repayment where continuance as an active asset of the Bank is not warranted are charged off as a Loss. The classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Senior Lending Officer is responsible for the timely and accurate risk rating of the loans in the portfolios at origination and on an ongoing basis. The Bank has an experienced outsourced Loan Review function that on a quarterly basis, reviews and assesses loans within the portfolio and the adequacy of the Bank’s allowance for loan losses. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard or Doubtful on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

Management evaluates individual loans in all of the segments for possible impairment if the loan is either in nonaccrual status, or is risk rated Substandard or Doubtful. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of any shortfall in relation to the principal and interest owed.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Bank’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. A reserve for losses related to unfunded lending commitments is also maintained. This reserve represents management’s estimate of losses inherent in unfunded credit commitments.

Federal Home Loan Bank of New York Stock

The Company’s required investment in the common stock of the FHLB is carried at cost as of September 30, 2014 and 2013.

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

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Concentration of Risk

The Company’s lending activities are concentrated in loans secured by real estate located in Westchester County, New York and surrounding areas.

Premises and Equipment

Premises and equipment are comprised of land, at cost, and buildings, building improvements, furnishings and equipment and leasehold improvements, at cost less accumulated depreciation and amortization. Depreciation and amortization charges are computed using the straight-line method over the following estimated useful lives:


		Years
Buildings and improvements		10 – 50
Furnishings and equipment		3 – 10
Leasehold improvements		The lesser of useful life or term of lease

Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to expense in the year incurred. Rental income is netted against occupancy expenses in the consolidated statements of income.

Advertising

Advertising expense is recognized as incurred.

Income Taxes

The Company and the Bank file a consolidated federal income tax return. Federal income taxes are allocated to the Company and the Bank based upon the contribution of their respective income or loss to the consolidated return. The Company and the Bank file a combined state income tax return.

Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the income tax returns differ from these provisions due principally to temporary differences in the treatment of certain items for financial statement and income tax reporting purposes. Deferred income taxes have been recorded to recognize such temporary differences. The realization of deferred tax assets is assessed and a valuation allowance is provided, when necessary, for that portion of the asset which more likely than not will not be realized.

The Company follows the FASB’s guidance regarding accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This guidance prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation of the implementation of this guidance, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended September 30, 2014 and 2013. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the consolidated statement of income. The Company did not recognize any interest and penalties for the years ended September 30, 2014 and 2013. The tax years subject to examination by the taxing authorities are the years ended September 30, 2014 and 2013, and December 31, 2012 and 2011.

Benefit Plans

The Company has a non-contributory defined benefit pension plan covering all eligible employees. The Company also has a 401(k) retirement plan and an ESOP, both of which are defined contribution plans.

The benefits for the pension plan are based on years of service and employees’ compensation. Prior service costs for the pension plan generally are amortized over the estimated remaining service periods of employees. The Company uses the corridor approach in the valuation of the pension plan which defers all actuarial gains and losses resulting from differences between actual results and economic estimates or actuarial assumptions. For the pension plan, these unrecognized gains and losses are amortized to income when net gains and losses exceed 10% of the greater of the market-value of plan assets or the projected benefit obligation at the beginning of the plan year.

In accordance with FASB’s guidance regarding accounting for defined benefit and other postretirement plans, the Company recognizes the over-funded or under-funded status of the defined benefit pension plans as an asset or liability in the consolidated statement of financial condition, with the changes in the funded status recorded through other comprehensive income (loss) in the year in which the change occurs.

Net Income Per Share

Basic net income per share was computed by dividing the net income available to common stockholders by the weighted average number of shares of common stock outstanding, adjusted for unearned shares of the Company’s employee stock ownership plan, or “ESOP”. Stock options granted are considered common stock equivalents and are therefore considered in diluted net income per share calculations, if dilutive, using the treasury stock method. For the years ended September 30, 2014 and 2013, 157,879 and 178,179 of the 186,479 of stock options outstanding were anti-dilutive and therefore excluded from the computation of diluted net income per share. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating both basic and diluted net income per share until they are committed to be released.

Off-Balance Sheet Credit-Related Financial Instruments

In the ordinary course of business, the Company enters into commitments to extend credit, including commitments under lines of credit. Such financial instruments are recorded when they are funded.

Reclassification

Amounts in the prior year’s financial statements have been reclassified whenever necessary to conform to the current year’s presentation. Such reclassifications had no impact on stockholder’s equity or net income.

Note 5—Securities Available for Sale

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


September 30, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
U.S. Government Agencies:
Due within five years	$	4,997	$	—	$	30	$	4,967
Due after five but within ten years		9,995		—		241		9,754
Due after ten years but within fifteen years		5,000		—		148		4,852
Corporate bonds due after five years but within ten years		4,364		53		—		4,417
Municipal bonds:
Due within five years		1,281		17		—		1,298
Due after five years but within ten years		2,436		58		3		2,491
Mortgage-backed securities		11,492		178		84		11,586

	$	39,565	$	306	$	506	$	39,365


September 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
U.S. Government Agencies:
Due after five but within ten years	$	14,990	$	—	$	760	$	14,230
Due after ten years but within fifteen years		5,000		—		404		4,596
Corporate bonds due after five years but within ten years		4,384		—		78		4,306
Municipal bonds:
Due within five years		988		—		8		980
Due after five years but within ten years		2,753		32		38		2,747
Mortgage-backed securities		13,497		203		139		13,561

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

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


	Less than 12 Months				12 Months or More				Total
September 30, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. Government Agencies	$	—	$	—	$	19,573	$	419	$	19,573	$	419
Municipal bonds		—		—		1,324		3		1,324		3
Mortgage-backed securities		—		—		3,743		84		3,743		84

	$	—	$	—	$	24,640	$	506	$	24,640	$	506


	Less than 12 Months				12 Months or More				Total
September 30, 2013	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. Government Agencies	$	18,826	$	1,164	$	—	$	—	$	18,826	$	1,164
Corporate bonds		4,306		78						4,306		78
Municipal bonds		2,625		46						2,625		46
Mortgage-backed securities		4,353		139		—		—		4,353		139

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

When the fair value of security is below its amortized cost, additional analysis is performed to determine whether other-than-temporary impairment conditions exist. Securities are analyzed quarterly for possible other-than-temporary impairment. In addition to the severity of unrealized losses and the length of time such losses have existed, the analysis considers (i) whether the Company has the intent to sell the securities prior to recovery and/or maturity and (ii) whether it is more likely than not that the Company will have to sell the securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company’s consolidated financial statements.

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

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

There were no sales of securities available for sale during the years ended September 30, 2014 and 2013.

Refer to Note 9 for disclosure of pledged securities.

Note 6—Loans Receivable


	September 30,
	2014			2013
	(In thousands)
Real estate:
One-to-four-family	$	90,567		$	90,177
Multi-family		28,659			25,771
Non-residential		56,076			50,655
Construction		174			935
Home equity and second mortgages		8,653			8,169

		184,129			175,707
Commercial & Industrial		40,346			33,089
Consumer		55			103

Total Loans		224,530			208,899
Allowance for loan losses		(740	)		(923	)
Net deferred loan origination fees and costs		(4	)		20

	$	223,786		$	207,996

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


September 30, 2014	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(In thousands)
Real estate:
One-to-four-family	$	5,740	$	84,825	$	90,565
Multi-family		—		28,658		28,658
Non-residential		1,738		54,337		56,075
Construction		—		174		174
Home equity and second mortgages		374		8,279		8,653

		7,852		176,273		184,125
Commercial & Industrial		3,297		37,049		40,346
Consumer		4		51		55

Total	$	11,153	$	213,373	$	224,526


September 30, 2013	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(In thousands)
Real estate:
One-to-four-family	$	6,693	$	83,493	$	90,186
Multi-family		—		25,773		25,773
Non-residential		—		50,660		50,660
Construction		—		935		935
Home equity and second mortgages		471		7,699		8,170

		7,164		168,560		175,724
Commercial & Industrial		873		32,219		33,092
Consumer		—		103		103

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

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


	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
September 30, 2014	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Real estate:
One-to-four-family	$	—	$	—	$	5,740	$	5,740	$	5,874
Multi-family		—		—		—		—		—
Non-residential		—		—		1,738		1,738		2,071
Construction		—		—		—		—		—
Home equity and second mortgages		—		—		374		374		374

		—		—		7,852		7,852		8,319
Commercial & Industrial		—		—		3,297		3,297		3,297
Consumer		4		4		—		4		4

Total	$	4	$	4	$	11,149	$	11,153	$	11,620


	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
September 30, 2013	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Real estate:
One-to-four-family	$	—	$	—	$	6,693	$	6,693	$	6,658
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Construction		—		—		—		—		—
Home equity and second mortgages		—		—		471		471		462

		—		—		7,164		7,164		7,120
Commercial & Industrial		—		—		873		873		873
Consumer		—		—		—		—		—

Total	$	—	$	—	$	8,037	$	8,037	$	7,993

The following table presents the average recorded investment in impaired loans and related interest income recognized for the years ended September 30, 2014 and 2013:


September 30, 2014	One-to- four- family		Home Equity and Second Mortgages		Non- residential		Commercial & Industrial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	5,977	$	381	$	1,653	$	1,144	$	1	$	9,156
Interest income recognized on an accrual basis on impaired loans		95		10		18		97		—		220
Interest income recognized on a cash basis on impaired loans		45		2		—		7		—		54

September 30, 2013	One-to- four- family		Home Equity and Second Mortgages		Non- residential		Commercial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	9,165	$	558	$	—	$	175	$	10	$	9,908
Interest income recognized on an accrual basis on impaired loans		118		11		—		26		—		155
Interest income recognized on a cash basis on impaired loans		19		2		—		1		—		22

The following table presents the classes of the loan portfolio summarized by the aggregate Pass (including loans graded Watch) and the classified ratings of Special Mention, Substandard and Doubtful within the internal risk rating system as of September 30, 2014 and 2013:


September 30, 2014	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate:
One-to-four-family	$	87,808	$	—	$	2,757	$	—	$	90,565
Multi-family		28,658		—		—		—		28,658
Non-residential		54,337		—		1,738		—		56,075
Construction		174		—		—		—		174
Home equity and second mortgages		8,417		139		97		—		8,653

		179,394		139		4,592		—		184,125
Commercial & Industrial		35,839		1,210		3,297		—		40,346
Consumer		51		—		—		4		55

Total	$	215,284	$	1,349	$	7,889	$	4	$	224,526


September 30, 2013	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate:
One-to-four-family	$	86,077	$	—	$	4,109	$	—	$	90,186
Multi-family		25,018		755		—		—		25,773
Non-residential		50,660		—		—		—		50,660
Construction		935		—		—		—		935
Home equity and second mortgages		7,999		—		171		—		8,170

		170,689		755		4,280		—		175,724
Commercial & Industrial		28,498		3,721		873		—		33,092
Consumer		103		—		—		—		103

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

Management further monitors the performance and credit quality of the loan portfolio by analyzing the delinquency aging of the portfolio as determined by the length of time a recorded payment is past due.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2014 and 2013:


September 30, 2014	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Non- Accrual		Total Past Due		Total
	(In thousands)
Real estate:
One-to-four-family	$	88,304	$	240	$	—	$	—	$	2,021	$	2,261	$	90,565
Multi-family		28,658		—		—		—		—		—		28,658
Non-residential		56,075		—		—		—		—		—		56,075
Construction		174		—		—		—		—		—		174
Home equity and second mortgages		8,416		—		50		—		187		237		8,653

		181,627		240		50		—		2,208		2,498		184,125
Commercial & Industrial		39,678		511		—		—		157		668		40,346
Consumer		51		—		—		4		—		4		55

Total	$	221,356	$	751	$	50	$	4	$	2,365	$	3,170	$	224,526


September 30, 2013	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Non- Accrual		Total Past Due		Total
	(In thousands)
Real estate:
One-to-four-family	$	86,125	$	—	$	237	$	—	$	3,824	$	4,061	$	90,186
Multi-family		25,773		—		—		—		—		—		25,773
Non-residential		50,660		—		—		—		—		—		50,660
Construction		935		—		—		—		—		—		935
Home equity and second mortgages		8,098		—		—		—		72		72		8,170

		171,591		—		237		—		3,896		4,133		175,724
Commercial & Industrial		32,206		—		13		—		873		886		33,092
Consumer		103		—		—		—		—		—		103

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

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

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

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


September 30, 2014	ALLL Balance		Collectively Evaluated for Impairment		Individually Evaluated for Impairment
	(In thousands)
Real estate:
One-to-four-family	$	257	$	257	$	—
Multi-family		83		83		—
Non-residential		266		266		—
Construction		—		—		—
Home equity and second mortgages		26		26		—

		632		632		—
Commercial & Industrial		100		100		—
Consumer		8		4		4

Total	$	740	$	736	$	4


September 30, 2013	ALLL Balance		Collectively Evaluated for Impairment		Individually Evaluated for Impairment
	(In thousands)
Real estate:
One-to-four-family	$	225	$	225	$	—
Multi-family		48		48		—
Non-residential		374		374		—
Construction		7		7		—
Home equity and second mortgages		82		82		—

		736		736		—
Commercial & Industrial		187		187		—
Consumer		—		—		—

Total	$	923	$	923	$	—

The following table summarizes activity in the primary segments of the ALLL for the years ended September 30, 2014 and 2013:


September 30, 2014	Balance September 30, 2013		Charge- offs			Recoveries		Provision			Balance September 30, 2014
	(In thousands)
Real estate:
One-to-four-family	$	225	$	(142	)	$	—	$	174		$	257
Multi-family		48		—			—		35			83
Non-residential		374		(333	)		—		225			266
Construction		7		—			—		(7	)		—
Home equity and second mortgages		82		—			—		(56	)		26

		736		(475	)		—		370			632
Commercial & Industrial		187		(9	)		1		(79	)		100
Consumer		—		—			—		8			8

Total	$	923	$	(484	)	$	1	$	300		$	740


September 30, 2013	Balance September 30, 2012		Charge- offs			Recoveries		Provision		Balance September 30, 2013
	(In thousands)
Real estate:
One-to-four-family	$	625	$	(562	)	$	82	$	80	$	225
Multi-family		35		—			—		13		48
Non-residential		67		—			—		307		374
Construction		3		—			—		4		7
Home equity and second mortgages		71		—			—		14		82

		801		(562	)		82		415		736
Commercial & Industrial		164		—			—		23		187
Consumer		2		(7	)		—		5		—

Total	$	967	$	(569	)	$	82	$	443	$	923

A troubled debt restructuring (“TDR”) is a loan that has been modified whereby the Bank has agreed to make certain concessions that would otherwise not be granted to a borrower experiencing or expected to experience financial difficulties in order to maximize the ultimate recovery of a loan. The types of concessions granted generally include, but are not limited to interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. The concessions granted on these loans consisted of interest rate reductions and/- or extensions of the loan term. The following table summarizes the TDR identified during the years ended September 30, 2014 and 2013:

September 30, 2014

Number of Loans

Recorded Investment
Before Modification

Recorded Investment
After Modification

(Dollars in thousands)

One-to-four-family

1,471

1,590

Non-residential

532

549

Commercial & Industrial

170

167

September 30, 2013

Number of Loans

Recorded Investment
Before Modification

Recorded Investment
After Modification

(Dollars in thousands)

One-to-four-family

1,089

1,170

A default on a troubled debt restructured loan for purposes of disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. During the years ended September 30, 2014 and 2013, one and no defaults occurred on troubled debt restructured loans that were modified as a TDR within 12 months of the initial modification, respectively. The TDR that defaulted during the year ended September 30, 2014 was a one-to-four-family loan and totaled approximately $506,000 at September 30, 2014.

Note 7—Premises and Equipment


	September 30,
	2014			2013
	(In thousands)
Land	$	179		$	179

Buildings and improvements		1,336			1,336
Accumulated depreciation		(669	)		(632	)

		667			704

Leasehold improvements		2,561			2,526
Accumulated amortization		(1,260	)		(1,068	)

		1,301			1,458

Furnishings and equipment		2,576			2,388
Accumulated depreciation		(2,130	)		(1,987	)

		446			401

	$	2,593		$	2,742

Note 8—Deposits


	September 30,
	2014					2013
	Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Demand deposits:
Non-interest bearing deposits	$	35,451		—		$	28,488		—
Interest bearing deposits		41,675		0.32	%		50,275		0.30	%

		77,126		0.17	%		78,763		0.19	%
Savings and club deposits		44,230		0.27	%		43,050		0.25	%
Certificates of deposit		105,426		1.17	%		90,499		1.37	%

	$	226,782		0.71	%	$	212,312		0.71	%

The scheduled maturities of certificates of deposit are as follows:


Years Ending September 30, (In thousands)
2015	$	54,238
2016		31,217
2017		14,849
2018		4,766
2019		356

	$	105,426

Interest expense on deposits consists of the following:


	Years Ended September 30,
	2014		2013
	(In thousands)
Demand deposits	$	135	$	166
Savings and club deposits		118		106
Certificates of deposit		1,229		1,200

	$	1,482	$	1,472

The aggregate amount of certificates of deposit with balances of $100,000 or more totaled approximately $60.2 million and $38.6 million at September 30, 2014 and 2013, respectively. Depositor’s accounts are insured by the FDIC up to the standard maximum deposit insurance amount $250,000 for each deposit insurance ownership category.

Note 9—Advances from FHLB

A schedule of advances from the FHLB follows:


	September 30,
	2014		2013
	(In thousands)
Overnight and short term advances, maturing in less than one year, with interest at 0.39% and 0.38%	$	11,600	$	4,560
One year advance, maturing February 12, 2015 and February 28, 2014, with interest payable monthly at 0.27% and 0.27%		2,350		1,250
Seven year advance, maturing December 29, 2014, with interest payable quarterly at 3.56%		5,000		5,000
Seven year fixed rate advance with interest at 5.57%, payable in monthly installments of principal and interest of $57,000 with a balloon payment of $8,925,000 on August 8, 2014		—		9,079

Total	$	18,950	$	19,889

A schedule of the Company’s annual principal obligations to the FHLB is as follows:


Year Ending September 30, (In thousands)
2015	$	18,950

	$	18,950

These FHLB advances are secured by stock of the FHLB in the amount of $1.2 million and $1.3 million at September 30, 2014 and 2013, respectively, and a blanket assignment on the qualifying loans.

The Company can borrow on an overnight or a term basis from the FHLB. The Company’s overall credit exposure at the FHLB cannot exceed 50% of its total assets, subject to certain limitations based on the underlying loans pledged as collateral.

No available-for-sale securities were pledged to the FHLB as of September 30, 2014 and 2013.

Note 10—Lease Commitments and Total Rental Expense

The Company leases five locations under long-term operating leases. Future minimum lease payments by year and in the aggregate, under non-cancellable operating leases with initial or remaining terms of one year or more, consisted of the following at September 30, 2014 (in thousands):


Years ending September 30,
2015	$	577
2016		500
2017		503
2018		375
2019		279
Thereafter		1,528

	$	3,762

The total rental expense and related charges for all leases for the years ended September 30, 2014 and 2013 was $797,000 and $786,000, respectively.

Note 11—Income Taxes

The Company qualifies as a thrift under the provisions of the Internal Revenue Code and, therefore, was permitted, prior to January 1, 1996, to deduct from federal taxable income an allowance for bad debts based on 8% of taxable income before such deduction, less certain adjustments, subject to certain limitations. Beginning January 1, 1996, the Company, for federal income tax purposes, must calculate its tax bad debt deduction using either the experience or specific charge off method. The New York State tax law permits the Company to deduct 32% of its taxable income before bad debt deduction, subject to certain limitations.

Retained earnings at September 30, 2014 included approximately $1,981,000 of such bad debt deduction for which federal income taxes of approximately $612,000 have not been provided. In addition, deferred New York State taxes of approximately $369,000 have not been provided on bad debt deductions in the amount of $4,100,000. If such amount is used for purposes other than for bad debt losses, including distributions in liquidation, it will be subject to income tax at the then current rate.

The components of income taxes expense are as follows:


	Years Ended September 30,
	2014			2013
	(In thousands)
Current income tax expense:
Federal	$	275		$	105
State		69			33

		344			138

Deferred income tax expense (benefit):
Federal		(6	)		230
State		(2	)		84

		(8	)		314

	$	336		$	452

The following table reconciles the reported income taxes and the federal income taxes which would be computed by applying the normal federal income tax rate of 34% to income before income taxes:


	Years Ended September 30,
	2014			Percent of Pretax Income			2013			Percent of Pretax Income
	(Dollars in thousands)
Federal income taxes	$	338			34.0	%	$	473			34.0	%
State income taxes, net of federal income tax effect		44			4.4	%		77			5.5	%
Non-deductible stock based compensation		3			0.3	%		14			1.0	%
Non-deductible merger related costs (reimbursement)		0			0.0	%		(102	)		(7.3	)%
Other items, net		(46	)		(4.6	)%		4			0.3	%

Effective Income Taxes	$	336			33.8	%	$	452			32.5	%

The tax effects of existing temporary differences that give rise to significant portions of net deferred tax assets and liabilities are as follows:


	September 30,
	2014		2013
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	294	$	366
Depreciation		107		—
Deferred rent		75		63
Benefit plan adjustment (Accumulated Other Comprehensive Income)		700		599
Unrealized loss on securities available for sale		79		473
Stock based compensation		228		203
Interest income and other		43		152

Total Deferred Tax Assets		1,526		1,856

Deferred tax liabilities:
Accrued pension		274		292
Depreciation		—		26

Total Deferred Tax Liabilities		274		318

Net Deferred Tax Assets Included in Other Assets	$	1,252	$	1,538

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and carry-forwards are available.

At September 30, 2014 and 2013 the Company had no net operating loss carry-forwards available for tax reporting purposes.

Note 12—Comprehensive Income (Loss)

Total comprehensive income (loss) represents the sum of net income and items of “other comprehensive income or loss” that are reported directly in equity on an after tax basis, such as the net unrealized holding gain or loss on securities available for sale and defined benefit pension plan adjustments. The Company has reported its total comprehensive income in the consolidated statements of comprehensive income and changes in stockholders’ equity.

Accumulated other comprehensive (loss), which is included in stockholders’ equity, consisted of the following:


	September 30,
	2014		2013
	(In thousands)
Net unrealized holding (losses) on securities available for sale, net of deferred income tax benefits of $79,000 and $473,000, respectively	$	(121)	$	(719)
Benefit plan adjustment, net of related deferred taxes of $700,000 and $599,000, respectively		(1,063)		(909)

	$	(1,184)	$	(1,628)

Note 13—Regulatory Matters

For the purpose of granting eligible account holders a priority in the event of future liquidation, the Bank, at the time of conversion, established a liquidation account in an amount equal to its retained earnings of $8.3 million at September 30, 2006. In the event of a future liquidation of the Bank (and only in such event), an eligible account holder who continues to maintain his or her deposit account shall be entitled to receive a distribution from the special account. The total amount of the special account is decreased (but never increased) in an amount proportionally corresponding to decreases in the deposit account balances of eligible account holders as of each subsequent year end. After conversion, no dividends may be paid to stockholders if such dividends would reduce retained earnings of the converted Bank below the amount required by the special account.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to total assets (as defined). The following table presents a reconciliation of the Bank’s capital based on GAAP and regulatory capital at the dates presented:


	September 30,
	2014		2013
	(In thousands)
GAAP capital:	$	21,775	$	20,318
Pension liability, net of deferred taxes		1,063		909
Unrealized (gain) loss on securities available for sale, net of deferred taxes		121		719

Tier I and tangible capital		22,959		21,946
General valuation allowance		740		923

Total Regulatory Capital	$	23,699	$	22,869

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


	Actual					For Capital Adequacy Purposes						To be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
	(Dollars in thousands)
September 30, 2014:
Total capital (to risk-weighted assets)	$	23,699		12.36	%	$	15,338	³		8.00	%	$	19,173	³		10.00	%
Core (Tier 1) capital (to risk-weighted assets)		22,959		11.97			—			—			11,504	³		6.00
Core (Tier 1) capital (to total adjusted assets)		22,959		8.40			10,930	³		4.00			13,662	³		5.00
Tangible capital (to total adjusted assets)		22,959		8.40			4,099	³		1.50			—			—
September 30, 2013:
Total capital (to risk-weighted assets)	$	22,869		12.91	%	$	14,176	³		8.00	%	$	17,720	³		10.00	%
Core (Tier 1) capital (to risk-weighted assets)		21,946		12.39			—			—			10,632	³		6.00
Core (Tier 1) capital (to total adjusted assets)		21,946		8.49			10,342	³		4.00			12,928	³		5.00
Tangible capital (to total adjusted assets)		21,946		8.49			3,878	³		1.50			—			—

The Bank continues to meet the requirements to be categorized as “well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions existing or events which have occurred since September 30, 2014 that management believes would change the Bank’s regulatory capital categorization.

Note 14—Benefit Plans

Pension Plan

The Bank maintains a non-contributory defined benefit pension plan (the “Plan”) covering all eligible employees hired before July 1, 2008. The benefits are based on employees’ years of service and compensation. The Bank’s policy is to fund the Plan annually with at least the minimum contribution deductible and/or allowable for federal income tax purposes. On January 28, 2010, the Board of Directors passed a resolution to suspend the accrual of benefits under the Company’s defined benefit pension plan. The following table sets forth the Plan’s funded status and components of net periodic pension cost:


	September 30,
	2014			2013
	(In thousands)
Change in benefit obligation:
Benefit obligation—beginning of year	$	5,065		$	4,043

Interest cost		248			256
Actuarial loss		481			957
Benefits paid		(219	)		(191	)

Benefit obligation—end of year	$	5,575		$	5,065

Change in plan assets:
Fair value of assets—beginning of year	$	4,298		$	4,157
Actual return on plan assets		429			332
Benefits paid		(219	)		(191	)

Fair value of assets—end of year	$	4,508		$	4,298


	September 30,
	2014			2013
	(In thousands)
Reconciliation of funded status:
Accumulated benefit obligation	$	5,575		$	5,065

Projected benefit obligation	$	(5,575	)	$	(5,065	)
Fair value of assets		4,508			4,298

Funded status	$	(1,067	)	$	(767	)

Accrued pension cost included in other liabilities	$	(1,067	)	$	(767	)

The Company expects to recognize approximately $91,000 of net actuarial loss in operations during the year ending September 30, 2015.


	September 30,
	2014			2013
	(In thousands)
Amounts recognized in accumulated other comprehensive loss, pre-tax, consist of:
Net actuarial loss	$	(1,763	)	$	(1,508	)


	Years Ended September 30,
	2014			2013
	(Dollars in thousands)
Net periodic pension expense
Interest cost	$	248		$	256
Expected return on assets		(293	)		(284	)
Amortization of unrecognized net loss		91			18

Total net periodic pension (credit) expense	$	46		$	(10	)

Valuation assumptions:
Discount rate		4.50	%		5.00	%
Rate of return on long-term assets		7.00	%		7.00	%
Salary increase rate		0.00	%		0.00	%

The Plan assets are invested as follows:


	September 30,
	2014			2013
Separate account—Prudential Large Cap Blend / Victory Fund		52	%		51	%
Guaranteed insurance funds		48	%		49	%

		100	%		100	%

The overall expected long-term rate of return on Plan assets was 7.0% for both 2014 and 2013.

The fair values of the Company’s pension plan assets, by asset category (see Note 17 for definition of Levels), are as follows:


September 30, 2014	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(In thousands)
Separate account—Prudential Large Cap Blend /Victory Fund	$	2,342	$	—	$	2,342	$	—
Guaranteed investment contract	$	2,166	$	—	$	—	$	2,166

September 30, 2013
	(In thousands)
Separate account—Prudential Large Cap Blend /Victory Fund	$	2,178	$	—	$	2,178	$	—
Guaranteed investment contract	$	2,120	$	—	$	—	$	2,120

At September 30, 2014, expected benefit payments were as follows (in thousands):


Years ending September 30,
2015	$	226
2016		222
2017		226
2018		272
2019		338
2020 to 2024		1,678

	$	2,962

The Bank does not expect to have any required contributions to the Plan during the fiscal year ending September 30, 2015.

401(k) “Savings and Investment Plan”

The Company has implemented a Savings and Investment Plan (the “Savings Plan”) pursuant to Section 401(k) of the Internal Revenue Code for all eligible employees. Under the Savings Plan, employees may elect to contribute a percentage of their compensation, subject to limits. The Company makes a matching contribution equal to 50% of an employee’s contribution, up to 8.0% of compensation, subject to certain limitations. The Savings Plan expenses for the years ended September 30, 2014 and 2013, amounted to $72,000 and $83,000, respectively.

Employees Stock Ownership Plan (“ESOP”)

The Company established an ESOP for all eligible employees in connection with the public offering of common stock in April 2007. The ESOP used the proceeds of a $1.6 million, 8.0% term loan from the Company to purchase 164,413 shares of Company common stock. The term loan from the Company to the ESOP is payable in annual installments of principal and interest over 30 years commencing on December 31, 2007. The Company intends to make discretionary contributions to the ESOP which will be equal to principal and interest payments on the term loan to the ESOP from the Company. ▇▇▇▇▇▇ purchased with the loan proceeds are initially pledged as collateral for the term loan and are held in a suspense account for future allocation among participants. Contributions to the ESOP and shares released from the suspense account will be allocated among the participants on the basis of compensation, as defined by the ESOP, in the year of allocation. As of September 30, 2014 and 2013, the loan had a balance of $1,487,000 and $1,509,000, respectively.

The ESOP is accounted for in accordance with the guidance issued by FASB. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Dividends on unallocated ESOP shares are recorded as a reduction of debt. ESOP compensation expense was $50,000 and $48,000 for the years ended September 30, 2014 and 2013, respectively.

The ESOP shares are summarized as follows:


	September 30,
	2014		2013
Unearned shares		121,900		127,380
▇▇▇▇▇▇ committed to be released		4,110		4,110
Shares released		36,992		31,512

Total shares		163,002		163,002

Fair value of unearned shares	$	1,573,000	$	1,093,000

Note 15—Stock Based Compensation

At a special meeting of the stockholders of the Company held on November 9, 2007, the stockholders approved the CMS Bancorp, Inc. 2007 Stock Option Plan and the CMS Bancorp, Inc. 2007 Recognition and Retention Plan (collectively the “Plans”). The Plans authorize the award of up to 205,516 stock options and 82,206 shares of restricted stock. The stock options and restricted stock awarded vest over a five year service period based on the anniversary of the grant date.

Under the Plans, the Company has granted shares of restricted stock and options to purchase the Company’s common stock as shown in the following table. The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model and the assumptions shown in the following table:


	September 2014		September 2013
Shares of restricted stock		—		4,519
Grant date fair value per share	$	—	$	8.04
Number of stock options		—		16,000
Exercise price	$	NA	$	8.04
Fair value per option	$	NA	$	4.85
Risk free interest rate		NA		1.62	%
Volatility factor		NA		61.2	%
Expected life		NA		7 years
Dividends		NA		none

The Company expenses, in accordance with FASB guidance, the fair value of all options over their five year vesting periods and expenses the fair value of all share-based compensation granted over the requisite five year vesting periods. In the years ended September 30, 2014 and 2013, the Company recorded an expense of $44,000 and $53,000 respectively, relating to stock options and $36,000 and $54,000, respectively, relating to the restricted stock. The Company recognized approximately $32,000 and $44,000 of income tax benefits resulting from this expense in the years ended September 30, 2014 and 2013, respectively.

As of September 30, 2014 and 2013, there were 19,037 stock options and no shares of restricted stock in either year remaining available for future awards under the Plans. Stock options and restricted stock awarded under the Plans vest over five years, at the rate of 20% per year.

The following is a summary of the status of the Company’s non-vested restricted shares:


	Restricted Shares			Weighted Average Grant Date Fair Value
Non-vested at September 30, 2012		28,255		$	8.99
Vested		(15,584	)	$	9.74

Non-vested at September 30, 2013		12,771		$	8.24
Vested		(4,265	)	$	8.20

Non-vested at September 30, 2014		8,506		$	8.26

Expected future compensation expense relating to the 8,506 non-vested restricted shares outstanding at September 30, 2014 is $56,000 over a weighted average period of 2.0 years.

The following is a summary of stock option activity:


	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Balance at September 30, 2012		186,479	$	9.56		6.2 years
Granted		—	$	—		—

Balance at September 30, 2013		186,479	$	9.56		5.2 years
Granted		—		—		—

Balance at September 30, 2014		186,479	$	9.56		4.2 years

Exercisable at September 30, 2014		163,439	$	9.77		2.4 years

Shares issued upon exercise of stock options will be issued from treasury stock or from previously unissued shares. As of September 30, 2014, the Company had 192,362 shares of treasury stock. Expected future compensation expense relating to non-vested options outstanding at September 30, 2014 is $84,000 over a weighted average period of 2.4 years.

At September 30, 2014 and 2013, the stock options outstanding had an intrinsic value of $623,000 and $27,000, respectively, and stock options exercisable had an intrinsic value of $111,000 and $10,000 at September 30, 2014 and 2013, respectively.

Note 16—Commitments and Contingencies

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

The Company has the following outstanding commitments:


	September 30
	2014		2013
	(In thousands)
Commitments to originate loans, expiring in three months or less	$	2,756	$	3,850
Commitments under homeowners’ equity lending program		6,721		6,619
Commitments under overdraft protection and commercial lines of credit		3,982		4,558

Total	$	13,459	$	15,027

At September 30, 2014, $892,700 in outstanding commitments to originate loans were at fixed rates ranging from 4.25% to 4.375% and $1,863,000 were at variable rates ranging from 4.25% to 4.75% at September 30, 2014. At September 30, 2013, $900,000 in outstanding commitments to originate loans were at fixed rates ranging from 3.75% to 4.875% and $2,950,000 were variable rates ranging from 4.25% to 4.75%. At September 30, 2014 and 2013, undisbursed funds from approved lines of credit under a homeowners’ equity lending program totaled $6,721,000 and $6,619,000, respectively. Interest rates are either fixed (ranging from 7.550% to 7.625% at September 30, 2014) or variable, based on the prime rate or prime minus 25 basis points adjusted on a monthly basis (ranging from 2.00% to 5.25% at September 30, 2014). At September 30, 2014 and 2013, unused overdraft protection and commercial lines of credits were $4.0 million and $4.6 million, respectively. Unless specifically cancelled by notice from the Company, these funds represent firm commitments available to the respective borrowers on demand.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held consists primarily of residential real estate, but may include income-producing commercial properties.

The Company also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of these transactions.

The Company, in the ordinary course of business, becomes a party to litigation from time to time. In the opinion of management, the ultimate disposition of such litigation is not expected to have a material adverse effect on the financial position or results of operations of the Company.

Note 17—Fair Value Measurements and Fair Value of Financial Instruments

U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy at September 30, 2014 and 2013 are summarized below:


Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
			(In thousands)
September 30, 2014
Securities available for sale:
U.S. Government Agencies	$	19,573	$	—	$	19,573	$	—
Corporate bonds		4,417		—		4,417		—
Municipal bonds		3,789		—		3,789		—
Mortgage-backed securities		11,586		—		11,586		—


Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
			(In thousands)
September 30, 2013
Securities available for sale:
U.S. Government Agencies	$	18,826	$	—	$	18,826	$	—
Corporate bonds		4,306		—		4,306		—
Municipal bonds		3,727		—		3,727		—
Mortgage-backed securities		13,561		—		13,561		—

For financial assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy at September 30, 2014 and 2013 are summarized below:

Description

Fair
Value

(Level 1)
Quoted Prices in
Active Markets for
Identical Assets

(Level 2)
Significant Other
Observable
Inputs

(Level 3)
Significant
Unobservable Inputs

(In thousands)

September 30, 2014

Impaired loans

1,908

—

1,908

Other real estate owned

183

—

183

September 30, 2013

Impaired loans

—

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value:

(Dollars in thousands)

September 30, 2014

Fair value
estimate

Valuation techniques

Unobservable input

Range

Weighted
average

Impaired loans

1,908

Appraisals (1)

Liquidation
expenses (2)

4.02% to 5.67%

4.84%

Other real estate owned

183

Appraisals (1)

Liquidation
expenses (2)

6.0%

1)	Fair value is generally determined through discounted independent appraisals of the underlying collateral less any loan related liquidation expenses.

2)	Includes estimated liquidation expenses by borrower.

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

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

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

Loans Receivable. The fair value of loans receivable is estimated by discounting the future cash flows, using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans.

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market, determined based on actual amounts subsequently realized after the balance sheet date, or estimates of amounts to be subsequently realized, based on actual amounts realized for similar loans.

Deposits. The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using market rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.

Advances from FHLB. Fair value is estimated using rates currently offered for advances of similar remaining maturities.

Commitments to Extend Credits. The fair value of commitments to fund credit lines and originate or participate in loans is estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest and the committed rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, was not considered material at September 30, 2014 or 2013.

The carrying amounts and estimated fair values of financial instruments at September 30, 2014 are summarized as follows:

Description

Carrying
Amount

Fair
Value

(Level 1)
Quoted Prices in
Active Markets for
Identical Assets

(Level 2)
Significant Other
Observable Inputs

(Level 3)
Significant
Unobservable Inputs

(In thousands)

September 30, 2014

Financial assets:

Cash and cash equivalents

3,147

—

Securities available-for-sale

39,365

—

39,365

—

Loans held for sale

349

—

349

—

Loans receivable

223,786

221,189

—

221,189

Accrued interest receivable

925

—

925

—

Financial liabilities:

Deposits

226,782

217,765

—

217,765

—

FHLB-NY advances

18,950

20,976

—

20,976

—

Accrued interest payable

109

—

109

—


Description	Carrying Amount		Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
					(In thousands)
September 30, 2013
Financial assets:
Cash and cash equivalents	$	2,477	$	2,477	$	2,477	$	—	$	—
Securities available-for-sale		40,420		40,420		—		40,420		—
Loans held for sale		337		337		—		337
Loans receivable		207,996		224,884		—		—		224,884
Accrued interest receivable		954		954		—		954		—
Financial liabilities:
Deposits		212,312		213,595		—		213,595		—
FHLB-NY advances		19,889		20,976		—		20,976		—
Accrued interest payable		130		130		—		130		—

Limitations

The fair value estimates are made at a discrete point in time based on relevant market information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all of the financial instruments were offered for sale.

In addition, the fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value the anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

Note 18—Parent Only Financial Information

The following are the financial statements of the Company (Parent only) as of and for the years ended September 30, 2014 and 2013.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

(In thousands)


	September 30,
	2014		2013
Assets
Cash and cash equivalents	$	398	$	844
Investment in Bank		21,775		20,318
ESOP loan receivable		1,487		1,509
Other assets		295		154

Total assets	$	23,955	$	22,825

Liabilities and stockholders’ equity
Other liabilities	$	79	$	90
Stockholders’ equity		23,876		22,735

Total liabilities and stockholders’ equity	$	23,955	$	22,825

CONDENSED STATEMENTS OF OPERATIONS

(In thousands)


	Years Ended September 30,
	2014			2013
Interest income	$	121		$	122
Equity in income of Bank		843			873
Provision for loan losses		0			72
Other non-interest expenses		435			92

Income before income tax (benefit)		529			831
Income tax (benefit)		(128	)		(108	)

Net income		657			939
Preferred stock dividends		90			33

Net income attributable to common shareholders	$	567		$	906

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)


	Years Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	657		$	939
Equity in (income) of Bank		(843	)		(873	)
Provision for loan losses		0			72
(Increase) decrease in other assets		(180	)		91
Decrease in other liabilities		(12	)		(279	)

Net cash (used by) operating activities		(378	)		(50	)

Cash flows from investing activities:
Capital contribution to Bank		0			(1,455	)
Net decrease in loan receivable		0			569
Decrease in ESOP loan receivable		22			21

Net cash provided by (used by) investing activities		22			(865	)

Cash flows from financing activities
Proceeds of sale of preferred stock		0			1,455
Dividend on preferred stock		(90	)		(33	)

Net cash (used by) provided by financing activities		(90	)		1,422
Net (decrease) increase in cash and cash equivalents		(446	)		507
Cash and cash equivalents—beginning of period		844			337

Cash and cash equivalents—end of period	$	398		$	844

Note 19—Transactions with Officers and Directors

The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its officers, directors, and their immediate families (commonly referred to as “related parties”), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-related parties. These persons were indebted to the bank for loans totaling $3.96 million at September 30, 2014 and $2.47 million September 30, 2013, respectively. During the year ended September 30, 2014, $1.58 million of new loans were made to and $92 thousand of repayments were made by related parties. During the year ended September 30, 2013, $3.5 million of new loans were made and $1.3 million of repayments were made.

CMS Bancorp, Inc.

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