Item 2. - Managements Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
This Form 10-Q 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 1A Risk Factors of our Form 10-K for the year ended September 30, 2012 which was filed with the SEC
on December 28, 2012, which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:
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risks associated with the pending merger with Customers Bancorp;
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changes in interest rates;
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our allowance for loan losses may not be sufficient to cover actual loan losses;
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the risk of loss associated with our loan portfolio;
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lower demand for loans;
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changes in our asset quality;
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other-than-temporary impairment charges for investments;
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the soundness of other financial institutions;
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changes in the real estate market or local economy;
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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 Office of Thrift Supervisions functions under the Dodd-Frank Act and the subsequent conversion of CMS Banks charter to that of a New York state-chartered savings bank;
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our ability to retain our executive officers and other key personnel;
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competition in our primary market area;
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risk of noncompliance with laws and regulations, including changes in laws and regulations to which we are subject;
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changes in the Federal Reserves monetary or fiscal policies;
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our ability to maintain effective internal controls over financial reporting;
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the inclusion of certain anti-takeover provisions in our organizational documents;
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the low trading volume in our stock;
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recent developments affecting the financial markets, including the actual and threatened downgrade of U.S. government securities; and
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risks related to use of technology and cybersecurity.
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Any or all of our forward-looking statements in this Report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or
to reflect the occurrence of anticipated or unanticipated events.
General
The 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys interest-earning assets and the interest paid on interest-bearing liabilities. The Companys net interest income may be affected by market
interest rate changes. Local market
21
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 Companys ability to invest deposits and reinvest proceeds from loan and investment repayments at higher interest rates. The
primary goals of the Companys 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 Companys net interest income to
fluctuations in interest rates. Despite the challenges of the ever-changing banking and regulatory environment, we have continued to grow 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 Companys provision for loan losses may increase to reflect this increased risk, which could cause a reduction in the Companys earnings.
Pending Merger with Customers Bancorp
On August 10, 2012, the Company announced that it entered into a definitive merger agreement with Customers Bancorp, Inc., headquartered in
Wyomissing, Pennsylvania (Customers) whereby through a series of transactions, the Company will be merged into Customers, and the Bank will be merged into Customers wholly-owned bank subsidiary, Customers Bank, a Pennsylvania
state-chartered bank headquartered in Phoenixville, Pennsylvania (the Merger). Upon completion of the Merger, Customers will have acquired all outstanding shares of CMS Bancorps common stock in exchange for shares of
Customers common stock. Any fractional shares that result due to this exchange of shares will be paid in cash. As of the date of the merger announcement, the total transaction value is approximately $20.8 million, and the Merger Agreement
provides for CMS Bancorps stockholders to receive shares of Customers voting common stock based upon an exchange ratio determined at the closing of the transaction, with fractional shares to be cashed out. The exchange ratio formula
provides that CMS Bancorp stock will be valued at 95% CMS Bancorps common stockholders equity as of the month end prior to the closing, while Customers stock will be valued at 125% of Customers modified stockholder equity as
of the month end prior to closing. Modified stockholders equity is defined as June 30, 2012 common stockholders equity plus additions to retained earnings through the month-end prior to closing. If, however, the closing occurs on or
after April 30, 2013, the valuation date will be fixed as of March 31, 2013. Shares issued by Customers in capital raises and purchase accounting adjustments from any other acquisitions will not be included in calculating modified
stockholders equity.
The Merger Agreement has been unanimously approved by CMS Bancorps Board of Directors and the transactions
contemplated by the Merger Agreement are subject to various conditions including, among other things, (i) approval of the Merger by the holders of a majority of the outstanding shares of CMS Bancorps common stock; (ii) the receipt of
all required regulatory approvals; (iii) the non-occurrence of any event that has a material adverse effect on CMS Bancorp and its subsidiaries; and (iv) as of the closing date (before giving effect to the Merger), CMS Bancorp and its
subsidiaries shall have, on a consolidated basis, nonperforming assets (as defined in the Merger Agreement) less than or equal to $12 million, as well as other conditions to closing that are customary in transactions such as the Merger. In addition,
Customers is currently in the process of seeking regulatory approval related to its acquisition of Acacia Federal Savings Bank, headquartered in Falls Church, Virginia (the Acacia Transaction). Customers is not required to seek
regulatory approval with respect to the Merger until after regulatory approval is received for the Acacia Transaction. Assuming the satisfaction of such conditions, it is currently expected that the Merger will be completed in the first half of
calendar year 2013. For additional information about the Merger announcement, see the Companys Form 8-K and press release exhibit filed with the U.S. Securities and Exchange Commission (SEC) on August 10, 2012.
Business Strategy
The 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. Subject to the completion of the previously
announced pending Merger with Customers Bancorp, 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 Companys
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.
22
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
Major financial reform legislation, known as the Dodd-Frank Act, was signed into law by the President on July 21, 2010. Among other things, the
Dodd-Frank 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 Dodd-Frank Act affecting the Company and Bank have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the Dodd-Frank
Act.
Of particular significance to federal savings associations (as applicable to the Bank prior to June 29, 2012) and savings and loan
holding companies such as the Company is that, as a result of regulatory restructuring implementing the Dodd-Frank Act, both the Company and Bank transitioned from the consolidated supervision and regulation jurisdiction of the Office of Thrift
Supervision (OTS) to the jurisdiction of their current new and separate primary federal regulators for federal savings associations and their holding companies on July 21, 2011. The Bank then subsequently transitioned to the primary
state supervision and regulation of the New York State Department of Financial Services (NYSDFS) as well as the Federal Deposit Insurance Corporation as the Banks federal safety and soundness regulator. For a discussion of the
regulation of savings and loan holding companies and New York state-chartered savings banks, as impacted by the Dodd-Frank Act, see the Companys Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission
(SEC) on December 28, 2012.
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.
It is managements opinion that accounting
estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making these estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of the allowance for loan losses and the assessment of whether deferred tax assets 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
Companys market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys 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. Managements 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.
Comparison of Financial Condition at
December 31, 2012 to September 30, 2012
Total assets increased by $9.0 million, or 3.4%, to $273.6 million at December 31,
2012 from $264.7 million at September 30, 2012. Increases in deposit balances were used to fund loan growth and the increase in interest bearing cash equivalents.
Loans receivable were $207.2 million and $201.5 million at December 31, 2012 and September 30, 2012, respectively, representing an increase of $5.7 million, or 2.9%. The increase in loans
resulted principally from increases in multi-family and commercial loans.
The banking industry as a whole has seen increases in loan
delinquencies and defaults in recent years. As of December 31, 2012 and September 30, 2012, the Bank had $7.4 million and $6.2 million of non-performing loans, respectively, substantially all of which were in process of foreclosure and
have been placed on non-accrual status. At December 31, 2012 and September 30, 2012, the Bank had $11.1 million and $11.4 million of loans classified as impaired. At December 31, 2012, $0.5 million of these impaired loans required
specific loss allowances totaling $27,000. The remaining $10.7 million of impaired loans did not require specific loss allowances. At September 30, 2012, $1.5 million of impaired loans required specific loss allowances of $48,000. The impaired
loans were primarily the result of continued difficult general economic conditions, increased unemployment and continued declines in the local real estate market. As of December 31, 2012 and September 30, 2012, the allowance for loan
losses was 0.41% and 0.48% 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 $27,000 at December 31, 2012 compared to $48,000 at September 30, 2012. The allowance for loans collectively evaluated for impairment was $822,000 at
December 31, 2012 compared to $919,000 at September 30, 2012. The decrease of $97,000 was the result of changes in the size and mix of the loan portfolio as well as changes in the allowance allocation percentages applied to the loan categories,
net of the charge off of $218,000 in the three month period ended December 31, 2012. The allowance allocation, or loss percentages are based on one to five year historical charge offs, adjusted for the trend of losses, current economic
conditions including unemployment, real estate markets and other factors. Allowance allocation percentages can also be adjusted for trends as evidenced by the Federal Deposit Insurance Corporation Uniform Bank Performance Report (UBPR)
loss experience for the Banks Peer Group. As
23
a result of changes in the mix and volume of the loan portfolio, weak economic conditions, unemployment, declines in real estate values in the Banks primary market area, and lower
commercial real estate cash flows, $100,000 and $365,000 was provided for loan losses in the three month periods ended December 31, 2012 and 2011, respectively.
Deposits increased by $14.0 million, or 6.9%, from $203.5 million as of September 30, 2012 to $217.5 million as of December 31, 2012. The Bank participates in the Certificate of Deposit Account
Registry Service, or CDARS network. Increases in retail demand deposits of $5.6 million and an increase in CDARS deposits of $7.3 million accounted for the majority of the change. Increases in retail demand deposits resulted from the
continued emphasis on developing commercial deposit relationships and local market conditions. Under the CDARS 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. The Bank had $7.3 million and none, respectively, of CDARS deposits as of December 31, 2012 and
September 30, 2012 and otherwise had no brokered deposits as of December 31, 2012 and September 30, 2012.
Stockholders
equity increased by $182,000 from September 30, 2012 to December 31, 2012 as a result of net income of $182,000 and additions to equity resulting from accounting for stock-based compensation and the Companys ESOP, net of the other
comprehensive loss of $62,000. The other comprehensive loss in the three months ended December 31, 2012 resulted primarily from the unrealized losses on available for sale securities due to changes in market interest rates.
24
Comparison of Operating Results for the Three Months Ended December 31, 2012 and 2011
General.
The Company recorded net income of $182,000 for the three months ended December 31, 2012, compared to a net loss of
$227,000 for the three months ended December 31, 2011. The change was primarily due to lower interest expense ($587,000 in the three months ended December 31, 2012 compared to $951,000 in the three months ended December 31, 2011), and
the lower provision for loan losses ($100,000 in the three months ended December 31, 2012 compared to $365,000 in the three months ended December 31, 2011).
Average Balances, Interest and Average Yields/Costs.
The following table sets forth certain information relating to the Companys average balance sheets and reflects the average annual yield
on interest-earning assets and average annual cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing annualized income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from daily balances over the periods indicated. The average balances for loans are net of allowance for loan losses.
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Three Months Ended December 31,
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2012
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2011
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(Dollars in thousands)
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Average
Balance
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Interest
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Yield/
Cost
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Average
Balance
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Interest
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Yield/
Cost
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Interest-earning assets:
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|
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|
Loans receivable(1)
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$
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202,598
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|
$
|
2,577
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|
|
|
5.09
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%
|
|
$
|
179,402
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|
|
$
|
2,626
|
|
|
|
5.86
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%
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Securities(2)
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|
|
48,246
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|
|
|
227
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|
|
|
1.88
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%
|
|
|
55,667
|
|
|
|
240
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|
|
|
1.72
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%
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Other interest-earning assets(3)
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|
|
4,374
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|
|
|
26
|
|
|
|
2.38
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%
|
|
|
13,923
|
|
|
|
34
|
|
|
|
0.98
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%
|
|
|
|
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|
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|
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|
|
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|
|
|
|
|
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|
Total interest-earning assets
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|
|
255,218
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|
|
|
2,830
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|
|
|
4.44
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%
|
|
|
248,992
|
|
|
|
2,900
|
|
|
|
4.66
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%
|
|
|
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|
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|
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|
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|
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|
|
|
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|
Non interest-earning assets
|
|
|
6,233
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|
|
|
|
|
|
|
|
|
|
|
6,490
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Total assets
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$
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261,451
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$
|
255,482
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Interest-bearing liabilities:
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Demand deposits
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$
|
46,853
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|
|
|
45
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|
|
|
0.38
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%
|
|
$
|
30,744
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|
|
|
53
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|
|
|
0.69
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%
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Savings and club accounts
|
|
|
41,820
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|
|
|
26
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|
|
|
0.25
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%
|
|
|
40,808
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|
|
|
41
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|
|
|
0.40
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%
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Certificates of deposit
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|
|
89,236
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|
|
|
308
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|
|
|
1.38
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%
|
|
|
104,964
|
|
|
|
428
|
|
|
|
1.63
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%
|
Borrowed money(4)
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|
|
34,429
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|
|
|
208
|
|
|
|
2.42
|
%
|
|
|
35,884
|
|
|
|
429
|
|
|
|
4.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
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|
Total interest-bearing liabilities
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|
|
212,338
|
|
|
|
587
|
|
|
|
1.11
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%
|
|
|
212,400
|
|
|
|
951
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|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Non interest-bearing deposits
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|
|
26,376
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|
|
|
|
|
|
|
|
|
|
|
19,822
|
|
|
|
|
|
|
|
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|
Other liabilities
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
239,611
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|
|
|
|
|
|
|
|
|
|
|
233,538
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
21,840
|
|
|
|
|
|
|
|
|
|
|
|
21,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
261,451
|
|
|
|
|
|
|
|
|
|
|
$
|
255,482
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|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
$
|
2,243
|
|
|
|
3.33
|
%
|
|
|
|
|
|
$
|
1,949
|
|
|
|
2.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin
|
|
$
|
42,880
|
|
|
|
|
|
|
|
3.52
|
%
|
|
$
|
36,592
|
|
|
|
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
1.20x
|
|
|
|
|
|
|
|
|
|
|
|
1.17x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of allowance for loan losses and net deferred costs and fees.
|
(2)
|
Available for sale securities included at fair value.
|
(3)
|
Includes interest-earning cash equivalents, FHLB-NY stock and loans held for sale, which are held for a short period of time.
|
(4)
|
Includes mortgage escrow funds and FHLB-NY advances.
|
Interest Income.
Interest income of $2.8 million for the three months ended December 31, 2012, was $70,000 lower than interest income for the three months ended December 31, 2011. The
decrease in interest income was primarily due to a decrease of $49,000 in interest from loans, and a $21,000 decrease in interest from investments and other interest-earning assets.
Interest income from loans decreased by $49,000 in the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The decrease was due to a 77 basis point decline
in the average interest rate on loans, net of a $23.2 million, or 12.9%, increase in the average balance of loans to $202.6 million in the three months ended December 31, 2012 from $179.4 million in the three months ended December 31,
2011. The increase in average loan balances includes loans in the one-to-four-family, multi-family, non-residential real estate and commercial loan categories. The decrease in the average yield resulted principally from lower market interest rates.
The Company continues to sell a portion of conventional one-to-four-family residential mortgage originations into the
25
secondary market to generate non-interest income and reduce interest rate risk. The volume of loans sold was higher in the three months ended December 31, 2012 compared to 2011 as a result
of market conditions. Higher loan volume increased interest income by $318,000 while the effective lower interest rates decreased interest income by $367,000.
Interest income from securities decreased by $13,000 in the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Interest income from securities declined by
$34,000 as a result of lower average balances in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 and rose by $21,000 as a result of higher yields on the securities portfolio. Average balances
were lower in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 as the proceeds of security sales and calls were partially used to fund loan growth. The higher yields in the three months ended
December 31, 2012 compared to December 31, 2011 resulted from reinvesting the proceeds of security sales and calls in securities with slightly longer maturities. Other interest-earning assets consist of cash equivalents, FHLB-NY stock and
loans originated for resale. Interest on these assets declined by $8,000 in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 principally due to lower interest income on loans held for resale.
Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.66% in the quarter ended
December 31, 2011 to 4.44% in the quarter ended December 31, 2012. Of the $70,000 decrease in interest income in the three months ended December 31, 2012 compared to the three months ended December 31, 2011, higher average
balances of interest-earning assets caused an increase of $250,000 in interest income, while lower interest rates caused a decrease in interest income of $320,000.
Interest Expense.
Interest expense decreased by $364,000, or 38.3%, to $587,000 in the three months ended December 31, 2012 compared to $951,000 in the three months ended December 31,
2011. Interest expense on demand deposits decreased by $8,000 in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 principally due to lower interest rates paid on those deposits, offset in part
by higher average balances. Interest on savings and club account deposits decreased by $15,000 in the three months ended December 31, 2012 compared to the three months ended December 31, 2011 principally due to lower interest rates paid on
those deposits.
Interest expense on certificates of deposit decreased by $120,000 in the three months ended December 31, 2012 compared
to the three months ended December 31, 2011 as a result of the impact of lower average balances and lower interest rates in the 2012 period. The average balance of certificates of deposit decreased by $15.7 million to $89.2 million in the three
months ended December 31, 2012 compared to $105.0 million for the three months ended December 31, 2011. The decrease in average balances in the 2012 period was the result of decreases in CDARS and brokered deposits. The interest rate on
certificates of deposit was 1.38% in the three months ended December 31, 2012 compared to 1.63% in the three months ended December 31, 2011 as a result of lower market interest rates on retail deposits and the early repayment of a $5
million long-term brokered certificate of deposit.
In February 2012, the Company prepaid $20.0 million of FHLB-NY debt which was scheduled to
mature in August 2012. In prepaying this debt, the Company paid a prepayment penalty of $481,000 and estimated that this prepayment and financing was accretive to earnings for the fiscal year ending September 30, 2012 and thereafter. In June
2012, the Company prepaid $4.8 million of 3.54% brokered certificates of deposit which were scheduled to mature in 2026. In prepaying this deposit, the Company wrote off the remaining broker premium of $133,000 and estimated that this prepayment
would be accretive to earnings within one year.
This prepayment of the borrowing from FHLB-NY, along with refinancing at lower short-term
rates, reduced the average interest rate on borrowed money from 4.78% to 2.42% in the three months ended December 31, 2012 compared to the three months ended December 31, 2011, reducing interest expense on borrowed money by $204,000.
This refinancing, and overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.79%
in the quarter ended December 31, 2011 to 1.11% in the quarter ended December 31, 2012. Of the $364,000 decrease in interest expense in the three months ended December 31, 2012 compared to the three months ended December 31,
2011, declines in interest rates reduced interest expense by $310,000, while changes in volume and mix of interest-bearing liabilities caused a decrease in interest expense of $54,000.
26
Rate/Volume Analysis.
The following table analyzes the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and interest-bearing liabilities. It shows the amount of the change in interest income or expense caused by either changes in outstanding balances (volume) or changes in interest
rates. The effect of a change in volume is measured by applying the average rate during the first period to the volume change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods
to the average volume during the first period. Changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the absolute value of the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2012
Compared to
Three Months Ended December 31, 2011
|
|
|
|
(In thousands)
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
318
|
|
|
$
|
(367
|
)
|
|
$
|
(49
|
)
|
Securities
|
|
|
(34
|
)
|
|
|
21
|
|
|
|
(13
|
)
|
Other interest-earning assets
|
|
|
(34
|
)
|
|
|
26
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
250
|
|
|
|
(320
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
21
|
|
|
|
(29
|
)
|
|
|
(8
|
)
|
Savings and club accounts
|
|
|
1
|
|
|
|
(16
|
)
|
|
|
(15
|
)
|
Certificates of deposit
|
|
|
(59
|
)
|
|
|
(61
|
)
|
|
|
(120
|
)
|
Borrowed money
|
|
|
(17
|
)
|
|
|
(204
|
)
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
(54
|
)
|
|
|
(310
|
)
|
|
|
(364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
304
|
|
|
$
|
(10
|
)
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income.
Net interest income increased $294,000, or 15.1%, to $2.2 million for the three months ended
December 31, 2012 compared to $1.9 million in the three months ended December 31, 2011. The increase in net interest income was primarily attributable to higher balances of average interest-earning assets, net of lower yields on those
assets, changes in the mix of interest-bearing liabilities, and lower interest rates on those liabilities.
Provision for Loan Losses.
The allowance for loan losses was $849,000, or 0.41% of gross loans outstanding, at December 31, 2012 compared to $967,000 or 0.48% of gross loans outstanding at September 30, 2012. During the three month periods ended
December 31, 2012 and 2011, the Company charged $100,000 and $365,000, respectively, to expense to provide for loan losses, and wrote off $218,000 and no loans against the allowance, respectively. 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 December 31, 2012 and September 30, 2012, the Bank had $7.4 million and $6.2 million of non-performing loans, substantially all of
which were in process of foreclosure and have been placed on non-accrual status. At December 31, and September 30, 2012, the Bank had $11.1 million and $11.4 million of loans classified as impaired. At December 31, 2012, $499,000 of
these impaired loans required specific loss allowances totaling $27,000. The remaining $10.7 million of impaired loans did not require specific loss allowances. At September 30, 2012, $1.5 million of impaired loans required specific loss
allowances of $48,000. The impaired loans were primarily the result of continued difficult general economic conditions, increased unemployment and continued declines in the local real estate market.
There were $218,000 of loans charged off and no recoveries in the three month period ended December 31, 2012. There were no recoveries or loans
charged off in the three month period ended December 31, 2011. The weak economy nationally as well as in our primary market area contributed to an increase in the loss experience in the three month periods ended December 31, 2012 and 2011,
and as a result of changes in the mix and volume of the loan portfolio, weak economic conditions, unemployment, declines in real estate values in the Banks primary market area, and lower commercial real estate cash flows, $100,000 and $365,000
was provided for loan losses in the three month periods ended December 31, 2012 and 2011, respectively. The Bank has allocated the allowance for loan losses among categories of loan types as well as classification status at each period end
date.
Non-interest Income.
Non-interest income of $183,000 in the three months ended December 31, 2012 was higher than the
$100,000 in the comparable 2011 period primarily as a result of higher gains on sale of loans due to higher volume in the three months ended December 31, 2012.
Non-interest Expenses.
Non-interest expenses decreased by $21,000, for the three months ended December 31, 2012, compared to the prior year period, with all components of non-interest expense
being comparable between the two periods.
27
Income Tax Benefit.
The income tax expense was $117,000 in the three months ended December 31,
2012 compared to a benefit of $137,000 in the comparable 2011 period. The income tax benefit in the three months ended December 31, 2011 includes a reduction in previously recorded tax expense of $55,000 resulting from the change in the
Companys tax year from December 31 to September 30. Income tax expense is recorded based on pretax income at the statutory rate for federal tax purposes and the higher of the statutory rate or minimum tax rate for state purposes. The
effective tax rate in the three months ended December 31, 2012 and 2011 was different than the statutory rate as a result of certain non-taxable income and expense items.
Management of Market Risk
As a financial institution, the Companys 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 Companys 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 Companys operations, it is not subject to
foreign currency exchange or commodity price risk. Instead, the Companys 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 Companys 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 Companys net interest income to fluctuations in interest rates. Historically, the Companys 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 Companys 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.
Net Interest Income at Risk
The Company uses a simulation model to monitor interest rate
risk. This model reports the net interest income and net economic value at risk under different interest rate environments. Specifically, an analysis is performed related to changes in net interest income by assuming changes in interest rates, both
up and down, from current rates over the three year period following the financial statements. The changes in interest income and interest expense related to changes in interest rates reflect the interest rate sensitivity of the Companys
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, 2012, that would result from various basis point changes in interest rates over a twelve month period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Rates In Basis Points (Rate Shock)
|
|
Net Interest Income
|
|
|
|
Amount
|
|
|
Dollar
Change
|
|
|
Percent
Change
|
|
|
|
(Dollars in thousands)
|
|
300
|
|
$
|
9,078
|
|
|
$
|
(342
|
)
|
|
|
3.6
|
%
|
200
|
|
|
9,182
|
|
|
|
(238
|
)
|
|
|
2.5
|
%
|
100
|
|
|
9,319
|
|
|
|
(101
|
)
|
|
|
1.1
|
%
|
0
|
|
|
9,420
|
|
|
|
|
|
|
|
|
|
100
|
|
|
9,187
|
|
|
|
(233
|
)
|
|
|
2.5
|
%
|
Liquidity and Capital Resources
The Company is required to maintain levels of liquid assets sufficient to ensure the Companys safe and sound operation. Liquidity is defined as the Companys ability to meet current and future
financial obligations of a short-term nature. The Company adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings and loan funding
commitments. The Company also adjusts its liquidity level as appropriate to meet its asset/liability objectives.
28
The Companys primary sources of funds are retail deposits, the CDARS network, brokered certificates of
deposit, amortization and prepayments of loans, FHLB-NY 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 Companys 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-NY and the Federal Reserve which provide an additional source of funds. At December 31, 2012 and September 30, 2012, the Company had $31.0
million and $37.1 million of advances from the FHLB-NY, respectively, and CDARS deposits of $7.3 million and none, respectively and otherwise had no brokered certificates of deposit.
In the three months ended December 31, 2012, net cash provided by operating activities was $5.4 million compared to net cash provided by operating activities of $2.0 million in the same period in
2011. In the three months ended December 31, 2012 and 2011, the net income (loss) included non-cash expenses (consisting of depreciation, amortization, provision for loan losses, deferred taxes and stock-based compensation) of $374,000 and
$413,000, respectively. Net activity from loans originated for sale provided $2.2 million and $2.1 million of cash in the three months ended December 31, 2012 and 2011, respectively.
In the three months ended December 31, 2012 and 2011 investing activities used $5.3 million and $3.8 million, respectively. In the three months ended December 31, 2012 and 2011 net securities
transactions provided $308,000 and $990,000 of cash, respectively. Net changes in loans used $5.9 million and $4.7 million of cash in the three months ended December 31, 2012 and 2011, respectively.
Net cash provided by financing activities was $9.0 million in the three months ended December 31, 2012 compared to $6.6 million in the three months
ended December 31, 2011. In the three months ended December 31, 2012, repayment of FHLB-NY advances used $6.1 million of cash and changes in deposit balances provided $14.0 million in cash.
The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of December 31, 2012, the
Company had cash and cash equivalents of $10.9 million and available for sale securities of $47.9 million. At December 31, 2012, the Company had outstanding commitments to originate loans of $603,000 and $10.7 million of undisbursed funds from
approved lines of credit, homeowners equity lines of credit, and secured commercial lines of credit. Retail certificates of deposit scheduled to mature in one year or less at December 31, 2012, totaled $37.1 million. Historically, the
Companys deposit flow history has been that a significant portion of such deposits remain with the Company.
The Companys overall
credit exposure at the FHLB-NY, including borrowings under the Overnight Advance line of credit and other term borrowings 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 Banks capital position at December 31, 2012, 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)
|
|
$
|
20,449
|
|
|
|
11.83
|
%
|
|
$
|
13,831
|
|
|
|
8.00
|
%
|
|
$
|
17,289
|
|
|
|
10.00
|
%
|
Core (Tier 1) capital (to risk-weighted assets)
|
|
|
19,600
|
|
|
|
11.34
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10,373
|
|
|
|
6.00
|
|
Core (Tier 1) capital (to total adjusted assets)
|
|
|
19,600
|
|
|
|
7.17
|
|
|
|
10,930
|
|
|
|
4.00
|
|
|
|
13,663
|
|
|
|
5.00
|
|
Tangible capital (to total adjusted assets)
|
|
|
19,600
|
|
|
|
7.17
|
|
|
|
4,099
|
|
|
|
1.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
29
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 Companys financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources that are material to investors.