UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

OR

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

For the transition period from                      To                     

Commission File Number: 001-33322

CMS Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

123 Main Street, White Plains, New York 10601

(Address of principal executive offices) (Zip Code)

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

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

As of August 12, 2013 there were 1,862,803 shares of the registrant’s common stock, par value $.01 per share, outstanding.

CMS Bancorp, Inc.

INDEX

		Page Number
Part I - FINANCIAL INFORMATION
Item 1:	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2013 and September 30, 2012 (Unaudited)		3
	Consolidated Statements of Operations for the Three Months and Nine Months Ended June  30, 2013 and 2012 (Unaudited)		4
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine months Ended June 30, 2013 and 2012 (Unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine months Ended June  30, 2013 and 2012 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2013 and 2012 (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3:	Quantitative and Qualitative Disclosures about Market Risk		37
Item 4:	Controls and Procedures		37
Part II - OTHER INFORMATION
Item 1A:	Risk Factors		38
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 6:	Exhibits		39
SIGNATURES			41

2

Part I: Financial Information

Item 1. Financial Statements

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30, 2013			September 30, 2012
	(Dollars in thousands, except per share data)
ASSETS
Cash and amounts due from depository institutions	$	792		$	1,340
Interest-bearing deposits		3,451			501
Total cash and cash equivalents		4,243			1,841
Securities available for sale		41,220			48,361
Loans held for sale		—			2,426
Loans receivable, net of allowance for loan losses of $830 and $967, respectively		209,508			201,462
Other real estate owned		518			—
Premises and equipment		2,818			3,054
Federal Home Loan Bank of New York stock, at cost		1,309			2,032
Accrued interest receivable		1,056			1,006
Other assets		1,818			4,484
Total assets	$	262,490		$	264,666
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	215,417		$	203,516
Advances from Federal Home Loan Bank of New York		20,949			37,130
Advance payments by borrowers for taxes and insurance		1,791			844
Other liabilities		1,154			1,218
Total liabilities		239,311			242,708
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 1,500 shares issued and outstanding at June 30, 2013 (liquidation preference value $1,000 per share)		1			—
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		20,263			18,728
Retained earnings		6,893			6,101
Treasury stock, 192,362 shares		(1,660	)		(1,660	)
Unearned Employee Stock Ownership Plan (“ESOP”) shares		(1,301	)		(1,343	)
Accumulated other comprehensive income (loss)		(1,038	)		111
Total stockholders’ equity		23,179			21,958
Total liabilities and stockholders’ equity	$	262,490		$	264,666

See notes to consolidated financial statements.

3

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013		2012
	(Dollars in thousands, except per share data)
Interest income:
Loans	$	2,620		$	2,504		$	7,792	$	7,599
Securities		196			259			647		739
Other interest-earning assets		20			20			69		82
Total interest income		2,836			2,783			8,508		8,420
Interest expense:
Deposits		364			483			1,110		1,507
Mortgage escrow funds		12			8			40		24
Borrowings, short term		2			6			31		11
Borrowings, long term		177			175			524		854
Total interest expense		555			672			1,705		2,396
Net interest income		2,281			2,111			6,803		6,024
Provision for loan losses		25			275			393		640
Net interest income after provision for loan losses		2,256			1,836			6,410		5,384
Non-interest income:
Fees and service charges		40			42			124		128
Net gain on sale of loans		52			36			229		114
Net gain on sale of securities		—			243			—		782
Other		6			6			10		24
Total non-interest income		98			327			363		1,048
Non-interest expense:
Salaries and employee benefits		981			1,144			3,061		3,310
Net occupancy		307			317			940		914
Equipment		189			187			575		568
Professional fees		(97	)		163			161		458
Advertising		6			15			21		60
Federal insurance premiums		57			54			167		155
Directors’ fees		57			98			159		223
Other insurance		22			22			65		65
Bank charges		7			7			22		30
Penalty assessed on early repayment of borrowings		—			133			—		614
Charter conversion		—			89			5		181
Other		144			160			430		454
Total non-interest expense		1,673			2,389			5,606		7,032
Income (loss) before income taxes		681			(226	)		1,167		(600	)
Income tax expense (benefit)		180			(76	)		365		(210	)
Net income (loss)	$	501		$	(150	)	$	802	$	(390	)
Preferred stock dividends		10			—			10		—
Net income available to common stockholders	$	491		$	(150	)	$	792	$	(390	)
Net income (loss) per common share:
Basic and diluted	$	0.28		$	(0.09	)	$	0.46	$	(0.23	)
Weighted average number of common shares outstanding:
Basic		1,732,642			1,721,965			1,731,267		1,720,590
Diluted		1,733,470			1,721,965			1,731,791		1,720,590

See notes to consolidated financial statements.

4

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
	(In thousands)
Net income (loss) available to common stockholders	$	491		$	(150	)	$	792		$	(390	)
Other comprehensive income (loss):
Gross unrealized holding gains (losses) on securities available for sale, net of deferred income (tax) benefit of $629, $(156), $753 and $(231)		(955	)		238			(1,140	)		348
Gross unrealized holding gains on available for sale securities transferred to income on sale of securities, net of deferred income tax of $0, $97, $0, and $311 (a)		—			(146	)		—			(469	)
Retirement plan amortization, net of deferred income tax of $2, $3, $6, and $9 (b)		(3	)		(5	)		(9	)		(15	)
Other comprehensive income (loss)		(958	)		87			(1,149	)		(136	)
Comprehensive income (loss)	$	(467	)	$	(63	)	$	(357	)	$	(526	)

(a) Net gains on sale of available for sale securities and the related income tax are reflected in the consolidated statement of operations within the net gain on sale of securities and income tax expense (benefit) lines, respectively.

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

See notes to consolidated financial statements.

5

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

Nine Months Ended June 30, 2013 and 2012

(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 September 30, 2011	$	—	$	21	$	18,494		$	6,740		$	(1,660	)	$	(1,398	)	$	18		$	22,215
Net (loss)									(390	)											(390	)
Other comprehensive (loss)																		(136	)		(136	)
ESOP shares committed for release						(9	)								42						33
Stock option expense						75															75
Restricted stock award expense						108															108
Balance June 30, 2012	$	—	$	21	$	18,668		$	6,350		$	(1,660	)	$	(1,356	)	$	(118	)	$	21,905
Balance September 30, 2012	$	—	$	21	$	18,728		$	6,101		$	(1,660	)	$	(1,343	)	$	111		$	21,958
Net income available to common stockholders									792												792
Other comprehensive (loss)																		(1,149	)		(1,149	)
ESOP shares committed for release						(7	)								42						35
Stock option expense						43															43
Restricted stock award expense						45															45
Proceeds of sale of preferred stock		1				1,454															1,455
Balance June 30, 2013	$	1	$	21	$	20,263		$	6,893		$	(1,660	)	$	(1,301	)	$	(1,038	)	$	23,179

See notes to consolidated financial statements.

6

CMS Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	June 30,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	802		$	(390	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of premises and equipment		268			257
Amortization and accretion, net		95			425
Provision for loan losses		393			640
Deferred income taxes		270			(46	)
ESOP expense		35			33
Stock option expense		43			75
Restricted stock award expense		45			108
Net gain on sale of securities		—			(782	)
Net gain on sale of loans		(229	)		(114	)
Loans originated for sale		(5,817	)		(3,707	)
Proceeds from sale of loans originated for sale		8,472			6,021
Increase in interest receivable		(50	)		(190	)
Decrease in other assets		3,155			1,041
Increase (decrease) in accrued interest payable		1			(155	)
(Decrease) in other liabilities		(80	)		(98	)
Net cash provided by operating activities		7,403			3,118
Cash flows from investing activities:
Proceeds from sale of securities available for sale		—			23,482
Purchases of securities available for sale		—			(30,056	)
Principal repayments and calls on securities available for sale		5,183			13,117
Net (increase) in loans receivable		(8,987	)		(17,337	)
Additions to premises and equipment		(32	)		(681	)
Redemption of Federal Home Loan Bank of N.Y. stock		723			521
Net cash (used by) investing activities		(3,113	)		(10,954	)
Cash flows from financing activities:
Net increase in deposits		11,901			16,441
Repayment of advances from Federal Home Loan Bank of N.Y.		(16,181	)		(11,724	)
Proceeds of sale of preferred stock		1,455			—
Dividend on preferred stock		(10	)
Net increase in payments by borrowers for taxes and insurance		947			807
Net cash (used by) provided by financing activities		(1,888	)		5,524
Net increase (decrease) in cash and cash equivalents		2,402			(2,312	)
Cash and cash equivalents-beginning		1,841			4,304
Cash and cash equivalents-ending	$	4,243		$	1,992
Supplemental information:
Cash paid during the period for:
Interest	$	1,704		$	2,551
Income taxes	$	8		$	10
Other:
Real estate owned acquired in settlement of loans	$	518		$	—

See notes to consolidated financial statements.

7

CMS Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The consolidated financial statements include the accounts of CMS Bancorp, Inc. (the “Company”) 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.

2. Description of Business, Nature of Operations and Pending Merger

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”).

On August 10, 2012, the Company announced that it entered into a definitive merger agreement (“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 Bancorp’s 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. The total transaction value, as calculated on the date of the merger announcement, was approximately $20.8 million.

Effective as of April 22, 2013, the Company and Customers entered into an Amendment to Agreement and Plan of Merger (“Amendment”) to the Merger Agreement. The Amendment extended from April 30, 2013 to December 31, 2013 the initial date at which, if the merger of the Company with and into Customers has not closed, either the Company or Customers may terminate the Merger Agreement, subject to the termination date being extended until March 31, 2014 under certain specified circumstances. The Amendment also updated the definitions of “CMS Valuation” and “Customers Valuation,” establishing the valuation date for book value as of March 31, 2013. The exchange ratio will remain fixed for the pendency of the transaction, using the multiples of 0.95x for the Company’s common equity, and 1.25x for Customers common equity for purposes of calculating the exchange ratio.

Other key terms agreed to by the Company and Customers under the Amendment include: (a) a right for the Company to terminate the Merger Agreement, as amended, exercisable at any time after May 20, 2013, if either (i) Customers has not made the contemplated investment in the Company of $1.5 million of Company’s Preferred Stock, or (ii) Customers and the Company have not agreed upon the terms of the $2.0 million senior secured lending facility that Customers shall make available to the Company; and (b) an agreement by Customers to pay the Company a termination fee of $1.0 million in the event the Merger Agreement, as amended, is terminated under certain provisions primarily relating to failure to consummate the Parent Merger due to non-receipt of required government approvals. Also pursuant to the Amendment, Customers reimbursed the Company for $300,000 of merger-related expenses.

On May 22, 2013, the Company and Customers consummated the contemplated investment in the Company by Customers of $1.5 million of the Company’s Preferred Stock, whereby the Company issued and sold 1,500 shares of Series A Preferred Stock to Customers. The issuance price was $1,000.00 per share, for an aggregate purchase price of $1,500,000, less a 3% discount. The shares of Series A Preferred Stock sold to Customers were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D, as promulgated by the SEC.

8

On May 21, 2013, the Company filed a Certificate of Designations (“Certificate”) with the Secretary of State of the State of Delaware establishing the designations, powers, preferences, limitations, restrictions, and relative rights of the Series A Preferred Stock. 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 will be 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 U.S. Securities and Exchange Commission (“SEC”) on May 24, 2013.

As of August 12, 2013, the Company and Customers continue to negotiate the final terms of the $2.0 million senior secured lending facility.

The Merger Agreement, as amended, has been unanimously approved by CMS Bancorp’s 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 Bancorp’s 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. The Amendment removed the previous condition to Customers’ obligation to commence the filing of regulatory applications (i.e., the closing of the Acacia Federal Savings Bank transaction). Assuming the satisfaction of such conditions, it is currently expected that the Merger will be completed in late 2013 or early 2014. For additional information about the Merger announcement, see the Company’s Forms 8-K filed with the U.S. SEC on August 10, 2012 and April 24, 2013.

3. Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine months ended June 30, 2013 are not necessarily indicative of the results which may be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto which are in the Company’s Annual Report for the fiscal year ended September 30, 2012, filed with the SEC on December 28, 2012.

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 June 30, 2013 and through the date these consolidated financial statements were issued.

9

4. Critical Accounting Policies

The consolidated financial statements included in this report have been prepared in conformity with U.S. 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 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 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 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 availability of updated information.

5. Net Income (Loss) Per Share

Basic net income (loss) per share was computed by dividing the net income (loss) 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. 188,454 of the 196,754 stock options outstanding were anti-dilutive and therefore excluded from the computation of diluted net income per share for the three and nine month periods ended June 30, 2013. All outstanding stock options were anti-dilutive and therefore excluded from the computation of diluted net (loss) per share for the three month and nine month periods ended June 30, 2012.

10

6. Retirement Plan – Components of Net Periodic Pension Cost

The components of periodic pension expense were as follows:

	Three Months Ended						Nine months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(In thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost		64			63			192			188
Expected return on plan assets		(66	)		(55	)		(198	)		(164	)
Amortization of unrecognized loss		5			8			15			24
Total	$	3		$	16		$	9		$	48

7. 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 under the Plans vest over a five year service period based on the anniversary of the grant date.

The Company recorded compensation expense with respect to stock options of $10,000 and $25,000 during the three month periods ended June 30, 2013 and 2012, respectively, and $43,000 and $75,000 during the nine month periods ended June 30, 2013 and 2012, respectively. Unrecognized compensation expense associated with stock option grants as of June 30, 2013 was $141,000.

The Company recorded compensation expense with respect to restricted stock of $9,000 and $37,000 during the three month periods ended June 30, 2013 and 2012, respectively, and $45,000 and $108,000 during the nine month periods ended June 30, 2013 and 2012, respectively. Unrecognized compensation expense associated with grants of restricted stock as of June 30, 2013 was $101,000.

8. Securities

Securities available for sale as of June 30, 2013 and September 30, 2012 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
June 30, 2013
U.S. Government Agencies:
Due after five but within ten years	$	14,990	$	—	$	809	$	14,181
Due after ten years but within fifteen years		5,000		—		259		4,741
Corporate bonds due after five years but within ten years		4,389		—		107		4,282
Municipal bonds:
Due after one but within five years		990		—		17		973
Due after five years but within ten years		2,757		35		50		2,742
Mortgage-backed securities		14,185		261		145		14,301
	$	42,311	$	296	$	1,387	$	41,220

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
September 30, 2012
U.S. Government Agencies:
Due after five but within ten years	$	18,981	$	78	$	—	$	19,059
Due after ten years but within fifteen years		5,000		29		—		5,029
Corporate bonds due after five years but within ten years		4,404		195		—		4,599
Municipal bonds:
Due after five years but within ten years		3,765		127		—		3,892
Mortgage-backed securities		15,409		373		—		15,782
	$	47,559	$	802	$	—	$	48,361

11

There were no securities with unrealized losses at September 30, 2012. The unrealized losses reported on securities at June 30, 2013 relate to four securities issued by U.S. Government Agencies, three corporate bonds, four municipal bonds and one mortgaged-backed security.

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

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
June 30, 2013
U.S. Government Agencies	$	18,922	$	1,068	$	—	$	—	$	18,922	$	1,068
Corporate bonds		4,282		107						4,282		107
Municipal bonds		2,561		67						2,561		67
Mortgage-backed securities		4,410		145		—		—		4,410		145
	$	30,175	$	1,387	$	—	$	—	$	30,175	$	1,387

When the fair value of security is below its amortized cost, and depending on the length of time the condition exists, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Securities are analyzed quarterly for possible other-than-temporary impairment. 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.

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 nine month period ended June 30, 2013. During the nine months ended June 30, 2012, the Company sold available for sale securities with a carrying value of $22.7 million, and recognized a gain of $782,000 on such sales.

9. Loans

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 date.

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.

Loan balances as of June 30, 2013 and September 30, 2012 consist of the following:

	June 30, 2013			September 30, 2012
	(In thousands)
Real estate:
One-to-four-family	$	90,526		$	96,449
Multi-family		26,320			21,220
Non-residential		49,808			43,361
Construction		873			398
Home equity and second mortgages		8,684			10,111
		176,211			171,539
Commercial		33,987			30,618
Consumer		73			83
Total Loans		210,271			202,240
Allowance for loan losses		(830	)		(967	)
Net deferred loan origination fees and costs		67			189
	$	209,508		$	201,462

12

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 310-10-35 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.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends and 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 Federal Thrift Financial 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 one year to five year averages, depending on the trend of losses and other factors. 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 reasonably 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 total of the two components represents the Bank’s ALLL. 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 earnings 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

13

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. A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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.

The following table summarizes the primary segments of the loan portfolio, including net deferred loan origination fees and costs, as of June 30, 2013 and September 30, 2012:

June 30, 2013	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(In thousands)
Real estate:
One-to-four-family	$	7,298	$	83,257	$	90,555
Multi-family		—		26,328		26,328
Non-residential		—		49,823		49,823
Construction		—		874		874
Home equity and second mortgages		474		8,213		8,687
		7,772		168,495		176,267
Commercial		11		33,987		33,998
Consumer		—		73		73
Total	$	7,783	$	202,555	$	210,338

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September 30, 2012	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(In thousands)
Real estate:
One-to-four-family	$	10,797	$	85,742	$	96,539
Multi-family		—		21,241		21,241
Non-residential		—		43,401		43,401
Construction		—		398		398
Home equity and second mortgages		619		9,502		10,121
		11,416		160,284		171,700
Commercial		15		30,631		30,646
Consumer		—		83		83
Total	$	11,431	$	190,998	$	202,429

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 June 30, 2013 and September 30, 2012:

June 30, 2013	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Real estate:
One-to-four-family	$	—	$	—	$	7,298	$	7,298	$	7,257
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Construction		—		—		—		—		—
Home equity and second mortgages		—		—		474		474		465
		—		—		7,772		7,772		7,722
Commercial		—		—		11		11		11
Consumer		—		—		—		—		—
Total	$	—	$	—	$	7,783	$	7,783	$	7,733

September 30, 2012	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Real estate:
One-to-four-family	$	1,384	$	41	$	9,413	$	10,797	$	10,730
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Construction		—		—		—		—		—
Home equity and second mortgages		108		7		511		619		605
		1,492		48		9,924		11,416		11,335
Commercial		—		—		15		15		15
Consumer		—		—		—		—		—
Total	$	1,492	$	48	$	9,939	$	11,431	$	11,350

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The following table presents the average recorded investment in impaired loans and related interest income recognized for the three month periods ended June 30, 2013 and 2012:

June 30, 2013	One-to- four- family		Home Equity and Second Mortgages		Commercial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	8,908	$	543	$	—	$	11	$	9,461
Interest income recognized on an accrual basis on impaired loans		34		3		—		—		37
Interest income recognized on a cash basis on impaired loans		16		3		—		—		19

June 30, 2012	One-to- four- family		Home Equity and Second Mortgages		Commercial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	10,048	$	699	$	58	$	9	$	10,814
Interest income recognized on an accrual basis on impaired loans		41		6		—		—		47
Interest income recognized on a cash basis on impaired loans		2		1		—		—		3

The following table presents the average recorded investment in impaired loans and related interest income recognized for the nine month periods ended June 30, 2013 and 2012:

June 30, 2013	One-to- four- family		Home Equity and Second Mortgages		Commercial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	9,783	$	580	$	—	$	13	$	10,376
Interest income recognized on an accrual basis on impaired loans		111		9		—		—		120
Interest income recognized on a cash basis on impaired loans		27		5		—		—		32

June 30, 2012	One-to- four- family		Home Equity and Second Mortgages		Commercial		Consumer		Total
	(In thousands)
Average investment in impaired loans	$	8,941	$	685	$	66	$	7	$	9,699
Interest income recognized on an accrual basis on impaired loans		103		13		—		—		116
Interest income recognized on a cash basis on impaired loans		2		1		—		—		3

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 June 30, 2013 and September 30, 2012:

June 30, 2013	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate:
One-to-four-family	$	86,517	$	—	$	4,038	$	—	$	90,555
Multi-family		25,570		758		—		—		26,328
Non-residential		49,823		—		—		—		49,823
Construction		874		—		—		—		874
Home equity and second mortgages		8,571		—		116		—		8,687
		171,355		758		4,154		—		176,267
Commercial		32,180		1,807		11		—		33,998
Consumer		73		—		—		—		73
Total	$	203,608	$	2,565	$	4,165	$	—	$	210,338

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September 30, 2012	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate:
One-to-four-family	$	88,137	$	—	$	8,402	$	—	$	96,539
Multi-family		20,475		766		—		—		21,241
Non-residential		43,401		—		—		—		43,401
Construction		398		—		—		—		398
Home equity and second mortgages		9,786		—		335		—		10,121
		162,197		766		8,737		—		171,700
Commercial		28,761		1,870		15		—		30,646
Consumer		83		—		—		—		83
Total	$	191,041	$	2,636	$	8,752	$	—	$	202,429

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 June 30, 2013 and September 30, 2012:

June 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	$	85,716	$	—	$	998	$	—	$	3,841	$	4,839	$	90,555
Multi-family		26,328		—		—		—		—		—		26,328
Non-residential		49,823		—		—		—		—		—		49,823
Construction		874		—		—		—		—		—		874
Home equity and second mortgages		8,576		20		—		—		91		111		8,687
		171,317		20		998		—		3,932		4,950		176,267
Commercial		33,125		9		864		—		—		873		33,998
Consumer		73		—		—		—		—		—		73
Total	$	204,515	$	29	$	1,862	$	—	$	3,932	$	5,823	$	210,338

September 30, 2012	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	$	87,715	$	1,889	$	867	$	—	$	6,068	$	8,824	$	96,539
Multi-family		21,241		—		—		—		—		—		21,241
Non-residential		43,401		—		—		—		—		—		43,401
Construction		398		—		—		—		—		—		398
Home equity and second mortgages		9,992		—		—		—		129		129		10,121
		162,747		1,889		867		—		6,197		8,953		171,700
Commercial		30,646		—		—		—		—		—		30,646
Consumer		75		8		—		—		—		8		83
Total	$	193,468	$	1,897	$	867	$	—	$	6,197	$	8,961	$	202,429

The Company was not committed to lend additional funds on nonaccrual loans at June 30, 2013.

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.

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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 June 30, 2013 and September 30, 2012:

June 30, 2013	ALLL Balance		Collectively Evaluated for Impairment		Individually Evaluated for Impairment
	(In thousands)
Real estate:
One-to-four-family	$	234	$	234	$	—
Multi-family		44		44		—
Non-residential		349		349		—
Construction		5		5		—
Home equity and second mortgages		97		97		—
		729		729		—
Commercial		100		100		—
Consumer		1		1		—
Total	$	830	$	830	$	—

September 30, 2012	ALLL Balance		Collectively Evaluated for Impairment		Individually Evaluated for Impairment
	(In thousands)
Real estate:
One-to-four-family	$	625	$	584	$	41
Multi-family		35		35		—
Non-residential		67		67		—
Construction		3		3		—
Home equity and second mortgages		71		64		7
		801		753		48
Commercial		164		164		—
Consumer		2		2		—
Total	$	967	$	919	$	48

The following table summarizes activity in the primary segments of the ALLL for the three month periods ended June 30, 2013 and 2012:

June 30, 2013	Balance March 31, 2013		Charge- offs			Recoveries		Provision			Balance June 30, 2013
	(In thousands)
Real estate:
One-to-four-family	$	244	$	(13	)	$	4	$	(1	)	$	234
Multi-family		49		—			—		(5	)		44
Non-residential		358		—			—		(9	)		349
Construction		7		—			—		(2	)		5
Home equity and second mortgages		85		—			—		12			97
		743		(13	)		4		(5	)		729
Commercial		76		—			—		24			100
Consumer		2		(7	)		—		6			1
Total	$	821	$	(20	)	$	4	$	25		$	830

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June 30, 2012	Balance March 31, 2012		Charge- offs			Recoveries		Provision			Balance June 30, 2012
	(In thousands)
Real estate:
One-to-four-family	$	732	$	(482	)	$	—	$	558		$	808
Multi-family		30		—			—		(15	)		15
Non-residential		119		—			—		(28	)		91
Construction		4		—			—		(4	)		—
Home equity and second mortgages		43		(260	)		—		255			38
		928		(742	)		—		766			952
Commercial		612		(19	)		—		(496	)		97
Consumer		5		(4	)		—		5			6
Total	$	1,545	$	(765	)	$	—	$	275		$	1,055

The following table summarizes activity in the primary segments of the ALLL for the nine month periods ended June 30, 2013 and 2012:

June 30, 2013	Balance September 30, 2012		Charge- offs			Recoveries		Provision			Balance June 30, 2013
	(In thousands)
Real estate:
One-to-four-family	$	625	$	(527	)	$	4	$	132		$	234
Multi-family		35		—			—		9			44
Non-residential		67		—			—		282			349
Construction		3		—			—		2			5
Home equity and second mortgages		71		—			—		26			97
		801		(527	)		4		451			729
Commercial		164		—			—		(64	)		100
Consumer		2		(7	)		—		6			1
Total	$	967	$	(534	)	$	4	$	393		$	830

June 30, 2012	Balance September 30, 2011		Charge- offs			Recoveries		Provision			Balance June 30, 2012
	(In thousands)
Real estate:
One-to-four-family	$	583	$	(502	)	$	—	$	727		$	808
Multi-family		29		—			—		(14	)		15
Non-residential		92		—			—		(1	)		91
Construction		3		—			—		(3	)		—
Home equity and second mortgages		31		(260	)		—		267			38
		738		(762	)		—		976			952
Commercial		459		(19	)		—		(343	)		97
Consumer		3		(4	)		—		7			6
Total	$	1,200	$	(785	)	$	—	$	640		$	1,055

Effective October 1, 2011, the Company adopted Accounting Standards Update (ASU) No. 2011-02, which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). A 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

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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, ASU No. 2011-02 requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. In conjunction with the Bank’s adoption of ASU No. 2011-02, it determined that no loans were TDRs other than those previously considered as such. The table below summarizes TDRs during the three month and nine month periods ended June 30, 2013 and 2012, respectively. The concessions granted on these loans consisted of interest rate reductions.

The following table summarizes the TDRs during the three month and nine month periods ended June 30, 2013 and 2012:

	Number of Loans		Recorded Investment Before Modification		Recorded Investment After Modification
Three Months Ended June 30, 2013	(Dollars in thousands)
One-to-four-family		1	$	308	$	381
Three Months Ended June 30, 2012
One-to-four-family		3	$	490	$	525

	Number of Loans		Recorded Investment Before Modification		Recorded Investment After Modification
Nine months Ended June 30, 2013	(Dollars in thousands)
One-to-four-family		3	$	821	$	902
Nine months Ended June 30, 2012
One-to-four-family		5	$	1,711	$	1,771
Commercial		1		72		72

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 three month and nine month periods ended June 30, 2013 and 2012, no defaults occurred on troubled debt restructured loans that were modified as a TDR within the previous 12 months.

10. Fair Value Measurements

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.

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For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy at June 30, 2013 and September 30, 2012 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)
June 30, 2013
Securities available for sale:
U.S. Government Agencies	$	18,922	$	—	$	18,922	$	—
Corporate bonds		4,282		—		4,282		—
Municipal bonds		3,715		—		3,715		—
Mortgage-backed securities		14,301		—		14,301		—

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, 2012
Securities available for sale:
U.S. Government Agencies	$	24,088	$	—	$	24,088	$	—
Corporate bonds		4,599		—		4,599		—
Municipal bonds		3,892		—		3,892		—
Mortgage-backed securities		15,782		—		15,782		—

For financial assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy at June 30, 2013 and September 30, 2012 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)
June 30, 2013
Impaired loans	$	1,716	$	—	$	—	$	1,716
Other real estate owned
September 30, 2012
Impaired loans	$	1,444	$	—	$	—	$	1,444

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)
Impaired loans	Fair value estimate		Valuation techniques	Unobservable input	Range	Weighted average
June 30, 2013	$	1,716	Discounted cash flows (1)	Liquidation expenses (2)	-1.04% to -10.78%		-7.12	%
September 30, 2012	$	1,444	Discounted cash flows (1)	Liquidation expenses (2)	-1.46% to -6.47%		-3.24	%

(1) Fair value is generally determined through discounted cash flows or independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Includes estimated liquidation expenses.

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The following methods and assumptions were used to estimate the fair value of each class of financial instruments at June 30, 2013 and September 30, 2012:

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 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 estimated fair value in the aggregate, 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.

Other real estate owned. The fair value of OREO is determined using appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs). All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”). Appraisals are certified to the Bank and performed by appraisers on the Bank’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”.

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 June 30, 2013 or September 30, 2012.

The carrying amounts and estimated fair values of financial instruments at June 30, 2013 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
June 30, 2013	(In thousands)
Financial assets:
Cash and cash equivalents	$	4,243	$	4,243	$	4,243	$	—	$	—
Securities available-for-sale		41,220		41,220		—		41,220		—
Loans receivable		209,508		228,820		—		—		228,820
Other real estate owned		518		518		—		—		518
Accrued interest receivable		1,056		1,056		1,056		—		—
Financial liabilities:
Deposits		215,417		216,741		132,769		83,972		—
FHLB-NY advances		20,949		22,026		—		22,026		—
Accrued interest payable		94		94		94		—		—

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The carrying amounts and estimated fair values of financial instruments at September 30, 2012 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
September 30, 2012	(In thousands)
Financial assets:
Cash and cash equivalents	$	1,841	$	1,841	$	1,841	$	—	$	—
Securities available-for-sale		48,361		48,361		—		48,361		—
Loans held for sale		2,426		2,426		—		2,426
Loans receivable		201,462		228,507		—		—		228,507
Accrued interest receivable		1,006		1,006		1,006		—		—
Financial liabilities:
Deposits		203,516		205,054		116,905		88,149		—
FHLB-NY advances		37,130		38,366		—		38,366		—
Accrued interest payable		93		93		93		—		—

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.

11. 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 June 30, 2013 and September 30, 2012. Management evaluates this common stock for impairment in accordance with the FASB guidance on accounting by certain entities that lend to or finance the activities of others. Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of the investment’s cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost 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 related to the FHLB stock was necessary as of June 30, 2013 or September 30, 2012.

12. Contingencies

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.

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Item 2. - Management’s 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:

• risks associated with the pending merger with Customers Bancorp;

• 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 Office of Thrift Supervision’s functions under the Dodd-Frank 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;

• 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.

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 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

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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 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 Company’s provision for loan losses may increase to reflect this increased risk, which could cause a reduction in the Company’s earnings.

Pending Merger with Customers Bancorp

On August 10, 2012, the Company announced that it entered into a definitive merger agreement (“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 Bancorp’s 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. The total transaction value, as calculated on the date of the merger announcement, was approximately $20.8 million

Effective as of April 22, 2013, the Company and Customers entered into an Amendment to Agreement and Plan of Merger (“Amendment”) to the Merger Agreement. The Amendment extended from April 30, 2013 to December 31, 2013 the initial date at which, if the merger of the Company with and into Customers has not closed, either the Company or Customers may terminate the Merger Agreement, subject to the termination date being extended until March 31, 2014 under certain specified circumstances. The Amendment also updated the definitions of “CMS Valuation” and “Customers Valuation,” establishing the valuation date for book value as of March 31, 2013. The exchange ratio will remain fixed for the pendency of the transaction, using the multiples of 0.95x for the Company’s common equity, and 1.25x for Customers common equity for purposes of calculating the exchange ratio.

Other key terms agreed to by the Company and Customers under the Amendment include: (a) a right for the Company to terminate the Merger Agreement, as amended, exercisable at any time after May 20, 2013, if either (i) Customers has not made the contemplated investment in the Company of $1.5 million of Company Preferred Stock, or (ii) Customers and the Company have not agreed upon the terms of the $2.0 million senior secured lending facility that Customers shall make available to the Company; and (b) an agreement by Customers to pay the Company a termination fee of $1.0 million in the event the Merger Agreement, as amended, is terminated under certain provisions primarily relating to failure to consummate the Parent Merger due to non-receipt of required government approvals. Also pursuant to the Amendment, Customers reimbursed the Company for $300,000 of merger-related expenses

On May 22, 2013, the Company and Customers consummated the contemplated investment in the Company by Customers of $1.5 million of Company’s Preferred Stock, whereby the Company issued and sold 1,500 shares of Series A Preferred Stock to Customers. See the discussion in Part II, Item 2 below for additional information about the unregistered sale of equity securities.

As of August 12, 2013, the Company and Customers continue to negotiate the final terms of the $2.0 million senior secured lending facility.

The Merger Agreement, as amended, has been unanimously approved by CMS Bancorp’s 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 Bancorp’s 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. The Amendment removed the previous condition to Customers’ obligation to commence the filing of regulatory applications (i.e., the closing of the Acacia Federal Savings Bank transaction). Assuming the satisfaction of such conditions, it

25

is currently expected that the Merger will be completed in late 2013 or early 2014. For additional information about the Merger announcement, see the Company’s Forms 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on August 10, 2012 and April 24, 2013.

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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 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.

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 Bank’s 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 Company’s Annual Report on Form 10-K filed with the 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 management’s opinion that accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the assessment of whether deferred 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 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 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 June 30, 2013 to September 30, 2012

Total assets decreased by $2.2 million, or 0.8%, to $262.5 million at June 30, 2013 from $264.7 million at September 30, 2012. Increases in loan balances and decreases in advances from the FHLB were funded from calls and repayments of securities, increases in deposits and the sale of $1.5 million of preferred stock to Customers Bank under the Merger Agreement.

Loans receivable were $209.5 million and $201.5 million at June 30, 2013 and September 30, 2012, respectively, representing an increase of $8.0 million, or 4.0%. The increase in loans resulted principally from increases in multi-family, non-residential and commercial loans, net of a decrease in one-to-four-family loans.

While there have been improvements in recent quarters, the banking industry as a whole saw increases in loan delinquencies and defaults in recent years. As of June 30, 2013 and September 30, 2012, the Bank had $3.9 million and $6.2 million of non-performing loans, respectively, substantially all of which were in process of foreclosure or were troubled debt restructurings and have been placed on

27

non-accrual status. At June 30, 2013 and September 30, 2012, the Bank had $7.8 million and $11.4 million of loans classified as impaired. At June 30, 2013, none of these impaired loans required 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 June 30, 2013 and September 30, 2012, the allowance for loan losses was 0.39% 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 none at June 30, 2013 compared to $48,000 at September 30, 2012. The allowance for loans collectively evaluated for impairment was $830,000 at June 30, 2013 compared to $919,000 at September 30, 2012. The decrease of $137,000 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 $527,000 in the nine month period ended June 30, 2013. 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 Bank’s Peer Group. 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 Bank’s primary market area, and lower commercial real estate cash flows, $393,000 and $640,000 was provided for loan losses in the nine month periods ended June 30, 2013 and 2012, respectively.

Deposits increased by $11.9 million, or 5.8%, from $203.5 million as of September 30, 2012 to $215.4 million as of June 30, 2013. The Bank participates in the Certificate of Deposit Account Registry Service, or “CDARS” network. Increases in retail demand deposits of $2.1 million and an increase in CDARS deposits of $9.8 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 $9.8 million and none, respectively, of CDARS deposits as of June 30, 2013 and September 30, 2012 and otherwise had no brokered deposits as of June 30, 2013 and September 30, 2012.

Borrowings from FHLB declined from $37.1 million at September 30, 2012 to $20.9 million at June 30, 2013. The $11.9 million decline was funded primarily from increases CDARS and retail deposits.

Stockholders’ equity increased by $1.2 million from September 30, 2012 to June 30, 2013 as a result of preferred stock sold to Customers, net income of $802,000 and additions to equity resulting from accounting for stock-based compensation and the Company’s ESOP, net of the other comprehensive loss of $1.1 million. The other comprehensive loss in the nine months ended June 30, 2013 resulted primarily from unrealized losses on available for sale securities due to changes in market interest rates.

28

Comparison of Operating Results for the Three Months Ended June 30, 2013 and 2012

General. The Company recorded net income of $501,000 for the three months ended June 30, 2013, compared to a net loss of $150,000 for the three months ended June 30, 2012. In the three months ended June 30, 2013, the Company also recorded $10,000 of preferred dividends, leaving net income attributable to common stockholders of $491,000. The change was primarily due to higher net interest income ($2.3 million in the three months ended June 30, 2013 compared to $2.1 million in the three months ended June 30, 2012), and lower non-interest expenses ($1.7 million in the three months ended June 30, 2013 compared to $2.4 million in the three months ended June 30, 2012), and the lower provision for loan losses ($25,000 in the three months ended June 30, 2013 compared to $275,000 in the three months ended June 30, 2012). A $243,000 gain on sale of securities in the three months ended June 30, 2012 did not recur in the three months ended June 30, 2013. Non-interest expense in the three months ended June 30, 2012 included $222,000 of aggregate costs of the charter conversion and penalty assessed on early repayment of borrowings which did not recur in the three months ended June 30, 2013, and in the three months ended June 30, 2013, the Company recorded the $300,000 reimbursement of prior merger related costs from Customers Bank.

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

	Three Months Ended June 30,
	2013							2012
	(Dollars in thousands)
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Interest-earning assets:
Loans receivable(1)	$	207,727	$	2,620		5.05	%	$	187,945	$	2,504		5.33	%
Securities(2)		43,103		196		1.82	%		53,866		259		1.93	%
Other interest-earning assets(3)		3,453		20		2.32	%		4,773		20		1.68	%
Total interest-earning assets		254,283		2,836		4.46	%		246,584		2,783		4.51	%
Non interest-earning assets		6,158							6,929
Total assets	$	260,441						$	253,513
Interest-bearing liabilities:
Demand deposits	$	50,246		37		0.29	%	$	34,843		42		0.48	%
Savings and club accounts		42,248		27		0.26	%		41,891		30		0.29	%
Certificates of deposit		94,773		300		1.27	%		110,669		411		1.49	%
Borrowed money(4)		22,996		191		3.32	%		20,722		189		3.65	%
Total interest-bearing liabilities		210,263		555		1.06	%		208,125		672		1.29	%
Non interest-bearing deposits		26,604							22,516
Other liabilities		866							1,174
Total liabilities		237,733							231,815
Total stockholders’ equity		22,708							21,698
Total liabilities and stockholders’ equity	$	260,441						$	253,513
Interest rate spread			$	2,281		3.40	%			$	2,111		3.22	%
Net interest-earning assets/net interest margin	$	44,020				3.59	%	$	38,459				3.42	%
Ratio of interest-earning assets to interest-bearing liabilities				1.21x							1.18x

(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 June 30, 2013, was $53,000 higher than interest income for the three months ended June 30, 2012. The increase in interest income was primarily due to an increase of $116,000 in interest from loans, net of a $63,000 decrease in interest from investments.

29

Interest income from loans increased by $116,000 in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase was due to a $19.8 million, or 10.5%, increase in the average balance of loans to $207.7 million in the three months ended June 30, 2013 from $183.7 million in the three months ended June 30, 2012, net of a 28 basis point decrease in the average interest rate earned on those loans. The increase in average loan balances includes loans in the multi-family, non-residential real estate and commercial loan categories, net of a decrease in one-to-four-family loans. 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 secondary market to generate non-interest income and reduce interest rate risk. Higher loan volume increased interest income by $253,000 while the effective lower interest rates decreased interest income by $137,000.

Interest income from securities decreased by $63,000 in the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Interest income from securities declined by $50,000 as a result of lower average balances in the three months ended June 30, 2013 compared to the three months ended June 30, 2012, and declined by $13,000 as a result of lower yields on the securities portfolio. Average balances were lower in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 as the repayments of securities and calls were used to fund loan growth. The lower yields in the three months ended June 30, 2013 compared to June 30, 2012 resulted from lower market interest rates. Other interest-earning assets consist of cash equivalents, FHLB stock and loans originated for resale. Interest on these assets was unchanged in the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.51% in the quarter ended June 30, 2012 to 4.46% in the quarter ended June 30, 2013. Of the $53,000 increase in interest income in the three months ended June 30, 2013 compared to the three months ended June 30, 2012, higher average balances of interest-earning assets caused an increase of $197,000 in interest income, while lower interest rates caused a decrease in interest income of $144,000.

Interest Expense. Interest expense declined by $117,000, or 17.4%, to $555,000 in the three months ended June 30, 2013 compared to $672,000 in the three months ended June 30, 2012 principally due to lower average balances of certificates of deposit and lower interest rates paid on those deposits.

Interest expense on certificates of deposit decreased by $111,000 in the three months ended June 30, 2013 compared to the three months ended June 30, 2012 as a result of the impact of lower average balances and lower interest rates in the 2013 period. The average balance of certificates of deposit decreased by $15.9 million to $94.8 million in the three months ended June 30, 2013 compared to $110.7 million for the three months ended June 30, 2012. The decrease in average balances in the 2013 period was the result of decreases in retail, CDARS and brokered deposits. The interest rate on certificates of deposit was 1.27% in the three months ended June 30, 2013 compared to 1.49% in the three months ended June 30, 2012 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 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.

This refinancing, and overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.29% in the quarter ended June 30, 2012 to 1.06% in the quarter ended June 30, 2013. Of the $117,000 decrease in interest expense in the three months ended June 30, 2013 compared to the three months ended June 30, 2012, declines in interest rates reduced interest expense by $97,000, while changes in volume and mix of interest-bearing liabilities caused a decrease in interest expense of $20,000.

30

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 June 30, 2013 Compared to Three Months Ended June 30, 2012
	(In thousands)
	Volume			Rate			Net
Interest-earning assets:
Loans receivable	$	253		$	(137	)	$	116
Securities		(50	)		(13	)		(63	)
Other interest-earning assets		(6	)		6			—
Total interest-earning assets		197			(144	)		53
Interest-bearing liabilities:
Demand deposits		15			(20	)		(5	)
Savings and club accounts		—			(3	)		(3	)
Certificates of deposit		(55	)		(56	)		(111	)
Borrowed money		20			(18	)		2
Total interest-bearing liabilities		(20	)		(97	)		(117	)
Net interest income	$	217		$	(47	)	$	170

Net Interest Income. Net interest income increased $170,000, or 8.1%, to $2.3 million for the three months ended June 30, 2013 compared to $1.8 million in the three months ended June 30, 2012. 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 $830,000, or 0.39% of gross loans outstanding, at June 30, 2013 compared to $967,000 or 0.48% of gross loans outstanding at September 30, 2012. During the three month periods ended June 30, 2013 and 2012, the Company charged $25,000 and $275,000, respectively, to expense to provide for loan losses, and wrote off $20,000 and $765,000 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 June 30, 2013 and September 30, 2012, the Bank had $3.9 million and $6.2 million of non-performing loans, substantially all of which were in process of foreclosure or were troubled debt restructurings and have been placed on non-accrual status. At June 30, 2013 and September 30, 2012, the Bank had $7.8 million and $11.4 million of loans classified as impaired. At June 30, 2013, none of these impaired loans required 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 $20,000 of loans charged off and $4,000 of recoveries in the three month period ended June 30, 2013. There were no recoveries and $765,000 of loans were charged off in the three month period ended June 30, 2012. The weak economy nationally as well as in our primary market area has contributed to the loss experience of the Bank. As a result of changes in the expected recovery of non-performing loans and in the mix and volume of the loan portfolio, weak economic conditions, unemployment, declines in real estate values in the Bank’s primary market area, and lower commercial real estate cash flows, $25,000 and $275,000 was provided for loan losses in the three month periods ended June 30, 2013 and 2012, 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 $98,000 in the three months ended June 30, 2013 was lower than the $327,000 in the comparable 2012 period primarily as a result of gains on sale of securities of $243,000 in the three months ended June 30, 2012 which did not recur in the 2013 period.

Non-interest Expenses. Non-interest expenses decreased by $716,000, for the three months ended June 30, 2013, compared to the prior year period. Non-interest expense in the three months ended June 30, 2012 included in aggregate $222,000 of costs of the charter conversion and penalty assessed on early repayment of borrowings which did not recur in the three months ended June 30, 2013.

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Professional fees in the three months ended June 30, 2013 include the reimbursement of 300,000 of prior merger related costs from Customers Bank. Aside from these three items, non-interest expense declined by $194,000 in the three months ended June 30, 2013 compared to the prior period primarily as a result of lower employee headcount, lower pension and lower stock based compensation costs in the three months ended June 30, 2013 compared to the 2012 period.

Income Tax Expense / Benefit. The income tax expense was $180,000 in the three months ended June 30, 2013 compared to a benefit of $76,000 in the comparable 2012 period. 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 June 30, 2013 and 2012 was different than the statutory rate as a result of certain non-taxable income and expense items, including non-taxable merger related costs and reimbursements.

Comparison of Operating Results for the Nine Months Ended June 30, 2013 and 2012

General. The Company recorded net income of $802,000 for the nine months ended June 30, 2013, compared to a net loss of $390,000 for the nine months ended June 30, 2012. The change was primarily due to higher net interest income ($6.8 million in the nine months ended June 30, 2013 compared to $6.0 million in the nine months ended June 30, 2012), and lower non-interest expenses ($5.6 million in the three months ended June 30, 2013 compared to $7.0 million in the three months ended June 30, 2012) and a $782,000 gain on sale of securities in the nine months ended June 30, 2012 which did not recur in the nine months ended June 30, 2013. Non-interest expense in the nine months ended June 30, 2012 included $795,000 in aggregate costs resulting from the charter conversion and penalty assessed on early repayment of borrowings which did not recur in the nine months ended June 30, 2013, and in the three months ended June 30, 2013, the Company recorded the $300,000 reimbursement of prior merger related costs from Customers Bank.

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

	Nine Months Ended June 30,
	2013							2012
	(Dollars in thousands)
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Interest-earning assets:
Loans receivable(1)	$	206,377	$	7,792		5.03	%	$	183,675	$	7,599		5.52	%
Securities(2)		45,968		647		1.88	%		54,965		739		1.79	%
Other interest-earning assets(3)		3,981		69		2.31	%		8,502		82		1.29	%
Total interest-earning assets		256,326		8,508		4.43	%		247,142		8,420		4.54	%
Non interest-earning assets		6,146							6,663
Total assets	$	262,472						$	253,805
Interest-bearing liabilities:
Demand deposits	$	48,554		129		0.35	%	$	32,510		135		0.55	%
Savings and club accounts		42,127		78		0.25	%		41,395		110		0.35	%
Certificates of deposit		92,670		903		1.30	%		107,863		1,262		1.56	%
Borrowed money(4)		28,448		595		2.79	%		28,056		889		4.22	%
Total interest-bearing liabilities		211,799		1,705		1.07	%		209,824		2,396		1.52	%
Non interest-bearing deposits		27,741							20,946
Other liabilities		713							1,174
Total liabilities		240,253							231,944
Total stockholders’ equity		22,218							21,861
Total liabilities and stockholders’ equity	$	262,471						$	253,805
Interest rate spread			$	6,803		3.36	%			$	6,024		3.02	%
Net interest-earning assets/net interest margin	$	44,527				3.54	%	$	37,318				3.25	%
Ratio of interest-earning assets to interest-bearing liabilities				1.21x							1.18x

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(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 $8.5 million for the nine months ended June 30, 2013, was $88,000 higher than interest income for the nine months ended June 30, 2012. The increase in interest income was primarily due to an increase of $193,000 in interest from loans, net of a decrease in interest from investments and other interest-earning assets of $105,000.

Interest income from loans increased by $193,000 in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012. The increase was due to a $22.7 million, or 12.4%, increase in the average balance of loans to $206.4 million in the nine months ended June 30, 2013 from $183.7 million in the nine months ended June 30, 2012, net of a 48 basis point decline in the average interest rate on loans. The increase in average loan balances includes loans in the one-to-four-family, multi-family, non-residential real estate and commercial loan categories, net of a decrease in one-to-four-family loans. 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 secondary market to generate non-interest income and reduce interest rate risk. Higher loan volume increased interest income by $898,000 while the effective lower interest rates decreased interest income by $705,000.

Interest income from securities declined by $92,000 in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012. Interest income from securities declined by $127,000 as a result of lower average balances in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 and rose by $35,000 as a result of higher yields on the securities portfolio. Average balances were lower in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 as the proceeds of security sales and calls were partially used to fund loan growth. The higher yields in the nine months ended June 30, 2013 compared to June 30, 2012 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 $13,000 in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012.

Overall declines in interest rates reduced the average interest rate on interest-earning assets from 4.54% in the nine months ended June 30, 2012 to 4.43% in the nine months ended June 30, 2013. Of the $88,000 increase in interest income in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012, higher average balances of interest-earning assets caused an increase of $713,000 in interest income, while lower interest rates caused a decrease in interest income of $625,000.

Interest Expense. Interest expense declined by $691,000, or 28.8%, to $1.7 million in the nine months ended June 30, 2013 compared to $2.4 million in the nine months ended June 30, 2012 principally as a result of lower interest expense on certificates of deposit and borrowings.

Interest expense on certificates of deposit declined by $359,000 in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 as a result of the impact of lower average balances and lower interest rates in the 2013 period. The average balance of certificates of deposit declined by $15.2 million to $92.7 million in the nine months ended June 30, 2013 compared to $107.9 million for the nine months ended June 30, 2012. The decrease in average balances in the 2013 period was the result of decreases in CDARS and brokered deposits. The interest rate on certificates of deposit was 1.30% in the nine months ended June 30, 2013 compared to 1.56% in the nine months ended June 30, 2012 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 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.

This prepayment of the borrowing from FHLB, along with refinancing at lower short-term rates, reduced the average interest rate on borrowed money from 4.22% to 2.79% in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012, reducing interest expense on borrowed money, including mortgage escrow funds by $306,000.

This refinancing, and overall declines in market interest rates reduced the average interest rate on interest-bearing liabilities from 1.52% in the quarter ended June 30, 2012 to 1.07% in the quarter ended June 30, 2013. Of the $691,000 decrease in interest expense in the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012, declines in interest rates reduced interest expense by $593,000, while changes in volume and mix of interest-bearing liabilities caused a decrease in interest expense of $98,000.

33

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.

	Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012
	(In thousands)
	Volume			Rate			Net
Interest-earning assets:
Loans receivable	$	898		$	(705	)	$	193
Securities		(127	)		35			(92	)
Other interest-earning assets		(58	)		45			(13	)
Total interest-earning assets		713			(625	)		88
Interest-bearing liabilities:
Demand deposits		53			(59	)		(6	)
Savings and club accounts		2			(34	)		(32	)
Certificates of deposit		(164	)		(195	)		(359	)
Borrowed money		12			(306	)		(294	)
Total interest-bearing liabilities		(98	)		(593	)		(691	)
Net interest income	$	811		$	(32	)	$	779

Net Interest Income. Net interest income increased $779,000, or 12.9%, to $6.8 million for the nine months ended June 30, 2013 compared to $6.0 million in the nine months ended June 30, 2012. 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 $830,000, or 0.39% of gross loans outstanding, at June 30, 2013 compared to $967,000 or 0.48% of gross loans outstanding at September 30, 2012. During the nine month periods ended June 30, 2013 and 2012, the Company charged $393,000 and $640,000, respectively, to expense to provide for loan losses, and wrote off $534,000 and $785,000 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 June 30, 2013 and September 30, 2012, the Bank had $3.9 million and $6.2 million of non-performing loans, substantially all of which were in process of foreclosure or were troubled debt restructurings and have been placed on non-accrual status. At June 30, 2013 and September 30, 2012, the Bank had $7.8 million and $11.4 million of loans classified as impaired. At June 30, 2013, none of these impaired loans required 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 $534,000 of loans charged off and $4,000 of recoveries in the nine month period ended June 30, 2013. There were no recoveries and $785,000 of loans were charged off in the nine month period ended June 30, 2012. The weak economy nationally as well as in our primary market area has contributed to the loss experience of the Bank. As a result of changes in the expected recovery of non-performing loans and in the mix and volume of the loan portfolio, weak economic conditions, unemployment, declines in real estate values in the Bank’s primary market area, and lower commercial real estate cash flows, $393,000 and $640,000 was provided for loan losses in the nine month periods ended June 30, 2013 and 2012, 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 $363,000 in the nine months ended June 30, 2013 was lower than the $1.0 million in the comparable 2012 period primarily as a result of $782,000 of gains on the sale of securities in the nine months ended June 30, 2012 which did not recur in the 2013 period, offset in part by higher gains on sale of loans due to higher volume in the nine months ended June 30, 2013.

Non-interest Expenses. Non-interest expenses decreased by $1.4 million for the nine months ended June 30, 2013, compared to the prior year period. Non-interest expense in the nine months ended June 30, 2012 included $795,000 in aggregate costs resulting from the charter

34

conversion and penalty assessed on early repayment of borrowings which did not recur in the three months ended June 30, 2013. Professional fees in the nine months ended June 30, 2013 include the reimbursement of $300,000 of prior merger related costs from Customers. Aside from these three items, non-interest expense declined by $338,000 in the three months ended June 30, 2013 compared to the prior period primarily as a result of lower employee headcount, lower pension and lower stock based compensation costs in the nine months ended June 30, 2013 compared to the 2012 period.

Income Tax Expense / Benefit. The income tax expense was $365,000 in the three months ended June 30, 2013 compared to a benefit of $210,000 in the comparable 2012 period. 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 June 30, 2013 and 2012 was different than the statutory rate as a result of certain non-taxable income and expense items, including non taxable merger related costs and reimbursements.

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.

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 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 March 31, 2013, 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	$	9,436	$	(304	)		-3.1	%
200		9,551		(189	)		-1.9	%
100		9,663		(77	)		-0.8	%
0		9,740		—			—
-100		9,533		(207	)		-2.1	%

Liquidity and Capital Resources

The Company is required to maintain levels of liquid assets sufficient to ensure the Company’s safe and sound operation. Liquidity is defined as the Company’s ability to meet current and future financial obligations of a short-term nature. The Company adjusts its liquidity

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levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings and loan funding commitments. The Company also adjusts its liquidity level as appropriate to meet its asset/liability objectives.

The Company’s primary sources of funds are retail deposits, the 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 June 30, 2013 and September 30, 2012, the Company had $20.9 million and $37.1 million of advances from the FHLB, respectively, and CDARS deposits of $9.8 million and none, respectively and had no brokered certificates of deposit as of either date.

In the nine months ended June 30, 2013, net cash provided by operating activities was $7.4 million compared to net cash provided by operating activities of $3.1 million in the same period in 2012. In the nine months ended June 30, 2013 and 2012, the net income (loss) included non-cash expenses (consisting of depreciation, amortization, provision for loan losses, deferred taxes and stock-based compensation) of $1.1 million and $1.5 million, respectively. Net activity from loans originated for sale provided $2.4 million and $2.2 million of cash in the nine months ended June 30, 2013 and 2012, respectively.

In the nine months ended June 30, 2013 and 2012, investing activities used $3.1 million and $11.0 million of cash, respectively. In the nine months ended June 30, 2013 and 2012, net securities transactions provided $5.1 million and $6.5 million of cash, respectively. Net changes in loans used $9.0 million and $17.3 million of cash in the nine months ended June 30, 2013 and 2012, respectively.

Net cash used by financing activities was $1.9 million in the nine months ended June 30, 2013 compared to net cash provided by financing activities of $5.5 million in the nine months ended June 30, 2012. In the nine months ended June 30, 2013, repayment of FHLB-NY advances used $16.2 million of cash and changes in deposit balances provided $11.9 million of cash, compared to $11.7 million and $16.4 million in the 2012 period, respectively. In the nine months ended June 30, 2013 the Company sold $1.5 million of preferred stock to Customers Bancorp.

The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments. As of June 30, 2013, the Company had cash and cash equivalents of $4.2 million and available for sale securities of $41.2 million. At June 30, 2013, the Company had outstanding commitments to originate loans of $1.9 million and $10.5 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 June 30, 2013, totaled $33.1 million. Historically, the Company’s deposit flow history has been that a significant portion of such deposits remain with the Company.

The Company’s overall credit exposure at the FHLB, 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 Bank’s capital position at June 30, 2013, 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)	$	22,552		12.74	%	³$	14,157	³	8.00	%	³$	17,696	³	10.00	%
Core (Tier 1) capital (to risk-weighted assets)		21,722		12.28			N/A		N/A		³	10,618	³	6.00
Core (Tier 1) capital (to total adjusted assets)		21,722		8.27		³	10,512	³	4.00		³	13,140	³	5.00
Tangible capital (to total adjusted assets)		21,722		8.27		³	3,942	³	1.50			N/A		N/A

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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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to Smaller Reporting Companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is (i) recorded, processed, summarized and reported and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II: Other Information

Item 1A. Risk Factors

Except as described below, there have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended September 30, 2012.

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

Effective as of April 22, 2013, the Company entered into an Amendment to Agreement and Plan of Merger (“Amendment”) to that certain Agreement and Plan of Merger dated as of August 10, 2012 by and between CMS Bancorp, Inc. and Customers Bancorp, Inc. (“Merger Agreement”), whereby through a series of transactions, CMS Bancorp will be merged into Customers and CMS will be merged into Customers’ wholly-owned bank subsidiary, Customers Bank (the “Merger”). Upon completion of the Merger, Customers is to acquire all outstanding shares of CMS Bancorp’s common stock in exchange for shares of Customers’ common stock based on an exchange ratio to be determined using a valuation date prior to the closing of the transaction. Any fractional shares that result due to this exchange of shares will be paid in cash.

The Amendment extended from April 30, 2013 to December 31, 2013 the initial date at which, if the merger of the Company with and into Customers pursuant to the Merger Agreement, as amended, has not closed, either the Company or Customers may terminate the Agreement, subject to the termination date being extended until March 31, 2014 under certain specified circumstances. The Amendment also updated the definitions of “CMS Valuation” and “Customers Valuation,” establishing the valuation date for book value as of March 31, 2013. The exchange ratio will remain fixed for the pendency of the transaction, using the multiples of 0.95x for CMS common equity, and 1.25x for Customers common equity for purposes of calculating the exchange ratio.

Other key terms agreed to by the Company and Customers under the Amendment include: (a) a right for the Company to terminate the Merger Agreement, as amended, exercisable at any time after May 20, 2013, if either (i) Customers has not made the contemplated investment in the Company of $1.5 million of Company’s Preferred Stock, or (ii) Customers and the Company have not agreed upon the terms of the $2.0 million senior secured lending facility that Customers shall make available to the Company; and (b) an agreement by Customers to pay the Company a termination fee of $1.0 million in the event the Merger Agreement, as amended, is terminated under certain provisions primarily relating to failure to consummate the Parent Merger due to non-receipt of required government approvals. Also pursuant to the Amendment, Customers reimbursed the Company for $300,000 of merger-related expenses.

The Merger Agreement, as amended, has been unanimously approved by the Company’s 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 the Company’s common stock; (ii) the receipt of all required regulatory approvals; (iii) the non-occurrence of any event that has a material adverse effect on the Company and its subsidiaries; and (iv) as of the closing date (before giving effect to the Merger), the Company 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. The Amendment removed the previous provision in the Merger Agreement regarding the closing of the Acacia Federal Savings Bank transaction as a pre-condition to Customers’ obligation to commence the filing of regulatory applications.

There can be no assurance that all of the conditions to closing will be satisfied, or where possible, waived, or that the Merger and/or related transactions will become effective. If the Merger and related transactions do not become effective because conditions to closing are not satisfied, or because one of the parties, or all of the parties mutually, terminate the Merger Agreement, as amended, the following adverse effects are possible: (i) the Company’s stockholders will not receive the Customers’ common stock in exchange for Company common stock which Customers has agreed to pay based on an exchange ratio; (ii) the Company’s stock price could decline; (iii) the Company’s business could be adversely affected; (iv) the Company will have incurred significant transaction costs related to negotiating and working towards the Merger; and (v) under certain circumstances, the Company could have to pay Customers a termination fee of up to $1,000,000. For additional information about the Merger announcement, see the Company’s Forms 8-K filed with the SEC on August 10, 2012 and April 24, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 22, 2013, the Company and Customers consummated a transaction whereby the Company issued and sold 1,500 shares of Series A Preferred Stock to Customers pursuant to the terms of an Amendment to the Merger Agreement. The issuance price was $1,000.00 per share, for an aggregate purchase price of $1,500,000, less a 3% discount. The shares of Series A Preferred Stock sold to Customers were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D, as promulgated by the SEC.

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On May 21, 2013, the Company filed a Certificate of Designations (“Certificate”) with the Secretary of State of the State of Delaware establishing the designations, powers, preferences, limitations, restrictions, and relative rights of the Series A Preferred Stock. 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 will be 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.

Item 6. Exhibits

Exhibit No.	Description
3.1	Certificate of Incorporation of CMS Bancorp, Inc. (1)
3.2	Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on February 20, 2009. (2)
3.3	Certificate of Designations for the Series A Noncumulative Perpetual Preferred Stock, as filed with the Secretary of State of the State of Delaware on May 21, 2013 (4)
3.4	Bylaws of CMS Bancorp, Inc. (1)
4.1	Form of Stock Certificate of CMS Bancorp, Inc. (1)
4.2	Form of Option Agreement under the CMS Bancorp, Inc. 2007 Stock Option Plan. (3)
4.3	Form of Restricted Stock Award Agreement under the CMS Bancorp, Inc. 2007 Recognition and Retention Plan. (3)
4.4	Form of Stock Certificate for Series A Noncumulative Perpetual Preferred Stock (4)
10.1	Amendment to Agreement and Plan of Merger, dated as of April 22, 2013 (5)
31.1	Rule 13a-14(a)/15d-14(a) Certification of principal executive officer*
31.2	Rule 13a-14(a)/15d-14(a) Certification of principal financial officer*
32.1	Section 1350 Certification of principal executive officer*
32.2	Section 1350 Certification of principal financial officer*
101	Interactive data files: (i) Consolidated Statements of Financial Condition as of June 30, 2013 and September 30, 2012 (unaudited), (ii) Consolidated Statements of Operations for the Three Months Ended June 30, 2013 and 2012 (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2013 and 2012 (unaudited), (iv) Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2013 and 2012, and (v) Notes to Consolidated Financial Statements.**

* Included herewith.

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** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

(1) Incorporated by reference to the Registration Statement No. 333-139176 on Form SB-2 filed with the Commission on December 7, 2006, as amended.

(2) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on February 23, 2009.

(3) Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed with the Commission on November 30, 2007.

(4) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on May 24, 2013.

(5) Incorporated by reference to the Registrant’s Form 8-K filed with the Commission on April 24, 2013.

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SIGNATURES

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

	CMS Bancorp, Inc.
Date: August 12, 2013	/s/ JOHN RITACCO
	John E. Ritacco
	President and Chief Executive Officer
Date: August 12, 2013	/s/ STEPHEN DOWD
	Stephen E. Dowd
	Chief Financial Officer

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