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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 March 31, 2010

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: 0-53163

 

 

BCSB BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-1424764

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236

(Address of principal executive offices)

(410) 256-5000

Registrant’s telephone number, including area code)

N/A

(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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨      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 April 30, 2010 the issuer had 3,120,945 shares of Common Stock issued and outstanding.

 

 

 


Table of Contents

CONTENTS

 

          PAGE

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Consolidated Statements of Financial Condition as of March 31, 2010 (unaudited) and September 30, 2009    3
   Consolidated Statements of Operations for the Six and Three Months Ended March 31, 2010 and 2009 (unaudited)    4
   Consolidated Statements of Comprehensive (Loss) Income for the Six and Three Months Ended March 31, 2010 and 2009 (unaudited)    5
   Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009 (unaudited)    6
   Notes to Consolidated Financial Statements    8

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    21

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    34

Item 4.

   Controls and Procedures    34

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    35

Item 1A.

   Risk Factors    35

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    35

Item 3.

   Defaults Upon Senior Securities    35

Item 4.

   Removed and reserved    35

Item 5.

   Other Information    36

Item 6.

   Exhibits    37

SIGNATURES

   38


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

     March 31,
2010
    September 30,
2009
 
     (unaudited)        
     (dollars in thousands)  
Assets     

Cash and due from banks

   $ 7,552      $ 5,535   

Interest-bearing deposits in other banks

     3,904        3,786   

Federal funds sold

     71,126        30,931   
                

Cash and cash equivalents

     82,582        40,252   

Interest bearing time deposits

     100        100   

Loans receivable, net of allowances ($6,440) and ($3,927)

     396,748        401,011   

Mortgage-backed securities, available for sale

     82,535        90,478   

Foreclosed real estate and repossessed assets

     5        639   

Premises and equipment, net

     8,094        9,024   

Federal Home Loan Bank of Atlanta stock, at cost

     1,485        1,485   

Bank owned life insurance

     15,304        15,001   

Core deposit intangible

     87        101   

Accrued interest and other assets

     13,806        11,347   
                

Total assets

   $ 600,746      $ 569,438   
                
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits:

    

Non-interest bearing

   $ 28,761      $ 25,529   

Interest-bearing

     488,711        462,460   
                

Total deposits

     517,472        487,989   

Junior subordinated debentures

     17,011        17,011   

Other liabilities

     6,798        5,305   
                

Total liabilities

     541,281        510,305   
                

Commitments and Contingencies

    

Stockholders’ Equity

    

Preferred stock (par value $.01 - 5,000,000 authorized, 10,800 shares issued and outstanding at March 31, 2010 and September 30, 2009, respectively)

     10,426        10,383   

Common stock (par value $.01 - 50,000,000 authorized, 3,120,945 issued and outstanding at March 31, 2010 and September 30, 2009, respectively)

     31        31   

Stock warrants

     481        481   

Additional paid-in capital

     39,033        38,984   

Obligation under rabbi trust

     1,014        1,035   

Retained earnings

     11,835        12,117   

Accumulated other comprehensive loss (net of taxes)

     (1,334     (1,812

Employee stock ownership plan

     (1,059     (1,100

Stock held by Rabbi Trust

     (962     (986
                

Total stockholders’ equity

     59,465        59,133   
                

Total liabilities and stockholders’ equity

   $ 600,746      $ 569,438   
                

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

     For the Six Months
Ended March 31,
    For the Three Months
Ended March 31,
 
     2010     2009     2010     2009  
     (Dollars in thousands except per share data)  

Interest Income

        

Interest and fees on loans

   $ 12,310      $ 12,391      $ 6,073      $ 6,104   

Interest on mortgage backed securities

     2,294        2,630        1,122        1,342   

Interest and dividends on investment securities

     3        31        2        14   

Other interest income

     79        117        44        35   
                                

Total interest income

     14,686        15,169        7,241        7,495   

Interest Expense

        

Interest on deposits

     4,609        6,719        2,241        3,210   

Interest on borrowings – short term

     —          224        —          111   

Other interest expense – debentures

     303        539        149        194   
                                

Total interest expense

     4,912        7,482        2,390        3,515   
                                

Net interest income

     9,774        7,687        4,851        3,980   

Provision for losses on loans

     2,500        300        2,200        150   
                                

Net interest income after provision for losses on loans

     7,274        7,387        2,651        3,830   

Other Income

        

Total other-than-temporary impairment charges

     (1,052     —          (1,052     —     

Less: Portion included in other comprehensive income (pre-tax)

     952        —          952        —     
                                

Net other-than-temporary impairment charges on securities available for sale

     (100     —          (100     —     

Gain on repossessed assets

     14        190        6        18   

Mortgage banking operations

     43        13        19        —     

Fees on transaction accounts

     383        501        165        208   

Income from bank owned life insurance

     296        159        145        123   

Miscellaneous income

     569        191        269        102   
                                

Total other income

     1,205        1,054        504        451   

Non-Interest Expenses

        

Salaries and related expense

     4,685        3,914        2,337        2,125   

Occupancy expense

     1,215        1,202        629        623   

Federal deposit insurance premiums

     486        306        264        180   

Data processing expense

     840        809        427        397   

Property and equipment expense

     470        485        276        254   

Professional fees

     389        457        109        217   

Advertising

     204        232        109        136   

Telephone, postage and office supplies

     152        191        73        101   

Other expenses

     140        312        61        128   
                                

Total non-interest expenses

     8,581        7,908        4,285        4,161   
                                

(Loss) income before tax (benefit) provision

     (102     533        (1,130     120   

Income tax (benefit) expense

     (133     191        (491     18   
                                

Net income (loss)

     31        342        (639     102   

Preferred stock dividends and discount accretion

     (313     (165     (156     (154
                                

Net (loss) income available to common shareholders

   $ (282   $ 177      $ (795   $ (52
                                

Per Share Data:

        

Basic and diluted (loss) earnings per share of common stock

   $ (.09   $ .06      $ (.27   $ (.02
                                

Dividends per common share

   $ —        $ —        $ —        $ —     
                                

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

     For the Six Months Ended
March 31,
 
     2010     2009  
     ( in thousands)  

Net Income

   $ 31      $ 342   

Other comprehensive income (loss), net of tax:

    

Unrealized net holding gains (losses) on Available-for-sale portfolios, net of tax (benefit) of $311 and $(698), respectively

     478        (986
                

Comprehensive Income (Loss )

   $ 509      $ (644
                
     For the Three Months Ended
March 31,
 
     2010     2009  
     ( in thousands)  

Net ( Loss) Income

   $ (639   $ 102   

Other comprehensive income (loss), net of tax:

    

Unrealized net holding gains on Available-for-sale portfolios, net of tax ) of $56 and $160, respectively

     86        441   
                

Comprehensive (Loss) Income

   $ (553   $ 543   
                

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Six Months  Ended
March 31,
 
     2010     2009  
     (dollars in thousands)  

Operating Activities

    

Net income

   $ 31      $ 342   

Adjustments to reconcile net income to net cash provided by operating activities

    

Other-than-temporary impairment charges on securities available for sale

     100        —     

Amortization of deferred loan fees and cost, net

     (114     (114

Non-cash compensation under stock-based benefit plan

     114        104   

Provision for losses on loans

     2,500        300   

Amortization of purchase premiums and discounts, net

     (3     59   

Provision for depreciation

     463        507   

Gains on sale of real estate and repossessed assets

     (14     (190

Increase in cash surrender value of bank owned life insurance

     (296     (159

Increase in accrued interest and other assets

     (2,771     (232

Gain on sale of loans

     (42     —     

Loans originated for sale

     (3,481     —     

Proceeds from loans sold

     3,523        —     

Increase in other liabilities

     333        588   

Decrease in obligation under Rabbi Trust

     (21     (35
                

Net cash provided by operating activities

     322        1,170   

Cash Flows from Investing Activities

    

Purchase of bank owned life insurance

     (7     (39

Net decrease in loans

     1,877        4,496   

Purchase of mortgage-backed securities- available for sale

     —          (10,162

Principal collected on mortgage-backed securities

     8,612        6,085   

Proceeds from sales of foreclosed real estate

     639        1,455   

Proceeds from sales of repossessed assets

     47        49   

Investment in premises and equipment

     (97     (196

Proceeds from sale of fixed assets

     564        —     

Redemption of Federal Home Loan Bank of Atlanta Stock, net

     —          74   
                

Net cash provided by investing activities

     11,635        1,762   

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

     For the Six Months  Ended
March 31,
 
     2010     2009  
     (dollars in thousands)  

Cash Flows from Financing Activities

    

Net increase in deposits

   $ 29,482      $ 11,840   

Net increase in advances by borrowers for taxes and insurance

     1,161        983   

Net proceeds from preferred stock offering (Troubled Asset Relief Program “TARP”)

     —          10,800   

Dividends paid on preferred stock

     (270     (78
                

Net cash provided by financing activities

     30,373        23,545   
                

Increase in cash equivalents

     42,330        26,477   

Cash and cash equivalents at beginning of period

     40,252        34,983   
                

Cash and cash equivalents at end of period

   $ 82,582      $ 61,460   
                

Supplemental Disclosures of Cash Flows Information:

    

Cash paid during the period for:

    

Interest

   $ 4,912      $ 6,717   
                

Income taxes

   $ 570      $ 20   
                

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Principles of Consolidation

BCSB Bancorp, Inc. (the “Company”) owns 100% of Baltimore County Savings Bank, F.S.B. and its subsidiaries (the “Bank”). The Bank owns 100% of Ebenezer Road, Inc. The accompanying consolidated financial statements include the accounts and transactions of these companies on a consolidated basis since the date of acquisition. All intercompany transactions have been eliminated in the consolidated financial statements. Ebenezer Road, Inc. sells insurance products. Its operations are not material to the consolidated financial statements.

Note 2 - Basis for Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The financial statements of the Company are presented on a consolidated basis with those of the Bank. The results for the six months ended March 31, 2010 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2010. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in BCSB Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2009.

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term related to the determination of the allowance for loan losses (the “Allowance”), other-than-temporary impairment of investment securities and deferred tax assets.

Note 3 - Organization

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the Federal Deposit Insurance Corporation (“FDIC”). The maximum insurance limit is scheduled to revert to $100,000 after December 31, 2013. The Bank’s non-interest earning demand deposit accounts currently have unlimited FDIC insurance.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 - Mortgage-Backed Securities

The amortized cost and estimated fair values of mortgage backed securities are as follows as of March 31, 2010 and September 30, 2009:

 

(in thousands)

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair
Value

Available for sale:

          

March 31, 2010

          

GNMA certificates

   $ 3,660    $ 115    $ —        $ 3,775

Collateralized mortgage obligations

     20,851      —        (5,078     15,773

FNMA certificates

     43,554      1,948      (12     45,490

FHLMC participating certificates

     16,672      825      —          17,497
                            
   $ 84,737    $ 2,888    $ (5,090   $ 82,535
                            

September 30, 2009

          

GNMA certificates

   $ 3,716    $ 250    $ —        $ 3,966

Collateralized mortgage obligations

     21,866      —        (6,095     15,771

FNMA certificates

     49,450      2,026      (44     51,432

FHLMC participating certificates

     18,438      871      —          19,309
                            
   $ 93,470    $ 3,147    $ (6,139   $ 90,478
                            

There were no sales of available for sale mortgage backed securities during the six months ended March 31, 2010 or the year ended September 30, 2009.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5 - Mortgage-Backed Securities- continued

Below are schedules of both investment securities and mortgage backed securities with unrealized losses as of March 31, 2010 and the length of time the individual security has been in a continuous unrealized loss position.

 

     Less than 12 months     12 months or more     Total  

(in thousands)

   Fair
Value
   Unrealized
Losses
    Fair
Value
   Unrealized
Losses
    Fair
Value
   Unrealized
Losses
 

Mortgage-backed securities

     3,278      (13     —        —          3,278      (13
                                             

Collateralized mortgage obligations

     —        —          15,773      (5,678     15,773      (5,678
                                             

Total temporarily impaired securities

   $ 3,278    $ (13   $ 15,773    $ (5,678   $ 19,051    $ (5,691
                                             

At March 31, 2010 the Company has seven securities in an unrealized loss position.

During the quarter ended March 31, 2010, we determined that, based on our most recent estimate of cash flows, other-than-temporary-impairment (“OTTI”) had occurred with respect to one of our mortgage-backed securities and resulted in a pre-tax charge to earnings of $100,000. This security was rated “AAA” by Standard & Poors at origination. This security had an original principle balance of $5.0 million and has a current principle balance of $3.1 million. This security has an estimated fair value of $1.6 million at March 31, 2010. Most of the decline in fair value related to this security is principally due to non-credit factors. Under the revised guidance for recognition and presentation of other-than-temporary impairments for debt securities, impairment recognition for the Company’s mortgage-backed securities are now segmented into credit and non-credit related components. Any fair value adjustment due to identified credit-related components will be recorded as an adjustment to current period earnings, while non-credit-related fair value adjustments will be recorded through other comprehensive income as the Company does not have the intent to sell the securities nor does it believe it is more likely than not that it will be required to sell the securities.

The following table presents the change in the credit portion of the other-than-temporary impairments recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income (loss) for the three months ended March 31, 2010.

 

     (in thousands)

Credit loss on debt securities held as of December 31, 2009

   $ 500

Addition for credit loss for which an other-than-temporary-impairment was previously recognized

     100

Addition for credit loss for which an other-than-temporary-impairment was not previously recognized

     —  
      

Credit loss on debit securities held as of March 31, 2010

   $ 600
      

There were no credit losses on debt securities as of or for the three months ended March 31, 2009.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5 - Mortgage-Backed Securities- continued

The Company engages the service of independent third party professionals to analyze the OTTI status of the mortgage-backed securities. The OTTI methodology is formulated within The FASB Accounting Standards Codification. As noted above, the goal is to identify expected cash flows of the instrument in question as well as the expected “credit loss component”. In order to derive these two values, the model addresses each component of the net present value calculation with results dependent the following three major assumptions:

 

  1. Loss Severity assumption

 

  2. CDR assumption (likelihood of default)

 

  3. Prepayment assumption

Loss Severity assumption – The loss severity assumption is simplified by access to a historical database. From this data, recent realized loss severity rates by issuer and origination year are utilized to build an assumption.

CDR assumption – The creditworthiness of a borrower is most often determined by factors such as debt service coverage ratio, LTV, FICO, or Asset Documentation (Full, Low, or No). However, the most defining characteristic of a loan’s expected performance is whether the loan is current or delinquent. Therefore, all of the loans within the pool are segregated by their status category.

Next, information is incorporated from access to a service provider that has compiled a database of loan performance statistics for the last few decades. Default rates are then obtained by state and by aging bucket (30, 60, 90 days past due) for applicable periods of the mortgage-backed securities under review.

Probabilities are derived called “transition probabilities” or “migration probabilities” for the specified dataset. In essence, these values represent the historical likelihood of a 30 Day Delinquent loan moving through the credit pipeline to default. These values are also derived for 60 Day and 90 Day Delinquent loans. The resulting probabilities are used within the CDR assumptions for all loans falling into these categories.

The current loan category is stratified by FICO scores and Asset Doc to estimate probabilities of loans meeting these characteristics that are likely to move into default. The average default rate is then calculated to utilize as an assumed stress scenario.

Prepayment assumption – This component is based on historical activity. As most of these instruments have gravitated towards a baseline voluntary prepayment stream over the previous year, recent history gives a good estimate of future voluntary prepayment results.

These assumptions return both a “credit loss component” as well as expected cash flows. The final analysis incorporates several scenarios using these credit assumptions with varying prepayment speeds to reflect the sensitivity of the security.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6 - Cash Flow Presentation

For purposes of the statements of cash flows, cash and cash equivalents include cash and amounts due from depository institutions, investments in federal funds, and certificates of deposit with original maturities of 90 days or less.

Note 7 - Earnings Per Share

Basic per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options and warrants, unless the effect is to reduce a loss or increase earnings per share. The basic and diluted weighted average common shares outstanding for the six and three month periods ended March 31, 2010 and 2009 are as follows:

 

     For the Six Months Ended March 31,  
     2010     2009  
     (in thousands except per share data)  
     Income (Loss)     Shares    Per Share     Income     Shares    Per Share  

Basic EPS

              

Net Income

   $ 31      2,918    $ .01      $ 342      2,904    $ .06   

Less preferred dividend

     (313   2,918      (.10     (165   —        —     
                                          

Income (Loss) available to common shareholders

     (282   2,918      (.09     177      2,904      .06   

Diluted EPS

              

Effect of dilutive shares

     —        —        —          —        8      —     
                                          

Income (Loss) available to common shareholders plus assumed conversions

   $ (282   2,918    $ (.09   $ 177      2,912      .06   
                                          
     For the Three Months March 31,  
     2010     2009  
     (in thousands except per share data)  
     Income (Loss)     Shares    Per Share     Income (Loss)     Shares    Per Share  
                                    

Basic EPS

              

Net (Loss) Income

   $ (639   2,919    $ (.22   $ 102      2,908    $ .03   

Less preferred dividend

     (156   2,919      (.05     (154   —        (.05
                                          

Loss available to common shareholders

     (795   2,919      (.27     (52   2,908      (.02

Diluted EPS

              

Effect of dilutive shares

     —        —        —          —        —        —     
                                          

Income (loss) available to common shareholders plus assumed conversions

   $ (795   2,919    $ (.27   $ (52   2,908    $ (.02
                                          

Options to purchase 64,436 shares which were outstanding at March 31, 2010 and 74,175 shares which were outstanding March 31, 2009, were not included in the computation of diluted EPS because the effect of which would have been anti-dilutive. Warrants to purchase 183,465 shares which were outstanding at March 31, 2010 and March 31, 2009 were not included in the computation of diluted EPS because the effect of which would have been anti-dilutive.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 8 - Preferred Stock

On December 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement, and the related Securities Purchase Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued (i) 10,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase 183,465 shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $10,800,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Under the original terms of the Purchase Agreement, the Company is prohibited from redeeming the Series A preferred stock within the first three years unless it completed a qualified equity offering whereby it received aggregate gross proceeds of not less than $2.7 million. However, the provisions introduced by the American Recovery and Reinvestment Act of 2009 indicate that once the Company notifies Treasury that it would like to redeem the Series A preferred stock, the Treasury must permit the Company to do so subject to consultation with the OTS. The Company will be subject to existing supervisory procedures for approving redemption requests for capital instruments. The OTS will weigh the Company’s desire to redeem the Series A preferred stock against the contribution of Treasury capital to the Company’s overall soundness, capital adequacy and ability to lend, including confirming that the Company has a comprehensive internal capital assessment process.

The warrant is exercisable at $8.83 per share at any time on or before December 23, 2018. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

The Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the warrant will be subject to any contractual restrictions on transfer.

Note 9 - Regulatory Capital

The following table sets forth the Bank’s capital position at March 31, 2010.

 

     Actual     For Capital
Adequacy Purposes
    To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
     Actual
Amount
   % of
Assets
    Required
Amount
   % of
Assets
    Required
Amount
   % of
Assets
     (Unaudited) (dollars in thousands)

Tangible (1)

   $ 66,031    11.04   $ 8,973    1.50   $ N/A    N/A%(3)

Tier I capital (2)

     66,031    17.24        N/A    N/A (3)      22,984    6.00        

Core (1)

     66,031    11.04        23,928    4.00        29,910    5.00        

Risk-weighted (2)

     69,293    18.09        30,645    8.00        38,306    10.00        

 

(1) To adjusted total assets
(2) To risk-weighted assets
(3) Not applicable

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10 - Stock Option Plans

On July 15, 1999, the Company established a Stock Option Plan (the “1999 Plan”) whereby 120,366 shares of common stock have been reserved for issuance under the 1999 Plan. Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. Options are exercisable in four or five annual installments at the market price of common stock at the date of grant. The Options must be exercised within ten years from the date of grant. There were 43,428 options granted during the year ended September 30, 2002. There were 15,792 options granted during the year ended September 30, 2007, 22,193 options granted during the year ended September 30, 2008 and 11,796 options granted during the year ended September 30, 2009. No options were granted during the years ended September 30, 2003 through 2006. There were no options granted during the six months ended March 31, 2010.

The following table summarizes the shares under the Company’s stock option plan at March 31, 2010:

 

Number of Shares

   Price    Weighted Average
Contractual Life

26,452

   $ 21.61    2.1

10,528

     28.41    6.7

5,264

     17.95    7.7

22,193

     11.61    7.8

11,796

     8.25    9.5

The total exercisable shares of 45,971 have a weighted average contractual life of 4.3 years, and an aggregate intrinsic value of $0.

At the annual shareholders meeting held in May 2009 the Company approved an additional Stock Option Plan (the “2009 Plan”) whereby 191,740 shares of common stock have been reserved for issuance under the 2009 Plan. Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. The Options must be exercised within ten years from the date of grant. There were no options granted during the six months ended March 31, 2010.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10 - Stock Option Plans - continued

The following table presents the activity related to options under all plans for the six months ended March 31, 2010.

 

     Shares    Weighted Average
Exercise Price

Outstanding at September 30, 2009

   76,233    $ 17.32

Options exercised

   —        —  

Forfeited

   —        —  

Granted

   —        —  
           

Outstanding at March 31, 2010

   76,233    $ 17.32
           

Exercisable at March 31, 2010

   45,971    $ 19.96
           

There were no options granted during the six months ended March 31, 2010 and 2009.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11 - Recent Accounting Pronouncements

All pending but not yet effective Accounting Standards Updates (“ASU”) were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operations.

In June 2009, the FASB issued guidance on, “Accounting for Transfers of Financial Assets” that requires enhanced disclosures about the transfer of financial assets and a company’s continuing involvement in transferred assets. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. This statement changes the derecognition guidance for transferors of financial assets, including entities that sponsor securitizations.

In June 2009 FASB issued guidance which eliminates the concept of a qualifying special purpose entity (“QSPE”). The guidance eliminates any reference to a QSPE and requires a transferor to evaluate transfers to such entities under the amended guidance. This guidance also introduces the concept of a participating interest. A participating interest is defined as a proportionate interest ownership interest in a financial asset in which the cash flows from the asset are allocated to the participating interest holders in proportion to their ownership share.

Additionally, this guidance significantly modifies the conditions required for a transfer of a financial asset or a participating interest therein to qualify as a sale and also changes the measurement guidance for transfers of financial assets in that it requires that a transferor recognize and initially measure at fair value any servicing assets, servicing liabilities, and any other assets obtained and liabilities incurred in a sale. The statement amends the disclosure requirements that will allow financial statement users to understand the nature and extent of the transferor’s continuing involvement with financial assets that have been transferred. The Company does not expect that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In June 2009, the FASB issued guidance, which 1) replaces the quantitative-based risks and rewards calculations for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosure about an enterprise’s involvement in variable interest entities. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. We do not expect the adoption of the guidance to have a material impact, if any on the Company’s consolidated financial condition or results of operations.

Note 12 - Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company has $922,000 of standby letters of credit as of March 31, 2010. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of March 31, 2010 for guarantees under standby letters of credit issued is not considered to be material.

Note 13 - Fair Value Measurements

Effective October 1, 2008, the Company adopted FASB guidance for – “Fair Value Measurements” . This guidance defined the concept of fair value, established a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. This guidance applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Fair value is defined as

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 13 - Fair Value Measurements - continued

 

the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets. The disclosure’s emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of this guidance did not have any effect on the Company’s financial position or results of operations.

GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:

 

   

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted process of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Each financial instrument’s level assignment with the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement for the particular category. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of each instrument under the valuation hierarchy.

Securities Available for Sale

Fair values of investment securities are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are generally classified within Level 2 of the valuation hierarchy. (See note 5 above.)

The following table presents the financial instruments measured at fair value on the recurring basis as of March 31, 2010 on the Consolidated Statement of Financial Condition utilizing the hierarchy discussed above.

 

     At March 31, 2010     
($ in thousands)    Total    Level 1    Level 2    Level 3    Total changes
In fair values
Included in Period

Earnings

GNMA certificates available for sale

   $ 3,775    $ —      $ 3,775    $ —      $ —  

FNMA certificates available for sale

     45,490      —        45,490      —        —  

FHLMC certificates available for sale

     17,497      —        17,497      —        —  

Collateralized mortgage obligations available for sale

     15,773      —        15,773      —        —  
                                  
   $ 82,535    $ —      $ 82,535    $ --    $ —  
                                  

Nonrecurring fair value changes

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis, but are subject to fair value in certain circumstances, such as when there is evidence of impairment that may require write downs. The write-downs for the Company’s more significant assets or liabilities measured on a non-recurring basis are based on the lower of amortized cost or estimated fair value.

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price of the loan, or the fair value of the underlying collateral asset.

 

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Foreclosed Real Estate and Repossessed Assets

Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to Foreclosed Real Estate and Repossessed Assets. These assets are carried at lower of cost or fair value of the collateral, less costs to sell. There was no Foreclosed Real Estate at March 31, 2010.

Impaired loans , Foreclosed Real Estate and Repossessed Assets are classified as Level 3 within the valuation hierarchy.

 

     At March 31, 2010
($ in thousands)    Total    Level
1
   Level
2
   Level 3

Impaired Loans

   $ 8,980    $ —      $ —      $ 8,980

Foreclosed Real Estate and Repossessed Assets

   $ 5    $ —      $ —      $ 5
                           

Total

   $ 8,985    $ —      $ —      $ 8,985
                           

 

($ in thousands)    Impaired Loans, Foreclosed Real
Estate and Repossessed Assets

Balance at September 30, 2009

   $8,329

Total net gains for the year

   —  

Net transfers in/(out) Level 3

   656
    

Balance at March 31, 2010

   $8,985
    

Net realized gains included in net income for the year to date relating to sales of repossessed assets.

   $     14
    

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 - Disclosures About Fair Value of Financial Instruments

The estimated fair values of the Bank’s financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques prescribed by the FASB and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The carrying amount is a reasonable estimate of fair value for cash, federal funds and interest-bearing deposits in other banks. Fair value is based on bid prices and pricing models received from third party pricing services for investment securities and mortgage backed securities. The carrying amount of Federal Home Loan Bank of Atlanta stock is a reasonable estimate of fair value. Loans receivable were discounted using a single discount rate, comparing the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. These rates were used for each aggregated category of loans as reported on the Office of Thrift Supervision Quarterly Report. The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The Junior Subordinated Debentures are considered to be at fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered on deposits of similar remaining maturities. The fair value of Federal Home Loan Bank advances is estimated using rates currently offered on advances of similar remaining maturities. The carrying amounts of accrued interest receivable, accrued interest payable, and mortgage servicing rights approximate fair value. Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 - Disclosures About Fair Value of Financial Instruments - Continued

The estimated fair values of the Bank’s financial instruments are as follows:

 

     March 31, 2010    September 30, 2009
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
          (Amounts in Thousands)     

Financial Assets

           

Cash

   $ 7,552    $ 7,552    $ 5,535    $ 5,535

Interest-bearing deposits in other banks

     3,904      3,904      3,786      3,786

Federal funds sold

     71,126      71,126      30,931      30,931

Interest-bearing time deposits

     100      100      100      100

Loans Receivable

           

Mortgage loans

     390,718      400,714      391,560      399,425

Share loans

     497      497      661      661

Consumer loans

     5,533      5,754      8,790      9,053

Mortgage-backed securities – available for sale

     82,535      82,535      90,478      90,478

Federal Home Loan Bank of Atlanta stock

     1,485      1,485      1,485      1,485

Accrued interest receivable

     2,204      2,204      2,306      2,306

Mortgage servicing rights

     252      252      296      296

Financial Liabilities

           

Deposits

   $ 517,472    $ 519,033    $ 487,989    $ 488,756

Junior Subordinated Debt

     17,011      17,011      17,011      17,011

Accrued interest payable

     71      71      51      51

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the FDIC. This maximum insurance limit is scheduled to revert to $100,000 after December 31, 2013. The Bank’s noninterest earning demand deposit accounts have unlimited FDIC insurance.

The Company’s net income is dependent primarily on its net interest income, which is the difference between interest income earned on its interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the Company’s net income also is affected by the level of other income, which primarily consists of fees and charges, and levels of non-interest expenses such as salaries and related expenses.

The operations of the Company are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company’s market area.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition is based on the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses.

Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on management’s evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimated loss and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management’s estimation of losses. The use of different estimates or assumptions could produce different provisions for loan losses.

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Under the revised guidance, for recognition and presentation of other-than-temporary impairments the amount of other-than-temporary impairment that is recognized through earnings for debt securities is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The revised guidance also requires that an evaluation be done to determine whether the Company has the intent to sell or will be more likely than not required to sell these securities. The discount rate used to determine the credit loss is the expected book yield on the security.

The Company accounts for income taxes under the asset/liability method. Deferred tax assets are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company’s control. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

 

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Available Information

The Company and Bank maintain an Internet website at http://www.baltcosavings.com. The Company makes available its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports filed with the Securities and Exchange Commission (“SEC”) as well as other information related to the Company, free of charge. SEC reports are available on this site as soon as reasonably practicable after electronically filed.

 

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Table of Contents

Recent Developments

Sale of Branches

On January 12, 2010, BCSB Bancorp, Inc. (the “Company”) announced that on January 12, 2010 its subsidiary, Baltimore County Savings Bank, F.S.B. (the “Bank”) entered into a definitive Purchase and Assumption Agreement (the “Agreement”) with American Bank (“American”) under which the Bank will sell four branch offices, located at 6335 Baltimore National Pike, Catonsville, Maryland, 9416 Baltimore National Pike, Ellicott City, Maryland, 4228 Harford Road, Baltimore, Maryland, and 9231 Lakeside Boulevard, Owings Mills, Maryland (collectively, the “Branches”), to American. The agreement provides that American will assume the deposits associated with the Branches, which totaled approximately $85 million at March 31, 2010. Under the agreement, American will purchase the personal property, furniture, fixtures, leasehold improvements and equipment located at the Branches and the Bank’s right, title and interest in and to the real property on which the Hamilton Branch is located and the buildings and improvements situated thereon. American also will assume the leases for the premises for the Catonsville, Ellicott City and Owings Mills Branches. American will pay a premium equal to the lesser of 2% of the deposit liabilities it assumes or $1,350,000. For further information regarding the proposed sale of branches, including a copy of the Purchase and Assumption Agreement, see the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2010.

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, whether regulatory approval will be obtained for the branch sales described above under “ Sale of Branches”, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected and the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to 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.

Comparison of Financial Condition at March 31, 2010 and September 30, 2009

During the six months ended March 31, 2010, assets increased by $31.3 million, or 5.5%, from $569.4 million at September 30, 2009 to $600.7 million at March 31, 2010. Our cash and cash equivalents increased $42.3 million, or 105.2% from $40.3 million at September 30, 2009 to $82.6 million at March 31, 2010, primarily due to an increase in deposits and principal repayments on loans receivable and mortgage-backed securities. Net loans receivable decreased $4.3 million, or 1.1%, from $401.0 million at September 30, 2009 to $396.7 million at March 31, 2010. Management’s lending strategy remains focused on commercial real estate, commercial business and home equity lending. Mortgage-backed securities available for sale decreased by $8.0 million, or 8.8%, from $90.5 million at September 30, 2009 to $82.5 million at March 31, 2010 resulting primarily from principal payments received during the period. At March 31, 2010, all mortgage-backed securities were classified as available for sale for liquidity purposes. The cash surrender value on the bank owned life insurance increased $303,000, or 2.0% from $15.0 million at September 30, 2009 to $15.3 million at March 31, 2010. Accrued interest and other assets increased $2.5 million from $11.3 million at September 30, 2009 to $13.8 million at March 31, 2010 primarily due to the recently required prepayment of the FDIC insurance premiums.

The Company has accumulated higher than normal levels of liquidity in anticipation of the pending sale of four branches. The amount of liquidity actually utilized in connection with this transaction will be dependant upon the amount of liquidity available at the time of settlement and the total amount of deposits transferred. In any event, a substantial amount of the liquidity on hand at March 31, 2010 is expected to be deployed in connection with this transaction.

 

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Deposits increased by $29.5 million, or 6.0%, from $488.0 million at September 30, 2009 to $517.5 million at March 31, 2010. The Bank has been successful in attracting new deposits without increasing the overall cost for such funds.

Stockholders’ equity increased by $332,000, or .56%, from $59.1 million at September 30, 2009 to $59.5 million at March 31, 2010. This increase was due to a decline in accumulated other comprehensive loss during the period. Our accumulated other comprehensive loss net of taxes was $1.3 million at March 31, 2010, compared to accumulated other comprehensive loss net of taxes of $1.8 million at September 30, 2009. At March 31, 2010, we had $5.1 million of gross unrealized losses related to collateralized mortgage obligations with an amortized cost of $20.8 million as of that date. These securities contain mortgages with Alt-A characteristics. Gross unrealized losses for these same securities were approximately $6.1 million as of September 30, 2009. We recorded other-than-temporary impairment (“OTTI”) charges of $500,000 on these securities during the year ended September 30, 2009 and $100,000 during the six months ended March 31, 2010. We do not intend to sell, nor is it more likely than not we will be required to sell these securities before maturity or recovery. If in the future it is determined that future declines in market values or credit losses with respect to these or any other securities are other than temporary, the Company would be required to recognize additional losses in its Consolidated Statement of Operations.

Comparison of Operating Results for the Six Months Ended March 31, 2010 and 2009

Net Income. Net income available to common shareholders was $177,000 for the six months ended March 31, 2009 and a loss of $282,000 for the six months ended March 31, 2010. The decrease was primarily due to the increase in the provision for losses on loans of $2.2 million. The Company also recorded an other-than-temporary impairment (“OTTI”) charge of $100,000, and had increased FDIC insurance premiums and salaries and related expense. These charges against earnings were partially offset by improved net interest income, and reduced professional fees.

Net Interest Income. Net interest income increased by $2.1 million, or 27.1%, from $7.7 million for the six months ended March 31, 2009 to $9.8 million for the six months ended March 31, 2010. The increase in net interest income primarily was due to an improved net interest margin resulting from reduced cost of funds on the deposit portfolio during the period. The net interest margin increased 69 basis points from 2.88% for the six months ended March 31, 2009 to 3.57% for the six months ended March 31, 2010.

Interest Income. Interest income decreased by $483,000, or 3.2% from $15.2 million for the six months ended March 31, 2009 to $14.7 million for the six months ended March 31, 2010. This was primarily due to a decrease in the average rate earned on all interest earning assets during the period. The average rate earned on total interest-earning assets declined by 31 basis points from 5.68% for the six months ended March 31, 2009 to 5.37% for the six months ended March 31, 2010.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased from $7.5 million for the six months ended March 31, 2009 to $4.9 million for the six months ended March 31, 2010, a decrease of $2.6 million or 34.3%. Interest on deposits decreased $2.1 million from $6.7 million for the six months ended March 31, 2009 to $4.6 million for the six months ended March 31, 2010. This decrease was due to the decrease in the average cost of deposits of 93 basis points from 2.76% for the six months ended March 31, 2009 to 1.83% for the six months ended March 31, 2010. This was partially offset by an increase in the average balance of deposits of $16.6 million from $487.4 million for the six months ended March 31, 2009 to $504.0 million for the six months ended March 31, 2010. Interest on short-term borrowings decreased by $224,000 for the six months ended March 31, 2010 as there were no short-term borrowings outstanding during the period. Other interest expense decreased by $236,000 or 43.8% from $539,000 for the six months ended March 31, 2009 to $303,000 for the six months ended March 31, 2010. This was due to the decline in interest expense on Junior Subordinated Debentures. The average cost of funds on the debt decreased by 278 basis points, from 6.34% for the six months ended March 31, 2009 to 3.56% for the six months ended March 31, 2010. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

 

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Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the six month periods ended March 31, 2010 and 2009. Total average assets are computed using month-end balances.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or “interest rate spread,” which banks have traditionally used as an indicator of profitability. Another indicator of net interest income is “net interest margin,” which is net interest income divided by the average balance of interest-earning assets.

 

     For the Six Months Ended March 31,  
     2010     2009  
     Average
Balance
   Interest    Average
Rate
    Average
Balance
   Interest    Average
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                

Loans receivable, net

   $ 401,378    $ 12,310    6.13   $ 398,013    $ 12,391    6.23

Mortgage-backed securities

     87,486      2,294    5.24        92,238      2,630    5.70   

FHLB stock and Investment securities

     1,485      3    .40        2,548      31    2.43   

Other interest earning assets

     56,723      79    .28        41,793      117    .56   
                                

Total Interest-earning assets

     547,072      14,686    5.37        534,592      15,169    5.68   

Bank Owned Life Insurance

     15,128           14,493      

Noninterest-earning assets

     25,092           30,456      
                        

Total assets

   $ 587,292         $ 579,541      
                        

Interest-bearing liabilities:

                

Deposits

   $ 504,030    $ 4,609    1.83   $ 487,408    $ 6,719    2.76

Short-term FHLB Advances

     —        —      —          10,000      224    4.48   

Junior Subordinated Debentures

     17,011      303    3.56        17,011      539    6.34   

Other liabilities

     1,185      —      —          1,682      —      —     
                                

Total interest-bearing liabilities

     522,226      4,912    1.88        516,101      7,482    2.90   
                                

Noninterest-bearing liabilities

     4,942           6,997      
                        

Total liabilities

     527,168           523,098      

Stockholders’ Equity

     60,124           56,443      
                        

Total liabilities and stockholders’ equity

   $ 587,292         $ 579,541      
                        

Net interest income

      $ 9,774         $ 7,687   
                        

Interest rate spread

         3.49         2.78
                        

Net interest margin

         3.57         2.88
                        

Ratio average interest earning assets/interest- bearing liabilities

         104.76         103.58
                        

 

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Rate/Volume Analysis. The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by old volume); and (iii) changes in rate/volume (changes in rate multiplied by the changes in volume).

 

     For Six Months Ended March 31,  
     2010 Vs. 2009  
     Increase (Decrease) Due to  
     Volume     Rate     Rate/Volume     Total  
     (In Thousands)  

Interest income:

        

Loans receivable, net

   $ 104      $ (184   $ (1   $ (81

Mortgage-backed securities

     (135     (212     11        (336

Investment securities

     (13     (26     11        (28

Other interest-earning assets

     42        (59     (21     (38
                                

Total interest-earning assets

     (2     (481     —          (483

Interest expense:

        

Deposits

     229        (2,262     (77     (2,110

Short-term FHLB advances

     (224     —          —          (224

Junior Subordinated Debentures

     —          (236     —          (236
                                

Total interest-bearing liabilities

     5        (2,498     (77     (2,570
                                

Change in net interest income

   $ (7   $ 2,017      $ 77      $ 2,087   
                                

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We established an additional $2.2 million provision for losses on loans during the six months ended March 31, 2010 as compared to a provision of $300,000 for the six months ended March 31, 2009. Additional loan loss provisions were necessary to address the continued decline in overall economic conditions and increases in troubled assets, particularly in relation to the commercial loan portfolio. Nonperforming loans were $9.6 million at March 31, 2010 versus $7.7 million at September 30, 2009, the Company’s prior fiscal year end. Most of the nonperforming assets consisted of commercial loans, which increased to $8.7 million at March 31, 2010 from $6.3 million at September 30, 2009 primarily due to the addition to nonperforming assets of one $3.5 million loan relationship. The loan is secured with commercial real estate utilized as an owner occupied manufacturing facility. Loan charge-offs for the six months ended March 31, 2010 were $49,000 as compared to $129,000 for the six months ended March 31, 2009, a decrease of $80,000. Loan recoveries were $62,000 for the six months ended March 31, 2010 compared to $130,000 for the six months ended March 31, 2009. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality”.

Other Income. Other income increased $151,000, or 14.3%, from $1.0 million for the six months ended March 31, 2009 to $1.2 million for the six months ended March 31, 2010. The increase in other income for the six months ended March 31, 2010 was primarily attributable to increased income from the Bank Owned Life Insurance of $137,000, or 86.2% and an increase in miscellaneous income of $378,000, or 197.9%, which was primarily due to additional commissions from investment services. These increases were partially offset by a decrease in gains on repossessed assets of $176,000, or 92.6%, a decrease of $118,000, or 23.6%, in fees on transaction accounts and an OTTI charge of $100,000.

Non-interest Expenses. Total non-interest expenses increased by $673,000, or 8.5%, from $7.9 million for the six months ended March 31, 2009 to $8.6 million for the six months ended March 31, 2010. This was primarily due to an increase of $771,000, or 19.7% in salaries and related expenses related to additional personnel and increased benefit costs. Federal deposit insurance premiums increased by $180,000, or 58.8% from $306,000 for the six months ended March 31, 2009 to $486,000 for the six months ended March 31, 2010. This increase was due to higher premiums assessed to all banks to replenish the reserve fund. These increases were partially offset by a decrease in professional fees of $68,000, or 14.9% from $457,000 for the six months ended March 31, 2009 to $389,000 for the six months ended March 31, 2010. The decrease in professional fees was primarily due to reimbursed legal fees from our commercial insurance provider for prior period litigation. Other expenses also decreased by $172,000, or 55.1%, from $312,000 for the six months ended March 31, 2009 to $140,000 for the six months ended March 31, 2010. This was primarily due to decreased losses on dishonored checks and ATM disputes and a decrease in bank service charges.

 

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Income Taxes. Our income tax (benefit) expense was $(133,000) and $191,000 for the six months ended March 31, 2010 and 2009, respectively. The change in income taxes for the six months ended March 31, 2010 as compared to the same period in the prior year was primarily due to decreased pretax earnings and fluctuations in income from bank owned life insurance, which impacts our effective tax rate since it is not subject to income taxes.

Comparison of Operating Results for the Three Months Ended March 31, 2010 and 2009

Net Income. Net loss available to common shareholders increased by $743,000, from a loss of $52,000 for the three months ended March 31, 2009 to a loss of $795,000 for the three months ended March 31, 2010. The decrease was primarily due to increased loan loss provisions of $2.2 million, partially offset by improved net interest income.

Net Interest Income. Net interest income increased by $871,000, or 21.9%, from $4.0 million for the three months ended March 31, 2009 to $4.8 million for the three months ended March 31, 2010. The increase in net interest income primarily was attributable to reduced cost of funds on the deposit portfolio during the period. The net interest margin increased 54 basis points from 2.95% for the three months ended March 31, 2009 to 3.49% for the three months ended March 31, 2010.

Interest Income. Interest income decreased by $254,000, or 3.4% from $7.5 million for the three months ended March 31, 2009 to $7.2 million for the three months ended March 31, 2010. This was primarily due to a decrease in the average rate earned on all interest earning assets and the decline in outstanding principal balances of mortgage-backed securities during the period. The average rate earned on total interest-earning assets declined by 36 basis points from 5.57% for the three months ended March 31, 2009 to 5.21% for the three months ended March 31, 2010. Interest and fees on loans remained stable at $6.1 million for the three months ended March 31, 2009 and 2010. There was an increase in the average balance of loans receivable of $4.0 million from $398.0 million for the three months ended March 31, 2009 to $402.0 million for the three months ended March 31, 2010. The average rate earned on loans also declined by 9 basis points from 6.13% for the three months ended March 31, 2009 to 6.04% for the three months ended March 31, 2010. Interest income on mortgage-backed securities decreased by $220,000 or 16.4% from $1.3 million for the three months ended March 31, 2009 to $1.1 million for the three months ended March 31, 2010. This decline was due to a decrease in the average balance of mortgage-backed securities from $94.1 million for the three months ended March 31, 2009 to $85.6 million for the three months ended March 31, 2010. The yield on mortgage-backed securities also decreased by 46 basis points from 5.70% for the three months ended March 31, 2009 to 5.24% for the three months ended March 31, 2010.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased from $3.5 million for the three months ended March 31, 2009 to $2.4 million for the three months ended March 31, 2010, a decrease of $1.1 million or 32.0%. Interest on deposits decreased $969,000 from $3.2 million for the three months ended March 31, 2009 to $2.2 million for the three months ended March 31, 2010. This decrease was due to the decrease in the average cost of deposits of 87 basis points from 2.63% for the three months ended March 31, 2009 to 1.76% for the three months ended March 31, 2010. This was partially offset by an increase in the average balance of deposits of $18.5 million from $490.2 million for the three months ended March 31, 2009 to $508.8 million for the three months ended March 31, 2010. Interest on short-term borrowings decreased by $111,000 for the three months ended March 31, 2010 as there were no short-term borrowings outstanding during the three months ended March 31. 2010. Other interest expense decreased by $45,000 or 23.2% from $194,000 for the three months ended March 31, 2009 to $149,000 for the three months ended March 31, 2010. This was due to the decline in interest expense on Junior Subordinated Debentures. The average cost of funds on the debt decreased by 106 basis points, from 4.56% for the three months ended March 31, 2009 to 3.50% for the three months ended March 31, 2010. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

 

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Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the three month periods ended March 31, 2010 and 2009. Total average assets are computed using month-end balances.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or “interest rate spread,” which banks have traditionally used as an indicator of profitability. Another indicator of net interest income is “net interest margin,” which is net interest income divided by the average balance of interest-earning assets.

 

     For the Three Months Ended March 31,  
     2010     2009  
     Average
Balance
   Interest    Average
Rate
    Average
Balance
   Interest    Average
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                

Loans receivable, net

   $ 402,005    $ 6,073    6.04   $ 398,028    $ 6,104    6.13

Mortgage-backed securities

     85,582      1,122    5.24        94,083      1,342    5.70   

FHLB stock and Investment securities

     1,485      2    .54        2,557      14    2.19   

Other interest-earning assets

     66,629      44    .26        44,635      35    .31   
                                

Total Interest-earning assets

     555,701      7,241    5.21        539,303      7,495    5.57   

Bank Owned Life Insurance

     15,201           14,190      

Noninterest-earning assets

     24,566           31,073      
                        

Total assets

   $ 595,468         $ 584,566      
                        

Interest-bearing liabilities:

                

Deposits

   $ 508,751    $ 2,241    1.76   $ 490,216    $ 3,210    2.63

Short-term FHLB Advances

     —        —      —          10,000      111    4.44   

Junior Subordinated Debentures

     17,011      149    3.50        17,011      194    4.56   

Other liabilities

     1,415      —      —          1,276      —      —     
                                

Total interest-bearing liabilities

     527,177      2,390    1.81        518,503      3,515    2.72   
                                

Noninterest-bearing liabilities

     8,076           6,439      
                        

Total liabilities

     535,253           524,942      

Stockholders’ Equity

     60,215           59,624      
                        

Total liabilities and stockholders’ equity

   $ 595,468         $ 584,566      
                        

Net interest income

      $ 4,851         $ 3,980   
                        

Interest rate spread

         3.40         2.85
                        

Net interest margin

         3.49         2.95
                        

Ratio average interest-earning assets/interest- bearing liabilities

         105.41         104.01
                        

 

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Rate/Volume Analysis. The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by old volume); and (iii) changes in rate/volume (changes in rate multiplied by the changes in volume).

 

     For Three Months Ended March 31,  
     2010 Vs. 2009  
     Increase (Decrease) Due to  
     Volume     Rate     Rate/Volume     Total  
     (In Thousands)  

Interest income:

        

Loans receivable, net

   $ 61      $ (91   $ (1   $ (31

Mortgage-backed securities

     (117     (113     10        (220

Investment securities

     (6     (11     5        (12

Other interest-earning assets

     18        (4     (5     9   
                                

Total interest-earning assets

     (44     (219     9        (254

Interest expense:

        

Deposits

     121        (1,050     (40     (969

Short-term FHLB advances

     (111     —          —          (111

Junior Subordinated Debentures

     —          (45     —          (45
                                

Total interest-bearing liabilities

     10        (1,095     (40     (1,125
                                

Change in net interest income

   $ (54   $ 876      $ 49      $ 871   
                                

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. During the three months ended March 31, 2010 we established additional provisions for losses on loans of $2.2 million, as compared to a provision of $150,000 for the three months ended March 31, 2009. Additional loan loss provisions were necessary to address the continued decline in overall economic conditions and increases in troubled assets, particularly in relation to the commercial loan portfolio. Nonperforming loans were $9.6 million at March 31, 2010 versus $7.7 million at September 30, 2009, the Company’s prior fiscal year end. Most of the nonperforming assets consisted of commercial loans, which increased to $8.7 million at March 31, 2010 from $6.3 million at September 30, 2009 primarily due to the addition to nonperforming assets of one $3.5 million loan relationship. The loan is secured with commercial real estate utilized as an owner occupied manufacturing facility. Loan charge-offs for the three months ended March 31, 2010 were $9,000 as compared to $48,000 for the three months ended March 31, 2009. Loan recoveries were $21,000 for the three months ended March 31, 2010 compared to $39,000 for the three months ended March 31, 2009. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality.”

Other Income. Other income increased $53,000, or 11.7%, from $451,000 for the three months ended March 31, 2009 to $504,000 for the three months ended March 31, 2010. The increase in other income for the three months ended March 31, 2010 was primarily attributable to an increase in miscellaneous income of $167,000, or 163.7% which was primarily due to increased commissions from investment services. Income from the Bank Owned Life Insurance also increased, by $22,000, or 17.9%. These increases were partially offset by an “OTTI” charge of $100,000, and a decrease of $43,000, or 20.7% in fees on transaction accounts.

Noninterest Expenses. Total non-interest expenses increased by $124,000, or 3.0%, from $4.2 million for the three months ended March 31, 2009 to $4.3 million for the three months ended March 31, 2010. This was primarily due to an increase of $212,000, or 10.0% in salaries and related expenses due to additional personnel and increased benefit costs. Federal deposit insurance premiums increased by $84,000, or 46.7% from $180,000 for the three months ended March 31, 2009 to $264,000 for the three months ended March 31, 2010. This increase was due to higher premiums assessed to all banks to replenish the reserve fund. These increases were partially offset by a decrease in professional fees by $108,000, or 50.0% from $217,000 for the three months ended March 31, 2009 to $109,000 for the three months ended March 31, 2010. The decrease in professional fees was due to reimbursement of legal fees from our commercial insurance provider for prior period litigation. Other expenses also decreased by $67,000, or 52.3%, from $128,000 for the three months ended March 31, 2009 to $61,000 for the three months ended March 31, 2010. This was primarily due to decreased losses on dishonored checks and ATM disputes and a decrease in bank service charges.

 

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Income Taxes. Our income tax (benefit) expense was $(491,000) and $18,000 for the three months ended March 31, 2010 and 2009, respectively. The change in income taxes for the three months ended March 31, 2010 as compared to the same period in the prior year was primarily due to decreased income. Our effective tax rate is impacted by income received from Bank Owned Life Insurance, which is not subject to income taxes.

Commitments, Contingencies and Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit and commitments to sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:

 

     At March 31,
2010
   At September 30,
2009
     (In thousands)

Commitments to originate new loans

   $ 3,180    $ 5,866

Unfunded commitments to extend credit under existing equity line and commercial lines of credit

     35,860      33,859

Commercial letters of credit

     922      1,038

Commitments to originate new loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line commitments for the unfunded portion of equity lines are for a term of 20 years, and commercial lines of credit are generally renewable on an annual basis. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Loans Receivable

Loans receivable at March 31, 2010 and September 30, 2009 consist of the following:

 

(in thousands)

   March 31,
2010
    September 30,
2009
 

Single-family residential mortgages

   $ 128,147      $ 140,991   

Single-family rental property loans

     56,370        51,698   

Commercial real estate loans

     147,207        136,106   

Construction loans

     24,510        28,869   

Commercial loans secured

     1,016        296   

Commercial loans unsecured

     315        322   

Commercial lease loans

     2,017        2,855   

Commercial lines of credit

     8,085        8,832   

Automobile loans

     4,174        7,322   

Home equity lines of credit

     32,761        29,167   

Other consumer loans

     2,129        2,443   
                
     406,731        408,901   

Add  – purchase accounting premiums, net

     24        62   

Less  – undisbursed portion of loans in process

     (3,331     (3,664

– unearned interest

     (46     (127

– deferred loan origination fees and costs

     (190     (234

– allowance for loans losses

     (6,440     (3,927
                
   $ 396,748      $ 401,011   
                

 

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Asset Quality

At March 31, 2010, we had $9.6 million in non-performing assets, consisting of nonaccrual loans and repossessed assets representing 1.60% of total assets. At September 30, 2009 non-performing assets were $8.3 million or 1.46% of total assets. Our net recoveries for the three months ended March 31, 2010 and March 31, 2009 were $13,000 and $1,000, respectively. Our allowance for loan losses was $6.4 million at March 31, 2010 compared to $3.9 million at September 30, 2009.

The following table presents an analysis of the Company’s non-performing assets:

 

     At March 30,
2010
    At September 30,
2009
 
     (In thousands)  

Nonperforming loans (1):

    

Nonaccrual loans:

    

Single family residential

   $ 876      $ 1,186   

Multi-family residential

     —          —     

Commercial real estate

     8,129        6,269   

Construction

     —          —     

Commercial leases

     580        235   

Land

     —          —     

Consumer Loans

     —          —     
                

Total nonaccrual loans

     9,585        7,690   

Loans 90 days past due and accruing

     —          —     

Restructured loans

     —          —     
                

Total nonperforming loans

     9,585        7,690   

Other nonperforming assets

     5        639   
                

Total nonperforming assets

   $ 9,590      $ 8,329   
                

Nonperforming loans to loans receivable

     2.38     1.88

Nonperforming assets as a percentage of loans , foreclosed real estate and repossessed assets

     2.38     2.07

Nonperforming assets to total assets

     1.60     1.46

Loans modified in Troubled Debt Restructurings not included as nonperforming assets above

   $ 0      $ 0   
                

 

(1) Nonperforming status denotes loans on which, in the opinion of management, the collection of additional interest is questionable. Also included in this category are Troubled Debt Restructurings (TDRs). At March 31, 2010 TDRs totaled $3.5 million, of which $3.3 million were not delinquent. At September 30, 2009, TDR’s totaled $3.9 million, of which $3.7 million were not delinquent. Reporting guidance requires disclosure of these loans as nonperforming even though they may be current in terms of principal and interest payments.

 

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The following table sets forth an analysis of the Company’s allowance for loan losses for the periods indicated.

 

     For the Six months Ended March 31,  
     2010     2009  
     (Dollars in thousands)  

Balance at beginning of period

   $ 3,927      $ 2,672   

Loans charged-off:

    

Real estate mortgages:

    

Single-family residential

     —          —     

Multi-family residential

     —          —     

Commercial

     —          (84

Construction

     —          —     

Commercial Leases

     (15     —     

Consumer

     (34     (45
                

Total charge-offs

     (49     (129

Recoveries:

    

Real estate mortgage:

    

Single-family residential

     —          —     

Multi-family residential

     —          —     

Commercial

     —          —     

Construction

     —          —     

Commercial loans secured

     —          —     

Consumer

     62        130   
                

Total recoveries

     62        130   

Net loans recovered

     13        1   

Provision for loan losses

     2,500        300   
                

Balance at end of period

   $ 6,440      $ 2,973   
                

Ratio of net recoveries to average loans outstanding during the period

     —       —  
                

Regulations require that we classify assets on a regular basis. There are three classifications for problem assets: substandard, doubtful and loss. We regularly review our assets to determine whether any assets require classification or re-classification. At March 31, 2010, the Company had $29.3 million in classified assets, consisting of $17.3 million in substandard collateralized mortgage obligations (CMOs), $12.0 million in substandard and loss loans, and $5,000 in repossessed assets. At September 30, 2009, the Company had $4.9 million in classified assets consisting of $4.3 million in substandard and loss loans, and $639,000 in foreclosed property or other real estate owned.

During the three months ended March 31, 2010, the Company added $17.3 million in CMOs to its substandard asset category. Although these securities have performed in accordance with contractual terms to date, they have Alt-A characteristics and are rated below investment grade. Additionally, $600,000 in cumulative pre-tax OTTI charges have been recorded in connection with these securities. As a result, they have been classified as substandard in accordance with regulatory guidelines.

In addition to regulatory classifications, we also classify as “special mention” assets that are currently performing in accordance with their contractual terms but may exhibit some form of credit weakness and may become classified or non-performing assets in the future. At March 31, 2010, we have identified approximately $13.2 million in assets classified as special mention. At September 30, 2009, $14.7 million in assets were classified as special mention.

The Bank’s methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but are expected to have occurred. Management conducts regular reviews of the Banks’ assets and evaluates the need to establish allowances on the basis of these reviews. Allowances are established by management and reviewed by the Board of Directors on a quarterly basis based on an assessment of risk in the Bank’s assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Additional provisions for losses on loans are made in order to bring the allowance to a level deemed adequate. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the collateral.

 

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Liquidity and Capital Resources

At March 31, 2010, the Bank exceeded all regulatory minimum capital requirements. For information comparing the Bank’s tangible, core and risk-based capital levels to the regulatory requirements, see Note 8 of the Notes to Consolidated Financial Statements.

The Company’s primary sources of funds are deposits and proceeds from maturing investment securities and mortgage-backed securities and principal and interest payments on loans. While maturities and scheduled amortization of mortgage-backed securities and loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors.

The primary investing activities of the Company are the origination of loans and the purchase of investment securities and mortgage-backed securities. During the six months ended March 31, 2010 and 2009, the Company had $36.6 million and $31.0 million, respectively, of gross loan originations. The Company purchased $10.2 million in mortgage-backed securities during the six months ended March 31, 2009 and $0 during the six months ended March 31, 2010. The primary financing activity of the Company is the attraction of savings deposits.

The Company has other sources of liquidity if there is a need for funds. The Bank has the ability to obtain advances from the FHLB of Atlanta in excess of $140 million as of March 31, 2010. In addition, securities in the available for sale portfolio provide liquidity and the Company has the immediately liquid resources of cash and cash due from banks, interest-bearing deposits in other banks and federal funds sold, if needed.

The Bank is required to maintain adequate levels of liquid assets as defined by OTS regulations. Management seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide for lower rates of return, the Bank’s relatively high liquidity will, to a certain extent, result in lower rates of return on assets.

The Company’s most liquid assets are cash, interest-bearing deposits in other banks and federal funds sold, which are short-term, highly liquid investments with original maturities of less than six months that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Company’s operating, financing and investing activities during any given period. At March 31, 2010, cash, interest-bearing deposits in other banks and federal funds sold were $7.6 million, $3.9 million and $71.1 million, respectively.

We anticipate that we will have sufficient funds available to meet our current commitments. Certificates of deposit which are scheduled to mature in less than one year at March 31, 2010 totaled $171.6 million. Based on past experience, management believes that a significant portion of such deposits will remain with Baltimore County Savings Bank. Baltimore County Savings Bank is a party to financial instruments with off-balance-sheet risk made in the normal course of business to meet the financing needs of its customers. These financial instruments are standby letters of credit, lines of credit and commitments to fund mortgage loans and involve to varying degrees elements of credit risk in excess of the amount recognized in the statement of financial position. The contract amounts of those instruments express the extent of involvement Baltimore County Savings Bank has in this class of financial instruments and represents Baltimore County Savings Bank’s exposure to credit loss from nonperformance by the other party. Baltimore County Savings Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. At March 31, 2010, Baltimore County Savings Bank had commitments under standby letters of credit, lines of credit and commitments to originate loans of $922,000, $35.9 million and $3.2 million, respectively.

The Company has accumulated higher than normal levels of liquidity in anticipation of the pending sale of four branches. The amount of liquidity actually utilized in connection with this transaction will be dependant upon the amount of liquidity available at the time of settlement and the total amount of deposits transferred. In any event, a substantial amount of the liquidity on hand at March 31, 2010 is expected to be deployed in connection with this transaction.

 

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In March 2002, BCSB Bankcorp issued $12,887,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust I, a Delaware business trust, in which BCSB Bancorp now owns all of the common equity. The debentures carry a rate of 3.65% over the six month LIBOR rate, and reset quarterly. The rate was 3.9% at March 31, 2010. The debentures are the sole asset of BCSB Bankcorp Capital Trust I. BCSB Bankcorp Capital Trust I issued $12,500,000 of mandatory redeemable preferred securities to investors. BCSB Bancorp’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by BCSB Bancorp of BCSB Bankcorp Capital Trust I obligations under the preferred securities. The Company used a portion of the net proceeds that it retained from the 2008 completed stock offering to redeem $6.0 million of the $12.5 million in outstanding trust preferred securities issued by a trust wholly owned by the Company.

In September 2003, BCSB Bankcorp issued $10,310,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust II, a Delaware business trust, in which BCSB Bancorp now owns all of the common equity. The debentures carry a rate of 3.00% over the six month LIBOR rate, and reset quarterly. The rate was 3.25% at March 31, 2010. The debentures are the sole asset of BCSB Bankcorp Capital Trust II. BCSB Bankcorp Capital Trust II issued $10,000,000 of mandatory redeemable preferred securities to investors. BCSB Bancorp’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by BCSB Bancorp of BCSB Bankcorp Capital Trust II obligations under the preferred securities.

Pursuant to these trust preferred securities, the Company, must make quarterly interest payments, which totaled $892,000 during the year ended September 30, 2009 and $303,000 during the six months ended March 31, 2010.

The Company has outstanding (i) 10,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase 183,465 shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $10,800,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. The Company must remit dividends quarterly. Payments remitted totaled $270,000 during the six months ended March 31, 2010. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Under the original terms of the Purchase Agreement, the Company is prohibited from redeeming the Series A preferred stock within the first six years unless it completed a qualified equity offering whereby it received aggregate gross proceeds of not less than $2.7 million. However, the provisions introduced by the American Recovery and Reinvestment Act of 2008 indicate that once the Company notifies Treasury that it would like to redeem the Series A preferred stock, the Treasury must permit the Company to do so subject to consultation with the OTS. The Company will be subject to existing supervisory procedures for approving redemption requests for capital instruments. The OTS will weigh the Company’s desire to redeem the Series A preferred stock against the contribution of Treasury capital to the Company’s overall soundness, capital adequacy and ability to lend, including confirming that the Company has a comprehensive internal capital assessment process.

The warrant is exercisable at $8.83 per share at any time on or before March 23, 2018. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

The Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the warrants will be subject to any contractual restrictions on transfer.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 3 is not necessary as the registrant is a smaller reporting company.

 

Item 4. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported,

 

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within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On August 6, 2008 the Bank along with two other banks that were victims of the check kitting scheme were sued by another creditor of the failed check casher Global Express Money Orders, Inc. (Global) in the Circuit Court of Baltimore City (Case Number 24 C 08-004896). On April 3, 2010 a Notice of Dismissal was filed by the Plaintiff dismissing the action with prejudice finally resolving the matter. On May 28, 2010 Brian Satisky, the former owner of the Company that perpetrated the Fraud will be sentenced for his conviction of Bank Fraud in the matter of the United States v. Satisky (Case Number 09-CR-00262). For further discussion of the issues and other matters arising out of the June 2006 check-kiting scheme perpetrated upon the Bank See, “Item 1A. Risk Factors” in the Company’s annual report on form 10-K for the year ended September 30, 2009.

In addition from time to time the Company and/or Bank are a party to various legal proceedings incident to its business. There were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject which were expected by management to result in a material loss to the Company or Bank. There are no pending regulatory proceedings to which the Company, the Bank and their subsidiaries are a part or to which any of their properties are subject which are currently expected to result in a material loss.

 

Item 1A. Risk Factors

For information regarding the Company’s risk factors see “Risk Factors,” in the Company’s Form 10-K for the fiscal year ended September 30, 2009 filed with the Securities and Exchange Commission on December 23, 2009. As of March 31, 2010, the risk factors of the Company have not changed materially from those reported in the Form 10-K

 

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

(a) None

(b) None

(c) None

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Removed and Reserved

 

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Item 5. Other Information

The Company’s Annual Meeting of Stockholders was held on February 17, 2010. There were 3,120,945 shares of common stock outstanding and entitled to vote at the meeting. A total of 2,873,361 shares representing 92.23% of the total outstanding shares of the Company’s common stock represented at the Annual Meeting in person or by proxy.

Stockholders voted in favor of the election of three nominees for director. The voting results for each nominee were as follows:

 

Nominee

   Votes in Favor
of Election
   Votes Withheld

H. Adrian Cox

   2,092,293    124,362

William M. Loughran

   2,182,239    34.416

John J. Panzer, Jr.

   2,180,785    35.870

There were 661,706 broker nonvotes on the matter.

     

In addition, stockholders voted in favor of the ratification of the appointment of Stegman & Company as independent registered public accountants of the Company for the fiscal year ending September 30, 2010. There were 2,866,320 votes cast in favor of the proposal to ratify the appointment of auditors, 6,399 votes were cast against the proposal and 5,642 votes abstained. There were 0 broker nonvotes on the matter.

In addition, stockholders voted in favor of the proposal to approve the compensation of the named executive officers. There were 2,753,948 votes cast in favor of the proposal to approve the compensation of the named executive officers, 105,695 votes were cast against the proposal, and 18,718 votes abstained. There were 0 broker nonvotes on the matter.

 

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Item 6. Exhibits

The following exhibits are filed herewith:

 

Exhibit

Number

 

Title

  2.1

  Purchase and Assumption Agreement dated January 12, 2010, by and between American Bank and Baltimore County Savings Bank, F.S.B. (incorporated by reference from the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2010)

31.1

  Rule 13a-14(a) Certification of Chief Executive Officer

31.2

  Rule 13a-14(a) Certification of Chief Financial Officer

32

  Section 1350 Certifications

 

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SIGNATURES

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

 

    BCSB BANCORP, INC.
Date: May 13, 2010    

/s/ Joseph J. Bouffard

   

Joseph J. Bouffard

President

(Principal Executive Officer)

Date: May 13, 2010    

/s/ Anthony R. Cole

   

Anthony R. Cole

Executive Vice President

(Principal Financial and Accounting Officer)

 

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