- Quarterly Report (10-Q)

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 December 31, 2008

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)

 

 

 

United States		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)

[phone]

(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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		¨   (Do not check if a smaller reporting company)		Smaller Reporting Company		x

As of January 21, 2009 the issuer had 3,121,076 shares of Common Stock issued and outstanding.

 

 

 

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CONTENTS

 

				PAGE
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Statements of Financial Condition as of December 31, 2008 (unaudited) and September 30, 2008		3
		Consolidated Statements of Operations for the Three Months Ended December 31, 2008 and 2007 (unaudited)		4
		Consolidated Statements of Comprehensive Income (Loss) Three Months Ended December 31, 2008 and 2007 (unaudited)		5
		Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2008 and 2007 (unaudited)		6
		Notes to Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		28
Item 4.		Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		29
Item 1A.		Risk Factors		29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3.		Defaults Upon Senior Securities		29
Item 4.		Submission of Matters to a Vote of Security Holders		29
Item 5.		Other Information		29
Item 6.		Exhibits		29
SIGNATURES

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

		December 31, 2008				September 30, 2008
		(unaudited)
		(dollars in thousands)
Assets
Cash and due from banks		$	6,382			$	8,305
Interest-bearing deposits in other banks			6,354				5,741
Federal funds sold			35,970				20,937
Cash and cash equivalents			48,706				34,983
Interest bearing time deposits			100				100
Investment securities, available for sale			991				994
Loans receivable, net			395,792				400,469
Mortgage-backed securities, available for sale			95,946				89,956
Foreclosed real estate and repossessed assets			10				1,244
Premises and equipment, net			9,517				9,762
Federal Home Loan Bank of Atlanta stock, at cost			1,559				1,559
Bank owned life insurance			14,452				14,389
Goodwill and other intangible assets			2,422				2,431
Accrued interest and other assets			12,169				11,195
Total assets		$	581,664			$	567,082
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	28,984			$	25,498
Interest-bearing			458,271				459,293
Total deposits			487,255				484,791
Short Term Advances from the Federal Home Loan Bank of Atlanta			10,000				10,000
Junior Subordinated Debentures			17,011				17,011
Accounts payable trade date securities			2,029				—
Other liabilities			5,967				5,525
Total liabilities			522,262				517,327
Commitments and contingencies
Stockholders’ Equity
Preferred stock (par value $.01 – 5,000,000 authorized, 10,800 and 0 shares issued and outstanding at December 31, 2008 and September 30, 2008, respectively)			—				—
Common stock (par value $.01 – 50,000,000 authorized, 3,121,076 issued and outstanding at December 31, 2008 and September 30, 2008, respectively)			31				31
Additional paid-in capital			50,136				38,839
Obligation under Rabbi Trust			1,090				1,100
Retained earnings (substantially restricted)			14,723				14,484
Accumulated other comprehensive loss (net of taxes)			(3,894	)			(2,467	)
Discount on preferred stock			(481	)			—
Employee Stock Ownership Plan			(1,161	)			(1,181	)
Stock held by Rabbi Trust			(1,042	)			(1,051	)
Total stockholders’ equity			59,402				49,755
Total liabilities and stockholders’ equity		$	581,664			$	567,082

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 OPERATIONS (UNAUDITED)

 

		For the Three Months Ended December 31,
		2008			2007
		(dollars in thousands except per share data)
Interest Income
Interest and fees on loans		$	6,287		$	6,912
Interest on mortgage backed securities			1,288			1,460
Interest and dividends on investment securities			17			81
Other interest income			82			809
Total interest income			7,674			9,262
Interest Expense
Interest on deposits			3,509			4,860
Interest on FHLB borrowings – short term			113			113
Interest on FHLB borrowings – long term			—			116
Other interest expense – debentures			345			511
Total interest expense			3,967			5,600
Net interest income			3,707			3,662
Provision for losses on loans			150			—
Net interest income after provision for losses on loans			3,557			3,662
Other Income
Gain (loss) on sale of repossessed assets			172			(38	)
Mortgage banking operations			13			12
Fees on transaction accounts			293			254
Income from bank owned life insurance			36			135
Miscellaneous income			89			102
Other income, net			603			465
Non-Interest Expenses
Salaries and related expense			1,789			2,202
Occupancy expense			578			561
Data processing expense			413			364
Property and equipment expense			232			287
Professional fees			240			92
Advertising			95			150
Telephone, postage and office supplies			90			119
Other expenses			310			322
Total non-interest expenses			3,747			4,097
Income before tax provision (benefit)			413			30
Income tax provision (benefit)			173			(63	)
Net Income		$	240		$	93
Net Income Per Share of Common Stock:
Basic and diluted income per share of common stock		$	.08		$	.03

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 Three Months Ended December 31,
		2008				2007
		(in thousands)
Net Income		$	240			$	93
Other comprehensive (loss) income, net of tax:
Unrealized net holding (losses) gains on Available-for-sale portfolios, net of tax $(898) and $632			(1,427	)			957
Comprehensive (Loss) Income		$	(1,187	)		$	1,050

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		For the Three Months Ended December 31,
		2008				2007
		(dollars in thousands)
Operating Activities
Net income		$	240			$	93
Adjustments to reconcile net income to
Operating Activities
Amortization of deferred loan fees and cost, net			(74	)			(38	)
Non-cash compensation under stock-based benefit plan			45				45
Provision for losses on loans			150				—
Amortization of purchase premiums and discounts, net			59				49
Provision for depreciation			253				260
(Gains) Loss on sale of repossessed assets			(172	)			38
Increase in cash surrender value of bank owned life insurance			(36	)			(135	)
Increase in accrued interest and other assets			(76	)			(710	)
Increase (decrease) in other liabilities			499				(1,220	)
(Decrease) increase in obligation under Rabbi Trust			(10	)			3
Net cash provided (used) by operating activities			878				(1,615	)
Cash Flows from Investing Activities
Purchase of bank owned life insurance			(27	)			(28	)
Proceeds from maturities of investment securities – available for sale			—				1,000
Net decrease in loans			4,512				4,134
Purchase of mortgage-backed securities – available for sale			(10,162	)			—
Principal collected on mortgage-backed securities			1,827				2,003
Proceeds from sales of foreclosed real estate			1,455				—
Proceeds from sales of repossessed assets			12				50
Increase in accounts payable trade date securities			2,029				—
Investment in premises and equipment			(8	)			(106	)
Net cash (used) provided by investing activities			(362	)			7,053

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

		For the Three Months Ended December 31,
		2008			2007
		(dollars in thousands)
Cash Flows from Financing Activities
Net increase (decrease) in deposits		$	2,324		$	(19,764	)
Net increase in advances by borrowers for taxes and insurance			83			26
Net proceeds from preferred stock offering (Troubled Asset Relief Program “TARP”)			10,800			—
Net cash provided (used) by financing activities			13,207			(19,738	)
Increase (decrease) in cash equivalents			13,723			(14,300	)
Cash and cash equivalents at beginning of period			34,983			76,016
Cash and cash equivalents at end of period		$	48,706		$	61,716
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest		$	3,892		$	5,435
Income taxes		$	20		$	—

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

 

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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 three months ended December 31, 2008 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2009. 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, 2008.
				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, deferred tax assets and intangible assets.
Note 3		—		Organization
				The Company is a Maryland corporation which was recently organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008, discussed further below. 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, 2009. The Bank’s non-interest earning demand deposit accounts currently have unlimited FDIC insurance.
				BCSB Bankcorp, Inc., a federal corporation, was the former mid-tier stock holding company for the Bank. BCSB Bankcorp Inc. was organized in conjunction with the Bank’s reorganization from the mutual savings association to the mutual holding company structure in 1998. Baltimore County Savings Bank, M.H.C., a federal mutual holding company, was the mutual holding company parent of BCSB Bankcorp, Inc. and owned 63.3% of BCSB Bankcorp, Inc.’s outstanding stock. As a result of treasury stock purchases, this stake increased to approximately 64.5% of BCSB Bankcorp’s outstanding stock at the time of the second-step conversion.
				On April 10, 2008, a second-step conversion was completed after which Baltimore County Savings Bank, M.H.C. and BCSB Bankcorp, Inc. ceased to exist and were replaced by BCSB Bancorp, Inc., which was organized as the new stock-form holding company for the Bank and successor to BCSB Bankcorp, Inc. The second-step conversion was accounted for as a change in corporate form with no resulting change in the historical basis of the former BCSB Bankcorp, Inc.’s assets, liabilities and equity. A total of 1,976,538 new shares of the Company were sold at $10 per share in the subscription, community and syndicated community

 

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				offerings through which the Company received proceeds of approximately $17.1 million, net of offering costs of approximately $2.8 million. The Company contributed $8.5 million or approximately 50% of the net proceeds to the Bank in the form of a capital contribution. The Company loaned $1.2 million to the Bank’s Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire 122,197 shares of the Company’s common stock at $10 per share. As part of the conversion, outstanding public shares of BCSB Bankcorp, Inc. were exchanged for .5264 shares of the new holding company of the Bank. No fractional shares were issued. Instead, cash was paid to shareholders at $10 per share for any fractional shares that would otherwise be issued. A total of 3,121,076 shares were outstanding as of the closing of the second-step conversion on April 10, 2008.
Note 4		—		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.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 5		—		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 three month periods ended December 31, 2008 and 2007 are as follows:

 

		For the Three Months Ended December 31,
		2008									2007
		(in thousands except per share data)
		Income				Shares		Per Share			Income			Shares		Per Share
Basic EPS
Net Income		$	240			2,900		$	.08		$	93		3,110		$	.03
Less preferred dividend			(11	)
Income available to common shareholders			229			2,900			.08			93		3,110			.03
Diluted EPS
Effect of dilutive shares			—			9			—			—		—			—
Income available to common shareholders plus assumed conversions		$	229			2,909		$	.08		$	93		3,110		$	.03

Weighted-average shares outstanding for the three month period ended December 31, 2007 have been adjusted by the exchange rate of .5264 as a result of the second-step conversion that occurred on April 10, 2008.

Options to purchase 86,151 and 50,271 shares were outstanding at December 31, 2008 and December 31, 2007, respectively were not included in the computation of diluted EPS because the effect of including such options would have been anti-dilutive.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6		—		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. Prior to February 15, 2012, the Company may redeem shares of Series A preferred stock only if it has received aggregate gross proceeds of not less than $2,700,000 from one or more qualified equity offerings, and the aggregate redemption price may not exceed the net proceeds received by the Company from such offerings. The redemption of the Series A preferred stock requires prior regulatory approval.

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, except that Treasury may not transfer a portion of the warrant with respect to, or exercise the warrant for, more than one-half of the shares of common stock underlying the warrant prior to the earlier of (a) the date on which the Company has received aggregate gross proceeds of not less than $10,800,000 from one or more qualified equity offerings and (b) December 31, 2009.

 

Note 7		—		Regulatory Capital

The following table sets forth the Bank’s capital position at December 31, 2008.

 

		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 capital (1)		$	64,379		11.17	%		$	8,643		1.50	%		$	N/A		N/A	%(3)
Tier I capital (2)			64,379		17.83				N/A		N/A	(3)			21,663		6.00
Core capital (1)			64,379		11.17				23,048		4.00				28,810		5.00
Risk-based capital (2)			66,885		18.52				28,884		8.00				36,105		10.00

 

(1)	To adjust total assets

(2)	To risk-weighted assets

(3)	Not applicable

 

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Note 8		—		Stock Option Plans

The Company has a stock option plan (the “Plan”) whereby 120,366 shares of common stock have been reserved for issuance under the 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 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, and 15.792 options granted during the year ended September 30, 2007 and 22,193 during the year ended September 31, 2008.

At December 31, 2008 there were 12,239 shares under option with an exercise price of $15.19 and a weighted average remaining life of .75 years, 35,927 shares with an exercise price of $21.60 and a weighted average remaining life of 3.5 years, 10,528 shares with an exercise price of $28.44 and a weighted average remaining life of 8.0 years, 5,264 shares with an exercise price of $17.95 and a weighted average life of 9.0 years and 22,193 shares with an exercise price of $11.61 and a weighted average life of 9.25 years. The total exercisable shares of 50,271 have a weighted average remaining life of 3.00 years, and an aggregate intrinsic value of $0.

In connection with the second-step conversion completed in April 10, 2008 all outstanding options and shares were adjusted based upon the .5264 exchange ratio. The number of shares subject to options and the exercises prices set forth in Note 7 were adjusted to reflect the proportional change in values that resulted from the exchange.

The following table presents the activity related to options under all plans for the three months ended December 31, 2008.

 

		Shares		Weighted Average Exercise Price
Outstanding at September 30, 2008		86,151		$	18.99
Options exercised
Granted		—			—
Outstanding at December 31, 2008		86,151		$	18.99
Exercisable at December 31, 2008		50,271		$	20.38

There were no options granted during the three months ended December 31, 2008 and 5,264 were granted during the three months ended December 31, 2007. The fair values of our options granted were calculated using the Black-Scholes option-pricing model with the following weighted average assumptions for the three months ended December 31, 2007.

 

		2007
Dividend Yield		$
Expected volatility			26.65
Risk-free interest rate			4.64
Expected lives			10.00 years

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9		—		Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards SFAS No. 157, “Fair Value Measurements”. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 for financial assets and liabilities and November 15, 2008 for non-financial assets and liabilities,and interim periods within those fiscal years. The adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment to FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS No. 157, “Fair Value Measurements”. The adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments , stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The impact of SAB 109 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141, Revised 2007 (SFAS 141R), “Business Combinations”. SFAS 141R’s objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after December 31, 2008. The adoption of this standard did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” SFAS 160’s objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for deconsolidation of a subsidiary. SFAS 160 shall be effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the implementation of SFAS 160 to have a material impact on our consolidated financial statement.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,an Amendment of FASB Statement No. 133.” This statement changes the disclosure requirements for

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We have not yet determined the effect that the application of SFAS No. 161 will have on the disclosures to our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Company’s financial statements.

On October 10, 2008, the FASB issued Staff Position (“FSP”) No. 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective immediately upon issuance, and includes prior period for which financial statements have not been issued. We applied the guidance contained in FSP 157-3 in determining fair values at September 30, 2008 and subsequent periods, although it did not have a material impact on our financial condition, results of operations, or liquidity.

 

Note 10		—		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 $921,000 of standby letters of credit as of December 31, 2008. 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 December 31, 2008 for guarantees under standby letters of credit issued is not considered to be material.

 

Note 11		—		Fair Value Measurements

Effective October 1, 2008, the Company adopted SFAS No. 157 – “Fair Value Measurements” (“SFAS No. 157”). This statement defined the concept of fair value, established a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. SFAS No. 157 applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Under FASB Staff Position No. 157-2, portions of SFAS No. 157 have been deferred until years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statement on a recurring basis. Therefore, the Company has partially adopted the provisions of SFAS No. 157. Fair value is defined as 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 SFAS No. 157 did not have any effect on the Company’s financial position or results of operations.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11		—		Fair Value Measurements-continued

SFAS No. 157 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 prices 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.

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.

The following table presents the financial instruments measured at fair value on the recurring basis as of December 31, 2008 on the Consolidated Statement of Financial Condition utilizing the SFAS No. 157 hierarchy discussed above.

 

		At December 31, 2008
($ in thousands)		Total			Level 1			Level 2			Level 3
Securities available for sale		$	96,937		$	—		$	96,937		$	—

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.

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 cost to sell. There were $10,000 in repossessed assets which is the fair market value of repossessed automobiles.

Impaired loans are classified as Level 3 within the valuation hierarchy.

 

		At December 31, 2008
($ in thousands)		Total			Level 1			Level 2			Level 3
Impaired Loans		$	1,264		$	—		$	—		$	1,264

 

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($ in thousands)		Impaired Loans
Balance at September 30, 2008		$	835
Total net gains for the year			—
Net transfers in/(out) Level 3			429
Balance at December 31, 2008		$	1,264
Net realized gains included in net income for the year to date relating to sales of repossessed assets.		$	172

 

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Item 2.

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

General

BCSB Bancorp, Inc. BCSB Bancorp (“BCSB Bancorp” or the “Company”), a Maryland corporation, is the holding company for Baltimore County Savings Bank, F.S.B. (the “Bank”). The Company’s primary asset is its investment in the Bank. The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of the Bank. The Company’s most significant asset is its investment in the Bank. Accordingly, the information set forth in this Quarterly Report on Form 10-Q, including financial statements and related data, relates primarily to the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Currently, the Company does not maintain offices separate from those of the Bank or employ any persons other than officers of the Bank who are not separately compensated for such service. At December 31, 2008, the Company had total assets of $581.7 million, total deposits of $487.3 million and stockholders’ equity of $59.4 million.

The Company’s and the Bank’s executive offices are located at 4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236, and its main telephone number is [phone].

Baltimore County Savings Bank, F.S.B. The Bank is a community-oriented financial institution dedicated to serving the financial service needs of consumers and businesses within its market area, which consists of the Baltimore Metropolitan Area. The Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”), its deposit insurer. The Bank attracts deposits from the general public and invests these funds in loans secured by first mortgages on owner-occupied, single-family residences in its market area and other real estate loans consisting of commercial real estate loans, construction loans and single-family rental property loans. The Bank also originates consumer loans and commercial loans. The Bank derives its income primarily from interest earned on these loans, and to a lesser extent, interest earned on investment securities and mortgage-backed securities. The Bank operates out of its main office in Baltimore County, Maryland and 18 branch offices in Baltimore County, Harford County, Howard County and Baltimore City in Maryland.

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.

Completed Reorganization

On April 10, 2008, a second-step conversion was completed after which Baltimore County Savings Bank, M.H.C. and BCSB Bankcorp, Inc. ceased to exist, a newly organized Maryland corporation, BCSB Bancorp, Inc., became the holding company for the Bank. As part of the conversion a total of 1,976,538 shares the Company’s common stock were sold at $10.00 per share in an initial public offering and the Company received net proceeds of approximately $17.1 million. The Company contributed $8.5 million or approximately 50% of the net proceeds to the Bank. The Company also loaned $1.2 million to the Bank’s Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire 122,197 shares of the Company’s common stock. As part of the conversion, each outstanding public share of BCSB Bankcorp, Inc. was exchanged for 0.5264 shares of the Company’s common stock. Information herein for dates and periods prior to April 10, 2008 reflects such information for BCSB Bankcorp, Inc.

 

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Critical Accounting Policies

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. 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. Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Management 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 management’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.

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, 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. 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.

 

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Comparison of Financial Condition at December 31, 2008 and September 30, 2008

During the three months ended December 31, 2008, assets increased by $14.6 million, or 2.6% from $567.1 million at September 30, 2008 to $581.7 million at December 31, 2008. Our cash and cash equivalents increased $13.7 million, or 39.2% from $35.0 million at September 30, 2008 to $48.7 million at December 31, 2008 primarily due to proceeds received from participation in TARP previously discussed. Net loans receivable decreased $4.7 million, or 1.2%, from $400.5 million at September 30, 2008 to $395.8 million at December 31, 2008. Management’s lending strategy remains focused on commercial real estate, commercial business and home equity lending. We have ceased our indirect auto lending program. The indirect loan portfolio, which was $7.6 million at December 31, 2008, is expected to decline over time as the loans are paid down. Mortgage-backed securities available for sale increased by $6.0 million, or 6.7%, from $89.9 million at September 30, 2008 to $95.9 million at December 31, 2008 resulting from securities purchased during the period. At December 31, 2008, all mortgage-backed securities were classified as available for sale for liquidity purposes. Net premises and equipment decreased $245,000, or 2.5%, from $9.8 million at September 30, 2008 to $9.5 million at December 31, 2008. The cash surrender value on the Bank Owned Life Insurance increased $63,000, or .44% from $14.4 million at September 30, 2008 to $14.5 million at December 31, 2008.

Deposits increased by $2.5 million, or .51 %, from $484.8 million at September 30, 2008 to $487.3 million at December 31, 2008. The Bank’s current strategy remains focused on increasing core deposits such as checking and savings accounts. Federal Home Loan Bank of Atlanta short-term advances remained stable at $10.0 million as of December 31, 2008 and September 30, 2008. Advances may be used to fund loan demand when other available liquidity sources do not meet this demand.

Stockholders’ equity increased by $9.6 million, or 19.4%, from $49.8 million at September 30, 2008 to $59.4 million at December 31, 2008. 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 Company contributed $5.5 million or approximately 51% of the net proceeds to the Bank in the form of a capital contribution. This was partially offset by an increase in the accumulated other comprehensive loss of $1.4 million from $(2.5) million at September 30, 2008 to $(3.9) million at December 31, 2008.

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. Prior to February 15, 2012, the Company may redeem shares of Series A preferred stock only if it has received aggregate gross proceeds of not less than $2,700,000 from one or more qualified equity offerings, and the aggregate redemption price may not exceed the net proceeds received by the Company from such offerings. The redemption of the Series A preferred stock requires prior regulatory approval.

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 warrants will be subject to any contractual restrictions on transfer, except that Treasury may not transfer a portion of the warrant with respect to, or exercise the warrant for, more than one-half of the shares of common stock underlying the warrant prior to the earlier of (a) the date on which the Company has received aggregate gross proceeds of not less than $10,800,000 from one or more qualified equity offerings and (b) December 31, 2009.

Our accumulated other comprehensive loss net of taxes was $3.9 million at December 31, 2008, compared to accumulated other comprehensive loss net of taxes of $2.5 million at September 30, 2008. At December 31, 2008, $7.8 million of the investment portfolio’s gross unrealized losses related to three collateralized mortgage obligations with an amortized cost of $20.1 million as of that date. Gross unrealized losses for these same securities were approximately $3.7 million as of September 30, 2008. We have the ability and intent to hold these securities to maturity, and, to date,

 

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the securities have performed in accordance with their terms. If in the future we determine that the decline in market values with respect to these or any other securities are other than temporary, we would be required to recognize losses in our Consolidated Statement of Operations with respect to such securities.

Comparison of Operating Results for the Three Months Ended December 31, 2008 and 2007

Net Income . Net income increased by $147,000 from $93,000 for the three months ended December 31, 2007 to $240,000 for the three months ended December 31, 2008. The improvement was primarily due to gain on sale of repossessed assets and reduced non-interest expenses.

Net Interest Income . Net interest income increased by $45,000, or 1.2%, from $3.66 million for the three months ended December 31, 2007 to $3.71 million for the three months ended December 31, 2008. The increase in net interest income primarily was due to a improved net interest margin resulting from reduced cost of funds on the deposit portfolio during the period. The net interest margin increased 34 basis points from 2.46% for the three months ended December 31, 2007 to 2.80% for the three months ended December 31, 2008.

Interest Income . Interest income decreased by $1.6 million, or 17.1% from $9.3 million for the three months ended December 31, 2007 to $7.7 million for the three months ended December 31, 2008. Interest and fees on loans decreased by $625,000, or 9.0%, from $6.9 million for the three months ended December 31, 2007 to $6.3 million for the three months ended December 31, 2008. This was primarily due to a decrease in the average balance of loans receivable of $21.2 million from $419.2 million for the three months ended December 31, 2007 to $398.0 for the three months ended December 31, 2008. The average rate earned on loans also declined by 27 basis points from 6.59% for the three months ended December 31, 2007 to 6.32% for the three months ended December 31, 2008. Also contributing to the decrease in interest income was a decrease in interest on mortgage-backed securities of $172,000, from $1.5 million for the three months ended December 31, 2007 to $1.3 million for the three months ended December 31, 2008. This decrease was primarily due to a decrease in the average balance of mortgage-backed securities from $105.7 million for the three months ended December 31, 2007 to $90.4 million for the three months ended December 31, 2008. Interest and dividends on investment securities decreased by $64,000, or 79.0% from $81,000 for the three months ended December 31, 2007 to $17,000 for the three months ended December 31, 2008. This was primarily due to a decrease in the average balance from $5.6 million for the three months ended December 31, 2007 to $2.5 million for the three months ended December 31, 2008 as these securities either matured or were sold. Other interest income, which primarily consists of the investment in overnight federal fund decreased by $727,000, or 89.9% from $809,000 for the three months ended December 31, 2007 to $82,000 for the three months ended December 31, 2008. This was due to the decrease in the average balance by $25.4 million, from $64.3 million at December 31, 2007 to $38.9 at December 31, 2008. The decrease in the average yield earned on other investments of 419 basis points, from 5.03% for the three months ended December 31, 2007 to .84% for the three months ended December 31, 2008 was due to drastic declines in interest rates over the period.

Interest Expense . Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased from $5.6 million for the three months ended December 31, 2007 to $4.0 million for the three months ended December 31, 2008, a decrease of $1.6 million or 29.2%. Interest on deposits decreased $1.4 million from $4.9 million for the three months ended December 31, 2007 to $3.5 million for the three months ended December 31, 2008 due to a decrease in the average balance of deposits of $67.5 million from $552.1 million for the three months ended December 31, 2007 to $484.6 million for the three months ended December 31, 2008. The Bank’s current strategy is to focus on increasing core deposits such as checking and savings accounts. The average cost of deposits decreased 62 basis points from 3.52% at December 31, 2007 to 2.90% at December 31, 2008. Interest on short-term borrowings remained stable at $113,000 for the three months ended December 31, 2008 and 2007. Interest on long-term borrowings decreased by $116,000 for the three months ended December 31, 2008. There were no long term borrowings for the three months ended December 31, 2008. Also contributing to reduced interest expense was interest on the Trust Preferred Securities/Junior Subordinated Debentures, which decreased by $166,000 from $511,000 for the three months ended December 31, 2007 to $345,000 for the three months ended December 31, 2008 due to the payoff of approximately $6.2 million of this debt during the Summer of 2008. 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 December 31, 2008 and 2007. 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 December 31,
		2008									2007
		Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net		$	397,999		$	6,287		6.32	%		$	419,242		$	6,912		6.59	%
Mortgage-backed securities			90,393			1,288		5.70				105,659			1,460		5.53
Investment securities			2,539			17		2.68				5,601			81		5.78
Other interest earning assets			38,951			82		.84				64,336			809		5.03
Total Interest-earning assets			529,882			7,674		5.79				594,838			9,262		6.23
Bank Owned Life Insurance			14,382									13,406
Noninterest-earning assets			30,253									24,786
Total assets		$	574,517								$	633,030
Interest-bearing liabilities:
Deposits		$	484,599		$	3,509		2.90			$	552,153		$	4,860		3.52	%
Short-term FHLB Advances			10,000			113		4.52				10,000			113		4.52
Long-term FHLB Advances			—			—		—				10,000			116		4.64
Junior Subordinated Debentures			17,011			345		8.11				23,197			511		8.81
Other liabilities			2,087			—		.00				1,038			—		.00
Total interest-bearing liabilities			513,697			3,967		3.09				596,388			5,600		3.76
Noninterest-bearing liabilities			7,559									1,296
Total liabilities			521,259									597,684
Stockholders’ Equity			53,261									35,346
Total liabilities and stockholders’ equity		$	574,517								$	633,030
Net interest income					$	3,707								$	3,662
Interest rate spread								2.70	%								2.47	%
Net interest margin								2.80	%								2.46	%
Ratio average interest earning assets/interest-bearing liabilities								103.15	%								99.74	%

 

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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 December 31,
		2008 Vs. 2007
		Increase (Decrease) Due to
		Volume				Rate				Rate/Volume				Total
		(In Thousands)
Interest income:
Loans receivable, net		$	(347	)		$	(293	)		$	15			$	(625	)
Mortgage-backed securities			(208	)			42				(6	)			(172	)
Investment securities			(44	)			(44	)			24				(64	)
Other interest-earning assets			(320	)			(674	)			267				(727	)
Total interest-earning assets			(919	)			(969	)			300				(1,588	)
Interest expense:
Deposits			(595	)			(861	)			105				(1,351	)
Long-term FHLB advances			(116	)			—				—				(116	)
Junior Subordinated Debentures			(136	)			(41	)			11				(166	)
Total interest-bearing liabilities			(847	)			(902	)			116				(1,633	)
Change in net interest income		$	(72	)		$	(67	)		$	184			$	45

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 $150,000 provision for losses on loans during the three months ended December 31, 2008 as compared to no provision for the three months ended December 31, 2007. Loan charge-offs for the three months ended December 31, 2008 were $81,000 as compared to $109,000 for the three months ended December 31, 2007, a decrease of $28,000. Loan recoveries were $90,000 for the three months ended December 31, 2008 compared to $91,000 for the three months ended December 31, 2007. Nonperforming loans at December 31, 2008 were $1.3 million as compared to $835,000 at September 30, 2008. 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 $138,000, from $465,000 for the three months ended December 31, 2007 to $603,000 for the three months ended December 31, 2008. The increase in other income for the three months ended December 31, 2008 was primarily attributable to gains of $172,000 from the sale of foreclosed real estate and repossessed assets. Fees on transaction accounts increased $39,000, or 15.4%, from $254,000 for the three months ended December 31, 2007 to $293,000 for the three months ended December 31, 2008. Income from Bank Owned Life Insurance (BOLI) decreased $99,000 for the three months ended December 31, 2008 from $135,000 for the three months ended December 31, 2007, to $36,000 for the three months ended December 31, 2008. This decrease was due to an adjustment in the rate of dividends earned on the BOLI investment.

Non-interest Expenses. Total non-interest expenses decreased by $350,000, or 8.5%, from $4.1 million for the three months ended December 31, 2007 to $3.7 million for the three months ended December 31, 2008. This was primarily due to the decrease in salaries and related expenses by $413,000, or 18.8%, from $2.2 million for the three months ended December 31, 2007 to $1.8 million for the three months ended December 31, 2008. The decrease in salaries was primarily related to initiatives to improve efficiency, which resulted in staff reductions during the later part of fiscal year ended September 30, 2008. Data processing fees increased $49,000, or 13.5%, from $364,000 for the three months ended December 31, 2007 to $413,000 for the three months ended December 31, 2008. This increase was due to the increase in the data processor’s contract fees. Professional fees increased $148,000, or 160.9% from $92,000 for the three months ended December 31, 2007 to $240,000 for the three months ended December 31, 2008. The increase in professional fees was primarily due to increased legal and consulting fees. These increases were partially offset by a decrease in advertising expense of $55,000, or 36.7%, from $150,000 for the three months ended December 31, 2007 to $95,000 for the three months ended December 31, 2008. This decrease was due to decreased advertising during the period. Telephone postage and office supplies also decreased by $29,000, or 24.4% from $119,000 for the three months ended December 31, 2007 to $90,000 for the three months ended December 31, 2008.

 

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Income Taxes . Our income tax (benefit) expense was $(63,000) and $173,000 for the three months ended December 31, 2007 and 2008, respectively. The change in income taxes for the three months ended December 31, 2008 as compared to the same period in the prior year was primarily due to improved 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.

 

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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:

 

		December 31, 2008			December 31, 2007
		(In thousands)
Commitments to originate new loans		$	6,197		$	8,887
Unfunded commitments to extend credit under existing equity line and commercial lines of credit			30,044			29,064
Commercial letters of credit			921			769

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.

 

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Asset Quality

At December 31, 2008, we had $1.3 million in non-performing assets, consisting of nonaccrual loans and repossessed assets representing .22% of total assets. At September 30, 2008, non-performing assets were $2.1 million or .37% of assets. Our net recoveries (charge-offs) for the three months ended December 31, 2008 and December 31, 2007 were $9,000 and $(18,000), respectively. Our allowance for loan losses was $2.8 million at December 31, 2008 compared to $2.7 million at September 30, 2008.

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

 

		At December 31, 2008				At September 30, 2008
		(In thousands)
Nonperforming loans:
Nonaccrual loans:
Single family residential		$	65			$	291
Multi-family residential			—				—
Commercial real estate			1,026				369
Construction			—				—
Commercial leases			44				173
Land			129				—
Consumer Loans			—				2
Total nonaccrual loans			1,264				835
Loans 90 days past due and accruing			—				—
Restructured loans			—				—
Total non-performing loans			1,264				835
Other non-performing assets			10				1,244
Total nonperforming assets		$	1,274			$	2,079
Nonperforming loans to loans receivable			.32	%			.21	%
Nonperforming assets as a percentage of loans and foreclosed real estate			.32	%			.52	%
Nonperforming assets to total assets			.22	%			.37	%

 

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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 Three months Ended December 31
		2008				2007
		(Dollars in thousands)
Balance at beginning of period		$	2,672			$	2,650
Loans charged-off:
Real estate mortgages:
Single-family residential			—				(35	)
Multi-family residential			—				—
Commercial			—				—
Construction			—				—
Commercial Leases			(27	)			—
Consumer			(54	)			(74	)
Total charge-offs			(81	)			(109	)
Recoveries:
Real estate mortgage:
Single-family residential			—				—
Multi-family residential			—				—
Commercial			31				—
Construction			—				—
Commercial loans secured			—				—
Consumer			59				91
Total recoveries			90				91
Net loans recovered (charged-off)			9				(18	)
Provision for loan losses			150				—
Balance at end of period		$	2,831			$	2,632
Ratio of net recoveries (charge-offs) to average loans outstanding during the period			.01	%			(.01	)%

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 December 31, 2008, the Company had $1.3 million in classified assets, consisting of $1.3 million in substandard and loss loans, and $10,000 in repossessed assets. At September 30, 2008, the Company had $2.2 million in substandard and loss loans, consisting of $2.2 million in loans and $14,000 in repossessed assets. The Company also had real estate owned valued at $1.2 million.

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 December 31, 2008, we have identified approximately $11.3 million in assets classified as special mention. At September 30, 2008, $10.5 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 monthly 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.

Asset quality concerns have increased recently as a result of declining conditions in housing and credit markets. The Bank has no direct sub-prime or Alt-A loss exposure in its loan portfolio. Although “Special mention” assets

 

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increased from September 30, 2008 to December 31, 2008, substandard and loss loans, which exhibit the greatest risk exposure, decreased during the same period from $2.2 million at September 30, 2008 to $1.3 million at December 31, 2008. Loan loss allowances as a percentage of gross loans outstanding have increased slightly between September 30, 2008 and December 31, 2008. For the three months ended December 31, 2008, recoveries have exceeded charge-offs.

Liquidity and Capital Resources

At December 31, 2008, 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 6 of 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 three months ended December 31, 2008 and 2007, the Company had $13.4 million and $16.9 million, respectively, of gross loan originations. During the three months ended December 31, 2008 and 2007, the Company did not purchase any investment securities. During the three months ended December 31, 2008 and 2007 the Company purchased mortgage-backed securities in the amounts of $10.2 and $0, respectively. 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 additional advances from the FHLB of Atlanta in the amount of $115.3 million as of December 31, 2008. 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, federal funds sold and securities purchased under resale agreements if needed.

The Bank is required to maintain adequate levels of liquid assets as defined by OTS regulations. The Bank’s average daily liquidity ratio for the month of December was approximately 28.2%. 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 three 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 December 31, 2008, cash, interest-bearing deposits in other banks and federal funds sold were $6.4 million, $6.4 million and $36.0 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 December 31, 2008 totaled $222.6 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 December 31, 2008, Baltimore County Savings Bank had commitments under standby letters of credit, lines of credit and commitments to originate loans of $921,000, $30.0 million and $6.2 million, respectively.

In June 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 three month LIBOR rate, and reset quarterly. The rate was 8.47% at December 31, 2008. 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

 

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Bankcorp Capital Trust I obligations under the preferred securities. The Company used a portion of the net proceeds that it retained from the recently 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, while retaining sufficient liquidity to cover at least two years of projected operating expenses.

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 three month LIBOR rate, and reset quarterly. The rate was 7.82% at December 31, 2008. 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 $1.6 million during the year ended September 30, 2008 and $345,000 during the three months ended December 31, 2008.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities.

The Company considers interest rate risk to be its most significant market risk, which could potentially have the greatest impact on operating earnings. The structure of the Company’s loan and deposit portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income. However, the Company does not believe that any material changes in interest rate risk exposures occurred since September 30, 2008.

 

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, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) 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.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

None.

 

Item 1A.

Risk Factors

None.

 

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.

Submission of Matters to a Vote of Security-Holders

None.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

The following exhibits are filed herewith:

 

Exhibit Number		Title
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: February 6, 2009		/s/ Joseph J. Bouffard
		Joseph J. Bouffard
		President
		(Principal Executive Officer)
Date: February 6, 2009		/s/ Anthony R. Cole
		Anthony R. Cole
		Executive Vice President
		(Principal Financial and Accounting Officer)