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, 2012

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)

[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 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   x     No   ¨

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

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-Accelerated Filer		¨   (Do not check if a smaller reporting company)		Smaller Reporting Company		x

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

As of January 31, 2013 the issuer had 3,184,403 shares of Common Stock issued and outstanding.

 

 

 

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Table of Contents

CONTENTS

 

				PAGE
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Statements of Financial Condition as of December 31, 2012 (unaudited) and September 30, 2012			3
		Consolidated Statements of Operations for the Three Months Ended December 31, 2012 and 2011 (unaudited)			4
		Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 and 2011 (unaudited)			5
		Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 and 2011 (unaudited)			6
		Notes to Consolidated Financial Statements (unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			52
Item 4.		Controls and Procedures			52
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			53
Item 1A.		Risk Factors			53
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3.		Defaults Upon Senior Securities			53
Item 4.		Mine Safety Disclosures			53
Item 5.		Other Information			53
Item 6.		Exhibits			54
SIGNATURES					55

 

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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,				September 30,
		2012				2012
		(unaudited)
		(dollars in thousands except per share data)
Assets
Cash		$	9,180			$	8,389
Interest bearing deposits in other banks			11,513				11,501
Federal funds sold			38,677				31,034
Cash and cash equivalents			59,370				50,924
Investment securities, available for sale			4,801				4,628
Loans available for sale			612				806
Loans receivable, net of allowances of $5,488 and $5,470			328,686				334,810
Mortgage backed securities, available for sale			209,018				213,563
Foreclosed real estate			3,370				1,674
Premises and equipment, net			9,975				10,080
Premises and equipment, net, held for sale			208				208
Federal Home Loan Bank of Atlanta stock, at cost			959				959
Federal Reserve Bank stock, at cost			1,381				1,381
Bank owned life insurance			17,007				16,869
Accrued interest and other assets			8,626				9,197
Total assets		$	644,013			$	645,099
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	36,211			$	35,264
Interest-bearing			527,781				531,092
Total deposits			563,992				566,356
Junior subordinated debentures			17,011				17,011
Other liabilities			7,395				6,593
Total liabilities			588,398				589,960
Stockholders’ Equity
Common stock (par value $.01 – 50,000,000 authorized, 3,184,403 and 3,188,665 shares issued and outstanding at December 31, 2012 and September 30, 2012, respectively)			32				32
Stock warrants			481				481
Additional paid-in capital			39,934				39,880
Obligation under rabbi trust			1,022				1,013
Retained earnings			14,680				14,041
Accumulated other comprehensive income, net of related deferred tax effect			1,276				1,511
Employee stock ownership plan			(835	)			(855	)
Stock held by rabbi trust			(975	)			(964	)
Total stockholders’ equity			55,615				55,139
Total liabilities and stockholders’ equity		$	644,013			$	645,099

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,
		2012				2011
		(dollars in thousands except per share data)
Interest Income
Interest and fees on loans		$	5,322			$	5,515
Interest on mortgage-backed securities			1,179				1,058
Interest and dividends on investment securities			72				93
Other interest income			25				35
Total interest income			6,598				6,701
Interest Expense
Interest on deposits			1,327				1,774
Other interest expense			157				157
Total interest expense			1,484				1,931
Net interest income			5,114				4,770
Provision for losses on loans			500				300
Net interest income after provision for losses on loans			4,614				4,470
Other Income
Gain on sale of repossessed assets			—				57
Mortgage banking operations			41				41
Fees on transaction accounts			162				162
Income from bank owned life insurance			138				105
Miscellaneous income			324				179
Total other income			665				544
Non-Interest Expenses
Salaries and related expense			2,564				2,538
Occupancy expense			607				568
Data processing expense			357				367
Federal deposit insurance premiums			146				215
Property and equipment expense			135				128
Professional fees			111				155
Advertising			68				58
Telephone, postage and office supplies			73				75
Foreclosure and impaired loan expenses			101				91
Other expenses			105				120
Total non-interest expenses			4,267				4,315
Income before tax expense			1,012				699
Income tax expense			373				237
Net income		$	639			$	462
Per Share Data:
Basic earnings per share		$	0.21			$	0.15
Diluted earnings per share		$	0.20			$	0.15
Dividends per 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

(UNAUDITED)

 

		For the Three Months  Ended December 31,
		2012				2011
		(in thousands)
Net income		$	639			$	462
Other comprehensive loss net of tax:
Unrealized net holding (losses) on Available-for-sale portfolios, net of tax of $(152) and $(233), respectively			(235	)			(357	)
Comprehensive income		$	404			$	105

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 CASH FLOWS (UNAUDITED)

 

		For the Three Months Ended December 31,
		2012				2011
		(dollars in thousands)
Operating Activities
Net income		$	639			$	462
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred loan fees, net			(70	)			(76	)
Non-cash compensation under stock-based benefit plan			129				90
Provision for losses on loans			500				300
Amortization of purchase premiums and discounts, net			169				234
Provision for depreciation			214				162
Gain on sale of real estate and repossessed assets			—				(57	)
Increase in cash surrender value of bank owned life insurance			(138	)			(105	)
Decrease in accrued interest and other assets			721				133
Gain on sale of loans			(43	)			(49	)
Loans originated for sale			(2,992	)			(4,563	)
Proceeds from loans sold			3,229				3,898
Increase (decrease) in other liabilities			391				(87	)
Increase in obligation under Rabbi Trust			9				13
Net cash provided by operating activities			2,758				355
Cash Flows from Investing Activities
Proceeds from maturities of investment securities – available for sale			—				2,000
Net decrease in loans			3,997				9,992
Proceeds from sale of foreclosed real estate			—				1,781
Purchase of mortgage-backed securities – available for sale			(9,046	)			(25,870	)
Principal collected on mortgage-backed securities			12,865				9,128
Investment in premises and equipment			(109	)			(566	)
Redemption of Federal Home Loan Bank of Atlanta stock			—				73
Purchase of Federal Reserve Bank stock			—				(1,325	)
Increase in accounts payable trade date securities			—				7,966
Net cash provided by investing activities			7,707				3,179

 

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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,
		2012				2011
		(dollars in thousands)
Cash Flows from Financing Activities
Net (decrease) increase in deposits		$	(2,365	)		$	10,432
Net increase in advances by borrowers for taxes and insurance			409				262
Repurchase of common stock			(63	)			—
Net cash (used) provided by financing activities			(2,019	)			10,694
Increase in cash and cash equivalents			8,446				14,228
Cash and cash equivalents at beginning of period			50,924				60,108
Cash and cash equivalents at end of period		$	59,370			$	74,336
Supplemental Disclosure of Cash Flows Information:
Cash paid during the period for:
Interest		$	1,377			$	1,889
Income taxes		$	187			$	2
Supplemental Disclosure of Non-cash investing activity:
Transfer from loans to Foreclosed real estate		$	1,697			$	—
Transfer from Foreclosed real estate to loans		$	—			$	—

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Principles of Consolidation

BCSB Bancorp, Inc. (the “Company”) owns 100% of Baltimore County Savings Bank, and its subsidiaries (the “Bank”). The Bank owns 100% of Ebenezer Road, Inc. and Lyons Properties, LLC. The accompanying consolidated financial statements include the accounts and transactions of these companies on a consolidated basis since the date of inception. All intercompany transactions have been eliminated in the consolidated financial statements. Ebenezer Road, Inc. sells insurance products and Lyons Properties, LLC holds real estate owned through foreclosure or deeds in lieu of foreclosure.

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 adjustments) 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, 2012 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2013 or any other period. 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, 2012.

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 state chartered commercial bank. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the Federal Deposit Insurance Corporation (“FDIC”).

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 - Investment Securities

The amortized cost and estimated fair values of investment securities are as follows as of December 31, 2012 and September 30, 2012.

 

(in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Available for sale:
December 31, 2012
Corporate Bonds		$	4,880				—				(179	)		$	4,701
Equity Investments			100				—				—				100
		$	4,980			$	—			$	(179	)		$	4,801
September 30, 2012
Corporate Bonds			4,880				—				(352	)			4,528
Equity Investments			100				—				—				100
		$	4,980			$	—			$	(352	)		$	4,628

There were no sales of available for sale securities during the three months ended December 31, 2012. During the year ended September 30, 2012 there was one sale of an available for sale mortgage-backed security. The security was sold for $1.2 million with a loss of $6,000.

The equity investments consist of an investment in one local bank, whose stock is not listed or widely traded. Therefore, the investment is carried at cost.

Below is a schedule of investment securities with unrealized losses as of December 31, 2012 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
Corporate Bonds		$	0			$	0			$	4,701			$	(179	)		$	4,701			$	(179	)
Total temporarily impaired securities		$	0			$	0				4,701			$	(179	)		$	4,701			$	(179	)

Below is a schedule of investment securities with unrealized losses as of September 30, 2012 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
Corporate Bonds		$	—			$	—			$	4,528			$	(352	)		$	4,528			$	(352	)
Total temporarily impaired securities		$	—			$	—			$	4,528			$	(352	)		$	4,528			$	(352	)

At December 31, 2012 and September 30, 2012 the Company had two investment securities in an unrealized loss position.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Mortgage-Backed Securities- available for sale

The amortized cost and estimated fair values of mortgage-backed securities available for sale are as follows as of December 31, 2012 and September 30, 2012:

 

(in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Available for sale:
December 31, 2012
GNMA certificates		$	3,392			$	77			$	—			$	3,469
Private label collateralized mortgage obligations			10,615				6				(2,162	)			8,459
Collateralized mortgage obligations			177,154				3,281				(20	)			180,415
FNMA certificates			10,926				736				—				11,662
FHLMC participating certificates			4,644				369				—				5,013
		$	206,731			$	4,469			$	(2,182	)		$	209,018
September 30, 2012
GNMA certificates		$	3,416			$	1			$	—			$	3,417
Private label collateralized mortgage obligations			11,259				10				(2,235	)			9,034
Collateralized mortgage obligations			178,948				3,781				—				182,729
FNMA certificates			11,690				840				—				12,530
FHLMC participating certificates			5,403				450				—				5,853
		$	210,716			$	5,082			$	(2,235	)		$	213,563

During the three months ended December 31, 2012, and the fiscal year ended September 30, 2012 there were no sales of available for sale mortgage-backed securities.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Mortgage-Backed Securities available for sale - continued

 

Below is a schedule of mortgage-backed securities with unrealized losses as of December 31, 2012 and September 30, 2012 and the length of time the individual security has been in a continuous unrealized loss position.

 

		December 31, 2012
		Less than 12 months								12 months or more								Total
(in thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Private label collateralized mortgage obligations		$	—			$	—			$	7,240			$	(2,162	)			7,240			$	(2,162	)
Collateralized mortgage obligations			4,002				(20	)			—				—				4,002				(20	)
Total temporarily impaired securities		$	4,002			$	(20	)		$	7,240			$	(2,162	)		$	11,242			$	(2,182	)

 

		September 30, 2012
		Less than 12 months								12 months or more								Total
(in thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Private label collateralized mortgage obligations		$	—			$	—			$	7,673			$	(2,235	)		$	7,673			$	(2,235	)
Collateralized mortgage obligations			—				—				—				—				—				—
Total temporarily impaired securities		$	—			$	—			$	7,673			$	(2,235	)		$	7,673			$	(2,235	)

At December 31, 2012 and September 30, 2012 the Company had four and two mortgage-backed securities in unrealized loss positions, respectively.

During the three months ended December 31, 2012, we determined that, based on our most recent estimate of cash flows, there was no additional other-than-temporary-impairment (“OTTI”). At December 31, 2012, we had $2.2 million of gross unrealized losses related to private label collateralized mortgage obligations with an amortized cost of $10.6 million as of that date. These securities contain mortgages with Alt-A characteristics. Gross unrealized losses for these same securities were approximately $2.2 million as of September 30, 2012. We recorded other-than-temporary impairment (“OTTI”) charges of $370,000 on these securities during the year ended September 30, 2012 and $0 for the three months ended December 31, 2012.

The Company has one private label security for approximately $3.5 million that is not receiving full contractual payments. We are recognizing interest income on a cash basis on this security. Any shortages above interest due are applied against the corresponding “OTTI” reserve.

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. Under guidance for recognition and presentation of other-than-temporary-impairments, the amount of other-than-temporary-impairment that is recognized through earnings is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The discount rate used to determine the credit loss is the expected book yield on the security.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Mortgage-Backed Securities - continued

 

The following shows the activity in “OTTI” related to credit losses for the three months ended December 31,

 

		2012				2011
Balance at Beginning of Period		$	733			$	400
Additional OTTI taken for credit losses			—				—
Charge-offs due to payment shortages			(52	)			—
Balance at end of Period		$	681			$	400

The Company engages the service of independent third party valuation professionals to analyze the OTTI status of the non-agency mortgage-backed securities. The OTTI methodology is formulated within “FASB ASC.” The valuation is meant to be “Level Three” pursuant to FASB ASC – Topic 820 – Fair Value Measurements and Disclosures . As part of the valuation process and OTTI determination, assumptions related to prepayment, default and loss severity on the collateral supporting the non-agency mortgage-backed securities are input into an industry standard valuation model.

Prepayment Assumptions

Estimates of prepayment speeds begins with the prepayment rates provided by the Securities Industry & Financial Markets Association (SIFMA) as of the valuation date to approximate a measure of the borrowers’ incentive to prepay based on market interest rates. In order to incorporate the borrowers’ ability to prepay, we then make adjustments to the base rate to reflect the borrowers’ ability to qualify for a new loan based on their credit. We also make adjustments based on the location of the property to capture the appreciation or depreciation by MSA and thus reflect the likelihood the property will appraise at an amount sufficient to repay the existing loan. These adjustments factor prepay speeds down as credit quality and home prices deteriorate, reflecting the diminished ability to refinance.

In addition, assumptions are based on evaluation of the conditional prepayment rates (CPR) and conditional repayment rates (CRR) over a 1 month, 3 month, 6 month, 1 year and lifetime basis- to the extent these values are provided by the servicer, and forecasts from other industry experts.

Default Rates

Estimates for the conditional default rate (“CDR”) vectors are based on the status of the loans at the valuation date – current, 30- 59 days delinquent, 60-89 days delinquent, 90+ days delinquent, foreclosure or REO – and proprietary loss migration models ( e.g . percentage of 30 day delinquents that will ultimately migrate to default, percentage of 60 day delinquents that will ultimately migrate to default, etc.). The model assumes that the 60 day plus population will move to repossession inventory subject to our loss migration assumptions and liquidate over the next 24 months. Defaults vector from month 25 to month 36 to our month 37 CDR value and ultimately vector to zero over an extended period of time of at least 15 years. Default assumptions are benchmarked to the recent results experienced by major servicers of non-Agency MBS for securities with similar attributes and forecasts from other industry experts and industry research.

Loss Severity

Estimates for loss severity are based on the initial loan to value ratio, the loan’s lien position, private mortgage insurance proceeds available (if any), and the estimated change in the price of the property since origination. The historical change in the value of the property is estimated using the Housing Pricing Indices by Metropolitan Statistical Area (“MSA”) produced by the Federal Housing Finance Agency (“FHFA”). Estimates for future changes in the prices of the residences collateralizing the mortgages is based on the Case Shiller forecasts and forecasts by MSA provided by the Housing Predictor website.

The loss severity assumption is static for twelve months then decreases monthly based on future market appreciation. The annual market appreciation assumption is 2.50% after 12 months. The loss severity is subject to a floor value of 23.00%.

Loss severity is benchmarked to the recent results of the loan collateral supporting the securities and the results experienced by major servicers of non-agency mortgage-backed-securities for securities with similar attributes.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Mortgage-Backed Securities available for sale - continued

 

The prepayment, default and loss severity assumptions result in forecasted cumulative loss rates. These cumulative loss rates are benchmarked to the projected cumulative losses by product, by year of origination, released by other industry experts.

The collateral cash flows that result from the prepayment, default and loss severity assumptions are applied to securities supporting the collateral by priority based upon the cash flow waterfall rules provided in the prospectus supplement. The cash flows are then discounted at the appropriate interest rate in order to determine if the impairment on a security is other than temporary.

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans

Loans Receivable

Loans receivable at December 31, 2012 and September 30, 2012 consist of the following:

 

						December 31,				September 30,
(in thousands)						2012				2012
Single-family residential mortgages						$	73,404			$	76,823
Single-family rental property loans							62,556				62,111
Commercial real estate loans							142,394				141,364
Construction loans							18,593				21,396
Commercial loans secured							241				71
Commercial loans unsecured							58				60
Commercial lease loans							6				20
Commercial lines of credit							8,160				9,952
Automobile loans							351				437
Home equity lines of credit							32,104				32,840
Other consumer loans							1,367				1,714
							339,234				346,788
Less		–		undisbursed portion of loans in process			(5,084	)			(6,467	)
		–		unearned interest			(2	)			(3	)
		–		deferred loan origination fees and costs			26				(38	)
		–		allowance for losses on loans			(5,488	)			(5,470	)
						$	328,686			$	334,810

Classes

For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: residential real estate loans, residential rental loans, commercial, construction, home equity loans, automobile loans and other consumer loans. The company also separates these segments into classes based on the associated risks within these segments. Commercial loans are divided into the following five classes: construction, land acquisition and development, commercial loans secured by real estate, commercial loans unsecured and leases. Residential loans are divided into two classes, residential owner occupied and residential rental properties. Each class of loan requires significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment. Management must use judgment in establishing additional input metrics for the modeling process. Historical loss percentages are also utilized to assist in projecting potential future losses.

Based on credit risk assessment and management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. During the period, management has applied additional loss estimations based on the current environmental factors, geographical concentrations, residential property values, commercial vacancy rates, unemployment rate and the Company’s internal delinquency trends.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Impaired loans are reviewed individually for potential loss. In instances where loan balances exceed estimated realizable values, specific loss allocations are identified.

Under our methodology for calculating the allowance for loan losses, loss rates are determined for the following loan pools: construction, residential owner occupied, residential rental, home equity loans, loan acquisition and development, secured commercial loans, unsecured commercial loans, leases and consumer loans. Loss rates are then applied to loan balances of these portfolio segments exclusive of loans with specific loss allocations that were reviewed individually. This methodology provides an in-depth analysis of the Bank’s portfolio and reflects the probable inherent losses within it. Reserve allocations are then reviewed and consolidated. This process is performed on a quarterly basis.

During the fiscal year ended September 30, 2012, we modified our loss reserve assessment approach to expand analysis of loss rates from a period of the previous one year to the prior two years on a rolling quarter-to-quarter basis. The result was then annualized and applied to loan pools specified above. Also during the fiscal year ended September 30, 2012, the Company isolated a segment of the loan portfolio, residential rental loans, to perform more detailed analysis for potential losses.

A two year look back period of charge-off experience is considered to more reasonably approximate current loss exposure within the portfolio. As mentioned above, we also began employing a more detailed approach in reviewing residential rental loans during the fiscal year ended September 30, 2012. Loss rates for this category have been noticeably higher than other types of loans. Additionally, geographic concentration is considered to be more of a risk factor for this type of product. Loans within this category are segregated by internal risk ratings, with higher reserves allocated as risk ratings reflect more potential for loss.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

The Allowance for Loan Losses and Recorded Investment in loans as of and for the three months ended December 31, 2012 are as follows:

Allowance for Losses on Loans

For the period ended December 31, 2012

(Dollars in thousands)

 

		Residential Loans				Residential Rental Loans				Commercial Loans				Construction Loans				Home Equity Loans				Automobile Loans				Other Consumer Loans				Total Loans
Three Months ended December 31, 2012 Allowance for losses on loans:
Beginning Balance		$	140			$	2,232			$	1,477			$	1,492			$	119			$	—			$	10			$	5,470
Charge-Offs			—				(1	)			—				(504	)			—				—				—				(505	)
Recoveries			—				—				3				—				—				20				—				23
Provisions			(39	)			398				(59	)			212				(2	)			(20	)			10				500
Ending Balance		$	101			$	2,629			$	1,421			$	1,200			$	117			$	—			$	20			$	5,488
Ending balance individually evaluated for impairment		$	2,112			$	7,227			$	6,996			$	4,942			$	—			$	—			$	—			$	21,277	(1)
Ending balance collectively evaluated for impairment		$	71,292			$	55,329			$	143,863			$	13,651			$	32,104			$	351			$	1,367			$	317,957	(1)
Ending Allowance balance for loans individually evaluated for impairment		$	—			$	1,224			$	98			$	586			$	—			$	—				—			$	1,908
Ending Allowance balance for loans collectively evaluated for impairment		$	101			$	1,405			$	1,323			$	614			$	117			$	—			$	20			$	3,580

 

(1)	Balances are not adjusted for undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

The Allowance for Loan Losses and Recorded Investment in loans as of and for the three months ended December 31, 2011 are as follows:

Allowance for Losses on Loans

For the period ended December 31, 2011

(Dollars in thousands)

 

		Residential Loans				Residential Rental Loans				Commercial Loans				Construction Loans				Home Equity Loans				Automobile Loans				Other Consumer Loans				Total Loans
Three Months ended December 31, 2011 Allowance for losses on loans:
Beginning Balance		$	205			$	1,594			$	1,514			$	1,267			$	168			$	—			$	20			$	4,768
Charge-Offs			—				(11	)			—				—				—				—				(5	)			(16	)
Recoveries			—				—				—				—				—				12				—				12
Provisions			(79	)			72				506				(192	)			—				(12	)			5				300
Ending Balance		$	126			$	1,655			$	2,020			$	1,075			$	168			$	—			$	20			$	5,064
Ending balance individually evaluated for impairment		$	1,151			$	6,955			$	4,980			$	8,523			$	299			$	—			$	20			$	21,928	(1)
Ending balance collectively evaluated for impairment		$	85,834			$	56,892			$	141,194			$	20,816			$	33,592			$	819			$	1,909			$	341,056	(1)
Ending Allowance balance for loans individually evaluated for impairment		$	—			$	566			$	125			$	314			$	—			$	—				20			$	1,025
Ending Allowance balance for loans collectively evaluated for impairment		$	126			$	1,089			$	1,895			$	761			$	168			$	—			$	—			$	4,039

 

(1)	Balances are not adjusted for undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Credit Quality Indicators

The Company has several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment. Loan classifications are generated on a monthly basis.

The following are the definitions of the Company’s credit quality indicators:

Pass

Asset is of sufficient quality to not warrant any mention whatsoever.

Special Mention

These credit facilities have potential developing weaknesses that deserve extra attention from management. This classification may be warranted if a developing weakness is evident that is associated with the ability of the borrower to repay. If a developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the bank’s debt in the future. This grade should not be assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved.

Substandard

Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.

Doubtful

Loans and other credit extensions classified as doubtful have all the weaknesses inherent in those substandard with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in non-accrual status, with collections applied to principal on the bank’s books.

Loss

Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. A portion of a loan may also be assigned this rating since the Bank may determine that the balance of the loan is collectable.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

The classification of loans as of December 31, 2012 and September 30, 2012 are as follows:

December 31, 2012

(Dollars in thousands)

 

		Residential Loans				Residential Rental Loans				Commercial Loans				Construction Loans				Home Equity Loans				Automobile Loans				Other Consumer Loans				Total
Grade
Pass		$	70,719			$	55,065			$	138,304			$	13,303			$	31,980			$	351			$	1,367			$	311,089
Special Mention			573				264				5,559				348				124				—				—				6,868
Substandard			2,112				7,227				6,996				4,942				—				—				—				21,277
Doubtful			—				—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—				—
Total		$	73,404			$	62,556			$	150,859			$	18,593			$	32,104			$	351			$	1,367			$	339,234	(1)

September 30, 2012

(Dollars in thousands)

 

		Residential Loans				Residential Rental Loans				Commercial Loans				Construction Loans				Home Equity Loans				Automobile Loans				Other Consumer Loans				Total
Grade
Pass		$	76,166			$	49,817			$	141,413			$	13,129			$	32,840			$	437			$	1,714			$	315,516
Special Mention			119				3,824				2,465				—				—				—				—				6,408
Substandard			538				8,470				7,589				8,267				—				—				—				24,864
Doubtful			—				—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—				—
Total		$	76,823			$	62,111			$	151,467			$	21,396			$	32,840			$	437			$	1,714			$	346,788	(1)

 

(1)	Balances are not adjusted for undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

Single-Family Residential Real Estate Lending. The Bank historically has been and continues to be an originator of single-family, residential real estate loans in its market area. The Bank has never participated in the origination of sub-prime lending and, accordingly, has no direct exposure to this type of lending within its loan portfolio. The Bank originates fixed-rate mortgage loans at competitive interest rates. Due to interest rate risk considerations, the Bank has employed a strategy of selling most fixed-rate single-family residential mortgage loans originated into the secondary market.

A small portion of the Bank’s single-family mortgage loans carry adjustable rates. After the initial term, the rate adjustments on the Bank’s adjustable-rate loans are indexed to a rate which adjusts per loan terms based upon changes in an index based on the weekly average yield on U.S. Treasury securities adjusted to a constant comparable maturity of one year, as made available by the Federal Reserve Board. The interest rates on most of the Bank’s adjustable-rate mortgage loans are adjusted once a year, and these loans have an initial adjustment period of one, three or five years. The maximum adjustment is 2% per adjustment period with a maximum aggregate adjustment of 6% over the life of the loan. All of the Bank’s adjustable-rate loans require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the loan term and, thus, do not permit any of the increased payment to be added to the principal amount of the loan, known as “negative amortization.”

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

The retention of adjustable-rate loans in the Bank’s portfolio helps reduce the Bank’s exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Further, although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank’s adjustable-rate loans will fully adjust to compensate for increases in the Bank’s cost of funds. Finally, adjustable-rate loans increase the Bank’s exposure to decreases in prevailing market interest rates, although decreases in the Bank’s cost of funds tend to offset this effect.

Single-Family Rental Property Loans. The Bank also offers single-family residential mortgage loans secured by properties that are not owner-occupied, although management has decided to limit future origination volume for this loan product. Single-family residential mortgage loans secured by rental properties are made on a fixed-rate or an adjustable-rate basis and carry interest rates generally from 1.5% to 2.0% above the rates charged on comparable loans secured by owner-occupied properties. The maximum term on such loans is 10 years with amortizations up to 25 years.

Commercial Real Estate Lending. The Bank’s commercial real estate loan portfolio includes loans to finance the acquisition of office buildings, churches, commercial office condominiums, shopping centers, hospitality, and commercial and industrial buildings. Such loans generally range in size from $100,000 to $5 million. Commercial real estate loans are originated on a fixed-rate or adjustable-rate basis with terms of 5 to 10 years and with amortizations of up to 30 years.

Commercial real estate lending entails significant additional risks as compared with single-family residential property lending. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for office and retail space and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It is the Bank’s policy generally to obtain annual financial statements of the business of the borrower or the project for which commercial real estate loans are made. In addition, in the case of commercial real estate loans made to a legal entity, the Bank seeks, whenever possible, to obtain personal guarantees and annual financial statements of the principals of the legal entity. As a result of the economic downturn, the Bank has experienced a decline in its pipeline for this product type within the loan portfolio.

Construction Lending. A substantial portion of the Bank’s construction loans are originated for the construction of owner-occupied, single-family dwellings in the Bank’s primary market area. Residential construction loans are offered primarily to individuals building their primary or secondary residence, as well as to selected local developers to build single-family dwellings. Generally, loans to owner/occupants for the construction of owner-occupied, single-family residential properties are originated in connection with the permanent loan on the property and have a construction term of up to 12 months. Such loans are offered on fixed rate terms. Interest rates on residential construction loans made to the owner/occupant have interest rates during the construction period equal to the same rate on the permanent loan selected by the customer. Interest rates on residential construction loans to builders are set at the prime rate plus a margin of between 0% and 1.5%, typically with interest rate floors. Interest rates on commercial construction loans are based on the prime rate plus a negotiated margin of between 0% and 1.5% and adjust monthly, typically with interest rate floors with construction terms generally not exceeding 18 months . Advances are made on a percentage of completion basis. Prior to making a commitment to fund a loan, the Bank requires both an appraisal of the property by appraisers approved by the Board of Directors and a study of projected construction costs. The Bank also reviews and inspects each project at the commencement of construction and as needed prior to disbursements during the term of the construction loan.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

On occasion, the Bank makes acquisition and development loans to local developers to acquire and develop land for sale to builders who will construct single-family residences. Acquisition and development loans, which are considered by the Bank to be construction loans, are made at a rate that adjusts monthly, based on the prime rate plus a negotiated margin, typically with interest rate floors for terms of up to three years. Interest only is paid during the term of the loan, and the principal balance of the loan is paid down as developed lots are sold to builders. Generally, in connection with acquisition and development loans, the Bank issues a letter of credit to secure the developer’s obligation to local governments to complete certain work. If the developer fails to complete the required work, the Bank would be required to fund the cost of completing the work up to the amount of the letter of credit. Letters of credit generate fee income for the Bank but create additional risk.

Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate and the borrower is unable to meet the Bank’s requirements of putting up additional funds to cover extra costs or change orders, then the Bank will demand that the loan be paid off and, if necessary, institute foreclosure proceedings, or refinance the loan. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with collateral having a value which is insufficient to assure full repayment. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers ( i.e. , borrowers who satisfy all credit requirements and whose loans satisfy all other underwriting standards which would apply to the Bank’s permanent mortgage loan financing for the subject property) in the Bank’s market area. On loans to builders, the Bank works only with selected builders and carefully monitors the creditworthiness of the builders.

Commercial Lines of Credit. The Bank provides commercial lines of credit to businesses within the Bank’s market area. These loans are secured by business assets, including real property, equipment, automobiles and consumer leases. Generally, all loans are further personally guaranteed by the owners of the business. The commercial lines have adjustable interest rates tied to the prime rate, typically with interest rate floors and are offered at rates from prime plus 0% to prime plus 3.5%.

Consumer Lending . The consumer loans currently in the Bank’s loan portfolio consist of automobile loans, home equity lines of credit and loans secured by savings deposits.

Automobile loans are secured by both new and used cars and, depending on the creditworthiness of the borrower, may be made for up to 110% of the “invoice price” or clean “black book” value, whichever is lower, or, with respect to used automobiles, the loan values as published by a wholesale value listing utilized by the automobile industry. Automobile loans are made directly to the borrower-owner. New and used cars are financed for a period generally of up to five years, or less, depending on the age of the car. Collision insurance is required for all automobile loans. The Bank also maintains a blanket collision insurance policy that provides insurance for any borrower who allows their insurance to lapse.

The Bank originates second mortgage loans and home equity lines of credit. Second mortgage loans are made at fixed rates and for terms of up to 15 years. The Bank’s home equity lines of credit currently have adjustable interest rates tied to the prime rate and are currently offered at the prime rate with a floor of 3.25%. The interest rate may not adjust to a rate higher than 24%. The home equity lines of credit require monthly payments until the loan is paid in full, with a loan term not to exceed 30 years. The minimum monthly payment is the outstanding interest. Home equity lines of credit are secured by subordinate liens against residential real property. The Bank requires that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least sufficient to cover its loan.

The Bank makes savings account loans for up to 90% of the depositor’s savings account balance. The interest rate is normally 3.0% above the rate paid on the related savings account, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

As part of the Bank’s loan strategy, the Bank has diversified its lending portfolio to afford the Bank the opportunity to earn higher yields and to provide a fuller range of banking services. These products have generally been in the consumer area and include boat loans and loans for the purchase of recreational vehicles.

Consumer lending usually affords the Bank the opportunity to earn yields higher than those obtainable on single-family residential lending. However, consumer loans entail greater risk than residential mortgage loans, particularly in the case of loans which are unsecured or secured by rapidly depreciable assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by events such as job loss, divorce, illness or personal bankruptcy.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Impaired loans as of December 31, 2012 are as follows:

Impaired Loans

As of December 31, 2012

(Dollars in thousands)

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance
Loans without specific valuation allowances:
Residential Loan		$	2,112			$	2,112			$	—
Residential Rental Loans			1,532				1,532				—
Commercial Loans			5,374				5,374				—
Construction Loans			1,759				1,759				—
Home Equity Loans			—				—				—
Consumer Loans			—				—				—
Other Loans			—				—				—
Total		$	10,777			$	10,777			$	—
Loans with specific allowance recorded:
Residential Loans		$	—			$	—			$	—
Residential Rental Loans			5,695				5,695				1,224
Commercial Loans			1,622				1,622				98
Construction Loans			3,183				3,183				586
Home Equity Loans			—				—				—
Consumer Loans			—				—				—
Other Loans			—				—				—
Total		$	10,500			$	10,500			$	1,908

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

The following presents information related to the average recorded investment and interest income recognized on impaired loans for the three months ended December 31, 2012:

 

		Three Months Ended December 31, 2012
(dollars in thousands)		Average Recorded Investment				Interest Income Recognized
Loans without specific valuation allowances:
Residential Loans		$	2,114			$	20
Residential Rental Loans			1,532				4
Commercial Loans			5,616				76
Construction Loans			2,189				65
Home Equity Loans			—				—
Consumer Loans			—				—
Other Loans			—				—
Total		$	11,451			$	165
Loans with specific allowance recorded:
Residential Loans		$	—			$	—
Residential Rental Loans			5,697				66
Commercial Loans			1,624				16
Construction Loans			3,183				32
Home Equity Loans			—				—
Consumer Loans			—				—
Other Loans			—				—
Total		$	10,504			$	114

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Impaired loans as of September 30, 2012 are as follows:.

Impaired Loans

As of September 30, 2012

(Dollars in thousands)

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance
Loans without specific valuation allowances:
Residential Loans		$	1,163			$	1,163			$	—
Residential Rental Loans			2,123				2,123
Commercial Loans			3,925				3,925				—
Construction Loans			2,775				2,775				—
Home Equity Loans			210				210				—
Consumer Loans			—				—				—
Other Loans			—				—				—
Total		$	10,196			$	10,196			$	—
Loans with specific allowance recorded:
Residential Loans		$	—			$	—			$	—
Residential Rental Loans			5,012				5,012				840
Commercial Loans			1,635				1,635				111
Construction Loans			5,492				5,492				1,071
Home Equity Loans			—				—				—
Consumer Loans			—				—				—
Other Loans			—				—				—
Total		$	12,139			$	12,139			$	2,022

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Credit Losses on Loans - continued

 

The following presents information related to the average recorded investment and interest income recognized on impaired loans for the three months ended December 31,2011:

 

		Three Months Ended December 31, 2011
(dollars in thousands)		Average Recorded Investment				Interest Income Recognized
Loans without specific valuation allowances:
Residential Loans (1)		$	—			$	—
Residential Rental Loans			6,178				75
Commercial Loans			4,191				6
Construction Loans			2,866				37
Home Equity Loans			138				1
Consumer Loans			—				—
Other Loans			—				—
Total		$	13,373			$	119
Loans with specific allowance recorded:
Residential Loans (1)		$	—			$	—
Residential Rental Loans			1,520				3
Commercial Loans			295				—
Construction Loans			2,017				—
Home Equity Loans			—				—
Consumer Loans			—				—
Other Loans			—				—
Total		$	3,852			$	3

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Past due loans as of December 31, 2012 and September 30, 2012 are as follows :

Credit Quality Information

Age Analysis of Past Due Loans

As of December 31, 2012

 

		30-59 Days past due				60-89 Days past due				Non-Accrual				Total past due and Non-Accrual				Current				Total Loans				Non- Accrual Loans that are  Current				Loans Greater than 90 days and Accruing
Residential Loans		$	508			$	424			$	711			$	1,643			$	71,761			$	73,404			$	196			$	—
Residential Rental Loans			—				—				2,775				2,775				59,781				62,556				357
Commercial Loans			—				290				2,441				2,731				148,128				150,859				1,222				—
Construction Loans			537				—				3,353				3,890				14,703				18,593				3,353				—
Home Equity Loans			179				—				81				260				31,844				32,104				—				—
Automobile Loans			—				—				—				—				351				351				—				—
Other Loans			—				—				—				—				1,367				1,367				—				—
Total (1)		$	1,224			$	714			$	9,361			$	11,299			$	327,935			$	339,234			$	5,128			$	—

 

(1)	Balances are not adjusted for undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

Credit Quality Information

Age Analysis of Past Due Loans

As of September 30, 2012

 

		30-59 Days past due				60-89 Days past due				Non-Accrual				Total past due and Non-Accrual				Current				Total Loans				Non- Accrual Loans that are  Current				Loans Greater than 90 days and Accruing
Residential Loans		$	360			$	82			$	472			$	914			$	75,909			$	76,823			$	—			$	—
Residential Rental Loans			180				340				2,128				2,648				59,463				62,111				741
Commercial Loans			—				—				2,994				2,994				148,473				151,467				1,311				—
Construction Loans			—				—				7,551				7,551				13,845				21,396				294				—
Home Equity Loans			119				81				—				200				32,640				32,840				—				—
Automobile Loans			—				—				—				—				437				437				—				—
Other Loans			3				—				—				3				1,711				1,714				—				—
Total (1)		$	662			$	503			$	13,145			$	14,310			$	332,478			$	346,788			$	2,346			$	—

 

(1)	Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

Nonperforming Loans and Other Problem Assets . It is management’s policy to continually monitor its loan portfolio to anticipate and address potential and actual delinquencies. When a borrower fails to make a payment on a loan, the Bank takes immediate steps to have the delinquency cured and the loan restored to current status. Loans which are past due 15 days incur a late fee of 5% of principal and interest due. As a matter of policy, the Bank will send a late notice to the borrower after the loan has been past due 15 days and again after 30 days. If payment is not promptly received, the borrower is contacted again, and efforts are made to formulate an affirmative plan to cure the delinquency. Generally, after any loan is delinquent 90 days or more, formal legal proceedings are commenced to collect amounts owed. In the case of automobile loans, late notices are sent after loans are ten days delinquent, and the collateral is seized after a loan is delinquent 60 days. Repossessed cars subsequently are sold at auction.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Loans generally are placed on nonaccrual status if the loan becomes past due more than 90 days, except in instances where in management’s judgment there is no doubt as to full collectability of principal and interest. Consumer loans are generally charged-off, or any expected loss is reserved for, after they become more than 120 days past due. All other loans are charged-off, or any expected loss is reserved for when management concludes that they are uncollectible.

Troubled Debt Restructurings (TDRs) are placed on nonaccrual status when loan modifications take place. The interest component of subsequent payment receipts is recognized as income on a cash basis. TDRs are removed from nonaccrual status after performing in accordance with modified terms for a sustained period.

Real estate acquired by the Bank as a result of foreclosure is classified as foreclosed real estate until such time as it is sold. When such property is acquired, it is initially recorded at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated costs to sell. Costs relating to holding such real estate are charged against income in the current period, while costs relating to improving such real estate are capitalized until a saleable condition is reached. Any required write-down of the loan to its fair value less estimated selling costs upon foreclosure is charged against the allowance for loan losses.

Charge-off Policies

The Company’s loan charge-off policies are as follows:

When loans begin to demonstrate collectability issues the Bank performs an analysis to determine if a loss is expected. Loans are generally charged down to the fair value of collateral securing the asset, less estimated cost to sell, when management judges the asset to be uncollectible, repayment is deemed to be protracted beyond reasonable time frames, the asset has been classified as loss by either the internal loan review process or external examiners, or when the borrower has filed bankruptcy and the loss becomes evident based on a lack of assets.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Loans on Nonaccrual Status

(Dollars in Thousands)

 

		December 31, 2012				September 30, 2012
With no related allowance recorded:
Residential Loans		$	711			$	472
Residential Rental Loans			1,532				2,039
Commercial Loans			2,441				2,994
Constructions Loans			359				4,557
Home Equity Loans			81				—
Automobile Loans			—				—
Other Loans			—				—
		$	5,124			$	10,062
With an allowance recorded:
Residential Loans		$	—			$	—
Residential Rental Loans			1,243				89
Commercial Loans			—				—
Constructions Loans			2,994				2,994
Home Equity Loans			—				—
Automobile Loans			—				—
Other Loans			—				—
		$	4,237			$	3,083
Total Nonaccrual Loans		$	9,361	(1)		$	13,145	(1)

 

(1)

Includes Troubled Debt Restructurings (TDR’s) of $799,000 and $700,000 at December 31, 2012 and September 30, 2012, respectively, which were not delinquent. Reporting guidance requires disclosure of these loans as nonaccrual even though they may be current in terms of principal and interest payments. As of December 31, 2012 and September 30, 2012, the Company had total TDR’s of $6.5 million and $9.3 million, respectively.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Disclosures About Credit Quality and the Allowance for Losses on Loans - continued

 

Modifications

During the three months ended December 31,

 

		2012												2011
		Number of Contracts				Pre- Modification Outstanding Recorded Investments				Post- Modification Outstanding Recorded Investments				Number of Contracts				Pre- Modification Outstanding Recorded Investments				Post- Modification Outstanding Recorded Investments
Troubled Debt Restructurings
Residential-Prime			2			$	111			$	110				—			$	—			$	—
Commercial			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Consumer-Other			—				—				—				—				—				—
Finance leases			—				—				—				—				—				—

Troubled Debt Restructurings are considered to be in default after 90 days of non-payment. During the three months ended December 31, 2012, there were two TDR’s totaling $235,000 that were considered to be in default. During the three months ended December 31, 2011 there were no TDR’s considered to be in default.

Loans identified as Troubled Debt Restructurings are also included as nonperforming assets. TDR’s are represented by borrowers experiencing some form of financial difficulty, resulting in the Bank granting a concession as part of a loan modification. Loans modified as TDR’s were primarily comprised of loans for which payments were either deferred or reduced. Reporting guidance requires disclosure of these loans as nonperforming even though they may be current in terms of principal and interest payments. As of December 31, 2012, $6.5 million in TDR’s were included in non performing loans, $6.2 million of which were not delinquent.

As previously stated, TDR’s are included as nonperforming assets, although payments may be current in conjunction with modified loan terms. Typical loan modifications include lowering interest rates, deferring payments or extending repayment terms. As of December 31, 2012 specific loan loss reserves on TDR’s totaled $949,000.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8 - Earnings Per Share

Basic earnings 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, 2012 and 2011, respectively, are as follows:

 

		For the Three Months Ended December 31,
		2012												2011
		(in thousands except per share data)
		Income				Shares				Per Share				Income				Shares				Per Share
Basic EPS
Net Income		$	639				3,103			$	0.21			$	462				3,102			$	0.15
Income available to common shareholders		$	639				3,103			$	0.21			$	462				3,102			$	0.15
Diluted EPS
Net Income		$	639				3,103			$	0.21			$	462				3,102			$	0.15
Effect of dilutive shares			—				132				(0.01	)			—				54				—
Income available to common shareholders plus assumed conversions		$	639				3,235			$	0.20			$	462				3,156			$	0.15

Options to purchase 15,792 shares and 67,595 shares which were outstanding at December 31, 2012 and December 31, 2011, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9 - 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 and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The warrant is not subject to any contractual restrictions on transfer.

On January 26, 2011 the Company repurchased all $10.8 million of Series A Preferred Stock issued to the U.S. Treasury in December 2008 pursuant to the TARP Capital Purchase Program. BCSB completed the repayment without raising additional capital. As a result of the redemption, the Company accelerated the accretion of the remaining discount of approximately $310,000 on the preferred stock and recorded a reduction in retained earnings. The warrant issued to the U.S. Treasury has not been repurchased and remains outstanding.

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 relative fair value method was used to allocate the proceeds between the preferred stock and warrants. A discount rate of 12% was used in valuing the preferred stock and the Black-Scholes-Merton option pricing model was used to value the warrants. For further information, see “– Liquidity and Capital Resources.”

 

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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10 - Regulatory Capital

The following table sets forth the Bank’s capital position at December 31, 2012:

 

		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				% of Assets				Required Amount				% of Assets				Required Amount				% of Assets
		(Unaudited) (dollars in thousands)
Tier 1 leverage ratio (1)		$	64,942				10.06	%		$	25,810				4.00	%		$	32,262				5.00	%
Tier 1 risk based capital ratio (2)			64,942				17.33				N/A				N/A				22,841				6.00
Total risk based capital ratio (2)			68,483				18.28				29,975				8.00				37,468				10.00

 

(1)	To average total assets

(2)	To risk-weighted assets

The following table sets forth BCSB Bancorp Inc.’s capital position at December 31, 2012:

 

		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				% of Assets				Required Amount				% of Assets				Required Amount				% of Assets
		(Unaudited) (dollars in thousands)
Tier 1 leverage ratio (1)		$	53,049				8.26	%		$	25,697				4.00	%		$	32,121				5.00	%
Tier 1 risk based capital ratio (2)			53,049				14.10				N/A				N/A				22,567				6.00
Total risk based capital ratio (2)			56,589				15.05				30,088				8.00				37,611				10.00

 

(1)	To average total assets

(2)	To risk-weighted assets

 

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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11 - Stock Option Plans

The 1999 Plan

On July 15, 1999, the Company established a Stock Option Plan whereby 120,366 shares of common stock have been reserved for issuance. 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. Also, there were no options granted during the years ended September 30, 2012 and 2010, or during the three months ended December 31, 2012.

The 2009 Plan

At the annual shareholders meeting held in May 2009 the Company approved an additional Stock Option Plan whereby 191,740 shares of common stock were reserved for issuance. Options granted 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 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. In some cases options can be reissued from forfeitures when employees leave the Company. There were no options granted during the years ended September 30, 2009 or 2010. There were 177,930 options granted during the year ended September 30, 2011 and 15,052 options granted during the year ended September 30, 2012. There were no options granted during the three months ended December 31, 2012.

The following table summarizes the shares under the Company’s outstanding stock options at December 31, 2012:

 

Number of Shares				Price				Weighted Average Contractual Life (Years)
	10,528			$	28.41				4.0
	5,264				17.95				4.9
	22,193				11.61				5.0
	11,296				8.25				6.5
	176,320				10.29				7.8
	15,052				13.74				9.2

The total exercisable shares of 134,617 have a weighted average contractual life of 6.9 years, and an aggregate intrinsic value of $453,000 as of December 31, 2012.

 

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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11 - Stock Option Plans - continued

 

The following table presents the activity related to options under all plans for the three months ended December 31, 2012:

 

		Shares				Weighted Average Exercise Price
Outstanding at September 30, 2012			240,653			$	11.49
Options exercised			—				—
Options Expired			—				—
Granted			—				—
Outstanding at December 31, 2012			240,653			$	11.49
Exercisable at December 31, 2012			134,617			$	12.10

During the three months ended December 31, 2012 and December 31, 2011 there were no stock options granted. Option expense recognized during the three month periods ended December 31, 2012 and December 31, 2011 was $46,587 and $57,252, respectively. As of December 31, 2012, $330,657 of total unrecognized pretax expense related to stock options is expected to be recognized from January 1, 2013 through March 31, 2016.

 

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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 12 - Recent Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures About Offsetting Assets and Liabilities.”  This project began as an attempt to converge the offsetting requirements under U.S. GAAP and IFRS. However, as the Boards were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the adoption will have no impact on the Company’s Consolidated Financial Statements.

Note 13 - 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 $656,000 of standby letters of credit as of December 31, 2012. 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, 2012 for guarantees under standby letters of credit issued is not considered to be material.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 14 - Fair Value Measurements

The Company applies guidance issued by FASB regarding fair value measurements which provided a framework for measuring and disclosing fair value under generally accepted accounting principles. 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 t he 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 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. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

There were no transfers between levels during the three months ended December 31, 2012. The Company’s policy is to recognize transfers in and transfers out at the actual date of the event or change in the circumstances that caused the transfer. 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.

 

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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 14 - Fair Value Measurements - continued

 

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 tables present the financial instruments measured at fair value by class on the recurring basis as of December 31, 2012 and September 30, 2012 on the Consolidated Statement of Financial Condition utilizing the hierarchy discussed above.

 

		Total				At December 31, 2012												Total changes In fair values Included in Period Earnings
($ in thousands)						Level 1				Level 2				Level 3
Loans available for sale		$	612			$	—			$	612			$	—			$	—
Equity Investments			100				—				—				100				—
Corporate Bonds available for sale			4,701				—				4,701				—				—
GNMA certificates available for sale			3,469				—				3,469				—				—
FNMA certificates available for sale			11,662				—				11,662				—				—
FHLMC certificates available for sale			5,013				—				5,013				—				—
Private label collateralized mortgage obligations available for sale			8,459				—				8,459				—				—
Collateralized mortgage obligations available for sale			180,415				—				180,415				—
		$	214,431			$	—			$	214,331			$	100			$	—

 

 

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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 14 - Fair Value Measurements - continued

 

						At September 30, 2012												Total changes In fair values Included in Period Earnings
($ in thousands)		Total				Level 1				Level 2				Level 3
Loans available for sale		$	806			$	—			$	806			$	—			$	—
Equity Investments			100								—				100				—
Corporate Bonds available for sale			4,528				—				4,528				—				—
GNMA certificates available for sale			3,417				—				3,417				—				—
FNMA certificates available for sale			12,530				—				12,530				—				—
FHLMC certificates available for sale			5,853				—				5,853				—				—
Private label collateralized mortgage obligations available for sale			9,034				—				9,034				—				370	(1)
Collateralized mortgage obligations available for sale			182,729				—				182,729				—				—
		$	218,997			$	—			$	218,897			$	100			$	370	(1)

 

(1)	Represents other-than-temporary impairment charges taken during the fiscal year ended September 30, 2012.

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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Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 14 - Fair Value Measurements - continued

 

Foreclosed Real Estate and Repossessed Assets

Once a loan is determined to be uncollectible, the underlying collateral is repossessed and reclassified to Foreclosed Real Estate. These assets are carried at lower of cost or fair value of the collateral, less estimated costs to sell. There was $3.4 million in foreclosed real estate at December 31, 2012.

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

 

At December 31, 2012
($ in thousands)		Total				Level 1				Level 2				Level 3
Impaired Residential Loans		$	2,112			$	—			$	—			$	2,112
Impaired Residential Rental Loans			6,003				—				—				6,003
Impaired Commercial and Lease Loans			6,898				—				—				6,898
Impaired Construction Loans			4,356				—				—				4,356
Impaired Home Equity Loans			—				—				—				—
Premises and equipment held for sale			208				—				—				208
Foreclosed Real Estate			3,370				—				—				3,370
Total		$	22,947			$	—			$	—			$	22,947

 

At September 30, 2012
($ in thousands)		Total				Level 1				Level 2				Level 3
Impaired Residential Loans		$	1,163			$	—			$	—			$	1,163
Impaired Residential Rental Loans			6,295				—				—				6,295
Impaired Commercial and Lease Loans			5,449				—				—				5,449
Impaired Construction Loans			7,196				—				—				7,196
Impaired Home Equity Loans			210				—				—				210
Premises and equipment held for sale			208				—				—				208
Foreclosed Real Estate			1,674				—				—				1,674
Total		$	22,195			$	—			$	—			$	22,195

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 15 - 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 and Federal Reserve Bank 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. The fair value of Bank owned life insurance is based upon its current cash surrender value. 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 (UNAUDITED)

 

Note 15 - Disclosures About Fair Value of Financial Instruments - Continued

 

The estimated fair values of the Bank’s financial instruments are as follows as of December 31, 2012:

 

Fair Value Measurement
(dollars in thousands)		Carrying Amount				Fair Value				Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2012
Financial Assets
Cash		$	9,180			$	9,180			$	9,180			$	—			$	—
Interest-bearing deposits in other banks			11,513				11,513				11,513				—				—
Federal Funds sold			38,677				38,677				38,677				—				—
Investment securities available for sale			4,801				4,801				—				4,701				100
Loans available for sale			612				612				—				612				—
Loan Receivable
Mortgage Loans			326,971				356,130				—				—				356,130
Share Loans			216				216				—				—				216
Consumer Loans			1,499				1,432				—				—				1,432
Mortgage-backed securities-available for sale			209,018				209,018				—				209,018				—
Federal Home Loan Bank of Atlanta Stock			959				959				959				—				—
Federal Reserve Bank Stock			1,381				1,381				1,381				—				—
Bank owned life insurance			17,007				17,007				17,007				—				—
Accrued interest receivable			1,820				1,820				—				1,820				—
Mortgage servicing rights			42				42				—				—				42
Financial Liabilities
Deposits		$	563,992			$	563,740				—				563,740				—
Junior Subordinated Debt			17,011				17,011				—				17,011				—
Accrued interest payable			20				20				—				20				—

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 15 - Disclosures About Fair Value of Financial Instruments - Continued

 

The estimated fair values of the Bank’s financial instruments are as follows as of September 30, 2012:

 

		September 30, 2012
		Fair Value Measurement
(dollars in thousands)		Carrying Amount				Fair Value				Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets
Cash		$	8,389			$	8,389			$	8,389			$	—			$	—
Interest-bearing deposits in other banks			11,501				11,501				11,501				—				—
Federal Funds sold			31,034				31,034				31,034				—				—
Investment securities available for sale			4,628				4,628				—				4,528				100
Loans available for sale			806				806				—				806				—
Loan Receivable
Mortgage Loans			332,665				358,297				—				—				358,297
Share Loans			290				290				—				—				290
Consumer Loans			1,855				1,816				—				—				1,816
Mortgage-backed securities-available for sale			213,563				213,563				—				213,563				—
Federal Home Loan Bank of Atlanta Stock			959				959				959				—				—
Federal Reserve Bank Stock			1,381				1,381				1,381				—				—
Bank owned life insurance			16,869				16,869				16,869				—				—
Accrued interest receivable			2,024				2,024				—				2,024
Mortgage servicing rights			53				53				—				—				53
Financial Liabilities
Deposits		$	566,356			$	567,848				—			$	567,848				—
Junior Subordinated Debt			17,011				17,011				—				17,011				—
Accrued interest payable			63				63				—				63				—

 

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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. Effective September 30, 2011, the Bank became a Maryland state chartered commercial bank. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the FDIC.

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.

Impaired loans are reviewed individually for potential loss. In instances where loan balances exceed estimated realizable values, specific loss allocations are identified.

Under our methodology for calculating the allowance for loan losses, loss rates are determined for the following loan pools: construction, residential owner occupied, residential rental, home equity loans, loan acquisition and development, secured commercial loans, unsecured commercial loans, leases and consumer loans. Loss rates are then applied to loan balances of these portfolio segments exclusive of loans with specific loss allocations that were reviewed individually. This methodology provides an in-depth analysis of the Bank’s portfolio and reflects the probable inherent losses within it. Reserve allocations are then reviewed and consolidated. This process is performed on a quarterly basis.

During the fiscal year ended September 30, 2012, we modified our loss reserve assessment approach to expand analysis of loss rates from a period of the previous one year to the prior two years on a rolling quarter-to-quarter basis. The result was then annualized and applied to loan pools specified above. Also during the fiscal year ended September 30, 2012, the Company isolated a segment of the loan portfolio, residential rental loans, to perform more detailed analysis for potential losses.

A two year look back period of charge-off experience is considered to more reasonably approximate current loss exposure within the portfolio. As mentioned above, we also began employing a more detailed approach in reviewing residential rental loans during the fiscal year ended September 30, 2012. Loss rates for this category have been noticeably higher than other types of loans. Additionally, geographic concentration is considered to be more of a risk factor for this type of product. Loans within this category are segregated by internal risk ratings, with higher reserves allocated as risk ratings reflect more potential for loss.

 

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Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. The term “other-than-temporary” is not necessarily 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. 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 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.

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.

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 and the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2012 . 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, 2012 and September 30, 2012

During the three months ended December 31, 2012, assets decreased by $1.1 million, or .17%, from $645.1 million at September 30, 2012 to $644.0 million at December 31, 2012. Cash and cash equivalents increased by $8.4 million, or 16.6% during the three months ended December 31, 2012, from $50.9 million to $59.4 million. This increase was primarily due to reductions in loans receivable and the mortgage backed securities portfolio during the period. During the three months ended December 31, 2012, investment securities increased by $173,000, or 3.7% from $4.6 million at September 30, 2012 to $4.8 million at December 31, 2012 due to the change in fair value of the related securities. Net loans receivable decreased $6.1 million, or 1.8%, from $334.8 million at September 30, 2012 to $328.7 million at December 31, 2012. Management’s lending strategy remains focused on commercial real estate, commercial business and home equity lending. During this low rate environment the Company has employed a strategy of selling most residential loans into the secondary loan market. The reduction in residential loans combined with a decline in demand for other lending products is the primary reason for the decrease in our loan portfolio. Mortgage-backed securities available for sale decreased by $4.5 million, or 2.1%, from $213.6 million at September 30, 2012 to $209.0 million at December 31, 2012 due primarily to principal payments made during the three months ended December 31, 2012. At December 31, 2012, all mortgage-backed securities were classified as available for sale for liquidity purposes. Foreclosed real estate increased by $1.7 million, or 101.3%, from $1.7 million at September 30, 2012 to $3.4 million at December 31, 2012, primarily due to the foreclosure of a $1.5 million land acquisition and development loan during the period. The Company is aggressively pursuing the sale of the property, which is located in the state of Pennsylvania.

Deposits decreased by $2.4 million, or .42%, from $566.4 million at September 30, 2012 to $564.0 million at December 31, 2012.

Stockholders’ equity increased by $476,000, or .86%, from $55.1 million at September 30, 2012 to $55.6 million at December 31, 2012. This increase was due primarily to net income earned during the period, partially offset by a decline in accumulated other comprehensive income, net of related deferred tax effects.

Comparison of Operating Results for the Three Months Ended December 31, 2012 and 2011

Net Income . Net income was $639,000 for the three months ended December 31, 2012 and $462,000 for the three months ended December 31, 2011. This increase in net income was primarily due increases in net interest income and other income, partially offset by increased provision for loan losses.

Net Interest Income . Net interest income increased by $344,000, or 7.2%, from $4.8 million for the three months ended December 31, 2011 to $5.1 million for the three months ended December 31, 2012. The increase in net interest income primarily was due to higher average balances on mortgage-backed securities and a declining cost of funds rate on the deposit portfolio. These increases were partially offset by a decrease in interest and fees on loans as the average balance of the loan portfolio continued to decline.

Interest Income . Interest income decreased by $103,000, or 1.5% from $6.7 million for the three months ended December 31, 2011 to $6.6 million for the three months ended December 31, 2012. Interest and fees on loans decreased by $193,000, or 3.5%, from $5.5 million for the three months ended December 31, 2011 to $5.3 million for the three months ended December 31, 2012. This was primarily due to lower average balances on loans. Average loans declined by $23.0 million during the three months ended December 31, 2012 as compared to the same period in 2011. This decline was partially offset by an increase in interest on mortgage-backed securities of $121,000, or 11.4% from $1.1 million for the three months ended December 31, 2011 to $1.2 million for the three months ended December 31, 2012. This increase was primarily due to higher average balances on mortgage-backed securities. The average balance of mortgage-backed securities increased by $57.4 million, from $155.1 million during the three months ended December 31, 2011 to $212.5 million during the three months ended December 31, 2012. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity.

Interest Expense . Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $1.9 million for the three months ended December 31, 2011 to $1.5 million for the three months ended December 31, 2012, a decrease of $447,000 or 23.2%. Interest on deposits decreased $447,000, or 25.2%, from $1.8 million for the three months ended December 31, 2011 to $1.3 million for the three months ended December 31, 2012. This decrease was due to the decline in the average cost of deposits of 34 basis points from 1.28% for the three months ended December 31, 2011 to .94% for the three months ended December 31, 2012.

 

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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, 2012 and 2011.

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,
		2012												2011
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)		$	337,822			$	5,322				6.30	%		$	360,828			$	5,515				6.11	%
Mortgage-backed securities			212,511				1,179				2.22				155,076				1,058				2.73
Investment securities and FHLB stock			7,047				72				4.09				7,622				93				4.88
Other interest earning assets			45,190				25				.22				61,049				35				.23
Total Interest-earning assets			602,570				6,598				4.38				584,575				6,701				4.59
Bank Owned Life Insurance			16,909												15,943
Noninterest-earning assets			24,355												32,982
Total assets		$	643,834											$	633,500
Interest-bearing liabilities:
Deposits		$	564,799			$	1,327				.94	%		$	555,513			$	1,774				1.28	%
Junior Subordinated Debentures			17,011				157				3.69				17,011				157				3.69
Other liabilities			1,056				—				—				838				—				—
Total interest-bearing liabilities			582,866				1,484				1.02				573,362				1,931				1.35
Noninterest-bearing liabilities			5,535												8,150
Total liabilities			588,401												581,512
Stockholders’ Equity			55,433												51,988
Total liabilities and stockholders’ equity		$	643,834											$	633,500
Net interest income						$	5,114											$	4,770
Interest rate spread											3.36	%											3.24	%
Net interest margin (2)											3.39	%											3.26	%
Ratio average interest earning assets/interest-bearing liabilities											103.38	%											101.96	%

 

(1)	Includes nonaccrual loans

(2)	Represents net interest income divided by the average balance of interest-earning assets.

 

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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,
		2012								Vs.		2011
		Increase (Decrease) Due to
		Volume				Rate						Rate/Volume				Total
		(In Thousands)
Interest income:
Loans receivable, net		$	(351	)		$	171					$	(13	)		$	(193	)
Mortgage-backed securities			392				(205	)					(66	)			121
Investment securities			(7	)			(15	)					1				(21	)
Other interest-earning assets			(9	)			(1	)					—				(10	)
Total interest-earning assets			25				(50	)					(78	)			(103	)
Interest expense:
Deposits			30				(472	)					(5	)			(447	)
Junior Subordinated Debentures			—				—						—				—
Total interest-bearing liabilities			30				(472	)					(5	)			(447	)
Change in net interest income		$	(5	)		$	422					$	(73	)		$	344

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 a $500,000 provision for losses on loans during the three months ended December 31, 2012 as compared to a provision of $300,000 for the three months ended December 31, 2011. The increase in loan loss provisions was directly related to declines in estimated realizable values of certain problem loans, primarily investor rental properties. 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 $121,000, or 22.2%, from $544,000 for the three months ended December 31, 2011 to $665,000 for the three months ended December 31, 2012. The increase in other income for the three months ended December 31, 2012 was primarily attributable to an increase in miscellaneous income of $145,000, or 81.0%, from $179,000 for the three months ended December 31, 2011, to $324,000 for the three months ended December 31, 2012. This increase was partly due to increased commissions from investment sales and an increase in prepayment fees received as certain loans paid off prior to scheduled maturity. These increases were partially offset by a decrease in gains on repossessed assets of $57,000, or 100.00% from $57,000 for the three months ended December 31, 2011 to $0 for the three months ended December 31, 2012 as the Company disposed of no repossessed assets during the period.

Non-interest Expenses. Total non-interest expenses decreased by $48,000, or 1.1%, from $4.3 million for the three months ended December 31, 2011 to $4.3 million for the three months ended December 31, 2012. This overall decline was due primarily to decreases in federal deposit insurance and professional fees. Federal Insurance premiums decreased by $69,000, or 32.1% from $215,000 for the three months ended December 31, 2011 to $146,000 for the three months ended December 31, 2012. Premiums during the three months ended December 31, 2011 included certain Office of the Comptroller of Currency “OCC” assessment fees that were no longer incurred during the three months ended December 31, 2012. Professional fees decreased $44,000, or 28.4% from $155,000 for the three months ended December 31, 2011 to $111,000 for the three months ended December 31, 2012, primarily due to reduced legal fees. There were no other notable fluctuations within other categories of non-interest expenses during the three months ended December 31, 2012 as compared with the same period of the preceding fiscal year.

Income Taxes . Our income tax expense was $373,000 and $237,000 for the three months ended December 31, 2012 and 2011, respectively. The change in income taxes for the three months ended December 31, 2012 as compared to the same period in the prior year was primarily due to increased pretax earnings.

 

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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:

 

		At December 31, 2012				At September 30, 2012
		(In thousands)
Commitments to originate new loans		$	4,145			$	10,758
Unfunded commitments to extend credit under existing equity line and commercial lines of credit			31,494				32,225
Commercial letters of credit			656				390

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, 2012, we had $18.2 million in non-performing assets, consisting of nonaccrual loans, accruing troubled debt restructurings and repossessed assets representing 2.83% of total assets. At September 30, 2012 non-performing assets were $21.5 million or 3.33% of total assets. Our net charge-offs for the three months ended December 31, 2012 and December 31, 2011 were $482,000 and $4,000, respectively. Our allowance for loan losses was $5.5 million at December 31, 2012 compared to $5.5 million at September 30, 2012.

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

 

		At December 31, 2012				At September 30, 2012
		(In thousands)
Nonperforming loans:
Nonaccrual loans (1):
Single family residential		$	711			$	472
Single family rental property			2,775				2,128
Commercial real estate			2,441				2,994
Construction			3,353				7,551
Commercial leases			—				—
Commercial lines of credit			—				—
Consumer Loans			81				—
Total nonaccrual loans			9,361				13,145
Loans 90 days past due and accruing			—				—
Accruing Troubled Debt Restructurings			5,493				6,647
Total non-performing loans			14,854				19,792
Foreclosed Real Estate			3,370				1,674
Total nonperforming assets		$	18,224			$	21,466
Nonperforming loans to loans receivable			4.51	%			5.90	%
Nonperforming assets as a percentage of loans, foreclosed real estate and repossessed assets			5.49	%			6.38	%
Nonperforming assets to total assets			2.83	%			3.33	%
Loans modified in Troubled Debt Restructuring		$	6,527			$	9,267

 

(1)

Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is questionable. Also included in this category at December 31, 2012 are $1.0 million in Troubled Debt Restructurings, $800,000 of which were current. Reporting guidance requires disclosure of these loans as nonaccrual until the loans have performed according to the modified terms for a sustained period. As of December 31, 2012, the Company had a total of $6.5 million in Troubled Debt Restructurings.

 

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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
		2012				2011
		(Dollars in thousands)
Balance at beginning of period		$	5,470			$	4,768
Loans charged-off:
Real estate mortgages:
Single-family residential			—				—
Single-family residential-rentals			(1	)			(11	)
Commercial			—				—
Construction			(504	)			—
Commercial Leases			—				—
Consumer			—				(5	)
Total charge-offs			(505	)			(16	)
Recoveries:
Real estate mortgage:
Single-family residential			—				—
Single-family residential-rentals			—				—
Commercial			3				—
Construction			—				—
Commercial leases			—				—
Consumer			20				12
Total recoveries			23				12
Net loans charged-off			(482	)			(4	)
Provision for loan losses			500				300
Balance at end of period		$	5,488			$	5,064
Ratio of net charge-offs (annualized) to average loans outstanding during the period			.57	%			.00	%

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, 2012, the Company had $31.9 million in classified assets, consisting of $21.3 million in substandard loans, $7.2 million in substandard CMO’s, and $3.4 million in foreclosed property. At September 30, 2012, the Company had $34.2 million in classified assets consisting of $24.9 million in substandard loans, $7.6 million in substandard CMO’s and $1.7 million in foreclosed property or other real estate owned. For further information see note 7 of the notes to consolidated financial statements.

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, 2012, we have identified approximately $6.9 million in assets classified as special mention. At September 30, 2012, $6.4 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 December 31, 2012, the Bank and the Company exceeded all of their regulatory minimum capital requirements and are categorized as “well capitalized” under the regulatory framework for prompt corrective action. For information comparing the Bank’s and the Company’s capital levels to the regulatory requirements, see Note 10 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 three months ended December 31, 2012 and 2011, the Company had $17.0 million and $8.9 million, respectively, of gross loan originations. During the three months ended December 31, 2012, and 2011 the Company purchased $12.9 and $9.1 million, respectively, in investment securities and mortgage-backed securities. The primary financing activity of the Company is the attraction of savings deposits.

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 thirty days 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, 2012, cash, interest-bearing deposits in other banks and federal funds sold were $9.2 million, $11.5 million and $38.7 million, respectively.

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 $85.8 million as of December 31, 2012 and has a line of credit with M & T Bank for $5.0 million. In addition, securities in the available for sale portfolio provide liquidity and the Company has the immediately liquid resources of cash, cash due from banks and federal funds sold if needed. The Bank also has the ability to borrow from the Federal Reserve’s discount window with pledged securities.

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, 2012 totaled $124.4 million. Based on past experience, management believes that a significant portion of such deposits will remain with Baltimore County Savings Bank.

In June 2002, BCSB Bankcorp issued $12,887,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust I, a Delaware business trust, of 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 3.99% at December 31, 2012. 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 BCSB Bankcorp Capital Trust I.

In September 2003, BCSB Bankcorp issued $10,310,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust II, a Delaware business trust, of 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 3.34% at December 31, 2012. 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 $159,000 during the three months ended December 31, 2012 and $157,000 during the three months ended December 31, 2011.

Pursuant to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, in December 2008 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

 

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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 and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On January 26, 2011 the Company repurchased all $10.8 million of Series A Preferred Stock issued to the U.S. Treasury in December 2008 pursuant to the TARP Capital Purchase Program. BCSB completed the repayment without raising additional capital. The warrant issued to the U.S. Treasury to purchase 183,645 shares of the Company’s common stock at $8.83 per share, par value $.01 per share, has not been repurchased and remains outstanding. The warrant will not 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-15(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 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

For information regarding the Company’s legal proceedings see “Legal Proceedings,” in the Company’s Form 10-K for the fiscal year ended September 30, 2012 filed with the Securities and Exchange Commission on December 28, 2012 . As of December 31, 2012, the legal proceedings of the Company have not changed materially from those reported in the Form 10-K.

 

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, 2012 filed with the Securities and Exchange Commission on December 28, 2012. As of December 31, 2012, 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.

Mine Safety Disclosures

Not applicable

 

Item 5.

Other Information

None

 

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Item 6.

Exhibits

The following exhibits are filed herewith:

 

Exhibit Number		Title
3.1		Articles of Incorporation of BCSB Bancorp, Inc. (1)
3.2		Amended and Restated Bylaws of BCSB Bancorp, Inc. (2)
4.1		Form of Common Stock Certificate of BCSB Bancorp, Inc. (1)
4.2		Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of BCSB Bancorp, Inc. (3)
4.3		Warrant to Purchase 183,465 Shares of Common Stock of BCSB Bancorp, Inc. (3)
4.4		Indenture between BCSB Bankcorp, Inc. and Wells Fargo Bank, National Association ,dated June 27, 2002 (4)
4.5		Form of Floating Rate Junior Subordinated Deferrable Interest Debenture (4)
4.6		Indenture between BCSB Bankcorp, Inc. and Wells Fargo Bank, National Association. dated September 30, 2003 (4)
4.7		Form of Junior Subordinated Debt Securities Due 2033 (4)
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
101*		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition; (ii) Consolidate Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

(1)	Incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File No. 333-148745).

(2)	Incorporated herein by reference from the Company’s Current Report on Form 8-K filed on March 25, 2009 (File No. 0-53163).

(3)	Incorporated herein by reference from the Company’s Current Report on Form 8-K filed on December 23, 2008 (File No. 0-53163).

(4)	Incorporated herein by reference from BCSB Bankcorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2003 (File No. 0-24589).

*	Furnished, not filed.

 

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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 14, 2013						/s/ Joseph J. Bouffard
						Joseph J. Bouffard
						President and Chief Executive Officer
						(Principal Executive Officer)
Date: February 14, 2013						/s/ Anthony R. Cole
						Anthony R. Cole
						Executive Vice President and Chief Financial Officer
						(Principal Financial and Accounting Officer)

 

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