UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to ______
Commission File Number: 0-24589
BCSB BANKCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
UNITED STATES 52-2108333
- -------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4111 E. JOPPA ROAD, SUITE 300, BALTIMORE, MARYLAND 21236
---------------------------------------------------------
(Address of Principal Executive Offices)
(410) 256-5000
-----------------------------------------------
Issuer's Telephone Number, Including Area Code)
N/A
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check |X| whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 |X| whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of April 30, 2003, the issuer had 5,874,082 shares of Common Stock
issued and outstanding.
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2003 (unaudited) and September 30, 2002............2
Consolidated Statements of Operations for the Six Months and
Three Months Ended March 31, 2003 and 2002
(unaudited)..................................................3
Consolidated Statement of Comprehensive Income for the Six
Months and Three Months Ended March 31, 2003 and
2002 (unaudited)............................................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2003 and 2002 (unaudited)................... 5
Notes to Consolidated Financial Statements................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........23
Item 4. Controls and Procedures..............................................23
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings....................................................24
Item 2. Changes in Securities and Use of Proceeds............................24
Item 3. Defaults Upon Senior Securities......................................24
Item 4. Submission of Matters to a Vote of Security Holders..................24
Item 5. Other Information....................................................24
Item 6. Exhibits and Reports on Form 8-K.....................................24
SIGNATURES....................................................................25
CERTIFICATIONS................................................................26
1
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
MARCH 31, SEPTEMBER 30,
2003 2002
-------------- --------------
(Unaudited)
Assets
------
Cash $ 7,518,668 $ 6,467,598
Interest bearing deposits in other banks 2,307,003 15,808,342
Federal funds sold 11,946,394 3,527,387
Investment securities, held to maturity 2,000,000 4,495,986
Investment securities, available for sale 100,983,109 45,083,287
Loans receivable, net 381,177,117 396,616,729
Loans held for sale 729,300 --
Mortgage backed securities, held to maturity 23,190,631 33,691,430
Mortgage backed securities, available for sale 78,130,452 60,411,132
Premises and equipment, net 8,717,180 8,630,812
Federal Home Loan Bank of Atlanta stock 3,670,300 3,939,700
Accrued interest receivable 1,956,438 2,190,458
Prepaid and deferred income taxes 1,249,217 1,268,370
Goodwill 2,294,327 2,294,327
Core deposit intangible 458,000 542,000
Other assets 2,096,352 2,097,791
-------------- --------------
Total assets $ 628,424,488 $ 587,065,349
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Checks outstanding in excess of bank balance $ -- 390,799
Deposits 540,994,759 498,785,268
Advances from the Federal Home Loan Bank of Atlanta 25,868,700 26,968,099
Trust Preferred Securities 12,500,000 12,500,000
Advance payments by borrowers for taxes and insurance 2,030,678 1,194,371
Income taxes payable 143,452 58,226
Dividends payable 264,891 264,891
Other liabilities 737,111 1,598,132
-------------- --------------
Total liabilities 582,539,591 541,759,786
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock (Par value $.01 - 13,500,000 authorized,
5,874,082 issued and outstanding at March 31, 2003
and September 30, 2002 ) 58,741 58,741
Additional paid-in capital 20,329,455 20,302,518
Obligation under Rabbi Trust 1,176,520 1,156,870
Retained earnings (substantially restricted) 25,992,115 25,279,752
Accumulated Other Comperhensive Income (net of taxes) 393,474 664,554
Employee Stock Ownership Plan (868,908) (960,372)
Stock held by Rabbi Trust (1,196,500) (1,196,500)
--------------- ---------------
Total Stockholders' Equity 45,884,897 45,305,563
-------------- --------------
Total liabilities and Stockholders' Equity $ 628,424,488 $ 587,065,349
============== ==============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
FOR SIX MONTHS ENDED FOR THREE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Interest Income
- ---------------
Interest and fees on loans $13,916,798 $ 10,118,695 $ 6,909,015 $ 5,014,499
Interest on mortgage backed securities 2,065,369 1,651,973 1,009,590 825,760
Interest and dividends on investment securities 1,177,629 1,403,068 650,348 729,996
Other interest income 176,609 105,429 85,463 46,354
------------ ------------ ------------ ------------
Total interest income 17,336,405 13,279,165 8,654,416 6,616,609
Interest Expense
- ----------------
Interest on deposits 7,240,322 7,033,929 3,564,559 3,404,255
Interest on borrowings - short term 110,654 319,015 53,679 123,592
Interest on borrowings-long term 539,617 -- 264,844 --
Other Interest Expense 340,434 1,000 161,708 --
------------ ------------ ------------ ------------
Total interest expense 8,231,027 7,353,944 4,044,790 3,527,847
------------ ------------ ------------ ------------
Net interest income 9,105,378 5,925,221 4,609,626 3,088,762
Provision for losses on loans 412,365 69,370 130,367 5,508
------------ ------------ ------------ ------------
Net interest income after provision
for losses on loans 8,693,013 5,855,851 4,479,259 3,083,254
Other Income
- ------------
Gain on Sale of Loans 271,358 109,458 204,373 91,193
(Reversal of)/Provision for Losses on
Loans held for sale -- (10,761) -- 37,060
Servicing fee income 5,843 9,464 5,840 5,705
Fees and charges on loans 112,328 86,174 61,583 45,810
Fees on transaction accounts 246,207 191,598 116,917 103,611
Rental income 60,322 51,259 23,275 27,529
Gain from sale of investments 25,000 17,510 -- 17,510
Gain on sale of Mortgage Backed Securities 153,610 1,076 83,600 1,076
Miscellaneous income 77,142 5,244 30,468 (15,241)
------------ ------------ ------------ ------------
Net other income 951,810 461,022 526,056 314,253
Non-Interest Expenses
- ---------------------
Salaries and related expense 4,096,378 2,798,727 1,958,787 1,422,676
Occupancy expense 785,110 607,399 390,127 310,238
Deposit insurance premiums 100,815 76,615 51,197 43,082
Data processing expense 804,489 449,367 392,898 218,295
Property and equipment expense 632,678 472,978 322,170 248,849
Professional fees 137,046 97,917 78,870 53,000
Advertising 421,383 476,445 193,619 208,428
Telephone, postage and office supplies 324,768 224,569 170,118 122,159
Other expenses 352,254 225,400 189,354 83,977
------------ ------------ ------------ ------------
Total non-interest expenses 7,654,921 5,429,417 3,747,140 2,710,704
------------ ------------ ------------ ------------
Income before tax provision 1,989,902 887,456 1,258,175 686,813
Income tax provision 758,810 343,939 479,592 266,472
------------ ------------ ------------ ------------
Net income $ 1,231,092 $ 543,517 $ 778,583 $ 420,341
============ ============ ============ ============
Basic earnings per share $ .22 $ .10 $ .14 $ .08
============ ============ ============ ============
Diluted earnings per share $ .21 $ .10 $ .14 $ .07
============ ============ ============ ============
The accompanying notes to the consolidated financial statements are an integral
part of these statements
3
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(UNAUDITED)
-----------
FOR SIX MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
---- ----
Net Income $ 1,231,092 $ 543,517
Other comprehensive income, net of tax:
Unrealized net holding (losses) on
available-for-sale portfolios (161,449) (731,994)
Reclassification adjustment for gains
included in net income, net of tax (109,631) (11,408)
----------- -----------
Comprehensive income and (loss) $ 960,012 $ (199,885)
=========== ===========
FOR THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
---- ----
Net Income $ 778,583 $ 420,341
Other comprehensive income, net of tax:
Unrealized net holding gains on
available-for-sale portfolios 128,912 433,965
Reclassification adjustment for gains
included in net income, net of tax (51,314) (11,408)
--------- ---------
Comprehensive income $ 856,181 $ 842,898
========= =========
See accompanying notes to financial statements.
4
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------
FOR SIX MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
------------ -----------
Operating Activities
- --------------------
Net Income $ 1,231,092 $ 543,517
Adjustments to Reconcile Net Income to Net
Cash Used by Operating Activities
---------------------------------
Accretion of discount on investments (19,912) (4,080)
Dividends on Investment Securities (440,103) (426,154)
Gain on sale of investments (25,000) (17,510)
Loans originated for sale (8,682,343) (7,459,655)
Loans sold 8,224,401 6,773,410
Gain on sale of loans (271,358) (109,458)
Loan fees and costs deferred, net 135,692 99,615
Amortization of deferred loan cost, net (318,313) (102,918)
Provision for losses on loans 412,365 69,370
Provision for loss on loans held for sale -- 10,761
Non-cash compensation under Stock-Based Benefit Plan 118,401 90,565
Amortization of premium on mortgage backed securities 266,160 102,935
Amortization of purchase premiums and discounts, net (413,873) --
Gain on sale of mortgaged backed securities (153,610) (1,076)
Provision for depreciation 486,220 411,095
Decrease in accrued interest receivable 234,020 129,469
Decrease (increase) in prepaid income taxes 188,079 (73,700)
Decrease (increase) in other assets 1,439 (146,939)
Decrease in accrued interest payable on deposits (24,505) (54,317)
Increase in income taxes payable 85,226 36,591
Decrease in other liabilities and payables to
disbursing agents (861,021) (110,471)
Increase in obligation under Rabbi-Trust 19,650 --
----------- -----------
Net cash provided (used) by operating activities 192,707 (238,950)
5
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR SIX MONTHS ENDED
MARCH 31,
--------------------------------
2003 2002
----------- ------------
Cash Flows from Investing Activities
- ------------------------------------
Proceeds from maturing interest bearing deposits $ -- $ 2,154,000
Purchases of investment securities - available for sale (86,604,364) (38,387,242)
Proceeds from maturities of investment securities - available for sale 30,140,019 2,000,000
Proceeds from sale of investment securities- available for sale 1,025,000 5,013,875
Purchases of investment securities - held to maturity -- (500,000)
Proceeds from maturities of investment securities - held to maturity 2,500,000 8,000,000
Longer term loans originated (27,819,364) (25,778,983)
Principal collected on longer term loans 49,493,963 25,069,140
Net increase in short-term loans (6,723,516) (2,289,075)
Principal collected on mortgage backed securities - available for sale 12,227,065 6,889,484
Purchase of mortgage backed securities - available for sale (44,398,220) (31,832,464)
Proceeds from sale of mortgaged backed securities- available for sale 13,962,697 2,697,603
Purchase of mortgage backed securities- held to maturity -- (1,686,487)
Principal collected on mortgage backed securities - held to maturity 10,379,048 7,678,182
Proceeds from sales of foreclosed realestate -- 80,569
Purchase of WHG Bankcorp stock -- (819,936)
Investment in premises and equipment (572,588) (252,554)
Purchase of Federal Home Loan Bank of Atlanta stock -- (655,300)
Proceeds from sale if Federal Home Loan Bank of Atlanta stock 269,400 --
------------ -------------
Net cash used by investing activities (46,120,860) (42,619,370)
Cash Flows from Financing Activities
- ------------------------------------
Decrease in checks written in excess of bank balance (390,799) --
Net increase in demand deposits, money market, passbook
accounts and advances by borrowers for taxes and
insurance 17,744,654 15,703,672
Net increase in certificates of deposit 26,061,765 28,629,960
Increase in Federal Home Loan Bank of Atlanta advances -- 4,750,000
Repayment of Federal Home Loan Bank of Atlanta advances (1,000,000) (6,750,000)
Acquisition of stock for Rabbi Trust -- (57,000)
Increase in Dividends Payable -- 1
Dividends paid on stock (518,729) (528,092)
------------- -------------
Net cash provided by financing activities 41,896,891 41,748,541
------------- -------------
Increase) in cash and cash equivalents (4,031,262) (1,109,779)
Cash and cash equivalents at beginning of period 25,703,327 12,968,998
------------- -------------
Cash and cash equivalents at end of period $ 21,672,065 $ 11,859,219
============= =============
6
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR SIX MONTH PERIOD
ENDED MARCH 31,
---------------------------------
2003 2002
----------- -----------
The following is a summary of cash and cash equivalents:
Cash $ 7,518,668 $ 3,186,869
Interest bearing deposits in other banks 2,307,003 6,521,935
Federal funds sold 11,946,394 2,349,415
------------- -------------
Balance of cash items reflected on Statement of
Financial Condition 21,772,065 12,058,219
Less - certificate of deposit with a maturity of
more than Six months 100,000 199,000
------------- -------------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 21,672,065 $ 11,859,219
============= =============
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest $ 8,286,557 $ 7,496,391
============= =============
Income taxes $ 826,700 $ 345,400
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
7
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 1 - Principals of Consolidation
---------------------------
BCSB Bankcorp, Inc. (the "Company") owns 100% of BCSB Bankcorp Capital
Trust I and Baltimore County Savings Bank, F.S.B. and subsidiaries
(the "Bank") and also invests in federal funds sold, interest-bearing
deposits in other banks and U.S. Agency bonds. The Bank owns 100% of
Baltimore County Service Corporation and Ebenezer Road, Inc. The
accompanying consolidated financial statements include the accounts
and transactions of these companies on a consolidated basis since the
date of acquisition. All intercompany transactions have been
eliminated in the consolidated financial statements. Ebenezer Road,
Inc. sells insurance products.
Note 2 - Basis for Financial Statement Presentation
------------------------------------------
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America and the instructions to Form 10-Q.
Accordingly, they do not include all of the disclosures required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, all adjustments (none of which were other than normal
recurring accruals) necessary for a fair presentation of the financial
position and results of operations for the periods presented have been
included. The financial statements of the Company are presented on a
consolidated basis with those of the Bank. The results for the six
months ended March 31, 2003 are not necessarily indicative of the
results of operations that may be expected for the year ended
September 30, 2003. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and
related notes which are incorporated by reference in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 2002.
Note 3 - Cash Flow Presentation
----------------------
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository institutions,
investments in federal funds, and certificates of deposit with
original maturities of 90 days or less.
Note 4- Pro-Forma Income
----------------
Merger Agreement - On July 24, 2002, the Company acquired WHG
Bancshares Corporation, the holding company for Heritage Savings Bank,
a federally chartered savings bank. Holders of outstanding shares of
WHG Bancshares received $14.25 in cash.
The combination was accounted for under the purchase method of
accounting, and accordingly, the net assets were recorded at their
estimated fair values at the date of acquisition, July 24, 2002. The
Company recorded net premiums of $2,779,968 on assets and $2,981,701
on liabilities. A core deposit intangible of $630,000 was also
recorded. Fair value adjustments on the assets and liabilities
purchased are being amortized over the estimated lives of the related
assets and liabilities. The excess of purchase price over the
estimated fair value of the underlying net assets of $2,294,327 was
allocated to goodwill. Goodwill is assessed for impairment on an
annual basis.
The following unaudited pro forma condensed consolidated financial
information reflects the results of operations of the Company for the
six months ended March 31, 2002 as if the transaction had occurred at
the beginning of the period presented. These pro forma results are not
necessarily indicative of what the Company's results of operations
would have been had the acquisition actually taken place at the
beginning of each period presented.
8
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 4- Pro-Forma Income (Continued)
----------------
For the six months ended
------------------------
March 31, 2002
--------------=
Net Interest Income $8,077,853
Net Income 846,878
Diluted net income per share 0.14
Note 5 - Earnings Per Share
------------------
Basic per share amounts are based on the weighted average shares of
common stock outstanding. Diluted earnings per share assume the
conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities,
unless the effect is to reduce a loss or increase earnings per share.
No adjustments were made to net income (numerator) for all periods
presented. The basic and diluted weighted average shares outstanding
for the six and three months ended March 31, 2003 is as follows:
For the Six Months Ended March 31, 2003
------------------------------------------
Income Shares Per Share
Basic EPS (Numerator) (Denominator) Amount
--------- ----------- ------------- ---------
Income available to shareholders $ 1,231,092 5,720,840 $ 0.22
Effect of dilutive shares -- 37,954 --
----------- ---------- --------
Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions $ 1,231,092 5,758,794 $ 0.21
============ ========== ========
For the Three Months Ended March 31, 2003
------------------------------------------
Income Shares Per Share
Basic EPS (Numerator) (Denominator) Amount
--------- ----------- ------------- ---------
Income available to shareholders $ 778,583 5,723,152 $ 0.14
Effect of dilutive shares -- 42,168 --
----------- ---------- -------
Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions $ 778,583 $5,765,320 $ 0.14
=========== ========== =======
9
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 6 - Regulatory Capital
------------------
The following table sets forth the Bank's capital position at March
31, 2003.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------------- ----------------------- ----------------------
Actual % of Required % of Required % of
Amount Assets Amount Assets Amount Assets
------ ------ -------- ------ -------- ------
(unaudited)
Tangible (1) $ 46,621,466 7.53% $ 9,286,026 1.50% N/A N/A
Tier 1 capital (2) 46,621,466 13.40 N/A N/A 20,874,412 6.00%
Core (1) 46,621,466 7.53 24,762,736 4.00 30,953,420 5.00
Risk-weighted (2) 48,701,373 14.00 27,832,549 8.00 34,790,687 10.00
- ------------
(1) To adjusted total assets.
(2) To risk-weighted assets.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was formed by the Bank to become the holding company of the
Bank following the Bank's reorganization to the mutual holding company form of
organization (the "Reorganization"). The Reorganization was consummated on July
8, 1998.
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
securities and mortgage-backed securities portfolio 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.
FORWARD-LOOKING STATEMENTS
When used in this 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, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
RECENT ACQUISITION
On July 24, 2002, the Company and the Bank completed the acquisition of WHG
Bancshares Corporation ("WHG Bancshares") and its wholly owned subsidiary,
Heritage Savings Bank, F.S.B. ("Heritage Bank"). Stockholders of WHG Bancshares
received $14.25 per share in cash for each of the 1,285,050 outstanding shares
of WHG Bancshares's common stock. As a result of the merger, Heritage Bank
merged into the Bank and its five locations became branch offices of the Bank.
The aggregate purchase price was approximately $18.3 million. The transaction
was accounted for using the purchase method.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND SEPTEMBER 30, 2002
During the six months ended March 31, 2003, the Company's assets increased
by $41.3 million, or 7.0% from $587.1 million at September 30, 2002 to $628.4
million at March 31, 2003. Loans receivable, net decreased by $15.4 million, or
3.9%, from $396.6 million at September 30, 2002 to $381.2 million at March 31,
2003. The Company's mortgage-backed securities available for sale increased by
$17.7 million, or 29.3%, from $60.4 million at September 30, 2002 to $78.1
million at March 31, 2003. The Company's mortgage-backed securities held to
maturity decreased by
11
$10.5 million or 31.2% from $33.7 million at September 30, 2002 to $23.2 million
at March 31, 2003. The Company's investment portfolio available for sale
increased $55.9 million or 124.0%, from $45.1 million at September 30, 2002 to
$101.0 million at March 31, 2003. The Company's investment portfolio held to
maturity decreased by $2.5 million or 55.5% from $4.5 million at September 30,
2002 to $2.0 million at March 31, 2003. The preceeding was accomplished in an
effort to reduce interest rate risk in the balance sheet. The bank is reluctant
to make long term low rate loans in today's low interest rate environment.
Emphasis has been placed on short term loans such as automobile loans, home
equity loans and short term mortgages. The Company's deposits increased by $42.2
million, or 8.5%, from $498.8 million at September 30, 2002 to $541.0 million at
March 31, 2003. The increase in deposits was achieved through normal marketing
efforts and the acquisition of WHG Bancshares. The growth in deposits helped to
fund security purchases. The security purchases have been short tem balloon type
products and adjustable mortgage products.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
Net Income. Net income increased by $687,000, or 126.3%, from $544,000 for
the six months ended March 31, 2002 to $1.2 million for the six months ended
March 31, 2003. The increase in net income was partially attributable to
increased net interest income, due to an increase in the average balance of
loans. The average balance of loans increased $121.1 million, from $269.6
million at March 31, 2002 to $390.7 million at March 31, 2003, of which $116.8
million was a result of the merger with WHG Bancshares. The average balance of
deposits increased $165.8 million from $347.6 million at March 31, 2002 to
$513.4 million at March 31, 2003. Increase in other income also contributed to
the increase in net income.
Net Interest Income. Net interest income was $9.1 million for the six
months ended March 31, 2003, compared to $5.9 million for the six months ended
March 31, 2002, representing an increase of $3.2 million, or 53.7%. The increase
was primarily due to the increase in the volume of interest-earning assets. The
increase in volume of interest earning assets was primarily a result of the
merger with WHG Bancshares. The Company was able to increase interest rate
spread from 2.77% at March 31, 2002, to 3.10% at March 31, 2003 due to declining
interest rates and re-pricing of deposits.
Interest Income. Interest income increased by $4.0 million, or 30.6% from
$13.3 million for the six months ended March 31, 2002 to $17.3 million for the
six months ended March 31, 2003. Interest and fees on loans increased by $3.8
million, or 37.5%, from $10.1 million for the six months ended March 31, 2002 to
$13.9 million for the six months ended March 31, 2003. This was primarily due to
a $121.1 million increase in the average balance of loans receivable which more
than offset a decrease in the average yield on loans of 39 basis points from
7.51% at March 31, 2002 to 7.12% at March 31, 2003. The increase in the average
balance of loans was primarily attributable to the merger with WHG Bancshares
which consisted of $116.8 million in loans receivable. The decrease in the
average yield was attributed to the prevailing market rates in the economy.
Interest on mortgage-backed securities increased by $413,000 or 25.0% from $1.7
million for the six months ended March 31, 2002 to $2.1 million for the six
months ended March 31, 2003. This increase was primarily due to the increase in
the average balance of mortgage-backed securities from $59.9 million at March
31, 2002 to $92.2 million at March 31, 2003. Interest and dividends on
investment securities decreased by $225,000 or 16.1% from $1.4 million for the
six months ended March 31, 2002 to $1.2 million for the six months ended March
31, 2003. This was primarily due to a decrease in the average rate received on
investments from 5.22% at March 31, 2002 to 3.78% at March 31,2003.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense increased from $7.3
million for the six months ended March 31, 2002 to $8.2 million for the six
months ended March 31, 2003 a change of $877,000 or 11.9%. Interest on deposits
increased $206,000 due to an increase in the average volume of deposits by
$165.8 million from $347.6 million at March 31, 2002 to $513.4 million at March
31, 2003. The average yield on deposits decreased by 123 basis points from 4.05%
at March 31, 2002 to 2.82% at March 31, 2003. The Company was able to increase
its deposits through its use of advertising and the acquisition of WHG
Bancshares. Interest on short-term borrowings decreased by $208,000 for the six
months ended March 31, 2003, and interest on long-term borrowings increased by
$540,000. This increase was primarily due to an increase of $8.8 million in the
average balances of advances from the Federal Home Loan Bank of Atlanta during
the quarter ended March 31, 2003. Also contributing to interest expense was
interest on the Trust Preferred Securities which was $340,000 for the period
ending March 31, 2003.
12
Average Balance Sheet. The following tables 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 average
yields earned and rates paid. Such yield and costs are derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the period ended March 31, 2003. The period ended March 31,
2002 average balances were computed using month-end balances, except for Other
Investments which were computed using daily balances. Total average assets are
computed using month-end balances.
The table also presents information for the periods indicated with respect
to the differences between the average yield earned on interest-earning assets
and average rate paid on interest-bearing liabilities, or "interest rate
spread," which banks have traditionally used as an indicator of profitability.
Another indicator of net interest income is "net interest margin," which is its
net interest income divided by the average balance of interest-earning assets.
SIX MONTHS ENDED MARCH 31
---------------------------------------------------------------------------
2003 2002
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.................................... $ 390,781 $ 13,917 7.12% $ 269,645 $ 10,119 7.51%
Mortgage-backed securities............... 92,200 2,065 4.48 59,907 1,652 5.52
Dividends and investment securities...... 62,302 1,178 3.78 53,795 1,403 5.22
Other Investments........................ 25,355 176 1.40 8,020 105 2.62
--------- --------- ---------- --------
Total interest-earning assets........ 570,638 17,336 6.08 391,367 13,279 6.79
Noninterest-earning assets.................. 35,647 22,223
--------- ----------
Total assets......................... $ 606,285 $ 413,590
========= ==========
Interest-bearing liabilities:
Deposits................................. $ 513,371 7,240 2.82 347,608 7,034 4.05
FHLB Advances............................ 25,667 650 5.06 16,901 319 3.77
Trust Preferred Securities............... 12,500 340 5.44 -- -- --
Other liabilities........................ 1,548 1 0.13 1,661 1 0.12
--------- --------- ---------- --------
Total interest-bearing liabilities.......... 553,086 8,231 2.98 366,170 7,354 4.02
--------- ------ -------- ------
Noninterest-bearing liabilities............. 8,040 4,919
--------- ----------
Total liabilities.................... 561,126 371,089
Stockholders' equity ....................... 45,159 42,501
--------- ----------
Total liabilities and stockholders'
equity.......................... $ 606,285 $ 413,590
========= ==========
Net interest income......................... $ 9,105 $ 5,925
========= ========
Interest rate spread........................ 3.10% 2.77%
====== ======
Net interest margin......................... 3.19% 3.03%
====== ======
Ratio average interest earning assets/
interest bearing liabilities............ 103.17% 106.88%
====== ======
13
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(i) changes in volume (changes in volume multiplied by old rate); (ii) changes
in rates (change in rate multiplied by old volume); and (iii) changes in
rate/volume (changes in rate multiplied by the changes in volume).
FOR SIX MONTHS ENDED MARCH 31,
--------------------------------------------------
2003 VS. 2002
--------------------------------------------------
INCREASE (DECREASE)
DUE TO
--------------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
(IN THOUSANDS)
Interest income:
Loans receivable.......................... $ 4,540 $ (512) $ (230) $ 3,798
Mortgage-backed securities................ 893 (312) (168) 413
Investment securities and
FHLB Stock............................ 222 (386) (61) (225)
Other interest-earning assets............. 227 (49) (106) 72
-------- -------- -------- --------
Total interest-earning assets........... 5,882 (1,259) (565) 4,058
Interest expense:
Deposits.................................. 3,355 (2,132) (1,017) 206
FHLB advances............................. 166 108 56 330
Trust Preferred Securities................ 340 0 0 340
Other liabilities......................... 0 0 0 0
-------- -------- -------- --------
Total interest-bearing
liabilities.......................... 3,861 (2,024) (961) 876
-------- -------- -------- --------
Change in net interest income............... $ 2,021 $ 765 $ 396 $ 3,182
======== ======== ======== ========
Provision for Loan Losses. The Company charges provisions for loan losses
to earnings to maintain the total allowance for loan losses at a level
management considers adequate to provide for probable future loan losses. In
determining the provision, management considers prior loss experience, current
economic conditions and the probability of these conditions affecting future
loan performance. The Company established provisions for losses on loans of
$412,000 for the six months ended March 31, 2003, as compared to $69,000 for the
six months ended March 31, 2002, representing an increase of $343,000 The
provision increased due to the increased volume of loans and increased
chargeoffs. Loan chargeoffs for the six months ended March 31, 2003 were
$616,000 as compared to $188,000 for the six months ended March 31, 2002. The
increase in loan chargeoffs was partially due to the increased volume of loans
and current economic conditions. Loan recoveries were $157,000 for the six
months ended March 31, 2003 compared to $129,000 for the six months ended March
31, 2002. Non performing loans at March 31, 2003 were $750,000 as compared to
$541,000 at March 31, 2002. The total loss allowance allocated to domestic loans
is $2.1 million. In establishing such provisions, management considered an
analysis of the risk inherent in the loan portfolio.
Other Income. Other income increased by $491,000, or 106.5% from $461,000
for the six months ended March 31, 2002 to $952,000 for the six months ended
March 31, 2003. The increase in other income for the six months ended March 31
2002 was partially attributable to gains on the sale of loans of $271,000 for
the six months ended March 31, 2003 compared to $109,000 for the six months
ended March 31, 2002. . There was also a gain on the sale of Mortgaged Backed
Securities of $154,000 for the six months ended March 31, 2003 compared to a
gain of $1,000 for the six months ended March 31, 2002, and a gain on the sale
of investments of $25,000 for the six months ended March 31, 2003 compared to
$17,000 for the six months ended March 31, 2002. These gains were achieved
through the Company's implementation of a strategy to mitigate interest rate
risk. These gains may not
14
be achieved in the future should market conditions change. Fees on transaction
accounts increased by $55,000 due to the increase in the volume of transaction
accounts.
Non-interest Expenses. Total non-interest expenses increased by $2.2
million, or 41.0%, from $5.4 million for the six months ended March 31, 2002 to
$7.6 million for the six months ended March 31, 2003. The increase in
non-interest expenses was due to increases in salaries and related expenses of
$1.3 million, or 46.4%. The increase in salaries was partially due to the
increased personnel due to the merger with WHG Bancshares and increased loan
personnel as the Company attempts to diversify into the commercial loan market.
The increase in non-interest expenses also was due in part to the absence of a
credit to compensation expense of $169,000 for the six months ended March
31,2002 for the directors retirement plan due to the decline of value of the
shares held in the Rabbi-Trust. The Company established the Rabbi-Trust to hold
shares of Company Common Stock in connection with the Company's obligation to
pay deferred compensation under the Directors' Retirement Plan. The related
deferred compensation obligation was classified as a liability and adjusted with
a corresponding charge (or credit) to compensation cost by multiplying the
number of shares owned by the Rabbi Trust by the change in the fair market value
of each share, to reflect changes of the amount owed to the directors. No
adjustments to compensation expense for the Rabbi Trust were required for the
quarter ended March 31, 2003 as a result of stockholder approval of an amendment
to the Directors' Retirement Plan at the 2002 annual meeting of stockholders.
The Company also experienced increases of $355,000, or 79.0% in data
processing expenses, from $449,000 at March 31, 2002 to $804,000 at March 31,
2003. This increase was primarily due to an increased number of transaction
accounts due to the merger with WHG Bancshares and a rate increase. Occupancy
expense increased by $178,000 or 29.3% from $607,000 at March 31, 2002 to
$785,000 at March 31, 2003. The Company also experienced increases of $160,000,
or 33.8% in property and equipment expense and an increase of $100,000, or 44.6%
in telephone, postage and office supplies. These increases were due to the cost
of the additional branch offices acquired in the WHG Bancshares merger.
Income Taxes. The Company's income tax expense was $759,000 and $344,000
for the six months ended March 31, 2003 and 2002, respectively. The Company's
effective tax rates were 38.1% and 38.7% for the six months ended March 31, 2003
and 2002, respectively.
15
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
2002
Net Income. Net income increased by $359,000, or 85.2%, from $420,000 for
the three months ended March 31,2002 to $779,000 for the three months ended
March 31, 2003. The increase in net income was partially attributable to an
increase in other income and increased net interest income, due to an increase
in the average balance of loans. The average balance of loans increased $118.6
million, from $271.1 million at March 31, 2002 to $389.7 million at March 31,
2003, of which $116.8 million was a result of the merger with WHG Bancshares.
The average balance of deposits increased $166.4 million from, $356.1 million at
March 31, 2002 to $522.5 million at March 31, 2003 of which $118.2 million was a
result of the merger with WHG Bancshares.
Net Interest Income. Net interest income was $4.6 million for the three
months ended March 31, 2003, compared to $3.1 million for the three months ended
March 31, 2002, representing an increase of $1.5 million, or 49.2%. The increase
was primarily due to the increase in the volume of interest-earning assets. The
increase in the volume of interest earning assets was primarily a result of the
merger with WHG Bancshares. The company was able to increase interest rate
spread from2.84% at March 31, 2002 to 3.13% at March 31, 2003 due to declining
interest rates and re-pricing of deposits.
Interest Income. Interest income increased by $2.0 million, or 30.8% from
$6.6 million for the three months ended March 31, 2002 to $8.6 million for the
three months ended March 31, 2003. Interest and fees on loans increased by $1.9
million, or 37.8%, from $5.0 million for the three months ended March 31, 2002
to $6.9 million for the three months ended March 31, 2003. This was primarily
due to a $118.6 million increase in the average balance of loans receivable
which more than offset a decrease in the average yield on loans of 31 basis
points from 7.40% at March 31, 2002 to 7.09% at March 31, 2003. The increase in
the average balance of loans was primarily attributable to the merger with WHG
Bancshares which consisted of $116.8 million in loans receivable. The decrease
in the average yield was attributed to the prevailing market rates in the
economy. Interest on mortgage-backed securities increased by $184,000 or 22.3%
from $826,000 for the three months ended March 31, 2002 to $1.0 million for the
three months ended March 31, 2003. This increase was primarily due to the
increase in the average balance of mortgage-backed securities from $61.3 million
at March 31, 2002 to $91.6 million at March 31, 2003. Interest and dividends on
investment securities decreased by $80,000 or 10.9% from $730,000 for the three
months ended March 31, 2002 to $650,000 for the three months ended March 31,
2003. This was primarily due to a decrease in the average rate received on
investments from 4.98% at March 31, 2002 to 3.80% at March 31,2003.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense increased from $3.5
million for the three months ended March 31, 2002 to $4.0 million for the three
months ended March 31, 2003 a change of $517,000 or 14.7%. Interest on deposits
increased $160,000 due to an increase in the average volume of deposits by
$166.4 million from $356.0 million at March 31, 2002 to $522.5 million at March
31, 2003. The average yield on deposits decreased by 109 basis points from 3.82%
at March 31, 2002 to 2.73% at March 31, 2003. The Company was able to increase
its deposits through its use of advertising and the acquisition of WHG
Bancshares. Interest on short-term borrowings decreased by $70,000 for the three
months ended March 31, 2003, and interest on long-term borrowings increased by
$265,000. This increase was primarily due to an increase of $8.8 million in the
average balances of advances from the Federal Home Loan Bank of Atlanta during
the quarter ended March 31, 2003. Also contributing to interest expense was
interest on the Trust Preferred Securities which was $162,000 for the period
ending March 31, 2003.
16
Average Balance Sheet. The following tables 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 average
yields earned and rates paid. Such yield and costs are derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the three months ended March 31, 2003. The three months ended
March 31, 2002 average balances were computed using month-end balances. Total
average assets are computed using month-end balance.
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
2003 2002
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans $389,739 $ 6,909 7.09% $ 271,124 $ 5,014 7.40%
Mortgage-backed securities 91,604 1,010 4.41 61,293 826 5.39
Investment securities and FHLB stock 68,509 650 3.80 58,626 730 4.98
Interest bearing deposits in other banks
and Federal Funds sold 26,374 85 1.29 9,290 46 1.98
-------- ------- -------- -------
Total interest-earning assets 576,226 8,654 6.01 400,333 6,616 6.61
Noninterest-earning assets 40,798 22,087
-------- --------
Total assets $617,024 $422,420
======== ========
Interest-bearing liabilities:
Deposits $522,503 3,565 2.73 $356,073 3,404 3.82
FHLB Advances 25,583 317 4.96 16,761 124 2.96
Trust Preferred Securities 12,500 162 5.18 -- -- --
Other liabilities 1,660 1 .24 1,680 -- --
-------- ------- -------- -------
Total interest-bearing liabilities 562,246 4,045 2.88 374,514 3,528 3.77
------- ------ ------- ------
Noninterest-bearing liabilities 9,947 5,559
-------- --------
Total liabilities 572,193 380,073
Stockholders' equity 44,831 42,347
-------- --------
Total liabilities and stockholders'
Equity $617,024 $422,420
======== ========
Net interest income $4,609 $3,088
====== ======
Interest rate spread 3.13% 2.84%
====== ======
Net interest margin 3.20% 3.09%
====== ======
Ratio average interest earning assets/
interest bearing liabilities 102.49% 106.89%
====== ======
17
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(i) changes in volume (changes in volume multiplied by old rate); (ii) changes
in rates (change in rate multiplied by old volume); and (iii) changes in
rate/volume (changes in rate multiplied by the changes in volume).
FOR THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
2003 VS. 2002
--------------------------------------------------
INCREASE (DECREASE)
DUE TO
--------------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
(IN THOUSANDS)
Interest income:
Loans receivable.......................... $ 2,194 $ (204) $ (95) $ 1,895
Mortgage-backed securities................ 413 (153) (76) 184
Investment securities and
FHLB Stock............................ 124 (174) (30) (80)
Other interest-earning assets............. 87 (17) (31) 39
-------- -------- -------- --------
Total interest-earning assets........... 2,818 (548) (232) 2,038
Interest expense:
Deposits.................................. 1,592 (975) (456) 161
FHLB advances............................. 65 84 44 193
Trust Preferred Securities................ 162 0 0 162
Other liabilities......................... 0 1 0 1
-------- -------- -------- --------
Total interest-bearing
liabilities.......................... 1,819 (890) (412) 517
-------- -------- -------- --------
Change in net interest income............... $ 999 $ 342 $ 180 $ 1,521
======== ======== ======== ========
18
Provision for Loan Losses. The Company charges provisions for loan losses
to earnings to maintain a total allowance for loan losses at a level management
considers adequate to provide for probable loan losses. The Company increased
the provision for losses by $130,000 for the three months ended March 31, 2003.
This increases the loss allowance to $2.1 million, which the Company believes is
sufficient based on past experience. Loan chargeoffs for the three months ended
March 31, 2003 were $373,000 as compared to $81,000 for the three months ended
March 31, 2002. The provision increased due to the increased volume of loans and
increased chargeoffs. The increase in chargeoffs was due to the increased volume
of loans and current economic conditions. Loan recoveries were $54,000 for the
three months ended March 31, 2003 as compared to $57,000 for the three months
ended March 31, 2002. Non performing loans at March 31, 2003 were $750,000 as
compared to $541,000 at March 31, 2002. In establishing such provisions,
management considered the analysis of the risk inherent in the loan portfolio
and the increased emphasis on home equity loans, automobile loans, and consumer
loans which entail higher credit risks than residential mortgage loans.
Other Income. Other income increased by $212,000, or 67.4% from $314,000
for the three months ended March 31, 2002 to $526,000 for the three months ended
March 31, 2003. The increase in other income for the three months ended March 31
2003 was partially attributable to gains on the sale of loans of $204,000. There
was also a gain on the sale of Mortgaged Backed Securities of $84,000. These
gains were achieved through the Company's implementation of a strategy to
mitigate interest rate risk. These gains may not be achieved in the future
should market conditions change. Fees on transaction accounts increased by
$13,000.
Non-interest Expenses. Total non-interest expenses increased by $1.0
million, or 38.2%, from $2.7 million for the three months ended March 31, 2002
to $3.7 million for the three months ended March 31, 2003. The increase in
non-interest expenses was due to increases in salaries and related expenses of
$536,000, or 37.7%. The increase in salaries was partialy due to the increased
personnel due to the merger with WHG Bancshares and increased loan personnel as
the Company attempts to diversify into the commercial loan market. The increase
in non-interest expenses also was due in part to the absence of a credit to
compensation expense of $45,000 for the quarter ended March 31, 2002 for the
directors retirement plan due to the decline of value of the shares held in the
Rabbi-Trust. The Company established the Rabbi-Trust to hold shares of Company
Common Stock in connection with the Company's obligation to pay deferred
compensation under the Directors' Retirement Plan. The related deferred
compensation obligation was classified as a liability and adjusted with a
corresponding charge (or credit) to compensation cost by multiplying the number
of shares owned by the Rabbi Trust by the change in the fair market value of
each share, to reflect changes of the amount owed to the directors. No
adjustments to compensation expense for the Rabbi Trust were required for the
quarter ended March 31, 2003 as a result of stockholder approval of an amendment
to the Directors' Retirement Plan at the 2002 annual meeting of stockholders.
The Company also experienced increases of $175,000, or 80.0% in data
processing expenses, from $218,000 at March 31, 2002 to $392,000 at March 31,
2003. This increase was primarily due to an increased number of transaction
accounts due to the merger with WHG Bancshares and a rate increase. Occupancy
expense increased by $80,000 or 25.8% from $310,000 at March 31, 2002 to
$390,000 at March 31, 2003. The Company also experienced increases of $73,000,
or 29.5% in property and equipment expense and an increase of $48,000, or 39.3%
in telephone, postage and office supplies. These increases were due to the cost
of the additional branch offices acquired in the WHG Bancshares merger.
Income Taxes. The Company's income tax expense was $480,000 and $266,000
for the three months ended March 31, 2003 and 2002, respectively. The Company's
effective tax rates were 38.1% and 38.8% for the three months ended March 31,
2003 and 2002, respectively.
19
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:
March 31, 2003 September 30, 2002
-------------- ------------------
(dollars in thousands)
Commitments to originate new loans $16,087 $12,900
Commitments to originate new loans held for sale -- --
Unfunded commitments to extend credit under existing
equity line and commercial lines of credit 15,900 20,800
Commercial letters of credit 317 431
Commitments to sell loans held for sale 729 --
The Company does not have any special purpose entities or other similar forms of
off-balance sheet financing arrangements.
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 amounts of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.
Commitments to sell loans held for sale are agreements to sell loans to a
third party at an agreed upon price. At March 31, 2003, the aggregate fair value
of these commitments exceeded the book value of the loans to be sold.
CONTRACTUAL OBLIGATIONS
As of March 31, 2003
Payments due by period
----------------------
(Dollars in thousands)
Less than
1 year 1-3 years 4-5 years Over 5 years Total
--------- --------- --------- ------------ -----
Deposits $199,543 108,649 58,139 -- 366,331
Long-term borrowings -- 6,750 9,000 9,000 24,750
Lease obligations 751 2,193 1,106 3,325 7,375
-------- ------- ------ ------ -------
Total contractual cash
obligations $200,294 117,592 68,245 12,325 398,456
======== ======= ====== ====== =======
20
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are set forth in note 1 of
the consolidated financial statements as of September 30, 2002 which was filed
on Form 10-KSB. Of these significant accounting policies, the Company considers
its policy regarding the allowance for loan losses to be its most critical
accounting policy, because it requires management's most subjective and complex
judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan
losses and results of operations. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers that is
not known to management at the time of the issuance of the consolidated
financial statements.
ASSET QUALITY
At March 31, 2003, the Company had approximately $1.1 million in
non-performing assets (nonaccrual loans, repossessed assets and real estate
owned) or .17% of total assets. At September 30, 2002, non-performing assets
were $1.6 million or .28% of total assets. At March 31, 2003 and September 30,
2002, impaired loans totaled $141,000 and $0, respectively, as defined by
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan." At March 31, 2003, $ 141,000 of impaired loans was on
nonaccrual status, and their related reserve for losses totaled $73,000. There
was no impact on the provision as management had already anticipated the loans'
performance in setting the allowance for loan losses in previous periods. The
average carrying value of impaired loans was $68,000 during the six months ended
March 31, 2003. No interest income has been recorded on impaired loans in the
six months ended March 31, 2003. The Bank's net charge-offs for the six months
ended March 31, 2003 were $459,000. The Bank's allowance for loan losses was
$2.1 million at March 31, 2003 and $2.2 million at September 30, 2002. The ratio
of the allowance for loan losses to total loans, net of loans in process and
deferred loan fees decreased to .55% at March 31, 2003, compared to .58% at
September 30, 2002.
The following table presents an analysis of the Company's non-performing
assets:
At At
March 31, September 30,
2003 2002
---- ----
Nonperforming loans:
Nonaccrual loans $ 750 $1,391
Loans 90 days past due and accruing
-- --
Restructured loans -- --
------ ------
Total nonperforming loans 750 1,391
Other non-performing assets 365 229
------ ------
Total nonperforming assets $1,115 $1,620
====== ======
Nonperforming loans to loans receivable, net .29% .35%
Nonperforming assets as a percentage
of loans and other real estate owned .29% .41%
Nonperforming assets to total assets .17% .28%
Regulations require that the Company classify its assets on a regular
basis. There are three classifications for problem assets: substandard, doubtful
and loss. The Company regularly reviews its assets to determine whether any
assets
21
require classification or re-classification. At March 31, 2003, the Company had
$1.3 million in classified assets, consisting of $1.0 million in substandard and
loss loans, $0 in real estate owned and $ 365,000 in other repossessed assets.
At September 30, 2002, the Company had $2.0 million in substandard assets,
consisting of $1.8 million in loans, $0 in real estate owned and $214,000 in
other repossessed assets.
In addition to regulatory classifications, the Company also classifies as
"special mention" assets that are currently performing in accordance with their
contractual terms but may become classified or non-performing assets in the
future. At March 31, 2003, the Company has identified approximately $2.8 million
in assets classified as special mention.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Bank exceeded all regulatory minimum capital
requirements. For information comparing the Bank's tangible, core and risk-based
capital levels to the regulatory requirements, see Note 5 of Notes to
Consolidated Financial Statements.
The Company's primary sources of funds are deposits and proceeds from
maturing investment securities and mortgage-backed securities and principal and
interest payments on loans. While maturities and scheduled amortization of
mortgage-backed securities and loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
The primary investing activities of the Company are the origination of
loans and the purchase of investment securities and mortgage-backed securities.
During the six months ended March 31, 2003 and 2002, the Company had $27.8
million and $25.8 million, respectively, of loan originations. During the six
months ended March 31, 2003 and 2002, the Company purchased investment
securities in the amounts of $86.6 million and $38.8 million, respectively, and
mortgage-backed securities in the amounts of $44.4 million and $33.5 million,
respectively. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds.
The Bank has the ability to obtain advances from the FHLB of Atlanta. In
addition, the Company maintains a portion of its investments in interest-bearing
deposits at other financial institutions that will be available, if needed.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be changed at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Bank's average daily
liquidity ratio for the month of March was approximately 25.30%, which exceeded
the required level for such period. Management seeks to maintain a relatively
high level of liquidity in order to retain flexibility in terms of investment
opportunities and deposit pricing. Because liquid assets generally provide for
lower rates of return, the Bank's relatively high liquidity will, to a certain
extent, result in lower rates of return on assets.
The Company's most liquid assets are cash, interest-bearing deposits in
other banks and federal funds sold, which are short-term, highly liquid
investments with original maturities of less than six months that are readily
convertible to known amounts of cash. The levels of these assets are dependent
on the Company's operating, financing and investing activities during any given
period. At March 31, 2003, cash, interest-bearing deposits in other banks and
federal funds sold were $7.5 million, $2.3.million and $11.9 million,
respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. Certificates of deposit which are scheduled to
mature in less than one year at March 31, 2003 totaled $199.5 million. Based on
past experience, management believes that a significant portion of such deposits
will remain with the Bank. The Bank is a party to financial instruments with
off-balance-sheet risk made in the normal course of business to meet the
22
financing needs of its customers. These financial instruments are standby
letters of credit, lines of credit and commitments to fund mortgage loans and
involve to varying degrees elements of credit risk in excess of the amount
recognized in the statement of financial position. The contract amounts of those
instruments express the extent of involvement the Company has in this class of
financial instruments and represents the Company's exposure to credit loss from
nonperformance by the other party.
The Company generally requires collateral or other security to support
financial instruments with off-balance-sheet credit risk. At March 31, 2003, the
Company had commitments under standby letters of credit and lines of credit and
commitments to originate mortgage loans of $317,000, $15.9 million and $16.0
million respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.
The Company considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The structure of the Company's loan and deposit portfolios is such that a
significant change in interest rates may adversely impact net market values and
net interest income.
The Company monitors whether material changes in market risk have occurred
since September 30, 2002. The Company does not believe that any material adverse
changes in market risk exposures occurred since September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, 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 design and operation of the Company's disclosure controls
and procedures. 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 timely alerting them to material
information required to be included in the Company's periodic SEC reports.
In addition, and there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's Annual Meeting of Stockholders was held on February
12, 2003. 5,492,998 shares representing 93.5% of the total outstanding
shares of the Company's common stock were represented at the Annual
Meeting in person or by proxy.
Stockholders voted in favor of the election of two nominees for
director. The voting results for each nominee were as follows:
Votes in Favor
Nominee of Election Votes Withheld
------- --------------- --------------
Gary C. Loraditch 5,436,060 56,938
William J. Kappauf Jr. 5,462,409 30,589
There were 0 broker nonvotes on the matter
In addition, stockholders voted in favor of the ratification of
the appointment of Anderson Associates, LLP as independent auditors of
the Company for the fiscal year ending September 30, 2003. 5,437,677
votes were cast in favor of the proposal to ratify the appointment of
auditors, 40,531 votes were cast against the proposal, and 14,790
votes abstained. There were 0 broker non-votes on the matter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The following exhibit is filed herewith:
Exhibit Title
Number -----
------
99 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Form 8-K
On February 19, 2003 the Company filed a Current Report on
Form 8-K reporting under Item 5. The Company filed an
amendment to that Form 8-K on February 28, 2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BCSB BANKCORP, INC.
Date: May 8, 2003 /s/ Gary C. Loraditch
--------------------------------------------
Gary C. Loraditch
President
(Principal Executive Officer)
Date: May 8, 2003 /s/ Bonnie M. Klein
--------------------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting Officer)
25
CERTIFICATION
I, Gary C. Loraditch, President of BCSB Bankcorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of BCSB Bankcorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
/s/ Gary C.Loraditch
-------------------------------------
Gary C. Loraditch
President
(Principal Executive Officer)
26
CERTIFICATION
I, Bonnie M. Klein, Vice President and Treasurer of BCSB Bankcorp, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of BCSB Bankcorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003
/s/ Bonnie M. Klein
-------------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial Officer)
27