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 June 30, 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 July 31, 2003, the issuer had 5,874,218 shares of Common Stock issued
and outstanding.
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2003 (unaudited) and September 30, 2002..................2
Consolidated Statements of Operations for the Nine Months
and Three Months Ended June 30, 2003 and 2002 (unaudited)........3
Consolidated Statement of Comprehensive Income for the
Nine Months and Three Months Ended June 30, 2003
and 2002 (unaudited)..............................................4
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 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...........24
Item 4. Controls and Procedures..............................................24
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings....................................................25
Item 2. Changes in Securities and Use of Proceeds............................25
Item 3. Defaults Upon Senior Securities......................................25
Item 4. Submission of Matters to a Vote of Security Holders..................25
Item 5. Other Information....................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................25
SIGNATURES....................................................................26
CERTIFICATIONS................................................................27
1
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
JUNE 30, SEPTEMBER 30,
2003 2002
-------------- --------------
(Unaudited)
Assets
------
Cash $ 10,642,180 $ 6,467,598
Interest bearing deposits in other banks 9,380,636 15,808,342
Federal funds sold 5,007,695 3,527,387
Investment securities, held to maturity 2,500,000 4,495,986
Investment securities, available for sale 117,839,411 45,083,287
Loans receivable, net 373,291,239 396,616,729
Loans held for sale 572,919 --
Mortgage backed securities, held to maturity 20,210,945 33,691,430
Mortgage backed securities, available for sale 80,776,555 60,411,132
Premises and equipment, net 8,614,397 8,630,812
Federal Home Loan Bank of Atlanta stock 3,304,900 3,939,700
Accrued interest receivable 1,882,830 2,190,458
Prepaid and deferred income taxes 1,046,303 1,268,370
Goodwill 2,294,327 2,294,327
Core deposit intangible 438,000 542,000
Other assets 1,942,109 2,097,791
-------------- --------------
Total assets $ 639,744,446 $ 587,065,349
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Checks outstanding in excess of bank balance $ -- 390,799
Deposits 547,482,688 498,785,268
Advances from the Federal Home Loan Bank of Atlanta 23,818,335 26,968,099
Trust Preferred Securities 12,500,000 12,500,000
Advance payments by borrowers for taxes and insurance 2,861,968 1,194,371
Income taxes payable 143,451 58,226
Dividends payable 264,891 264,891
Other liabilities 6,626,610 1,598,132
-------------- --------------
Total liabilities 593,697,943 541,759,786
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock (Par value $.01 - 13,500,000 authorized,
5,874,082 issued and outstanding at June 30, 2003
and September 30, 2002 ) 58,751 58,741
Additional paid-in capital 20,361,030 20,302,518
Obligation under Rabbi Trust 1,186,220 1,156,870
Retained earnings (substantially restricted) 25,760,120 25,279,752
Accumulated Other Comperhensive Income (net of taxes) 700,058 664,554
Employee Stock Ownership Plan (823,176) (960,372)
Stock held by Rabbi Trust (1,196,500) (1,196,500)
--------------- ---------------
Total Stockholders' Equity 46,046,503 45,305,563
-------------- --------------
Total liabilities and Stockholders' Equity $ 639,744,446 $ 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 NINE MONTHS ENDED FOR THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Interest Income
- ---------------
Interest and fees on loans $ 20,157,718 $ 15,222,940 $ 6,240,920 $ 5,104,245
Interest on mortgage backed securities 3,061,049 2,556,694 995,680 904,721
Interest and dividends on investment securities 2,043,325 2,214,813 865,696 811,745
Other interest income 267,263 149,338 90,654 43,909
------------ ------------ ------------ ------------
Total interest income 25,529,355 20,143,785 8,192,950 6,864,620
Interest Expense
- ----------------
Interest on deposits 10,770,764 10,358,778 3,530,442 3,324,849
Interest on borrowings - short term 162,643 557,466 51,989 238,451
Interest on borrowings-long term 791,249 -- 251,632 8,051
Other Interest Expense 501,285 9,051 160,851 --
------------ ------------ ------------ ------------
Total interest expense 12,225,941 10,925,295 3,994,914 3,571,351
------------ ------------ ------------ ------------
Net interest income 13,303,414 9,218,490 4,198,036 3,293,269
Provision for losses on loans 1,198,713 209,251 786,348 139,881
------------ ------------ ------------ ------------
Net interest income after provision
for losses on loans 12,104,701 9,009,239 3,411,688 3,153,388
Other Income
- ------------
Gain on Sale of Loans 340,109 132,440 68,751 22,982
Provision for Losses on Loans held for sale -- -- -- 10,761
Servicing fee income (5,493) 13,652 (11,336) 4,188
Fees and charges on loans 165,547 127,120 53,219 40,946
Fees on transaction accounts 379,349 304,713 133,142 113,115
Rental income 93,321 69,410 32,999 18,151
Gain from sale of investments 40,652 44,026 15,652 26,516
Gain on sale of Mortgage Backed Securities 232,900 5,595 79,290 4,519
Miscellaneous income 97,916 24,131 20,774 18,887
------------ ------------ ------------ ------------
Net other income 1,344,301 721,087 392,491 260,065
Non-Interest Expenses
- ---------------------
Salaries and related expense 6,268,066 4,240,699 2,171,688 1,441,972
Occupancy expense 1,204,969 907,756 419,859 300,357
Deposit insurance premiums 151,811 113,681 50,996 37,062
Data processing expense 1,140,083 665,139 335,594 215,772
Property and equipment expense 973,579 703,406 340,901 230,428
Professional fees 186,127 141,031 49,081 43,114
Advertising 598,271 631,015 176,888 154,570
Telephone, postage and office supplies 488,030 333,542 163,262 108,973
Other expenses 415,319 323,313 63,065 97,913
------------ ------------ ------------ ------------
Total non-interest expenses 11,426,255 8,059,582 3,771,334 2,630,165
------------ ------------ ------------ ------------
Income before tax provision 2,022,747 1,670,744 32,845 783,288
Income tax provision 769,810 647,059 11,000 303,120
------------ ------------ ------------ ------------
Net income $ 1,252,937 $ 1,023,685 $ 21,845 $ 480,168
============ ============ ============ ============
Basic earnings per share $ .22 $ .18 $ .00 $ .09
============ ============ ============ ============
Diluted earnings per share $ .22 $ .18 $ .00 $ .08
============ ============ ============ ============
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 NINE MONTHS ENDED
JUNE 30
2003 2002
--------------------------
Net Income $ 1,252,937 $ 1,023,685
Other comprehensive income, net of tax:
Unrealized net holding gains/ (losses) on
available-for-sale portfolios 203,410 (37,126)
Reclassification adjustment for gains
included in net income, net of tax (167,906) (30,457)
----------- -----------
Comprehensive income $ 1,288,441 $ 956,102
=========== ===========
FOR THREE MONTHS ENDED
JUNE 30,
--------------------------
2003 2002
----------- -----------
Net Income $ 21,845 $ 480,168
Other comprehensive income, net of tax:
Unrealized net holding gains on
available-for-sale portfolios 364,859 694,868
Reclassification adjustment for gains
included in net income, net of tax (58,275) (19,049)
----------- -----------
Comprehensive income $ 328,429 $ 1,155,987
=========== ===========
See accompanying notes to financial statements.
4
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR NINE MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
------------ ------------
Operating Activities
- --------------------
Net Income $ 1,252,937 $ 1,023,685
Adjustments to Reconcile Net Income to Net
Cash Used by Operating Activities
- ---------------------------------
Accretion of discount on investments (57,900) (9,019)
Dividends on Investment Securities (723,316) (723,784)
Gain on sale of investments (40,652) (44,026)
Loans originated for sale (10,526,862) (8,193,455)
Loans sold 10,294,052 8,325,895
Gain on sale of loans (340,109) (132,440)
Loan fees and costs deferred, net 274,798 88,768
Amortization of deferred loan cost, net (506,871) (124,998)
Provision for losses on loans 1,198,713 209,251
Non-cash compensation under Stock-Based Benefit Plan 187,718 137,196
Amortization of premium on mortgage backed securities 398,032 175,818
Amortization of purchase premiums and discounts, net (452,083) --
Gain on sale of mortgaged backed securities (232,900) (5,595)
Provision for depreciation 737,259 608,062
Decrease in accrued interest receivable 307,628 154,065
Decrease (increase) in prepaid income taxes 198,092 (83,661)
Decrease (increase) in other assets 155,682 (635,346)
Decrease in accrued interest payable on deposits (29,331) (123,784)
Increase in income taxes payable 85,225 39,783
Increase (decrease) in other liabilities and payables to
disbursing agents 5,028,478 (296,135)
Increase in obligation under Rabbi-Trust 29,350 --
------------ ------------
Net cash provided by operating activities 7,237,940 390,280
5
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR NINE 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 (133,076,372) (51,353,090)
Proceeds from maturities of investment securities - available for sale 56,185,019 4,912,000
Proceeds from sale of investment securities- available for sale 5,040,652 13,013,875
Purchases of investment securities - held to maturity (500,000) (500,000)
Proceeds from maturities of investment securities - held to maturity 2,500,000 15,000,000
Longer term loans originated (52,531,646) (33,305,411)
Principal collected on longer term loans 82,462,075 31,317,443
Net increase in short-term loans (7,937,955) (9,852,244)
Principal collected on mortgage backed securities - available for sale 19,211,814 8,433,556
Purchase of mortgage backed securities - available for sale (57,820,305) (36,990,376)
Proceeds from sale of mortgaged backed securities- available for sale 18,038,332 2,935,234
Purchase of mortgage backed securities- held to maturity (1,038,404) (6,113,580)
Principal collected on mortgage backed securities - held to maturity 14,384,179 11,864,292
Proceeds from sales of foreclosed real estate -- 80,569
Investment in premises and equipment (720,844) (289,834)
Purchase of Federal Home Loan Bank of Atlanta stock -- (655,300)
Proceeds from sale of Federal Home Loan Bank of Atlanta stock 634,800 --
------------- -------------
Net cash used by investing activities (55,168,655) (49,348,866)
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 18,679,105 23,731,221
Net increase in certificates of deposit 32,634,162 24,836,330
Increase in Federal Home Loan Bank of Atlanta advances -- 6,900,000
Repayment of Federal Home Loan Bank of Atlanta advances (3,000,000) (12,400,000)
Acquisition of stock for Rabbi Trust -- (57,000)
Trust Preferred Securities -- 12,500,000
Exercised Stock Options 8,000 40,000
Increase in Dividends Payable -- 626
Dividends paid on stock (772,569) (792,763)
------------- -------------
Net cash provided by financing activities 47,157,899 54,758,414
------------- -------------
Decrease (increase) in cash and cash equivalents (772,816) 5,799,828
Cash and cash equivalents at beginning of period 25,703,327 12,968,998
------------- -------------
Cash and cash equivalents at end of period $ 24,930,511 $ 18,768,826
============= =============
6
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR NINE MONTH PERIOD
ENDED JUNE 30,
--------------------------------
2003 2002
----------- ------------
The following is a summary of cash and cash equivalents:
Cash $ 10,642,180 $ 6,903,960
Interest bearing deposits in other banks 9,380,636 6,786,480
Federal funds sold 5,007,695 5,277,386
------------- -------------
Balance of cash items reflected on Statement of
Financial Condition 25,030,511 18,967,826
Less - certificate of deposit with an original maturity of
more than ninety days 100,000 199,000
------------- -------------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 24,930,511 $ 18,768,826
============= =============
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest $ 12,286,181 $ 10,937,143
============= =============
Income taxes $ 826,700 $ 643,100
============= =============
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 nine
months ended June 30, 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
nine months ended June 30, 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 nine months ended
-------------------------
June 30, 2002
-------------
Net Interest Income $ 12,705,623
Net Income 1,968,505
Diluted net income per share 0.34
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 nine and three months ended June 30, 2003 is as follows:
For the Nine Months Ended June 30, 2003
---------------------------------------
Income Shares Per Share
Basic EPS (Numerator) (Denominator) Amount
--------- ----------- ------------- ------
Income available to shareholders $1,252,937 5,723,135 $ 0.22
Effect of dilutive shares -- 45,683 --
---------- ---------- --------
Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions $1,252,937 5,768,818 $ 0.22
========== ========== ========
For the Three Months Ended June 30, 2003
----------------------------------------
Income Shares Per Share
Basic EPS (Numerator) (Denominator) Amount
--------- ----------- ------------- ------
Income available to shareholders $ 21,845 5,723,085 $ 0.00
Effect of dilutive shares -- 59,739 --
---------- ---------- --------
Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions $ 21,845 $5,782,824 $ 0.00
========== ========== ========
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 June 30,
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) $ 46,854,930 7.44% $ 9,443,551 1.50% N/A N/A
Tier 1 capital (2) 46,854,930 13.16 N/A N/A 21,356,156 6.00%
Core (1) 46,854,930 7.44 25,182,802 4.00 31,478,502 5.00
Risk-weighted (2) 48,945,605 13.75 28,474,875 8.00 35,593,594 10.00
- ------------
(1) To adjusted total assets.
(2) To risk-weighted assets.
Note 7- Stock Option Plan
-----------------
The Company has a Stock Option Plan (the "Plan") whereby 228,660
shares of common stock have been reserved for issuance under the Plan.
Options granted under the Plan may be Incentive Stock Options within
the meaning of Section 422 of the Internal Revenue Code of 1986 as
amended or Non-Incentive 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. An additional 74,500 options were granted during the
year ended September 30, 2002.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to make certain disclosures as if the fair value method of
accounting had been applied to the Company's stock option grants made
subsequent to 1994. Accordingly, the Company estimated the grant date
fair value of each option awarded in fiscal 1999 using the
Black-Scholes Option-Pricing model with the following relevant
assumptions: dividend yield of 6.25%, risk-free interest rate of 5.72%
and expected lives of 10 years. The assumption for expected volatility
was 31.55%. The estimated fair value of each option granted was $1.62.
The Company estimated the grant date fair value of each option
awarded in fiscal 2002 using the Black-Scholes Option-Pricing model
with the following relevant assumptions: dividend yield of 4.08%,
risk-free interest rate of 4.49% and expected lives of 10 years. The
assumption for expected volatility was 32.63%. The estimated fair
value of each option granted was $2.80.
Had compensation cost been determined for the nine months ended
June 30, 2003 and 2002 including the weighted- average estimate of
fair value of each option granted the Company's proforma net income
would be $1,214,014 and $ 1,008,770, respectively, reduced by $38,923
and $14,915. Proforma earnings, basic and diluted, per share would
have been $.21 for the nine month period ending June 30, 2003 and $.18
and $.17, respectively, for the nine month period ending June 30,
2002.
Had compensation cost been determined for the three months ended
June 30, 2003 and 2002 including the weighted-average estimate of fair
value of each option granted, the Company's proforma net income would
be $8,871 and $475,196, respectively, reduced by $12,974 and $4,972.
Proforma earnings, basic and diluted, per share would have been $.00
for the three month period ending June 30, 2003 and $.08
10
for the three month period ending June 30, 2002.
Note 8- Recent Accounting Pronouncements
--------------------------------
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This Statement
improves financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. In particular,
this Statement (1) clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement 133, (2) clarifies when a
derivative contains a financing component, (3) amends the definition
of an underlying to conform it to language used in FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others",
and (4) amends certain other existing pronouncements. Those changes
will result in more consistent reporting on contracts as either
derivatives or hybrid instruments. This Statement is effective for
contracts and hedging relationships entered into or modified after
June 30, 2003.
In May 2003, FASB issued SFAS No. 150 " Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in
some circumstances). This Statement is effective for financial
instruments entered into or modified after May 31, 2003.
The above accounting pronouncements will not have a material
impact on the consolidate financial statements.
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
11
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 JUNE 30, 2003 AND SEPTEMBER 30, 2002
During the nine months ended June 30, 2003, the Company's assets increased
by $52.6 million, or 9.0% from $587.1 million at September 30, 2002 to $639.7
million at June 30, 2003. Loans receivable, net decreased by $23.3 million, or
5.9%, from $396.6 million at September 30, 2002 to $373.3 million at June 30,
2003. The Company's mortgage-backed securities available for sale increased by
$20.4 million, or 33.7%, from $60.4 million at September 30, 2002 to $80.8
million at June 30, 2003. The Company's mortgage-backed securities held to
maturity decreased by $13.5 million or 40.0% from $33.7 million at September 30,
2002 to $20.2 million at June 30, 2003. The Company's investment portfolio
available for sale increased $72.7 million or 161.4%, from $45.1 million at
September 30, 2002 to $117.8 million at June 30, 2003. The Company's investment
portfolio held to maturity decreased by $2.0 million or 44.4% from $4.5 million
at September 30, 2002 to $2.5 million at June 30, 2003. The preceeding was
accomplished in an effort to reduce interest rate risk in the balance sheet. The
bank was reluctant to make long term low rate loans in the low interest rate
environment that prevailed during the nine month period ended June 30, 2003.
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 $48.7
million, or 9.8%, from $498.8 million at September 30, 2002 to $547.5 million at
June 30, 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 term balloon
type products and adjustable mortgage products.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002
Net Income. Net income increased by $229,000, or 22.4%, from $1.0 million
for the nine months ended June 30, 2002 to $1.2 million for the nine months
ended June 30, 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 $117.8 million, from $271.0
million at June 30, 2002 to $388.8 million at June 30, 2003, of which $116.8
million was a result of the merger with WHG Bancshares. The average balance of
deposits increased $167.7 million from $355.9 million at June 30, 2002 to $523.6
million at June 30, 2003. Increase in other income also contributed to the
increase in net income. The increase in net income was partially offset by an
increase in the provision for loan losses, and increases in non-interest
expenses. The provision for loan losses increased $989,000 from $209,000 for the
nine months ended June 30, 2002 to $1.2 million for the nine months ended June
30, 2003. Non-interest expenses increased $3.4 million from $8.0 million for the
nine months ended June 30, 2002 to $11.4 million for the nine months ended June
30, 2003.
Net Interest Income. Net interest income was $13.3 million for the nine
months ended June 30, 2003, compared to $9.2 million for the nine months ended
June 30, 2002, representing an increase of $4.1 million, or 44.3%. The increase
was primarily due to the increase in the volume of interest-earning assets. The
increase in volume of interest earning
12
assets was primarily a result of the merger with WHG Bancshares. The Company was
able to increase interest rate spread from 2.83% at June 30, 2002, to 2.94% at
June 30, 2003 due to declining interest rates and re-pricing of deposits.
Interest Income. Interest income increased by $5.4 million, or 26.7% from
$20.1 million for the nine months ended June 30, 2002 to $25.5 million for the
nine months ended June 30, 2003. Interest and fees on loans increased by $4.9
million, or 32.4%, from $15.2 million for the nine months ended June 30, 2002 to
$20.1 million for the nine months ended June 30, 2003. This was primarily due to
a $117.8 million increase in the average balance of loans receivable which more
than offset a decrease in the average yield on loans of 58 basis points from
7.49% at June 30, 2002 to 6.91% at June 30, 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 $504,000 or 19.7% from $2.6
million for the nine months ended June 30, 2002 to $3.1 million for the nine
months ended June 30, 2003. This increase was primarily due to the increase in
the average balance of mortgage-backed securities from $62.3 million at June 30,
2002 to $94.0 million at June 30, 2003. Interest and dividends on investment
securities decreased by $172,000 or 7.8% from $2.2 million for the nine months
ended June 30, 2002 to $2.0 million for the nine months ended June 30, 2003.
This was primarily due to a decrease in the average rate received on investments
from 5.1% at June 30, 2002 to 3.6% at June 30, 2003.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense increased from $10.9
million for the nine months ended June 30, 2002 to $12.2 million for the nine
months ended June 30, 2003 a change of $1.3 million or 11.9%. Interest on
deposits increased $412,000 due to an increase in the average volume of deposits
by $167.7 million from $355.9 million at June 30, 2002 to $523.6 million at June
30, 2003. The average yield on deposits decreased by 114 basis points from 3.88%
at June 30, 2002 to 2.74% at June 30, 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 $395,000 for the nine months
ended June 30, 2003, and interest on long-term borrowings increased by $791,000.
This increase was primarily due to an increase of $9.2 million in the average
balances of advances from the Federal Home Loan Bank of Atlanta during the nine
months ended June 30, 2003. Also contributing to interest expense was interest
on the Trust Preferred Securities which was $501,000 for the nine month period
ending June 30,2003.
13
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 average
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 period ended June 30, 2003. The period ended June 30, 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.
NINE MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.................................... $ 388,859 $ 20,158 6.91% $ 271,028 $ 15,223 7.49%
Mortgage-backed securities............... 93,963 3,061 4.34 62,336 2,557 5.47
Dividends and investment securities...... 75,506 2,043 3.61 57,700 2,215 5.12
Other Investments........................ 25,456 267 1.40 8,673 149 2.29
--------- --------- ---------- --------
Total interest-earning assets........ 583,784 25,529 5.83 399,737 20,144 6.72
Noninterest-earning assets.................. 32,219 22,600
--------- ----------
Total assets......................... $ 616,003 $ 422,337
========= ==========
Interest-bearing liabilities:
Deposits................................. $ 523,584 10,771 2.74 355,888 10,359 3.88
FHLB Advances............................ 25,442 953 4.99 16,242 558 4.58
Trust Preferred Securities............... 12,500 501 5.34 183 8 5.83
Other liabilities........................ 1,853 1 0.07 1,946 1 0.07
--------- --------- ---------- --------
Total interest-bearing liabilities.......... 563,379 12,226 2.89 374,259 10,926 3.89
--------- -------- -------- -------
Noninterest-bearing liabilities............. 7,845 5,435
--------- ----------
Total liabilities.................... 571,224 379,694
Stockholders' equity ....................... 44,779 42,643
--------- ----------
Total liabilities and stockholders'
equity.......................... $ 616,003 $ 422,337
========= ==========
Net interest income......................... $ 13,303 $ 9,218
========= ========
Interest rate spread........................ 2.94% 2.83%
======= =======
Net interest margin......................... 3.04% 3.07%
======= =======
Ratio average interest earning assets/
interest bearing liabilities............ 103.62% 106.81%
======= =======
14
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 Nine Months Ended June 30,
-----------------------------------------
2003 vs. 2002
-----------------------------------------
Increase (Decrease)
Due to
-----------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable ................ $ 6,646 $(1,193) $ (518) $ 4,935
Mortgage-backed securities ...... 1,294 (524) (266) 504
Investment securities and
FHLB Stock .................. 681 (652) (201) (172)
Other interest-earning assets ... 288 (58) (112) 118
------- ------- ------- -------
Total interest-earning assets.. 8,909 (2,427) (1,097) 5,385
Interest expense:
Deposits ........................ 4,881 (3,038) (1,431) 412
FHLB advances ................... 316 50 29 395
Trust Preferred Securities ...... 539 (1) (45) 493
Other liabilities ............... 0 0 0 0
------- ------- ------- -------
Total interest-bearing
liabilities ................ 5,736 (2,989) (1,447) 1,300
------- ------- ------- -------
Change in net interest income ..... $ 3,173 $ 562 $ 350 $ 4,085
======= ======= ======= =======
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 $1.2
million for the nine months ended June 30, 2003, as compared to $209,000 for the
nine months ended June 30, 2002, representing an increase of $1.0 million. The
provision increased due to the increased chargeoffs and the increased volume of
loans. Loan chargeoffs for the nine months ended June 30, 2003 were $1.5 million
as compared to $320,000 for the nine months ended June 30, 2002 an increase of
$1.2 million. The increase in loan chargeoffs was caused by the charge off of
$569,000 for a commercial loan arrangement and related transactions for which
collectibility is in doubt. In addition loan chargeoffs increased due to the
increased volume of loans and adverse economic conditions. Loan recoveries were
$267,000 for the nine months ended June 30, 2003 compared to $247,000 for the
nine months ended June 30, 2002. Non performing loans at June 30, 2003 were
$348,000 as compared to $362,000 at June 30, 2002. The total loss allowance
allocated to domestic loans is $2.2 million. In establishing such provisions,
management considered an analysis of the risk inherent in the loan portfolio.
Other Income. Other income increased by $623,000, or 86.4% from $721,000
for the nine months ended June 30, 2002 to $1.3 million for the nine months
ended June 30, 2003. The increase in other income for the nine months ended June
30 2002 was partially attributable to gains on the sale of loans of $340,000 for
the nine months ended June 30, 2003 compared to $132,000 for the nine months
ended June 30, 2002. There was also a gain on the sale of Mortgaged Backed
Securities of $233,000 for the nine months ended June 30, 2003, compared to a
gain of $6,000 for the nine months ended June 30, 2002, and a gain on the sale
of investments of $41,000 for the nine months ended June 30, 2003 compared to
$44,000 for the nine months ended June 30, 2002.
15
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
$75,000 due to the increase in the volume of transaction accounts. Servicing fee
income decreased $19,000 from $14,000 for the nine months ended June 30, 2002 to
$(5,000) for the nine months ended June 30, 2003. This decrease was attributable
to adjustments to the servicing premium on loans sold due to payoffs.
Non-interest Expenses. Total non-interest expenses increased by $3.3
million, or 41.8%, from $8.1 million for the nine months ended June 30, 2002 to
$11.4 million for the nine months ended June 30, 2003. The increase in
non-interest expenses was due to increases in salaries and related expenses of
$2.0 million, or 47.8%. 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 nine months ended June 30,
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 June 30, 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 $475,000, or 71.4% in data
processing expenses, from $665,000 at June 30, 2002 to $1.1 million at June 30,
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 $297,000 or 32.7% from $908,000 at June 30, 2002 to $1.2
million at June 30, 2003. The Company also experienced increases of $270,000, or
38.4% in property and equipment expense and an increase of $155,000, or 46.3% 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 $770,000 and $647,000
for the nine months ended June 30, 2003 and 2002, respectively. The Company's
effective tax rates were 38.0% and 38.7% for the nine months ended June 30, 2003
and 2002, respectively.
16
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND
2002
Net Income. Net income decreased by $458,000, or 95.5%, from $480,000 for
the three months ended June 30, 2002 to $22,000 for the three months ended June
30, 2003. The decrease in net income was due to the increase in the provision
caused by the establishment of a provision of $569,000 for a commercial loan
arrangement and related transactions for which collectibility is in doubt. This
decrease was partially offset by increases in other income and increased net
interest income due to an increase in the average balance of loans. The average
balance of loans increased $102.2 million, from $273.8 million at June 30, 2002
to $376.0 million at June 30, 2003, of which $116.8 million was a result of the
merger with WHG Bancshares. The average balance of deposits increased $171.6
million from, $372.4 million at June 30, 2002 to $544.0 million at June 30, 2003
of which $118.2 million was a result of the merger with WHG Bancshares.
Net Interest Income. Net interest income was $4.2 million for the three
months ended June 30, 2003, compared to $3.3 million for the three months ended
June 30, 2002, representing an increase of $905,000, or 27.5%. 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 interest rate spread decreased from 2.93% at
June 30, 2002 to 2.71% at June 30, 2003 due to declining interest rates and
re-pricing of deposits.
Interest Income. Interest income increased by $1.3 million, or 19.3% from
$6.9 million for the three months ended June 30, 2002 to $8.2 million for the
three months ended June 30, 2003. Interest and fees on loans increased by $1.1
million, or 22.3%, from $5.1 million for the three months ended June 30, 2002 to
$6.2 million for the three months ended June 30, 2003. This was primarily due to
a $102.2 million increase in the average balance of loans receivable which more
than offset a decrease in the average yield on loans of 82 basis points from
7.46% at June 30, 2002 to 6.64% at June 30, 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 $91,000 or 10.1% from
$905,000 for the three months ended June 30, 2002 to $996,000 for the three
months ended June 30, 2003. This increase was primarily due to the increase in
the average balance of mortgage-backed securities from $67.2 million at June 30,
2002 to $97.5 million at June 30, 2003. Interest and dividends on investment
securities increased by $54,000 or 6.7% from $812,000 for the three months ended
June 30, 2002 to $865,000 for the three months ended June 30, 2003. This was
primarily due to an increase in the average balance of investments, from $65.5
million at June 30, 2002 to $101.9 million at June 30, 2003. This increase more
than offset a decrease in the rates received on investments from 4.96% at June
30, 2002 to 3.40% at June 30, 2003.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense increased from $3.6
million for the three months ended June 30, 2002 to $4.0 million for the three
months ended June 30, 2003 a change of $424,000 or 11.9%. Interest on deposits
increased $205,000 due to an increase in the average volume of deposits by
$171.6 million from $372.4 million at June 30, 2002 to $544.0 million at June
30, 2003. The average yield on deposits decreased by 97 basis points from 3.57%
at June 30, 2002 to 2.60% at June 30, 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 $186,000 for the three months
ended June 30, 2003, and interest on long-term borrowings increased by $244,000.
This increase was primarily due to an increase of $10.1 million in the average
balances of advances from the Federal Home Loan Bank of Atlanta during the
quarter ended June 30, 2003. Also contributing to interest expense was interest
on the Trust Preferred Securities which was $161,000 for the three month period
ending June 30, 2003.
17
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 average
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 months ended June 30, 2003. The three months ended
June 30, 2002 average balances were computed using month-end balances. Total
average assets are computed using month-end balance.
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
2003 2002
---------------------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans $376,016 $ 6,241 6.64% $ 273,795 $ 5,104 7.46%
Mortgage-backed securities 97,489 996 4.09 67,195 905 5.39
Investment securities and FHLB stock 101,913 865 3.40 65,511 812 4.96
Interest bearing deposits in other banks
and Federal Funds sold 25,657 91 1.42 9,980 44 1.76
-------- ------- --------- -------
Total interest-earning assets 601,075 8,193 5.45 416,481 6,865 6.59
------- -------
Noninterest-earning assets 34,364 23,350
-------- ---------
Total assets $635,439 $439,831
======== ========
Interest-bearing liabilities:
Deposits $544,011 3,530 2.60 $372,449 3,324 3.57
FHLB Advances 24,992 303 4.85 14,923 239 6.41
Trust Preferred Securities 12,500 161 5.15 549 8 5.83
Other liabilities 2,462 1 .16 2,515 1 0.16
-------- ------- --------- -------
Total interest-bearing liabilities 583,965 3,995 2.74 390,436 3,572 3.66
------- ---- ------- ----
Noninterest-bearing liabilities 7,457 6,468
-------- ---------
Total liabilities 591,422 389,073
Stockholders' equity 44,017 42,927
-------- ---------
Total liabilities and stockholders'
Equity $635,439 $439,831
======== ========
Net interest income $4,198 $3,293
====== ======
Interest rate spread 2.71% 2.93%
====== ======
Net interest margin 2.79% 3.16%
====== ======
Ratio average interest earning assets/
interest bearing liabilities 102.93% 106.67%
====== ======
18
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 June 30,
---------------------------------------
2003 vs. 2002
---------------------------------------
Increase (Decrease)
Due to
---------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable .................... $ 1,876 $ (535) $ (204) $ 1,137
Mortgage-backed securities .......... 413 (222) (100) 91
Investment securities and
FHLB Stock ...................... 448 (253) (142) 53
Other interest-earning assets ....... 70 (9) (14) 47
------- ------- ------- -------
Total interest-earning assets ..... 2,807 (1,019) (460) 1,328
Interest expense:
Deposits ............................ 1,531 (907) (418) 206
FHLB advances ....................... 161 (58) (39) 64
Trust Preferred Securities .......... 174 (1) (20) 153
Other liabilities ................... 0 0 0 0
------- ------- ------- -------
Total interest-bearing
liabilities .................... 1,866 (966) (477) 423
------- ------- ------- -------
Change in net interest income ......... $ 941 $ (53) $ 17 $ 905
======= ======= ======= =======
19
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 $786,000 for the three months ended June 30, 2003.
This increases the loss allowance to $2.2 million, which the Company believes is
sufficient based on past experience. Loan chargeoffs for the three months ended
June 30, 2003 were $886,000 as compared to $132,000 for the three months ended
June 30, 2002. The provision increased due to the increased volume of loans and
increased chargeoffs. The increase in chargeoffs was caused by the charge-off of
$569,000 for a commercial loan arrangement and related transactions for which
collectibility is in doubt and current economic conditions. Loan recoveries were
$110,000 for the three months ended June 30, 2003 as compared to $117,000 for
the three months ended June 30, 2002. Non performing loans at June 30, 2003 were
$348,000 as compared to $362,000 at June 30, 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 $132,000, or 50.8% from $260,000
for the three months ended June 30, 2002 to $392,000 for the three months ended
June 30, 2003. The increase in other income for the three months ended June 30,
2003 was partially attributable to increases on gains on the sale of loans of
$46,000. There was also an increase on gain on the sale of Mortgaged Backed
Securities of $75,000. 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 $20,000, and loan fees increased $12,000. Servicing fee
income decreased $15,000 from $4,000 for the three months ended June 30, 2002 to
$(11,000) for the three months ended June 30, 2003. This decreasee was
attributable to adjustments to the servicing premium on loans sold due to
payoffs.
Non-interest Expenses. Total non-interest expenses increased by $1.2
million, or 43.4%, from $2.6 million for the three months ended June 30, 2002 to
$3.8 million for the three months ended June 30, 2003. The increase in
non-interest expenses was due to increases in salaries and related expenses of
$730,000, or 50.6%. 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 June 30, 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 June 30, 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 $120,000, or 55.5% in data
processing expenses, from $216,000 at June 30, 2002 to $336,000 at June 30,
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 $120,000 or 39.8% from $300,000 at June 30, 2002 to
$420,000 at June 30, 2003. The Company also experienced increases of $110,000,
or 47.9% in property and equipment expense and an increase of $54,000, or 49.8%
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 $11,000 and $303,000 for
the three months ended June 30, 2003 and 2002, respectively. The Company's
effective tax rates were 33.5% and 38.7% for the three months ended June 30,
2003 and 2002, respectively.
20
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:
June 30, 2003 September 30, 2002
------------- ------------------
(dollars in thousands)
Commitments to originate new loans $21,124 $12,900
Commitments to originate new loans held for sale -- --
Unfunded commitments to extend credit under existing
equity line and commercial lines of credit 17,172 20,800
Commercial letters of credit 317 431
Commitments to sell loans held for sale -- --
The Company does not have any unconsolidated 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 June 30, 2003, the aggregate fair value
of these commitments exceeded the book value of the loans to be sold.
CONTRACTUAL OBLIGATIONS
As of June 30, 2003
Payments due by period
----------------------
(Dollars in thousands)
Less than
1 year 1-3 years 4-5 years Over 5 years Total
-------- --------- --------- ------------ -----
Deposits $194,965 109,061 68,878 -- 372,904
Long-term borrowings 2,500 2,250 9,000 9,000 22,750
Lease obligations 849 2,495 1,229 3,431 8,004
-------- -------- -------- -------- --------
Total contractual cash
obligations $198,314 113,806 79,107 12,431 403,658
======== ======== ======== ======== ========
21
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 June 30, 2003, the Company had approximately $680,000 in non-performing
assets (nonaccrual loans, repossessed assets and real estate owned) or .11% of
total assets. At September 30, 2002, non-performing assets were $1.6 million or
..28% of total assets. The Bank's net charge-offs for the nine months ended June
30, 2003 were $1.2 million. The Bank's allowance for loan losses was $2.2
million at June 30, 2003 and September 30, 2002. The ratio of the allowance for
loan losses to total loans, net of loans in process and deferred loan fees
increased to .59% at June 30, 2003, compared to .58% at September 30, 2002.
The following table presents an analysis of the Company's
non-performing assets:
At At
June 30, September 30,
2003 2002
---- ----
Nonperforming loans:
Nonaccrual loans $ 348 $1,391
Loans 90 days past due and accruing -- --
Restructured loans -- --
------ ------
Total nonperforming loans 348 1,391
Other non-performing assets 332 229
------ ------
Total nonperforming assets $ 680 $1,620
====== ======
Nonperforming loans to loans receivable, net .18% .35%
Nonperforming assets as a percentage
of loans and other real estate owned .18% .41%
Nonperforming assets to total assets .11% .28%
22
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
For the Nine For the Three
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period ....... $ 2,199 $ 1,563 $ 2,153 $ 1,574
---------------------------------------
Loans charged-off:
Real estate mortgage:
Single-family residential ........ -- -- -- --
Multi-family residential ......... -- -- -- --
Commercial ....................... -- -- -- --
Construction ....................... -- -- -- --
Commercial loans ................... 569 -- 569 --
Consumer ........................... 932 320 316 132
------- ------- ------- -------
Total charge-offs .................... 1,501 320 885 132
Recoveries:
Real estate mortgage:
Single-family residential ........ -- -- -- --
Multi-family residential ......... -- -- -- --
Commercial ....................... -- -- -- --
Construction ..................... -- -- -- --
Commercial loans secured ........... -- -- -- --
Consumer ........................... 267 247 110 117
------- ------- ------- -------
Total recoveries ..................... 267 247 110 117
Net loans charged off ................ (1,234) (73) 775 15
Provision for loan losses ........... 1,199 209 786 140
Allowance assumed in the provision ... -- -- -- --
---------------------------------------
Balance at end of period ............. $ 2,164 $ 1,699 $ 2,164 $ 1,699
=======================================
Ratio of net charge-offs
to average loans outstanding
during the period................... .39% .12% .24% .05%
=======================================
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 require classification or re-classification. At June 30, 2003, the
Company had $680,000 in classified assets, consisting of $348,000 in substandard
and loss loans, $0 in real estate owned and $ 332,000 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 June 30, 2003, the Company has identified approximately $2.7 million
in assets classified as special mention.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 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.
23
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 nine months ended June 30, 2003 and 2002, the Company had $52.5
million and $33.3 million, respectively, of loan originations. During the nine
months ended June 30, 2003 and 2002, the Company purchased investment securities
in the amounts of $133.6 million and $51.8 million, respectively, and
mortgage-backed securities in the amounts of $58.8 million and $43.1 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 June was approximately 25.05%, 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 nine 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 June 30, 2003, cash, interest-bearing deposits in other banks and
federal funds sold were $10.6 million, $9.4.million and $5.0 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 June 30, 2003 totaled $194.9 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
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 June 30, 2003, the
Company had commitments under standby letters of credit and lines of credit and
commitments to originate mortgage loans of $317,000, $17.2 million and $21.1
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.
24
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
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. 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. 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.
In addition, there have been no changes in the Company's internal control
over financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
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
None.
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
Number Title
------ -----
31.1 Rule #13a-14(a) Certification of Chief Executive Officer
31.2 Rule #13a-14(a) Certification of Chief Financial Officer
32 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 April 29, 2003 the Company filed a Current Report on Form
8-K reporting under Item 7 and Item 12.
26
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: August 13, 2003 /s/ Gary C. Loraditch
--------------------------------
Gary C. Loraditch
President
(Principal Executive Officer)
Date: August 13, 2003 /s/ Bonnie M. Klein
--------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
27