UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File No. 0-24589
BCSB BANKCORP, INC.
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(Name of Registrant as Specified in its Charter)
UNITED STATES 52-2108333
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4111 E. JOPPA ROAD, SUITE 300, BALTIMORE, MARYLAND 21236
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (410) 256-5000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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The aggregate market value of voting and common non-voting common equity
held by non-affiliates was approximately $25,493,309 computed by reference to
the closing sale price for the registrant's common stock on September 30, 2003
as reported on The Nasdaq National Market. For purposes of this calculation, it
is assumed that directors, executive officers and beneficial owners of more than
5% of the registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of December 1, 2003: 5,885,593
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
1. Portions of the registrant's Annual Report to Stockholders for the
Fiscal Year ended September 30, 2003. (Parts II and III)
2. Portions of Proxy Statement for registrant's 2004 Annual Meeting of
Stockholders. (Part III)
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
BCSB Bankcorp, Inc. BCSB Bankcorp, Inc. (the "Company") serves as the
holding company for its wholly owned subsidiaries, Baltimore County Savings
Bank, F.S.B. (the "Bank"), BCSB Bankcorp Capital Trust I and BCSB Bankcorp
Capital Trust II. Baltimore County Savings Bank, M.H.C. (the "MHC"), a federal
mutual holding company, owns 63.8% of the Company's outstanding common stock.
The Company's assets consist of its investment in the Bank and its portfolio of
investment securities. The Company is primarily engaged in the business of
directing, planning and coordinating the business activities of the Bank.
The Company's most significant asset is its investment in the Bank.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Bank. In the future, the
Company may become an operating company or acquire or organize other operating
subsidiaries, including other financial institutions. Currently, the Company
does not maintain offices separate from those of the Bank or employ any persons
other than officers of the Bank who are not separately compensated for such
service. At September 30, 2003, the Company had total assets of $668.2 million,
total deposits of $551.9 million and stockholders' equity of $44.8 million.
The Company's and the Bank's executive offices are located at 4111 E. Joppa
Road, Suite 300, Baltimore, Maryland 21236, and its main telephone number is
(410) 256-5000.
Baltimore County Savings Bank, F.S.B. The Bank is a federally chartered
stock savings bank operating through sixteen banking offices serving the
Baltimore metropolitan area. The Bank was chartered by the State of Maryland in
1955 under the name Baltimore County Building and Loan Association. The Bank
received federal insurance of its deposit accounts in 1985 and received a
federal charter in 1987, at which time it adopted its present name of Baltimore
County Savings Bank, F.S.B.
The Bank's principal business consists of attracting deposits from the
general public and investing these funds in loans secured by first mortgages on
owner-occupied, single-family residences in the Bank's market area, and, to a
lesser extent, other real estate loans, consisting of construction loans,
single-family rental property loans and commercial real estate loans, and
consumer loans, particularly automobile loans. The Bank derives its income
principally from interest earned on loans and, to a lesser extent, interest
earned on mortgage-backed securities and investment securities and other income.
Funds for these activities are provided principally by operating revenues,
deposits and repayments of outstanding loans and investment securities and
mortgage-backed securities.
MARKET AREA
The Bank's market area consists of the Baltimore metropolitan area. At
September 30, 2003, management estimates that more than 95% of deposits and 95%
of all lending came from its market area.
The economy of the Bank's market area is diversified, with a mix of
services, manufacturing, wholesale/retail trade, and federal and local
government. Once the backbone of the regional economy, the manufacturing
industry is relatively stable after almost two decades of decline. The
manufacturing section of Baltimore County received a further boost with General
Motors' completion of its construction of a new Allison Transmission Plant in
the White Marsh growth area, and pending Route 43 extension. The Baltimore
Metropolitan area, which consists of Baltimore City, Anne Arundel, Baltimore,
Carroll, Harford and Howard Counties has an estimated population, according to
the 2000 census, of 2,512,943 which equals approximately 47% of Maryland's total
population. Baltimore County has the largest population at 754,292 followed by
Baltimore City at 651,154, Anne Arundel County at 489,000, Howard County at
247,842 and Harford County at 218,000. Located adjacent to major transportation
corridors and Washington, DC, the Baltimore metropolitan area provides a
diversified broad economic base. According to Baltimore County Department of
Economic Development seventy-seven percent of Baltimore County's employees work
in the private sector with approximately 9% in manufacturing, 20% in trade,
transportation and utilities, 13.8% professional business services, 13.8%
education and health services, and 8% in
2
leisure and hospitality. Government provides 17.5% of the County's jobs, with
self-employed providing the remaining employment.
Harford County continues to experience strong economic growth while
maintaining a strong government presence of approximately 11,484 employed in the
Aberdeen Proving Grounds both in the military and in civilian capacity. The
Maryland Department of Labor and Licensing Regulation estimates 54,727 work in
Harford County's private sector with 30% working in retail trade, 33% in service
and 19% in construction and manufacturing.
LENDING ACTIVITIES
General. The Bank's gross loan portfolio totaled $365.3 million at
September 30, 2003, representing 54.7% of total assets at that date. At
September 30, 2003, $179.5 million, or 46.3% of the Bank's gross loan portfolio,
consisted of single-family, residential mortgage loans. Other loans secured by
real estate include construction loans, single-family rental property and
commercial real estate loans, which amounted to $16.4 million, $14.3million and
$53.7 million, respectively, or 4.2%, 3.7% and 13.8%, respectively, of the
Bank's gross loan portfolio at September 30, 2003. The Bank also originates
consumer loans, consisting primarily of automobile loans and home equity lines
of credit, which totaled $98.2 million and $13.9 million, respectively, or 25.3%
and 3.6% respectively, of the Bank's gross loan portfolio.
3
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At September 30, 2003, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
At September 30,
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ---------------- -------------- -------------- --------------
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
Real estate loans:
Single-family residential (1)...........$ 179,552 46.32% $221,062 53.09% $165,028 57.94% $152,469 59.42% $146,868 65.20%
Single-family rental property loans..... 14,348 3.70 8,306 2.00 7,581 2.66 5,080 1.98 4,832 2.15
Commercial.............................. 53,675 13.85 57,356 13.77 15,068 5.29 13,649 5.32 10,216 4.54
Construction (2)........................ 16,411 4.23 11,734 2.82 8,709 3.06 5,905 2.30 5,592 2.48
Commercial lines of credit................ 6,410 1.65 4,208 1.01 400 .14 44 .02 50 .02
Commercial leases......................... 820 .21 1,170 .28 1,308 .46 -- -- -- --
Commercial loans secured.................. 133 .03 1,595 .38 2,588 .91 1,475 .57 1,081 .48
Commercial loans unsecured................ 678 .17 -- -- -- -- -- -- -- --
Consumer loans:
Automobile.............................. 98,168 25.33 93,161 22.38 72,822 25.57 67,852 26.44 46,753 20.75
Home equity lines of credit............. 13,943 3.60 13,864 3.33 8,935 3.13 8,147 3.18 7,963 3.54
Other................................... 3,474 .90 3,897 .94 2,395 .84 1,976 .77 1,908 .84
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
387,612 100.00% 416,353 100.00% 284,834 100.00% 256,597 100.00% 225,263 100.00%
====== ====== ====== ====== ======
Add:
Purchase accounting premium (net)....... 1,320 1,990 -- -- --
Less:
Undisbursed portion of loans in process. 7,753 4,902 4,434 3,850 2,579
Deferred loan origination fees.......... 429 661 143 214 80
Unearned interest....................... 12,750 13,964 10,684 9,610 5,948
Allowance for loan losses............... 2,698 2,199 1,563 1,403 1,273
--------- -------- -------- -------- --------
Total.................................$ 365,302 $396,617 $268,010 $241,520 $215,383
========= ======== ======== ======== ========
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(1) Includes fixed-rate second mortgage loans.
(2) Includes acquisition and development loans.
4
Loan Maturity Schedules. The following table sets forth certain information
at September 30, 2003 regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
Due
Due during 1 through Due
the year ending 5 years after 5 years after
September 30, 2004 September 30, 2004 September 30, 2004 Total
------------------ ------------------ ------------------ -----
(In thousands)
Real estate loans:
Single-family residential......... $ 747 $ 14,270 $ 164,535 $ 179,552
Single-family rental property..... -- 1,048 13,300 14,348
Commercial........................ 3,029 9,289 41,357 53,675
Construction...................... 12,055 278 4,078 16,411
Commercial lines of credit.......... 5,481 929 -- 6,410
Commercial leases................... -- 714 -- 820
Commercial loans secured............ -- 133 -- 133
Commercial loans unsecured.............. -- -- 678 678
Consumer:
Automobile........................ 1,340 96,569 259 98,168
Home equity lines of credit....... 244 5,094 8,605 13,943
Other............................. 563 1,304 1,607 3,474
----------- ----------- ----------- ----------
Total.......................... $ 23,565 $ 129,628 $ 234,419 $ 387,612
=========== =========== =========== ==========
The following table sets forth at September 30, 2003, the dollar amount of
all loans due one year or more after September 30, 2003 which have predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
--------------- -----------------
(In thousands)
Real estate loans:
Single-family residential......................$ 169,936 $ 8,869
Single-family rental property................... 6,295 8,053
Commercial...................................... 28,951 21,695
Construction.................................... 4,356 --
Commercial lines of credit......................... 929 --
Commercial leases.................................. 714 --
Commercial loans secured........................... 133 --
Commercial loans unsecured......................... 678 --
Consumer:
Automobiles..................................... 96,828 --
Home equity lines of credit..................... -- 13,699
Other........................................... 2,911 --
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Total......................................$ 311,731 $ 52,316
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on
5
existing mortgage loans and, conversely, decrease when current mortgage loan
market rates are substantially lower than rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank concentrates its lending
activities in its market area.
The following table sets forth certain information with respect to the
Bank's loan origination, purchase and sale activity for the periods indicated.
Year Ended September 30,
---------------------------------------------
2003 2002 2001
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(In thousands)
Loans originated:
Real estate loans:
Single-family residential...................... $ 55,896 $ 39,589 $ 33,457
Single-family rental property loans............ 7,021 2,686 3,270
Commercial..................................... 21,021 10,002 3,030
Construction................................... 2,209 1,708 3,071
Commercial lines of credit......................... 605 3,014 980
Commercial loans secured........................... 994 2,584 1,185
Commercial leases.................................. 154 518 1,414
Consumer loans:
Automobiles.................................... 60,789 62,456 44,350
Home equity lines of credit.................... 9,269 5,102 2,957
Other.......................................... 1,290 1,573 1,563
--------- --------- ---------
Total loans originated...................... $ 159,248 $ 129,232 $ 95,277
========= ========= =========
Loans purchased:
Real estate loans................................ $ -- $ -- $ 1,500
--------- --------- ---------
Total loans purchased.............................. $ -- $ -- $ 1,500
========= ========= =========
Loans sold:
Whole loans...................................... $ 11,995 $ 10,183 $ 2,805
--------- --------- --------
Total loans sold................................... $ 11,995 $ 10,183 $ 2,805
========= ========= =========
The Bank's loan originations are derived from a number of sources,
including referrals by realtors or automobile dealers, depositors and borrowers
and advertising, as well as walk-in customers. The Bank's solicitation programs
consist of advertisements in local media, in addition to occasional
participation in various community organizations and events. Real estate loans
are originated by the Bank's loan personnel. Automobile loans may be originated
on an indirect basis through a limited number of approved dealers, and loan
applications are accepted at the Bank's offices.
Loan Underwriting Policies. The Bank's lending activities are subject to
the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. Real estate loans up to $500,000, as well as all requests for
lines of credit up to $250,000, may be approved by the Bank's Loan Committee,
which consists of the Bank's President, Senior Vice President of Lending and
Treasurer and meets weekly. All loans in excess of these amounts must be
approved by the full Board of Directors. Individual officers of the Bank have
been granted authority by the Board of Directors to approve loans up to varying
specified dollar amounts, depending upon the type of loan. Automobile loans are
approved by the Bank's car loan manager or assistant manager and reviewed by the
Bank's Sr. Vice President who supervises lending operations.
Applications for single-family real estate loans generally are underwritten
and closed in accordance with the standards of the Federal Home Loan Mortgage
Corporation, ("FHLMC") and the Federal National Mortgage
6
Association, ("FNMA"). Upon receipt of a loan application from a prospective
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. If a proposed loan is to be secured by a mortgage on real estate, an
appraisal of the real estate is undertaken by an appraiser approved by the Bank
and licensed by the State of Maryland. In the case of single-family residential
mortgage loans, except when the Bank becomes aware of a particular risk of
environmental contamination, the Bank generally does not obtain a formal
environmental report on the real estate at the time a loan is made. A formal
environmental report may be required in connection with commercial real estate
loans, and the Bank obtains a Phase I environmental study in connection with its
underwriting of acquisition and development loans.
It is the Bank's policy to record a lien on the real estate securing a loan
and to obtain title insurance or an attorney's certification which ensures that
the property is free of prior encumbrances and other possible title defects.
Borrowers must also obtain hazard insurance policies prior to closing and, when
the property is in a flood plain as designated by Federal Emergency Management
Agency, pay flood insurance policy premiums.
With respect to single-family residential mortgage loans, the Bank makes a
loan commitment of between 30 and 60 days for each loan approved. If the
borrower desires a longer commitment, the commitment may be extended for good
cause and upon written approval. No fees are charged in connection with the
issuance of a commitment letter. The interest rate is guaranteed until closing.
The Bank is permitted to lend up to 97% of the lesser of the appraised
value or the purchase price of the real property securing a mortgage loan.
However, if the amount of a residential loan originated or refinanced exceeds
80% of the appraised value, the Bank's policy is to obtain private mortgage
insurance at the borrower's expense on the principal amount of the loan. The
Bank does provide a first time home buyers loan program in conjunction with the
Federal Home Loan Bank of Atlanta where 100% of the loan amount will be funded
for qualified buyers. The Bank will make a single-family residential mortgage
loan with up to a 97% loan-to-value ratio if the required private mortgage
insurance is obtained. The Bank generally limits the loan-to-value ratio on
commercial real estate mortgage loans to 80%, although the loan-to-value ratio
on commercial real estate loans in limited circumstances has been as high as
90%. The Bank limits the loan-to-value ratio on single-family rental property
loans to 80%. Home equity loans are made in amounts which, when added to any
senior indebtedness, do not exceed 80% of the value of the property.
Under applicable law, with certain limited exceptions, loans and extensions
of credit by a savings institution to a person outstanding at one time shall not
exceed 15% of the institution's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus. Under these limits, the
Bank's loans to one borrower were limited to $8.1 million at September 30, 2003.
Applicable law additionally authorizes savings institutions to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
to develop residential housing, provided: (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
savings institution is and continues to be in compliance with its fully
phased-in regulatory capital requirements; (iii) the loans comply with
applicable loan-to-value requirements; (iv) the aggregate amount of loans made
under this authority does not exceed 150% of unimpaired capital and surplus; and
(v) the Director of OTS, by order, permits the savings institution to avail
itself of this higher limit. At September 30, 2003, the Bank had no lending
relationships in excess of the loans-to-one-borrower limit. At September 30,
2003, the Bank's largest loan customer was a $6.5 million relationship
consisting of a medical office building and other residential and commercial
investment properties. At September 30, 2003, the loans were current and
performing in accordance with their terms.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
Single-Family Residential Real Estate Lending. The Bank historically has
been and continues to be an originator of single-family, residential real estate
loans in its market area. At September 30, 2003, single-family, residential
mortgage loans, excluding single-family rental property loans and home equity
loans, totaled $179.5 million, or 46.3% of the Bank's gross loan portfolio.
7
The Bank originates fixed-rate mortgage loans at competitive interest
rates. At September 30, 2003, the Bank had $169.9 million of fixed-rate
single-family mortgage loans, which amounted to 95% of the Bank's single-family
mortgage loans. The Bank emphasizes the origination of fixed-rate single-family
residential mortgage loans with maturities of 15 years or less by offering more
competitive rates on these loans as compared to the rates it offers on
fixed-rate mortgage loans with terms in excess of 15 years.
The Bank also offers adjustable-rate, single-family residential mortgage
loans. As of September 30, 2003, $16.9 million, or 4.4% of the Bank's
single-family mortgage loans carried adjustable rates. After the initial term,
the rate adjustments on the Bank's adjustable-rate loans are indexed to a rate
which adjusts annually based upon changes in an index based on the weekly
average yield on U.S. Treasury securities adjusted to a constant comparable
maturity of one year, as made available by the Federal Reserve Board. The
interest rates on most of the Bank's adjustable-rate mortgage loans are adjusted
once a year, and the Bank offers loans that have an initial adjustment period of
one, three or five years. The maximum adjustment is 2% per adjustment period
with a maximum aggregate adjustment of 6% over the life of the loan. The Bank
offers adjustable-rate mortgage loans that provide for initial rates of interest
below the rates that would prevail when the index used for repricing is applied,
i.e., "teaser" rates. All of the Bank's adjustable-rate loans require that any
payment adjustment resulting from a change in the interest rate be sufficient to
result in full amortization of the loan by the end of the loan term and, thus,
do not permit any of the increased payment to be added to the principal amount
of the loan, known as "negative amortization."
The retention of adjustable-rate loans in the Bank's portfolio helps reduce
the Bank's exposure to increases in prevailing market interest rates. However,
there are unquantifiable credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable-rate loans. It
is possible that during periods of rising interest rates, the risk of default on
adjustable-rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable-rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed-rate period
before the first adjustment and the lifetime interest rate adjustment
limitations. Accordingly, there can be no assurance that yields on the Bank's
adjustable-rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, adjustable-rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although decreases in
the Bank's cost of funds tend to offset this effect.
Single-family Rental Property Loans. The Bank also offers single-family
residential mortgage loans secured by properties that are not owner-occupied. As
of September 30, 2003, single-family rental property loans totaled $14.3
million, or 3.7%, of the Bank's gross loan portfolio. Originations of
single-family rental property loans were $7.0 million, $2.7 million and $3.3
million for the years ended September 30, 2003, 2002 and 2001, respectively.
Single-family residential mortgage loans secured by nonowner-occupied properties
are made on a fixed-rate or an adjustable-rate basis and carry interest rates
generally from .5% to 1.0% above the rates charged on comparable loans secured
by owner-occupied properties. The maximum term on such loans is 30 years.
Construction Lending. A substantial portion of the Bank's construction
loans are originated for the construction of owner-occupied, single-family
dwellings in the Bank's primary market area. Residential construction loans are
offered primarily to individuals building their primary or secondary residence,
as well as to selected local developers to build single-family dwellings.
Generally, loans to owner/occupants for the construction of owner-occupied,
single-family residential properties are originated in connection with the
permanent loan on the property and have a construction term of up to 12 months.
Such loans are offered on a fixed-rate or adjustable-rate basis. Interest rates
on residential construction loans made to the owner/occupant have interest rates
during the construction period equal to the same rate on the permanent loan
selected by the customer. Interest rates on residential construction loans to
builders are set at the prime rate plus a margin of between .0% and 1.5%.
Interest rates on commercial construction loans are based on the prime rate plus
a negotiated margin of between .0% and 1.5% and adjust monthly, with
construction terms generally not exceeding 18 months. Advances are made on a
percentage of completion basis. At September 30, 2003, $16.4 million, or 4.2%,
of the Bank's gross loan portfolio consisted of commercial construction loans,
acquisition and development loans, and construction loans on single family
residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of projected construction costs. The Bank also reviews and inspects each
project at the commencement of construction and as needed prior to disbursements
during the term of the construction loan.
8
Consolidation in the building industry and the increasing presence in the
Bank's market of large builders that are not locally based have limited the
Bank's ability to compete for some loans to builders because the Bank's
loans-to-one-borrower limitation limits its ability to meet the volume
requirements of the large builders. The Bank's construction loans totaled $16.4
million, $11.7 million, $8.7 million, at September 30, 2003, 2002, 2001,
respectively, and construction loan originations were $2.2 million, $1.7 million
and $3.1 million during the years ended September 30, 2003, 2002 and 2001,
respectively.
On occasion, the Bank makes acquisition and development loans to local
developers to acquire and develop land for sale to builders who will construct
single-family residences. Acquisition and development loans, which are
considered by the Bank to be construction loans, are made at a rate that adjusts
monthly, based on the prime rate plus a negotiated margin, for terms of up to
three years. Interest only is paid during the term of the loan, and the
principal balance of the loan is paid down as developed lots are sold to
builders. Generally, in connection with acquisition and development loans, the
Bank issues a letter of credit to secure the developer's obligation to local
governments to complete certain work. If the developer fails to complete the
required work, the Bank would be required to fund the cost of completing the
work up to the amount of the letter of credit. Letters of credit generate fee
income for the Bank but create additional risk. At September 30, 2003, the Bank
had five such facilities outstanding totaling $419,000. All acquisition and
development loans were performing in accordance with their terms at such date.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate and the
borrower is unable to meet the Bank's requirements of putting up additional
funds to cover extra costs or change orders, then the Bank will demand that the
loan be paid off and, if necessary, institute foreclosure proceedings, or
refinance the loan. If the estimate of value proves to be inaccurate, the Bank
may be confronted, at or prior to the maturity of the loan, with collateral
having a value which is insufficient to assure full repayment. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers (i.e., borrowers who satisfy all credit requirements and whose loans
satisfy all other underwriting standards which would apply to the Bank's
permanent mortgage loan financing for the subject property) in the Bank's market
area. On loans to builders, the Bank works only with selected builders with whom
it has experience and carefully monitors the creditworthiness of the builders.
Commercial Real Estate Lending. The Bank's commercial real estate loan
portfolio includes loans to finance the acquisition of small office buildings,
churches, medical condominiums, small shopping centers and small commercial and
industrial buildings. Such loans generally range in size from $100,000 to $5
million, with the largest having an outstanding principal balance of $4.4
million at September 30, 2003. At September 30, 2003, the Bank had $53.7 million
of commercial real estate loans, which amounted to 13.8% of the Bank's gross
loan portfolio. Commercial real estate loans are originated on a fixed-rate or
adjustable-rate basis with terms of up to 25 years at a rate that is at least 1%
above the rate charged by the Bank on single-family residential mortgage loans
having comparable terms and interest rate adjustment periods.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real estate
loans typically involve larger loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans typically is dependent
on the successful operation of the real estate project, retail establishment or
business. These risks can be significantly impacted by supply and demand
conditions in the market for office and retail space and, as such, may be
subject to a greater extent to adverse conditions in the economy generally. To
minimize these risks, the Bank generally limits itself to its market area or to
borrowers with which it has prior experience or who are otherwise known to the
Bank. It is the Bank's policy generally to obtain annual financial statements of
the business of the borrower or the project for which commercial real estate
loans are made. In addition, in the case of commercial real estate loans made to
a legal entity, the Bank seeks, whenever possible, to obtain personal guarantees
and annual financial statements of the principals of the legal entity.
Commercial Lines of Credit. The Bank provides commercial lines of credit to
businesses within the Bank's market area. These loans are secured by business
assets, including real property, equipment, automobiles and consumer leases.
Generally, all loans are further personally guaranteed by the owners of the
business. The
9
commercial lines have adjustable interest rates tied to the prime rate and are
offered at rates from prime plus 0% to prime plus 3 1/2%. As of September 30,
2003, the Bank had $6.4 million of such loans outstanding.
Consumer Lending. The consumer loans currently in the Bank's loan portfolio
consist of automobile loans, home equity lines of credit and loans secured by
savings deposit.
Automobile loans totaled $98.2 million, or 25.3%, of the Bank's gross loan
portfolio, at September 30, 2003. Automobile loans are secured by both new and
used cars and, depending on the creditworthiness of the borrower, may be made
for up to 100% of the "sticker price" or purchase price, whichever is lower, or,
with respect to used automobiles, the loan values as published by a wholesale
value listing utilized by the automobile industry. Automobile loans are made
directly to the borrower-owner or indirectly, where the financing is arranged by
the car dealer. Management of the Bank estimates that approximately 80% of
automobile loans are originated on an indirect basis through various dealerships
located in its market area. Automobile loans originated on an indirect basis are
considered to entail greater credit risk than automobile loans originated on a
direct basis. New and relatively new cars (less than two years old or 20,000
miles or less) are financed for a period generally of up to six years, while
used cars are financed for a period generally of up to five years, or less,
depending on the age of the car. Collision insurance is required for all
automobile loans. The Bank also maintains a blanket collision insurance policy
that provides insurance for any borrower who allows his insurance to lapse.
The Bank originates second mortgage loans and home equity lines of credit.
As of September 30, 2003, home equity lines of credit totaled $13.9 million, or
3.6% of the Bank's gross loan portfolio. Second mortgage loans are made at fixed
rates and for terms of up to 15 years and totaled $11.7 million, or 3.0%, of the
Bank's gross loans at September 30, 2003.
The Bank's home equity lines of credit currently have adjustable interest
rates tied to the prime rate and can be offered anywhere from as low as the
prime rate less .25% up to the prime rate. The interest rate may not adjust to a
rate higher than 18%. The home equity lines of credit require monthly payments
until the loan is paid in full, with a loan term not to exceed 20 years. The
minimum monthly payment is 1.5% of the outstanding principal balance. Home
equity lines of credit are secured by subordinate liens against residential real
property. The Bank requires that fire and extended coverage casualty insurance
(and, if appropriate, flood insurance) be maintained in an amount at least
sufficient to cover its loan.
The Bank makes savings account loans for up to 90% of the depositor's
savings account balance. The interest rate is normally 2.0% above the rate paid
on the related savings account, and the account must be pledged as collateral to
secure the loan. Interest generally is billed on a quarterly basis. At September
30, 2003, savings account loans accounts totaled $1.2 million, or .31%, of the
Bank's gross loan portfolio.
As part of the Bank's loan strategy, the Bank has diversified its lending
portfolio to afford the Bank the opportunity to earn higher yields and to
provide a fuller range of banking services. These products have generally been
in the consumer area and include surgical loans, boat loans and loans for the
purchase of recreational vehicles. Such loans totaled $2.3 million at September
30, 2003.
Consumer lending affords the Bank the opportunity to earn yields higher
than those obtainable on single-family residential lending. However, consumer
loans entail greater risk than do residential mortgage loans, particularly in
the case of loans which are unsecured or secured by rapidly depreciable assets.
Repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by events
such as job loss, divorce, illness or personal bankruptcy.
Loan Fees and Servicing. The Bank receives fees in connection with late
payments and for miscellaneous services related to its loans. The Bank also
charges fees in connection with loan originations typically from 0 to 3 points
(one point being equal to 1% of the loan amount) on residential and commercial
loan originations. The Bank services loans sold to FHLMC and FNMA,. The Bank
also services participation loans originated and sold by the Bank with servicing
retained, and earns minimal income from this activity.
10
Nonperforming Loans and Other Problem Assets. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status. Loans which are past due 15 days incur a late fee of 5% of
principal and interest due. As a matter of policy, the Bank will send a late
notice to the borrower after the loan has been past due 15 days and again after
30 days. If payment is not promptly received, the borrower is contacted again,
and efforts are made to formulate an affirmative plan to cure the delinquency.
Generally, after any loan is delinquent 90 days or more, formal legal
proceedings are commenced to collect amounts owed. In the case of automobile
loans, late notices are sent after loans are ten days delinquent, and the
collateral is seized after a loan is delinquent 60 days. Repossessed cars
subsequently are sold at auction.
Loans generally are placed on nonaccrual status if the loan becomes past
due more than 90 days, except in instances where in management's judgment there
is no doubt as to full collectibility of principal and interest, or management
concludes that payment in full is not likely. Consumer loans are generally
charged off, or any expected loss is reserved for, after they become more than
120 days past due. All other loans are charged off when management concludes
that they are uncollectible. See Note 3 of Notes to Financial Statements.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate acquired through foreclosure until such time as it is sold. When
such property is acquired, it is initially recorded at the lower of cost or
estimated fair value and subsequently at the lower of book value or fair value
less estimated costs to sell. Costs relating to holding such real estate are
charged against income in the current period, while costs relating to improving
such real estate are capitalized until a saleable condition is reached. Any
required write-down of the loan to its fair value less estimated selling costs
upon foreclosure is charged against the allowance for loan losses. See Note 1 of
Notes to Financial Statements.
11
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
At September 30,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ------ ------ ------ ------
(In thousands)
Loans accounted for on a nonaccrual basis: (1)
Real estate:
Single-family residential.................... $ 59 $ 291 $ 239 $ 383 $ 840
Single-family rental property................ -- -- -- -- --
Commercial................................... 166 -- -- -- 185
Construction................................. -- -- -- -- --
Commercial lines of credit..................... -- -- -- -- --
Commercial loans secured....................... -- 1,100 -- -- --
Consumer....................................... 75 -- -- -- --
-------- --------- -------- -------- ---------
Total........................................ $ 300 $ 1,391 $ 239 $ 383 $ 1,025
======== ========= ======== ======== =========
Accruing loans which are contractually past due
90 days or more:
Real estate:
Single-family residential.................... $ -- $ -- $ -- $ -- $ --
Single-family rental property................ -- -- -- -- --
Commercial................................... -- -- -- -- --
Construction................................. -- -- -- -- --
Commercial lines of credit..................... -- -- -- -- --
Commercial loans secured....................... -- -- -- -- --
Consumer....................................... -- -- -- -- --
-------- --------- -------- -------- ---------
Total........................................ $ -- $ -- $ -- $ -- $ --
======== ========= ======== ======== =========
Total non-performing loans................... $ 300 $ 1,391 $ 239 $ 383 $ 1,025
======== ========= ======== ======== =========
Percentage of gross loans........................ .08% .33% .09% .15% .45%
======== ========= ======== ======== =========
Percentage of total assets....................... .04% .24% .06% .12% .34%
======== ========= ======== ======== =========
Other non-performing assets (2).................. $ 283 $ 229 $ 134 $ 126 $ 132
======== ========= ======== ======== =========
Loans modified in troubled debt restructuring... $ -- $ -- $ -- $ -- $ --
======== ========= ======== ======== =========
- -------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
non-accrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
collectibility of the loan.
(2) Other nonperforming assets include the Bank's inventory of repossessed
cars.
During the year ended September 30, 2003, gross interest income of $22,597,
would have been recorded on loans accounted for on a nonaccrual basis if the
loans had been current throughout the year. Interest on such loans included in
income during the year ended September 30, 2003 amounted to $6,644.
At September 30, 2003, the Bank had no loans which were not classified as
non-accrual, 90 days past due or restructured but where known information about
possible credit problems of borrowers caused management to have serious concerns
as to the ability of the borrowers to comply with present loan repayment terms
and may result in disclosure as nonaccrual, 90 days past due or restructured.
At September 30, 2003, nonaccrual loans consisted of two single-family
residential mortgage loans aggregating $59,000, and a $166,000 commercial loan.
Real estate acquired through foreclosure is initially recorded at the lower
of cost or estimated fair value and subsequently at the lower of book value or
fair value less estimated costs to sell. Fair value is defined as the amount in
cash or cash-equivalent value of other consideration that a real estate parcel
would yield in a current sale between a willing buyer and a willing seller, as
measured by market transactions. If a market does not exist, fair value of the
item is estimated based on selling prices of similar items in active markets or,
if there are no active markets for similar items, by discounting a forecast of
expected cash flows at a rate commensurate with the risk involved. Fair value is
generally determined through an appraisal at the time of foreclosure. The Bank
records a valuation allowance for
12
estimated selling costs of the property immediately after foreclosure.
Subsequent to foreclosure, real estate acquired through foreclosure is
periodically evaluated by management and an allowance for loss is established if
the estimated fair value of the property, less estimated costs to sell,
declines. At September 30, 2003, the Bank had no real estate owned. The Bank had
$283,000 of other nonperforming assets, which consisted of the Bank's inventory
of repossessed cars.
Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any. An asset is classified as
doubtful if full collection is highly questionable or improbable. An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future. The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include nonperforming
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Bank regularly reviews its
assets to determine whether any assets require classification or
re-classification. At September 30, 2003, the Bank had $1.3 million in
classified assets consisting of $1.2 million in assets classified as special
mention, $225,000 in assets classified as substandard, no assets classified as
doubtful and no assets classified as loss. Special mention assets consisted of
$1.0 million single-family residential mortgage loans 60 to 89 days delinquent
at September 30, 2003, $100,000 in land loans 60 to 89 days delinquent at
September 30, 2003 and $143,000 consumer loans 60 to 89 days delinquent at
September 30, 2003 and substandard assets consisted of the $225,000 in
nonaccrual loans described above.
Allowance for Loan Losses. In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions, regular reviews of delinquencies and loan
portfolio quality and evolving standards imposed by federal bank examiners. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses and
believes such allowances are adequate, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank's methodology for establishing the allowance for loan losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a monthly basis based on
an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, loan concentrations, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Additional provisions for losses on loans are made in
order to bring the allowance to a level deemed adequate. Specific reserves will
be provided for individual assets, or portions of assets, when ultimate
collection is considered improbable by management based on the current payment
status of the assets and the fair value of the security. At the date of
foreclosure or other repossession, the Bank would transfer the property to real
estate acquired in settlement of loans initially at the lower of cost or
estimated fair value and subsequently at the lower of book value or fair value
less estimated selling costs. Any portion of the outstanding loan balance in
excess of fair value less estimated selling costs
13
would be charged off against the allowance for loan losses. If, upon ultimate
disposition of the property, net sales proceeds exceed the net carrying value of
the property, a gain on sale of real estate would be recorded.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
Year Ended September 30,
-------------------------------------------------------------
2003 2002 2001 2000 1999
------ ----- ------ ------ ------
(In thousands)
Balance at beginning of period................... $ 2,199 $ 1,563 $ 1,403 $ 1,273 $ 1,034
-------- --------- -------- -------- ---------
Loans charged-off:
Real estate mortgage:
Single-family residential.................... -- -- 20 7 --
Multi-family residential..................... -- -- -- -- --
Commercial................................... -- -- -- -- --
Construction................................. -- -- -- -- (15)
Commercial loans secured....................... -- 159 -- -- --
Consumer....................................... 1,239 530 324 201 (217)
-------- --------- -------- -------- ---------
Total charge-offs................................ 1,239 689 344 208 (232)
Recoveries:
Real estate mortgage:
Single-family residential.................... -- -- -- -- --
Multi-family residential..................... -- -- -- -- --
Commercial................................... -- -- -- -- --
Construction................................. -- -- -- -- --
Commercial loans secured....................... -- -- -- -- --
Consumer....................................... 379 429 172 176 132
-------- --------- -------- -------- ---------
Total recoveries................................. 379 429 172 176 132
Net loans charged off............................ (860) (260) (172) (32) (100)
Provision for loan losses....................... 1,359 509 332 162 339
Allowance assumed in the provision............... -- 387 -- -- --
-------- --------- -------- -------- ---------
Balance at end of period......................... $ 2,698 $ 2,199 $ 1,563 $ 1,403 $ 1,273
======== ========= ======== ======== =========
Ratio of net charge-offs to average
loans outstanding during the period............ .22% .09% .07% .01% 0.05%
======== ========= ======== ======== =========
Of the $1.2 million charge-offs during the fiscal year ended September 30,
2003, $569,000 was related to a non accrual commercial loan. The Bank has
obtained judgments in the amount of $706,000 in connection with this loan see
"Item 3- Legal Proceedings."
14
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
At September 30,
------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ------------------ ------------------ ----------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Real estate:
Single-family residential.........$ 539 46.32% $ 760 53.09% $ 587 57.94% $ 421 59.42% $ 452 65.20%
Single-family rental property..... 22 3.70 17 2.00 15 2.66 10 1.98 10 2.15
Commercial........................ 396 13.85 314 13.77 151 5.29 136 5.32 118 4.54
Construction...................... 107 4.23 70 2.82 40 3.06 70 2.30 75 2.48
Commercial lines of credit.......... 16 1.65 46 1.01 -- .14 -- .02 -- .02
Commercial leases................... -- -- -- .28 -- .46 -- -- -- --
Commercial loans secured............ -- .21 -- .38 -- .91 -- .57 -- .48
Commercial loans unsecured.......... 569 .03 -- -- -- -- -- -- -- --
Consumer............................ 1,049 29.83 992 26.65 770 29.54 766 30.39 618 25.13
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses.$2,698 100.00% $2,199 100.00% $1,563 100.00% $1,403 100.00% $1,273 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
15
INVESTMENT ACTIVITIES
General. The Bank is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Atlanta,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets which savings banks are
required to maintain. See " -- Regulation -- Depository Institution Regulation
- -- Liquidity Requirements."
The Bank makes investments in order to maintain the levels of liquid assets
required by regulatory authorities and manage cash flow, diversify its assets,
obtain yield and to satisfy certain requirements for favorable tax treatment.
The investment activities of the Bank consist primarily of investments in
mortgage-backed securities and other investment securities, consisting primarily
of securities issued or guaranteed by the U.S. government or agencies thereof.
Typical investments include federally sponsored agency mortgage pass-through and
federally sponsored agency and mortgage-related securities. Investment and
aggregate investment limitations and credit quality parameters of each class of
investment are prescribed in the Bank's investment policy. The Bank performs
analyses on mortgage-related securities prior to purchase and on an ongoing
basis to determine the impact on earnings and market value under various
interest rate and prepayment conditions. Under the Bank's current investment
policy, securities purchases are made by the Bank's President. The Bank's
President and Treasurer have authority to sell investment securities subject to
the Bank's designation as available for sale and purchase comparable investment
securities with similar characteristics. The Board of Directors reviews all
securities transactions on a monthly basis.
Securities designated as "held to maturity" are those assets which the Bank
has the ability and intent to hold to maturity. Upon acquisition, securities are
classified as to the Bank's intent, and a sale would only be effected due to
deteriorating investment quality. The held to maturity investment portfolio is
not used for speculative purposes and is carried at amortized cost. In the event
the Bank sells securities from this portfolio for other than credit quality
reasons, all securities within the investment portfolio with matching
characteristics may be reclassified as assets available for sale. Securities
designated as "available for sale" are those assets which the Bank may not hold
to maturity and thus are carried at market value with unrealized gains or
losses, net of tax effect, recognized in retained earnings. At September 30,
2003 the Bank's securities portfolio consists of both available for sale and
held to maturity securities.
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA
and GNMA which guarantee the payment of principal and interest to investors.
Mortgage-backed securities generally increase the quality of the Bank's assets
by virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Bank.
Mortgage-related securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to
16
the mortgage-backed security. Premiums and discounts on mortgage-backed
securities are amortized or accredited over the estimated term of the securities
using a level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
Mortgage-related securities, which include collateralized mortgage
obligations ("CMOs"), are typically issued by a special purpose entity, which
may be organized in a variety of legal forms, such as a trust, a corporation or
a partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage-related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Accordingly, under this security structure, all
principal paydowns from the various mortgage pools are allocated to a
mortgage-related securities' class or classes structured to have priority until
it has been paid off. These securities generally have fixed interest rates, and,
as a result, changes in interest rates generally would affect the market value
and possibly the prepayment rates of such securities.
Some mortgage-related securities instruments are like traditional debt
instruments due to their stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other mortgage-related securities
instruments are entitled to the excess, if any, of the issuer's cash flows.
These mortgage-related securities instruments may include instruments designated
as residual interest and are riskier in that they could result in the loss of a
portion of the original investment. Cash flows from residual interests are very
sensitive to prepayments and, thus, contain a high degree of interest rate risk.
The Bank does not purchase residual interests in mortgage-related securities.
The Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate and adjustable rate mortgage-backed securities. The Bank
makes such investments in order to manage cash flow, diversify assets, obtain
yield, to satisfy certain requirements for favorable tax treatment and to
satisfy the qualified thrift lender test. See "Regulation -- Depository
Institution Regulation -- Qualified Thrift Lender Test."
At September 30, 2003, mortgage-backed securities with an amortized cost of
$18.4 million were classified as held to maturity. At September 30, 2003, the
Bank's held to maturity mortgage-backed securities had a weighted average yield
of 5.75%.
At September 30, 2003, mortgage-backed securities with an amortized cost of
$116.2million were classified as available for sale. At September 30, 2003, the
Bank's available for sale mortgage-backed securities had a weighted average
yield of 3.97%.
At September 30, 2003, the Bank did not have any CMOs, and the Bank's
investment policy does not permit investments in individual issues of CMOs or
Real Estate Mortgage Investment Conduits ("REMICs").
17
The following table sets forth the carrying value of the Bank's investments
at the dates indicated.
At September 30,
-------------------------------------
2003 2002 2001
-------- ---------- ---------
(Dollars in thousands)
Securities available for sale:
U.S. government and agency securities.................... $ 90,021 $ 19,360 $ 14,757
Mortgage Backed securities.............................. 116,204 60,411 11,442
Equity Investment in Mutual Funds....................... 31,268 25,723 9,212
--------- -------- ---------
Total Available for Sale.............................. 237,493 $105,494 $ 35,411
--------- -------- ---------
Securities held to maturity:
U.S. government and agency
securities........................................... $ 2,500 $ 4,496 $ 18,494
Mortgage-backed securities............................... 18,394 33,691 41,655
FHLB stock............................................... 3,305 3,940 1,834
--------- -------- ---------
Total Held to Maturity................................ $ 24,199 $ 42,127 $ 61,983
Total ................................................... $ 261,692 $147,621 $ 97,394
========= ======== =========
18
The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Bank's investment
portfolio at September 30, 2003.
More Total
One Year or Less One to Five Years Five to Ten Years than Ten Years Investment Portfolio
------------------ ----------------- -------------------- --------------- -----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
(Dollars in thousands)
Securities available for sale:
U.S. government and agency
obligations................$ -- --% $ 50,245 2.45% $ 37,271 3.18% $ 2,505 4.41% $ 90,021 $ 90,021 2.80%
Mortgage-backed securities.... -- -- 5,026 3.39 28,284 3.94 82,894 4.02 116,204 116,204 3.97
Equity Investment in Mutual
Funds ...................... 31,268 2.97 -- -- -- 31,268 31,268 2.97
-------- -------- -------- -------- -------- --------
Total available for sale... 31,268 55,271 65,555 85,399 237,493 237,493
-------- -------- -------- -------- -------- --------
More Total
One Year or Less One to Five Years Five to Ten Years than Ten Years Investment Portfolio
------------------ ----------------- -------------------- --------------- -----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
(Dollars in thousands)
Securities held to maturity:
U.S. government and agency
obligations................$ 500 6.00% $ 1,500 3.72% $ 500 6.30% $ -- --% $ 2,500 $ 2,551 4.69%
Mortgage-backed securities.... 14 7.03 313 6.45 1,538 6.40 16,529 5.77 18,394 18,983 5.84
FHLB stock ................... -- -- -- 3,305 4.21 3,305 3,305 4.21
-------- ------- ------- ------- ------- --------
Total held to maturity..... 514 1,813 2,038 19,834 24,199 24,839
-------- ------- ------- ------- ------- --------
Total ........................... 31,782 57,084 67,593 105,233 261,692 262,332
======== ======= ======= ======== ======== ========
19
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending,
investment activities and general operational purposes. In addition to deposits,
the Bank derives funds from loan principal and interest repayments, maturities
of investment securities and mortgage-backed securities and interest payments
thereon. Although loan repayments are a relatively stable source of funds,
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds, or on a longer term
basis for general operational purposes. The Bank has access to borrow from the
FHLB of Atlanta.
Deposits. The Bank attracts deposits principally from within its market
area by offering a variety of deposit instruments, including checking accounts,
money market accounts, statement and passbook savings accounts, Individual
Retirement Accounts, and certificates of deposit which range in maturity from
seven days to five years. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Bank on a periodic basis. The Bank reviews its
deposit mix and pricing on a weekly basis. In determining the characteristics of
its deposit accounts, the Bank considers the rates offered by competing
institutions, lending and liquidity requirements, growth goals and federal
regulations. Management believes it prices its deposits comparably to rates
offered by its competitors. The Bank does not accept brokered deposits.
The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially all of the Bank's
depositors are Maryland residents. To provide additional convenience, the Bank
participates in the STAR Automated Teller Machine ("ATM") network at locations
throughout the mid-Atlantic and the South and the CIRRUS Automated Teller
Machine network at locations throughout the United States, through which
customers can gain access to their accounts at any time. The Bank currently has
ATM machines in all of its sixteen offices. The Bank also has a remote ATM at
the Forest Hill Lanes in Forest Hill, Maryland and remote ATM's at three area
community college's, Dundalk Community College, Catonsville Community College
and Essex Community College. The Bank also has an Internet based banking system
to provide additional customer convenience.
20
Savings deposits in the Bank at September 30, 2003 were represented by the
various types of savings programs described below.
Interest* Minimum Minimum Balances Percentage of
Rate Term Category Amount (In thousands) Total Savings
- --------- ------- -------- ------- -------------- -------------
Demand deposits:
.34 % None NOW and Super NOW accounts $ 250 50,556 9.16%
.70 None Money market 250 15,540 2.81
-------- -------
Total demand deposits 66,096 11.97
Passbook savings deposits:
1.00 None Regular passbook 25 77,080 13.96
1.04 None Money market passbook 10,000 33,156 6.01
-------- -------
Total passbook savings deposits 110,236 19.97
Certificates of Deposit
.85 3 months or less Fixed-term, fixed-rate 1,000 12,095 2.19
2.67 6 months Fixed-term, fixed-rate 1,000 22,113 4.01
1.98 12 months Fixed-term, fixed-rate 100 70,123 12.73
2.47 18 months Fixed-term, fixed-rate 100 17,392 3.15
2.89 24 months Fixed-term, fixed-rate 100 43,859 7.94
2.98 30 months Fixed-term, fixed-rate 100 5,358 .97
4.00 36 months Fixed-term, fixed-rate 100 14,018 2.54
3.41 42 months Fixed-term, fixed-rate 100 21 .01
5.25 48 months Fixed-term, fixed-rate 100 4,538 .82
5.01 60 months Fixed-term, fixed-rate 100 83,161 15.06
5.77 $100,000 and over Fixed-term, fixed-rate N/A 102,518 18.57
-------- -------
Total certificates of deposit 375,196 67.99
Purchase accounting premiums, net 341 .06
Accrued interest payable 59 .01
-------- -------
Total deposits 551,928 100.00%
======== =======
- ---------------
* Represents weighted average interest rate.
21
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
Balance at Balance at Balance
September % of Increase September % of Increase September % of
30, 2003 Deposits (Decrease) 30, 2002 Deposits (Decrease) 30, 2001 Deposits
--------- -------- ----------- ---------- -------- ---------- -------- --------
(Dollars in thousands)
NOW ................................... $ 50,557 9.15% $ 4,729 $ 45,827 9.19% $ 11,788 $ 34,039 10.45%
Money market deposit................... 15,540 2.82 (3,369) 18,909 3.79 12,255 6,654 2.04
Passbook savings deposits.............. 110,236 19.97 17,935 92,301 18.50 31,357 60,944 18.71
Certificates of deposit................ 272,678 49.42 6,328 266,527 53.44 88,855 177,672 54.54
Certificates of deposit $100,000
and over............................ 102,518 18.57 28,776 73,742 14.78 27,470 46,272 14.20
Purchase accounting premiums, net...... 341 .06 (1,051) 1,392 .28 1,392 -- --
Accrued interests payable.............. 59 .01 (28) 87 .02 (118) 205 .06
---------- ------ --------- ---------- ------ --------- --------- ------
$ 551,929 100.00% $ 53,320 $ 498,785 100.00% $ 172,999 $ 325,786 100.00%
========== ====== ========= ========== ====== ========= ========= ======
22
The following tables set forth the average balances and average interest
rates based on month-end balances for various types of deposits as of the dates
indicated.
Year Ended September 30,
---------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------- --------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Rate (1) Balance Rate Balance Rate
---------- --------- --------- --------- ------- -------
(Dollars in thousands)
NOW........................... $ 43,579 .61% $ 25,423 1.71% $ 21,663 1.57%
Money market deposits......... 15,628 1.03 9,920 1.74 7,005 2.52
Passbook savings deposits..... 100,160 2.13 72,364 3.15 57,809 2.57
Non-interest-bearing demand
deposits................... 16,305 -- 12,583 -- 10,671 --
Certificates of deposit....... 354,349 3.29 262,439 4.23 200,584 5.87
--------- --------- ---------
Total..................... $ 530,021 2.68 $ 382,729 3.65 $ 297,732 4.63
========= ========= =========
- --------
(1) Annualized.
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
At September 30,
---------------------------------------
2003 2002 2001
------ ------ -------
(In thousands)
1.76 - 2%................................................. $ 84,309 $ 16,369 $ --
2.01 - 4%................................................. 172,828 167,206 23,525
4.01 - 6%................................................. 70,523 80,228 90,699
6.01 - 8%................................................. 47,536 76,466 109,720
---------- --------- ---------
$ 375,196 $ 340,269 $ 223,944
========== ========= =========
The following table sets forth the amount and maturities of time deposits
at September 30, 2003.
Amount Due
-------------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -------
(In thousands)
1.76 - 2%.................... $ 77,871 $ 5,486 $ 915 $ 37 $ 84,309
2.01 - 4%.................... 91,062 38,615 11,463 31,688 172,828
4.01 - 6%.................... 16,957 2,470 6,196 44,900 70,523
6.01 - 8%.................... 5,366 32,449 9,398 323 47,536
--------- --------- --------- -------- ----------
$ 191,256 $ 79,020 $ 27,972 $ 76,948 $ 375,196
========= ========= ========= ======== ==========
23
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
2003. At such date, such deposits represented 19.26% of total deposits and had a
weighted average rate of 5.77%.
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
Three months or less......................... $ 14,403
Over three through six months................ 13,585
Over six through 12 months................... 12,765
Over 12 months............................... 61,765
---------
Total.................................. $ 102,518
=========
The following table sets forth the savings activities of the Bank for the
periods indicated.
Year Ended September 30,
-------------------------------------------
2003 2002 2001
---------- ---------- -----------
(In thousands)
Deposits.................................................... $ 998,644 $ 682,641 $ 653,749
Increase from WHG merger.................................... -- 118,218 --
Withdrawals................................................. (959,547) (641,844) (610,630)
--------- --------- ----------
Net increase before interest credited...................... 39,097 159,015 43,119
Interest credited........................................... 14,223 13,984 13,785
--------- --------- ----------
Net increase in savings deposits....................... $ 53,320 $ 172,999 $ 56,904
========= ========= ==========
In the unlikely event the Bank is liquidated, depositors will be entitled
to full payment of their deposit accounts prior to any payment being made to the
sole stockholder of the Bank.
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending, investments and general operating activities. The
Bank is authorized, however, to use advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, the Bank is required to own stock in the FHLB of
Atlanta and is authorized to apply for advances. Advances are pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank has a Blanket Agreement for advances with the FHLB under
which the Bank may borrow up to 11% of assets subject to normal collateral and
underwriting requirements. Advances from the FHLB of Atlanta are secured by the
Bank's stock in the FHLB of Atlanta and other eligible assets. At September 30,
2003, the Bank had $32.3 million in outstanding FHLB advances.
On June 27, 2002, the Company established a Delaware business trust
subsidiary (the "Business Trust"), which issued and sold to private investors
12,500 securities with a liquidation amount of $1,000 per security, for a total
of $12.5 million of preferred securities. The Company funded the Business Trust
with $387,000 in exchange for 100% of the Business Trust's common securities.
The Business Trust used the proceeds from these transactions to purchase
$12,887,000 of floating rate subordinated debentures from the Company. The
Company makes periodic interest payments on the debentures to the Business
Trust, and the Business Trust in turn makes interest payments on the trust
preferred securities to the private investors.
The trust preferred securities issued by the Business Trust and the
subordinated debentures held by the Business Trust are due June 30, 2032. The
rate is 3.65% per annum over the three-month LIBOR rate and resets quarterly.
The rate at September 30, 2003 was 4.76%. The junior subordinated debentures are
the sole assets of the
24
Business Trust. The subordinated debt securities, unsecured, rank junior and are
subordinate in right of payment of all senior debt of the Company, and the
Company has guaranteed repayment on the trust preferred securities issued by the
Business Trust. The Company used the proceeds from these transactions to
increase the capital of the Bank. The $12.5 million proceeds from the
subordinated debt securities are includable as part of Tier 1 regulatory capital
for the Bank. In 2003, the Company had an annual expense of $658,000 related to
the trust preferred securities.
Payments to be made by the Business Trust on the trust preferred securities
are dependent on payments that the Company has undertaken to make, particularly
the payment to be made by the Company on the debentures. Distributions on the
trust preferred securities are payable quarterly at a rate of 3.65% per annum
over the three-month LIBOR rate. The distributions are funded by interest
payments received on the debentures and are subject to deferral for up to five
years under certain conditions. Distributions are included in interest expense.
The Company may redeem the debentures, in whole or in part, at par at any time
after June 30, 2007, or under certain conditions in whole but not in part, at
any time at a redemption price equal to 103% of the principal amount plus any
accrued unpaid interest.
On September 29, 2003, the Company established a second Delaware statutory
trust subsidiary (the "Statutory Trust"), which issued and sold to private
investors 10,000 securities with a liquidation amount of $1,000 per security,
for a total of $10.0 million of preferred securities. The Company funded the
Statutory Trust with $310,000 in exchange for 100% of the Statutory Trust's
common securities. The Statutory Trust used the proceeds from these transactions
to purchase $10,310,000 of floating rate subordinated debentures from the
Company. The Company makes periodic interest payments on the debentures to the
Statutory Trust, and the Statutory Trust in turn makes interest payments on the
trust preferred securities to the private investors.
The trust preferred securities and subordinated debentures are due October
7, 2033. The rate is 3.00% per annum over the three-month LIBOR rate and resets
quarterly. The rate at September 30, 2003 was 4.16%. The junior subordinated
debentures are the sole assets of the Statutory Trust. The subordinated debt
securities, unsecured, rank junior and are subordinate in right of payment of
all senior debt of the Company, and the Company has guaranteed repayment on the
trust preferred securities issued by the Statutory Trust. The Company used the
proceeds from these transactions to increase the capital of the Bank. The $10.3
million proceeds from the subordinated debt securities are includable as part of
Tier 1 regulatory capital for the Bank.
Payments to be made by the Statutory Trust on the trust preferred
securities are dependent on payments that the Company has undertaken to make,
particularly the payment to be made by the Company on the debentures.
Distributions on the trust preferred securities are payable quarterly at a rate
of 3.00% per annum over the three-month LIBOR rate. The distributions are funded
by interest payments received on the debentures and are subject to deferral for
up to five years under certain conditions. Distributions are included in
interest expense. The Company may redeem the debentures, in whole or in part, at
par at any time after October 7, 2008, or under certain conditions in whole but
not in part, at any time at a redemption price equal to 103% of the principal
amount plus any accrued unpaid interest.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries, with an additional investment
of 1% of assets where such investment serves primarily community, inner-city and
community development purposes. Under such limitations, as of September 30,
2003, the Bank was authorized to invest up to approximately $20.0 million in the
stock of or loans to subsidiaries, including the additional 1% investment for
community inner-city and community development purposes. Institutions meeting
their applicable minimum regulatory capital requirements may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock.
The Bank has two subsidiary service corporations, Baltimore County Service
Corp. ("BCSC") and Ebenezer Road, Inc. ("Ebenezer Road"). Further, BCSC has a
wholly owned subsidiary, Route 543, Incorporated ("Route 543"). BCSC was formed
in the mid 1970's for the purpose of participating in joint ventures for the
development of real estate. The last development project was completed during
the year ended September 30, 1996, and at September 30, 2003, BCSC conducted
immaterial activities. Route 543 currently is inactive. At September 30, 2003,
BCSC had substantially no assets or liabilities. The Bank does not intend to
conduct real estate development activities in the future. Ebenezer Road is an
insurance agency that sells primarily vendor's single
25
interest insurance on automobile loans, as well as annuity products. The fees
from the activities of its subsidiaries were immaterial during the year ended
September 30, 2003.
COMPETITION
The Bank faces strong competition both in originating real estate and
consumer loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates, the types of loans it
originates, the deposit products it offers and the quality of services it
provides to borrowers. The Bank also competes by offering products which are
tailored to the local community. Its competition in originating real estate
loans comes primarily from other savings institutions, commercial banks and
mortgage bankers. Commercial banks, credit unions and finance companies provide
vigorous competition in consumer lending. Competition may increase as a result
of the continuing reduction of restrictions on the interstate operations of
financial institutions.
The Bank attracts its deposits through its offices primarily from the local
community. Consequently, competition for deposits is principally from other
savings institutions, commercial banks, credit unions and brokers in the local
community. The Bank competes for deposits and loans by offering what it believes
to be a variety of deposit accounts at competitive rates, convenient business
hours, a commitment to outstanding customer service and a well-trained staff.
The Bank believes it has developed strong relationships with local realtors and
the community in general.
Management considers its market area for gathering deposits and making
loans to be the Baltimore metropolitan area in Maryland. The Bank estimates that
it competes with numerous banks and savings and loan associations for deposits
and loans. Based on data provided by a private marketing firm, the Bank
estimates that at September 30, 2003, it had approximately 2.8% of deposits held
by all banks and savings institutions in the Baltimore Metropolitan Area.
EMPLOYEES
As of September 30, 2003, the Company had 164 full-time and 21 part-time
employees, none of whom were represented by a collective bargaining agreement.
Management considers the Bank's relationships with its employees to be good.
DEPOSITORY INSTITUTION REGULATION
General. The Bank is a federally chartered savings institution, is a member
of the FHLB of Atlanta and its deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF"). As a federal savings institution, the Bank is subject to regulation
and supervision by the Office of Thrift Supervision ("OTS") and the FDIC and to
OTS regulations governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities and
general investment authority. The OTS periodically examines the Bank for
compliance with various regulatory requirements and for safe and sound
operations. The FDIC also has the authority to conduct special examinations of
the Bank because its deposits are insured by the SAIF. The Bank must file
reports with the OTS describing its activities and financial condition and must
obtain the approval of the OTS prior to entering into certain transactions, such
as mergers with or acquisitions of other depository institutions.
Regulatory Capital Requirements. Under the OTS's regulatory capital
requirements, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to at least 4.0% or 3.0% (if
the institution is rated composite 1 CAMELS under the OTS examination rating
system) of adjusted total assets and "total" capital (a combination of "core"
and "supplementary" capital) equal to 8.0% of risk-weighted assets. In addition,
the OTS has adopted regulations which impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution is rated composite 1 CAMELS under the OTS examination rating
system). For purposes of these regulations, Tier 1 capital has the same
definitions as core capital. See "--Prompt Corrective Regulatory Action."
Core capital is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated
26
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Core capital is generally reduced by the
amount of the savings association's intangible assets for which no market
exists. Limited exceptions to the deduction of intangible assets are provided
for purchased mortgage servicing rights and qualifying supervisory goodwill.
Tangible capital is given the same definition as core capital but does not
include an exception for qualifying supervisory goodwill and is reduced by the
amount of all the savings association's intangible assets with only a limited
exception for purchased mortgage servicing rights. Both core and tangible
capital are further reduced by an amount equal to a savings institution's debt
and equity investments in subsidiaries engaged in activities not permissible to
national banks (other than subsidiaries engaged in activities undertaken as
agent for customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). Investments in and extensions of
credit to such subsidiaries are required to be fully netted against tangible and
core capital. At September 30, 2003, the Bank had no such investments.
Adjusted total assets are a savings association's total assets as
determined under accounting principles generally accepted in the United States
of America increased by certain goodwill amounts and by a pro rated portion of
the assets of unconsolidated includable subsidiaries in which the savings
association holds a minority interest. Adjusted total assets are reduced by the
amount of assets that have been deducted from capital, the portion of savings
association's investments in unconsolidated includable subsidiaries, and, for
purpose of the core capital requirement, qualifying supervisory goodwill. At
September 30, 2003, the Bank's adjusted total assets for the purposes of the
core and tangible capital requirements were approximately $655.5 million.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to include both core capital and supplementary
capital in its total capital provided the amount of supplementary capital
included does not exceed the savings association's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments, a portion of the
savings association's general loss allowances and up to 45% of unrealized gains
on equity securities. Total core and supplementary capital are reduced by the
amount of capital instruments held by other depository institutions pursuant to
reciprocal arrangements, all equity investments and that portion of the
institution's land loans and non-residential construction loans in excess of 80%
loan-to-value ratio. As of September 30, 2003, the Bank had no high ratio land
or non-residential construction loans and no equity investments for which OTS
regulations require a deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each
off-balance sheet item after being multiplied by an assigned risk weight. Under
the OTS risk-weighting system, one-to-four family first mortgages not more than
90 days past due with loan-to-value ratios under 80% and average annual
occupancy rates of at least 80% and certain qualifying loans for the
construction of one-to-four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer and residential construction loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest by the FNMA or FHLMC are assigned a 20%
risk weight. Cash and U.S. Government securities backed by the full faith and
credit of the U.S. Government (such as mortgage-backed securities issued by
GNMA) are given a 0% risk weight.
For information with respect to the Bank's compliance with its regulatory
capital requirements at September 30, 2003, see Note 15 of Notes to Consolidated
Financial Statements.
The risk-based capital requirements of the OTS also require that savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk will be required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the "interest rate
risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets.
27
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The interest
rate risk rule did not have a material effect on the Bank's risk-based capital
at September 30, 2003.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. Such circumstances
would include a high degree of exposure to interest rate risk, concentration of
credit risk and certain risks arising from non-traditional activity. The OTS may
treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the OTS to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender ("QTL") test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the "BHCA") and other
statutes applicable to bank holding companies. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and a
savings institution and immediately repay any outstanding FHLB advances (subject
to safety and soundness considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments" must
total at least 65% of "portfolio assets." Under OTS regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In order
to maintain QTL status, the savings institution must maintain a weekly average
percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a
monthly average basis in nine out of 12 months. A savings institution that fails
to maintain QTL status will be permitted to requalify once, and if it fails the
QTL test a second time, it will become immediately subject to all penalties as
if all time limits on such penalties had expired.
At September 30, 2003, the percentage of the Bank's portfolio assets
invested in Qualified Thrift Investments was in excess of the percentage
required to qualify the Bank under the QTL test.
Dividend Limitations. Under the OTS prompt corrective action regulations,
the Bank would be prohibited from making any capital distributions if, after
making the distribution, it would have: (i) a total risk-based capital ratio of
less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a Tier 1 leverage ratio of less than 4.0%. See "Prompt Corrective
Regulatory Action." The OTS, after consultation with the FDIC, however, may
permit an otherwise prohibited stock repurchase if made in connection with the
issuance of additional shares in an equivalent amount and the repurchase will
reduce the institution's financial obligations or otherwise improve the
institution's financial condition. Under OTS regulations, the Bank is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time of its
conversion to stock form.
28
Savings institutions must submit notice to the OTS prior to making a
capital distribution if (a) they would not be well-capitalized after the
distribution, (b) the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its regulatory
capital, or (c) the institution is a subsidiary of a holding company. A savings
institution must make application to the OTS to pay a capital distribution if
(x) the institution would not be adequately capitalized following the
distribution, (y) the institution's total distributions for the calendar year
exceeds the institution's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or (z) the distribution
would otherwise violate applicable law or regulation or an agreement with or
condition imposed by the OTS.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation." The Company
intends to make full use of this favorable tax treatment afforded to the Bank
and the Company and does not contemplate use of any earnings of the Bank in a
manner which would limit either institution's bad debt deduction or create
federal tax liabilities.
Deposit Insurance. FDICIA required the FDIC to establish a risk-based
assessment system for insured depository associations that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the rule, the FDIC assigns an association to one of three
capital categories consisting of (i) well capitalized, (ii) adequately
capitalized, or (iii) undercapitalized, and one of three supervisory
subcategories. The supervisory subgroup to which an association is assigned is
based on a supervisory evaluation provided to the FDIC by the association's
primary federal regulator and information which the FDIC determines to be
relevant to the association's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the association's state supervisor). An association's assessment rate depends
on the capital category and supervisory category to which it is assigned. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Assessment rates range from zero basis points for an association in the highest
category (i.e., well-capitalized and healthy) to 27 basis points for an
association in the lowest category (i.e., undercapitalized and of substantial
supervisory concern.)
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of 12 district Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB of Atlanta, the Bank is required to acquire and hold shares
of capital stock in the FHLB of Atlanta in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase contracts,
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB of Atlanta, whichever is greater. The Bank was in
compliance with this requirement with investment in FHLB of Atlanta stock at
September 30, 2003, of $3.3 million. The FHLB of Atlanta serves as a reserve or
central bank for its member institutions within its assigned district. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It offers advances to members in accordance with policies
and procedures established by the FHFB and the Board of Directors of the FHLB of
Atlanta. Long-term advances may only be made for the purpose of providing funds
for residential housing finance. At September 30, 2003, the Bank had $31.2
million in advances outstanding from the FHLB of Atlanta.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% on transaction accounts from $6.0 million up to $42.8
million, plus 10% on the amount over $42.8 million. These reserve requirements
are subject to adjustment by the Federal Reserve Board. Because required
reserves must be maintained in the form of vault cash or in a non-interest
bearing account at a Federal Reserve Bank, the effect of the reserve requirement
is to reduce the amount of the institution's interest-earning assets. As of
September 30, 2003, the Bank met its reserve requirements.
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
29
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level" established by the appropriate federal
banking regulator, the institution will be subject to conservatorship or
receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). The following table shows the capital ratios
required for the various prompt corrective action categories.
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ------------ ---------------- ----------------
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
- -----------
* 3.0% if institution has a composite 1 CAMELS rating.
A "critically undercapitalized" savings institution is defined as an institution
that has a ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative perpetual preferred
stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency was required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The guidelines require savings institutions to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of
30
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A savings institution must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions. Under the guidelines, a savings institution
should maintain systems, commensurate with its size and the nature and scope of
its operations, to identify problem assets and prevent deterioration in those
assets as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management believes that
these regulatory standards do not materially affect the Bank's operations.
Lending Limits. Savings institutions generally are subject to the lending
limits applicable to national banks. With certain limited exceptions, the
maximum amount that a savings institution or a national bank may lend to any
borrower outstanding at one time and not fully secured by collateral having a
market value at least equal to the amount of the loan or extension of credit
(including certain related entities of the borrower) outstanding at one time and
not fully secured by collateral having a market value at least equal to the
amount of the loan or extension of credit may not exceed 15% of the unimpaired
capital and surplus of the institution. Loans and extensions of credit fully
secured by readily marketable collateral may comprise an additional 10% of
unimpaired capital and surplus. Savings institutions are additionally authorized
to make loans to one borrower, for any purpose: (i) in an amount not to exceed
$500,000, or (ii) by order of the Director of OTS, in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (a) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (b) the savings
institution is and continues to be in compliance with its fully phased-in
capital requirements; (c) the loans comply with applicable loan-to-value
requirements, and; (d) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus, or (iii) loans to
finance the sale of real property acquired in satisfaction of debts previously
contracted in good faith, not to exceed 50% of unimpaired capital and surplus of
the institution.
At September 30, 2003, the maximum amount that the Bank could have loaned
to any one borrower without prior OTS approval was $8.1 million. At such date,
the largest aggregate amount of loans that the Bank had outstanding to any one
borrower was $6.5 million.
Uniform Lending Standards. Under OTS regulations, savings institutions must
adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one-to-four family properties, the supervisory
limit is 85%; and (v) for loans secured by other improved property (e.g.,
farmland, completed commercial property and other income-producing property
including non-owner-occupied, one-to-four family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to-four family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multifamily and other
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory
31
loan-to-value limits do not apply to certain categories of loans including loans
insured or guaranteed by the U.S. government and its agencies or by financially
capable state, local or municipal governments or agencies, loans backed by the
full faith and credit of a state government, loans that are to be sold promptly
after origination without recourse to a financially responsible party, loans
that are renewed, refinanced or restructured without the advancement of new
funds, loans that are renewed, refinanced or restructured in connection with a
workout, loans to facilitate sales of real estate acquired by the institution in
the ordinary course of collecting a debt previously contracted and loans where
the real estate is not the primary collateral.
Management believes that the Bank's current lending policies conform to the
Interagency Guidelines.
Transactions with Related Parties. Generally, transactions between a
savings bank or its subsidiaries and its affiliates must be on terms as
favorable to the Bank as transactions with non-affiliates. In addition, certain
of these transactions are restricted to a percentage of the Bank's capital.
Affiliates of the Bank include the Company, the MHC, BCSB Bancorp Capital Trust
I, BCSB Capital Trust II and any company which would be under common control
with the Bank.
The Bank's authority to extend credit to executive officers, trustees and
10% shareholders, as well as entities under such persons control are currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed.
Financial Modernization Legislation. The Gramm-Leach-Bliley ("G-L-B") Act,
which was enacted in November 1999, authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities that will be permitted to bank holding companies are securities and
insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Secretary
of the Treasury, may approve additional financial activities. The G-L-B Act,
however, prohibits future acquisitions of existing unitary savings and loan
holding companies, like the Company, by firms which are engaged in commercial
activities and limits the permissible activities of unitary holding companies
formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for
federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which may acquire control of the Company, it may facilitate affiliations
with companies in the financial services industry.
32
REGULATION OF THE COMPANY
The Company is a savings and loan holding company within the meaning of
Section 10 of the HOLA and, as such, the Company is subject to OTS regulation,
examination and supervision. In addition, because the Bank's deposits are
insured by the SAIF maintained by the FDIC, the Bank is subject to certain
restrictions in dealing with the Company and with other persons affiliated with
the Bank.
As a condition to OTS approval of the Bank's reorganization into the mutual
holding company structure, the Company must operate under the activities
restrictions applicable to multiple savings and loan holding companies. The HOLA
limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities specifically
permissible by statute for multiple savings and loan holding companies and to
activities of bank holding companies which the Federal Reserve Board has deemed
permissible by regulation under Section 4(c)(8) of the Bank Holding Company Act,
as amended the ("BHCA"), subject to prior approval of the OTS, and to other
activities authorized by OTS regulation. In addition, under the terms of the
Company's federal stock charter, the purpose of the Company is to pursue any or
all of the lawful objectives of a federal mutual holding company.
The Company is permitted to, among other things: (i) invest in the stock of
a savings institution; (ii) acquire a mutual institution through the merger of
such institution into a savings institution subsidiary of such mutual holding
company or an interim savings institution of such mutual holding company; (iii)
merge with or acquire another mutual holding company, one of whose subsidiaries
is a savings institution; (iv) acquire non-controlling amounts of the stock of
savings institutions and savings institution holding companies, subject to
certain restrictions; (v) invest in a corporation the capital stock of which is
available for purchase by a savings institution under Federal law or under the
law of any state where the subsidiary savings institution or institutions have
their home offices; (vi) furnish or perform management services for a savings
institution subsidiary of such company; (vi) hold, manage, or liquidate assets
owned or acquired from a savings institution subsidiary of such company; (viii)
hold or manage properties used or occupied by a savings institution subsidiary
of such company; and (ix) acting as a trustee under deed or trust.
The HOLA prohibits a savings and loan holding company, such as the Company,
directly or indirectly, from (1) acquiring control (as defined) of a savings
institution (or holding company thereof) without prior OTS approval, (2)
acquiring more than 5% of the voting shares of a savings institution (or holding
company thereof) which is not a subsidiary, subject to certain exceptions,
without prior OTS approval, or (3) acquiring through merger, consolidation or
purchase of assets, another savings institution (or holding company thereof) or
acquiring all or substbantially all of the assets, another savings institution
(or holding company thereof) without prior OTS approval, or (4) acquiring
control of an uninsured institution. A savings and loan holding company may not
acquire as a separate subsidiary a savings institution which has its principal
offices outside of the state where the principal offices of its subsidiary
institution is located, except (i) in the case of certain emergency acquisitions
approved by the FDIC, (ii) if the holding company controlled (as defined) such
savings institution as of March 5, 1987, (iii) when the laws of the state in
which the savings institution to be acquired is located specifically authorize
such an acquisition. No director or officer of a savings and loan holding
company or person owning or controlling more than 25% of such holding company's
voting shares may, except with the prior approval of the OTS, acquire control of
any savings institution which is not a subsidiary of such holding company.
Transactions with Affiliates. Transactions between savings institutions and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act
and Regulation W promulgated thereunder. An affiliate of a savings institution
is any company or entity which controls, is controlled by or is under common
control with the savings institution. In a holding company context, the parent
holding company of a savings institution (such as the Company) and any companies
which are controlled by such parent holding company are affiliates of the
savings institution. Generally, Sections 23A and 23B (i) limit the extent to
which the savings institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or
33
otherwise extend credit to an affiliate, except for any affiliate which engages
only in activities which are permissible for bank holding companies, or (ii)
purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution. Savings associations are also subject to the anti-tying
provisions of Section 106(b) of the Bank Holding Company Act of 1956 ("BHCA")
which prohibits a depository institution from extending credit to or offering
any other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings institution, and
certain affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities the institution's loan
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral) and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus unless the institution has less than $100 million in deposits in which
case the aggregate limit may be increased to no more than two times unimpaired
capital and surplus. Section 22(h) also prohibits loans, above amounts
prescribed by the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the institution with any "interested" director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person), as to which
such prior board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the Federal
Reserve Board pursuant to Section 22(h) requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the
same as offered in comparable transactions to other persons unless the loan is
made pursuant to a benefit or compensation plan that is widely available to
other employees and does not give preference to insiders. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act and Regulation on loans to executive
officers and the restrictions of 12 U.S.C. Section 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval for such extensions of credit by the board of
directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. Section 1972 prohibits (i) a depository institution from extending
credit to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present other unfavorable
features.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 ("SOX") was signed into law which mandated a variety of reforms intended to
address corporate and accounting fraud. SOX contains provisions which amend the
Securities Exchange Act of 1934, as amended (the "Act") and provisions which
directed the Securities and Exchange Commission (the "SEC") to promulgate rules.
The Act provides for the establishment of a new Public Company Accounting
Oversight Board ("PCAOB"), which will enforce auditing, quality control and
independence standards for firms that audit public reporting companies and will
be funded by fees from all public reporting companies. The Act imposes higher
standards for auditor independence and restricts provision of consulting
services by auditing firms to companies they audit. Any non-audit services being
provided to an audit client will require preapproval by the Company's audit
committee members. In addition, certain audit partners must be rotated
periodically. The Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement. In addition, under the Act,
counsel will be required to report evidence of a material violation of the
securities laws or a breach of fiduciary duty by a company
34
to its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited in a fund for the benefit of harmed investors. Directors and executive
officers must also report most changes in their ownership of a company's
securities within two business days of the change, and as of the end of June,
2003, all ownership reports must be electronically filed.
The Act also increases the oversight and authority of audit committees of
publicly traded companies. Audit committee members must be independent and are
barred from accepting consulting, advisory or other compensatory fees from the
issuer. In addition, all SEC-reporting companies must disclose whether at least
one member of the committee is an "audit committee financial expert" (as such
term is defined by the SEC rules) and if not, why not. Audit committees of
publicly traded companies will have authority to retain their own counsel and
other advisors funded by the company. Audit committees must establish procedures
for the receipt, retention and treatment of complaints regarding accounting and
auditing matters and procedures for confidential, anonymous submission of
employee concerns regarding questionable accounting or auditing matters. It is
the responsibility of the audit committee to hire, oversee and resolve
disagreements with the Company's independent auditor.
Beginning six months after the SEC determines that the PCAOB is able to
carry out its functions, it will be unlawful for any person that is not a
registered public accounting firm ("RPAF") to audit a public reporting company.
Under the Act, a RPAF is prohibited from performing statutorily mandated audit
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions has been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Act also prohibits any officer or director of a company or any other
person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent public or certified
accountant engaged in the audit of the Company's financial statements for the
purpose of rendering the financial statement's materially misleading. The Act
also requires the SEC to prescribe rules requiring inclusion of an internal
control report and assessment by management in the annual report to
shareholders. The Act requires the RPAF that issues the audit report to attest
to and report on management's assessment of the Company's internal controls. In
addition, the Act requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC.
Although the Company anticipates it will incur additional expense in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
TAXATION
General. The Company and the Bank, together with the Bank's subsidiaries,
file a consolidated federal income tax return based on a fiscal year ending
September 30. Consolidated returns have the effect of deferring gain or loss on
intercompany transactions and allowing companies included within the
consolidated return to offset income against losses under certain circumstances.
Federal Income Taxation. Thrift institutions are subject to the provisions
of the Internal Revenue Code of 1986, as amended (the "Code") in the same
general manner as other corporations. However, institutions such as the Bank
which met certain definitional tests and other conditions prescribed by the Code
benefited from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience, however,
35
the amount of the bad debt reserve deduction with respect to qualifying real
property loans could be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method"). Legislation recently
signed by the President repealed the percentage of taxable income method of
calculating the bad debt reserve. The Bank historically has elected to use the
percentage method.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Associations with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Associations with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method.
The Bank's tax returns were last audited for the year ended September 30,
1994.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period. Beginning
with tax years ending on or after January 1, 1993, RRA also provides that
securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the rule.
State Income Taxation. The State of Maryland imposes an income tax of
approximately 7% on income measured substantially the same as federally taxable
income. Until December 2000, Maryland imposed a franchise tax, at a rate of
0.013% of the total withdrawal value of the deposits that a savings and loan
association held in Maryland at December 31 each year. The State of Maryland
currently assesses a personal property tax for December 2000 and forward.
For additional information regarding taxation, see Note 16 of Notes to
Financial Statements.
ITEM 2. PROPERTIES
- --------------------
The following table sets forth the location and certain additional
information regarding the Bank's offices at September 30, 2003.
Book Value at Approximate Deposits at
Year Owned or Expiration Date September 30, Square September 30,
Opened Leased (If Leased) (1) 2003 Footage 2003
------ ------ --------------- ------ ------- ------
(Deposits in
thousands)
MAIN OFFICE:
Perry Hall 1955 Leased (2) November 2018 $ 215,068 8,000 $ 138,741
BRANCH OFFICES:
Bel Air 1975 Leased June 2008 -- 2,000 47,920
Dundalk (3) 1976 Leased June 2006 -- 1,700 48,216
Timonium 1978 Leased July 2008 -- 1,250 73,630
Catonsville 2003 Leased April 2011 -- 3,550 41,722
Catonsville (4) 1981 Leased February 2006 -- 1,750 --
Abingdon 1999 Leased (2) October 2008 448,656 1,800 12,898
36
Forest Hill 1999 Leased (2) July 2019 390,109 1,800 20,842
Essex 1999 Leased November 2004 -- 3,200 11,629
Hickory 2000 Leased (2) January 2020 448,723 1,800 9,771
White Marsh 2000 Leased (2) January 2015 503,503 1,800 23,558
Carney 2001 Leased July 2011 -- 2,100 18,995
Lutherville (5) 2002 Owned 601,529 7,440 29,298
Golden Ring (5) 2002 Leased May 2006 -- 27,406
Hamilton (5) 2002 Owned 117,606 1,500 8,695
Woodlawn (5) 2002 Leased July 2004 -- 12,421
Ellicott City (5) 2002 Leased August 2020 -- 26,188
ADMINISTRATIVE OFFICE:
4111 E. Joppa Road 1994 Owned 1,268,392 18,000
Warehouse 1998 Leased September 2004 -- 4,800
4117 E. Joppa Road 2003 Owned 2,616
- ---------------
(1) All leases have at least one five-year renewal option, except for
Catonsville, Woodlawn, Ellicott City and Golden Ring locations.
(2) Building is owned, but land is leased.
(3) The Bank also is leasing a kiosk and drive-in ATM facility at this
location.
(4) This location is not currently used as a branch office.
(5) Branch acquired in WHG Bancshares acquisition.
The book value of the Bank's investment in premises and equipment totaled
$9.2 million at September 30, 2003. See Note 6 of Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
From time to time, the MHC, the Company and/or the Bank is a party to
various legal proceedings incident to its business. Except as set forth below,
at September 30, 2003, there were no legal proceedings to which the MHC, the
Company or the Bank was a party, or to which any of their property was subject,
which were expected by management to result in a material loss to the MHC, the
Company or the Bank. There are no pending regulatory proceedings to which the
MHC, the Company, the Bank or their subsidiaries is a party or to which any of
their properties is subject which are currently expected to result in a material
loss.
The Bank obtained judgments on June 5, 2002 in the amount of $1,500,000
against Key Leasing & Rental, Inc. and related parties before the Circuit Court
of Baltimore County, and filed similar claims against the same Defendants in
pending bankruptcy cases in the U.S. Bankruptcy Court for the District of
Maryland (Baltimore) on October 21, 2002 in the case of the individual
defendants and on November 1, 2002 in the case of Key Leasing & Rental, Inc. The
judgments and bankruptcy filing seek to secure the Bank's interest in automobile
leases pledged as collateral to Baltimore County Savings Bank and to recover any
deficiency balances remaining after the disposal of the collateral. The Bank has
foreclosed upon the collateral pursuant to a consent agreement reached between
the Bank and the US Bankruptcy Trustee on November 22, 2002.
The Bank obtained judgments on September 17, 2003 in the amount of
$705,785.88 against ATG Sales, LLC T/A Auto Gallery and Robert P and Karen R.
King before the Circuit Court of Baltimore County. The judgments seek to secure
the Bank's interest in connection with a delinquent commercial loan and over
advance liability of the defendants. The bank has foreclosed upon certain
collateral and entered into a forbearance and repayment agreement with the
Defendant.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
Not applicable.
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information contained under the sections captioned "Market Information"
in the Company's Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2003 (the "Annual Report") filed as Exhibit 13 hereto is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained under the section captioned "Selected Financial
Data" on page 2 in the Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 4
through 16 in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
The information contained under the section captioned "Market Risk" on page
5 in the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, Independent Auditor's Report and Selected Consolidated Financial
Data in the Annual Report, which are listed under Item 14 herein, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
Not applicable.
ITEM 9A. 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.
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.
38
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
- ---------------------------------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the Company's 2004
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
The Company and its subsidiaries have adopted a code of ethics which
applies to all of their directors, officers and employees and thus applies to
the Company's principal executive officer, principal financial officer and
principal accounting officer. The code of ethics is filed herewith as Exhibit
14.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors -- Executive Compensation," " -- Director Compensation,"
"-- Compensation Committee Report on Executive Compensation,"--"Compensation
Committee Interlocks and Insider Participation," and "-- Comparative Stock
Performance Graph" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
(a) and (b) Security Ownership of Certain Beneficial Owners and Security
Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Security Ownership" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements,
including any pledge by any person of securities of the
Company, the operation of which may at a subsequent date
result in a change in control of the registrant.
Item 201(d) Equity Compensation Plans
The following table sets forth certain information with respect to the
Company's equity compensation plans as of September 30, 2003.
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options, price of outstanding plans (excluding securities
warrants and rights options, warrants and rights reflected in column (a))
------------------- ---------------------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 136,625 9.87 91,524
Equity compensation plans not
approved by security holders -- -- --
Total 136,625 9.87 91,524
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Transactions
with Management" in the Proxy Statement.
39
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
- ------------------------------------------------
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following consolidated financial
statements are incorporated by reference from Item 7 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statement of Financial Condition as of September
30, 2003 and 2002
Consolidated Statements of Operations for the Years Ended
September 30, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision
is made in the applicable accounting regulations of the Securities and
Exchange Commission are omitted because of the absence of conditions under
which they are required or because the required information is included in
the consolidated financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K and is also the Exhibit Index.
No. Description
--- -----------
* 3.1 Charter of BCSB Bankcorp, Inc.
* 3.2 Bylaws of BCSB Bankcorp, Inc.
** 4.1 Form of Common Stock Certificate of BCSB Bankcorp, Inc.
4.2 Indenture between BCSB Bancorp, Inc. and Wells Fargo, N.A.
dated June 30, 2002
4.3 Form of Floating Rate Junior Subordinated Deferrable Interest
Debenture (Exhibit A to Exhibit 4.2)
4.4 Indenture between BCSB Bancorp, Inc. and Wells Fargo N.A.
dated September 30, 2003
4.5 Form of Junior Subordinated Debt Securities (Exhibit A to
Exhibit 4.4)
*** 10.1 BCSB Bankcorp, Inc. 1999 Stock Option Plan
*** 10.2 BCSB Bankcorp, Inc. Management Recognition Plan and Trust
Agreement
* 10.3 Amended and Restated Form of Change-in-Control Severance
Agreements between Baltimore County Savings Bank, F.S.B.
and Gary C. Loraditch and William M. Loughran
**** 10.4 Baltimore County Savings Bank, F.S.B. Deferred Compensation
Plan, as amended
* 10.5 Baltimore County Savings Bank, F.S.B. Incentive Compensation
Plan
**** 10.6 Form of Change-in-Control Severance Agreements between
Baltimore County Savings Bank, F.S.B. and David M. Meadows
and Bonnie M. Klein
**** 10.7 Baltimore County Savings Bank, F.S.B. Cash Deferred
Compensation Plan
10.8 Trust Preferred Securities Guarantee Agreement by and between
BCSB Bancorp, Inc. and Wells Fargo dated June 30, 2002
10.9 Guarantee Agreement by and between BCSB Bancorp, Inc. and
Wells Fargo, N.A. dated September 30, 2003
13 2003 Annual Report to Stockholders
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of Anderson Associates, LLP
31.1 Rule 13a-14(a) Certification of President
31.2 Rule 13a-14(a) Certification of Vice President and Treasurer
32 Section 1350 Certification
- --------------
* Incorporated herein by reference from the Company's Registration Statement on
Form SB-2 (File No. 333-44831).
40
** Incorporated herein by reference from the Company's Registration Statement
on Form 8-A.
*** Incorporated herein by reference from the Company's Annual Report on Form
10-KSB for the year ended September 30, 1999.
**** Incorporated herein by reference from the Company's Annual Report for the
year ended September 30, 2002.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 29, 2003
By: /s/ Gary C. Loraditch
-------------------------------------
Gary C. Loraditch
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Gary C. Loraditch December 29, 2003
- -----------------------------------------------
Gary C. Loraditch
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Bonnie M. Klein December 29, 2003
- -----------------------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ Henry V. Kahl December 29, 2003
- -----------------------------------------------
Henry V. Kahl
Chairman of the Board
/s/ H. Adrian Cox December 29, 2003
- -----------------------------------------------
H. Adrian Cox
Vice Chairman of the Board
/s/ William J. Kappauf, Jr. December 29, 2003
- -----------------------------------------------
William J. Kappauf, Jr.
Director
/s/ William M. Loughran December 29, 2003
- -----------------------------------------------
William M. Loughran
Vice President and Director
/s/ John J. Panzer, Jr. December 29, 2003
- -----------------------------------------------
John J. Panzer, Jr.
Director
/s/ P. Louis Rohe, Jr. December 29, 2003
- -----------------------------------------------
P. Louis Rohe, Jr.
Director
/s/ Michael J. Klein December 29, 2003
- -----------------------------------------------
Michael J. Klein
Director