UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to ______
Commission File Number: 0-24589
BCSB BANKCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
United States 52-2108333
- ----------------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236
-------------------------------------------------------
(Address of Principal Executive Offices)
(410) 256-5000
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check |X| whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
-- --
Indicate by check mark |X| whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- -----
As of April 30, 2004, the issuer had 5,899,093 shares of Common Stock
issued and outstanding.
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2004 (unaudited) and September 30, 2003...............................................2
Consolidated Statements of Operations for the Six Months and Three Months Ended
March 31, 2004 and 2003 (unaudited)............................................................3
Consolidated Statements of Comprehensive Income for the Six Months and Three Months Ended
March 31, 2004 and 2003 (unaudited)............................................................ 4
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 2004 and 2003 (unaudited)............................................................ 5
Notes to Consolidated Financial Statements...................................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................24
Item 4. Controls and Procedures.................................................................................25
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.......................................................................................26
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities........................26
Item 3. Defaults Upon Senior Securities.........................................................................26
Item 4. Submission of Matters to a Vote of Security Holders.....................................................26
Item 5. Other Information.......................................................................................26
Item 6. Exhibits and Reports on Form 8-K........................................................................26
SIGNATURES.......................................................................................................28
CERTIFICATIONS...................................................................................................29
1
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
MARCH 31, SEPTEMBER 30,
2004 2003
-------------- ----------------
(Unaudited)
Assets
------
Cash $ 12,114,215 $ 11,032,415
Interest bearing deposits in other banks 3,757,270 11,288,223
Federal funds sold 192,661 987,636
Investment securities, held to maturity 3,497,544 2,500,000
Investment securities, available for sale 156,149,724 121,289,555
Loans receivable, net 360,049,166 365,054,645
Loans held for sale -- 247,600
Mortgage backed securities, held to maturity 19,932,116 18,394,439
Mortgage backed securities, available for sale 142,249,246 116,204,401
Premises and equipment, net 9,055,391 9,226,887
Federal Home Loan Bank of Atlanta stock 3,417,000 3,304,900
Accrued interest receivable 2,074,671 2,114,609
Prepaid and deferred income taxes 1,185,740 1,752,582
Bank Owned Life Insurance 11,667,530 --
Goodwill 2,294,327 2,294,327
Core deposit intangible 394,000 421,000
Other assets 2,746,762 2,084,630
-------------- --------------
Total assets $ 730,777,363 $ 668,197,849
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposits $ 577,598,667 $ 551,928,619
Advances from the Federal Home Loan Bank of Atlanta 48,717,841 32,267,861
Trust Preferred Securities -- 22,500,000
Junior Subordinated Debentures 23,197,000 --
Advance payments by borrowers for taxes and insurance 1,759,432 854,694
Income taxes payable 192,792 193,051
Payables to disbursing agents 351,194 136,352
Accounts payable Trade Date Securities 30,937,277 13,998,307
Dividends payable 267,955 266,329
Other liabilities 1,931,911 1,284,720
-------------- --------------
Total liabilities 684,954,069 623,429,933
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock (Par value $.01 - 13,500,000 authorized,
5,899,093 and 5,885,593
shares issued and outstanding
at March 31, 2004 and September 30, 2003) 58,991 58,856
Additional paid-in capital 20,843,890 20,652,137
Obligation under Rabbi Trust 1,255,110 1,243,469
Retained earnings (substantially restricted) 25,426,747 25,556,888
Accumulated Other Comperhensive Income/(Loss) (net of taxes) 119,652 (770,874)
Employee Stock Ownership Plan (684,596) (776,060)
Stock held by Rabbi Trust (1,196,500) (1,196,500)
--------------- ---------------
Total Stockholders' Equity 45,823,294 44,767,916
-------------- --------------
Total liabilities and Stockholders' Equity $ 730,777,363 $ 668,197,849
============== ==============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
FOR SIX MONTHS ENDED FOR THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------------------------
2004 2003 2004 2003
-------- -------- ------ ------
Interest Income
- ---------------
Interest and fees on loans $11,064,268 $13,916,798 $ 5,411,417 $6,909,015
Interest on mortgage backed securities 2,470,871 2,065,369 1,270,422 1,009,590
Interest and dividends on investment securities 1,871,421 1,177,629 928,080 650,348
Other interest income 63,653 176,609 50,086 85,463
------------ ----------- ------------- ----------
Total interest income 15,470,213 17,336,405 7,660,005 8,654,416
Interest Expense
- ----------------
Interest on deposits 6,699,360 7,240,322 3,328,188 3,564,559
Interest on borrowings - short term 72,753 110,654 28,550 53,679
Interest on borrowings-long term 554,434 539,617 293,907 264,844
Other Interest Expense 529,323 340,434 261,635 161,708
------------ ----------- ------------ ----------
Total interest expense 7,855,870 8,231,027 3,912,280 4,044,790
------------ ----------- ------------ ----------
Net interest income 7,614,343 9,105,378 3,747,725 4,609,626
Provision for losses on loans 267,467 412,365 85,694 130,367
------------ ----------- ------------ ----------
Net interest income after provision
for losses on loans 7,346,876 8,693,013 3,662,031 4,479,259
Other Income
- ------------
Gain on repossessed assets 79,440 -- 2,052 --
Gain on Sale of Loans 41,800 271,358 17,798 204,373
Fees and charges on loans 120,521 112,328 65,327 61,583
Fees on transaction accounts 395,887 246,207 184,703 116,917
Rental income 60,744 60,322 28,940 23,275
Gain from sale of investments 7,800 25,000 20,546 --
Gain (loss) from sale of Mortgage Backed Securities 7,548 153,610 -- 83,600
Income from Bank Owned Life Insurance 242,530 -- 120,928
Miscellaneous income 17,373 82,985 7,788 36,308
------------ ----------- ------------ ----------
Net other income 973,643 951,810 448,082 526,056
Non-Interest Expenses
- ---------------------
Salaries and related expense 4,295,874 4,096,378 2,120,265 1,958,787
Occupancy expense 967,330 785,110 480,425 390,127
Deposit insurance premiums 107,936 100,815 54,949 51,197
Data processing expense 756,756 804,489 370,483 392,898
Property and equipment expense 600,248 632,678 299,248 322,170
Professional fees 118,949 137,046 53,846 78,870
Advertising 480,614 421,383 239,347 193,619
Telephone, postage and office supplies 300,454 324,768 154,330 170,118
Other expenses 228,481 352,254 152,960 189,354
------------ ----------- ------------ -----------
Total non-interest expenses 7,856,642 7,654,921 3,925,853 3,747,140
------------ ----------- ------------ -----------
Income before tax provision 463,877 1,989,902 184,260 1,258,175
Income tax provision 76,403 758,810 22,695 479,592
------------ ----------- ------------ -----------
Net income $ 387,474 $ 1,231,092 $ 161,565 $ 778,583
============ =========== ============ ===========
Basic earnings per share $ .07 $ .22 $ .03 $ .14
============ =========== ============ ===========
Diluted earnings per share $ .07 $ .21 $ .03 $ .14
============ =========== ============ ===========
Dividends per share $ .25 $ .25 $ .125 $ .125
============ =========== ============ ===========
The accompanying notes to the consolidated financial statements are an integral
part of these statements
3
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(UNAUDITED)
-----------
FOR SIX MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
---- ----
Net Income $ 387,474 $ 1,231,092
Other comprehensive income, net of tax:
Unrealized net holding gains (losses) on
available-for-sale portfolios, net of tax $566,546 and (100,951) 899,950 (161,449)
Reclassification adjustment for (gains) losses
included in net income, net of tax $ (5,927) and (68,979) (9,421) (109,631)
---------- -----------
Comprehensive income $1,278,003 $ 960,012
========== ===========
FOR THREE MONTHS ENDED
MARCH 30,
-------------------------------
2004 2003
---- ----
Net Income $ 161,565 $ 778,583
Other comprehensive income, net of tax:
Unrealized net holding gains on
available-for-sale portfolios, net of tax $960,092 and (224,834) 1,528,704 (346,522)
Reclassification adjustment for gains
included in net income, net of tax $(7,935) and (32,286) (12,611) (51,314)
---------- ---------
Comprehensive income $1,677,658 $ 380,747
========== =========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
9
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR SIX MONTHS ENDED
MARCH 31,
------------------------------
2004 2003
---------- ----------
Operating Activities
- --------------------
Net Income $ 387,474 $ 1,231,092
Adjustments to Reconcile Net Income to Net
Cash Used by Operating Activities
---------------------------------
Accretion of discount on investments (31,347) (19,912)
Dividends on Investment Securities (549,289) (440,103)
Gain on sale of investments (7,800) (25,000)
Loans originated for sale (3,201,800) (8,682,343)
Loans sold 3,491,200 8,224,401
Gain on sale of loans (41,800) (271,358)
Loan fees and costs deferred, net 16,423 135,692
Amortization of deferred loan fees and cost, net (132,198) (318,313)
Provision for losses on loans 267,467 412,365
Non-cash compensation under Stock-Based Benefit Plan 170,290 118,401
Amortization of premium on mortgage backed securities 197,271 266,160
Amortization of purchase premiums and discounts, net (40,254) (413,873)
Gain on sale of mortgaged backed securities (7,548) (153,610)
Provision for depreciation 470,083 486,220
Gain on sale of repossessed assets (79,440) --
Income from bank owned life insurance (242,530) --
Decrease in accrued interest receivable 39,938 234,020
Increase in prepaid income taxes 6,223 188,079
Decrease in other assets 34,868 1,439
Decrease in accrued interest payable on deposits (17,652) (24,505)
(Decrease) increase in income taxes payable (259) 85,226
Increase in accounts payable Trade Date Securities 16,938,970 --
Increase (decrease) in other liabilities and payables to
disbursing agents 862,033 (861,021)
Increase in obligation under Rabbi-Trust 11,641 19,650
----------- -----------
Net cash provided by operating activities 18,541,964 192,707
5
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR SIX MONTHS ENDED
MARCH 31,
2004 2003
----------- ------------
Cash Flows from Investing Activities
- ------------------------------------
Purchase of Bank Owned Life Insurance $ (11,425,000) $ --
Purchases of investment securities - available for sale (63,325,461) (86,604,364)
Proceeds from maturities of investment securities - available for sale 19,130,000 30,140,019
Proceeds from sale of investment securities- available for sale 10,460,470 1,025,000
Purchases of investment securities - held to maturity (2,497,875) --
Proceeds from maturities of investment securities - held to maturity 1,500,000 2,500,000
Longer term loans originated (28,778,668) (27,819,364)
Principal collected on longer term loans 33,360,168 49,493,963
Net increase (decrease) in short-term loans 74,789 (6,723,516)
Principal collected on mortgage backed securities - available for sale 10,498,987 12,227,065
Purchase of mortgage backed securities - available for sale (37,262,973) (44,398,220)
Proceeds from sale of mortgaged backed securities- available for sale 1,447,365 13,962,697
Purchase of mortgage backed securities- held to maturity (4,253,790) --
Principal collected on mortgage backed securities - held to maturity 2,698,171 10,379,048
Proceeds from sale of repossessed assets 79,440 --
Investment in premises and equipment (298,587) (572,588)
(Purchase)/Redemption of Federal Home Loan Bank of Atlanta stock (112,100) 269,400
-------------- -------------
Net cash used by investing activities (68,705,064) (46,120,860)
Cash Flows from Financing Activities
- ------------------------------------
Decrease in checks written in excess of bank balance -- (390,799)
Net increase in demand deposits, money market, passbook
accounts and advances by borrowers for taxes and
insurance 10,085,878 17,744,654
Net increase in certificates of deposit 16,686,021 26,061,765
Increase in Federal Home Loan Bank of Atlanta advances 46,350,000 --
Repayment of Federal Home Loan Bank of Atlanta advances (29,800,000) (1,000,000)
Exercised Stock Options 113,062 --
Increase in Dividends Payable 1,626 --
Dividends paid on stock (517,615) (518,729)
------------- -------------
Net cash provided by financing activities 42,918,972 41,896,891
------------- -------------
Increase in cash and cash equivalents (7,244,128) (4,031,262)
Cash and cash equivalents at beginning of period 23,208,274 25,703,327
------------- -------------
Cash and cash equivalents at end of period $ 15,964,146 $ 21,672,065
============= =============
6
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
MARCH 31,
--------------------------------
2004 2003
----------- ------------
The following is a summary of cash and cash equivalents:
Cash $ 12,114,215 $ 7,518,668
Interest bearing deposits in other banks 3,757,270 2,307,003
Federal funds sold 192,661 11,946,394
------------- -------------
Balance of cash items reflected on Statement of
Financial Condition 16,064,146 21,772,065
Less - certificate of deposit with an original maturity of
more than ninety days 100,000 100,000
------------- -------------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 15,964,146 $ 21,672,065
============= =============
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest $ 3,929,735 $ 8,286,557
============= =============
Income taxes $ 162,000 $ 826,700
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
7
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 1 - Principles of Consolidation
---------------------------
BCSB Bankcorp, Inc. (the "Company") owns 100% Baltimore County Savings
Bank, F.S.B. and subsidiaries (the "Bank") and also invests in federal
funds sold, interest-bearing deposits in other banks and U.S. Agency
bonds. The Bank owns 100% of Baltimore County Service Corporation and
Ebenezer Road, Inc. The accompanying consolidated financial statements
include the accounts and transactions of these companies on a
consolidated basis since the date of acquisition. All intercompany
transactions have been eliminated in the consolidated financial
statements. Ebenezer Road, Inc. sells insurance products. It's
operations are not material to the consolidated financial statements.
Note 2 - Basis for Financial Statement Presentation
------------------------------------------
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America and the instructions to Form 10-Q.
Accordingly, they do not include all of the disclosures required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, all adjustments (none of which were other than normal
recurring accruals) necessary for a fair presentation of the financial
position and results of operations for the periods presented have been
included. The financial statements of the Company are presented on a
consolidated basis with those of the Bank. The results for the three
and six months ended March 31, 2004 are not necessarily indicative of
the results of operations that may be expected for the year ending
September 30, 2004. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and
related notes which are incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended September 30, 2003.
Note 3 - Cash Flow Presentation
----------------------
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository institutions,
investments in federal funds, and certificates of deposit with
original maturities of 90 days or less.
8
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 4 - Earnings Per Share
------------------
Basic per share amounts are based on the weighted average shares of
common stock outstanding. Diluted earnings per share assume the
conversion, exercise or issuance of all potential common stock
instruments such as options, unless the effect is to reduce a loss or
increase earnings per share. No adjustments were made to net income
(numerator) for all periods presented. The basic and diluted weighted
average shares outstanding for the six and three months ended March
31, 2004 and 2003 is as follows:
For the Six Months Ended March 31,
------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Basic EPS
---------
$ 387,474 5,783,076 $ 0.07 $ 1,231,092 5,720,840 $ 0.22
Effect of dilutive shares -- 53,788 -- -- 37,954 --
--------- --------- ---------- ----------- --------- --------
Diluted EPS
----------- $ 387,474 5,836,864 $ 0.07 $ 1,231,092 5,758,794 $ 0.21
========= ========= ========== =========== ========= ========
For the Three Months Ended March 31,
------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Basic EPS
---------
$ 161,565 5,786,739 $ 0.03 $ 778,583 5,723,152 $ 0.14
Effect of dilutive shares -- 60,788 -- -- 42,168 --
--------- --------- ---------- ----------- --------- ---------
Diluted EPS
-----------
$ 161,565 5,847,527 $ 0.03 $ 778,583 5,765,320 $ 0.14
========= ========= ========== =========== ========= =========
9
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 5 - Regulatory Capital
------------------
The following table sets forth the Bank's capital position at March 31,
2004.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- ------------------------ ------------------------
ACTUAL % OF REQUIRED % OF REQUIRED % OF
AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS
------ ------ -------- ------ -------- ------
(unaudited)
Tangible (1) $ 53,108,521 7.43% $10,725,753 1.50% N/A N/A
Tier 1 capital (2) 53,108,521 15.81 N/A N/A 20,149,200 6.00%
Core (1) 53,108,521 7.43 28,602,009 4.00 35,752,511 5.00
Total (2) 55,177,907 16.43 26,865,600 8.00 33,582,000 10.00
- ------------
(1) To adjusted total assets.
(2) To risk-weighted assets.
Note 6 - Stock Option Plan
-----------------
Stock-Based Employee Compensation- At March 31, 2004 and 2003 the
company has four stock-based employee compensation plans, which are
described more fully in the 2003 Annual Report. The company accounts
for those plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No compensation cost is reflected in income
for the granted options as all granted options had an exercise price
equal to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
For the six months ended March 31,
2004 2003
---- ----
Net Income, as reported $ 387,474 $ 1,231,092
Add: Stock-based Compensation
Included in the determination of
Net income as reported, net of tax 140,208 94,952
Deduct: Total stock-based compensation
Expense determined under fair value
Method for all awards, net of tax (166,604) (121,348)
------- ---------
Pro forma net income $ 361,078 $ 1,204,696
======= =========
Earnings per share:
Basic-as reported $ .07 $ .22
=== ===
Basic-pro forma .06 .21
=== ===
Diluted-as reported .07 .21
=== ===
Diluted-proforma .06 .21
=== ===
10
Note7- Recent Accounting Pronouncements
--------------------------------
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003. This
Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). BCSB Bankcorp Capital Trust I ("BCSB I"), and BCSB Capital
Trust II ("BCSB II") qualify as variable interest entities under FIN 46. BCSB I
and BCSB II issued mandatorily redeemable preferred securities (Trust Preferred
Securities) to third-party investors and loaned the proceeds to the Company.
BCSB I and BCSB II hold, as there sole assets, subordinated debentures issued by
the Company.
FIN 46 required the Company to deconsolidate BCSB I and BCSB II from the
consolidated financial statements as of March 31, 2004. There has been no
restatement of prior periods for the adoption of FIN 46. The impact of this
deconsolidation was to increase junior subordinated debentures by $23,197,000
and reduce trust preferred securities line item by $22,500,000 which had
represented the trust preferred securities of the trust. The Company's equity
interest in the trust subsidiary of $697,000, which had previously been
eliminated in consolidation, is now reported in "Other assets" as of March 31,
2004. The deconsolidation had no effect on the bank's capital for regulatory
reporting purposes. The adoption of FIN 46 did not have an impact on the
Company's results of operations or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was formed by the Bank to become the holding company of the
Bank following the Bank's reorganization to the mutual holding company form of
organization (the "Reorganization"). The Reorganization was consummated on July
8, 1998.
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
securities and mortgage-backed securities portfolio and interest paid on
interest-bearing liabilities. Net interest income is determined by (i) the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Company's net income also is affected by the
level of other income, which primarily consists of fees and charges, and levels
of non-interest expenses such as salaries and related expenses.
The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are set forth in Note 1 of
the consolidated financial statements as of September 30, 2003 which was filed
on Form 10-K. Of these significant accounting policies, the Company considers
its policy regarding the allowance for loan losses to be its most critical
accounting policy, because it requires management's most subjective and complex
judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan
losses and results of operations. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers that is
not known to management at the time of the issuance of the consolidated
financial statements. The Company adopted the disclosure only provision of
11
FASB 123 see note 6 to the consolidated financial statements. They do not expect
to expense the fair market value of stock options until required by accounting
principles generally accepted in the United States of America.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND SEPTEMBER 30, 2003
During the six months ended March 31, 2004, the Company's assets increased
by $62.6 million, or 9.4% from $668.2 million at September 30, 2003 to $730.8
million at March 31, 2004. Loans receivable, net decreased by $5.0 million, or
1.4%, from $365.0 million at September 30, 2003 to $360.0 million at March 31,
2004. The Company's mortgage-backed securities available for sale increased by
$26.0 million, or 22.4%, from $116.2 million at September 30, 2003 to $142.2
million at March 31, 2004. The Company's mortgage-backed securities held to
maturity increased by $1.5 million or 8.2% from $18.4 million at September 30,
2003 to $19.9 million at March 31, 2004. The Company's investment portfolio
available for sale increased $34.9 million or 28.7%, from $121.3 million at
September 30, 2003 to $156.1 million at March 31, 2004. The Company's investment
portfolio held to maturity increased by $1.0 million or 39.9% from $2.5 million
at September 30, 2003 to $3.5 million at March 31, 2004. During the six months
ended March 31, 2004 the Company purchased $11.5 million of bank owned life
insurance. The preceeding was accomplished in an effort to reduce interest rate
risk in the balance sheet. Management was reluctant to make long term low rate
loans in the low interest rate environment that prevailed during the six month
period ended March 31, 2004. Emphasis has been placed on short term loans such
as automobile loans, home equity loans and short term mortgages. The Company's
deposits increased by $25.7 million, or 4.7%, from $551.9 million at September
30, 2003 to $577.6 million at March 31, 2004. The increase in deposits was
achieved through normal marketing efforts. Advances from the Federal Home Loan
Bank of Atlanta increased by $16.4 million, or 51.0% from $32.3 million at March
31, 2003 to $48.7 million at March 31, 2004. The funds were used to purchase
securities. Accounts Payable Trade Date Securities increased by $16.9 million or
121.0% from $13.9 million at March 31, 2003 to $30.9 million at March 31, 2004.
Trade Date Securities are commitments to settle security purchases in the near
future.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
Net Income. Net income decreased by $844,000, or 68.5%, from $1.2 million
for the six months ended March 31, 2003 to $387,000 for the six months ended
March 31, 2004. The decrease in net income was primarily attributable to
decreased net interest income of $1.5 million. This was partially offset by
decreases in the provision for loan losses and income taxes and an increase in
other income due to the Bank Owned Life Insurance.
Net Interest Income. Net interest income was $7.6 million for the six
months ended March 31, 2004, compared to $9.1 million for the six months ended
March 31, 2003, representing a decrease of $1.5 million, or 16.4%. The decrease
was primarily due to the decrease in the average rate on interest
earning-assets. The average rate on interest-earning assets decreased by 100
basis points from 6.08% for the six months ended March 31, 2003 to 5.08% for the
six months
12
ended March 31, 2004. Due to declining interest rates and loans re-pricing
faster than deposits the interest rate spread decreased 56 basis points from
3.10% for the six months ended March 31, 2003 to 2.54% for the six months ended
March 31, 2004.
Interest Income. Interest income decreased by $1.9 million, or 10.8% from
$17.3 million for the six months ended March 31, 2003 to $15.5 million for the
six months ended March 31, 2004. Interest and fees on loans decreased by $2.8
million, or 20.1%, from $13.9 million for the six months ended March 31, 2003 to
$11.1 million for the six months ended March 31, 2004. This was primarily due to
a decrease in the average yield on loans of 95 basis points from 7.12% at March
31, 2003 to 6.17% at March 31, 2004, and a $31.9 million decrease in the average
balance of loans receivable from $390.7 million at March 31, 2003 to $358.8
million at March 31, 2004. The decrease in the average balance of loans was
primarily attributable to increased competition in the refinancing market,
current economic conditions and management's reluctance to make long term low
rate loans in the low interest rate environment that prevailed during the
period. The decrease in the average yield was attributed to the prevailing
market rates in the economy. Interest on mortgage-backed securities increased by
$406,000 or 19.7% from $2.0 million for the six months ended March 31,2003 to
$2.5 million for the six months ended March 31,2004. This increase was primarily
due to the increase in the average balance of mortgage-backed securities from
$92.2 million at March 31, 2003 to $121.4 million at March 31,2004. Interest and
dividends on investment securities increased by $694,000 or 58.9% from $1.2
million for the six months ended March 31 ,2003 to $1.9 million for the six
months ended March 31,2004. This was primarily due to an increase in the average
balance of investments of $57.7 million, or 89.6% from $62.3 million for the six
months ended March 31, 2003 to $120.0 million for the six months ended March 31,
2004. The increase in the average balance more than offset a decrease in the
average yield on investments from 3.78% for the six months ended March 31, 2003
to 3.12% for the six months ended March 31, 2004.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense decreased from $8.2
million for the six months ended March 31, 2003 to $7.8 million for the six
months ended March 31,2004 a change of $375,000 or 4.6%. Interest on deposits
decreased $541,000 due to a decrease in the average yield on deposits of 43
basis points from 2.82% for the six months ended March 31, 2003 to 2.39% for the
six months ended March 31, 2004. This was partially offset by an increase in the
average balance of deposits of $47.0 million, or 9.2% from $513.4 million at
March 31, 2003 to $560.4 million at March 31, 2004. The Company was able to
increase its deposits through normal marketing efforts. Interest on short-term
borrowings decreased by $38,000 for the six months ended March 31, 2004 and
interest on long-term borrowings increased by $15,000. This increase was
primarily due to an increase of $8.3 million in the average balances of advances
from the Federal Home Loan Bank of Atlanta during the six months ended March
31,2004. Also contributing to interest expense was interest on the Trust
Preferred Securities which was $529,000 for the six month period ending March
31, 2004.
13
Average Balance Sheet. The following table sets forth certain information
relating to the Company's average balance sheet and reflects the average yield
on assets and cost of liabilities for the periods indicated and the average
yields earned and rates paid. Such yields and costs are derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the six month periods ended March 31, 2004, and March 31,
2003. Total average assets are computed using month-end balances.
The table also presents information for the periods indicated with respect
to the differences between the average yield earned on interest-earning assets
and average rate paid on interest-bearing liabilities, or "interest rate
spread," which banks have traditionally used as an indicator of profitability.
Another indicator of net interest income is "net interest margin," which is its
net interest income divided by the average balance of interest-earning assets.
Six Months Ended March 31
-----------------------------------------------------------------------------
2004 2003
----------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- -------- ---------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Loans.................................... $ 358,834 $ 11,064 6.17% $ 390,781 $ 13,917 7.12%
Mortgage-backed securities............... 121,436 2,471 4.07 92,200 2,065 4.48
Investment securities.................... 119,998 1,871 3.12 62,302 1,178 3.78
Other Investments........................ 10,479 64 1.22 25,355 176 1.39
--------- --------- ---------- --------
Total interest-earning assets........ 610,747 15,470 5.07 570,638 17,336 6.08
Noninterest-earning assets.................. 61,795 35,647
--------- ----------
Total assets......................... $ 672,542 $ 606,285
========= ==========
Interest-bearing liabilities:
Deposits................................. $ 560,402 6,699 2.39 513,371 7,240 2.82
FHLB Advances............................ 33,929 627 3.70 25,667 650 5.06
Jr. Sub. Debt/Trust Preferred Securities. 22,500 529 4.70 12,500 340 5.44
Other liabilities........................ 1,198 0 0.00 1,548 1 0.13
--------- --------- ---------- --------
Total interest-bearing liabilities.......... 618,029 7,855 2.54 553,086 8,231 2.98
--------- -------- -------- ------
Noninterest-bearing liabilities............. 9,769 8,040
--------- ----------
Total liabilities.................... 627,798 561,126
Stockholders' equity ....................... 44,744 45,159
--------- ----------
Total liabilities and stockholders'
equity.......................... $ 672,542 $ 606,285
========= ==========
Net interest income......................... $ 7,615 $ 9,105
========= ========
Interest rate spread........................ 2.52% 3.10%
=======
Net interest margin......................... 2.49% 3.19%
======= ======
Ratio average interest earning assets/
interest bearing liabilities............ 98.82% 103.17%
======= ======
14
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(i) changes in volume (changes in volume multiplied by old rate); (ii) changes
in rates (change in rate multiplied by old volume); and (iii) changes in
rate/volume (changes in rate multiplied by the changes in volume).
For Six Months Ended March 31,
---------------------------------------------------
2004 vs. 2003
---------------------------------------------------
Increase (Decrease)
Due to
---------------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable.......................... $ (1,130) $ (1,876) $ 153 $ (2,853)
Mortgage-backed securities................ 661 (194) (61) 406
Investment securities and
FHLB Stock............................ 1,089 (206) (190) 693
Other interest-earning assets............. (104) (20) 12 (112)
-------- -------- -------- --------
Total interest-earning assets........... 516 (2,296) (86) 1,866
Interest expense:
Deposits.................................. 663 (1,103) (101) (541)
FHLB advances............................. 210 (176) (57) (23)
Trust Preferred Securities................ 272 (46) (37) 189
Other liabilities......................... 0 (1) 0 (1)
-------- -------- -------- --------
Total interest-bearing
liabilities.......................... 1,145 (1,326) (195) (376)
-------- -------- -------- --------
Change in net interest income............... $ (659) $ (957) $ 126 $ (1,490)
======== ======== ======== ========
Provision for Loan Losses. The Company charges provisions for loan losses
to earnings to maintain the total allowance for loan losses at a level
management considers adequate to provide for probable loan losses. In
determining the provision, management considers prior loss experience, current
economic conditions and the probability of these conditions affecting future
loan performance. The Company established provisions for losses on loans of
$267,000 for the six months ended March 31, 2004, as compared to $412,000 for
the six months ended March 31, 2003, representing a decrease of $145,000. This
decrease was partially attributable to the decrease in the average balance of
loans of $31.9 million, or 8.2% from $390.8 million to $358.8 million. Loan
chargeoffs for the six months ended March 31, 2004 were $682,000 as compared to
$616,000 for the six months ended March 31, 2003 an increase of $66,000 Loan
charge offs increased due to adverse economic conditions. Loan recoveries were
$156,000 for the six months ended March 31, 2004 compared to $157,000 for the
six months ended March 31, 2003. Non performing loans at March 31, 2004 were
$1.0 million as compared to $750,000 at March 31, 2003. The total loss allowance
allocated to domestic loans is $2.4 million. In establishing such provisions,
management considered an analysis of the risk inherent in the loan portfolio.
Other Income. Other income increased by $22,000, or 2.3% from $952,000 for
the six months ended March 31, 2003 to $974,000 for the six months ended March
31, 2004. The increase in other income for the six months ended March 31, 2004
was primarily attributable to an increase in income from the Bank Owned Life
Insurance of $243,000 from $0 for the six months ended March 31, 2003 to
$243,000 for the six months ended March 31, 2004. Fees on transaction accounts
also increased by $150,000 for the six months ended March 31, 2004, due to an
increase in the volume of transaction accounts. These increases were partially
offset by a decrease in gains on the sale of loans of $229,000, from $42,000 for
the six months ended March 31, 2004 compared to $271,000 for the six months
ended
15
March 31, 2003. There was also a decrease in the gain on the sale of Mortgaged
Backed Securities of $146,000, from $154,000 for the six months ended March 31,
2003 to $8,000 for the six months ended March 31, 2004. Gain on the sale of
investments also decreased $17,000, from $25,000 for the six months ended March
31, 2003 to $8,000 for the six months ended March 31, 2004.
Non-interest Expenses. Total non-interest expenses increased by $202,000,
or 2.6%, from $7.7 million for the six months ended March 31, 2003 to $7.9
million for the six months ended March 31, 2004. The increase in non-interest
expenses was due to increases in salaries and related expenses of $200,000, or
4.9%. Occupancy expense also increased by $182,000, from $785,000 for the six
months ended March 31, 2003 to $967,000 for the six months ended March 31, 2004.
Advertising expense also increased by $60,000 or 14.3%, from $421,000 for the
six months ended March 31, 2003 to $481,000 for the six months ended March 31,
2004. These increases were partially offset by decreases in data processing
expenses, property plant and equipment expense and professional fees. Data
processing expense decreased by $47,000 or 5.8% from $804,000 for the six months
ended March 31, 2003 to $757,000 for the six months ended March 31, 2004.
Property plant and equipment expense decreased by $33,000, or 5.2% from $633,000
for the six months ended March 31, 2003 to $600,000 for the six months ended
March 31, 2004. Professional fees decreased by $18,000 or 13.2% from $137,000
for the six months ended March 31, 2003 to $119,000 for the six months ended
March 31, 2004.
Income Taxes. The Company's income tax expense was $76,000 and $759,000 for
the six months ended March 31, 2004 and 2003, respectively. The Company's
effective tax rates were 16.5% and 38.1% for the six months ended March 31, 2004
and 2003, respectively. The decrease in the effective tax rate was primarily
attributable to the Bank's earning non -taxable income from the Bank Owned Life
Insurance.
16
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
2003
Net Income. Net income decreased by $617,000, or 79.2%, from $779,000 for
the three months ended March 31, 2003 to $162,000 for the three months ended
March 31, 2004. The decrease in net income was primarily attributable to
decreased net interest income of $862,000. This was partially offset by a
decrease in the provision for loan losses and income taxes and an increase in
other income due to the Bank Owned Life Insurance.
Net Interest Income. Net interest income was $3.7 million for the three
months ended March 31, 2004, compared to $4.6 million for the three months ended
March 31, 2003, representing a decrease of $862,000, or 18.7%. The decrease was
primarily due to the decrease in the average rate on interest earning-assets.
The average rate on interest-earning assets decreased by 112 basis points from,
6.01% for the three months ended March 31, 2003 to 4.89% for the three months
ended March 31, 2004. Due to declining interest rates and loans re-pricing
faster than deposits, the interest rate spread decreased 75 basis points from,
3.13% for the three months ended March 31, 2004 to 2.38% for the three months
ended March 31, 2004.
Interest Income. Interest income decreased by $994,000, or 11.5% from $8.7
million for the three months ended March 31, 2003 to $7.7 million for the three
months ended March 31, 2004. Interest and fees on loans decreased by $1.5
million, or 21.7%, from $6.9 million for the three months ended March 31, 2003
to $5.4 million for the three months ended March 31, 2004. This was primarily
due to a decrease in the average yield on loans of 101 basis points from 7.09%
for the three months ended March 31, 2003 to 6.08% for the three months ended
March 31, 2004, and a $33.7 million decrease in the average balance of loans
receivable from $389.7 million at March 31, 2003 to $356.1 million at March 31,
2004. The decrease in the average balance of loans was primarily attributable to
increased competition in the refinancing market, current economic conditions and
the management's reluctance to make long term low rate loans in the low interest
rate environment that prevailed during the period. The decrease in the average
yield was attributed to the prevailing market rates in the economy. Interest on
mortgage-backed securities increased by $260,000 or 25.8% from $1.0 million for
the three months ended March 31, 2003 to $1.3 million for the three months ended
March 31, 2004. This increase was primarily due to the increase in the average
balance of mortgage-backed securities from $91.6 million at March 31, 2003 to
$134.7 million at March 31, 2004. Interest and dividends on investment
securities increased by $278,000 or 42.8% from $650,000 million for the three
months ended March 31, 2003 to $928,000 million for the three months ended March
31, 2004. This was primarily due to an increase in the average balance of
investments of $48.2 million from, $68.5 million at March 31, 2003 to $116.7
million at March 31, 2004. The increase in the average balance more than offset
a decrease of 72 basis points in the average yield on investments from, 3.80 %
for the three months ended March 31, 2003 to 3.08% for the three months ended
March 31, 2004.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense decreased from $4.0
million for the three months ended March 31, 2003 to $3.9 million for the three
months ended March 31, 2004 a change of $133,000 or 3.3%. Interest on deposits
decreased $237,000 due to a decrease in the average yield on deposits of 38
basis points from 2.73% at March 31, 2003 to 2.35% at March 31, 2004. This was
partially offset by an increase in the average volume of deposits of $43.1
million from $522.5 million at March 31, 2003 to $565.6 million at March 31,
2004. The Company was able to increase its deposits through normal marketing
efforts. Interest on short-term borrowings decreased by $25,000 for the three
months ended March 31, 2004, and interest on long-term borrowings increased by
$29,000 for the three months ended March 31, 2004. The increase in interest on
long-term borrowings was primarily due to an increase in the average balance of
long-term borrowings of $8.0 million, or 31.3%. This decrease in interest on
short-term borrowings was primarily due to a decrease of 113 basis points in the
average yield paid on advances from the Federal Home Loan Bank of Atlanta during
the three months ended March 31, 2004. Also contributing to interest expense was
interest on the Junior Subordinated Debenture/Trust Preferred Securities which
was $261,000 for the three month period ending March 31, 2004, compared to
$162,000 for the three month period ending March 31, 2003.
17
Average Balance Sheet. The following table sets forth certain information
relating to the Company's average balance sheet and reflects the average yield
on assets and cost of liabilities for the periods indicated and the average
yields earned and rates paid. Such yields and costs are derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the three month periods ended March 31, 2004 and 2003. Total
average assets are computed using month-end balances.
The table also presents information for the periods indicated with respect
to the differences between the average yield earned on interest-earning assets
and average rate paid on interest-bearing liabilities, or "interest rate
spread," which banks have traditionally used as an indicator of profitability.
Another indicator of net interest income is "net interest margin," which is its
net interest income divided by the average balance of interest-earning assets.
THREE MONTHS ENDED MARCH 31
----------------------------------------------------------------------------
2004 2003
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans.................................... $ 356,069 $ 5,411 6.08% $ 389,739 $ 6,909 7.09%
Mortgage-backed securities............... 134,722 1,271 3.77 91,604 1,010 4.41
Investment securities.................... 120,420 928 2.99 68,509 650 3.80
Other Investments........................ 17,157 50 1.17 26,374 85 1.29
--------- --------- ---------- --------
Total interest-earning assets........ 628,368 7,660 4.86 576,226 8,654 6.01
Noninterest-earning assets.................. 54,809 40,798
--------- ----------
Total assets......................... $ 683,177 $ 617,024
========= ==========
Interest-bearing liabilities:
Deposits................................. $ 565,611 3,328 2.35 522,503 3,565 2.73
FHLB Advances............................ 33,599 322 3.83 25,583 317 4.96
Jr. Sub. Debt/Trust Preferred Securities. 22,500 262 4.66 12,500 162 5.18
Other liabilities........................ 1,302 0 0.00 1,660 1 0.24
--------- --------- ---------- --------
Total interest-bearing liabilities.......... 623,012 3,912 2.51 562,246 4,045 2.88
--------- -------- -------- -------
Noninterest-bearing liabilities............. 14,790 9,947
--------- ----------
Total liabilities.................... 637,802 572,193
Stockholders' equity ....................... 45,375 44,831
--------- ----------
Total liabilities and stockholders'
equity.......................... $ 683,177 $ 617,024
========= ==========
Net interest income......................... $ 3,748 $ 4,609
========= ========
Interest rate spread........................ 2.35% 3.13%
======= ======
Net interest margin......................... 2.37% 3.20%
======= ======
Ratio average interest earning assets/
interest bearing liabilities............ 100.86% 102.49%
======= ======
18
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(i) changes in volume (changes in volume multiplied by old rate); (ii) changes
in rates (change in rate multiplied by old volume); and (iii) changes in
rate/volume (changes in rate multiplied by the changes in volume).
For Three Months Ended March 31,
-----------------------------------------------------
2004 vs. 2003
----------------------------------------------------
Increase (Decrease)
Due to
----------------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable.......................... $ (621) $ (961) $ 84 $ (1,498)
Mortgage-backed securities................ 477 (147) (69) 261
Investment securities and
FHLB Stock............................ 488 (135) (104) 249
Other interest-earning assets............. (30) (8) 3 (35)
-------- -------- -------- --------
Total interest-earning assets........... 314 (1,251) (86) (1,023)
Interest expense:
Deposits.................................. 294 (491) (40) (237)
FHLB advances............................. 99 (72) (22) 5
Jr. Sub. Debt./ Trust Preferred Securities 132 (18) (14) 100
Other liabilities......................... 0 (1) 0 (1)
-------- -------- -------- --------
Total interest-bearing
liabilities.......................... 525 (582) (76) (133)
-------- -------- -------- --------
Change in net interest income............... $ (242) $ (655) $ 7 $ (890)
======== ======== ======== ========
Provision for Loan Losses. The Company charges provisions for loan losses
to earnings to maintain the total allowance for loan losses at a level
management considers adequate to provide for probable loan losses. In
determining the provision, management considers a number of factors such as
existing loan levels, prior loss experience, current economic conditions and the
probability of these conditions affecting future loan performance. The Company
established provisions for losses on loans of $86,000 for the three months ended
March 31, 2004, as compared to $130,000 for the three months ended March 31,
2003, representing a decrease of $44,000. The decrease was partially
attributable to the decrease in the average balance of loans of $33.7 million or
8.6% from $389.7 million at March 31, 2003 to $356.0 million at March 31, 2003.
Loan chargeoffs for the three months ended March 31, 2004 were $353,000 as
compared to $373,000 for the three months ended March 31, 2003 a decrease of
$20,000. Loan chargeoffs decreased due to improving economic conditions. Loan
recoveries were $130,000 for the three months ended March 31, 2004 compared to
$54,000 for the three months ended March 31, 2003. Non performing loans at March
31, 2004 were $1.0 million as compared to $750,000 at March 31, 2003. The total
loss allowance allocated to domestic loans is $2.4 million. In establishing such
provisions, management considered an analysis of the risk inherent in the loan
portfolio. For additional information see Asset Quality.
Other Income. Other income decreased by $78,000, or 14.8% from $526,000 for
the three months ended March 31, 2003 to $448,000 for the three months ended
March 31, 2004. The decrease in other income for the three months ended March
31, 2004 was primarily attributable to a decrease of $187,000 in the gain on
sale of loans from $204,000 for the three months ended March 31, 2003 to $18,000
for the three months ended March 31, 2004. This was partially offset by an
increase in the cash surrender value of bank owned life insurance of $121,000
for the three months ended March 31, 2004, compared to $0 for the three months
ended March 31, 2003. There was also a gain on the sale of repossessed assets of
$2,000 for the three months ended
19
March 31, 2004 compared to $0, for the three months ended March 31, 2003. Fees
on transaction accounts also increased $68,000 from $117,000 for the three
months ended March 31, 2003 to $185,000 for the three months ended March 31,
2004. Fees on transaction accounts increased due to the increase in the volume
of transaction accounts. There was also an increase in the gain on the sale of
investments of $20,000 for the three months ended March 31, 2004. These gains
were partially offset by a decrease in gain on the sale of mortgage backed
securities of $84,000 for the three months ended March 31, 2004 from $84,000 for
the three months ended March 31, 2003 to $0 for the three months ended March 31,
2004. These securities were sold in an effort to mitigate interest rate risk.
Non-interest Expenses. Total non-interest expenses increased by $179,000
for the three months ended March 31, 2004, from $3.7 million for the three
months ended March 31, 2003 to $3.9 million for the three months ended March 31,
2004. The Company experienced increases of $161,000 in salaries and related
expenses for the three months ended March 31, 2004, from $2.0 million for the
three months ended March 31, 2003 to $2.1 million for the three months ended
March 31, 2004. Occupancy expense also increased by $90,000, from $390,000 for
the three months ended March 31, 2003 to $480,000 for the three months ended
March 31, 2004. These increases were partially offset by a decrease in data
processing expense of $23,000, from $393,000 for the three months ended March
31, 2003 to $370,000 for the three months ended March 31, 2004. Other expenses
also decreased by $36,000 for the three months ended March 31, 2004, from
$189,000 for the three months ended March 31, 2003 to $153,000 for the three
months ended March 31, 2004.
Income Taxes. The Company's income tax expense was $23,000 and $480,000 for
the three months ended March 31, 2004 and 2003, respectively. The Company's
effective tax rates were 12.3% and 38.1% for the three months ended March 31,
2004 and 2003, respectively. The decrease in the effective tax rate was
primarily attributable to the Bank's earning non-taxable income from the Bank
Owned Life Insurance.
20
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
including commitments to extend credit under existing lines of credit and
commitments to sell loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
Off-balance sheet financial instruments whose contract amounts represent
credit and interest rate risk are summarized as follows:
March 31, 2004 September 30, 2003
-------------- ------------------
(dollars in thousands)
Commitments to originate new loans $ 19,080 $ 10,600
Commitments to originate new loans held for sale -- --
Unfunded commitments to extend credit under existing
equity line and commercial lines of credit 19,918 20,400
Commercial letters of credit 419 419
Commitments to sell loans held for sale -- --
The Company does not have any unconsolidated special purpose entities or other
similar forms of off-balance sheet financing arrangements.
Commitments to originate new loans or to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Loan commitments generally expire within 30 to 45 days. Most
equity line commitments for the unfunded portion of equity lines are for a term
of 20 years, and commercial lines of credit are generally renewable on an annual
basis. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.
Commitments to sell loans held for sale are agreements to sell loans to a
third party at an agreed upon price.
CONTRACTUAL OBLIGATIONS
As of March 31, 2004
Payments due by period
----------------------
(Dollars in thousands)
Less than
1 year 1-3 years 4-5 years Over 5 years Total
----------------- --------- --------- ------------ -----
Time Deposits $ 194,755 115,757 81,572 -- 392,084
Long-term borrowings 29,800 -- 6,000 12,000 47,800
Junior Subordinated Debenture -- -- -- 23,197 23,197
Lease obligations 904 2,687 1,264 5,073 9,928
------------ ------- ------ ------ -------
Total contractual cash
obligations $ 225,459 118,444 88,836 40,270 473,009
============ ======= ====== ====== =======
21
ASSET QUALITY
At March 31, 2004, the Company had approximately $1.2 million in
non-performing assets (nonaccrual loans, repossessed assets and foreclosed real
estate) or .16% of total assets. At September 30, 2003, non-performing assets
were $583 000 or .04% of total assets. The Bank's net charge-offs for the three
months ended March 31, 2004 were $353,000. The Bank's allowance for loan losses
was $2.4 million at March 31, 2004 and $2.7 million at September 30, 2003.
The following table presents an analysis of the Company's non-performing
assets:
At At
March 31, September 30,
2004 2003
---- ----
Nonperforming loans:
Nonaccrual loans $ 1,045 $ 300
Loans 90 days past due and accruing -- --
Restructured loans -- --
--------- -------
Total nonperforming loans 1,045 300
Other non-performing assets 184 283
--------- -------
Total nonperforming assets $ 1,229 $ 583
========= =======
Nonperforming loans to loans receivable, net .29% .08%
Nonperforming assets as a percentage
of loans and other real estate owned .34% .08%
Nonperforming assets to total assets .16% .04%
22
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
For the Six Months Ended
March 31,
2004 2003
---- ----
Balance at beginning of period................... $ 2,698 $ 2,199
--------- --------
Loans charged-off:
Real estate mortgage:
Single-family residential.................... -- --
Multi-family residential..................... -- --
Commercial................................... -- --
Construction.................................. -- --
Commercial loans............................... -- --
Consumer....................................... 682 616
-------- ------
Total charge-offs................................ 682 616
Recoveries:
Real estate mortgage:
Single-family residential.................... -- --
Multi-family residential......................... -- --
Commercial................................... -- --
Construction................................. -- --
Commercial loans secured......................... -- --
Consumer....................................... 156 157
-------- ------
Total recoveries................................. 156 157
-------- ------
Net loans charged off............................ (526) (459)
Provision for loan losses....................... 267 412
-------- ------
Balance at end of period......................... $ 2,439 $2,152
======== ======
Ratio of net charge-offs to average
loans outstanding during the period............ .14% .12%
======== ======
Regulations require that the Company classify its assets on a regular
basis. There are three classifications for problem assets: substandard, doubtful
and loss. The Company regularly reviews its assets to determine whether any
assets require classification or re-classification. At March 31, 2004, the
Company had $1.2 million in classified assets, consisting of $1.0 million in
substandard and loss loans, and $ 184,000 in other repossessed assets. At
September 30, 2003, the Company had $583,000 in substandard assets, consisting
of $300,000 in loans, and $283,000 in other repossessed assets.
In addition to regulatory classifications, the Company also classifies as
"special mention" assets that are currently performing in accordance with their
contractual terms but may become classified or non-performing assets in the
future. At March 31, 2004, the Company has identified approximately $1.9 million
in assets classified as special mention.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Bank exceeded all regulatory minimum capital
requirements. For information comparing the Bank's tangible, core and risk-based
capital levels to the regulatory requirements, see Note 5 of Notes to
Consolidated Financial Statements.
The Company's primary sources of funds are deposits and proceeds from
maturing investment securities and mortgage-backed securities and principal and
interest payments on loans. While maturities and scheduled amortization of
23
mortgage-backed securities and loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
The primary investing activities of the Company are the origination of
loans and the purchase of investment securities and mortgage-backed securities.
During the six months ended March 31, 2004 and 2003, the Company had $28.8
million and $27.8 million, respectively, of loan originations. During the six
months ended March 31, 2004 and 2003, the Company purchased investment
securities in the amounts of $65.8 million and $86.6 million, respectively, and
mortgage-backed securities in the amounts of $41.5 million and $44.4 million,
respectively. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds.
The Bank has the ability to obtain advances from the FHLB of Atlanta. In
addition, the Company maintains a portion of its investments in interest-bearing
deposits at other financial institutions that will be available, if needed.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be changed at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Bank's average daily
liquidity ratio for the month of March was approximately 44.9%, which exceeded
the required level for such period. Management seeks to maintain a relatively
high level of liquidity in order to retain flexibility in terms of investment
opportunities and deposit pricing. Because liquid assets generally provide for
lower rates of return, the Bank's relatively high liquidity will, to a certain
extent, result in lower rates of return on assets.
The Company's most liquid assets are cash, interest-bearing deposits in
other banks and federal funds sold, which are short-term, highly liquid
investments with original maturities of less than three months that are readily
convertible to known amounts of cash. The levels of these assets are dependent
on the Company's operating, financing and investing activities during any given
period. At March 31, 2004, cash, interest-bearing deposits in other banks and
federal funds sold were $12.1 million, $3.8.million and $193,000, respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. Certificates of deposit which are scheduled to
mature in less than one year at March 31, 2004 totaled $194.7 million. Based on
past experience, management believes that a significant portion of such deposits
will remain with the Bank. The Bank is a party to financial instruments with
off-balance-sheet risk made in the normal course of business to meet the
financing needs of its customers. These financial instruments are standby
letters of credit, lines of credit and commitments to fund mortgage loans and
involve to varying degrees elements of credit risk in excess of the amount
recognized in the statement of financial position. The contract amounts of those
instruments express the extent of involvement the Company has in this class of
financial instruments and represents the Company's exposure to credit loss from
nonperformance by the other party.
The Company generally requires collateral or other security to support
financial instruments with off-balance-sheet credit risk. At March 31, 2004, the
Company had commitments under standby letters of credit and lines of credit and
commitments to originate mortgage loans of $419,000, $19.9 million and $19.1
million respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.
The Company considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The structure of the Company's loan and deposit portfolios is such that a
significant change in interest rates may adversely impact net market values and
net interest income.
The Company monitors whether material changes in market risk have occurred
since September 30, 2003. The Company does not believe that any material adverse
changes in market risk exposures occurred since September 30, 2003.
24
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. It should be noted that the design of the
Company's disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Company's principal executive and
financial officers have concluded that the Company's disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.
In addition, there have been no changes in the Company's internal control
over financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's Annual Meeting of Stockholders was held on February 11,
2004 5,606,837 shares representing 95.2% of the total outstanding shares of
the Company's common stock were represented at the Annual Meeting in person
or by proxy.
Stockholders voted in favor of the election of three nominees for director.
The voting results for each nominee were as follows:
Votes in Favor
Nominee of Election Votes Withheld
------- -------------- --------------
H. Adrian Cox 5,582,911 23,926
William M. Loughran. 5,553,387 53,450
John J. Panzer Jr. 5,582,961 23,876
There were 0 broker nonvotes on the matter.
In addition, stockholders voted in favor of the ratification of the
appointment of Beard Miller Company LLP as independent auditors of the
Company for the fiscal year ending September 30, 2004. 5,582,596 votes were
cast in favor of the proposal to ratify the appointment of auditors, 9,183
votes were cast against the proposal, and 15,057 votes abstained. There
were 0 broker non-votes on the matter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The following exhibits are filed herewith:
Exhibit
Number Title
------ -----
3.2 Bylaws of BCSB Bankcorp Inc.
26
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2003.
The following current reports on Form 8-K were filed during the quarter
ended March 31, 2004:
(b) Form 8-K
On January 6, 2004 the Company filed a Current Report on Form 8-K
reporting under Item 4. A change in registrant's certified
accountant, Beard Miller Company LLP, who acquired the Company's
former certified accountant Anderson Associates, LLP.
On February 12, 2004 the Company filed a Current Report on Form
8-K reporting under Item 7 and Item 12.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BCSB BANKCORP, INC.
Date: May 12, 2004 /s/ Gary C. Loraditch
-----------------------------------
Gary C. Loraditch
President
(Principal Executive Officer)
Date: May 12, 2004 /s/ Bonnie M. Klein
-----------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
28