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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 0-53163

 

 

BCSB BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-1424764

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236

(Address of principal executive offices)

(410) 256-5000 

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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

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

As of July 31, 2011 the issuer had 3,192,119 shares of Common Stock issued and outstanding.

 

 

 


Table of Contents

CONTENTS

 

          PAGE
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements   
  

Consolidated Statements of Financial Condition as of
June  30, 2011 (unaudited) and September 30, 2010

   3
  

Consolidated Statements of Operations for the Nine and Three Months Ended
June  30, 2011 and 2010 (unaudited)

   4
  

Consolidated Statements of Comprehensive Income for the Nine and Three Months Ended
June  30, 2011 and 2010 (unaudited)

   5
  

Consolidated Statements of Cash Flows for the Nine Months Ended
June  30, 2011 and 2010 (unaudited)

   6
  

Notes to Consolidated Financial Statements (unaudited)

   8
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    36
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    48
Item 4.    Controls and Procedures    48
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    49
Item 1A.    Risk Factors    49
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    49
Item 3.    Defaults Upon Senior Securities    49
Item 4.    (Removed and Reserved)    49
Item 5.    Other Information    49
Item 6.    Exhibits    49
SIGNATURES    51

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

     June 30,
2011
    September 30,
2010
 
     (unaudited)        
     (dollars in thousands)  
Assets     

Cash

   $ 6,641      $ 11,371   

Interest-bearing deposits in other banks

     12,843        11,829   

Federal funds sold

     78,882        85,699   
  

 

 

   

 

 

 

Cash and cash equivalents

     98,366        108,899   

Interest bearing time deposits

     —          100   

Investment securities, available for sale

     14,072        18,390   

Loans available for sale

     724        934   

Loans receivable, net of allowances ($3,876) and ($6,634)

     364,251        387,999   

Mortgage-backed securities, available for sale

     112,276        65,975   

Foreclosed real estate

     2,841        —     

Premises and equipment, net

     7,680        7,826   

Federal Home Loan Bank of Atlanta stock, at cost

     1,190        1,378   

Bank owned life insurance

     16,129        15,655   

Accrued interest and other assets

     12,035        13,399   
  

 

 

   

 

 

 

Total assets

   $ 629,564      $ 620,555   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits:

    

Non-interest bearing

   $ 31,622      $ 27,276   

Interest-bearing

     521,824        507,090   
  

 

 

   

 

 

 

Total deposits

     553,446        534,366   

Junior subordinated debentures

     17,011        17,011   

Accounts payable trade date securities

     —          2,000   

Other liabilities

     7,652        5,788   
  

 

 

   

 

 

 

Total liabilities

     578,109        559,165   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Preferred stock (par value $.01 - 5,000,000 authorized, 0 and 10,800 shares issued and outstanding at June 30, 2011 and September 30, 2010, respectively)

     —          10,469   

Common stock (par value $.01 - 50,000,000 authorized, 3,192,119 and 3,120,945 shares issued and outstanding at June 30, 2011 and September 30, 2010, respectively)

     31        31   

Stock warrants

     481        481   

Additional paid-in capital

     39,364        39,084   

Obligation under rabbi trust

     972        1,002   

Retained earnings

     12,703        12,698   

Accumulated other comprehensive loss (net of taxes)

     (214     (405

Employee stock ownership plan

     (957     (1,017

Stock held by rabbi trust

     (925     (953
  

 

 

   

 

 

 

Total stockholders’ equity

     51,455        61,390   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 629,564      $ 620,555   
  

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

3


Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

     For the Nine Months
Ended June 30,
    For the Three Months
Ended June 30,
 
     2011     2010     2011     2010  
     (Dollars in thousands except per share data)  

Interest Income

        

Interest and fees on loans

   $ 17,408      $ 18,296      $ 5,735      $ 5,986   

Interest on mortgage backed securities

     2,420        3,309        939        1,016   

Interest and dividends on investment securities

     321        4        134        1   

Other interest income

     178        140        49        60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     20,327        21,749        6,857        7,063   

Interest Expense

        

Interest on deposits

     6,057        6,882        1,914        2,273   

Other interest expense – debentures

     456        456        149        153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     6,513        7,338        2,063        2,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     13,814        14,411        4,794        4,637   

Provision for losses on loans

     800        2,800        —          300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for losses on loans

     13,014        11,611        4,794        4,337   

Other Income

        

Total other-than-temporary impairment charges

     (229     (1,052     (279     —     

Less: Portion included in other comprehensive income (pre-tax)

     129        952        179        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment charges on securities available for sale

     (100     (100     (100     —     

Gain on sale of repossessed assets

     7        8        —          (6

Mortgage banking operations

     223        58        55        15   

Fees on transaction accounts

     465        570        154        187   

Income from bank owned life insurance

     456        430        132        134   

Miscellaneous income

     669        802        153        233   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     1,720        1,768        394        563   

Non-Interest Expenses

        

Salaries and related expense

     7,486        6,898        2,543        2,213   

Occupancy expense

     1,923        1,888        648        674   

Federal deposit insurance premiums

     710        682        176        195   

Data processing expense

     1,321        1,239        422        399   

Property and equipment expense

     468        643        125        173   

Professional fees

     518        437        108        112   

Advertising

     354        316        110        83   

Telephone, postage and office supplies

     244        236        81        48   

Provision for losses on foreclosed real estate

     292        —          292        —     

Other expenses

     685        209        172        70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expenses

     14,001        12,548        4,677        3,967   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before tax provision

     733        831        511        933   

Income tax expense

     156        193        167        326   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     577        638        344        607   

Preferred stock dividends and discount accretion

     (573     (469     —          (156
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 4      $ 169      $ 344      $ 451   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

        

Basic earnings per share of common stock

   $ .00      $ .06      $ .11      $ .15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share of common stock

     .00        .06        .11        .14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ .00      $ .00      $ .00      $ .00   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     For the Nine Months  Ended
June 30,
 
     2011      2010  
     ( in thousands)  

Net income available to common shareholders

   $ 4       $ 169   

Other comprehensive income, net of tax:

     

Unrealized net holding gains on Available-for-sale portfolios, net of tax of $124 and $927, respectively

     191         1,423   
  

 

 

    

 

 

 

Comprehensive income

   $ 195       $ 1,592   
  

 

 

    

 

 

 
     For the Three Months Ended
June 30,
 
     2011      2010  
     ( in thousands)  

Net income available to common shareholders

   $ 344       $ 451   

Other comprehensive income, net of tax:

     

Unrealized net holding gains on Available-for-sale portfolios, net of tax of $331 and $615, respectively

     508         945   
  

 

 

    

 

 

 

Comprehensive income

   $ 852       $ 1,396   
  

 

 

    

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Nine Months  Ended
June 30,
 
     2011     2010  
     (dollars in thousands)  

Operating Activities

    

Net income

   $ 577      $ 638   

Adjustments to reconcile net income to net cash provided by operating activities

    

Other-than-temporary impairment charges on securities available for sale

     100        100   

Amortization of deferred loan fees and cost, net

     (169     (156

Non-cash compensation under stock-based benefit plan

     368        181   

Provision for losses on loans

     800        2,800   

Amortization of purchase premiums and discounts, net

     32        10   

Provision for depreciation

     521        672   

Loss on disposal of premises and equipment

     13        —     

Gains on sale of real estate and repossessed assets

     (7     (8

Increase in cash surrender value of bank owned life insurance

     (456     (430

Provision for losses on foreclosed real estate

     292        —     

Decrease (increase) in accrued interest and other assets

     1,313        (2,323

Gain on sale of loans

     (150     (49

Loans originated for sale

     (14,920     (4,829

Proceeds from loans sold

     15,280        4,878   

Increase (decrease) in other liabilities

     15        (773

Decrease in obligation under Rabbi Trust

     (28     (45
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,581        666   

Cash Flows from Investing Activities

    

Purchase of bank owned life insurance

     (17     (12

Net decrease in loans

     19,985        1,766   

Proceeds from maturity of interest-bearing deposits

     100        —     

Purchase of investment securities – available for sale

     (15,500     —     

Proceeds from maturities of investment securities – available for sale

     20,000        —     

Purchase of mortgage-backed securities – available for sale

     (56,896     —     

Principal collected on mortgage-backed securities

     10,521        15,288   

Proceeds from sales of foreclosed real estate

     —          639   

Proceeds from sales of repossessed assets

     5        47   

Decrease in accounts payable trade date securities

     (2,000     —     

Investment in premises and equipment

     (387     (145

Redemption of Federal Home Loan Bank stock

     188        —     

Proceeds from sale of premises and equipment

     —          564   
  

 

 

   

 

 

 

Net cash (used) provided by investing activities

     (24,001     18,147   
  

 

 

   

 

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

     For the Nine Months  Ended
June 30,
 
     2011     2010  
     (dollars in thousands)  

Cash Flows from Financing Activities

    

Net increase in deposits

   $ 19,080      $ 49,809   

Net increase in advances by borrowers for taxes and insurance

     1,848        2,050   

Repurchase of preferred stock

     (10,800     —     

Dividends paid on preferred stock

     (241     (405
  

 

 

   

 

 

 

Net cash provided by financing activities

     9,887        51,454   
  

 

 

   

 

 

 

(Decrease) increase in cash equivalents

     (10,533     70,267   

Cash and cash equivalents at beginning of period

     108,899        40,252   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 98,366      $ 110,519   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flows Information:

    

Cash paid during the period for:

    

Interest

   $ 6,525      $ 7,120   
  

 

 

   

 

 

 

Income taxes

   $ 513      $ 869   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-cash investing activity:

    

Transfer from loans to real estate acquired through foreclosure

   $ 3,133      $ —     
  

 

 

   

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Principles of Consolidation

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

Note 2 - Basis for Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, (none of which were other than normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The financial statements of the Company are presented on a consolidated basis with those of the Bank. The results for the nine months ended June 30, 2011 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2011. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in BCSB Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2010.

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term related to the determination of the allowance for loan losses (the “Allowance”), other-than-temporary impairment of investment securities and deferred tax assets.

Note 3 - Organization

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s non-interest earning demand deposit accounts currently have unlimited FDIC insurance.

Note 4 - Cash Flow Presentation

For purposes of the statements of cash flows, cash and cash equivalents include cash and amounts due from depository institutions, investments in federal funds, and certificates of deposit with original maturities of 90 days or less.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 5 - Investment Securities

The amortized cost and estimated fair values of investment securities are as follows as of June 30, 2011 and September 30, 2010.

 

(in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

Available for sale:

          

June 30, 2011

          

US Government and Agency securities

   $ 8,999         8         —        $ 9,007   

Corporate Bonds

     4,880         88         (3     4,965   

Equity Investments

     100         —           —          100   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 13,979       $ 96       $ (3   $ 14,072   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2010

          

US Government and Agency securities

   $ 17,006         7         —        $ 17,013   

Corporate Bonds

     1,380         —           (3     1,377   

Equity Investments

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 18,386       $ 7       $ (3   $ 18,390   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no sales of available for sale securities during the nine months ended June 30, 2011 or the year ended September 30, 2010.

Below is a schedule of investment securities with unrealized losses as of June 30, 2011 and the length of time the individual security has been in a continuous unrealized loss position.

 

     Less than 12 months     12 months or more      Total  

(in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

FNMA Agencies

   $ —         $ —        $ —         $ —         $ —         $ —     

FHLB Agencies

     —           —          —           —           —           —     

Corporate Bonds

     1,377         (3     —           —           1,377         (3
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,377       $ (3   $ —         $ —         $ 1,377       $ (3
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Below is a schedule of investment securities with unrealized losses as of September 30,2010 and the length of time the individual security has been in a continuous unrealized loss position.

 

      Less than 12 months     12 months or more      Total  

(in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

FNMA Agencies

   $ —         $ —        $ —         $ —         $ —         $ —     

FHLB Agencies

     —           —          —           —           —           —     

Corporate Bonds

     1,377         (3     —           —           1,377         (3
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,377       $ (3   $ —         $ —         $ 1,377       $ (3
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011 the Company had one investment security in an unrealized loss position.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Mortgage-Backed Securities

The amortized cost and estimated fair values of mortgage-backed securities are as follows as of June 30, 2011 and September 30, 2010:

 

(in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair
Value
 

Available for sale:

          

June 30, 2011

          

GNMA certificates

   $ 3,547       $ 37       $ —        $ 3,584   

Private label collateralized mortgage obligations

     14,865         17         (2,900     11,982   

Collateralized mortgage obligations

     68,996         655         (14     69,637   

FNMA certificates

     16,566         1,085           17,651   

FHLMC participating certificates

     8,750         672           9,422   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 112,724       $ 2,466       $ (2,914   $ 112,276   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2010

          

GNMA certificates

   $ 3,617       $ 65       $ —        $ 3,682   

Private label collateralized mortgage obligations

     17,039         105         (2,813     14,331   

Collateralized mortgage obligations

     14,381         —           —          14,381   

FNMA certificates

     21,477         1,167         —          22,644   

FHLMC participating certificates

     10,233         704         —          10,937   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 66,747       $ 2,041       $ (2,813   $ 65,975   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no sales of available for sale mortgage-backed securities during the nine months ended June 30, 2011. During the fiscal year ended September 30, 2010 proceeds from sales of available for sale mortgage backed securities were $20.4 million. Net gains amounted to $3,000. This consisted of gross gains of $921,000 and gross losses of $918,000.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Mortgage-Backed Securities - continued

 

Below is a schedule of mortgage-backed securities with unrealized losses as of June 30, 2011 and September 30, 2010 and the length of time the individual security has been in a continuous unrealized loss position.

 

      June 30, 2011  
     Less than 12 months      12 months or more      Total  
(in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Private label collateralized mortgage obligations

     $—           $—           $9,816         $(2,900)         $9,816         (2,900)   

Collateralized mortgage obligations

     9,522         (14)         —           —           9,522         (14)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     $9,522         $(14)         $9,816         $(2,900)         $19,338         $(2,914)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2010  
     Less than 12 months      12 months or more      Total  
(in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Mortgage-backed securities

     —           —           —           —           —           —     

Collateralized mortgage obligations

     —           —           11,165         (2,813)         11,165         (2,813)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ —         $ —         $ 11,165       $ (2,813)       $ 11,165       $ (2,813)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011 the Company had six mortgage-backed securities in an unrealized loss position.

During the nine months ended June 30, 2011, we determined that, based on our most recent estimate of cash flows, an additional other-than-temporary-impairment (“OTTI”) had occurred for $100,000. At June 30, 2011, we had $2.9 million of gross unrealized losses related to private label collateralized mortgage obligations with an amortized cost of $14.9 million as of that date. These securities contain mortgages with Alt-A characteristics. Gross unrealized losses for these same securities were approximately $2.6 million as of September 30, 2010. We recorded other-than-temporary impairment (“OTTI”) charges of $100,000 on these securities during the year ended September 30, 2010. We do not intend to sell, nor is it more likely than not we will be required to sell these securities before maturity or recovery. If in the future it is determined that future declines in market values or credit losses with respect to these or any other securities are other than temporary, the Company would be required to recognize additional losses in its Consolidate Statement of Operations. Under guidance for recognition and presentation of other-than-temporary- impairments, the amount of other-than-temporary- impairment that is recognized through earnings is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The discount rate used to determine the credit loss is the expected book yield on the security.

The following shows the activity in “OTTI” related to credit losses for the three and nine months ended June 30:

 

     Three months ended June 30      Nine months ended June 30  
     2011      2010      2011      2010  

Balance at beginning of period

     $100         $500         $100         $500   

Additional OTTI taken for credit losses

     100         100         100         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     $200         $600         $200         $600   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Prepayment Assumptions

Assumptions are based on evaluation of the conditional prepayment rates (“CPR”) and conditional repayment rates (“CRR”) over a 1 month, 3 month, 6 month, 1 year and lifetime basis – to the extent these values are provided by the servicer; estimated prepayment rates provided by the Securities Industry & Financial Markets Association (“SIFMA”), forecasts from other industry experts, and judgment given recent deterioration in credit conditions and declines in property values.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Mortgage-Backed Securities - continued

 

Default Rates

Estimates for the conditional default rate (“CDR”) vectors are based on the status of the loans at the valuation date – current, 30- 59 days delinquent, 60-89 days delinquent, 90+ days delinquent, foreclosure or REO – and proprietary loss migration models (i.e. percentage of 30 day delinquents that will ultimately migrate to default, percentage of 60 day delinquents that will ultimately migrate to default, etc.). The model assumes that the 60 day plus population will move to repossession inventory subject to our loss migration assumptions and liquidate over the next 24 months. Defaults vector from month 25 to month 36 to our month 37 CDR value and ultimately vector to zero over an extended period of time of at least 15 years.

Default assumptions are benchmarked to the recent results experienced by major servicers of non-Agency MBS for securities with similar attributes and forecasts from other industry experts and industry research.

Loss Severity

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

Estimates for future changes in the prices of the residences collateralizing the mortgages is based on the Case Shiller forecasts and forecasts by MSA provided by the Housing Predictor website.

The loss severity assumption is static for twelve months then decreases monthly based on future market appreciation. The annual market appreciation assumption is 3.50% after 12 months. The loss severity is subject to a floor value of 23.00%.

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

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

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

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

Classes

For purposes of determining the allowance for loan losses, The Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: residential real estate loans, commercial, construction, home equity loans, automobile loans and other consumer loans. The company also separates these segments into classes based on the associated risks within these segments. Commercial loans are divided into the following five classes: construction, land acquisition and development, commercial loans secured by real estate, commercial loans unsecured and leases. Residential loans are divided into two classes, residential owner occupied and residential rental properties.

Each class of loan requires significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment. Management must use judgment in establishing additional input metrics for the modeling process. The assumptions used to determine the allowance are independently validated and reviewed to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices, and end user controls are appropriate and properly documented.

Historical loss percentages are also utilized to assist in projecting potential future losses.

Based on credit risk assessment and management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. During the period management has applied additional loss estimations based on the current environmental factors, geographical concentrations, the state of the local economy and current bankruptcy rates.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

The Allowance for Loan Losses and Recorded Investment in loans for the three months ended June 30, 2011 are as follows:

Allowance for Credit Losses

For the nine months ended June 30, 2011

(Dollars in thousands)

 

     Residential
Loans (1)
    Commercial
Loans
    Construction
Loans
    Home
Equity
Loans
    Automobile
Loans
    Other
Consumer
Loans
    Total
Loans
 

Nine Months ended

              

June 30, 2011

              

Allowance for credit losses:

              

Beginning Balance

   $ 179      $ 5,380      $ 906      $ 108      $ 61      $ —        $ 6,634   

Charge-Offs

     (1,078     (2,212     (284     —          (28     (18     (3,620

Recoveries

     —          —          —          —          62        —          62   

Provisions

     2,159        (895     (450     63        (95     18        800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,260      $ 2,273      $ 172      $ 171      $ —        $ —        $ 3,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months ended

              

June 30, 2011

              

Allowance for credit losses:

              

Beginning Balance

   $ 1,481      $ 2,682      $ 584      $ 259      $ —        $ —        $ 5,006   

Charge-Offs

     (1,005     (121     —          —          (2     (18     (1,146

Recoveries

     —          —          —          —          16        —          16   

Provisions

     784        (288     (412     (88     (14     18        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,260      $ 2,273      $ 172      $ 171      $ —        $ —        $ 3,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ 6,705      $ 8,418      $ 7,364      $ 140      $ —        $ 20      $ 22,647 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 158,923      $ 137,674      $ 22,312      $ 34,078      $ 1,255      $ 1,916      $ 356,158 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Allowance balance for loan individually evaluated for impairment

   $ 204      $ 566      $ —        $ —        $ —        $ —        $ 770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Allowance balance for loans collectively evaluated for impairment

   $ 1,056      $ 1,707      $ 172      $ 171      $ —        $ —        $ 3,106   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude Loans in Process “LIP” and Deferred loan fees.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Credit Quality Indicators

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

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

Pass

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

Special Mention

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

Substandard

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

Doubtful

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

Loss

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

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The classification of loans as of June 30, 2011 are as follows:

June 30, 2011

(Dollars in thousands)

 

     Residential
Loans (1)
     Commercial
Loans
     Construction
Loans
     Home Equity
Loans
     Automobile
Loans
     Other
Consumer

Loans
     Total  

Grade

                 

Pass

   $ 158,814       $ 137,713       $ 22,322       $ 34,138       $ 1,255       $ 1,916       $ 356,158   

Special Mention

     4,592         4,204         5,222         —           —           —           14,018   

Substandard

     2,222         4,175         2,132         80         —           20         8,629   

Doubtful

     —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 165,628       $ 146,092       $ 29,676       $ 34,218       $ 1,255       $ 1,936       $ 378,805 (1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.

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

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

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

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

Commercial Real Estate Lending. The Bank’s commercial real estate loan portfolio includes loans to finance the acquisition of office buildings, churches, commercial office condominiums, shopping centers, hospitality, and commercial and industrial buildings. Such loans generally range in size from $100,000 to $5 million. Commercial real estate loans are originated on a fixed-rate or adjustable-rate basis with terms of 5 to 10 years and with amortizations of up to 25 years.

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

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

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

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

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

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

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

The Bank originates second mortgage loans and home equity lines of credit. Second mortgage loans are made at fixed rates and for terms of up to 15 years. The Bank’s home equity lines of credit currently have adjustable interest rates tied to the prime rate and are currently offered at the prime rate minus  1/4% with a floor of 4%. The interest rate may not adjust to a rate higher than 24%. The home equity lines of credit require monthly payments until the loan is paid in full, with a loan term not to exceed 30 years. The minimum monthly payment is the outstanding interest. Home equity lines of credit are secured by subordinate liens against residential real property. The Bank requires that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least sufficient to cover its loan.

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

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

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

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Impaired loans for the nine months ended June 30, 2011 are as follows:

Impaired Loans

For the Period ending June 30, 2011

(Dollars in Thousands)

 

     Recorded
Investments
     Unpaid Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans without a specific valuation allowance:

              

Residential Loans (1)

   $ 5,960       $ 5,955       $ —         $ 6,050       $ 211   

Commercial Loans

     3,562         3,554         —           3,575         69   

Constructions Loans

     —           —           —           —           —     

Home Equity Loans

     —           —           —           —           —     

Consumer Loans

     —           —           —           —           —     

Other Loans

     20         20         —           22         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,542       $ 9,529       $ —         $ 9,647       $ 281   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance recorded:

              

Residential Loans (1)

   $ 481       $ 479       $ 204       $ 482       $ 26   

Commercial Loans

     1,437         1,436         458         1,491         64   

Constructions Loans

     2,132         2,132         108         2,791         52   

Home Equity Loans

     —           —           —           —           —     

Consumer Loans

     —           —           —           —           —     

Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,050       $ 4,047       $ 770       $ 4,764       $ 142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Past due loans for the nine months ended June 30, 2011 are as follows:

Credit Quality Information

Age Analysis of Past Due Loans

For the Period Ended June 30, 2011

 

     31-60
Days
past due
     61-90
Days
past due
     Greater
than 90
days
     Total
past

due
     Current      Total
Loans
     Loans
Greater
than 90
days and
Accruing
 

Residential Loans (1)

   $ 273       $ 58       $ 386       $ 717       $ 164,911       $ 165,628       $ —     

Commercial Loans

     2,259         887         4,747         7,893         138,199         146,092         —     

Construction Loans

     —           —           —           —           29,676         29,676         —     

Home Equity Loans

     —           80         —           80         34,138         34,218         —     

Automobile Loans

     11         —           —           11         1,244         1,255         —     

Other Loans

     20         —           —           20         1,916         1,936         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,563       $ 1,025       $ 5,133       $ 8,721       $ 370,084       $ 378,805       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.

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 collectability 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, or any expected loss is reserved for when management concludes that they are uncollectible.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

Charge-off Policies

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

When loans become 90 days delinquent the Bank performs an analysis to determine if a loss is expected. Loans are generally charged down to the fair value of collateral securing the asset, less estimated cost to sell, when management judges the asset to be uncollectible, repayment is deemed to be protracted beyond reasonable time frames; the asset has been classified as loss by either the internal loan review process or external examiners, or when the borrower has filed bankruptcy and the loss becomes evident based on a lack of assets.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

BCSB BANCORP, INC. AND SUBSIDIARIES

Loans on Nonaccrual Status

(Dollars in Thousands)

 

     June 30,
2011
    September 30,
2010
 

With no related allowance recorded:

    

Residential Loans (1)

   $ 5,815      $ 2,210   

Commercial Loans

     3,254        1,125   

Constructions Loans

     —          —     

Home Equity Loans

     140        —     

Automobile Loans

     —          —     

Other Loans

     20        23   
  

 

 

   

 

 

 
   $ 9,229      $ 3,358   

With an allowance recorded:

    

Residential Loans (1)

   $ —        $ 110   

Commercial Loans

     2,138        5,384   

Constructions Loans

     140        3,933   

Home Equity Loans

     —          —     

Automobile Loans

     —          —     

Other Loans

     91        —     
  

 

 

   

 

 

 
   $ 2,369      $ 9,427   

Total nonaccrual loans

   $ 11,598 (2)    $ 12,785 (2) 
  

 

 

   

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Includes Troubled Debt Restructurings of $4.3 million and $3.3 million at June 30, 2011 and September 30, 2010, respectively which were current in terms of restructured payments. Reporting guidance requires disclosure of these loans as non-accrual even though they may be current.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8 - 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 and warrants, unless the effect is to reduce a loss or increase earnings per share. The basic and diluted weighted average common shares outstanding for three month periods ended June 30, 2011 and 2010, respectively are as follows:

 

     For the Nine Months Ended June 30,  
     2011     2010  
     (in thousands except per share data)  
     Income     Shares      Per Share     Income     Shares      Per Share  

Basic EPS

              

Net Income

   $ 577        2,990       $ .19      $ 638        2,919       $ .22   

Less preferred dividend

     (573     2,990         (.19     (469     2,919         (.16
  

 

 

      

 

 

   

 

 

      

 

 

 

Income available to common shareholders

     4        2,990         .00        169        2,919         .06   

Diluted EPS

              

Effect of dilutive shares

     —          75         .00        —          88         —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income available to common shareholders plus assumed conversions

   $ 4        3,065       $ .00      $ 169        3,007       $ .06   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     For the Three Months Ended June 30,  
     2011     2010  
     (in thousands except per share data)  
     Income     Shares      Per Share     Income     Shares      Per Share  

Basic EPS

              

Net Income

   $ 344        3,000       $ .11      $ 607        2,921       $ .21   

Less preferred dividend

     —          3,000         .00        (156     2,921         (.06
  

 

 

      

 

 

   

 

 

      

 

 

 

Income available to common shareholders

     344        3,000         .11        451        2,921         .15   

Diluted EPS

              

Effect of dilutive shares

     —          109         .00        —          211         (.01
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income available to common shareholders plus assumed conversions

   $ 344        3,109       $ .11      $ 451        3,132       $ .14   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Options to purchase 45,402 shares which were outstanding at June 30, 2011 and 64,436 shares which were outstanding June 30, 2010, were not included in the computation of diluted EPS because the effect would have been anti-dilutive.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 9 - Preferred Stock

On March 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement, and the related Securities Purchase Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued (i) 10,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase 183,465 shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $10,800,000 in cash.

The warrant is exercisable at $8.83 per share at any time on or before December 23, 2018. The warrant will not be subject to any contractual restrictions on transfer. The Series A preferred stock was repurchased on January 26, 2011, but the warrant remains outstanding. For further information, see “Recent Developments”.

Note 10 - Regulatory Capital

The following table sets forth the Bank’s capital position at June 30, 2011.

 

     Actual     For Capital
Adequacy Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Actual
Amount
     % of
Assets
    Required
Amount
     % of
Assets
    Required
Amount
     % of
Assets
 
     (Unaudited) (dollars in thousands)  

Tangible (1)

   $   62,607         10.01   $ 9,381         1.50   $ N/A         N/A %(3) 

Tier I capital (2)

     62,607         15.74        N/A         N/A (3)      23,865         6.00   

Core (1)

     62,607         10.01        25,016         4.00        31,271         5.00   

Risk-weighted (2)

     65,605         16.49        31,820         8.00        39,775         10.00   

 

(1) To adjusted total assets
(2) To risk-weighted assets
(3) Not applicable

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED

 

Note 11 - Stock Option Plans

 

The 1999 Plan

On July 15, 1999, the Company established a Stock Option Plan (the “1999 Plan”) whereby 120,366 shares of common stock have been reserved for issuance under the 1999 Plan. Options granted under the 1999 Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. Options are exercisable in four or five annual installments at the market price of common stock at the date of grant. The Options must be exercised within ten years from the date of grant. There were 43,428 options granted during the year ended September 30, 2002. There were 15,792 options granted under the 1999 Plan during the year ended September 30, 2007, 22,193 options granted under the 1999 Plan during the year ended September 30, 2008 and 11,796 options granted under the 1999 Plan during the year ended September 30, 2009. No options were granted under the 1999 Plan during the years ended September 30, 2003 through 2006. Also, there were no options granted under the 1999 Plan during the year ended September 30, 2010 or during the nine months ended June 30, 2011.

The 2009 Plan

At the annual shareholders meeting held in May 2009 the Company approved an additional Stock Option Plan (the “2009 Plan”) whereby 191,740 shares of common stock were reserved for issuance under the 2009 Plan. Options granted under the 2009 Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. Options are exercisable in four annual installments at the market price of common stock at the date of grant. The Options must be exercised within ten years from the date of grant. There were 177,930 options granted under the 2009 Plan during the nine months ended June 30, 2011.

The following table summarizes the shares under the Company’s stock option plan at June 30, 2011:

 

Number of Shares

   Price     

Weighted Average

Contractual Life

29,610    $   21.61       .9
10,528      28.41       5.5
5,264      17.95       6.5
22,193      11.61       6.5
11,296      8.25       8.0
176,320      10.29       9.3

The total exercisable shares of 60,149 have a weighted average contractual life of 3.8 years, and an aggregate intrinsic value of $745,000.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 11 - Stock Option Plans - continued

 

The following table presents the activity related to options under all plans for the nine months ended June 30, 2011.

 

     Shares     Weighted Average
Exercise Price
 

Outstanding at September 30, 2010

     79,391      $ 17.49   

Options exercised

     —          —     

Forfeited

     (2,110     9.79   

Granted

     177,930        10.29   
  

 

 

   

 

 

 

Outstanding at June 30, 2011

     255,211      $ 12.53   
  

 

 

   

 

 

 

Exercisable at June 30, 2011

     60,149      $ 18.21   
  

 

 

   

 

 

 

During the nine months ended June 30, 2011 there were 177,930 stock options granted. There were no stock options granted during the nine months ended June 30, 2010. Option expense recognized during the nine month periods ended June 30, 2011 and 2010, respectively was $158,484 and $50,428, respectively. As of June 30, 2011, $598,000 of total unrecognized pretax expense related to stock options is expected to be recognized from July 1, 2011 through November 30, 2014.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 12 - Recent Accounting Pronouncements

In January 2011, the FASB issued ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” The provisions of ASU No. 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company’s reporting period ended June 30, 2011. The amendments in ASU No. 2011-01 defer the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completes their project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of this ASU only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU will have no impact on the Company’s statements of income and condition.

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 are effective for the Company’s reporting period ending September 30, 2011. The adoption of ASU No. 2011-02 is not expected to have a material impact on the Company’s statements of income and condition.

In April, 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in ASU No. 2011-03 remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU No. 2011-03 also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance is effective for the Company’s reporting period ended June 30, 2012. The guidance will be applied prospectively to transactions or modifications of existing transaction that occur on or after January 1, 2012.

In June, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” This guidance requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and will require retrospective application for all periods presented.

Note 13 - Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company has $743,000 of standby letters of credit as of June 30, 2011. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2011 for guarantees under standby letters of credit issued is not considered to be material.

 

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Table of Contents

B BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14 - Fair Value Measurements

The Company applies guidance issued by FASB regarding fair value measurements which provided a framework for measuring and disclosing fair value under generally accepted accounting principles. This guidance applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets. The disclosure’s emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of this guidance did not have any effect on the Company’s financial position or results of operations.

GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:

 

   

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted process of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Each financial instrument’s level assignment with the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement for the particular category. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

There were $253,000 in transfers between levels during the nine months ended June 30, 2011. The Company’s policy is to recognize transfers in and transfers out at the actual date of the event or change in the circumstances that caused the transfer. The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of each instrument under the valuation hierarchy.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 14 - Fair Value Measurements - continued

 

Fair values of investment securities are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are generally classified within Level 2 of the valuation hierarchy.

The following tables present the financial instruments measured at fair value by class on the recurring basis as of June 30, 2011 and September 30, 2010 on the Consolidated Statement of Financial Condition utilizing the hierarchy discussed above.

 

            At June 30, 2011     

Total changes

In fair values

Included in

 
($ in thousands)    Total      Level 1      Level 2      Level 3      Period Earnings  

Loans available for sale

   $ 724       $ —         $ 724       $ —         $ —     

Equity Investments

     100         —           100         

FHLB Bonds available for sale

     3,001         —           3,001         —           —     

FHLMC Bonds available for sale

     2,002         —           2,002         —           —     

FNMA Bonds available for sale

     4,004         —           4,004         —           —     

Corporate Bonds available for sale

     4,965         —           4,965         —           —     

GNMA certificates available for sale

     3,584         —           3,584         —           —     

FNMA certificates available for sale

     17,651         —           17,651         —           —     

FHLMC certificates available for sale

     9,422         —           9,422         —           —     

Private label collateralized mortgage obligations available for sale

     69,637            69,637            100 (1) 

Collateralized mortgage obligations available for sale

     11,982         —           11,982         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 127,072       $ —         $ 127,072       $ —         $ 100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents other-than-temporary impairment charges taken during the nine months ended June 30, 2011.

 

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Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14 - Fair Value Measurements - continued

 

            At September 30, 2010     

Total changes

In fair values

Included in

 
($ in thousands)    Total      Level 1      Level 2      Level 3      Period Earnings  

Loans available for sale

   $ 934       $ —         $ 934       $ —         $ —     

FFCB available for sale

     2,001         —           2,001         —           —     

FHLB Bonds available for sale

     8,005         —           8,005         —           —     

FHLMC Bonds available for sale

     5,007         —           5,007         —           —     

FNMA Bonds available for sale

     2,000         —           2,000         —           —     

Corporate Bonds available for sale

     1,377         —           1,377         —           —     

GNMA certificates available for sale

     3,682         —           3,682         —           —     

FNMA certificates available for sale

     22,644         —           22,644         —           —     

FHLMC certificates available for sale

     10,937         —           10,937         —           —     

Private label collateralized mortgage obligations available for sale

     28,712            28,712            200 (1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 85,299       $ —         $ 85,299       $ —         $ 200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents other-than-temporary impairment charges taken during the fiscal year ended September 30, 2010.

Nonrecurring fair value changes

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis, but are subject to fair value in certain circumstances, such as when there is evidence of impairment that may require write-downs. The write-downs for the Company’s more significant assets or liabilities measured on a non-recurring basis are based on the lower of amortized cost or estimated fair value.

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price of the loan, or the fair value of the underlying collateral asset.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14 - Fair Value Measurements - continued

 

Foreclosed Real Estate and Repossessed Assets

Once a loan is determined to be uncollectible, the underlying collateral is repossessed and reclassified to Foreclosed Real Estate and Repossessed Assets. These assets are carried at lower of cost or fair value of the collateral, less costs to sell. There was $2.8 million in foreclosed real estate at June 30, 2011.

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

 

At June 30, 2011  

($ in thousands)

   Total      Level 1      Level 2      Level 3  

Impaired Residential Loans

   $ 6,230       $ —         $ —         $ 6,230   

Impaired Commercial and Lease Loans

     4,532         —           —           4,532   

Impaired Construction Loans

     2,024         —           —           2,024   

Impaired Consumer Loans

     20         —           —           20   

Foreclosed Real Estate and Repossessed Assets

     2,841         —           —           2,841   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,647       $ —         $ —         $ 15,647   
  

 

 

    

 

 

    

 

 

    

 

 

 
At September 30, 2010  

($ in thousands)

   Total      Level 1      Level 2      Level 3  

Impaired Residential Loans

   $ 2,033       $ —         $ —         $ 2,033   

Impaired Commercial and Lease Loans

     5,398         —           —           5,398   

Impaired Construction Loans

     2,822         —           —           2,822   

Impaired Consumer Loans

     23         —           —           23   

Foreclosed Real Estate and Repossessed Assets

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,276       $ —         $ —         $ 10,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14 - Fair Value Measurements - continued

 

The tables below summarize the changes in the recorded amount of assets measured at fair value on a nonrecurring basis for the nine months ended June 30, 2011. All assets measured at fair value on a nonrecurring basis were classified as Level 3 in the fair value hierarchy at June 30, 2011 and September 30, 2010.

Impaired Loans, Foreclosed Real Estate and Repossessed Assets

($ in thousands)

For the nine months ended

June 30, 2011

     Residential
Loans (1)
    Commercial
Loans
    Construction
Loans
    Home
Equity
Loans
     Automobile
Loans
    Other
Consumer
Loans
     Real
Estate
Owned
    Total  

Beginning Balance

   $ 2,033      $ 5,398      $ 2,822      $ —         $ 23      $ —         $ —        $ 10,276   

Charge-offs

     —          —          —             —          —           —          —     

Payments

     —          (840     (787     —           —          —           —          (1,627

Transfers to other real estate owned

     (1,109     (2,024     —          —           —          —           —          (3,133

Return to performing

     (87     (251       —           (23          (361

Additions

     6,228        2,499        —          —           —          20         3,133        11,880   

Changes in allowance

     (835     (250     (11     —           —          —           (292     (1,388
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 6,230      $ 4,532      $ 2,024      $ —         $ —        $ 20       $ 2,841      $ 15,647   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 15 - Disclosures About Fair Value of Financial Instruments

The estimated fair values of the Bank’s financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques prescribed by the FASB and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The carrying amount is a reasonable estimate of fair value for cash, federal funds and interest-bearing deposits in other banks. Fair value is based on bid prices and pricing models received from third party pricing services for investment securities and mortgage backed securities. The carrying amount of Federal Home Loan Bank of Atlanta stock is a reasonable estimate of fair value. Loans receivable were discounted using a single discount rate, comparing the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. These rates were used for each aggregated category of loans as reported on the Office of Thrift Supervision Quarterly Report. The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The Junior Subordinated Debentures are considered to be at fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered on deposits of similar remaining maturities. The fair value of Federal Home Loan Bank advances is estimated using rates currently offered on advances of similar remaining maturities. The carrying amounts of accrued interest receivable, accrued interest payable, and mortgage servicing rights approximate fair value. Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The estimated fair values of the Bank’s financial instruments are as follows:

 

     June 30, 2011      September 30, 2010  
     Carrying
Amount
     Estimated  Fair
Value
     Carrying
Amount
     Estimated  Fair
Value
 
     (Amounts in Thousands)  

Financial Assets

           

Cash

   $ 6,641       $ 6,641       $ 11,371       $ 11,371   

Interest-bearing deposits in other banks

     12,843         12,843         11,829         11,829   

Federal funds sold

     78,882         78,882         85,699         85,699   

Interest-bearing time deposits

     —           —           100         100   

Investment securities available for sale

     14,072         14,072         18,390         18,390   

Loans Receivable

           

Mortgage loans

     361,494         375,822         384,481         409,498   

Share loans

     290         290         369         369   

Consumer loans

     3,191         2,867         4,083         4,254   

Mortgage-backed securities – available for sale

     112,276         112,276         65,975         65,975   

Federal Home Loan Bank of Atlanta stock

     1,190         1,190         1,378         1,378   

Bank owned life insurance

     16,129         16,129         15,655         15,655   

Accrued interest receivable

     2,132         2,132         2,114         2,114   

Mortgage servicing rights

     152         152         212         212   

Financial Liabilities

           

Deposits

   $ 553,446       $ 555,332       $ 534,366       $ 535,120   

Junior Subordinated Debt

     17,011         17,011         17,011         17,011   

Accounts payable trade date securities

     —           —           2,000         1,993   

Accrued interest payable

     103         103         92         92   

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the FDIC. The Bank’s noninterest earning demand deposit accounts have unlimited FDIC insurance.

The Company’s net income is dependent primarily on its net interest income, which is the difference between interest income earned on its interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the Company’s net income also is affected by the level of other income, which primarily consists of fees and charges, and levels of non-interest expenses such as salaries and related expenses.

The operations of the Company are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company’s market area.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition is based on the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses.

Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on management’s evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimated loss and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management’s estimation of losses. The use of different estimates or assumptions could produce different provisions for loan losses.

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Under the revised guidance for recognition and presentation of other-than-temporary impairments, the amount of other-than-temporary impairment that is recognized through earnings for debt securities is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The revised guidance also requires that an evaluation be done to determine whether the Company has the intent to sell or is more likely than not required to sell these securities. The discount rate used to determine the credit loss is the expected book yield on the security.

The Company accounts for income taxes under the asset/liability method. Deferred tax assets are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company’s control. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

 

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Available Information

The Company and Bank maintain an Internet website at http://www.baltcosavings.com. The Company makes available its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports filed with the Securities and Exchange Commission (“SEC”) as well as other information related to the Company, free of charge. SEC reports are available on this site as soon as reasonably practicable after electronically filed.

Recent Developments

Repurchase of Series A Preferred Stock

On January 26, 2011 the Company repurchased all $10.8 million of Series A Preferred Stock issued to the U.S. Treasury in March 2008 pursuant to the TARP Capital Purchase Program. BCSB completed the repayment without raising additional capital. The TARP repayment will save the Company $540,000 in annual preferred dividends. As a result of the redemption, the Company had to accelerate accretion of the remaining discount on the preferred stock and record a reduction in retained earnings, thereby reducing net income available to common shareholders by approximately $310,000 during the three months ending March 31, 2011. The warrant issued to the U.S, Treasury has not been repurchased and remains outstanding. For further information, see “— Liquidity and Capital Resources.”

Charter Change

On April 8, 2011 the Company announced their application submittal to the Office of the Commissioner of Financial Regulation of the State of Maryland to convert its charter from a federally chartered savings bank to a Maryland-chartered commercial bank. BCSB Bancorp, Inc. has also filed an application with the Federal Reserve Bank to become a bank holding company. The charter change will not have any significant financial or regulatory impact or affect BCSB’s current activities. Subject to receiving the necessary regulatory approvals, the charter conversion is expected to be completed in the third quarter of 2011.

Credit Agreement

On January 18, 2011, the Company entered into a Credit Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”) and executed a Promissory Note in connection with the receipt of an 18-month revolving loan facility from M&T in the maximum principal amount of $2.0 million which matures on June 1, 2012. Pursuant to the terms of a Pledge Agreement entered into on the same date as the Credit Agreement, the loan is secured by the Company’s stock in its wholly owned subsidiary, Baltimore County Savings Bank, F.S.B. The Credit Agreement contains customary representations, warranties and covenants that are valid as between the parties and as of the date of entering into such Credit Agreement. The description of the Credit Agreement is a summary and is qualified in its entirety by the terms of the Credit Agreement.

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected and the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

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Table of Contents

Comparison of Financial Condition at June 30, 2011 and September 30, 2010

During the nine months ended June 30, 2011, assets increased by $9.0 million, or 1.5%, from $620.6 million at September 30, 2010 to $629.6 million at June 30, 2011. Our cash and cash equivalents decreased $10.5 million, or 9.7% from $108.9 million at September 30, 2010 to $98.4 million at June 30, 2011, primarily due to the deployment of available liquidity to invest in mortgage-backed securities. During the nine months ended June 30, 2011, investment securities decreased by $4.3 million, or 23.5% from $18.4 million at September 30, 2010 to $14.1 million at June 30, 2011. The decline was primarily due to contractual maturities since there were no sales of investment securities during the period. Mortgage-backed securities available for sale increased by $46.3 million, or 70.2%, from $66.0 million at September 30, 2010 to $112.3 million at June 30, 2011. The increase was primarily due to funds available from the declining loan portfolio and increased deposit portfolio. Net loans receivable decreased $23.7 million, or 6.1%, from $388.0 million at September 30, 2010 to $364.3 million at June 30, 2011. The decrease relates primarily to lower residential loans, which have decreased from accelerated repayments in a low rate environment. Management’s lending strategy remains focused on commercial real estate, commercial business and home equity lending. During this low rate environment the Company has employed a strategy of selling most residential loans into the secondary loan market.

Deposits increased by $19.0 million, or 3.6%, from $534.4 million at September 30, 2010 to $553.4 million at June 30, 2011. The Bank has been successful in attracting new deposits without increasing the overall cost for such funds.

Stockholders’ equity decreased by $9.9 million, or 16.2%, from $61.4 million at September 30, 2010 to $51.5 million at June 30, 2011. This decrease was due primarily to the repurchase in January of 2011 of all $10.8 million of Series A Preferred Stock issued to the U.S. Treasury in December 2008 pursuant to the TARP Capital Purchase Program. BCSB completed the repayment without raising additional capital.

Comparison of Operating Results for the Nine Months Ended June 30, 2011 and 2010

Net Income. Net income available to common shareholders was $4,000 for the nine months ended June 30, 2011 and $169,000 for the nine months ended June 30, 2010. The decrease in net income was primarily due to the accelerated accretion of the remaining discount on preferred stock repurchased, which approximated $310,000 during the nine months ended June 30, 2011. Also, net interest income decreased by $597,000, or 4.1%, from $14.4 million for the nine months ended June 20, 2010 to $13.8 million for the nine months ended June 30, 2011 and non-interest expenses increased during the nine months ended June 30, 2011 compared to the same period in the preceding year. Partially offsetting these declines in earnings was lower provision for losses on loans during the nine months ended June 30, 2011 compared to the nine months ended June 30, 2010.

Net Interest Income. Net interest income decreased by $597,000, or 4.1%, from $14.4 million for the nine months ended June 30, 2010 to $13.8 million for the nine months ended June 30, 2011. The decrease in net interest income primarily was due to lower average balances on loans and lower yields on mortgage-backed securities. Loan origination volume for retainage in the Bank’s portfolio has declined substantially during the current period, due to the Bank’s strategy of selling residential loan originations to the secondary market. Yields on mortgage-backed securities decreased due to the sale of approximately $20.4 million of higher yielding mortgage-backed securities during the three months ended September 30, 2010. The gain on the sale was offset in part by the loss from disposing of a problem CMO, which had resulted in cumulative OTTI charges of $600,000, but also reduced future yield on the portfolio as higher yielding securities were sold at gains. The decline in net interest income caused by decreased loan volume and lower yields on mortgage-backed securities was partially offset by higher average balances and higher yields on investment securities, and reduced cost of funds on the deposit portfolio during the period. The net interest margin decreased 28 basis points from 3.45% for the nine months ended June 30, 2010 to 3.17% for the nine months ended June 30, 2011.

Interest Income. Interest income decreased by $1.4 million, or 6.5% from $21.7 million for the nine months ended June 30, 2010 to $20.3 million for the nine months ended June 30, 2011. This was primarily due to lower average balances on loans and lower yields on mortgage-backed securities. Average loans declined by $20.5 million during the nine months ended June 30, 2011 as compared to the same period in 2010. The average rate earned on the mortgage-backed securities portfolio declined by 127 basis points from 5.14% for the nine months ended June 30, 2010 to 3.87% for the nine months ended June 30, 2011.

Interest Expense. Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $7.3 million for the nine months ended June 30, 2010 to $6.5 million for the nine months ended June 30, 2011, a decrease of $825,000 or 11.2%. Interest on deposits decreased $825,000 from $6.9 million for the nine months ended June 30, 2010 to $6.1 million for the nine months ended June 30, 2011. This decrease was due to the decrease in the average cost of deposits of 30 basis points from 1.78% for the nine months ended June 30, 2010 to 1.48% for the nine months ended June 30, 2011. This was partially offset by an increase in the average balance of deposits of $29.9 million from $514.3 million for the nine months ended June 30, 2010 to $544.2 million for the nine months ended June 30, 2011.

 

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Table of Contents

Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the nine month periods ended June 30, 2011 and 2010. 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 net interest income divided by the average balance of interest-earning assets.

 

     For the Nine Months Ended June 30,  
     2011     2010  
     Average
Balance
     Interest      Average
Rate
    Average
Balance
     Interest      Average
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                

Loans receivable, net

   $ 379,497       $ 17,408         6.12   $ 399,995       $ 18,296         6.10

Mortgage-backed securities

     83,422         2,420         3.87        85,909         3,309         5.14   

FHLB stock and Investment securities

     16,265         321         2.63        1,485         4         .36   

Other interest earning assets

     101,173         178         .23        70,132         140         .27   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-earning assets

     580,357         20,327         4.67        557,521         21,749         5.20   

Bank Owned Life Insurance

     15,885              15,356         

Noninterest-earning assets

     26,352              23,771         
  

 

 

         

 

 

       

Total assets

   $ 622,594            $ 596,648         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Deposits

   $ 544,162       $ 6,057         1.48   $ 514,251       $ 6,882         1.78

Junior Subordinated Debentures

     17,011         456         3.58        17,011         456         3.57   

Other liabilities

     1,417         —             1,582         —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     562,590         6,513         1.54        532,844         7,338         1.84   
     

 

 

    

 

 

      

 

 

    

 

 

 

Noninterest-bearing liabilities

     5,587              3,529         
  

 

 

         

 

 

       

Total liabilities

     568,177              536,373         

Stockholders’ Equity

     54,417              60,275         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 622,594            $ 596,648         
  

 

 

         

 

 

       

Net interest income

      $ 13,814            $ 14,411      
     

 

 

         

 

 

    

Interest rate spread

           3.13           3.36
        

 

 

         

 

 

 

Net interest margin

           3.17           3.45
        

 

 

         

 

 

 

Ratio average interest earning assets/interest-bearing liabilities

           103.16           104.63
        

 

 

         

 

 

 

 

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Table of Contents

Rate/Volume Analysis. The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by old volume); and (iii) changes in rate/volume (changes in rate multiplied by the changes in volume).

 

     For Nine Months Ended June 30,  
     2011     Vs.    2010  
  

 

 

 
     Increase (Decrease) Due to  
     Volume     Rate          Rate/Volume     Total  
     (In Thousands)  

Interest income:

           

Loans receivable, net

   $ (964     80           (4     (888

Mortgage-backed securities

     (96     (817        24        (889

Investment securities

     40        26           251        317   

Other interest-earning assets

     58        (14        (6     38   
  

 

 

   

 

 

      

 

 

   

 

 

 

Total interest-earning assets

     (962     (725        265        (1,422

Interest expense:

           

Deposits

     400        (1,158        (67     (825

Short-term FHLB advances

     —          —             —          —     

Junior Subordinated Debentures

     —          —             —          —     
  

 

 

   

 

 

      

 

 

   

 

 

 

Total interest-bearing liabilities

     400        (1,158        (67     (825
  

 

 

   

 

 

      

 

 

   

 

 

 

Change in net interest income

   $ (1,362     433           332        (597
  

 

 

   

 

 

      

 

 

   

 

 

 

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We established an $800,000 provision for losses on loans during the nine months ended June 30, 2011 as compared to a provision of $2.8 million for the nine months ended June 30, 2010. Additional loan loss provisions were necessary to address troubled assets, particularly in relation to the single family rental property loans portfolio. Nonperforming loans were $11.6 million at June 30, 2011 versus $12.8 million at September 30, 2010, the Company’s prior fiscal year end. Loan charge-offs for the nine months ended June 30, 2011 were $3.6 million as compared to $532,000 for the nine months ended June 30, 2010, an increase of $3.1 million. Loan recoveries were $62,000 for the nine months ended June 30, 2011 compared to $92,000 for the nine months ended June 30, 2010. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality”.

Other Income. Other income decreased $48,000, or 2.7%, from $1.8 million for the nine months ended June 30, 2010 to $1.7 million for the nine months ended June 30, 2011. The decrease in other income for the nine months ended June 30, 2011 was primarily attributable to a decrease in miscellaneous income of $133,000, or 16.6% from $802,000 for the nine months ended June 30, 2010 to $669,000 for the nine months ended June 30, 2011. This decrease was primarily due to lower commissions from investment sales and lower fees on transaction accounts. The decrease in miscellaneous income was partially offset by an increase of $165,000, or 284.5%, in fees from mortgage banking operations.

Non-interest Expenses. Total non-interest expenses increased by $1.5 million, or 11.6%, from $12.5 million for the nine months ended June 30, 2010 to $14.0 million for the nine months ended June 30, 2011. This was primarily due increases in salaries and related expenses , other expenses and provision for losses on foreclosed real estate. Salaries and related benefits increased by $588,000, or 8.5% from $6.9 million for the nine months ended June 30, 2010 to $7.5 million for the nine months ended June 30, 2011. The increase related primarily to additional personnel and increased benefit costs. Other expenses also increased by $476,000, or 227.8% from $209,000 for the nine months ended June 30, 2010 to $685,000 for the nine months ended June 30, 2011. This was primarily due to increased cost associated with impaired loans and foreclosed real estate. We also established a provision for losses on foreclosed real estate of $292,000 during the nine months ended June 30, 2011 due to declines in estimated realizable values on certain foreclosed properties held by the Company. These increases in non-interest expenses were partially offset by a decrease in property and equipment expense of $175,000, or 27.2% from $643,000 for the nine months ended June 30, 2010 to $468,000 for the nine months ended June 30, 2011. The decrease in property and equipment expenses was primarily due to decreased depreciation expense as certain fixed assets became fully depreciated.

Income Taxes. Our income tax expense was $156,000 and $193,000 for the nine months ended June 30, 2011 and 2010, respectively. The change in income taxes for the nine months ended June 30, 2011 as compared to the same period in the prior year was primarily due to decreased pretax earnings.

 

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Table of Contents

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

Net Income. Net income available to common shareholders decreased by $107,000 or 23.7%, from $451,000 for the three months ended June 30, 2010 to of $344,000 for the three months ended June 30, 2011. The decrease was primarily due to the current year’s quarter recognition of an other-than-temporary impairment and increases in non-interest expenses during the period, partially offset by improved net interest income and reduced loan loss provisions.

Net Interest Income. Net interest income increased by $157,000, or 3.4%, from $4.6 million for the three months ended June 30, 2010 to $4.8 million for the three months ended June 30, 2011. The increase in net interest income primarily was attributable to decreased costs of funds on deposits partially offset by reduced loan volume and lower yield on the mortgage-backed securities portfolio.

Interest Income. Interest income decreased by $206,000, or 2.9% from $7.1 million for the three months ended June 30, 2010 to $6.8 million for the three months ended June 30, 2011. This was primarily due to decreases in average balances on loans receivable and decreased average yields on mortgage-backed securities. The decline in average loans was $26.9 million, or 6.8%, from $397.2 million for the three months ended June 30, 2010 to $370.3 million for the three months ended June 30, 2011. The decrease was due to declines in loan origination volume and normal principle repayments. It is the Bank’s strategy to sell most residential loan originations into the secondary market. These reductions in interest income were partially offset by increases in average balances of mortgage-backed securities and investment securities, as the Company invested excess liquidity.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense, decreased from $2.4 million for the three months ended June 30, 2010 to $2.1 million for the three months ended June 30, 2011, a decrease of $363,000 or 14.9%. Interest on deposits decreased $359,000, or 15.8%, from $2.3 million for the three months ended June 30, 2010 to $1.9 million for the three months ended June 30, 2011. This decrease was due to the decrease in the average cost of deposits of 31 basis points from 1.70% for the three months ended June 30, 2010 to 1.39% for the three months ended June 30, 2011. This was partially offset by a 2.8% increase in the average balance of deposits of $14.9 million from $534.7 million for the three months ended June 30, 2010 to $549.6 million for the three months ended June 30, 2011. Other interest expense, which consists primarily of the interest on the Junior Subordinated Debentures, decreased by $4,000, or 2.6% from $153,000 for the three months ended June 30, 2010 to $149,000 for the three months ended June 30, 2011. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

 

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Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the three month periods ended June 30, 2011 and 2010. 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 net interest income divided by the average balance of interest-earning assets.

 

     For the Three Months Ended June 30,,  
     2011     2010  
     Average
Balance
     Interest      Average
Rate
    Average
Balance
     Interest      Average
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                

Loans receivable, net

   $ 370,304       $ 5,735         6.19   $ 397,230       $ 5,986         6.03

Mortgage-backed securities

     107,177         939         3.50        80,851         1,016         5.03   

FHLB stock and Investment securities

     21,645         134         2.48        1,485         1         .27   

Other interest-earning assets

     83,778         49         .23        96,950         60         .25   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-earning assets

     582,904         6,857         4.71        576,516         7,063         4.90   

Bank Owned Life Insurance

     15,891              15,356         

Noninterest-earning assets

     27,694              23,487         
  

 

 

         

 

 

       

Total assets

   $ 626,489            $ 615,359         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Deposits

   $ 549,605       $ 1,914         1.39   $ 534,693       $ 2,273         1.70

Junior Subordinated Debentures

     17,011         149         3.50        17,011         153         3.60   

Other liabilities

     2,186         —           —          2,376         —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     568,802         2,063         1.45        554,080         2,426         1.75   
     

 

 

    

 

 

      

 

 

    

 

 

 

Noninterest-bearing liabilities

     6,414              701         
  

 

 

         

 

 

       

Total liabilities

     575,216              554,781         

Stockholders’ Equity

     51,273              60,578         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 626,489            $ 615,359         
  

 

 

         

 

 

       

Net interest income

      $ 4,794            $ 4,637      
     

 

 

         

 

 

    

Interest rate spread

           3.26           3.15
        

 

 

         

 

 

 

Net interest margin

           3.29           3.22
        

 

 

         

 

 

 

Ratio average interest-earning assets/interest-bearing liabilities

           102.48           104.05
        

 

 

         

 

 

 

 

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Table of Contents

Rate/Volume Analysis. The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by old volume); and (iii) changes in rate/volume (changes in rate multiplied by the changes in volume).

 

     For Three Months Ended June 30,  
     2011     Vs.    2010  
  

 

 

 
     Increase (Decrease) Due to  
     Volume     Rate          Rate/Volume     Total  
     (In Thousands)  

Interest income:

           

Loans receivable, net

   $ (399     159           (11     (251

Mortgage-backed securities

     332        (309        (100     (77

Investment securities

     15        8           110        133   

Other interest-earning assets

     (11     —             —          (11
  

 

 

   

 

 

      

 

 

   

 

 

 

Total interest-earning assets

     (63     (142        (1     (206

Interest expense:

           

Deposits

     63        (411        (11     (359

Short-term FHLB advances

     —          —             —          —     

Junior Subordinated Debentures

     —          (4        —          (4
  

 

 

   

 

 

      

 

 

   

 

 

 

Total interest-bearing liabilities

     63        (415        (11     (363
  

 

 

   

 

 

      

 

 

   

 

 

 

Change in net interest income

   $ (126     273           10        157   
  

 

 

   

 

 

      

 

 

   

 

 

 

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. During the three months ended June 30, 2011 we did not establish additional provisions for losses on loans, as compared to a provision of $300,000 for the three months ended June 30, 2010. There were no provisions recorded during the three months ended June 30, 2011 based upon a loss reserve assessment conducted in relation to our loan portfolio at that time. This analysis indicated that current reserve levels sufficient when considering changes in the composition of the loan portfolio and troubled assets. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality.”

Other Income. Other income decreased $169,000, or 30.0%, from $563,000 for the three months ended June 30, 2010 to $394,000 for the three months ended June 30, 2011. The decrease in other income for the three months ended June 30, 2011 was primarily attributable to other-than-temporary-impairment charges on the private label mortgage-backed securities portfolio. There was also a decrease in miscellaneous income of $80,000, or 34.3% from $233,000 for the three months ended June 30, 2010 to $153,000 for the three months ended June 30, 2011. This decrease was primarily due lower commissions from investment sales. Fees on transaction accounts also decreased $33,000, or 17.6% from $187,000 for the three months ended June 30, 2010 to $154,000 for the three month ended June 30, 2011. These decreases were partially offset by an increase of $40,000, or 266.7%, in fees from mortgage banking operations.

Noninterest Expenses. Total non-interest expenses increased by $710,000, or 17.9%, from $4.0 million for the three months ended June 30, 2010 to $4.7 million for the three months ended June 30, 2011. This was primarily due to increases in salaries and related expenses, other expenses and provision for losses on foreclosed real estate. Salaries and related expense increased by $330,000, or 14.9% from $2.2 million for the three months ended June 30, 2010, to $2.5 million for the three months ended June 30, 2011. This increase related to additional personnel and benefit costs. Other expenses also increased by $102,000, or 145.7%, from $70,000 for the three months ended June 30, 2010 to $172,000 for the three months ended June 30, 2011. This increase was primarily due to costs associated with impaired loans and foreclosed real estate. We also established a provision for losses on foreclosed real estate of $292,000 during the three months ended June 30, 2011 due to declines in estimated realizable values on certain foreclosed properties held by the Company. These increases were partially offset by a decrease in property and equipment expenses of $48,000, or 27.7% from $173,000 for the three months ended June 30, 2010 to $125,000 for the three months ended June 30, 2011. The decrease in property and equipment expenses was primarily due to decreased depreciation expense as certain fixed assets have become fully depreciated.

Income Taxes. Our income tax expense was $167,000 and $326,000 for the three months ended June 30, 2011 and 2010, respectively. The change in income taxes for the three months ended June 30, 2011 as compared to the same period in the prior year was primarily due to changes in pretax earnings. Our effective tax rate is impacted by income received from Bank Owned Life Insurance, which is not subject to income taxes.

 

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Commitments, Contingencies and Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit and commitments to sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:

 

     At June 30,
2011
     At September 30,
2010
 
     (In thousands)  

Commitments to originate new loans

   $ 11,930       $ 3,657   

Unfunded commitments to extend credit under existing equity line and commercial lines of credit

     35,594         35,936   

Commercial letters of credit

     743         853   

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.

Loans Receivable

Loans receivable at June 30, 2011 and September 30, 2010 consist of the following:

 

(in thousands)

   June 30
2011
    September 30,
2010
 

Single-family residential mortgages

   $ 99,921      $ 117,186   

Single-family rental property loans

     65,707        70,662   

Commercial real estate loans

     136,794        136,573   

Construction loans

     29,676        23,800   

Commercial loans secured

     548        880   

Commercial loans unsecured

     71        78   

Commercial lease loans

     487        1,225   

Commercial lines of credit

     8,192        7,986   

Automobile loans

     1,255        2,544