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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 December 31, 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 definitions 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 January 31, 2012 the issuer had 3,188,665 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 December 31, 2011 (unaudited) and September  30, 2011

     3   
 

Consolidated Statements of Operations for the Three Months Ended December  31, 2011 and 2010 (unaudited)

     4   
 

Consolidated Statements of Comprehensive Income for the Three Months Ended December  31, 2011 and 2010 (unaudited)

     5   
 

Consolidated Statements of Cash Flows for the Three Months Ended December  31, 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

     39   
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.  

Mine Safety Disclosures

     49   
Item 5.  

Other Information

     49   
Item 6.  

Exhibits

     50   

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

 

    December 31,     September 30,  
    2011     2011  
    (dollars in thousands except per share data)  

Assets

   

Cash

  $ 8,032      $ 8,139   

Interest bearing deposits in other banks

    11,350        12,839   

Federal funds sold

    54,954        39,130   
 

 

 

   

 

 

 

Cash and cash equivalents

    74,336        60,108   

Investment securities, available for sale

    4,916        6,919   

Loans available for sale

    714        —     

Loans receivable, net of allowances of ($5,064) and ($4,768)

    354,627        364,843   

Mortgage-backed securities, available for sale

    166,805        150,879   

Foreclosed real estate

    1,275        2,999   

Premises and equipment, net

    10,336        9,932   

Federal Home Loan Bank of Atlanta stock, at cost

    1,051        1,124   

Federal Reserve Bank stock, at cost

    1,325        —     

Bank owned life insurance

    16,334        16,228   

Accrued interest and other assets

    11,918        11,824   
 

 

 

   

 

 

 

Total assets

  $ 643,637      $ 624,856   
 

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

   

Liabilities

   

Deposits:

   

Non-interest bearing

  $ 34,015      $ 30,121   

Interest-bearing

    526,431        519,893   
 

 

 

   

 

 

 

Total deposits

    560,446        550,014   

Junior subordinated debentures

    17,011        17,011   

Accounts payable trade date securities

    7,966        —     

Other liabilities

    6,060        5,872   
 

 

 

   

 

 

 

Total liabilities

    591,483        572,897   
 

 

 

   

 

 

 

Stockholders’ Equity

   

Common stock (par value $.01 – 50,000,000 authorized, 3,188,665 and 3,192,119 shares issued and outstanding at December 31, 2011 and September 30, 2011, respectively)

    32        32   

Stock warrant

    481        481   

Additional paid-in capital

    39,580        39,510   

Obligation under rabbi trust

    1,025        1,014   

Retained earnings

    12,704        12,241   

Accumulated other comprehensive income

    226        583   

Employee stock ownership plan

    (916     (937

Stock held by rabbi trust

    (978     (965
 

 

 

   

 

 

 

Total stockholders’ equity

    52,154        51,959   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 643,637      $ 624,856   
 

 

 

   

 

 

 

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 Three Months  Ended
December 31,
 
    2011     2010  
    (dollars in thousands except per share data)  

Interest Income

 

Interest and fees on loans

  $ 5,515      $ 5,932   

Interest on mortgage-backed securities

    1,058        726   

Interest and dividends on investment securities

    93        79   

Other interest income

    35        68   
 

 

 

   

 

 

 

Total interest income

    6,701        6,805   

Interest Expense

   

Interest on deposits

    1,774        2,191   

Other interest expense

    157        155   
 

 

 

   

 

 

 

Total interest expense

    1,931        2,346   
 

 

 

   

 

 

 

Net interest income

    4,770        4,459   

Provision for losses on loans

    300        800   
 

 

 

   

 

 

 

Net interest income after provision for losses on loans

    4,470        3,659   
 

 

 

   

 

 

 

Other Income

   

Gain on sale of repossessed assets

    57        7   

Mortgage banking operations

    41        18   

Fees on transaction accounts

    162        169   

Income from bank owned life insurance

    105        160   

Miscellaneous income

    179        430   
 

 

 

   

 

 

 

Total other income

    544        784   
 

 

 

   

 

 

 

Non-Interest Expenses

   

Salaries and related expense

    2,538        2,421   

Occupancy expense

    568        613   

Data processing expense

    367        447   

Federal deposit insurance premiums

    215        253   

Property and equipment expense

    128        173   

Professional fees

    155        167   

Advertising

    58        132   

Telephone, postage and office supplies

    75        77   

Foreclosure and impaired loan expenses

    91        52   

Other expenses

    120        120   
 

 

 

   

 

 

 

Total non-interest expenses

    4,315        4,455   
 

 

 

   

 

 

 

Income (Loss) before tax expense

    699        (12

Income tax expense (benefit)

    237        (57
 

 

 

   

 

 

 

Net income

    462        45   

Preferred stock dividends and discount accretion

    —          (156
 

 

 

   

 

 

 

Net income (loss) available to common shareholders

  $ 462      $ (111
 

 

 

   

 

 

 

Per Share Data:

   

Basic and diluted earnings (loss) per common share

  $ .15      $ (.04
 

 

 

   

 

 

 

Dividends per common share

  $ —        $ —     
 

 

 

   

 

 

 

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

 

4


Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

     For the Three Months Ended
December 31,
 
     2011     2010  
     ( in thousands)  

Net income (loss) available to common shareholders

   $ 462      $ (111

Other comprehensive loss, net of tax:

    

Unrealized net holding losses on

    

Available-for-sale portfolios, net of tax of $(233) and $(241), respectively

     (357     (370
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 105      $ (481
  

 

 

   

 

 

 

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

 

5


Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Three Months Ended
December 31,
 
     2011     2010  
     (dollars in thousands)  

Operating Activities

    

Net income

   $ 462      $ 45   

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

    

Amortization of deferred loan fees, net

     (76     (58

Non-cash compensation under stock-based benefit plan

     90        42   

Provision for losses on loans

     300        800   

Amortization of purchase premiums and discounts, net

     234        (46

Provision for depreciation

     162        194   

Gain on sale of real estate and repossessed assets

     (57     (7

Increase in cash surrender value of bank owned life insurance

     (105     (160

Increase in accrued interest and other assets

     133        1,093   

Gain on sale of loans

     (49     (87

Loans originated for sale

     (4,563     (9,164

Proceeds from loans sold

     3,898        8,443   

(Decrease) increase in other liabilities

     (87     846   

Increase in obligation under Rabbi Trust

     13        6   
  

 

 

   

 

 

 

Net cash provided by operating activities

     355        1,947   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Purchase of bank owned life insurance

     —          (10

Purchase of investment securities – available for sale

     —          (3,500

Proceeds from maturities of investment securities – available for sale

     2,000        5,500   

Net decrease in loans

     9,992        1,952   

Proceeds from sale of foreclosed real estate

     1,781        —     

Purchase of mortgage-backed securities – available for sale

     (25,870     (6,000

Principal collected on mortgage backed securities

     9,128        3,063   

Proceeds from sales of repossessed assets

     —          2   

Investment in premises and equipment

     (566     (37

Redemption of Federal Home Loan Bank of Atlanta stock

     73        51   

Purchase of Federal Reserve Bank stock

     (1,325     —     

Increase (decrease) in accounts payable trade date securities

     7,966        (2,000
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     3,179        (979
  

 

 

   

 

 

 

 

6


Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

     For the Three Months Ended
December 31,
 
     2011      2010  
     (dollars in thousands)  

Cash Flows from Financing Activities

     

Net increase in deposits

   $ 10,432       $ 4,450   

Net increase in advances by borrowers for taxes and Insurance

     262         242   

Dividends paid on preferred stock

     —           (135
  

 

 

    

 

 

 

Net cash provided by financing activities

     10,694         4,557   
  

 

 

    

 

 

 

Increase in cash and cash equivalents

     14,228         5,525   

Cash and cash equivalents at beginning of period

     60,108         108,899   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 74,336       $ 114,424   
  

 

 

    

 

 

 

Supplemental Disclosure of Cash Flows Information:

     

Cash paid during the period for:

     

Interest

   $ 1,889       $ 2,346   
  

 

 

    

 

 

 

Income taxes

   $ 2       $ 80   
  

 

 

    

 

 

 

Supplemental Disclosure of Non-cash investing activity:

     

Transfer from loans to Foreclosed real estate

   $ —         $ 186   
  

 

 

    

 

 

 

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

 

7


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, 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 three months ended December 31, 2011 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2012 or any other period. 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, 2011.

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 state chartered commercial bank. 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.

 

8


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 December 31, 2011 and September 30, 2011.

 

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

Available for sale:

          

December 31, 2011

          

US Government and Agency securities

   $ —           —           —        $ —     

Corporate Bonds

     4,880         —           (64     4,816   

Equity Investments

     100         —           —          100   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 4,980       $ —         $ (64   $ 4,916   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2011

          

US Government and Agency securities

   $ 2,000         1         —        $ 2,001   

Corporate Bonds

     4,880         —           (62     4,818   

Equity Investments

     100         —           —          100   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,980       $ 1       $ (62   $ 6,919   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no sales of available for sale securities during the three months ended December 31, 2011 or the year ended September 30, 2011.

Below is a schedule of investment securities with unrealized losses as of December 31, 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
 

Corporate Bonds

   $ 3,439       $ (61   $ 1,377       $ (3   $ 4,816       $ (64
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 3,439       $ (61   $ 1,377       $ (3   $ 4,816       $ (64
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Below is a schedule of investment securities with unrealized losses as of September 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
 

Corporate Bonds

   $ 3,442       $ (58   $ 1,376       $ (4   $ 4,818       $ (62
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 3,442       $ (58   $ 1,376       $ (4   $ 4,818       $ (62
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At December 31, 2011 and September 30, 2011 the Company had two investment securities in an unrealized loss position.

 

9


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 December 31, 2011 and September 30, 2011:

 

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

Available for sale:

          

December 31, 2011

          

GNMA certificates

   $ 3,487       $ 29       $ (17   $ 3,499   

Private label collateralized mortgage obligations

     13,595         —           (3,151     10,444   

Collateralized mortgage obligations

     127,246         1,978         —          129,224   

FNMA certificates

     14,400         994         —          15,394   

FHLMC participating certificates

     7,639         605         —          8,244   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 166,367       $ 3,606       $ (3,168   $ 166,805   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2011

          

GNMA certificates

   $ 3,510       $ 37       $ —        $ 3,547   

Private label collateralized mortgage obligations

     13,956         —           (2,905     11,051   

Collateralized mortgage obligations

     108,433         2,139         —          110,572   

FNMA certificates

     15,512         1,066         —          16,578   

FHLMC participating certificates

     8,444         687         —          9,131   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 149,855       $ 3,929       $ (2,905   $ 150,879   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no sales of available for sale mortgage-backed securities during the three months ended December 31, 2011 or during the fiscal year ended September 30, 2011.

 

10


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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 December 31, 2011 and September 30, 2011 and the length of time the individual security has been in a continuous unrealized loss position.

 

    

December 31, 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

   $ 1,899       $ (41   $ 8,545       $ (3,110   $ 10,444         (3,151

Collateralized mortgage obligations

     3,283         (17     —           —          3,283         (17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 5,182       $ (58   $ 8,545       $ (3,110   $ 13,727       $ (3,168
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

    

September 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

   $ 1,964       $ (45   $ 9,087       $ (2,860   $ 11,051       $ (2,905

Collateralized mortgage obligations

     —           —          —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,964       $ (45   $ 9,087       $ (2,860   $ 11,051       $ (2,905
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At December 31, 2011 and September 30, 2011 the Company had six mortgage-backed securities in an unrealized loss position.

During the three months ended December 31, 2011, we determined that, based on our most recent estimate of cash flows, there was no additional other-than-temporary-impairment (“OTTI”). At December 31, 2011, we had $ 3.2 million of gross unrealized losses related to private label collateralized mortgage obligations with an amortized cost of $13.6 million as of that date. These securities contain mortgages with Alt-A characteristics. Gross unrealized losses for these same securities were approximately $2.9 million as of September 30, 2011. We recorded other-than-temporary impairment (“OTTI”) charges of $300,000 on these securities during the year ended September 30, 2011. 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 Consolidated 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 months ended December 31,

 

     2011      2010  

Balance at Beginning of Period

   $ 400       $ 100   

Additional OTTI taken for credit losses

     —           —     
  

 

 

    

 

 

 

Balance at end of Period

   $ 400       $ 100   
  

 

 

    

 

 

 

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.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Mortgage-Backed Securities-continued

 

Prepayment Assumptions

Estimates of prepayment speeds begins with the prepayment rates provided by the Securities Industry & Financial Markets Association (SIFMA) as of the valuation date to approximate a measure of the borrowers’ incentive to prepay based on market interest rates. In order to incorporate the borrowers’ ability to prepay, we then make adjustments to the base rate to reflect the borrowers’ ability to qualify for a new loan based on their credit. We also make adjustments based on the location of the property to capture the appreciation or depreciation by MSA and thus reflect the likelihood the property will appraise at an amount sufficient to repay the existing loan. These adjustments factor prepay speeds down as credit quality and home prices deteriorate, reflecting the diminished ability to refinance.

In addition, 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, and forecasts from other industry experts.

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 (e.g. 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 2.50% 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

Loans Receivable

Loans receivable at December 31, 2011 and September 30, 2011 consist of the following:

 

     December 31,     September 30,  

(in thousands)

   2011     2011  

Single-family residential mortgages

   $ 86,985      $ 92,924   

Single-family rental property loans

     63,847        64,715   

Commercial real estate loans

     137,386        142,630   

Construction loans

     29,339        29,377   

Commercial loans secured

     428        501   

Commercial loans unsecured

     67        69   

Commercial lease loans

     204        312   

Commercial lines of credit

     8,089        7,919   

Automobile loans

     819        1,009   

Home equity lines of credit

     33,891        33,649   

Other consumer loans

     1,929        2,007   
  

 

 

   

 

 

 
     362,984        375,112   

Less - undisbursed portion of loans in process

     (3,144     (5,304

    - unearned interest

     (4     (4

    - deferred loan origination fees and costs

     (145     (193

    - allowance for loans losses

     (5,064     (4,768
  

 

 

   

 

 

 
   $ 354,627      $ 364,843   
  

 

 

   

 

 

 

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 December 31, 2011 are as follows:

Allowance for Credit Losses

For the three months ended December 31, 2011

(Dollars in thousands)

 

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

Three Months ended December 31, 2011

                

Allowance for credit losses:

                

Beginning Balance

   $ 1,799      $ 1,514       $ 1,267      $ 168       $ —        $ 20      $ 4,768   

Charge-Offs

     (11     —           —          —           —          (5     (16

Recoveries

     —          —           —          —           12        —          12   

Provisions

     (7     506         (192     —           (12     5        300   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,781      $ 2,020       $ 1,075      $ 168       $ —        $ 20      $ 5,064   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2011

                

Ending balance individually evaluated for impairment

   $ 8,106      $ 4,980       $ 8,523      $ 299       $ —        $ 20      $ 21,928 (2) 
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 142,726      $ 141,194       $ 20,816      $ 33,592       $ 819      $ 1,909      $ 341,056 (2) 
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Allowance balance for loan individually evaluated for impairment

   $ 566      $ 86       $ 253      $ —         $ —        $ 20      $ 925   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending Allowance balance for loans collectively evaluated for impairment

   $ 1,215      $ 1,895       $ 761      $ 168       $ —        $ —        $ 4,039   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

 

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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 December 31, 2010 are as follows:

Allowance for Credit Losses

For the three months ended December 31, 2010

(Dollars in thousands)

 

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

Allowance for credit losses:

               

Beginning Balance

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

Charge-Offs

     (73     (168     (19     —          (26     —           (286

Recoveries

     —          —          —          —          22        —           22   

Provisions

     1,347        (362     (107     (21     (57     —           800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,453      $ 4,850      $ 780      $ 87      $ —        $ —         $ 7,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balances as of September 30, 2011

               

Ending balance individually evaluated for impairment

   $ 7,635      $ 5,361      $ 4,534      $ 80      $ —        $ 20       $ 17,630 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance collectively evaluated for impairment

   $ 150,004      $ 146,070      $ 24,843      $ 33,569      $ 1,009      $ 1,987       $ 357,482 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Allowance balance for loan individually evaluated for impairment

   $ 566      $ 88      $ 451      $ —        $ —        $ 20       $ 1,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Allowance balance for loans collectively evaluated for impairment

   $ 1,233      $ 1,426      $ 816      $ 168      $ —        $ —         $ 3,643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

 

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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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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 classification of loans as of December 31, 2011 and 2010 are as follows:

December 31, 2011

(Dollars in thousands)

 

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

Grade

                    

Pass

   $ 144,134       $ 140,174       $ 20,429       $ 33,592       $ 819       $ 1,909       $ 341,057   

Special Mention

     4,977         639         5,708         162         —           —           11,486   

Substandard

     1,721         5,361         3,202         137         —           20         10,441   

Doubtful

     —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 150,832       $ 146,174       $ 29,339       $ 33,891       $ 819       $ 1,929       $ 362,984 (2) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

September 30, 2011

(Dollars in thousands)

 

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

Grade

                    

Pass

   $ 148,871       $ 146,336       $ 19,721       $ 33,322       $ 1,009       $ 1,987       $ 351,246   

Special Mention

     5,242         1,121         5,562         109         —           —           12,034   

Substandard

     3,526         3,974         4,094         218         —           20         11,832   

Doubtful

     —           —           —           —           —           —           —     

Loss

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 157,639       $ 151,431       $ 29,377       $ 33,649       $ 1,009       $ 2,007       $ 375,112 (2) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses

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.”

 

17


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. As a result of the economic downturn, the Bank has experienced a decline in its pipeline for this product type within the loan portfolio.

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.

 

18


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 five years, or less, depending on the age of the car. Collision insurance is required for all automobile loans. The Bank also maintains a blanket collision insurance policy that provides insurance for any borrower who allows 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.

 

20


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 three months ended December 31, 2011 and 2010 are as follows:

Impaired Loans

As of December 31, 2011

(Dollars in Thousands)

 

                         

For the Period Ending

December 31, 2011

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

Loans without a specific valuation allowance:

              

Residential Loans (1)

   $ 6,822       $ 6,364       $ —         $ 6,178       $ 75   

Commercial Loans

     4,186         4,179         —           4,191         6   

Constructions Loans

     2,662         2,662         —           2,866         37   

Home Equity Loans

     137         137         —           138         1   

Consumer Loans

     —           —           —           —           —     

Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,807       $ 13,342       $ —         $ 13,373       $ 119   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance recorded:

              

Residential Loans (1)

   $ 1,521       $ 1,517       $ 566       $ 1,520       $ 3   

Commercial Loans

     296         295         86         295         —     

Constructions Loans

     2,017         2,017         253         2,017         —     

Home Equity Loans

     —           —           —           —           —     

Consumer Loans

     —           —           —           —           —     

Other Loans

     —           20         20         20         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,834       $ 3,849       $ 925       $ 3,852       $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

21


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

As of September 30, 2011

(Dollars in Thousands)

 

                          For the Period Ending
December 31, 2010
 
     Recorded
Investments
     Unpaid Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans without a specific valuation allowance:

              

Residential Loans (1)

   $ 6,127       $ 6,116       $ —         $ 930       $ —     

Commercial Loans

     5,064         5,065         —           3,445         45   

Constructions Loans

     1,840         1,840         —           124         —     

Home Equity Loans

     80         80         —           88         —     

Consumer Loans

     —           —           —           —           —     

Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,111       $ 13,101       $ —         $ 4,587       $ 45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a specific allowance recorded:

              

Residential Loans (1)

   $ 1,523       $ 1,519       $ 566       $ —         $ —     

Commercial Loans

     298         296         88         5,888         —     

Constructions Loans

     2,694         2,694         451         —           —     

Home Equity Loans

     —           —           —           —           —     

Consumer Loans

     —           —           —           —           —     

Other Loans

     20         —           20         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,535       $ 4,529       $ 1,125       $ 5,888       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 as of December 31, 2011 and September 30, 2011 are as follows:

Credit Quality Information

Age Analysis of Past Due Loans

As of December 31, 2011

     30-59 Days
past due
     60-89 Days
past due
     Non-Accrual      Total
past due
and Non-Accrual
     Current      Total Loans      Non-
Accrual
Loans
that are
Current
     Loans Greater
than 90 days
and Accruing
 

Residential Loans (1)

   $ 946       $ 84       $ 6,968       $ 7,998       $ 142,834       $ 150,832       $ 5,228       $ —     

Commercial Loans

     837         —           4,376         5,213         140,961         146,174         296         —     

Construction Loans

     —           —           4,557         4,557         24,782         29,339         1,840         —     

Home Equity Loans

     161         —           137         298         33,593         33,891         137         —     

Automobile Loans

     —           —           —           —           819         819         —           —     

Other Loans

     4         —           20         24         1,905         1,929         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,948       $ 84       $ 16,058       $ 18,090       $ 344,894       $ 362,984       $ 7,501       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses.

Credit Quality Information

Age Analysis of Past Due Loans

As of September 30, 2011

 

     30-59 Days
past due
     60-89 Days
past due
     Non-Accrual      Total
past due
and Non-Accrual
     Current      Total Loans      Non-
Accrual
Loans
that are
Current
     Loans Greater
than 90 days
and Accruing
 

Residential Loans (1)

   $ 725       $ 254       $ 7,635       $ 8,614       $ 149,025       $ 157,639       $ 5,853       $ —     

Commercial Loans

     242         1,387         5,361         6,990         144,441         151,431         215         —     

Construction Loans

     —           2,717         4,534         7,251         22,126         29,377         1,840         —     

Home Equity Loans

     63         —           80         143         33,506         33,649         —           —     

Automobile Loans

     12         —           —           12         997         1,009         —           —     

Other Loans

     1         —           20         21         1,986         2,007         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,043       $ 4,358       $ 17,630       $ 23,031       $ 352,081       $ 375,112       $ 7,908       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Balances exclude undisbursed portion of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses,

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.

 

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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

 

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.

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 begin to demonstrate collectability issues 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.

 

24


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)

 

     December 31
2011
    September 30,
2011
 

With no related allowance recorded:

    

Residential Loans (1)

   $ 5,451      $ 6,116   

Commercial Loans

     4,081        5,065   

Construction Loans

     2,540        1,840   

Home Equity Loans

     137        80   

Automobile Loans

     —          —     

Other Loans

     —          —     
  

 

 

   

 

 

 
   $ 12,209      $ 13,101   
  

 

 

   

 

 

 

With an allowance recorded:

    

Residential Loans (1)

   $ 1,517      $ 1,519   

Commercial Loans

     295        296   

Construction Loans

     2,017        2,694   

Home Equity Loans

     —          —     

Automobile Loans

     —          —     

Other Loans

     20        20   
  

 

 

   

 

 

 
   $ 3,849      $ 4,529   
  

 

 

   

 

 

 

Total Nonaccrual Loans

   $ 16,058  (2)    $ 17,630  (2) 
  

 

 

   

 

 

 

 

(1) Includes single-family residential mortgages and single-family rental properties.
(2) Includes Troubled Debt Restructurings of $7.5 million at December 31, 2011 and $8.6 million at September 30, 2011, respectively, which were current in terms of restructured payments but accounted for on a non-accrual basis.

 

25


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

 

Modifications

As of and for the three months ended December 31,

 

     2011      2010  
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investments
     Post-
Modification
Outstanding
Recorded
Investments
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investments
     Post-
Modification
Outstanding
Recorded
Investments
 

Troubled Debt Restructurings

                 

Residential-Prime

     17       $ 6,638       $ 6,282         3       $ 452       $ 440   

Residential-Subprime

     —           —           —           —           —           —     

Commercial

     3         458         410         3         778         676   

Construction

     2         2,873         1,962         2         2,872         2,726   

Consumer-Other

     —           —           —           1         23         22   

Finance leases

     —           —           —           —           —           —     

 

     Number of
Contracts
     Recorded Investments      Number of
Contracts
     Recorded Investments  

Troubled Debt Restructurings

           

That Subsequently Defaulted

           

Residential-Prime

     —           —           1       $ 119   

Residential-Subprime

     —           —           —           —     

Commercial

     —           —           —           —     

Construction

     —           —           —           —     

Consumer-Other

     —           —           —           —     

Finance leases

     —           —           —           —     

 

26


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 December 31, 2011 and 2010, respectively are as follows:

 

     For the Three Months Ended December 31,  
     2011      2010  
     (in thousands except per share data)  
     Income      Shares      Per Share      Income     Shares      Per Share  

Basic EPS

                

Net Income

   $ 462         3,004       $ .15       $ 45        2,972       $ .01   

Less preferred dividend

     —           —           —           (156     —           (.05
  

 

 

       

 

 

    

 

 

      

 

 

 

Income available to common shareholders

   $ 462         3,004       $ .15       $ (111     2,972       $ (.04
  

 

 

       

 

 

    

 

 

      

 

 

 

Diluted EPS

                

Net Income

   $ 462         3,004       $ .15       $ (111     2,972       $ .04   

Effect of dilutive shares

     —           54         —           —          310         —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income available to common shareholders plus assumed conversions

   $ 462         3,058       $ .15       $ (111     3,282       $ (.04
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Options to purchase 67,595 shares which were outstanding at December 31, 2011 and December 31 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 December 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 Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The warrant will not be subject to any contractual restrictions on transfer.

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. As a result of the redemption, the Company accelerated the accretion of the remaining discount of approximately $310,000 on the preferred stock and recorded a reduction in retained earnings. The warrant issued to the U.S. Treasury has not been repurchased and remains outstanding.

The warrant is exercisable at $8.83 per share at any time on or before December 23, 2018. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur. The relative fair value method was used to allocate the proceeds between the preferred stock and warrants. A discount rate of 12% was used in valuing the preferred stock and the Black-Scholes-Merton option pricing model was used to value the warrants. For further information, see “— Liquidity and Capital Resources.”

The Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The warrant will be subject to any contractual restrictions on transfer.

Note 10 - Regulatory Capital

The following table sets forth the Bank’s capital position at December 31, 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)  

Tier 1 Leverage ratio (1)

   $ 63,115         10.12   $ 24,957         4.00   $ 31,196         5.00

Tier 1 risk based capital ratio (2)

     63,115         16.09        15,695         4.00        23,542         6.00   

Total risk based capital ratio (2)

     67,154         17.12        31,389         8.00        39,237         10.00   

 

(1) To average total assets
(2) To risk-weighted assets

 

28


Table of Contents

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 10 - Regulatory Capital-continued

 

The following table sets forth BCSB Bancorp Inc.’s capital position at December 31, 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)  

Tier 1 Leverage ratio (1)

   $ 51,883         8.32   $ 24,955         4.00   $ 31,194         5.00

Tier 1 risk based capital ratio (2)

     51,883         13.56        15,308         4.00        22,963         6.00   

Total risk based capital ratio (2)

     55,922         14.61        30,617         8.00        38,271         10.00   

 

(1) To average total assets
(2) To risk-weighted assets

 

29


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 years ended September 30, 2011 and 2010, or during the three months ended December 31, 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 three months ended December 31, 2010. There were no options granted under the 2009 Plan during the three months ended December 31, 2011.

The following table summarizes the shares under the Company’s outstanding stock options at December 31, 2011:

 

Number of Shares

     Price      Weighted Average
Contractual Life
(Years)
 
  29,610       $ 21.61         .6   
  10,528         28.41         5.0   
  5,264         17.95         6.0   
  22,193         11.61         6.0   
  11,296         8.25         7.5   
  176,320         10.29         8.8   

The total exercisable shares of 110,545 have a weighted average contractual life of 6.0 years, and an aggregate intrinsic value of $33,900.

 

30


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 three months ended December 31, 2011.

 

     Shares      Weighted Average
Exercise Price
 

Outstanding at September 30, 2011

     255,211       $ 12.53   

Options exercised

     —           —     

Forfeited

     —           —     

Granted

     —           —     
  

 

 

    

 

 

 

Outstanding at December 31, 2011

     255,211       $ 12.53   
  

 

 

    

 

 

 

Exercisable at December 31, 2011

     110,545       $ 15.44   
  

 

 

    

 

 

 

During the three months ended December 31, 2011 there were no stock options granted. During the three months ended December 31, 2010 there were 177,930 options granted. Option expense recognized during the three month periods ended December 31, 2011 and 2010, respectively was $57,252 and $16,809, respectively. As of December 31, 2011, $483,000 of total unrecognized pretax expense related to stock options is expected to be recognized from January 1, 2012 through November 30, 2014.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 12 - Recent Accounting Pronouncements

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 December 31, 2011. The guidance will be applied prospectively to transactions or modifications of existing transaction that occur on or after January 1, 2011 and is not expected to have a material impact on the Company’s statements of income and condition.

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 $437,000 of standby letters of credit as of December 31, 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 December 31, 2011 for guarantees under standby letters of credit issued is not considered to be material.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 no transfers between levels during the three months ended December 31, 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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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 December 31, 2011 and September 30, 2011 on the Consolidated Statement of Financial Condition utilizing the hierarchy discussed above.

 

            At December 31, 2011      Total changes
In fair values
Included in
Period
 
($ in thousands)    Total      Level 1      Level 2      Level 3      Earnings  

Loans available for sale

   $ 714       $ —         $ 714       $ —         $ —     

Equity Investments

     100         —           100         —           —     

Corporate Bonds available for sale

     4,816         —           4,816         —           —     

GNMA certificates available for sale

     3,499         —           3,499         —           —     

FNMA certificates available for sale

     15,394         —           15,394         —           —     

FHLMC certificates available for sale

     8,244         —           8,244         —           —     

Private label collateralized mortgage obligations available for sale

     10,444         —           10,444         —           —     

Collateralized mortgage obligations available for sale

     129,224         —           129,224         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 172,435       $ —         $ 172,435       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 14 - Fair Value Measurements-continued

 

 

            At September 30, 2011     

Total changes
In fair values
Included in
Period

Earnings

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

Loans available for sale

   $ —         $ —         $ —         $ —         $ —     

Equity Investments

     100            100         

FNMA Bonds available for sale

     2,001         —           2,001         —           —     

Corporate Bonds available for sale

     4,818         —           4,818         —           —     

GNMA certificates available for sale

     3,547         —           3,547         —           —     

FNMA certificates available for sale

     16,578         —           16,578         —           —     

FHLMC certificates available for sale

     9,131         —           9,131         —           —     

Private label collateralized mortgage obligations available for sale

     11,051         —           11,051         —           300 (1) 

Collateralized mortgage obligations available for sale

     110,572         —           110,572         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 157,798       $ —         $ 157,798       $ —         $ 300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents other-than-temporary impairment charges taken during the fiscal year ended September 30, 2011.

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. These assets are carried at lower of cost or fair value of the collateral, less estimated costs to sell. There was $1.3 million in foreclosed real estate at December 31, 2011.

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

 

At December 31, 2011

 

($ in thousands)

   Total      Level 1      Level 2      Level 3  

Impaired Residential Loans

   $ 8,018       $ —         $ —         $ 8,018   

Impaired Commercial and Lease Loans

     4,474         —           —           4,474   

Impaired Construction Loans

     4,679         —           —           4,679   

Impaired Consumer Loans

     20         —           —           20   

Foreclosed Real Estate and Repossessed Assets

     1,275         —           —           1,275   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,466       $ —         $ —         $ 18,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

At September 30, 2011

 

($ in thousands)

   Total      Level 1      Level 2      Level 3  

Impaired Residential Loans

   $ 8,148       $ —         $ —         $ 8,148   

Impaired Commercial and Lease Loans

     5,460         —           —           5,460   

Impaired Construction Loans

     4,658         —           —           4,658   

Impaired Consumer Loans

     20         —           —           20   

Foreclosed Real Estate and Repossessed Assets

     2,999         —           —           2,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,285       $ —         $ —         $ 21,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 and Federal Reserve Bank 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. The fair value of Bank owned life insurance is based upon its current cash surrender value. 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:

 

     December 31, 2011      September 30, 2011  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 
            (Amounts in Thousands)         

Financial Assets

           

Cash

   $ 8,032       $ 8,032       $ 8,139       $ 8,139   

Interest-bearing deposits in other banks

     11,350         11,350         12,839         12,839   

Federal funds sold

     54,954         54,954         39,130         39,130   

Investment securities available for sale

     4,916         4,916         6,919         6,919   

Loans Receivable

           

Mortgage loans

     352,589         368,147         361,826         381,140   

Share loans

     260         260         337         337   

Consumer loans

     2,492         2,068         2,680         2,588   

Mortgage-backed securities – available for sale

     166,805         166,805         150,879         150,879   

Federal Home Loan Bank of Atlanta stock

     1,051         1,051         1,124         1,124   

Federal Reserve Bank stock

     1,325         1,325         —           —     

Bank owned life insurance

     16,334         16,334         16,228         16,228   

Accrued interest receivable

     2,030         2,030         2,129         2,129   

Mortgage servicing rights

     88         88         110         110   

Financial Liabilities

           

Deposits

   $ 560,446       $ 562,615       $ 550,014       $ 552,597   

Junior Subordinated Debt

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

Accounts payable trade date securities

     7,966         7,966         —           —     

Accrued interest payable

     138         138         86         86   

 

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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. Effective September 30, 2011, the Bank became a Maryland state chartered commercial bank. 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.

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, 2011. 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 December 31, 2011 and September 30, 2011

During the three months ended December 31, 2011, assets increased by $18.8 million, or 3.0%, from $624.8 million at September 30, 2011 to $643.6 million at December 31, 2011. Our cash and cash equivalents increased $14.2 million, or 23.7% from $60.1 million at September 30, 2011 to $74.3 million at December 31, 2011, primarily due to an increase in deposits and principal and interest repayments on loans receivable. During the three months ended December 31, 2011 investment securities decreased by $2.0 million, or 28.9% from $6.9 million at September 30, 2011 to $4.9 million at December 31, 2011. Net loans receivable decreased $10.2 million, or 2.8%, from $364.8 million at September 30, 2011 to $354.6 million at December 31, 2011. 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. Mortgage-backed securities available for sale increased by $15.9 million, or 10.6%, from $150.9 million at September 30, 2011 to $166.8 million at December 31, 2011 due primarily to security purchases made during the three months ended December 31, 2011 in order to deploy available liquidity. At December 31, 2011, all mortgage-backed securities were classified as available for sale for liquidity purposes.

Deposits increased by $10.4 million, or 1.9%, from $550.0 million at September 30, 2011 to $560.4 million at December 31, 2011. The Bank has been successful in attracting new non interest bearing deposits which decreases the overall cost for funds.

Stockholders’ equity increased by $195,000, or .38%, from $51.9 million at September 30, 2011 to $52.1 million at December 31, 2011. This increase was due primarily to net income of $462,000 during the period which was partially offset by a decline in accumulated other comprehensive income.

Comparison of Operating Results for the Three Months Ended December 31, 2011 and 2010

Net Income. Net income (loss) available to common shareholders was $462,000 for the three months ended December 31, 2011 and $(111,000) for the three months ended December 31, 2010. This increase was primarily due to lower loan loss provisions and, to a lesser extent, increased net interest income during the three months ended December 31, 2011 as compared to the three months ended December 31, 2010.

Net Interest Income. Net interest income increased by $311,000, or 7.0%, from $4.4 million for the three months ended December 31, 2010 to $4.8 million for the three months ended December 31, 2011. The increase in net interest income primarily was due to higher average balances on mortgage-backed securities and a declining cost of funds rate on the deposit portfolio. These increases were partially offset by a decrease in interest and fees on loans.

Interest Income. Interest income decreased by $104,000, or 1.5% from $6.8 million for the three months ended December 31, 2010 to $6.7 million for the three months ended December 31, 2011. Interest and fees on loans decreased by $417,000, or 7.0%, from $5.9 million for the three months ended December 31, 2010 to $5.5 million for the three months ended December 31, 2011. This was primarily due to lower average balances on loans. Average loans declined by $26.9 million during the three months ended December 31, 2011 as compared to the same period in 2010. This decline was partially offset by an increase in interest on mortgage-backed securities of $332,000, or 45.7% from $726,000 for the three months ended December 31 2010 to $1.1 million for the three months ended December 31, 2011. This increase was primarily due to higher average balances on mortgage-backed securities. The average balance of mortgage-backed securities increased by $89.9 million, from $65.2 million during the three months ended December 31, 2010 to $155.1 million during the three months ended December 31, 2011. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity.

Interest Expense. Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $2.3 million for the three months ended December 31, 2010 to $1.9 million for the three months ended December 31, 2011, a decrease of $415,000 or 17.7%. Interest on deposits decreased $417,000, or 19.0%, from $2.2 million for the three months ended December 31, 2010 to $1.8 million for the three months ended December 31, 2011. This decrease was due to the decrease in the average cost of deposits of 34 basis points from 1.62% for the three months ended December 31, 2010 to 1.28% for the three months ended December 31, 2011. This decrease in interest expense was partially offset by an increase in the average balance of deposits of $14.5 million, or 2.7%, from $541.0 million for the three months ended December 31, 2010 to $555.5 million for the three months ended December 31, 2011.

 

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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 December 31, 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 December 31,  
     2011     2010  
     Average
Balance
     Interest      Average
Rate
    Average
Balance
     Interest      Average
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                

Loans receivable, net

   $ 360,828       $ 5,515         6.11   $ 387,691       $ 5,932         6.12

Mortgage-backed securities

     155,076         1,058         2.73        65,162         726         4.46   

FHLB stock and Investment securities

     7,622         93         4.88        14,172         79         2.23   

Other interest earning assets

     61,049         35         .23        115,599         68         .24   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-earning assets

     584,575         6,701         4.59        582,624         6,805         4.67   

Bank Owned Life Insurance

     15,943              15,118         

Noninterest-earning assets

     32,982              26,779         
  

 

 

         

 

 

       

Total assets

   $ 633,500            $ 624,521         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Deposits

   $ 555,513       $ 1,774         1.28   $ 541,050       $ 2,191         1.62

Junior Subordinated Debentures

     17,011         157         3.69        17,011         155         3.64   

Other liabilities

     838         —           —          1,033         —           —     
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     573,362         1,931         1.35        559,094         2,346         1.68   
     

 

 

    

 

 

      

 

 

    

 

 

 

Noninterest-bearing liabilities

     8,150              3,827         
  

 

 

         

 

 

       

Total liabilities

     581,512              562,921         

Stockholders’ Equity

     51,988              61,600         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 633,500            $ 624,521         
  

 

 

         

 

 

       

Net interest income

      $ 4,770            $ 4,459      
     

 

 

         

 

 

    

Interest rate spread

           3.24           2.99
        

 

 

         

 

 

 

Net interest margin

           3.26           3.06
        

 

 

         

 

 

 

Ratio average interest earning assets/interest-bearing liabilities

           101.96           104.21
        

 

 

         

 

 

 

 

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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 December 31,  
     2011 Vs. 2010  
     Increase (Decrease) Due to  
     Volume     Rate     Rate/Volume     Total  
     (In Thousands)  

Interest income:

        

Loans receivable, net

   $ (408   $ (9   $ —        $ (417

Mortgage-backed securities

     998        (279     (387     332   

Investment securities

     (37     93        (42     14   

Other interest-earning assets

     (33     —          —          (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     520        (195     (429     (104

Interest expense:

        

Deposits

     59        (464     (12     (417

Junior Subordinated Debentures

     —          2        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     59        (462     (12     (415
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 461      $ 267      $ (417   $ 311   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 a $300,000 provision for losses on loans during the three months ended December 31, 2011 as compared to a provision of $800,000 for the three months ended December 31, 2010. The decrease in loan loss provisions during the three months ended December 31, 2011 as compared to December 31, 2010 was primarily due to a decline in nonperforming assets and loan charge-offs during the three months ended December 31, 2011. Nonperforming loans were $17.2 million at December 31, 2011 versus $18.3 million at September 30, 2011 and $13.7 million at December 31, 2010. Loan charge-offs for the three months ended December 31, 2011 were $16,000 as compared to $286,000 for the three months ended December 31, 2010, a decrease of $270,000. Loan recoveries were $12,000 for the three months ended December 31, 2011 compared to $22,000 for the three months ended December 31, 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 $240,000, or 30.6%, from $784,000 for the three months ended December 31, 2010 to $544,000 for the three months ended December 31, 2011. The decrease in other income for the three months ended December 31, 2011 was primarily attributable to a decrease in miscellaneous other income of $251,000, or 58.4% from $430,000 for the three months ended December 31, 2010 to $179,000 for the three months ended December 31, 2011. This decrease was primarily due to lower commissions from investment sales. Income from Bank Owned Life Insurance also decreased by $55,000, or 34.4% from $160,000 for the three months ended December 31, 2010 to $105,000 for the three months ended December 31, 2011. These decreases were partially offset by an increase of $50,000 in gains on sale of foreclosed assets from $7,000 for the three months ended December 31, 2010, to $57,000 for the three months ended December 31, 2011.

Non-interest Expenses. Total non-interest expenses decreased by $140,000, or 3.1%, from $4.4 million for the three months ended December 31, 2010 to $4.3 million for the three months ended December 31, 2011. This overall decline was due to decreases in several expense categories compared to the corresponding period of the prior year, including Occupancy, Data Processing, FDIC premiums, Property and equipment, Professional fees and Advertising. The Company has successfully implemented a variety of expense reduction initiatives that have favorably impacted operating expenses. Occupancy expense decreased by $45,000, or 7.3% from $613,000 for the three months ended December 31, 2010 to $568,000 for the three months ended December 31, 2011. Data Processing expenses decreased by $80,000, or 17.9% from $447,000 for the three months ended December 31, 2010 to $367,000 for the three months ended December 31, 2011. Federal Insurance premiums decreased by $38,000, or 15.0% from $253,000 for the three months ended December 31, 2010 to $215,000 for the three months ended December 31, 2011. Property and equipment expense decreased by $45,000, or 26.0%, from $173,000 for the three months ended December 31, 2010 to $128,000 for the three months ended December 31, 2011. Professional fees decreased $12,000, or 7.2% from $167,000 for the three months ended December 31, 2010 to $155,000 for the three months ended December 31, 2011. Advertising expense decreased $74,000, or 56.1% from $132,000 for the three months ended December 31, 2010 to $58,000 for the three months ended December 31, 2011. Decreases in these non-interest expense categories were partially offset by

 

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moderate increases in Salaries and related expenses and Foreclosure and impaired loan expenses. Salaries and related benefits increased by $117,000, or 4.8% from $2.4 million for the three months ended December 31, 2010 to $2.5 million for the three months ended December 31, 2011. The increase related primarily to additional personnel and increased benefits costs. Foreclosure and impaired loan expenses also increased by $39,000, or 75.0% from $52,000 for the three months ended December 31, 2010 to $91,000 for the three months ended December 31, 2011.

Income Taxes. Our income tax expense (benefit) was $237,000 and $(57,000) for the three months ended December 31, 2011 and 2010, respectively. The change in income taxes for the three months ended December 31, 2011 as compared to the same period in the prior year was primarily due to increased pretax earnings.

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 December 31,
2011
     At September 30,
2011
 
     (In thousands)  

Commitments to originate new loans

   $ 9,171       $ 6,592   

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

     33,285         35,831   

Commercial letters of credit

     436         401   

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.

 

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Asset Quality

At December 31, 2011, we had $18.5 million in non-performing assets, consisting of nonaccrual loans, accruing troubled debt restructurings and repossessed assets representing 2.87% of total assets. At September 30, 2011 non-performing assets were $21.3 million or 3.41% of assets. Our net charge-offs for the three months ended December 31, 2011 and December 31, 2010 were $4,000 and $264,000, respectively. Our allowance for loan losses was $5.1 million at December 31, 2011 compared to $7.2 million at September 30, 2011.

The following table presents an analysis of the Company’s non-performing assets:

 

     At December 31,
2011
    At September 30,
2011
 
     (In thousands)  

Nonperforming loans (1):

    

Nonaccrual loans:

    

Single family residential

   $ 258      $ 1,048   

Single family rental property

     6,847        6,667   

Commercial real estate

     4,297        5,097   

Construction

     4,557        4,534   

Commercial leases

     79        50   

Commercial lines of credit

     —          214   

Land

     —          —     

Consumer Loans

     20        20   
  

 

 

   

 

 

 

Total nonaccrual loans

     16,058        17,630   

Loans 90 days past due and accruing

     —          —     

Accruing Troubled Debt Restructurings

     1,133        656   
  

 

 

   

 

 

 

Total non-performing loans

     17,191        18,286   

Foreclosed Real Estate

     1,275        2,999   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 18,466      $ 21,285   
  

 

 

   

 

 

 

Nonperforming loans to loans receivable

     4.85     5.01

Nonperforming assets as a percentage of loans, foreclosed real estate and repossessed assets

     5.19     5.79

Nonperforming assets to total assets

     2.87     3.41

Loans modified in Troubled Debt Restructuring

   $ 8,654      $ 8,665   
  

 

 

   

 

 

 

 

(1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is questionable. Also included in this category at December 31, 2011 are $7.5 million in Troubled Debt Restructurings, all but $20,000 of which were not delinquent. Reporting guidance requires disclosure of these loans as nonaccrual until the loans have performed according to the modified terms for a sustained period.

 

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The following table sets forth an analysis of the Company’s allowance for loan losses for the periods indicated.

 

     For the Three Months Ended December 31  
     2011     2010  
     (Dollars in thousands)  

Balance at beginning of period

   $ 4,768      $ 6,634   

Loans charged-off:

    

Real estate mortgages:

    

Single-family residential

     (11     (73

Commercial

     —          (168

Construction

     —          (19

Commercial Leases

     —          —     

Consumer

     (5     (26
  

 

 

   

 

 

 

Total charge-offs

     (16     (286

Recoveries

    </