BCSB Bcsb Bancorp, Inc. (MM)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2008

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)

 

 

 

United States		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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

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

As of July 30, 2008 the issuer had 3,120,945 shares of Common Stock issued and outstanding.

 

 

 

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CONTENTS

 

				PAGE
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Statements of Financial Condition as of June 30, 2008 (unaudited) and September 30, 2007		1
		Consolidated Statements of Operations for the Nine and Three Months Ended June 30, 2008 and 2007 (unaudited)		2
		Consolidated Statements of Comprehensive Income (Loss) for the Nine and Three Months Ended June 30, 2008 and 2007 (unaudited)		3
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2008 and 2007 (unaudited)		4
		Notes to Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		28
Item 4.		Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		28
Item 1A.		Risk Factors		29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3.		Defaults Upon Senior Securities		29
Item 4.		Submission of Matters to a Vote of Security Holders		29
Item 5.		Other Information		31
Item 6.		Exhibits		31
SIGNATURES

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

		June 30, 2008				September 30, 2007
		(unaudited)
		(dollars in thousands)
Assets
Cash and due from banks		$	9,124			$	9,468
Interest-bearing deposits in other banks			7,027				17,121
Federal funds sold			44,940				49,427
Cash and cash equivalents			61,091				76,016
Interest bearing time deposits			100				100
Investment securities, available for sale			999				3,970
Loans receivable, net			402,706				416,302
Mortgage-backed securities, available for sale			94,325				104,999
Foreclosed real estate and repossessed assets			13				94
Premises and equipment, net			9,902				10,454
Federal Home Loan Bank of Atlanta stock, at cost			1,559				2,270
Bank owned life insurance			14,270				13,847
Goodwill and other intangible assets			2,441				2,477
Accrued interest and other assets			10,772				11,852
Total assets		$	598,178			$	642,381
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing		$	28,808			$	30,880
Interest-bearing			481,451				527,577
Total deposits			510,259				558,457
Short Term Advances from the Federal Home Loan Bank of Atlanta			10,000				10,000
Long Term Advances from the Federal Home Loan Bank of Atlanta			—				10,000
Junior Subordinated Debentures			17,011				23,197
Other liabilities			10,792				6,135
Total liabilities			548,062				607,789
Commitments and contingencies
Stockholders’ Equity
Common stock (par value $.01 – 13,500,000 authorized, 3,120,945 issued and outstanding at June 30, 2008 and 5,929,743 at September 30, 2007)			31				59
Additional paid-in capital			38,823				21,620
Obligation under Rabbi Trust			1,100				1,146
Retained earnings (substantially restricted)			14,023				13,590
Accumulated other comprehensive loss (net of taxes)			(1,607	)			(682	)
Employee Stock Ownership Plan			(1,202	)			(44	)
Stock held by Rabbi Trust			(1,052	)			(1,097	)
Total stockholders’ equity			50,116				34,592
Total liabilities and stockholders’ equity		$	598,178			$	642,381

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

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		For the Nine Months Ended June 30,								For the Three Months Ended June 30,
		2008				2007				2008				2007
		(Dollars in thousands except per share data)
Interest Income
Interest and fees on loans		$	20,131			$	21,763			$	6,542			$	7,173
Interest on mortgage–backed securities			4,202				3,468				1,312				1,132
Interest and dividends on investment securities			191				3,186				43				120
Other interest income			1,594				1,443				357				1,231
Total interest income			26,118				29,860				8,254				9,656
Interest Expense
Interest on deposits			13,441				15,517				4,026				5,067
Interest on borrowings – short term			337				971				121				108
Interest on borrowings – long term			306				1,859				60				180
Other interest expense – debentures			1,319				1,538				358				514
Total interest expense			15,403				19,885				4,565				5,869
Net interest income			10,715				9,975				3,689				3,787
Provision for losses on loans			—				117				—				—
Net interest income after provision for losses on loans			10,715				9,858				3,689				3,787
Other Income
(Loss) gain on repossessed assets			(63	)			10				(21	)			20
Valuation allowance on loans held for sale			—				(1,207	)			—				299
Mortgage banking operations			37				13				14				12
Fees on transaction accounts			746				459				270				199
Loss on sale of investments and mortgage-backed securities			—				(5,863	)			—				27
Income from bank owned life insurance			373				428				128				146
Other income			341				327				149				105
Total other income, net			1,434				(5,833	)			540				808
Non-Interest Expenses
Salaries and related expense			6,137				5,944				2,037				1,997
Occupancy expense			1,704				1,686				557				565
Data processing expense			1,122				1,088				381				365
Property and equipment expense			855				899				284				303
Professional fees			320				385				135				63
Advertising			442				391				153				102
Recovery on dishonored checks			—				(3,353	)			—				—
Telephone, postage and office supplies			304				287				84				102
Debt retirement expense			—				17				—				—
Other expenses			749				820				179				252
Total non-interest expenses			11,633				8,164				3,810				3,749
Income (loss) before tax expense (benefit)			516				(4,139	)			419				846
Income tax expense (benefit)			82				(1,524	)			134				247
Net income (loss)		$	434			$	(2,615	)		$	285			$	599
Per Share Data:
Basic and diluted earnings (loss) per share		$	.14			$	(.84	)		$	.09			$	.19
Dividends per share		$	.00			$	.00			$	.00			$	.00

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

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

		For the Nine Months Ended June 30,
		2008				2007
		(in thousands)
Net Income (Loss)		$	434			$	(2,615	)
Other comprehensive income, net of tax:
Unrealized net holding losses on available-for-sale portfolios, net of tax $(1,011) and $(516)			(1,606	)			(819	)
Reclassification adjustment for losses included in net income, net of tax $0 and $2,265			—				3,599
Comprehensive (Loss) Income		$	(1,172	)		$	165

 

		For the Three Months Ended June 30,
		2008				2007
		(in thousands)
Net Income		$	285			$	599
Other comprehensive income, net of tax:
Unrealized net holding losses on available-for-sale portfolios, net of tax $(1,405), and $(1,368)			(2,233	)			(1,253	)
Reclassification adjustment for losses included in net income, net of tax $0 and $10			—				(17	)
Comprehensive Loss		$	(1,948	)		$	(671	)

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

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		For the Nine Months Ended June 30,
		2008				2007
		(dollars in thousands)
Operating Activities
Net income (loss)		$	434			$	(2,615	)
Adjustments to reconcile net income (loss) to
Net Cash Provided by Operating Activities
Loss on sale of investments and mortgage-backed securities			—				5,863
Proceeds from sale of loans			—				45,231
Realized loss on loans held for sale			—				1,207
Amortization of deferred loan fees and cost, net			168				(136	)
Non-cash compensation under stock-based benefit plan			144				234
Provision for losses on loans			—				117
Amortization of purchase premiums and discounts, net			(65	)			170
Provision for depreciation			769				789
Loss (gains) on sale of repossessed assets			63				(10	)
Increase in cash surrender value of bank owned life insurance			(374	)			(428	)
(Increase) decrease in accrued interest and other assets			1,647				(307	)
Increase in other liabilities			2,957				285
(Decrease) increase in obligation under Rabbi Trust			(46	)			15
Net cash provided by operating activities			5,697				50,415
Cash Flows from Investing Activities
Purchase of bank owned life insurance			(49	)			(44	)
Purchase of investment securities – available for sale			—				(802	)
Proceeds from maturities of investment securities – available for sale			3,000				15,000
Proceeds from sale of investment securities – available for sale			—				126,480
Proceeds from maturities of investment securities – held to maturity			—				3,500
Net decrease in loans			13,351				8,995
Purchase of mortgage-backed securities – available for sale			—				(84,867	)
Principal collected on mortgage-backed securities			9,141				13,206
Proceeds from sale of mortgage-backed securities- available for sale			—				77,771
Proceeds from sales of foreclosed real estate			60				—
Proceeds from sales of repossessed assets			148				211
Investment in premises and equipment			(218	)			(135	)
Redemption of Federal Home Loan Bank of Atlanta Stock, net			711				4,702
Net cash provided by investing activities		$	26,144			$	164,017

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

		For the Nine Months Ended June 30,
		2008				2007
		(dollars in thousands)
Cash Flows from Financing Activities
Net decrease in deposits		$	(48,198	)		$	(38,270	)
Net increase in advances by borrowers for taxes and insurance			1,700				1,294
Net proceeds from stock offering			17,140				—
Loan to employee stock ownership plan			(1,222	)			—
Proceeds from Federal Home Loan Bank of Atlanta advances			—				146,550
Repayment of Federal Home Loan Bank of Atlanta advances			(10,000	)			(244,550	)
Redemption of trust preferred securities			(6,186	)			—
Acquisition of stock for Rabbi Trust			—				(13	)
Exercised stock options			—				17
Net cash (used) by financing activities			(46,766	)			(134,972	)
(Decrease) Increase in cash equivalents			(14,925	)			79,460
Cash and cash equivalents at beginning of period			76,016				11,737
Cash and cash equivalents at end of period		$	61,091			$	91,197
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest		$	15,403			$	19,811
Income taxes		$	—			$	—
Supplemental Disclosures of Non-cash Investing Activity:
Transfer of held to maturity securities to available for sale		$	—			$	27,536
Transfer of loans to loans held for sale		$	—			$	46,438

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

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Principles of Consolidation

BCSB Bancorp, Inc. (the “Company”) owns 100% of Baltimore County Savings Bank, F.S.B. and subsidiaries (the “Bank”). The Bank owns 100% of Ebenezer Road, Inc. The accompanying consolidated financial statements include the accounts and transactions of these companies on a consolidated basis since the date of acquisition. All intercompany transactions have been eliminated in the consolidated financial statements. Ebenezer Road, Inc. sells insurance products. Its operations are not material to the consolidated financial statements.

Note 2 - Basis for Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The financial statements of the Company are presented on a consolidated basis with those of the Bank. The results for the nine months ended June 30, 2008 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2008. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in BCSB Bankcorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2007.

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, deferred tax assets and intangible assets.

Note 3 - Organization

The Company is a Maryland corporation which was recently organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008, discussed further below. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $100,000 by the Federal Deposit Insurance Corporation (“FDIC”).

BCSB Bankcorp, Inc., a federal corporation, was the former mid-tier stock holding company for the Bank. The BCSB Bankcorp Inc. was organized in conjunction with the Bank’s reorganization from the mutual savings association to the mutual holding company structure in 1998. Baltimore County Savings Bank, M.H.C., a federal mutual holding company, was the mutual holding company parent of BCSB Bankcorp, Inc. and owned 63.3% of BCSB Bankcorp, Inc.’s outstanding stock.

On April 10, 2008, a second-step conversion was completed after which Baltimore County Savings Bank, M.H.C. and BCSB Bankcorp, Inc. ceased to exist and were replaced by BCSB Bancorp, Inc., which was organized as the new stock-form holding company for the Bank and successor to BCSB Bankcorp, Inc. The second-step conversion was accounted for as a change in corporate form with no resulting change in the historical basis of the former BCSB Bankcorp, Inc.’s assets, liabilities and equity. A total of 1,976,538 new shares of the Company were sold at $10 per share in the subscription, community and syndicated community offerings through which the Company received proceeds of approximately $17.1 million, net of offering costs of approximately $2.8 million. The Company contributed $8.5 million or approximately 50% of the net proceeds to the Bank in the form of a capital contribution. The Company loaned $1.2 million to the Bank’s Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire 122,197 shares of the

 

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Company’s common stock at $10 per share. As part of the conversion, outstanding public shares of BCSB Bankcorp, Inc. were exchanged for .5264 shares of the new holding company of the Bank. No fractional shares were issued. Instead, cash was paid to shareholders at $10 per share for any fractional shares that would otherwise be issued. The exchange resulted in an additional 1,144,407 outstanding shares of the Company for a total of 3,120,945 outstanding shares as of the closing of the second-step conversion on April 10, 2008.

Note 4 - Cash Flow Presentation

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

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 5 - Earnings Per Share

Basic per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, unless the effect is to reduce a loss or increase earnings per share. No adjustments were made to net income (numerator) for all periods presented. The basic and diluted weighted average shares outstanding for the nine and three month periods ended June 30, 2008 and 2007 are as follows:

 

		For the Nine Months Ended June 30,
		2008								2007
		(in thousands except per share data)
		Income			Shares		Per Share			Income (Loss)				Shares		Per Share
Basic EPS
Income (loss) available to shareholders		$	434		3,052		$	.14		$	(2,615	)		3,107		$	(.84	)
Diluted EPS
Effect of dilutive shares			—		12			—			—			—			—
Income (loss) available to shareholders plus assumed conversions		$	434		3,064		$	.14		$	(2,615	)		3,107		$	(.84	)
		For the Three Months June 30,
		2008								2007
		(in thousands except per share data)
		Income (Loss)			Shares		Per Share			Income (Loss)				Shares		Per Share
Basic EPS
Income available to shareholders		$	285		2,925		$	.09		$	599			3,097		$	.19
Diluted EPS
Effect of dilutive shares			—		10			—			—			—			—
Income (loss) available to shareholders plus assumed conversions		$	285		2,935		$	.09		$	599			3,097		$	.19

Weighted-average shares outstanding for the nine and three month periods ended June 30, 2008 and June 30, 2007 have been adjusted by the exchange rate of .5264 as a result of the second-step conversion that occurred on April 10, 2008.

Options to purchase 86,151 shares and 20,984 shares were outstanding at June 30, 2008 and June 30, 2007, respectively were not included in the computation of diluted EPS because the effect of which would have been anti-dilutive.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 6 - Regulatory Capital

The following table sets forth the Bank’s capital position at June 30, 2008.

 

		Actual						For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Provisions
		Actual Amount			% of Assets			Required Amount			% of Assets			Required Amount			% of Assets
		(Unaudited) (dollars in thousands)
Tangible (1)		$	54,518		9.36	%		$	8,736		1.50	%		$	N/A		N/A	%(3)
Tier I capital (2)			54,518		15.68				N/A		N/A	(3)			21,704		6.00
Core (1)			54,518		9.36				23,298		4.00				29,123		5.00
Risk-weighted (2)			56,713		15.86				28,938		8.00				36,173		10.00

 

(1)	To adjust total assets

(2)	To risk-weighted assets

(3)	Not applicable

Note 7 - Stock Option Plans

The Company has a Stock Option Plan (the “Plan”) whereby 120,366 shares of common stock have been reserved for issuance under the Plan. Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. Options are exercisable in 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, 15,792 options granted during the year ended September 30, 2007 and 22,193 options granted during the nine months ended June 30, 2008. No options were granted during the years ended September 30, 2006 or 2005.

At June 30, 2008 there were 12,239 shares under option with an exercise price of $15.20 and a weighted average remaining life of 1.00 years, 35,927 shares with an exercise price of $21.61 and a weighted average remaining life of 3.8 years, 10,528 shares with an exercise price of $28.44 and a weighted average remaining life of 8.50 years, 5,264 shares with an exercise price of $17.95 and a weighted average life of 9.25 years and 22,193 shares with an exercise price of $11.61 and a weighted average life of 9.75 years. The total exercisable shares of 50,271 have a weighted average remaining life of 3.75 years, and an aggregate intrinsic value of $(484,000).

In connection with the second-step conversion completed in April 10, 2008 all outstanding options and shares were adjusted based upon the .5264 exchange ratio. The exercise prices were adjusted to reflect the proportional change in values that resulted from the exchange.

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 7 - Stock Option Plans- continued

The following table presents the activity related to options under all plans for the nine months ended June 30, 2008.

 

		Shares		Weighted Average Exercise Price
Outstanding at September 30, 2007		63,958		$	21.56
Options exercised
Granted		22,193			11.60
Outstanding at June 30, 2008		86,151		$	18.99
Exercisable at June 30, 2008		50,271		$	20.38

There were 22,193 options granted during the nine months ended June 30, 2008 and 10,528 were granted during the nine months ended June 30, 2007. The fair values of our options granted were calculated using the Black-Scholes option-pricing model with the following weighted average assumptions for the nine months ended June 30, 2008.

 

		2008			2007
Dividend Yield		$	0		0
Expected volatility			29.42		29.95
Risk-free interest rate			3.15		4.64
Expected lives			10.00 years		10.00 years

 

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BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 8 - Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109”, which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 was effective for the Company on October 1, 2007. The adoption of this standard did not have a material impact on our financial condition, results of operations or liquidity.

In September 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods as defined in SFAS No. 106, “ Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The EITF reached a consensus that Bank Owned Life Insurance policies purchased for this purpose do not effectively settle the entity’s obligation to the employee in this regard and thus the entity must record compensation cost and a related liability. Entities should recognize the effects of applying this Issue through either, (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the balance sheet as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. Management is currently evaluating the impact of adopting this Issue on the Company’s financial statements. This Issue is effective for fiscal years beginning after December 15, 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 for financial assets and liabilities and November 15, 2008 for non-financial assets and liabilities, and interim periods within those fiscal years. Management does not expect the adoption of this Statement to have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment to FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS No. 157, “Fair Value Measurements”. Management does not expect the adoption of this Statement to have a material impact on the Company’s consolidated financial statements.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan

 

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Commitments , stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the impact of this Bulletin to be material.

In December 2007, the FASB issued SFAS No. 141, Revised 2007 (SFAS 141R), “Business Combinations”. SFAS 141R’s objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after December 31, 2008. We do not expect the implementation of SFAS 141R to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” SFAS 160’s objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for deconsolidation of a subsidiary. SFAS 160 shall be effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the implementation of SFAS 160 to have a material impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We have not yet determined the effect that the application of SFAS No. 161 will have on the disclosures to our consolidated financial statements.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Company’s financial statements.

Note 9 - 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 $840,000 of standby letters of credit as of June 30, 2008. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2008 for guarantees under standby letters of credit issued is not considered to be material.

Note 10 - Balance Sheet Restructuring

During the quarter ended June 30, 2007, the Company restructured its balance sheet. The Company sold or committed to sell approximately $169.1 million of mortgage-backed securities, $31.9 million in mutual funds and $47.7 million in fixed rate single family mortgage loans. The Company used a portion of the proceeds from these sales to prepay $68.5 million of Federal Home Loan Bank advances with an average cost of 4.97%. During the same quarter, Management transferred $27.5 million of securities that were previously classified as held to maturity to the available for sale classification. Accordingly, the Company has reclassified all remaining securities as available for sale. The Company accounts for security transactions based upon the trade date.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

BCSB Bancorp, Inc.(the “Company”) is a Maryland-chartered corporation formed in March 2007 to be the new stock holding company of the Bank. Following the completion of the second-step conversion on April 10, 2008, the Company owns all of the Bank’s capital stock and directs, plans and coordinates the Bank’s business activities. In the future, BCSB Bancorp might also acquire or organize other operating subsidiaries, including other financial institutions or financial services companies, although it currently has no specific plans or agreements to do so.

Baltimore County Savings Bank, F.S.B. is a community-oriented financial institution dedicated to serving the financial service needs of consumers and businesses within its market area, which consists of the Baltimore Metropolitan Area. The Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, its primary federal regulator, and the Federal Deposit Insurance Corporation, its deposit insurer. We attract deposits from the general public and invest these funds in loans secured by first mortgages on owner-occupied, single-family residences in our market area and other real estate loans consisting of commercial real estate loans, construction loans and single-family rental property loans. To a lesser extent, we originate consumer loans and commercial loans. We derive our income primarily from interest earned on these loans, and to a lesser extent, interest earned on investment securities and mortgage-backed securities. We operate out of our main office in Baltimore County, Maryland and 18 branch offices in Baltimore County, Harford County and Howard County and Baltimore City in Maryland.

Plan of Conversion and Reorganization

On February 14, 2007, the Company announced that it adopted a Plan of Conversion and Reorganization (the “Plan”), pursuant to which it converted from the mutual holding structure to the stock holding company structure. Pursuant to the terms of the Plan, the Company’s wholly owned subsidiary, Baltimore County Savings Bank, F.S.B. (the “Bank”), formed a new Maryland corporation that acquired all of the outstanding shares of the Bank’s common stock. Shares of the Company’s common stock, other than those held by the Baltimore County Savings Bank, M.H.C. (the “MHC”),were converted into shares of the new Maryland corporation pursuant to an exchange ratio designed to approximate the percentage ownership interests of such persons.

As part of the Plan, the new Maryland holding company offered shares of its common stock for sale to the Bank’s eligible account holders, to the Bank’s tax-qualified employee benefit plans and to members of the general public in a subscription and community offering in the manner and subject to the priorities set forth in the Plan. The amount of stock that was offered was based on an independent appraisal of the Company as fully converted.

On April 10, 2008 BCSB Bancorp completed its second-step conversion. BCSB Bancorp acquired all of the outstanding shares of the Bank’s common stock after the completion of the Bank’s conversion from a mutual holding company structure. As of April 10, 2008 BCSB Bancorp had 3,120,945 shares issued and outstanding of which 1,976,538 were sold in the offering at $10.00 a share. The outstanding shares of BCSB Bankcorp were exchanged for shares in BCSB Bancorp at an exchange ratio of .5264 resulting in 1,144,407 shares. The “Company” retained one-half of the net proceeds of the offering, less the amount needed to fund an employee stock ownership plan, and contributed the remaining net proceeds to the Bank.

Supervisory Agreement and Other Commitments

On March 9, 2008 the Supervisory Agreement that Baltimore County Savings Bank entered into on December 8, 2005 with the Office of Thrift Supervision was lifted. Baltimore County Savings Bank had entered into the Supervisory Agreement with the Office of Thrift Supervision and agreed to take all necessary and appropriate actions to comply with the Bank Secrecy Act and the Flood Disaster Protection Act and applicable regulations under these acts and to adopt and submit for review and approval by the Office of Thrift Supervision a comprehensive three year business plan that considered our existing operations, business strategies, current market conditions, local demographics, earnings, available resources and existing capital levels.

In addition to the Supervisory Agreement, we have made certain other commitments to the Office of Thrift Supervision. These commitments continue to be in effect and are as follows:

 

•

Baltimore County Savings Bank will not pay any dividend to BCSB Bancorp without the prior written approval of the Office of Thrift Supervision.

 

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•

BCSB Bancorp will not declare or pay any dividends, nor will it incur any debt, without the prior written approval of the Office of Thrift Supervision.

 

•

Our Board of Directors will revise our internal control policies and procedures related to higher risk accounts in accordance with our Bank Secrecy Act compliance program.

Critical Accounting Policies

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, we evaluate our estimates, including those related to the allowance for loan losses.

We believe 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. We believe the allowance for loan losses is a significant estimated loss and therefore regularly evaluate 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. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

We account 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 our 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.

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,

 

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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. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

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

Comparison of Financial Condition at June 30, 2008 and September 30, 2007

During the nine months ended June 30, 2008, our assets decreased by $44.2 million, or 6.9% from $642.4 million at September 30, 2007 to $598.2 million at June 30, 2008. Our cash and cash equivalents decreased $14.9 million, or 19.6% from $76.0 million at September 30, 2007 to $61.1 million at June 30, 2008. The decrease in liquidity was used to fund maturing certificate of deposit accounts. Our investment portfolio available for sale decreased $3.0 million or 74.8%, from $4.0 million at September 30, 2007 to $1.0 million at June 30, 2008 due to maturing investments. Net loans receivable, decreased $13.6 million, or 3.3%, from $416.3 million at September 30, 2007 to $402.7 million at June 30, 2008. Our lending strategy has shifted such that commercial real estate lending, commercial business lending and home equity lending have become our key focus. We have ceased our indirect auto lending program. The indirect loan portfolio, which was $11.8 million at June 30, 2008, is expected to decline over time as the loans are paid down. Our mortgage-backed securities available for sale decreased by $10.7 million, or 10.2%, from $105.0 million at September 30, 2007 to $94.3 million at June 30, 2008. At June 30, 2008, all mortgage-backed securities were classified as available for sale for liquidity purposes. Net premises and equipment decreased $552,000, or 5.3%, from $10.4 million at September 30, 2007 to $9.9 million at June 30, 2008. The cash surrender value on the Bank Owned Life Insurance increased $423,000, or 3.1% from $13.8 million at September 30, 2007 to $14.3 million at June 30, 2008. Overall, we expect minimal growth until interest margins improve to a level sufficient to allow growth. We are seeking to increase core deposits in an effort to reduce our cost of funds.

Deposits decreased by $48.2 million, or 8.6 %, from $558.5 million at September 30, 2007 to $510.3 million at June 30, 2008. The Bank’s current strategy is to focus on increasing core deposits such as checking and savings accounts and to allow run off of the higher cost certificate of deposits accounts. Federal Home Loan Bank of Atlanta short-term advances remained stable at $10.0 million as of June 30, 2008, and long term advances decreased $10.0 million due to maturing debt in May 2008. Advances may be used to fund loan demand when other available liquidity sources do not meet this demand.

Stockholders’ equity increased by $15.5 million, or 44.9%, from $34.6 million at September 30, 2007 to $50.1 million at June 30, 2008, which was attributable to the net proceeds from the second step offering. A total of 1,976,538 new shares of the Company were sold at $10 per share in the subscription, community and syndicated community offerings through which the Company received net proceeds of approximately $17.1 million, net of offering costs of approximately $2.8 million. The Company contributed $8.5 million or approximately 50% of the net proceeds to the Bank in the form of a capital contribution. The Company loaned $1.2 million to the Bank’s ESOP and the ESOP used those funds to acquire 122,197 shares of the Company’s common stock at $10 per share. This was partially offset by an increase in the accumulated other comprehensive loss of $925,000 from $(682,000) at September 30, 2007 to $(1.6) million at June 30, 2008.

Our accumulated other comprehensive loss net of taxes was $1.6 million at June 30, 2008, compared to accumulated other comprehensive income net of taxes of $626,000 at March 31, 2008 and accumulated other comprehensive loss net of taxes of $682,000 at September 30, 2007. At June 30, 2008, $2.6 million of the investment portfolio’s gross unrealized losses related to two collateralized mortgage obligations with an amortized cost of $12.5 million as of that date. Gross unrealized losses for these two securities were approximately $364,000 as of March 31, 2008, which indicates that most of the decline in market value occurred over the three month period ended June 30, 2008. We have the ability and intent to hold these securities to maturity, and, to date, the securities have performed in accordance with their terms. If in the future we determine that the decline in market values with respect to these or any other securities are other than temporary, we would be required to recognize losses in our Consolidated Statement of Operations with respect to such securities.

Comparison of Operating Results for the Nine Months Ended June 30, 2008 and 2007

Net Income . Net income increased from a net loss of $2.6 million for the nine months ended June 30, 2007 to net income of $434,000 for the nine months ended June 30, 2008. The improvement was primarily due to losses sustained in 2007 from the balance sheet restructuring, partially offset by recoveries from insurance on dishonored checks. The increase was also due to improved net interest income, which increased by $740,000, or 7.4%, from $10.0 million for the nine months ended June 30, 2007 to $10.7 million for the nine months ended June 30, 2008. This resulted from enhanced interest rate spread from the balance sheet restructuring completed during the second and third quarters of fiscal year ended September 30, 2007.

Net Interest Income . Net interest income increased by $740,000, or 7.4%, from $10.0 million for the nine months ended June 30, 2007 to $10.7 million for the nine months ended June 30, 2008. The increase in net interest

 

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income primarily was due to improved net interest margin resulting from the balance sheet restructuring transactions completed during the second and third quarters of fiscal year ended September 30, 2007. Net interest margin increased 55 basis points from 1.92% for the nine months ended June 30, 2007 to 2.47% for the nine months ended June 30, 2008.

Interest Income . Interest income decreased by $3.7 million, or 12.5% from $29.9 million for the nine months ended June 30, 2007 to $26.1 million for the nine months ended June 30, 2008. Interest and fees on loans decreased by $1.6 million, or 7.5%, from $21.8 million for the nine months ended June 30, 2007 to $20.1 million for the nine months ended June 30, 2008. This was primarily due to a decrease in the average balance of loans receivable of $41.0 million from $453.8 million for the nine months ended June 30, 2007 to $412.8 for the nine months ended June 30, 2008. This decrease was partially offset by an increase in the average yield earned on loans receivable of 11 basis points from 6.39% for the nine months ended June 30, 2007 to 6.50% for the nine months ended June 30, 2008. The decrease in the average balance of loans receivable was primarily attributable to the sale of $46.4 million in residential loans in connection with the balance sheet restructuring. The increase in the average yield was attributable to the shift within the portfolio from automobile loans to higher yielding real estate loans. Interest on mortgage-backed securities increased by $734,000 or 21.1% from $3.5 million for the nine months ended June 30, 2007 to $4.2 million for the nine months ended June 30, 2008. This increase was primarily due to the increase in the average rate from 4.46% for the nine months ended June 30, 2007 to 5.49% for the nine months ended June 30, 2008. During the quarter ended June 30, 2007 the balance sheet was restructured and lower yielding securities were sold and replaced with higher yielding securities. This increase was partially offset by a decrease in the average balance of mortgage-backed securities from $103.7 million for the nine months ended June 30, 2007 to $102.0 million for the nine months ended June 30, 2008. Interest and dividends on investment securities decreased by $3.0 million, or 94.1% from $3.2 million for the nine months ended June 30, 2007 to $191,000 for the nine months ended June 30, 2008. This was primarily due to a decrease in the average balance from $98.1 million for the nine months ended June 30, 2007 to $4.3 million for the nine months ended June 30, 2008 as these securities either matured or were sold.

Interest Expense . Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased from $19.9 million for the nine months ended June 30, 2007 to $15.4 million for the nine months ended June 30, 2008, a decrease of $4.5 million or 22.5%. Interest on deposits decreased $2.1 million from $15.5 million for the nine months ended June 30, 2007 to $13.4 million for the nine months ended June 30, 2008 due to a decrease in the average balance of deposits from $593.3 million for the nine months ended June 30, 2007 to $537.0 million for the nine months ended June 30, 2008. The Bank’s current strategy is to focus on increasing core deposits such as checking and savings accounts and to allow run off of the higher cost certificate of deposits accounts. The average cost of deposits decreased 15 basis points from 3.49% at June 30, 2007 to 3.34% at June 30, 2008. Interest on short-term borrowings decreased by $634,000 or 63.3% for the nine months ended June 30, 2008. Interest on long-term borrowings decreased by $1.6 million or 84.6% for the nine months ended June 30, 2008. The overall decrease in borrowings was primarily due to a decrease of $57.4 million in the average balances of advances from the Federal Home Loan Bank of Atlanta during the nine months ended June 30, 2008. In connection with the balance sheet restructuring, advances totaling $104.0 million were prepaid. Also contributing to reduced interest expense was interest on the Trust Preferred Securities/Junior Subordinated Debentures , which decreased by $219,000 from $1.5 million for the nine months ended June 30, 2007 to $1.3 million for the nine months ended June 30, 2008. On June 30, 2008, $6.0 million of trust preferred securities were redeemed with proceeds from the second-step conversion. The Company also redeemed $186,000 of common stock of BCSB Capital Trust I that was associated with the trust preferred securities. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly. At June 30, 2008 the rate was 6.36% on $6.5 million of trust preferred securities and 5.71% on $10.0 million of trust preferred securities.

 

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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 nine month periods ended June 30, 2008 and 2007. Total average assets are computed using month-end balances.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or “interest rate spread,” which banks have traditionally used as an indicator of profitability. Another indicator of net interest income is “net interest margin,” which is net interest income divided by the average balance of interest-earning assets.

 

		For the Nine Months Ended June 30,
		2008									2007
		Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net		$	412,772		$	20,131		6.50	%		$	453,808		$	21,763		6.39	%
Mortgage-backed securities			101,988			4,202		5.49				103,735			3,468		4.46
Investment securities			4,332			191		5.88				98,064			3,186		4.33
Other interest earning assets			60,464			1,594		3.52				36,425			1,443		5.28
Total Interest-earning assets			579,556			26,118		6.01				692,032			29,860		5.75
Bank Owned Life Insurance			14,045									13,434
Noninterest-earning assets			29,197									25,444
Total assets		$	622,798								$	730,910
Interest-bearing liabilities:
Deposits		$	537,038		$	13,441		3.34			$	593,272		$	15,517		3.49
Short-term FHLB Advances			10,000			337		4.49				26,956			971		4.80
Long-term FHLB Advances			8,462			306		4.82				45,788			1,859		5.41
Junior Subordinated Debentures			23,175			1,319		7.59				23,197			1,538		8.84
Other liabilities			1,455			—		.00				1,941			—		.00
Total interest-bearing liabilities			580,130			15,403		3.54				691,154			19,885		3.84
Noninterest-bearing liabilities			1,941									5,836
Total liabilities			582,071									696,990
Stockholders’ Equity			40,727									33,920
Total liabilities and stockholders’ equity		$	622,798								$	730,910
Net interest income					$	10,715								$	9,975
Interest rate spread								2.47	%								1.91	%
Net interest margin								2.47	%								1.92	%
Ratio average interest earning assets/interest-bearing liabilities								99.90	%								100.13	%

 

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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 Nine Months Ended June 30,
		2008 Vs. 2007
		Increase (Decrease) Due to
		Volume				Rate				Rate/Volume				Total
		(In Thousands)
Interest income:
Loans receivable, net		$	(1,962	)		$	363			$	(33	)		$	(1,632	)
Mortgage-backed securities			(61	)			809				(14	)			734
Investment securities			(3,046	)			1,138				(1,087	)			(2,995	)
Other interest-earning assets			949				(481	)			(317	)			151
Total interest-earning assets			(4,120	)			1,829				(1,451	)			(3,742	)
Interest expense:
Deposits			(1,471	)			(668	)			63				(2,076	)
Short-term FHLB advances			(610	)			(63	)			39				(634	)
Long-term FHLB advances			(1,516	)			(203	)			166				(1,553	)
Junior Subordinated Debentures			(1	)			(218	)			0				(219	)
Other liabilities			0				0				0				0
Total interest-bearing liabilities			(3,598	)			(1,152	)			268				(4,482	)
Change in net interest income		$	(522	)		$	2,981			$	(1,719	)		$	740

Provision for Loan Losses . We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We did not establish any additional provision for losses on loans during the nine months ended June 30, 2008 as compared to a provision of $117,000 for the nine months ended June 30, 2007. Loan charge offs for the nine months ended June 30, 2008 were $190,000 as compared to $302,000 for the nine months ended June 30, 2007, a decrease of $112,000. Loan recoveries were $215,000 for the nine months ended June 30, 2008 compared to $212,000 for the nine months ended June 30, 2007. Nonperforming loans at June 30, 2008 were $1.7 million as compared to $2.8 million at June 30, 2007. 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 increased from a loss of $5.8 million for the nine months ended June 30, 2007 to a gain of $1.4 million for the nine months ended June 30, 2008. The increase in other income for the nine months ended June 30, 2008 was primarily attributable to losses from the sale of investments and mortgage backed securities and valuation allowances on loans held for sale in 2007. During the nine months ended June 30, 2007 there was a loss on the sale of investments and mortgage backed securities of $5.9 million and a realized loss on loans held for sale of $1.2 million, due to the balance sheet restructuring. Fees on transaction accounts increased $287,000, or 62.5%, from $459,000 for the nine months ended June 30, 2007 to $746,000 for the nine months ended June 30, 2008. The increase is primarily attributable to the implementation of an overdraft protection program. Income from Bank Owned Life Insurance (BOLI) decreased $55,000 for the nine months ended June 30, 2008 from $428,000 for the nine months ended June 30, 2007, to $373,000 for the nine months ended June 30, 2008. This decrease was due to an adjustment in the rate of dividends earned on the BOLI investment.

Non-interest Expenses. Total non-interest expenses increased by $3.5 million, or 42.5%, from $8.2 million for the nine months ended June 30, 2007 to $11.6 million for the nine months ended June 30, 2008. This was primarily due to the recovery of insurance proceeds from the check-kiting incident of $3.4 million during the nine months ended June 30, 2007. Salaries and related expenses increased by $193,000, or 3.3%, from $5.9 million for the nine months ended June 30, 2007 to $6.1 million for the nine months ended June 30, 2008. Occupancy expense remained stable at $1.7 million for the nine months ended June 30, 2007 and 2008. Data processing fees increased $34,000, or 3.1%, from $1.1 million for the nine months ended June 30, 2007 to $1.1 million for the nine months ended June 30, 2008. This increase was due to the increase in the data processor’s contract fees. Advertising increased $51,000, or 13.0%, from $391,000 for

 

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the nine months ended June 30, 2007 to $442,000 for the nine months ended June 30, 2008. This increase was due to additional promotion of new products during the period. These increases were partially offset by a decrease in professional fees and other expenses. Professional fees decreased by $65,000, or 16.9%, from $385,000 for the nine months ended June 30, 2007 to $320,000 for the nine months ended June 30, 2008. The decrease in professional fees was primarily due to reduced legal and consulting fees. Other expenses decreased by $71,000, or 8.7%, from $820,000 for the nine months ended June 30, 2007 to $749,000 for the nine months ended June 30, 2008.

Income Taxes . Our income tax expense (benefit) was $82,000 and $(1.5) million for the nine months ended June 30, 2008 and 2007, respectively. The change in income taxes for the nine months ended June 30, 2008 as compared to the same period in the prior year was primarily due to improved pretax earnings. However, the tax rate as a percentage of pretax earnings (loss) decreased substantially during the nine months ended June 30, 2008 as compared with the nine months ended June 30, 2007. This change relates to recently enacted increases in Maryland state corporate income tax rates from 7% to 8.25%. Deferred tax assets were adjusted to reflect the new state income tax rate when such assets are expected to be realized. The adjustment decreased our income tax expense by approximately $50,000 for the nine months ended June 30, 2008. Additionally, our effective tax rate is impacted by income received from Bank Owned Life Insurance, which is not subject to income taxes.

Comparison of Operating Results for the Three Months Ended June 30, 2008 and 2007

Net Income . Net income decreased from $599,000 for the three months ended June 30, 2007 to $285,000 for the three months ended June 30, 2008. The decrease was primarily due to gains from the sale of loans in 2007 from the balance sheet restructuring. Decreased net interest income also contributed to the decline in net income. Net interest income decreased by $98,000, or 2.6% from $3.8 million for the three months ended June 30, 2007 to $3.7 million for the three months ended June 30, 2008.

Net Interest Income . Net interest income decreased by $98,000, or 2.6%, from $3.8 million for the three months ended June 30, 2007 to $3.7 million for the three months ended June 30, 2008. The decrease in net interest income primarily was due to decreases in the average rate of interest on Federal Funds sold and overnight investments due to rate cuts by the Federal Reserve Bank over the past year. Our ratio of average interest-earning assets to average interest-bearing liabilities increased from 99.44% for the three months ended June 30, 2007 to 101.78% for the three months ended June 30, 2008.

Interest Income . Interest income decreased by $1.4 million, or 14.5%, from $9.6 million for the three months ended June 30, 2007 to $8.2 million for the three months ended June 30, 2008. Interest and fees on loans decreased by $631,000, or 8.8%, from $7.2 million for the three months ended June 30, 2007 to $6.5 million for the three months ended June 30, 2008. This was primarily due to a substantial decrease in yield on Federal Funds sold and overnight investments due to rate cuts by the Federal Reserve Bank and a decrease in the average balance of loans receivable of $32.1 million from $440.2 million for the three months ended June 30, 2007 to $408.1 for the three months ended June 30, 2008. The decrease in the average balance of loans receivable was primarily attributable to the sale of $46.4 million in residential loans in connection with the balance sheet restructuring. Interest on mortgage-backed securities increased by $180,000, or 15.9%, from $1.1 million for the three months ended June 30, 2007 to $1.3 million for the three months ended June 30, 2008. The average balance of mortgage-backed securities increased by $10.8 million from $87.7 million for the three months ended June 30, 2007 to $98.5 million for the three months ended June 30, 2008. Interest and dividends on investment securities decreased by $77,000, or 64.2% from $120,000 for the three months ended June 30, 2007 to $43,000 for the three months ended June 30, 2008. This was primarily due to the decrease in the average balance of investment securities from $7.5 million for the three months ended June 30, 2007 to $2.8 million for the three months ended June 30, 2007 as these securities either matured or were sold. Interest income on other earning assets decreased by $874,000, or 71.0%, from $1.2 million for the three months ended June 30, 2007 to $357,000 for the three months ended June 30, 2008. This was primarily due to a substantial decline in yield on Federal Funds sold due to rate cuts by the Federal Reserve Bank and an overall decrease in the average balance of liquid interest earning assets.

Interest Expense . Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased, from $5.9 million for the three months ended June 30, 2007 to $4.6 million for the three months ended June 30, 2008, a decrease of $1.3 million, or 22.2%. Interest on deposits decreased $1.0 million from $5.1 million for the three months ended June 30, 2007 to $4.0 million for the three months ended June 30, 2008 due to a decrease in the average balance of deposits from $582.6 million for the three months ended June 30, 2007 to $523.2 million for the three months ended June 30, 2008. Interest on deposits also decreased due to a decline in the average cost of funds on deposits from 3.48% for the three months ended June 30, 2007 to 3.08% for the three months ended June 30, 2008. The Bank’s current strategy is to focus on increasing core deposits such as checking and savings accounts and to allow the run-off of higher cost certificate of deposits accounts. Interest on borrowings decreased by $107,000 or 37.2% for the three months ended June 30, 2008. The overall decrease in interest expense on borrowings was primarily due to a

 

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decrease in the average balances of advances from the Federal Home Loan Bank of Atlanta of $8.0 million, from $23.3 million at June 30, 2007 to $15.3 million at June 30, 2008. Interest expense on the Trust Preferred Securities/Junior Subordinated Debentures decreased $156,000, or 30.3% from $514,000 for the three months ended June 30, 2007 to $358,000 for the three months ended June 30, 2008. This decrease was due primarily to a decline in interest rates paid on these borrowings from 8.86% for the three months ended June 30, 2007 to 6.19% for the three months ended June 30, 2008. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

 

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Average Balance Sheet . The following table sets forth certain information relating to our average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the three month periods ended June 30, 2008 and 2007. Total average assets are computed using month end balances.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or “interest rate spread,” which banks have traditionally used as an indicator of profitability. Another indicator of net interest income is “net interest margin,” which is its net interest income divided by the average balance of interest-earning assets.

 

		For the Three Months Ended June 30,
		2008									2007
		Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net		$	408,124		$	6,542		6.41	%		$	440,253		$	7,173		6.52	%
Mortgage-backed securities			98,533			1,312		5.33				87,685			1,132		5.16
Investment securities			2,840			43		6.06				7,522			120		6.38
Other interest earning assets			64,236			357		2.22				92,661			1,231		5.31
Total Interest-earning assets			573,733			8,254		5.75				628,121			9,656		6.15
Bank Owned Life Insurance			14,190									13,593
Noninterest-earning assets			27,697									28,604
Total assets		$	615,620								$	670,318
Interest-bearing liabilities:
Deposits		$	523,212		$	4,026		3.08			$	582,583		$	5,067		3.48
Short-term FHLB Advances			10,000			121		4.84				10,000			108		4.32
Long-term FHLB Advances			5,385			60		4.46				13,333			180		5.40
Junior Subordinated Debentures			23,131			358		6.19				23,197			514		8.86
Other liabilities			2,087			—		.00				2,564			—		.00
Total interest-bearing liabilities			563,815			4,565		3.24				631,677			5,869		3.72
Noninterest-bearing liabilities			1,371									4,564
Total liabilities			565,186									636,241
Stockholders’ Equity			50,434									34,077
Total liabilities and stockholders’ equity		$	615,620								$	670,318
Net interest income					$	3,689								$	3,787
Interest rate spread								2.52	%								2.43	%
Net interest margin								2.57	%								2.41	%
Ratio average interest earning assets/interest bearing liabilities								101.76	%								99.44	%

 

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

 

		For Three Months Ended June 30,
		2008 vs. 2007
		Increase (Decrease) Due to
		Volume				Rate				Rate/Volume			Total
		(In Thousands)
Interest income:
Loans receivable, net		$	(486	)		$	(155	)		$	10		$	(631	)
Mortgage-backed securities			141				35				4			180
Investment securities			(74	)			(7	)			4			(77	)
Other interest-earning assets			(380	)			(713	)			219			(874	)
Total interest-earning assets			(799	)			(840	)			237			(1,402	)
Interest expense:
Deposits			(517	)			(584	)			60			(1,041	)
Short-term FHLB advances			—				13							13
Long-term FHLB advances			(120	)			—				—			(120	)
Junior Subordinated Debentures			(1	)			(155	)			—			(156	)
Other liabilities			—				—				—			—
Total interest-bearing liabilities			(638	)			(726	)			60			(1,304	)
Change in net interest income		$	(161	)		$	(114	)		$	177		$	(98	)

 

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Provision for Loan Losses . We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We did not establish any additional provision for losses on loans during the three months ended June 30, 2008 or June 30, 2007. Charge offs for the three months ended June 30, 2008 were $45,000 as compared to $93,000 for the three months ended June 30, 2007, a decrease of $48,000. Loan recoveries were $46,000 for the three months ended June 30, 2008 compared to $26,000 for the three months ended June 30, 2007. Nonperforming loans at June 30, 2008 were $1.7 million as compared to $2.8 million at June 30, 2007. 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 by $268,000, from $808,000 for the three months ended June 30, 2007 to $540,000 for the three months ended June 30, 2008. The decrease in other income for the three months ended June 30, 2008 was primarily attributable to a decrease in the valuation allowance on loans held for sale. This decrease was partially offset by an increase in fees on transaction accounts of $71,000, or 35.7%, from $199,000 for the three months ended June 30, 2007 to $270,000 for the three months ended June 30, 2008. The increase is primarily attributable to the implementation of an overdraft protection program. Income from Bank Owned Life Insurance (BOLI) decreased $18,000 for the three months ended June 30, 2008 from $146,000 for the three months ended June 30, 2007, to $128,000 for the three months ended June 30, 2008. This decrease was due to an adjustment in the rate of dividends earned on the BOLI investment.

Non-interest Expenses. Total non-interest expenses increased by $61,000, or 1.6%, from $3.7 million for the three months ended June 30, 2007 to $3.8 million for the three months ended June 30, 2008. Salaries and related expenses for the three months ended June 30, 2008 included $130,000 in severance costs associated with a reduction in staff. Property plant and equipment expense decreased by $19,000 or 6.3%, from $303,000 for the three months ended June 30, 2007 to $ 284,000 for the three months ended June 30, 2008. Advertising expense increased by $51,000, or 50.0%, from $102,000 for the three months ended June 30, 2007 to $153,000 for the three months ended June 30, 2008. This increase was due to additional promotion of new products during the period. Professional fees increased $72,000, or 114.3%, from $63,000 for the three months ended June 30, 2007 to $135,000 for the three months ended June 30, 2008. The increase in professional fees was primarily due to increased legal and consulting fees. Telephone, postage and office supplies decreased by $18,000 or 17.6%, from $102,000 for the three months ended June 30, 2007 to $84,000 for the three months ended June 30, 2008. This decrease was primarily due to decreased mailing expenses. Other expenses also decreased by $72,000 or 28.7%, from $252,000 for the three months ended June 30, 2007 to $179,000 for the three months ended June 30, 2008. This decrease related primarily to $89,000 in reversed expenses previously accrued in connection with potential litigation that had been settled.

Income Taxes . Our income tax expenses were $134,000 and $247,000 for the three months ended June 30, 2008 and 2007, respectively. Our tax expense decreased for the three months ended June 30, 2008 as compared to the same quarter in the prior year primarily due to a decrease in pretax earnings.

 

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Commitments, Contingencies and Off-Balance Sheet Risk

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

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

 

		June 30, 2008			September 30, 2007
		(In thousands)
Commitments to originate new loans		$	6,526		$	8,835
Unfunded commitments to extend credit under existing equity line and commercial lines of credit			29,182			29,942
Commercial letters of credit			840			1,010

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 June 30, 2008, we had $1.7 million in non-performing assets, consisting of nonaccrual loans and repossessed assets representing .28% of total assets. Approximately $1.3 million of this total is represented by a commercial office building located in Shrewsbury, PA. The property is fully leased with positive cash flow. No loss of principal is anticipated. At September 30, 2007, non-performing assets were $2.4 million or .37% of assets. There was one impaired commercial loan with an outstanding balance of $2.3 million at September 30, 2007. The property securing this loan was foreclosed upon and sold with no loss of principal to the Company. Our net recoveries for the quarter ended June 30, 2008 were $1,000. Our allowance for loan losses was $2.7 million at June 30, 2008 compared to $2.6 million at September 30, 2007.

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

 

		At June 30, 2008				At September 30, 2007
		(In thousands)
Nonperforming loans:
Nonaccrual loans:
Single family residential		$	—			$	—
Multi-family residential			—				—
Commercial real estate			1,649				2,266
Construction			—				—
Commercial loans			—				—
Land			—				—
Consumer Loans			13				24
Total nonaccrual loans			1,662				2,290
Loans 90 days past due and accruing			—				—
Restructured loans			—				—
Total nonperforming loans			1,662				2,290
Other nonperforming assets			20				108
Total nonperforming assets		$	1,682			$	2,398
Nonperforming loans to loans receivable, net			.41	%			.55	%
Nonperforming assets as a percentage of loans and foreclosed real estate			.42	%			.58	%
Nonperforming assets to total assets			.28	%			.37	%

 

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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 Nine months Ended June 30
		2008				2007
		(Dollars in thousands)
Balance at beginning of period		$	2,650			$	2,679
Loans charged-off:
Real estate mortgages:
Single-family residential			—				—
Multi-family residential			—				—
Commercial			—				—
Construction			—				—
Commercial Loans			—				—
Consumer			(190	)			(302	)
Total charge-offs			(190	)			(302	)
Recoveries:
Real estate mortgage:
Single-family residential			—				—
Multi-family residential			—				—
Commercial			—				—
Construction			—				—
Commercial loans secured			—				—
Consumer			215				212
Total recoveries			215				212
Net loans recovered (charged-off)			25				(90	)
Provision for loan losses			—				117
Balance at end of period		$	2,675			$	2,706
Ratio of net recoveries (charge-offs) to average loans outstanding during the period			.01	%			.02	%

Regulations require that we classify assets on a regular basis. There are three classifications for problem assets: substandard, doubtful and loss. We regularly review our assets to determine whether any assets require classification or re-classification. At June 30, 2008, the Company had $1.7 million in classified assets, consisting of $1.7 million in substandard and loss loans, and $13,000 in repossessed assets. At September 30, 2007, the Company had $5.7 million in substandard and loss loans, consisting of $5.7 million in loans and $94,000 in foreclosed real estate.

In addition to regulatory classifications, we also classify as “special mention” assets that are currently performing in accordance with their contractual terms but may exhibit some form of credit weakness and may become classified or non-performing assets in the future. At June 30, 2008, we have identified approximately $11.3 million in assets classified as special mention. At September 30, 2007, $1.9 million in assets were classified as special mention.

The Bank’s methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but are expected to have occurred. Management conducts regular reviews of the Banks’ assets and evaluates the need to establish allowances on the basis of these reviews. Allowances are established by management and reviewed by the Board of Directors on a monthly basis based on an assessment of risk in the Bank’s assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally.

Additional provisions for losses on loans are made in order to bring the allowance to a level deemed adequate. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the collateral.

Asset quality concerns have increased recently as a result of declining conditions in housing and credit markets. The Bank has no direct sub-prime or Alt-A loss exposure in its loan portfolio. Although “Special mention” assets increased from September 30, 2007 to June 30, 2008, substandard and loss loans, which exhibit the greatest risk

 

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exposure, decreased during the same period from $5.7 million at September 30, 2007 to $1.7 million at June 30, 2008. Loan loss allowances as a percentage of gross loans outstanding have increased slightly between September 30, 2007 and June 30, 2008. For the nine months ended June 30, 2008 recoveries have exceeded charge-offs. Based upon these factors, it was determined that the allowance for loan losses at June 30, 2008 was adequate and that no additional provision for loan losses during the three months ending June 30, 2008 was necessary.

Liquidity and Capital Resources

At June 30, 2008, the Bank exceeded all regulatory minimum capital requirements. For information comparing the Bank’s tangible, core and risk-based capital levels to the regulatory requirements, see Note 6 of Notes to Consolidated Financial Statements.

The Company’s primary sources of funds are deposits and proceeds from maturing investment securities and mortgage-backed securities and principal and interest payments on loans. While maturities and scheduled amortization of mortgage-backed securities and loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors.

The primary investing activities of the Company are the origination of loans and the purchase of investment securities and mortgage-backed securities. During the nine months ended June 30, 2008 and 2007, the Company had $59.0 million and $89.2 million, respectively, of gross loan originations. During the nine months ended June 30, 2008 and 2007, the Company purchased investment securities in the amounts of $0 and $802,000, respectively, and mortgage-backed securities in the amounts of $0 and $84.9 million, respectively. The primary financing activity of the Company is the attraction of savings deposits.

The Company has other sources of liquidity if there is a need for funds. The Bank has the ability to obtain additional advances from the FHLB of Atlanta in the amount of $159.0 million as of June 30, 2008. In addition, securities in the available for sale portfolio provide liquidity and the Company has the immediately liquid resources of cash and cash due from banks, federal funds sold and securities purchased under resale agreements if needed.

The Bank is required to maintain adequate levels of liquid assets as defined by OTS regulations. The Bank’s average daily liquidity ratio for the month of June was approximately 28.3%. Management seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide for lower rates of return, the Bank’s relatively high liquidity will, to a certain extent, result in lower rates of return on assets.

The Company’s most liquid assets are cash, interest-bearing deposits in other banks and federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Company’s operating, financing and investing activities during any given period. At June 30, 2008, cash, interest-bearing deposits in other banks and federal funds sold were $9.1 million, $7.0 million and $44.9 million, respectively.

We anticipate that we will have sufficient funds available to meet our current commitments. Certificates of deposit which are scheduled to mature in less than one year at June 30, 2008 totaled $220.3 million. Based on past experience, management believes that a significant portion of such deposits will remain with Baltimore County Savings Bank. Baltimore County Savings Bank is a party to financial instruments with off-balance-sheet risk made in the normal course of business to meet the financing needs of its customers. These financial instruments are standby letters of credit, lines of credit and commitments to fund mortgage loans and involve to varying degrees elements of credit risk in excess of the amount recognized in the statement of financial position. The contract amounts of those instruments express the extent of involvement Baltimore County Savings Bank has in this class of financial instruments and represents Baltimore County Savings Bank’s exposure to credit loss from nonperformance by the other party. Baltimore County Savings Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. At June 30, 2008, Baltimore County Savings Bank had commitments under standby letters of credit, lines of credit and commitments to originate loans of $840,000, $29.2 million and $6.5 million, respectively.

In June 2002, BCSB Bankcorp issued $12,887,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust I, a Delaware business trust, in which BCSB Bancorp now owns all of the common equity. The debentures carry a rate of 3.65% over the three month LIBOR rate, and reset quarterly. The rate was 6.36% at June 30, 2008. The debentures are the sole asset of BCSB Bankcorp Capital Trust I. BCSB Bankcorp Capital Trust I issued $12,500,000 of mandatory

 

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redeemable preferred securities to investors. BCSB Bancorp’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by BCSB Bancorp of BCSB Bankcorp Capital Trust I obligations under the preferred securities. The preferred securities are redeemable by BCSB Bankcorp on or after September 30, 2007 or under certain conditions in whole but not in part at any time at a redemption price equal to 103% of the principal amount plus any accrued interest. The Company used a portion of the net proceeds that it retained from the recently completed stock offering to redeem $6.0 million of the $12.5 million in outstanding trust preferred securities issued by a trust wholly owned by the Company, while retaining sufficient liquidity to cover at least two years of projected operating expenses.

In September 2003, BCSB Bankcorp issued $10,310,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust II, a Delaware business trust, in which BCSB Bancorp now owns all of the common equity. The debentures carry a rate of 3.00% over the three month LIBOR rate, and reset quarterly. The rate was 5.71% at June 30, 2008. The debentures are the sole asset of BCSB Bankcorp Capital Trust II. BCSB Bankcorp Capital Trust II issued $10,000,000 of mandatory redeemable preferred securities to investors. BCSB Bancorp’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by BCSB Bancorp of BCSB Bankcorp Capital Trust II obligations under the preferred securities. The preferred securities are redeemable by BCSB Bancorp on or after October 7, 2008 or under certain conditions in whole but not in part at any time at a redemption price equal to 103% of the principal amount plus any accrued interest.

Pursuant to these trust preferred securities, the Company, must make quarterly interest payments, which totaled $2.1 million during the year ended September 30, 2007 and $358,000 during the three months ended June 30, 2008.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities.

The Company considers interest rate risk to be its most significant market risk, which could potentially have the greatest impact on operating earnings. The structure of the Company’s loan and deposit portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income. However, the Company does not believe that any material changes in interest rate risk exposures occurred since September 30, 2007.

 

Item 4.

Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

None.

 

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Item 1A.

Risk Factors

None.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None

(c) None

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Submission of Matters to a Vote of Security-Holders

The Company’s Annual Meeting of Stockholders was held on April 2, 2008. There were 5,925,743 shares entitled to vote as of the date of February 11, 2008, including 3,754,960 shares held by Baltimore County Savings Bank, M.H.C. 5,749,461 shares representing 96.96% of the total outstanding shares of the Company’s common stock were represented at the Annual Meeting in person or by proxy.

 

I.	ADOPTION OF PLAN OF CONVERSION AND REORGANIZATION

 

		Number of Votes		Percentage of Outstanding Shares (including shares held by Baltimore County Savings Bank, M.H.C.)		Percentage of Outstanding Shares (excluding shares held by Baltimore County Savings Bank, M.H.C.)
FOR		5,105,533		86.1%		62.0%
AGAINST		163,567		2.7%		7.5%
ABSTAIN		11,219		.192%		.5%

There were 469,141 broker nonvotes on the matter

 

II.	INFORMATIONAL PROPOSALS

 

a.

Approval of an increase in the authorized shares of capital stock.

 

		Number of Votes		Votes Cast
FOR		5,394,474		93.86%
AGAINST		341,185		5.91%
ABSTAIN		13,797		.23%

There were 0 broker nonvotes on the matter

 

b.

Approval of a provision in BCSB Bancorp’s articles of incorporation to limit the ability of stockholders to remove directors.

 

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		Number of Votes		Votes Cast
FOR		4,800,037		90.79%
AGAINST		456,625		8.77%
ABSTAIN		23,657		.44%

There were 469,142 broker nonvotes on the matter

 

c.

Approval of a provision in BCSB Bancorp’s articles of incorporation to limit business combinations with interested stockholders.

 

		Number of Votes		Votes Cast
FOR		4,904,373		92.75%
AGAINST		351,254		6.83%
ABSTAIN		24,694		.42%

There were 469,140 broker nonvotes on the matter

 

d.

Approval of a provision in BCSB Bancorp’s articles of incorporation requiring a super-majority vote to approve certain amendments to BCSB Bancorp’s articles of incorporation.

 

		Number of Votes		Votes Cast
FOR		4,856,341		91.77%
AGAINST		403,378		7.85%
ABSTAIN		20,602		.38%

There were 469,140 broker nonvotes on the matter

 

e.

Approval of a provision in BCSB Bancorp’s articles of incorporation to limit the voting rights of shares beneficially owned in excess of 10% of BCSB Bancorp’s outstanding voting stock.

 

		Number of Votes		Votes Cast
FOR		4,866,672		91.97%
AGAINST		386,720		7.53%
ABSTAIN		26,927		.50%

There were 469,141 broker nonvotes on the matter

 

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III.	ELECTION AS DIRECTORS OF THE FOLLOWING NOMINEES :

For a term of three-years:

 

		FOR				WITHHELD
		Number of Votes		Percentage of Votes Cast		Number of Votes		Percentage of Votes Cast
Henry V. Kahl		5,571,364		96.9%		178,093		3%
Michael J. Klein		5,576,276		96.9%		173,182		3%

For a term of one year:

 

		FOR				WITHHELD
		Number of Votes		Percentage of Votes Cast		Number of Votes		Percentage of Votes Cast
Ernest A. Moretti		5,580,830		97%		168,627		2.9%

 

IV.	RATIFICATION OF THE APPOINTMENT OF PUBLIC INDEPENDENT REGISTERED ACCOUNTING FIRM

Resolved, that the appointment of Stegman & Company as independent registered accounting firm of BCSB Bankcorp, Inc. for the 2008 fiscal year, having been presented to and considered at this meeting, be and hereby is ratified and approved in all respects.

 

		Number		Percentage
FOR		5,692,342		99.05%
AGAINST		39,653		.67%
ABSTAIN		17,465		.29%

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

The following exhibits are filed herewith:

 

Exhibit Number		Title
31.1		Rule 13a-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Chief Financial Officer
32		Section 1350 Certifications

 

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		BCSB BANCORP, INC.
Date: July 31, 2008		/s/ Joseph J. Bouffard
		Joseph J. Bouffard
		President
		(Principal Executive Officer)
Date: July 31, 2008		/s/ Anthony R. Cole
		Anthony R. Cole
		Executive Vice President
		(Principal Financial and Accounting Officer)