General

BCSB Bancorp, Inc. BCSB Bancorp ("BCSB Bancorp" or the "Company"), a Maryland corporation, is the holding company for Baltimore County Savings Bank, F.S.B. (the "Bank"). The Company's primary asset is its investment in the Bank. The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of the Bank. The Company's most significant asset is its investment in the Bank. Accordingly, the information set forth in this Quarterly Report on Form 10-Q, including financial statements and related data, relates primarily to the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Currently, the Company does not maintain offices separate from those of the Bank or employ any persons other than officers of the Bank who are not separately compensated for such service. At December 31, 2008, the Company had total assets of $581.7 million, total deposits of $487.3 million and stockholders' equity of $59.4 million.

The Company's and the Bank's executive offices are located at 4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236, and its main telephone number is
(410) 256-5000.

Baltimore County Savings Bank, F.S.B. The Bank is a 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 ("FDIC"), its deposit insurer. The Bank attracts deposits from the general public and invests these funds in loans secured by first mortgages on owner-occupied, single-family residences in its market area and other real estate loans consisting of commercial real estate loans, construction loans and single-family rental property loans. The Bank also originates consumer loans and commercial loans. The Bank derives its income primarily from interest earned on these loans, and to a lesser extent, interest earned on investment securities and mortgage-backed securities. The Bank operates out of its main office in Baltimore County, Maryland and 18 branch offices in Baltimore County, Harford County, Howard County and Baltimore City in Maryland.

Available Information

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

Completed Reorganization

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, a newly organized Maryland corporation, BCSB Bancorp, Inc., became the holding company for the Bank. As part of the conversion a total of 1,976,538 shares the Company's common stock were sold at $10.00 per share in an initial public offering and the Company received net proceeds of approximately $17.1 million. The Company contributed $8.5 million or approximately 50% of the net proceeds to the Bank. The Company also 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 Company's common stock. As part of the conversion, each outstanding public share of BCSB Bankcorp, Inc. was exchanged for 0.5264 shares of the Company's common stock. Information herein for dates and periods prior to April 10, 2008 reflects such information for BCSB Bankcorp, Inc.

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. Management evaluates its estimates, including those related to the allowance for loan losses.

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

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term "other than temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews 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.

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

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. 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 December 31, 2008 and September 30, 2008

During the three months ended December 31, 2008, assets increased by $14.6 million, or 2.6% from $567.1 million at September 30, 2008 to $581.7 million at December 31, 2008. Our cash and cash equivalents increased $13.7 million, or 39.2% from $35.0 million at September 30, 2008 to $48.7 million at December 31, 2008 primarily due to proceeds received from participation in TARP previously discussed. Net loans receivable decreased $4.7 million, or 1.2%, from $400.5 million at September 30, 2008 to $395.8 million at December 31, 2008. Management's lending strategy remains focused on commercial real estate, commercial business and home equity lending. We have ceased our indirect auto lending program. The indirect loan portfolio, which was $7.6 million at December 31, 2008, is expected to decline over time as the loans are paid down. Mortgage-backed securities available for sale increased by $6.0 million, or 6.7%, from $89.9 million at September 30, 2008 to $95.9 million at December 31, 2008 resulting from securities purchased during the period. At December 31, 2008, all mortgage-backed securities were classified as available for sale for liquidity purposes. Net premises and equipment decreased $245,000, or 2.5%, from $9.8 million at September 30, 2008 to $9.5 million at December 31, 2008. The cash surrender value on the Bank Owned Life Insurance increased $63,000, or .44% from $14.4 million at September 30, 2008 to $14.5 million at December 31, 2008.

Deposits increased by $2.5 million, or .51 %, from $484.8 million at September 30, 2008 to $487.3 million at December 31, 2008. The Bank's current strategy remains focused on increasing core deposits such as checking and savings accounts. Federal Home Loan Bank of Atlanta short-term advances remained stable at $10.0 million as of December 31, 2008 and September 30, 2008. Advances may be used to fund loan demand when other available liquidity sources do not meet this demand.

Stockholders' equity increased by $9.6 million, or 19.4%, from $49.8 million at September 30, 2008 to $59.4 million at December 31, 2008. On December 23, 2008, as part of the Troubled Asset Relief Program ("TARP") Capital Purchase Program, the Company entered into a Letter Agreement, and the related Securities Purchase Agreement - Standard Terms (collectively, the "Purchase Agreement"), with the United States Department of the Treasury ("Treasury"), pursuant to which the Company issued (i) 10,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share ("Series A preferred stock"), and (ii) a warrant to purchase 183,465 shares of the Company's common stock, par value $0.01 per share, for an aggregate purchase price of $10,800,000 in cash. The Company contributed $5.5 million or approximately 51% of the net proceeds to the Bank in the form of a capital contribution. This was partially offset by an increase in the accumulated other comprehensive loss of $1.4 million from $(2.5) million at September 30, 2008 to $(3.9) million at December 31, 2008.

The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Prior to February 15, 2012, the Company may redeem shares of Series A preferred stock only if it has received aggregate gross proceeds of not less than $2,700,000 from one or more qualified equity offerings, and the aggregate redemption price may not exceed the net proceeds received by the Company from such offerings. The redemption of the Series A preferred stock requires prior regulatory approval.

The warrant is exercisable at $8.83 per share at any time on or before December 23, 2018. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

The Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the warrants will be subject to any contractual restrictions on transfer, except that Treasury may not transfer a portion of the warrant with respect to, or exercise the warrant for, more than one-half of the shares of common stock underlying the warrant prior to the earlier of (a) the date on which the Company has received aggregate gross proceeds of not less than $10,800,000 from one or more qualified equity offerings and (b) December 31, 2009.

Our accumulated other comprehensive loss net of taxes was $3.9 million at December 31, 2008, compared to accumulated other comprehensive loss net of taxes of $2.5 million at September 30, 2008. At December 31, 2008, $7.8 million of the investment portfolio's gross unrealized losses related to three collateralized mortgage obligations with an amortized cost of $20.1 million as of that date. Gross unrealized losses for these same securities were approximately $3.7 million as of September 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 Three Months Ended December 31, 2008 and 2007

Net Income. Net income increased by $147,000 from $93,000 for the three months ended December 31, 2007 to $240,000 for the three months ended December 31, 2008. The improvement was primarily due to gain on sale of repossessed assets and reduced non-interest expenses.

Net Interest Income. Net interest income increased by $45,000, or 1.2%, from $3.66 million for the three months ended December 31, 2007 to $3.71 million for the three months ended December 31, 2008. The increase in net interest income primarily was due to a improved net interest margin resulting from reduced cost of funds on the deposit portfolio during the period. The net interest margin increased 34 basis points from 2.46% for the three months ended December 31, 2007 to 2.80% for the three months ended December 31, 2008.

Interest Income. Interest income decreased by $1.6 million, or 17.1% from $9.3 million for the three months ended December 31, 2007 to $7.7 million for the three months ended December 31, 2008. Interest and fees on loans decreased by $625,000, or 9.0%, from $6.9 million for the three months ended December 31, 2007 to $6.3 million for the three months ended December 31, 2008. This was primarily due to a decrease in the average balance of loans receivable of $21.2 million from $419.2 million for the three months ended December 31, 2007 to $398.0 for the three months ended December 31, 2008. The average rate earned on loans also declined by 27 basis points from 6.59% for the three months ended December 31, 2007 to 6.32% for the three months ended December 31, 2008. Also contributing to the decrease in interest income was a decrease in interest on mortgage-backed securities of $172,000, from $1.5 million for the three months ended December 31, 2007 to $1.3 million for the three months ended December 31, 2008. This decrease was primarily due to a decrease in the average balance of mortgage-backed securities from $105.7 million for the three months ended December 31, 2007 to $90.4 million for the three months ended December 31, 2008. Interest and dividends on investment securities decreased by $64,000, or 79.0% from $81,000 for the three months ended December 31, 2007 to $17,000 for the three months ended December 31, 2008. This was primarily due to a decrease in the average balance from $5.6 million for the three months ended December 31, 2007 to $2.5 million for the three months ended December 31, 2008 as these securities either matured or were sold. Other interest income, which primarily consists of the investment in overnight federal fund decreased by $727,000, or 89.9% from $809,000 for the three months ended December 31, 2007 to $82,000 for the three months ended December 31, 2008. This was due to the decrease in the average balance by $25.4 million, from $64.3 million at December 31, 2007 to $38.9 at December 31, 2008. The decrease in the average yield earned on other investments of 419 basis points, from 5.03% for the three months ended December 31, 2007 to .84% for the three months ended December 31, 2008 was due to drastic declines in interest rates over the period.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased from $5.6 million for the three months ended December 31, 2007 to $4.0 million for the three months ended December 31, 2008, a decrease of $1.6 million or 29.2%. Interest on deposits decreased $1.4 million from $4.9 million for the three months ended December 31, 2007 to $3.5 million for the three months ended December 31, 2008 due to a decrease in the average balance of deposits of $67.5 million from $552.1 million for the three months ended December 31, 2007 to $484.6 million for the three months ended December 31, 2008. The Bank's current strategy is to focus on increasing core deposits such as checking and savings accounts. The average cost of deposits decreased 62 basis points from 3.52% at December 31, 2007 to 2.90% at December 31, 2008. Interest on short-term borrowings remained stable at $113,000 for the three months ended December 31, 2008 and 2007. Interest on long-term borrowings decreased by $116,000 for the three months ended December 31, 2008. There were no long term borrowings for the three months ended December 31, 2008. Also contributing to reduced interest expense was interest on the Trust Preferred Securities/Junior Subordinated Debentures, which decreased by $166,000 from $511,000 for the three months ended December 31, 2007 to $345,000 for the three months ended December 31, 2008 due to the payoff of approximately $6.2 million of this debt during the Summer of 2008. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

Average Balance Sheet. The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the three month periods ended December 31, 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 Three Months Ended December 31,
                                                      2008                                 2007
                                         Average                 Average      Average                 Average
                                         Balance     Interest     Rate        Balance     Interest     Rate
                                                               (Dollars in thousands)
Interest-earning assets:
Loans receivable, net                   $ 397,999   $    6,287      6.32 %   $ 419,242   $    6,912      6.59 %
Mortgage-backed securities                 90,393        1,288      5.70       105,659        1,460      5.53
Investment securities                       2,539           17      2.68         5,601           81      5.78
Other interest earning assets              38,951           82       .84        64,336          809      5.03

Total Interest-earning assets             529,882        7,674      5.79       594,838        9,262      6.23
Bank Owned Life Insurance                  14,382                               13,406
Noninterest-earning assets                 30,253                               24,786

Total assets                            $ 574,517                            $ 633,030


Interest-bearing liabilities:
Deposits                                $ 484,599   $    3,509      2.90     $ 552,153   $    4,860      3.52 %
Short-term FHLB Advances                   10,000          113      4.52        10,000          113      4.52
Long-term FHLB Advances                        -            -         -         10,000          116      4.64
Junior Subordinated Debentures             17,011          345      8.11        23,197          511      8.81
Other liabilities                           2,087           -        .00         1,038           -        .00

Total interest-bearing liabilities        513,697        3,967      3.09       596,388        5,600      3.76

Noninterest-bearing liabilities             7,559                                1,296

Total liabilities                         521,259                              597,684
Stockholders' Equity                       53,261                               35,346

Total liabilities and stockholders'
equity                                  $ 574,517                            $ 633,030


Net interest income                                 $    3,707                           $    3,662

Interest rate spread                                                2.70 %                               2.47 %

Net interest margin                                                 2.80 %                               2.46 %

Ratio average interest earning
assets/interest-bearing liabilities                               103.15 %                              99.74 %

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

                                               For Three Months Ended December 31,
                                                          2008 Vs. 2007
                                                    Increase (Decrease) Due to
                                      Volume           Rate         Rate/Volume       Total
                                                          (In Thousands)
Interest income:
Loans receivable, net                $    (347 )     $    (293 )   $          15     $   (625 )
Mortgage-backed securities                (208 )            42                (6 )       (172 )
Investment securities                      (44 )           (44 )              24          (64 )
Other interest-earning assets             (320 )          (674 )             267         (727 )

Total interest-earning assets             (919 )          (969 )             300       (1,588 )

Interest expense:
Deposits                                  (595 )          (861 )             105       (1,351 )
Long-term FHLB advances                   (116 )            -                 -          (116 )
Junior Subordinated Debentures            (136 )           (41 )              11         (166 )

Total interest-bearing liabilities        (847 )          (902 )             116       (1,633 )


Change in net interest income        $     (72 )     $     (67 )   $         184     $     45

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We established an additional $150,000 provision for losses on loans during the three months ended December 31, 2008 as compared to no provision for the three months ended December 31, 2007. Loan charge-offs for the three months ended December 31, 2008 were $81,000 as compared to $109,000 for the three months ended December 31, 2007, a decrease of $28,000. Loan recoveries were $90,000 for the three months ended December 31, 2008 compared to $91,000 for the three months ended December 31, 2007. Nonperforming loans at December 31, 2008 were $1.3 million as compared to $835,000 at September 30, 2008. 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 $138,000, from $465,000 for the three months ended December 31, 2007 to $603,000 for the three months ended December 31, 2008. The increase in other income for the three months ended December 31, 2008 was primarily attributable to gains of $172,000 from the sale of foreclosed real estate and repossessed assets. Fees on transaction accounts increased $39,000, or 15.4%, from $254,000 for the three months ended December 31, 2007 to $293,000 for the three months ended December 31, 2008. Income from Bank Owned Life Insurance (BOLI) decreased $99,000 for the three months ended December 31, 2008 from $135,000 for the three months ended December 31, 2007, to $36,000 for the three months ended December 31, 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 decreased by $350,000, or 8.5%, from $4.1 million for the three months ended December 31, 2007 to $3.7 million for the three months ended December 31, 2008. This was primarily due to the decrease in salaries and related expenses by $413,000, or 18.8%, from $2.2 . . .