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BCSB > SEC Filings for BCSB > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for BCSB BANCORP INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BCSB BANCORP INC.


14-May-2013

Quarterly Report


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

General

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. Effective September 30, 2012, the Bank became a Maryland state chartered commercial bank. The Bank's deposit accounts are insured up to a maximum of $250,000 by the FDIC.

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

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

Critical Accounting Policies and Estimates

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

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

Impaired loans are reviewed individually for potential loss. In instances where loan balances exceed estimated realizable values, specific loss allocations are identified.

Under our methodology for calculating the allowance for loan losses, loss rates are determined for the following loan pools: construction, residential owner occupied, residential rental, home equity loans, loan acquisition and development, secured commercial loans, unsecured commercial loans, leases and consumer loans. Loss rates are then applied to loan balances of these portfolio segments exclusive of loans with specific loss allocations that were reviewed individually. This methodology provides an in-depth analysis of the Bank's portfolio and reflects the probable inherent losses within it. Reserve allocations are then reviewed and consolidated. This process is performed on a quarterly basis.

During the fiscal year ended September 30, 2012, we modified our loss reserve assessment approach to expand analysis of loss rates from a period of the previous one year to the prior two years on a rolling quarter-to-quarter basis. The result was then annualized and applied to loan pools specified above. Also during the fiscal year ended September 30, 2012, the Company isolated a segment of the loan portfolio, residential rental loans, to perform more detailed analysis for potential losses.

A two year look back period of charge-off experience is considered to more reasonably approximate current loss exposure within the portfolio. As mentioned above, we also began employing a more detailed approach in reviewing residential rental loans during the fiscal year ended September 30, 2012. Loss rates for this category have been noticeably higher than other types of loans. Additionally, geographic concentration is considered to be more of a risk factor for this type of product. Loans within this category are segregated by internal risk ratings, with higher reserves allocated as risk ratings reflect more potential for loss.


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Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. The term "other-than-temporary" is not necessarily 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. For recognition and presentation of other-than-temporary impairments the amount of other-than-temporary impairment that is recognized through earnings for debt securities is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The discount rate used to determine the credit loss is the expected book yield on the security.

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

Available Information

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

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected and the risk factors described in Item 1A of the Company's Annual Report on Form 10-K for the year ended September 30, 2012 . The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

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


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Comparison of Financial Condition at March 31, 2013 and September 30, 2012

During the six months ended March 31, 2013, assets decreased by $2.8 million, or .43%, from $645.1 million at September 30, 2012 to $642.3 million at March 31, 2013. Cash and cash equivalents decreased by $5.9 million, or 11.6% during the six months ended March 31, 2013, from $50.9 million to $45.0 million. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity. Net loans receivable decreased $18.9 million, or 5.6%, from $334.8 million at September 30, 2012 to $315.9 million at March 31, 2013. Management's lending strategy remains focused on commercial real estate, commercial business and home equity lending. During this low rate environment the Company has employed a strategy of selling most residential loans into the secondary loan market. The reduction in residential loans combined with a decline in demand for other lending products is the primary reason for the decrease in our loan portfolio. Mortgage-backed securities available for sale increased by $20.7 million, or 9.7%, from $213.6 million at September 30, 2012 to $234.3 million at March 31, 2013 due primarily to purchases made during the six months ended March 31, 2013. At March 31, 2013, all mortgage-backed securities were classified as available for sale for liquidity purposes. Foreclosed real estate increased by $2.0 million, or 118.6%, from $1.7 million at September 30, 2012 to $3.7 million at March 31, 2013, primarily due to the foreclosure of a $1.5 million land acquisition and development loan during the period. The Company is aggressively pursuing the sale of the property, which is located in the state of Pennsylvania.

Deposits decreased by $5.3 million, or .94%, from $566.4 million at September 30, 2012 to $561.0 million at March 31, 2013.

Stockholders' equity increased by $587,000, or 1.1%, from $55.1 million at September 30, 2012 to $55.7 million at March 31, 2013. This increase was due primarily to net income earned during the period, partially offset by a decline in accumulated other comprehensive income, net of related deferred tax effects.

Comparison of Operating Results for the Six Months Ended March 31, 2013 and 2012

Net Income. Net income was $942,000 for the six months ended March 31, 2013 and $1,036,000 for the six months ended March 31, 2012. This decrease in net income was primarily due to a combination of fluctuations, including decreases in other income and non-interest expense and increases in net interest income and provision for losses on loans,

Net Interest Income. Net interest income increased by $342,000, or 3.6%, from $9.5 million for the six months ended March 31, 2012 to $9.9 million for the six months ended March 31, 2013. The increase in net interest income primarily was due to a declining cost of funds on the deposit portfolio and higher average balances on mortgage-backed securities. These increases were partially offset by a decrease in interest and fees on loans as the average balance of the loan portfolio continued to decline.

Interest Income. Interest income decreased by $517,000, or 3.9% from $13.2 million for the six months ended March 31, 2012 to $12.7 million for the six months ended March 31, 2013. Interest and fees on loans decreased by $647,000, or 6.0%, from $10.8 million for the six months ended March 31, 2012 to $10.1 million for the six months ended March 31, 2013. This was primarily due to lower average balances on loans. Average loans declined by $25.6 million during the six months ended March 31, 2013 as compared to the same period in 2012. This decline was partially offset by an increase in interest on mortgage-backed securities of $209,000, or 9.6% from $2.2 million for the six months ended March 31, 2012 to $2.4 million for the six months ended March 31, 2013. This increase was primarily due to higher average balances on mortgage-backed securities. The average balance of mortgage-backed securities increased by $56.8 million, from $162.8 million during the six months ended March 31, 2012 to $219.5 million during the six months ended March 31, 2013. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity.

Interest Expense. Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $3.7 million for the six months ended March 31, 2012 to $2.8 million for the six months ended March 31, 2013, a decrease of $859,000 or 23.3%. Interest on deposits decreased $848,000, or 25.2%, from $3.4 million for the six months ended March 31, 2012 to $2.5 million for the six months ended March 31, 2013. This decrease was due to the decline in the average cost of deposits of 31 basis points from 1.21% for the six months ended March 31, 2012 to .90% for the six months ended March 31, 2013.


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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 six month periods ended March 31, 2013 and 2012. No tax equivalent yield adjustments were made, as the effect was not material.

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 Six Months Ended March 31,
                                                        2013                                      2012
                                         Average                    Average        Average                    Average
                                         Balance      Interest        Rate         Balance      Interest        Rate
                                                                    (Dollars in thousands)

Interest-earning assets:
Loans receivable, net (1)               $ 330,900     $  10,135         6.13 %    $ 356,503     $  10,782         6.05 %
Mortgage-backed securities                219,524         2,388         2.18        162,759         2,179         2.68
Investment securities and FHLB stock        7,092           127         3.58          7,426           184         4.96
Other interest earning assets              44,668            48         0.21         60,427            70         0.23

Total Interest-earning assets             602,184        12,698         4.22        587,115        13,215         4.50
Bank Owned Life Insurance                  16,984                                    16,370
Noninterest-earning assets                 25,534                                    31,062

Total assets                            $ 644,702                                 $ 634,547


Interest-bearing liabilities:
Deposits                                $ 562,458     $   2,517         0.90 %    $ 557,500     $   3,365         1.21 %
Junior Subordinated Debentures             17,011           308         3.62         17,011           319         3.75
Other liabilities                           1,240            -            -           1,175            -            -

Total interest-bearing liabilities        580,709         2,825         0.97        575,686         3,684         1.28

Noninterest-bearing liabilities             8,107                                     6,559

Total liabilities                         588,816                                   582,245
Stockholders' Equity                       55,886                                    52,302

Total liabilities and stockholders'
equity                                  $ 644,702                                 $ 634,547


Net interest income                                   $   9,873                                 $   9,531

Interest rate spread                                                    3.25 %                                    3.22 %

Net interest margin (2)                                                 3.28 %                                    3.25 %

Ratio average interest earning
assets/interest-bearing liabilities                                   103.70 %                                  101.99 %

(1) Includes nonaccrual loans

(2) Represents net interest income divided by the average balance of interest-earning assets.


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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 Six Months Ended March 31,
                                                          2013 Vs. 2012
                                                    Increase (Decrease) Due to
                                        Volume        Rate        Rate/Volume       Total
                                                          (In Thousands)
   Interest income:
   Loans receivable, net                $  (774 )    $  137      $         (10 )    $ (647 )
   Mortgage-backed securities               761        (410 )             (142 )       209
   Investment securities                     (8 )       (51 )                2         (57 )
   Other interest-earning assets            (18 )        (6 )                2         (22 )

   Total interest-earning assets            (39 )      (330 )             (148 )      (517 )

   Interest expense:
   Deposits                                  30        (870 )               (8 )      (848 )
   Junior Subordinated Debentures            -          (11 )               -          (11 )

   Total interest-bearing liabilities        30        (881 )               (8 )      (859 )


   Change in net interest income        $   (69 )    $  551      $        (140 )    $  342

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We established a $950,000 provision for losses on loans during the six months ended March 31, 2013 as compared to a provision of $600,000 for the six months ended March 31, 2012. The increase in loan loss provisions was directly related to declines in estimated realizable values of certain problem loans, primarily investor rental properties, and to address elevated charge-offs during the period. 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 $283,000, or 17.5%, from $1.6 million for the six months ended March 31, 2012 to $1.3 million for the six months ended March 31, 2013. The decrease in other income for the six months ended March 31, 2013 was primarily attributable to a decrease in gain on sale of foreclosed real estate and repossessed assets of $402,000, or 100.0%, from $402,000 for the six months ended March 31, 2012, to $0 for the six months ended March 31, 2013. These decreases were partially offset by an increase in miscellaneous income of $133,000, or 28.5% from $467,000 for the six months ended March 31, 2012 to $600,000 for the six months ended March 31, 2013 primarily due to increased commissions from investment sales, an increase in prepayment fees collected on loans and gains from the sale of mortgage-backed securities of $69,000, or 100.00% from $0 for the six months ended March 31, 2012 to $69,000 for the six months ended March 31, 2013 as the Company sold 17 available for sale mortgaged-backed securities for $39.0 million, at a gross gain of $658,000 and one private label CMO sold for $3.4 million with a loss of $589,000, for a net gain of $69,000.

Non-interest Expenses. Total non-interest expenses decreased by $173,000, or 1.9%, from $9.0 million for the six months ended March 31, 2012 to $8.8 million for the six months ended March 31, 2013. This overall decline was due primarily to decreases in salaries and related expense, federal deposit insurance and professional fees. Salaries and related expenses decreased by $249,000, or 4.5% from $5.5 million for the six months ended March 31, 2012 to $5.3 million for the six months ended March 31, 2013. This decrease was primarily due to a moderate decline in retail staff levels. Federal Insurance premiums decreased by $59,000, or 16.4% from $360,000 for the six months ended March 31, 2012 to $301,000 for the six months ended March 31, 2013. Premiums during the six months ended March 31, 2012 included certain Office of the Comptroller of Currency "OCC" assessment fees that were no longer incurred during the six months ended March 31, 2013. Professional fees decreased $57,000, or 20.3% from $281,000 for the six months ended March 31, 2012 to $224,000 for the six months ended March 31, 2013, primarily due to reduced legal fees. These decreases were partially offset by increases in occupancy expense and foreclosed and impaired loan expenses. Occupancy expense increased by $107,000, or 9.4% from $1.1 million for the six months ended March 31, 2012 to $1.2 million for the six months ended March 31, 2013. This increase was primarily due to increased office building repairs. Foreclosure and impaired loan expenses increased by $68,000, or 52.7% from $129,000 for the six months ended March 31, 2012 to $197,000 for the six months ended March 31, 2013 due to increased activity related to property foreclosures.


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Income Taxes. Our income tax expense was $508,000 and $532,000 for the six months ended March 31, 2013 and 2012, respectively. The change in income taxes for the six months ended March 31, 2013 as compared to the same period in the prior year was primarily due to decreased pretax earnings.

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

Net Income. Net income was $303,000 for the three months ended March 31, 2013 and $574,000 for the three months ended March 31, 2012. This decrease in net income was primarily due an increase in the provision for loan losses and a decrease in other income, which was partially offset by decreases in non-interest expenses.

Net Interest Income. Net interest income remained relatively stable at $4.8 million for the three months ended March 31, 2012 and 2013, as lower average balances on loans receivable were offset by a declining cost of funds rate on the deposit portfolio.

Interest Income. Interest income decreased by $414,000, or 6.4% from $6.5 million for the three months ended March 31, 2012 to $6.1 million for the three months ended March 31, 2013. Interest and fees on loans decreased by $454,000, or 8.6%, from $5.3 million for the three months ended March 31, 2012 to $4.8 million for the three months ended March 31, 2013. This was primarily due to lower average balances on loans. Average loans declined by $28.4 million during the three months ended March 31, 2013 as compared to the same period in 2012. This decline was partially offset by an increase in interest on mortgage-backed securities of $87,000, or 7.8% from $1.1 million for the three months ended March 31, 2012 to $1.2 million for the three months ended March 31, 2013. This increase was primarily due to higher average balances on mortgage-backed securities. The average balance of mortgage-backed securities increased by $56.2 million, from $170.4 million during the three months ended March 31, 2012 to $226.7 million during the three months ended March 31, 2013. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity.

Interest Expense. Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $1.7 million for the three months ended March 31, 2012 to $1.3 million for the three months ended March 31, 2013, a decrease of $412,000 or 23.5%. Interest on deposits decreased $401,000, or 25.2%, from $1.6 million for the three months ended March 31, 2012 to $1.2 million for the three months ended March 31, 2013. This decrease was due to the decline in the average cost of deposits of 29 basis points from 1.14% for the three months ended March 31, 2012 to .85% for the three months ended March 31, 2013.


Table of Contents

Average Balance Sheet. The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the three month periods ended March 31, 2013 and 2012. No tax equivalent yield adjustments were made, as the effect was not material.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and . . .

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