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

Show all filings for BCSB BANCORP INC.

Form 10-Q for BCSB BANCORP INC.


14-Aug-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.

Recent Developments

On June 13, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with F.N.B. Corporation ("FNB"), the parent company of First National Bank of Pennsylvania ("FNB Bank"). Pursuant to the Merger Agreement, the Company will merge with and into FNB (the "Merger"). Promptly following consummation of the Merger, it is expected that Baltimore County Savings Bank will merge with and into FNB Bank. In the Merger, shareholders of the Company will receive 2.080 shares (the "Exchange Ratio") of FNB common stock for each common share of the Company they own. Outstanding Company stock options and share awards relating to Company common shares will be converted into options and share awards relating to shares of FNB common stock upon consummation of the Merger, subject to adjustments based on the Exchange Ratio. Consummation of the Merger is subject to certain conditions, including, among others, approval of the Merger by the Company's shareholders, the receipt of all required governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of each party, the performance in all material respects by each party of its obligations under the Merger Agreement, effectiveness of the registration statement to be filed by FNB with the SEC to register shares of FNB common stock to be offered to Company shareholders, receipt of tax opinions, and the absence of any injunctions or other legal restraints. Currently, the Merger is expected to be completed in the first quarter of 2014.

A putative stockholder class action lawsuit was filed in connection with the Merger Agreement on July 12, 2013 in the Circuit Court in Baltimore County, Maryland, against the Company, each of its directors and FNB. For more information on the lawsuit, see "Part II Item 1. Legal Proceedings" below.

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.


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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. 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.

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 June 30, 2013 and September 30, 2012

During the nine months ended June 30, 2013, assets decreased by $7.2 million, or 1.1% from $645.1 million at September 30, 2012 to $637.9 million at June 30, 2013. Cash and cash equivalents decreased by $11.7 million, or 23.0% during the nine months ended June 30, 2013, from $50.9 million to $39.2 million. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity. Net loans receivable decreased $19.0 million, or 5.7%, from $334.8 million at September 30, 2012 to $315.8 million at June 30, 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 $20.6 million, or 9.6%, from $213.6 million at September 30, 2012 to $234.1 million at June 30, 2013 due primarily to purchases made during the nine months ended June 30, 2013. At June 30, 2013, all mortgage-backed securities were classified as available for sale for liquidity purposes. Foreclosed real estate increased by $2.1 million, or 125.1%, from $1.7 million at September 30, 2012 to $3.8 million at June 30, 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 $5.9 million, or 1.0%, from $566.4 million at September 30, 2012 to $560.5 million at June 30, 2013.

Stockholders' equity decreased by $3.5 million, or 6.4%, from $55.1 million at September 30, 2012 to $51.6 million at June 30, 2013. This decrease was primarily due to a decline in market values of the Company's mortgage-backed securities portfolio due to recent interest rate increases. Unrealized gains and losses on such securities are reflected in Stockholders' Equity through Accumulated Other Comprehensive (Loss) Income. To a lesser extent, the Company's repurchase of its TARP related stock warrant from the U.S. Treasury also contributed to the decrease. These decreases were partially offset by net income earned during the period.

Comparison of Operating Results for the Nine Months Ended June 30, 2013 and 2012

Net Income. Net income was $1.4 million for the nine months ended June 30, 2013 and June 30, 2012, respectively. Net income remained stable during the nine months ended June 30, 2013 as compared to the same period in 2012, primarily due to a combination of offsetting fluctuations, including increases in other income and non-interest expenses.

Net Interest Income. Net interest income increased by $259,000, or 1.8%, from $14.3 million for the nine months ended June 30, 2012 to $14.5 million for the nine months ended June 30, 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 $1.0 million, or 5.1% from $19.6 million for the nine months ended June 30, 2012 to $18.6 million for the nine months ended June 30, 2013. Interest and fees on loans decreased by $1.1 million, or 6.9%, from $15.8 million for the nine months ended June 30, 2012 to $14.8 million for the nine months ended June 30, 2013. This was primarily due to lower average balances on loans. Average loans declined by $25.7 million during the nine months ended June 30, 2013 as compared to the same period in 2012. This decline was partially offset by an increase in interest on mortgage-backed securities of $229,000, or 6.8% from $3.4 million for the nine months ended June 30, 2012 to $3.6 million for the nine months ended June 30, 2013. This increase was primarily due to higher average balances on mortgage-backed securities. The average balance of mortgage-backed securities increased by $54.8 million, from $172.0 million during the nine months ended June 30, 2012 to $226.8 million during the nine months ended June 30, 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 $5.4 million for the nine months ended June 30, 2012 to $4.1 million for the nine months ended June 30, 2013, a decrease of $1.3 million, or 23.6%. Interest on deposits decreased $1.2 million, or 25.4%, from $4.9 million for the nine months ended June 30, 2012 to $3.6 million for the nine months ended June 30, 2013. This decrease was due to the decline in the average cost of deposits of 30 basis points from 1.16% for the nine months ended June 30, 2012 to .86% for the nine months ended June 30, 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 nine month periods ended June 30, 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 Nine Months Ended June 30,
                                                      2013                                      2012
                                       Average                    Average        Average                    Average
                                       Balance      Interest        Rate         Balance      Interest        Rate
                                                                  (Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)             $ 325,868     $  14,751         6.04 %    $ 351,603     $  15,845         6.01 %
Mortgage-backed securities              226,770         3,612         2.12        171,990         3,383         2.62
Investment securities and FHLB
stock                                     7,034           182         3.45          7,120           278         5.21
Other interest earning assets            40,111            61          .20         58,379           101          .23

Total Interest-earning assets           599,783        18,606         4.14        589,092        19,607         4.44
Bank Owned Life Insurance                17,063                                    16,455
Noninterest-earning assets               26,479                                    30,345

Total assets                          $ 643,325                                 $ 635,892


Interest-bearing liabilities:
Deposits                              $ 561,976     $   3,631          .86 %    $ 557,753     $   4,869         1.16 %
Junior Subordinated Debentures           17,011           460         3.61         17,011           482         3.78
Other liabilities                         1,440            -            -           1,500            -            -

Total interest-bearing liabilities      580,427         4,091          .94        576,264         5,351         1.24

Noninterest-bearing liabilities           6,674                                     6,958

Total liabilities                       587,101                                   583,222
Stockholders' Equity                     56,224                                    52,670

Total liabilities and stockholders'
equity                                $ 643,325                                 $ 635,892


Net interest income                                 $  14,515                                 $  14,256

Interest rate spread                                                  3.20 %                                    3.20 %

Net interest margin (2)                                               3.23 %                                    3.23 %

Ratio average interest earning
assets/interest- bearing
liabilities                                                         103.33 %                                  102.23 %

(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 Nine Months Ended June 30,
                                                          2013 Vs. 2012
                                                   Increase (Decrease) Due to
                                      Volume         Rate         Rate/Volume        Total
                                                         (In Thousands)
Interest income:
Loans receivable, net                $ (1,164 )    $     79      $          (9 )    $ (1,094 )
Mortgage-backed securities              1,076          (645 )             (202 )         229
Investment securities                      (3 )         (94 )                1           (96 )
Other interest-earning assets             (31 )         (13 )                4           (40 )

Total interest-earning assets            (122 )        (673 )             (206 )      (1,001 )

Interest expense:
Deposits                                   37        (1,255 )              (20 )      (1,238 )
Junior Subordinated Debentures             -            (22 )               -            (22 )

Total interest-bearing liabilities         37        (1,277 )              (20 )      (1,260 )


Change in net interest income        $   (159 )    $    604      $        (186 )    $    259

Provision for Losses on Loans. We charge or credit to income provisions for losses on loans 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 $1.1 million provision for losses on loans during the nine months ended June 30, 2013 as compared to a provision of $900,000 for the nine months ended June 30, 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 remained stable at $2.0 million for the nine months ended June 30, 2013 and 2012. There were certain offsetting fluctuations that contributed to the stability of other income. Gain on sale of foreclosed real estate and repossessed assets decreased by $453,000, or 101.0%, from $448,000 for the nine months ended June 30, 2012, to a loss of $5,000 for the nine months ended June 30, 2013. Fees on transaction accounts also decreased by $27,000, or 5.9%, from $460,000 for the nine months ended June 30, 2012, to $433,000 for the nine months ended June 30, 2013. These decreases were partially offset by an increase in gain on sale of property and equipment by $114,000, or 100%, from $0 for the nine months ended June 30, 2012 to $114,000 for the nine months ended June 30, 2013, due to the sale of the Hamilton branch office.
Other-than-temporary impairment charges decreased by $250,000, or 100%, from $250,000 for the nine months ended June 30, 2012 to $0 for the nine months ended June 30, 2013. Miscellaneous income also increased by $99,000, or 13.2% from $748,000 for the nine months ended June 30, 2012 to $847,000 for the nine months ended June 30, 2013 primarily due to increased commissions from investment sales. There was also an increase in gains from the sale of mortgage-backed securities of $75,000 from a loss of $6,000 for the nine months ended June 30, 2012 to $69,000 for the nine months ended June 30, 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 increased by $154,000, or 1.2%, from $13.2 million for the nine months ended June 30, 2012 to $13.3 million for the nine months ended June 30, 2013. This increase was due primarily to cost associated with the upcoming merger, and increased foreclosed and impaired loan expenses. Merger related expense was $280,000, for the nine months ended June 30, 2013 compared to no merger related expense for the nine months ended June 30, 2012. Occupancy expense increased by $61,000, or 3.5% from $1.7 million for the nine months ended June 30, 2012 to $1.8 million for the nine months ended June 30, 2013. This increase was primarily due to increased office building repairs. Data processing cost increased by $37,000, or 3.7% from $998,000 for the nine months ended June 30, 2012 to $1.0 million for the nine months ended June 30, 2013. Advertising expense also increased by $47,000, or 18% from $261,000 for the nine months ended June 30, 2012 to $308,000 for the nine months ended June 30, 2013 as the Company focused on promotional activities for certain newly introduced products. Foreclosure and impaired loan expenses increased by


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$122,000, or 63.2% from $193,000 for the nine months ended June 30, 2012 to $315,000 for the nine months ended June 30, 2013 due to increased activity related to property foreclosures. These increases were offset by decreases in salaries and related expenses, Federal Deposit Insurance premiums, professional fees and other expenses. Salaries and related expenses decreased by $203,000, or 2.5% from $8.0 million for the nine months ended June 30, 2012 to $7.8 million for the nine months ended June 30, 2013. This decrease was primarily due to a moderate decline in retail staff levels. Federal Deposit Insurance premiums decreased by $17,000, or 3.6% from $477,000 for the nine months ended June 30, 2012 to $460,000 for the nine months ended June 30, 2013. Premiums during the nine months ended June 30, 2012 included certain Office of the Comptroller of Currency "OCC" assessment fees that were no longer incurred during the nine months ended June 30, 2013. Professional fees decreased $98,000, or 26.3% from $373,000 for the nine months ended June 30, 2012 to $275,000 for the nine months ended June 30, 2013, primarily due to reduced legal fees. Other expenses decreased by $71,000, or 15.2% from $467,000 for the nine months ended June 30, 2012 to $396,000 for the nine months ended June 30, 2013. This decrease was primarily due to decreased losses on dishonored checks and ATM losses.

Income Taxes. Our income tax expense was $744,000 and $746,000 for the nine . . .

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