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BCSB > SEC Filings for BCSB > Form 10-Q on 14-Feb-2014All Recent SEC Filings

Show all filings for BCSB BANCORP INC.

Form 10-Q for BCSB BANCORP INC.


14-Feb-2014

Quarterly Report


Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

General

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. Effective September 30, 2011, the Bank became a Maryland state chartered commercial bank. The Bank's deposit accounts are insured up to a maximum of $250,000 by the FDIC.

The 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.

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


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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, 2013 . 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 December 31, 2013 and September 30, 2013

During the three months ended December 31, 2013, total assets decreased by $13.1 million, or 2.1%, from $619.0 million at September 30, 2013 to $605.9 million at December 31, 2013. Our cash and cash equivalents decreased $1.9 million, or 7.1% from $26.5 million at September 30, 2013 to $24.6 million at December 31, 2013, primarily due to a decrease in deposits. Net loans receivable decreased $3.8 million, or 1.2%, from $324.1 million at September 30, 2013 to $320.3 million at December 31, 2013. The decrease relates primarily to a decline in residential mortgages due to accelerated repayments and sales of new loan production. The Company has employed a strategy of selling newly originated long term fixed rate residential loans into the secondary loan market. Management's portfolio lending strategy remains focused on commercial real estate, commercial business and home equity lending. Mortgage-backed securities available for sale decreased by $7.7 million, or 3.5%, from $220.1 million at September 30, 2013 to $212.4 million at December 31, 2013. The decrease was primarily due to principle repayments on the portfolio.

Deposits decreased by $12.2 million, or 2.2%, from $543.8 million at September 30, 2013 to $531.6 million at December 31, 2013.

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

Net Income. Net income was $202,000 for the three months ended December 31, 2013 and $639,000 for the three months ended December 31, 2012. This decrease in net income was primarily due to merger related expense,

Net Interest Income. Net interest income decreased by $572,000, or 11.1%, from $5.1 million for the three months ended December 31, 2012 to $4.5 million for the three months ended December 31, 2013. The decrease in net interest income primarily was due to a decrease in interest and fees on loans as the average yield and average balance of the loan portfolio continued to decline. These decreases were partially offset by a declining cost of funds on the deposit portfolio.

Interest Income. Interest income decreased by $891,000, or 13.5% from $6.6 million for the three months ended December 31, 2012 to $5.7 million for the three months ended December 31, 2013. Interest and fees on loans decreased by $795,000 or 14.9%, from $5.3 million for the three months ended December 31, 2012 to $4.5 million for the three months ended December 31, 2013. This was primarily due to lower average yield and average balances on loans as the portfolio continued to decline. The average rate declined by 65 basis points, from 6.30% during the three months ended December 31, 2012 to 5.65% during the three months ended December 31, 2013. Average loans declined by $17.40 million during the three months ended December 31, 2013 as compared to the same period in 2012. Interest income on mortgage-backed securities also declined by $61,000, or 5.2% from $1.2 million for the three months ended December 31, 2012 to $1.1 million for the three months ended December 31, 2013. This decrease was primarily due to lower average rates on mortgage-backed securities. The average rates on mortgage-backed securities decreased 17 basis points, from 2.22% during the three months ended December 31, 2012 to 2.05% during the three months ended December 31, 2013.

Interest Expense. Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $1.5 million for the three months ended December 31, 2012 to $1.2 million for the three months ended December 31, 2013, a decrease of $319,000 or 21.5%. Interest on deposits decreased $314,000, or 23.7%, from $1.3 million for the three months ended December 31, 2012 to $1.0 million for the three months ended December 31, 2013. This decrease was primarily due to the decline in the average cost of deposits of 19 basis points from .94% for the three months ended December 31, 2012 to .75% for the three months ended December 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 three month periods ended December 31, 2013 and 2012.

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,
                                                         2013                                       2012
                                          Average                     Average        Average                     Average
                                          Balance       Interest        Rate         Balance       Interest        Rate
                                                                      (Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)                $ 320,404     $    4,527         5.65 %    $ 337,822     $    5,322         6.30 %
Mortgage-backed securities                 217,819          1,118         2.05        212,511          1,179         2.22
Investment securities and FHLB stock         6,978             47         2.69          7,047             72         4.09
Other interest earning assets               18,388             15          .33         45,190             25          .22

Total Interest-earning assets              563,589          5,707         4.05        602,570          6,598         4.38
Bank Owned Life Insurance                   17,534                                     16,909
Noninterest-earning assets                  27,108                                     24,355

Total assets                             $ 608,231                                  $ 643,834

Interest-bearing liabilities:
Deposits                                 $ 538,872     $    1,013          .75 %    $ 564,799     $    1,327          .94 %
Junior Subordinated Debentures              17,011            152         3.57         17,011            157         3.69
Other liabilities                              872             -            -           1,056             -            -

Total interest-bearing liabilities         556,755          1,165          .84        582,866          1,484         1.02

Noninterest-bearing liabilities                809                                      5,535

Total liabilities                          557,564                                    588,401
Stockholders' Equity                        50,667                                     55,433

Total liabilities and stockholders'
equity                                   $ 608,231                                  $ 643,834

Net interest income                                    $    4,542                                 $    5,114

Interest rate spread                                                      3.21 %                                     3.36 %

Net interest margin (2)                                                   3.22 %                                     3.39 %

Ratio average interest earning
assets/interest-bearing liabilities                                     101.23 %                                   103.38 %

(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 Three Months Ended December 31,
                                            2013                               Vs.                             2012

                                                                    Increase (Decrease) Due to

                                           Volume                 Rate                   Rate/Volume          Total
                                                                        (In Thousands)
Interest income:
Loans receivable, net                     $    (274 )       $            (548 )         $           27        $ (795 )
Mortgage-backed securities                       29                       (88 )                     (2 )         (61 )
Investment securities                            -                        (25 )                     -            (25 )
Other interest-earning assets                   (14 )                      12                       (8 )         (10 )

Total interest-earning assets                  (259 )                    (649 )                     17          (891 )
Interest expense:
Deposits                                        (61 )                    (265 )                     12          (314 )
Junior Subordinated Debentures                   -                         (5 )                     -             (5 )

Total interest-bearing liabilities              (61 )                    (270 )                     12          (319 )

Change in net interest income             $    (198 )       $            (379 )         $            5        $ (572 )

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 did not established any additional provision for losses on loans during the three months ended December 31, 2013 as compared to a provision of $500,000 for the three months ended December 31, 2012. 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 $173,000, or 26.0%, from $665,000 for the three months ended December 31, 2012 to $492,000 for the three months ended December 31, 2013. The decrease in other income for the three months ended December 31, 2013 was primarily attributable to a decrease in miscellaneous income of $145,000, or 44.7%, from $324,000 for the three months ended December 31, 2012, to $179,000 for the three months ended December 31, 2013. This decrease was primarily due to decreased commissions from investment sales. Losses on repossessed assets also increased by $41,000 or 100%, from $0 for the three months ended December 31, 2012, to $41,000 for the three months ended December 31, 2013. Fees on transaction accounts decreased by $12,000 or 7.4%, from $162,000 for the three months ended December 31, 2012, to $150,000 for the three months ended December 31, 2013. These decreases were partially offset by an increase in income from Bank Owned Life Insurance of $25,000, or 18.1% from $138,000 for the three months ended December 31, 2012 to $163,000 for the three months ended December 31, 2013.

Non-interest Expenses. Total non-interest expenses increased by $390,000, or 9.1%, from $4.3 million for the three months ended December 31, 2012 to $4.7 million for the three months ended December 31, 2013. This increase was primarily due to costs associated with the upcoming merger. Merger related expense was $914,000 for the three months ended December 31, 2013 compared to $0 for the three months ended December 31, 2012. The increase in merger related expense was partially offset by decreases in salaries and related expenses of $267,000, or 10.4% %, from $2.6 million for the three months ended December 31, 2012, to $2.3 million for the three months ended December 31, 2013. Occupancy expense decreased by $47,000 , or 7.7%, from $607,000 for the three months ended December 31, 2012, to $560,000 for the three months ended December 31, 2013. Federal Insurance premiums decreased by $20,000, or 13.7% from $146,000 for the three months ended December 31, 2012 to $126,000 for the three months ended December 31, 2013. Professional fees decreased $85,000, or 76.6% from $111,000 for the three months ended December 31, 2012 to $26,000 for the three months ended December 31, 2013, primarily due to significantly reduced legal fees. Foreclosure and impaired loan expenses decreased by $62,000, or 61.4% from $101,000 for the three months ended December 31, 2012 to $39,000 for the three months ended December 31, 2013, primarily due to reduced foreclosures. There were no other notable fluctuations within other categories of non-interest expenses during the three months ended December 31, 2013 as compared with the same period of the preceding fiscal year.


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Income Taxes. Our income tax expense was $175,000 and $373,000 for the three months ended December 31, 2013 and 2012, respectively. The change in income taxes for the three months ended December 31, 2013 as compared to the same period in the prior year was primarily due to decreased pretax earnings and certain nondeductible merger related expenses during the three months ended December 31, 2013.

Commitments, Contingencies and Off-Balance Sheet Risk

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

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

                                                  At December 31,             At September 30,
                                                       2013                         2013
                                                                 (In thousands)
Commitments to originate new loans               $           3.652           $              549
Unfunded commitments to extend credit
under existing equity line and
commercial lines of credit                                  31,136                       31,323
Commercial letters of credit                                   424                          480

Commitments to originate new loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line commitments for the unfunded portion of equity lines are for a term of 20 years, and commercial lines of credit are generally renewable on an annual basis. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower.


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Asset Quality

At December 31, 2013, we had $17.8 million in non-performing assets, consisting of nonaccrual loans, accruing troubled debt restructurings and repossessed assets representing 2.94% of total assets. At September 30, 2013 non-performing assets were $17.3 million or 2.79% of total assets. Our net recoveries (charge-offs) for the three months ended December 31, 2013 and December 31, 2012 were $15,000 and ($482,000), respectively. Our allowance for loan losses was $5.6 million at December 31, 2013 and September 30, 2013.

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

                                                  At December 31,              At September 30,
                                                       2013                          2013
                                                                 (In thousands)
Nonperforming loans:
Nonaccrual loans (1):
Single family residential                        $           1,010            $              860
Single family rental property                                3,476                         3,013
Commercial real estate                                       1,507                         1,526
Construction                                                 2,994                         2,994
Commercial lines of credit                                      46                            47
Consumer Loans                                                  35                            -

Total nonaccrual loans                                       9,068                         8,440
Loans 90 days past due and accruing                             -                             -
Accruing Troubled Debt Restructurings                        5,964                         5,999

Total non-performing loans                                  15,032                        14,439
Foreclosed Real Estate                                       2,783                         2,861

Total nonperforming assets                       $          17,815            $           17,300

Nonperforming loans to loans receivable                       4.69 %                        4.45 %
Nonperforming assets as a percentage of
loans, foreclosed real estate and
repossessed assets                                            5.51 %                        5.29 %
Nonperforming assets to total assets                          2.94 %                        2.79 %
Loans modified in Troubled Debt
Restructuring                                    $           7,192            $            7,226

(1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is questionable. Also included in this category at December 31, 2013 are $1.2 million in Troubled Debt Restructurings, $1.2 million of which were current. Reporting guidance . . .

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