BCSB Bankcorp 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from            to            

Commission File Number: 0-24589

BCSB BANKCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

United States	52-2108333
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

4111 E. Joppa Road, Suite 300, Baltimore, Maryland 21236

(Address of Principal Executive Offices)

(410) 256-5000

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

As of June 30, 2007, the issuer had 5,915,743 shares of Common Stock issued and outstanding.

CONTENTS

		PAGE
PART I.FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2007 (unaudited) and September 30, 2006	2
	Consolidated Statements of Operations for the Nine and Three Months Ended June 30, 2007 and 2006 (unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the Nine and Three Months Ended June 30, 2007 and 2006 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2007 and 2006 (unaudited)	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
SIGNATURES

PART I.FINANCIAL INFORMATION

Item 1. Financial Statements

1

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30, 2007			September 30, 2006
	(unaudited)
	(dollars in thousands)
Assets
Cash and due from banks	$	8,778		$	8,421
Interest-bearing deposits in other banks		43,185			2,854
Federal funds sold		39,234			462
Cash and Cash Equivalents		91,197			11,737
Interest bearing time deposits		100			100
Investment securities, available for sale		3,906			143,068
Investment securities, held to maturity		—			4,496
Loans receivable, net		408,032			463,776
Mortgage-backed securities, available for sale		107,040			86,801
Mortgage-backed securities, held to maturity		—			28,675
Foreclosed real estate		94			94
Premises and equipment, net		10,572			11,225
Federal Home Loan Bank of Atlanta stock, at cost		2,270			6,972
Bank owned life insurance		13,691			13,218
Goodwill and other intangible assets		2,491			2,536
Accrued interest and other assets		11,717			13,159
Total assets	$	651,110		$	785,857
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	29,872		$	23,406
Interest-bearing		536,649			581,439
Total Deposits		566,521			604,845
Short Term Advances from the Federal Home Loan Bank of Atlanta		10,000			40,000
Long Term Advances from the Federal Home Loan Bank of Atlanta		10,000			78,473
Junior Subordinated Debentures		23,197			23,197
Other liabilities		7,553			5,921
Total liabilities		617,271			752,436
Commitments and contingencies
Stockholders’ Equity
Common stock (par value $.01 – 13,500,000 authorized, 5,915,743 shares issued and outstanding at June 30, 2007 and 5,913,743 shares issued and outstanding at September 30, 2006)		59			59
Additional paid-in capital		21,503			21,390
Obligation under Rabbi Trust		1,142			1,246
Retained earnings (substantially restricted)		13,896			16,511
Accumulated other comprehensive loss (net of taxes)		(1,574	)		(4,354	)
Employee Stock Ownership Plan		(90	)		(227	)
Stock held by Rabbi Trust		(1,097	)		(1,204	)
Total stockholders’ equity		33,839			33,421
Total liabilities and stockholders’ equity	$	651,110		$	785,857

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

2

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For the Nine Months Ended June 30,						For the Three Months Ended June 30,
	2007			2006			2007		2006
	(Dollars in thousands except per share data)
Interest Income
Interest and fees on loans	$	21,763		$	20,992		$	7,173	$	7,256
Interest on mortgage–backed securities		3,468			3,821			1,132		1,226
Interest and dividends on investment securities		3,186			4,657			120		1,578
Other interest income		1,443			186			1,231		119
Total interest income		29,860			29,656			9,656		10,179
Interest Expense
Interest on deposits		15,517			13,260			5,067		4,782
Interest on borrowings – short term		971			1,991			108		482
Interest on borrowings – long term		1,859			2,065			180		850
Other interest expense – debentures		1,538			1,396			514		493
Total interest expense		19,885			18,712			5,869		6,607
Net interest income		9,975			10,944			3,787		3,572
Provision for losses on loans		117			152			—		20
Net interest income after provision for losses on loans		9,858			10,792			3,787		3,552
Other Income
Gain (loss) on repossessed assets		10			(26	)		20		(1	)
Realized loss (gain) on loans held for sale		(1,207	)		—			299
Mortgage banking operations		13			29			12		2
Fees on transaction accounts		459			431			199		146
(Loss) gain on sale of investments and mortgage-backed Securities		(5,863	)		51			27		51
Income from bank owned life insurance		428			339			146		103
Other income		327			341			105		99
Total other income, net		(5,833	)		1,165			808		400
Non-Interest Expenses
Salaries and related expense		5,944			6,247			1,997		1,986
Occupancy expense		1,686			1,597			565		527
Data processing expense		1,088			1,327			365		355
Property and equipment expense		899			939			303		320
Professional fees		385			207			63		38
Advertising		391			464			102		191
(Recovery) loss on dishonored checks		(3,353	)		10,721			—		10,721
Telephone, postage and office supplies		287			352			102		88
Debt retirement expense		17			—			—		—
Other expenses		820			759			252		219
Total non-interest expenses		8,164			22,613			3,749		14,445
(Loss) Income before tax benefit		(4,139	)		(10,656	)		846		(10,493	)
Income tax (benefit) expense		(1,524	)		(3,761	)		247		(3,603	)
Net income (loss)	$	(2,615	)	$	(6,895	)	$	599	$	(6,890	)
Per Share Data:
Basic and diluted earnings per share	$	(.44	)	$	(1.18	)	$	.10	$	(1.18	)
Dividends per share	$	.00		$	.375		$	.00	$	.125

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

3

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	For the Nine Months Ended June 30,
	2007			2006
	( in thousands)
Net Loss	$	(2,615	)	$	(6,895	)
Other comprehensive income, net of tax:
Unrealized net holding (losses) on available-for-sale portfolios, net of tax $(516) and $(1,705)		(819	)		(2,694	)
Reclassification adjustment for losses included in net income, net of tax $2,265 and $2		3,599			3
Comprehensive Income (Loss)	$	165		$	(9,586	)

	For the Three Months Ended June 30,
	2007			2006
	( in thousands)
Net Income (Loss)	$	599		$	(6,890	)
Other comprehensive income, net of tax:
Unrealized net holding (losses) on available-for-sale portfolios, net of tax $(1,368) and ($525)		(1,253	)		(811	)
Reclassification adjustment for losses (gains) included in net income, net of tax $10 and $2		(17	)		3
Comprehensive (Loss)	$	(671	)	$	(7,698	)

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

4

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For Nine Months Ended June 30,
	2007			2006
	(dollars in thousands)
Operating Activities
Net loss	$	(2,615	)	$	(6,895	)
Adjustments to reconcile net (loss) to
Net Cash Provided by Operating Activities
Loss (gain) on sale of investments and mortgage-backed securities		5,863			(51	)
Proceeds from sale of loans		45,231			—
Realized loss on loans held for sale`		1,207			—
Amortization of deferred loan fees and cost, net		(136	)		(120	)
Provision for losses on loans		117			152
Non-cash compensation under stock-based benefit plan		234			202
Amortization of purchase premiums and discounts, net		170			244
Provision for depreciation		789			780
(Gain) loss on sale of repossessed assets		(10	)		26
Increase in cash surrender value of bank owned life insurance		(428	)		(339	)
Increase in accrued interest and other assets		(307	)		(3,450	)
Increase in other liabilities		285			2,169
Increase in obligation under Rabbi Trust		15			24
Net cash provided (used) by operating activities		50,415			(7,258	)
Cash Flows from Investing Activities
Purchase of bank owned life insurance		(44	)		(48	)
Purchase of investment securities – held to maturity		—			(3,000	)
Purchase of investment securities – available for sale		(802	)		(1,257	)
Proceeds from maturities of investment securities – available for sale		15,000			1,500
Proceeds from sale of investment securities – available for sale		126,480			405
Proceeds from maturities of investment securities – held to maturity		3,500			500
Net decrease (increase) in loans		8,995			(13,482	)
Purchase of mortgage-backed securities – available for sale		(84,867	)		—
Purchase of mortgage-backed securities – held to maturity		—			(6,704	)
Principal collected on mortgage-backed securities		13,206			21,944
Proceeds from sale of mortgage-backed securities – available for sale		77,771			—
Proceeds from sales of repossessed assets		211			266
Investment in premises and equipment		(135	)		(1,688	)
Redemption of Federal Home Loan Bank of Atlanta Stock, net		4,702			805
Net cash provided (used) by investing activities		164,017			(759	)

5

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For Nine Months Ended June 30,
	2007			2006
	(dollars in thousands)
Cash Flows from Financing Activities
Net (decrease) increase in deposits	$	(38,270	)	$	21,833
Net increase in advances by borrowers for taxes and insurance		1,294			1,523
Proceeds from Federal Home Loan Bank of Atlanta advances		146,550			164,550
Repayment of Federal Home Loan Bank of Atlanta advances		(244,550	)		(183,200	)
Acquisition of stock for Rabbi Trust		(13	)		(33	)
Exercised stock options		17			10
Dividends paid on common stock		—			(795	)
Net cash (used) provided by financing activities		(134,972	)		3,888
Increase in cash equivalents		79,460			(4,129	)
Cash and cash equivalents at beginning of period		11,737			23,529
Cash and cash equivalents at end of period	$	91,197		$	19,400
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest	$	19,811		$	18,258
Income taxes	$	—		$	—
Supplemental Disclosures of Non-cash Investing Activity:
Transfer of held to maturity securities to available for sale	$	27,536		$	—
Transfer of loans to loans held for sale	$	46,438		$	—

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

6

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 –Principles of Consolidation

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

Note 2 –Basis for Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The financial statements of the Company are presented on a consolidated basis with those of the Bank. The results for the nine months ended June 30, 2007 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2007. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term related to the determination of the allowance for loan losses (the “Allowance”), other-than-temporary impairment of investment securities, deferred tax assets and intangible assets.

Note 3 –Cash Flow Presentation

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

7

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 –Earnings Per Share

Basic per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, unless the effect is to reduce a loss or increase earnings per share. No adjustments were made to net income (numerator) for all periods presented. As of June 30, 2007 39,864 shares were excluded from the diluted earnings per shares calculations as they were anti-dilutive. The basic and diluted weighted average shares outstanding for the nine and three months ended June 30, 2007 and 2006 are as follows:

	For the Nine Months Ended June 30,
	2007							2006
	(in thousands except per share data)
	Income (Loss)			Shares	Per Share			Income (Loss)			Shares	Per Share
Basic EPS
(Loss) Income available to shareholders	$	(2,615	)	5,901	$	(.44	)	$	(6,895	)	5,851	$	(1.18	)
Diluted EPS
Effect of dilutive shares		—		—		—			—		—		—
(Loss) Income available to shareholders plus assumed conversions	$	(2,615	)	5,901	$	(.44	)	$	(6,895	)	5,851	$	(1.18	)
	For the Three Months June 30,
	2007							2006
	(in thousands except per share data)
	Income (Loss)			Shares	Per Share			Income			Shares	Per Share
Basic EPS
(Loss) Income available to shareholders	$	599		5,884	$	.10		$	(6,890	)	5,857	$	(1.18	)
Diluted EPS
Effect of dilutive shares		—		28		.10			—		—		—
Income available to shareholders plus assumed conversions	$	599		5,912	$	.10		$	(6,890	)	5,857	$	(1.18	)

8

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5 –Regulatory Capital

The following table sets forth the Bank’s capital position at June 30, 2007.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Actual Amount		% of Assets		Required Amount		% of Assets		Required Amount		% of Assets
	(Unaudited)(dollars in thousands)
Tangible (1)	$	46,957	7.32	%	$	9,622	1.50	%	$	N/A	N/A	%
Tier I capital (2)		46,957	12.16			N/A	N/A			23,170	6.00
Core (1)		46,957	7.32			25,658	4.00			32,072	5.00
Risk-weighted (2)		48,978	12.68			30,894	8.00			38,617	10.00

(1) To adjust total assets

(2) To risk-weighted assets

Note 6 –Stock Option Plans

As of June 30, 2007 and 2006, the Company had four stock-based employee compensation plans, which are more fully described in the 2006 Annual Report. Prior to fiscal 2006, the Company applied the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost was recognized in the accompanying consolidated statements of operations prior to fiscal year 2006 on stock options granted to employees, since all options granted under the Company’s share incentive programs had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective October 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes APB No. 25. SFAS No. 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted using the modified prospective method of application, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro-forma disclosures in prior periods. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. This resulted in $17,249 and $24,000 of compensation expense to be recorded during the nine months ended June 30, 2007 and 2006 respectively. Compensation expense of $7,389 and $8,000 was recorded during the quarters ended June 30, 2007 and 2006 respectively.

At June 30, 2007, there were 36,250 shares under option with an exercise price of $8.00 and a weighted average contractual life of 2 years, 75,250 shares with an exercise price of $11.375 and a weighted average remaining life of 5 years and 20,000 shares with an exercise price of $14.97 and a contractual life of 9.3 years that vest ratably over five years. The total exercisable shares of 111,500 have a weighted average remaining life of 4 years, and an aggregate intrinsic value of $54,000 at June 30, 2007.

9

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the activity related to options under all plans for the nine months ended June 30, 2007.

	Shares		Weighted Average Exercise Price
Outstanding at September 30, 2006	113,500		$	10.30
Options exercised	(2,000	)		11.38
Granted	20,000			14.97
Outstanding at June 30, 2007	131,500		$	10.99
Exercisable at June 30, 2007	111,500		$	10.28

The weighted average fair values of our option grants for the nine months ended June 30, 2007 and 2006 were $148,000 and $0 respectively, on the dates of grants. No options were granted during fiscal year 2006 or 2005. The fair values of our options granted were calculated using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions for the nine months ended June 30, 2007 and 2006:

	2007
Dividend Yield	$	0
Expected volatility		29.95
Risk-free interest rate		4.64
Expected lives		10.0 years

10

BCSB BANKCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7 –Recent Accounting Pronouncements

In February 2006, The FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This statement amends Statements No. 133 and 140 by: permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifying which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishing a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifying that concentrations of credit risk in the form of subordination are not embedded derivatives; and amending Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The statement is effective for fiscal years beginning after September 15, 2006. The adoption of this standard did not have a material impact on our financial condition, results of operations or liquidity.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This statement amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. It requires an entity to recognize a servicing asset or servicing liability each time an obligation is undertaken to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable. The statement permits the choice between the “amortization method” and the “fair value measurement method” for the subsequent measurement of the servicing assets or liabilities and allows for a one-time reclassification of available-for-sale securities to trading securities at initial adoption. The statement also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. The statement is effective for fiscal years beginning after September��30, 2006. The adoption of this standard did not have a material impact on our financial condition, results of operations or liquidity.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109”, which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is assessing the impact, if any, that the adoption may have on its financial statements.

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

11

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

In September 2006, the Securities and Exchange Commission (the “SEC”) released Staff Accounting Bulletin No. 108 (“SAB 108”), which provides detail in the quantification and correction of financial statement misstatements. SAB 108 specifies that companies should apply a combination of the “rollover” and “iron curtain” methodologies when making determinations of materiality. The rollover method quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, regardless of the year(s) of origination. SAB 108 instructs companies to quantify the misstatement under both methodologies and if either method results in the determination of a material error, then the company must adjust its financial statements to correct the error. SAB 108 also reminds preparers that a change from an accounting principle that is not generally accepted to a principle that is generally accepted is a correction of an error. The Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Management does not expect the adoption of this Bulletin to have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities”. This statement permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This pronouncement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is evaluating the impact of this new standard, but currently believes that adoption will not have a material impact on its financial position or results of operations.

Note 8 –Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company has $796,000 of standby letters of credit as of June 30, 2007. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2007 for guarantees under standby letters of credit issued is not considered to be material.

Note 9 – Balance Sheet Restructuring

During the nine months ended June 30, 2007, the Company restructured its balance sheet. The Company sold approximately $169.1 million of investments and mortgage-backed securities, $31.9 million in mutual funds and $46.4 million in fixed rate single family mortgage loans. The Company used a portion of the proceeds from these sales to prepay $98.5 million of Federal Home Loan Bank advances with an average cost of 4.97%. During the nine months ended June 30, 2007, the Company transferred $27.5 million of securities that were previously classified as held to maturity to the available for sale classification. Accordingly, the Company has reclassified all remaining securities as available for sale. The Company accounts for security transactions based upon the trade date.

Note 10 – Reclassification

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

12

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

General

BCSB Bankcorp, Inc.BCSB Bankcorp, Inc. (the “Company”) serves as the holding company for its wholly owned subsidiaries, Baltimore County Savings Bank, F.S.B. (the “Bank”), BCSB Bankcorp Capital Trust I and BCSB Bankcorp Capital Trust II. Baltimore County Savings Bank, M.H.C. (the “MHC”), a federal mutual holding company, owns 63.5% of the Company’s outstanding common stock. The Company’s assets consist of its investment in the Bank and its portfolio of investment securities. 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 report, 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 June 30, 2007, the Company had total consolidated assets of $651.1 million, total deposits of $566.5 million and stockholders’ equity of $33.8 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 federally chartered stock savings bank operating through eighteen banking offices serving the Baltimore metropolitan area. The Bank was chartered by the State of Maryland in 1955 under the name Baltimore County Building and Loan Association. The Bank received federal insurance of its deposit accounts in 1985 and received a federal charter in 1987, at which time it adopted its present name of Baltimore County Savings Bank, F.S.B.

The Bank’s principal business consists of attracting deposits from the general public and investing these funds in loans secured by first mortgages on owner-occupied, single-family residences in the Bank’s market area, and, to a lesser extent, other real estate loans, consisting of construction loans, single-family rental property loans and commercial real estate loans, and consumer loans. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest earned on mortgage-backed securities and investment securities and fees and charges. Funds for these activities are provided principally by operating revenues, deposits and repayments of outstanding loans and investment securities and mortgage-backed securities.

Plan of Conversion and Reorganization

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

As part of the Plan, the new Maryland holding company will offer shares of its common stock for sale to the Bank’s eligible account holders, to the Bank’s tax-qualified employee benefit plans and to members of the general public in a subscription and community offering in the manner and subject to the priorities set forth in the Plan. The amount of stock that will be offered will be based on an independent appraisal of the Company as fully converted. The new Maryland corporation expects to retain one-half of the net proceeds of the offering, less the amount needed to fund an employee stock ownership plan, and contribute the remaining net proceeds to the Bank. The new Maryland corporation may contribute a greater percentage of the net proceeds to ensure that at the closing of the conversion the Bank has tangible capital of at least 10.0% of adjusted total assets. The Company anticipates that the additional capital raised in the conversion will assist it to continue to satisfy its debt obligations under the trust preferred securities. Consummation of the Plan is subject to, among other conditions, the approval of the Office of Thrift Supervision, the Company’s stockholders and the MHC’s members.

13

Supervisory Agreement and Other Commitments

On December 8, 2005, Baltimore County Savings Bank entered into a Supervisory Agreement with the Office of Thrift Supervision. Pursuant to the terms of the Supervisory Agreement, we agreed as follows:

• To take all necessary and appropriate actions to comply with the Bank Secrecy Act and the Flood Disaster Protection Act and applicable regulations under these acts.

• Within 60 days, to prepare, adopt and submit for review and approval by the Office of Thrift Supervision a comprehensive three year business plan that considers our existing operations, business strategies, current market conditions, local demographics, earnings, available resources and existing capital levels. We must implement the business plan as approved by the Office of Thrift Supervision, and any material modifications to the business plan must be submitted to the Office of Thrift Supervision 45 days prior to implementation.

• To review and revise as necessary our written policy for compliance with the Bank Secrecy Act laws and regulations. In amending the Bank Secrecy Act compliance program, the Board of Directors must: (i) review and revise as necessary our written methodology for assigning risk levels; (ii) strengthen our customer identification program; (iii) review and revise as necessary our written internal controls, due diligence processes and oversight and monitoring procedures; (iv) strengthen our currency transaction reporting procedures; (v) review and revise as necessary our specific review procedures to ensure the accurate completion and timely filing of all currency transaction reports; and (vi) address all deficiencies and weaknesses and complete all required corrective actions discussed in our 2005 examination by the Office of Thrift Supervision. The Board also must review our Bank Secrecy Act compliance program on an annual basis to assess its adequacy and compliance with applicable Bank Secrecy Act laws and regulations and, within 60 days, review and revise our policies and procedures for conducting annual independent testing of our Bank Secrecy Act compliance program.

• To review and amend as necessary our Flood Disaster Protection Act policy and procedures to ensure that appropriate flood insurance, if required, is obtained and maintained for all properties securing a loan from us. We also must ensure that our personnel receive appropriate training and periodically review our compliance with the Flood Disaster Protection Act policy.

• To review and revise as necessary our written indirect automobile loan underwriting policies and procedures to strengthen and improve our automobile underwriting and approval process.

The Supervisory Agreement will remain in effect until terminated, modified, or suspended in writing by the Office of Thrift Supervision. We believe we have fully adopted and implemented the various plans, policies and procedures required by the Supervisory Agreement.

Given the declining yield on the indirect automobile lending program and the required loss reserves, in 2005 we made the decision to end our indirect automobile lending program. The portfolio balances for the indirect automobile lending program have decreased from $65.9 million at December 31, 2005 to $36.4 million at December 31, 2006, since this measure. We have filed an amended business plan with the Office of Thrift Supervision to take into account the conversion, the suspension of dividends, a balance sheet restructuring and certain losses from a check-kiting scheme that made the original business plan obsolete.

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

• Baltimore County Savings Bank, F.S.B. will not pay any dividend to BCSB Bankcorp or to Baltimore County Savings Bank, M.H.C. without the prior written approval of the Office of Thrift Supervision.

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

14

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

While we believe we are in compliance with the terms of the Supervisory Agreement and our additional commitments, a failure to comply with the Supervisory Agreement and our additional commitments could result in the initiation of further enforcement action by the Office of Thrift Supervision, including the imposition of civil monetary penalties. We have incurred significant additional regulatory compliance expense in connection with the Supervisory Agreement and our additional commitments. However, regulatory compliance expense attributable to the Supervisory Agreement and our additional commitments is not anticipated to have a material financial impact on us in the future, except that, if we are unable to complete this offering, BCSB Bankcorp’s commitment not to incur debt, and Baltimore County Savings Bank’s commitment not to pay a dividend to BCSB Bankcorp, without prior Office of Thrift Supervision approval, could adversely affect our ability to meet our obligations under our trust preferred securities. For further information, see“Risk Factors—Risks Related to Our Business—We are subject to the restrictions and conditions of a Supervisory Agreement with, and other commitments have made to, the Office of Thrift Supervision. Failure to comply with the Supervisory Agreement could result in additional enforcement action against us, including the imposition of monetary penalties, and could adversely affect our ability to meet our obligations under our trust preferred securities. “ and “Regulation and Supervision”.

Balance Sheet Restructuring

The Company is in the process of transforming its balance sheet by emphasizing assets and liabilities that allow us to increase our net interest margin while reducing exposure to risk from interest rate fluctuations. The Company will accomplish this transformation with short-term and long-term initiatives.

In the short-term, we executed an initiative to restructure our balance sheet as follows:

The Company sold approximately $169.1 million of mortgage-backed securities and investment securities with an average yield of 3.51%. The Company used the majority of the proceeds from these sales to prepay $98.5 million of Federal Home Loan Bank advances with an average cost of 4.97%. The remainder of the proceeds from the sale of mortgage-backed securities and investment securities initially are invested in overnight deposits with the Federal Home Loan Bank of Atlanta yielding 5.19% and used, over time, to fund outflows of certificate of deposit accounts which is expected to occur as we reduce certificates of deposit rates in an effort to reduce these higher cost deposits as a funding source.

We sold $31.9 million of mutual funds and approximately $46.4 million of fixed-rate single-family mortgage loans with a weighted average yield of 5.11% and a weighted average remaining term to maturity of 119 months. Approximately 75% of the proceeds from these sales were used to purchase investment securities with an anticipated approximate yield of 5.55%. We expect to use the remaining proceeds from the sale of single-family mortgage loans to originate commercial mortgage loans as opportunities to do so become available.

As a result of this balance sheet restructuring, we expect to increase our interest rate spread, reduce our exposure to risks of interest rate fluctuations and improve our capital ratios. In connection with the balance sheet restructuring, we incurred an after-tax charge to income of $4.7 million during the nine months ending June 30, 2007. There were no known credit issues with any of the assets that were sold. The losses associated with the assets sold as a result of the restructuring were generally a reflection of the assets’ yield in the current interest rate environment. Our recent analysis indicated that without taking this action, net interest margins and net income would have declined in future periods. We believe that the balance sheet restructuring, will improve profitability going forward, although there can be no assurances that this will occur. The decision to execute the restructuring occurred on March 21, 2007 and was only considered after our Board of Directors approved the Plan on February 14, 2007.

Critical Accounting Policies

Management’s discussion and analysis of the Company’s financial condition is based on the consolidated financial statements, and consolidated statements of operations which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires

15

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 estimate 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. Refer to the discussion of Allowance for Loan Losses in Note 3 to the Consolidated Financial Statements in the annual report for a detailed description of management’s estimation process and methodology related to the allowance 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 decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

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

Forward-Looking Statements

When used in this 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 June 30, 2007 and September 30, 2006

During the nine months ended June 30, 2007, we significantly restructured our balance sheet by selling mortgage-backed securities, investment securities and mutual funds. For further information regarding this restructuring and future planned asset sales, as well as our use and intended use of the proceeds from these asset sales, see “—Balance Sheet Restructuring”.

16

During the nine months ended June 30, 2007, the Company’s assets decreased by $134.7 million, or 17.1% from $785.8 million at September 30, 2006 to $651.1 million at June 30, 2007. The Company’s interest bearing deposits in other banks increased $40.3 million, from $2.9 million at September 30, 2006 to $43.2 million at June 30, 2007 as the Company invested the proceeds from sales of mortgage-backed securities and investment securities in short-term instruments. Such funds are expected to be used in funding the outflows of certificate of deposit accounts that are expected to occur as we reduce certificates of deposit rates in an effort to reduce these higher cost deposits as a funding source. The Company’s investment portfolio available for sale decreased $139.2 million, or 97.3%, from $143.1 million at September 30, 2006 to $3.9 million at June 30, 2007 due to the sale of various investment securities in an effort to restructure the balance sheet. The Company’s investment portfolio held to maturity decreased $4.5 million from $4.5 million at September 30, 2006 to $0 at June 30, 2007, as various investments matured and the funds were not reinvested in securities as the Company restructured its balance sheet. Net loans receivable, decreased $55.7 million, or 12.0%, from $463.8 million at September 30, 2006 to $408.0 million at June 30, 2007. The Bank’s lending strategy has shifted such that commercial real estate lending and commercial business lending and short term home equity lending have become key focuses. The Bank ceased its indirect auto lending program in December 2005. The indirect loan portfolio was $42.3 million at September 30, 2006 and $25.8 million at June 30, 2007. It is expected to decline over time as the loans are paid down. The Company’s mortgage-backed securities available for sale increased $20.2 million, or 23.3%, from $86.8 million at September 30, 2006 to $107.0 million at June 30, 2007. This increase was primarily a result of the transfer and reclassification of held to maturity mortgage-backed securities to available for sale and securities purchased in the restructuring. The Company’s mortgage-backed securities held to maturity decreased $28.7 million or 100.0% from $28.7 million at September 30, 2006 to $0 at June 30, 2007 as all mortgage-backed securities are now classified as available for sale for liquidity purposes. The Company no longer intends to classify mortgage-backed securities and investment securities as held to maturity for the foreseeable future. Premises and equipment decreased $653,000, or 5.8%, from $11.2 million at September 30, 2006 to $10.6 million at June 30, 2007. The cash surrender value on the Bank Owned Life Insurance increased $473,000, or 3.6%, from $13.2 million at September 30, 2006 to $13.7 million at June 30, 2007. Due to the decrease in the interest margin, the Bank’s current budget calls for minimal growth, until interest margins return to a level sufficient to allow growth. The Bank is seeking to increase core deposits in an effort to decrease the cost of funds. Any increase in deposits may be offset by decreases in levels of borrowings. New loans may be made to offset payments received on existing loans and securities. If payments received on loans exceed demand, then securities may be purchased or borrowings further reduced.

Deposits decreased by $38.3 million, or 6.3%, from $604.8 million at September 30, 2006 to $566.5 million at June 30, 2007. This decrease was primarily due to increased competition. Short-term advances from the Federal Home Loan Bank of Atlanta decreased by $30.0 million, or 75.0%, from $40.0 million at September 30, 2006 to $10.0 million at June 30, 2007. Long-term advances from the Federal Home Loan Bank of Atlanta decreased $68.5 million, or 87.3%, from $78.5 million at September 30, 2006, to $10.0 million at June 30, 2007. Advances from the Federal Home Loan Bank of Atlanta decreased as the Bank used funds from the sale of securities to pay off $98.5 million in high cost advances as part of the strategy to restructure the balance sheet.

Stockholders’ equity increased by $418,000, or 1.2%, from $33.4 million at September 30, 2006 to $33.8 million at June 30, 2007, which was primarily attributable to the decrease in accumulated other comprehensive loss of $2.8 million, from a negative $4.3 million at September 30, 2006 to a negative $1.6 million at June 30, 2007, offset, in part, by net losses of $2.6 million for the nine months ended June 30, 2007. The change in these unrealized losses was mainly due the realization of the losses as the securities were sold. The remaining unrealized losses are considered temporary as they reflect market values on June 30, 2007 and are subject to change daily as interest rates fluctuate. This decrease in accumulated other comprehensive loss is due to the effect rising interest rates have on the available for sale securities recorded at fair market value and has no impact on the Bank’s regulatory capital.

Comparison of Operating Results for the Nine Months Ended June 30, 2007 and 2006

Net Income. Net income for the nine months ended June 30, 2007 was impacted significantly by our balance sheet restructuring. In March of 2007, we elected to sell approximately $169.1 million of securities held in our investment portfolio (average yield 3.51%) and use the majority of the proceeds from the sale to repay short-term borrowings (average cost 4.97%). We also sold $31.9 million of mutual funds and $46.4 million of fixed-rate single family mortgage loans with a weighted average yield of 5.11%. In conjunction with the restructuring, we realized pre-tax losses on the sales of securities and loans of $7.1 million. The restructure is expected to have a positive impact in future periods as the yields on securities and loans sold were significantly lower than those on borrowings repaid. During the same period the Bank recovered a partial amount of the loss from the check- kiting scheme that was perpetrated on the Bank in June of 2006. The amount recovered from insurance proceeds was $3.4 million.

17

Net loss decreased from a loss of $6.9 million for the nine months ended June 30, 2006 to a net loss of $2.6 million for the nine months ended June 30, 2007. The decrease was primarily due to a decrease in the loss on dishonored checks of $14.1 million for the nine months ended June 30, 2007, from a loss of $10.7 million for the nine months ended June 30, 2006 to a recovery of $3.4 million for the nine months ended June 30, 2007. This was partially offset by a loss on the sale of investments and mortgage backed securities of $5.9 million for the nine months ended June 30, 2007, and a loss on the sale of loans of $1.2 million. Also contributing to the net loss for the nine months ended June 30, 2007 was a decrease of $969,000, or 8.8%, in net interest income from $10.9 million for the nine months ended June 30, 2007 to $10.0 million for the nine months ended June 30, 2007.

Net Interest Income. Net interest income decreased by $969,000 or 8.8% from $10.9 million for the nine months ended June 30, 2006 compared to $10.0 million for the nine months ended June 30, 2007. The decrease in net interest income primarily was the result of increases in the average rate on interest bearing liabilities offset partially by decrease in the average balance of interest bearing liabilities. The interest rate spread decreased 9 basis points from 2.00% for the nine months ended June 30, 2006 to 1.91% for the nine months ended June 30, 2007. The Company’s ratio of average interest-earning assets to average interest-bearing liabilities increased from 98.19% for the nine months ended June 30, 2006 to 100.13% for the nine months ended June 30, 2007. The Company’s interest rate spread has decreased due to the rising rates paid on deposits not being completely offset by rising rates for new loans. With the sale of low yielding assets and the redemption of high cost borrowings as a result of the balance sheet restructuring, improvements in interest spread are expected to occur. Changes in short term rates affect the Company’s interest rate spread as $23.0 million borrowed funds tied to LIBOR re-price as interest rates fluctuate.

Interest Income. Interest income increased by $204,000, or .69% from $29.6 million for the nine months ended June 30, 2006 to $29.9 million for the nine months ended June 30, 2007. Interest and fees on loans increased by $771,000, or 3.7%, from $21.0 million for the nine months ended June 30, 2006 to $21.8 million for the nine months ended June 30, 2007. This was primarily due to a increase in the average yield earned on loans receivable of 32 basis points from 6.07% for the nine months ended June 30, 2006, to 6.39% for the nine months ended June 30, 2007. This was partially offset by a decrease in the average balance of loans receivable of $7.3 million from $461.1 million for the nine months ended June 30, 2006 to $453.8 million for the nine months ended June 30, 2007. The decrease in the average balance of loans was primarily attributable to the sale of $46.4 million of residential loans, competition and current economic conditions. The increase in the average yield was attributable to the prevailing market rates in the economy. Interest on mortgage-backed securities decreased by $353,000 or 9.2% from $3.8 million for the nine months ended June 30, 2006 to $3.5 million for the nine months ended June 30, 2007. This decrease was primarily due to the decrease in the average balance of mortgage-backed securities from $126.6 million for the nine months ended June 30, 2006 to $103.7 million for the nine months ended June 30, 2007. The decrease in the average balance more than offset an increase in the average rate from 4.02% at June 30, 2006 to 4.46% at June 30, 2007. Interest and dividends on investment securities decreased $1.5 million, from $4.6 million for the nine months ended June 30, 2006 to $3.2 million for the nine months ended June 30, 2007. This was primarily due to an increase in the average yield on investments of 46 basis points from 3.87% for the nine months ended June 30, 2006 to 4.33% for the nine months ended June 30, 2007 due to “step up” provisions on some investment securities and the sale of lower yielding securities. However, this was partially offset by a decrease in the average balance of investments of $62.3 million, from $160.4 million for the nine months ended June 30, 2006 to $98.1 million for the nine months ended June 30, 2007.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense, increased from $18.7 million for the nine months ended June 30, 2006 to $19.9 million for the nine months ended June 30, 2007, an increase of $1.2 million or 6.3%. Interest on deposits increased $2.2 million from $13.3 million at June 30, 2006 to $15.5 million at June 30, 2007 due to an increase in the average cost of deposits of 58 basis points from 2.91% for the nine months ended June 30, 2006 to 3.49% for the nine months ended June 30, 2007. This was partially offset by a decrease in the average balance of deposits of $15.1 million, or 2.5%, from $608.4 million at June 30, 2006 to $593.3 million at June 30, 2007. The decrease in deposits was primarily due to increased competition for deposit funds. We intend to reduce our reliance on higher cost certificates of deposits. Interest on short-term borrowings decreased by $1.0 million, or 51.2%, for the nine months ended June 30, 2007 from $2.0 million at June 30, 2006 to $971,000 at June 30, 2007. Interest on long-term borrowings decreased by $206,000, or 10.0% for the nine months ended June 30, 2007 from $2.1 million for the nine months ended June 30, 2006 to $1.9 million for the nine months ended June 30, 2007. The overall decrease in borrowings was primarily due to a decrease of $59.9 million in the average balances of advances from the Federal Home Loan Bank of Atlanta during the nine months ended June 30, 2007. Also contributing to interest expense was interest on the Junior Subordinated Debentures, which increased by $142,000 for the nine months

18

ended June 30, 2007 from $1.4 million for the nine months ended June 30, 2006 to $1.5 million for the nine months ended June 30, 2007. The average rate paid on the Junior Subordinated Debentures increased 82 basis points from 8.02% during 2006 to 8.84% during 2007. The rates on the Junior Subordinate Debentures are based on LIBOR and adjust quarterly.

19

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, 2007 and 2006. Total average assets are computed using month-end balances. No tax equivalency adjustment has been made as the Company does not earn interest income exempt from federal income tax. Loans placed on non-accrual are included in the average balance.

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,
	2007						2006
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	453,808	$	21,763	6.39	%	$	461,064	$	20,992	6.07	%
Mortgage-backed securities		103,735		3,468	4.46			126,659		3,821	4.02
Investment securities		98,064		3,186	4.33			160,400		4,657	3.87
Other interest earning assets		36,425		1,443	5.28			4,218		186	5.88
Total Interest-earning assets		692,032		29,860	5.75			752,341		29,656	5.26
Bank Owned Life Insurance		13,434						12,847
Noninterest-earning assets		25,444						45,308
Total assets	$	730,910					$	810,496
Interest-bearing liabilities:
Deposits	$	593,272	$	15,517	3.49		$	608,367	$	13,260	2.91
Short-term FHLB Advances		26,956		971	4.80			69,726		1,991	3.81
Long-term FHLB Advances		45,788		1,859	5.41			62,928		2,065	4.38
Junior Subordinated Debentures		23,197		1,538	8.84			23,197		1,396	8.02
Other liabilities		1,941		—	.00			2,027		0	0
Total interest-bearing liabilities		691,154		19,885	3.84			766,245		18,712	3.26
Noninterest-bearing liabilities		5,836						5,627
Total liabilities		696,990						771,872
Stockholders’ Equity		33,920						38,624
Total liabilities and stockholders’ equity	$	730,910					$	810,496
Net interest income			$	9,975					$	10,944
Interest rate spread					1.91	%					2.00	%
Net interest margin					1.92	%					1.94	%
Ratio average interest earning assets/interest-bearing liabilities					100.13	%					98.19	%

20

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

	For Nine Months Ended June 30,
	2007						vs.			2006
	Increase (Decrease) Due to
	Volume			Rate			Rate/Volume			Total
	(In Thousands)
Interest income:
Loans receivable, net	$	(330	)	$	1,119		$	(18	)	$	771
Mortgage-backed securities		(685	)		405			(73	)		(353	)
Investment securities and FHLB Stock		(1,808	)		555			(218	)		(1,471	)
Other interest-earning assets		1,421			(19	)		(145	)		1,257
Total interest-earning assets		(1,402	)		2,060			(454	)		204
Interest expense:
Deposits		(329	)		2,652			(66	)		2,257
Short-term FHLB advances		(1,222	)		521			(319	)		(1,020	)
Long-term FHLB advances		(562	)		489			(134	)		(207	)
Junior Subordinated Debentures		0			142			0			142
Other liabilities		0			0			0			0
Total interest-bearing liabilities		(2,113	)		3,804			(519	)		1,172
Change in net interest income	$	711		$	(1,744	)	$	65		$	(968	)

Provision for Loan Losses. The Company charges or credits to income provisions for loan losses to maintain the total allowance for loan losses at a level management considers adequate to provide losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, management considers a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. The Company established additional provision for losses on loans of $117,000 during the nine months ended June 30, 2007 as compared to $152,000 for the nine months ended June 30, 2006. Loan chargeoffs for the nine months ended June 30, 2007 were $302,000 as compared to $467,000 for the nine months ended June 30, 2006, a decrease of $165,000. Loan recoveries were $212,000 for the nine months ended June 30, 2007 compared to $219,000 for the nine months ended June 30, 2006. Non performing loans at June 30, 2007 were $2.8 million as compared to $175,000 at June 30, 2006. The total allowance for loan losses is $2.7 million at June 30, 2007. In establishing such provisions, management considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality”.

Other Income.Other income was $1.2 million for the nine months ended June 30, 2006 and ($5.8) million for the nine months ended June 30, 2007. During the nine months ended June 30, 2007, the Company incurred a loss of $5.9 million from the sale of investments and mortgage-backed securities as the Bank implemented its restructuring plan. The amount realized from this sale was a loss of $1.2 million for the nine months ended June 30, 2007. The difference in the loss was primarily due to interest rate fluctuations. In March 2007 the Company recorded a $1.5 million valuation allowance on loans held for sale. Fees on transaction accounts also increased by $28,000 from $431,000 for the nine months ended June 30, 2006 to $459,000 for the nine months ended June 30, 2007. In May of 2007 the Bank implemented an overdraft protection program. Losses on repossessed assets decreased by $36,000 from a loss of $26,000 for the nine months ended June 30, 2006 to a gain of $10,000 for the nine months ended June 30, 2007. Income from Bank Owned Life Insurance (BOLI) increased $89,000 from $339,000 for the nine months ended June 30, 2006, to $428,000 for the nine months ended June 30, 2007. This increase was due to an adjustment in the rate of dividends earned on the BOLI investment.

Non-interest Expenses.Total non-interest expenses decreased by $14.4 million, or 63.9%, from $22.6 million for the nine months ended June 30, 2006 to $8.2 million for the nine months ended June 30, 2007. The decrease in non-interest expenses was primarily due to the recovery of $3.3 million of insurance proceeds on the loss from the check-

21

kiting scheme perpetrated on the Bank discovered in June 2006 of $10.7 million before taxes. Data processing fees decreased by $239,000, from $1.3 million for the nine months ended June 30, 2006 to $1.1 million for the nine months ended June 30, 2007. This decrease was due to the change of data processors. Salaries and related expenses decreased by $303,000, or 4.85%, from $6.2 million for the nine months ended June 30, 2006 to $5.9 million for the nine months ended June 30, 2007. This decrease was primarily due to a decrease in the work force as the Bank continued with its cost cutting strategies. Employee benefits were adjusted to be less costly while still offering competitive benefits. Advertising expense also decreased by $73,000, or 15.7%, from $464,000 for the nine months ended June 30, 2006 to $391,000 for the nine months ended June 30, 2007. This decrease was due to decreased advertising during the period. Professional fees increased $178,000, or 86.0%, from $207,000 for the nine months ended June 30, 2006 to $385,000 for the nine months ended June 30, 2007. Professional fees increased due to additional legal fees arising from the supervisory agreement and the check- kiting scheme perpetrated against the Bank in June 2006. There was also an increase in other expenses of $61,000, or 8.0%, from $759,000 for the nine months ended June 30, 2006 to $820,000 for the nine months ended June 30, 2007.

Income Taxes. The Company’s income tax (benefit) was $(1.5) million and $(3.8) million for the nine months ended June 30, 2007 and 2006, respectively. The Company’s tax benefit decreased for the nine months ended June 30, 2007 as compared to the same period in the prior year as the Company’s loss decreased due to the recovery of $3.3 million of insurance proceeds on the loss from the check-kiting scheme perpetrated on the Bank discovered in June 2006. The Company also earned certain income that is exempt from state taxes and $428,000 non-taxable income from the Bank Owned Life Insurance during the nine months ended June 30, 2007.

Comparison of Operating Results for the Three Months Ended June 30, 2007 and 2006

Net Income. Net income increased by $7.5 million, from a net loss of $(6.9) million for the three months ended June 30, 2006 to net income of $599,000 for the three months ended June 30, 2007. The increase in net income was primarily attributable to a decrease in non-interest expense of $10.6 million from $14.4 million for the three months ended June 30, 2006 to $3.7 million for the three months ended March 31, 2007. The decrease in non-interest expense was due primarily to a decrease in the loss on dishonored checks from $10.7 million for the three months ended June 30, 2006 to $0 for the three months ended June 30, 2007. This was partially offset by an increase in net interest income by $215,000 or 6.0%, from $3.6 million for the three months ended June 30, 2006 to $3.8 million for the three months ended June 30, 2007.

Net Interest Income. Net interest income increased by $215,000 or 6.0% from $3.6 million for the three months ended June 30, 2006 to $3.8 million for the three months ended June 30, 2007. The increase in net interest income primarily was the result of increases in the average rate on interest-earning assets of 77 basis points from 5.38% for the three months ended June 30, 2006 to 6.15% for the three months ended June 30, 2007 which was partially offset by a decrease in the average balance of interest-earning assets from, $756.9 million at June 30, 2006 to $628.1 million at June 30, 2007. The average rate on interest bearing liabilities increased 29 basis points from 3.43% for the three months ended June 30, 2006 to 3.72% for the three months ended June 30, 2007. The increase in the average rate was partially offset by the decrease in the average balance of interest-bearing liabilities of $138.8 million from $770.5 million for the three months ended June 30, 2006 to $631.7 million for the three months ended June 30, 2007. The Company’s ratio of average interest-earning assets to average interest-bearing liabilities increased from 98.2% for the three months ended June 30, 2006 to 99.4% for the three months ended June 30, 2007. The primary reason for the increase in this ratio is the decrease in interest-bearing liabilities by retiring $98.5 million FHLB advances, as the Company restructured its balance sheet. With the sale of low yielding assets and the redemption of high cost borrowings as a result of the balance sheet restructuring, improvements in interest rate spread should occur in the future.

Interest Income. Interest income decreased by $523,000, or 5.1%, from $10.2 million for the three months ended June 30, 2006 to $9.6 million for the three months ended June 30, 2007. Interest and fees on loans decreased by $83,000, or 1.1%, from $7.3 million for the three months ended June 30, 2006 to $7.2 million for the three months ended June 30, 2007. This was primarily due to a decrease in the average balance of loans receivable of $26.5 million from $466.7 million for the three months ended June 30, 2006 to $440.2 million for the three months ended at June 30, 2007. The decrease in the average balance was primarily due to the sale of $46.4 million of residential loans due to the restructuring of the balance sheet. This was partially offset by an increase in the average yield earned on loans receivable of 30 basis points from 6.22% for the three months ended June 30, 2006 to 6.52% for the three months ended June 30, 2007. The increase in the average yield was attributable to the prevailing market interest rates. Interest on mortgage-backed securities decreased $94,000, or 7.7%, from $1.2 million for the three months ended June 30, 2006 to $1.1 million for the three months ended June 30, 2007. This decrease was primarily due to the decrease in the average balance

22

of mortgage-backed securities from $120.6 million for the three months ended June 30, 2006 to $87.7 million for the three months ended June 30, 2007. The decrease in the average balance more than offset an increase in the average rate from 4.06% for the three months ended June 30, 2006 to 5.16% for the three months ended June 30, 2007. Interest and dividends on investment securities decreased by $1.4 million, or 92.4%, from $1.6 million for the three months ended June 30, 2006 to $120,000 for the three months ended June 30, 2007. This was primarily due to a decrease in the average balance of investments of $153.6 million, from $161.1 million for the three months ended June 30, 2006 to $7.5 million for the three months ended June 30, 2007. The decrease in the average balance of investment securities and FHLB stock was due to the balance sheet restructuring. However, this was partially offset by an increase in the average yield on investments of 246 basis points from 3.92% for the three months ended June 30, 2006 to 6.38% for the three months ended June 30, 2007 due to step up provisions on some investment securities.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense, decreased from $6.6 million for the three months ended June 30, 2006 to $5.9 million for the three months ended June 30, 2007, a change of $738,000, or 11.2%. Interest on deposits increased $285,000, or 6.0%, from $4.8 million for the three months ended June 30, 2006 to $5.1 million for the three months ended June 30, 2007 due to an increase in the average yield on deposits of 39 basis points from 3.09% for the three months ended June 30, 2006 to 3.48% for the three months ended June 30, 2007. This was partially offset by a decrease in the average balance of deposits of $36.5 million, or 5.9%, from $619.1 million for the three months ended June 30, 2006 to $582.6 million for the three months ended June 30, 2007. The decrease in deposits was primarily due to increased competition for low cost deposit funds. Interest on short-term borrowings decreased by $374,000, or 77.59%, from $482,000 for the three months ended June 30, 2006, to $108,000 for the three months ended June 30, 2007. Interest on long-term borrowings decreased by $670,000, or 78.8%, from $850,000 for the three months ended June 30, 2006 to $180,000 for the three months ended June 30, 2007. The overall decrease in interest on borrowings was primarily due to a decrease of $102.2 million in the average balances of advances from the Federal Home Loan Bank of Atlanta during the three months ended June 30, 2007. The average rate increased 71 basis points from 4.24% for the three months ended June 30, 2006 to 4.95% for the three months ended June 30, 2007. Also contributing to interest expense was interest on the Junior Subordinated Debentures, which increased by $21,000 from $493,000 for the three months ended June 30, 2006 to $514,000 for the three months ended June 30, 2007. This increase was due to the increase in the average yield paid on the Junior Subordinated Debentures from 8.50%, during 2006 to 8.86% during 2007. The rates on the Junior Subordinate Debentures are based on LIBOR and adjust quarterly.

23

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 June 30, 2007 and 2006. Total average assets are computed using month-end balances. No tax equivalency adjustment has been made as the Company does not earn interest income exempt from federal income tax. Loans placed on non-accrual are included in the average balance.

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

	For the Three Months Ended June 30,
	2007						2006
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	440,253	$	7,173	6.52	%	$	466,665	$	7,256	6.22	%
Mortgage-backed securities		87,685		1,132	5.16			120,642		1,226	4.06
Investment securities		7,522		120	6.38			161,094		1,578	3.92
Other interest earning assets		92,661		1,231	5.31			8,465		119	5.62
Total interest-earning assets		628,121		9,656	6.15			756,866		10,179	5.38
Bank Owned Life Insurance		13,593						12,981
Noninterest-earning assets		28,604						43,194
Total assets	$	670,318					$	813,041
Interest-bearing liabilities:
Deposits	$	582,583	$	5,067	3.48		$	619,117	$	4,782	3.09
Short-term FHLB Advances		10,000		108	4.32			50,833		482	3.79
Long-term FHLB Advances		13,333		180	5.40			74,667		850	4.55
Junior Subordinated Debentures		23,197		514	8.86			23,197		493	8.50
Other liabilities		2,564		—	.00			2,744		—	.00
Total interest-bearing liabilities		631,677		5,869	3.72			770,558		6,607	3.43
Noninterest-bearing liabilities		4,564						7,491
Total liabilities		636,241						778,049
Stockholders’ Equity		34,077						34,992
Total liabilities and stockholders’ equity	$	670,318					$	813,041
Net interest income			$	3,787					$	3,572
Interest rate spread					2.43	%					1.95	%
Net interest margin					2.41	%					1.89	%
Ratio average interest-earning assets/interest bearing liabilities					99.44	%					98.22	%

24

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

	For Three Months Ended June 30,
	2007						vs.			2006
	Increase (Decrease) Due to
	Volume			Rate			Rate/Volume			Total
	(In Thousands)
Interest income:
Loans receivable, net	$	(435	)	$	373		$	(21	)	$	(83	)
Mortgage-backed securities		(331	)		326			(89	)		(94	)
Investment securities		(1,505	)		999			(952	)		(1,458	)
Other interest-earning assets		1,186			(7	)		(67	)		1,112
				��
Total interest-earning assets		(1,085	)		1,691			(1,129	)		(523	)
Interest expense:
Deposits		(282	)		603			(36	)		285
Short-term FHLB advances		(388	)		65			(51	)		(374	)
Long-term FHLB advances		(699	)		157			(128	)		(670	)
Junior Subordinated Debentures		—			21			—			21
Other liabilities		—			—			—			—
Total interest-bearing liabilities		(1,369	)		846			(215	)		(738	)
Change in net interest income	$	284		$	845		$	(914	)	$	215

25

Provision for Loan Losses. The Company charges provisions for loan losses to income to maintain the total allowance for loan losses at a level management considers adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision or reversal, management considers a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. The Company did not establish any additional provisions for losses on loans for the three months ended June 30, 2007. A provision of $20,000 was recorded for the three months ending June 30. 2006. Loan chargeoffs for the three months ended June 30, 2007 were $93,000, as compared to $110,000 for the three months ended June 30, 2006, a decrease of $17,000, or 15.4%. The decrease in loan chargeoffs was due to prevailing low loan delinquency and a decrease in actual losses in the bank’s consumer loan portfolio. Loan recoveries were $26,000 for the three months ended June 30, 2007 compared to $56,000 for the three months ended June 30, 2006. Non performing loans at June 30, 2007 were $2.8 million, as compared to $175,000 at June 30, 2006. The increase in non performing loans was due to a commercial customer who was delinquent and has subsequently filed for bankruptcy. While the Bank believes the collateral on this loan is sufficient to render the Bank whole, a specific valuation allowance of $280,000 has been associated with this loan due to changing market conditions and the time associated with the foreclosure process. The total loss allowance allocated to loans was $2.7 million at June 30, 2007. In establishing such provisions, management considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality”.

Other Income.Other income was $400,000 for the three months ended June 30, 2006 as compared to $808,000 for the three months ended June 30, 2007. Fees on transaction accounts increased $53,000 for the three months ended June 30, 2007 from $146,000 for the three months ended June 30, 2006 to $199,000 for the three months ended June 30, 2007. In May 2007 the Bank began offering an overdraft protection program. There was an increase in the gain on repossessed assets of $21,000 from a loss of $1,000 for the three months ended June 30, 2006 to a gain of $20,000 for the three months ended June 30, 2007. Repossessed assets are primarily vehicles which have been repossessed. The loss on repossessed assets is the deficiency from net proceeds from the sale of the collateral and the loan balance. Income from Bank Owned Life Insurance (BOLI) increased $43,000 for the three months ended June 30, 2007 from $103,000 for the three months ended June 30, 2006, to $146,000 for the three months ended June 30, 2007. This increase was due to an adjustment in the rate of dividends earned on the BOLI investment.

Non-interest Expenses.Total non-interest expenses decreased by $10.7 million, or 74.05%, from $14.4 million for the three months ended June 30, 2006 to $3.7 million for the three months ended June 30, 2007. The decrease in non-interest expenses was primarily due to the decrease in loss on dishonored checks of $10.7 million for the three months ended June 30, 2007 from $10.7 million for the three months ended June 30, 2006, to $0 for the three months ended June 30, 2007. Salaries and related expenses remained relatively stable at $2.0 million for the three months ended June 30, 2006 and 2007. Advertising expense also decreased $89,000, or 46.6%, from $191,000 for the three months ended June 30, 2006 to $102,000 for the three months ended June 30, 2007. This decrease was due to decreased advertising during the period. These decreases were partially offset by increases in data processing fees of $10,000, from $355,000 for the three months ended June 30, 2006 to $365,000 for the three months ended June 30, 2007. Professional fees also increased by $25,000, or 65.8%, from $38,000 for the three months ended June 30, 2006 to $63,000 for the three months ended June 30, 2007. Occupancy expense increased by $38,000, or 7.21%, from $527,000 for the three months ended June 30, 2006 to $565,000 for the three months ended June 30, 2007. Other expenses increased $32,000 for the three months ended June 30, 2007, from $219,000 for the three months ended June 30, 2006 to $251,000 for the for the three months ended June 30, 2007.

Income Taxes. The Company’s income tax expense (benefit) was $247,000 and $(3.6) million for the three months ended June 30, 2007 and 2006, respectively. The Company also earned certain non-taxable income from the Bank Owned Life Insurance during the three months ended June 30, 2007 amounting to $146,000.

26

Commitments, Contingencies and Off-Balance Sheet Risk

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

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

	June 30, 2007	September 30, 2006
	(In thousands)
Commitments to originate new loans	$10,779	$7,205
Unfunded commitments to extend credit under existing equity line and commercial lines of credit	27,659	30,485
Commercial letters of credit	830	754

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.

27

Asset Quality

At June 30, 2007, the Company had $2.9 million in non-performing assets, consisting of nonaccrual loans,, repossessed assets and foreclosed real estate, representing .45% of total assets. There was one impaired commercial loan at June 30 2007, for $2.3 million and $2.4 million at September 30, 2006. There is a specific allowance for this loan of $280,000. The Company believes this is sufficient due to the fact that the loan is collateral dependent and the Company does not expect to incur any additional loss. This was a single commercial real estate loan that was classified as nonaccrual during the year ended September 30, 2006. The loan is secured by a mixed retail and office use commercial office building in Timonium, Maryland. The loan had an outstanding principal balance of $2.3 million at June 30, 2007, and the property securing the loan was appraised at $2.6 million. The borrower is in bankruptcy. The property securing the loan is approximately 70% leased, the tenant makes rental payments directly to the Bank, and we use these payments to reduce the principal outstanding balance of the loan. At September 30, 2006, non-performing assets were $2.6 million or .33% of total assets. The Bank’s net chargeoffs for the nine months ended June 30, 2007 were $90,000. The Bank’s allowance for loan losses was $2.7 million at June 30, 2007 and $2.6 million at September 30, 2006.The Bank has no sub-prime or Alt-A loan exposure.

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

	At June 30, 2007			At September 30, 2006
	(In thousands)
Nonperforming loans:
Nonaccrual loans:
Single family residential	$	487		$	70
Multi-family residential		—			—
Commercial real estate		2,283			2,381
Construction		—			—
Commercial loans		—			—
Land		—			—
Consumer Loans		13			—
Total nonaccrual loans		2,783			2,451
Loans 90 days past due and accruing		—			—
Restructured loans		—			—
Total non-performing loans		2,783			2,451
Other non-performing assets		126			130
Total nonperforming assets	$	2,909		$	2,581
Nonperforming loans to loans receivable, net		.68	%		.53	%
Nonperforming assets as a percentage of loans and foreclosed real estate		.71	%		.56	%
Nonperforming assets to total assets		.45	%		.33	%

28

The following table sets forth an analysis of the Company’s allowance for loan losses for the periods indicated.

	For the Nine Months Ended June 30
	2007			2006
	(Dollars in thousands)
Balance at beginning of period	$	2,679		$	2,747
Loans charged-off:
Real estate mortgages:
Single-family residential		—			—
Multi-family residential		—			—
Commercial		—			—
Construction		—			—
Commercial Loans		—			—
Consumer		(302	)		(467	)
Total charge-offs		(302	)		(467	)
Recoveries:
Real estate mortgage:
Single-family residential		—			—
Multi-family residential		—			—
Commercial		—			—
Construction		—			—
Commercial loans secured		—			—
Consumer		212			219
Total recoveries		212			219
Net loans (charged-off)		(90	)		(248	)
Provision for loan losses		117			152
Balance at end of period	$	2,706		$	2,651
Ratio of net charge-offs to average loans outstanding during the period		(.02	)%		(.05	)%

Banking regulations require that the Company classify its assets on a regular basis. There are three classifications for problem assets: substandard, doubtful and loss. The Company regularly reviews its assets to determine whether any assets require classification or re-classification. At June 30, 2007, the Company had $4.3 million in classified assets, consisting of $4.2 million in substandard and loss loans, $94,000 in foreclosed real estate and $32,000 in other repossessed assets. At September 30, 2006, the Company had $2.6 million in substandard and loss loans, consisting of $2.5 million in loans, $94,000 in foreclosed real estate and $36,000 in other repossessed assets.

In addition to regulatory classifications, the Company also designates as “special mention” assets that are currently performing in accordance with their contractual terms but may become classified or non-performing assets in the future. At June 30, 2007, the Company identified approximately $1.0 million in assets classified as special mention.

Liquidity and Capital Resources

At June 30, 2007, the Bank exceeded all regulatory minimum capital requirements. For information comparing the Bank’s tangible, core and risk-based capital levels to the regulatory requirements, see Note 5 of Notes to Consolidated Financial Statements.

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

The primary investing activities of the Company are the origination of loans and the purchase of investment securities and mortgage-backed securities. During the nine months ended June 30, 2007 and 2006, the Company had $60.9 million and $97.5 million, respectively, of gross loan originations. During the nine months ended June 30, 2007

29

and 2006, the Company purchased investment securities in the amounts of $802,000 and $1.3 million respectively, and mortgage-backed securities in the amounts of $84.9 million and $0 million, respectively. The primary financing activity of the Company is the attraction of savings deposits.

The Company has other sources of liquidity if there is a need for funds. The Bank has the ability to obtain additional advances from the FHLB of Atlanta in the amount of $159.9 million as of June 30, 2007. In addition, securities in the available for sale portfolio provide liquidity and the Company has the immediately liquid resources of cash and cash due from banks, federal funds sold and securities purchased under resale agreements if needed.

The Bank is required to maintain adequate levels of liquid assets as defined by OTS regulations. The Bank’s average daily liquidity ratio for the month of June was approximately 33.0%. Management seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide for lower rates of return, the Bank’s relatively high liquidity will, to a certain extent, result in lower rates of return on assets.

The Company’s most liquid assets are cash, interest-bearing deposits in other banks and federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Company’s operating, financing and investing activities during any given period. At June 30, 2007, cash, interest-bearing deposits in other banks and federal funds sold were $8.8 million, $43.2 million and $39.2 million, respectively. The Company invested the proceeds from sales of mortgage-backed securities and investment securities in short term instruments. These funds are expected to be used to fund outflows of certificate of deposit accounts which are expected to occur as we reduce certificates of deposit rates in an effort to reduce these higher cost deposits as a funding source.

The Company anticipates that it will have sufficient funds available to meet its current commitments. Certificates of deposit which are scheduled to mature in less than one year at June 30, 2007 totaled $250.4 million. As part of the plan to restructure the balance sheet the Company plans to reduce certificate of deposit rates in an effort to reduce these higher cost of deposits as a funding source. The Company plans to decrease certificates of deposits by approximately $76.0 million over the next several months. Should the Bank experience significant deposit run off the Bank anticipates that it will have sufficient liquidity to meet its needs as outlined above. The Bank is a party to financial instruments with off-balance-sheet risk made in the normal course of business to meet the financing needs of its customers. These financial instruments are standby letters of credit, lines of credit and commitments to fund mortgage loans and involve to varying degrees elements of credit risk in excess of the amount recognized in the statement of financial position. The contract amounts of those instruments express the extent of involvement the Company has in this class of financial instruments and represents the Company’s exposure to credit loss from nonperformance by the other party.

The Company generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. At June 30, 2007, the Company had commitments under standby letters of credit and lines of credit and commitments to originate mortgage loans of $830,000, $27.6 million and $10.8 million, respectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

The Company considers interest rate risk to be its most significant market risk, which could potentially have the greatest impact on operating earnings. The structure of the Company’s loan and deposit portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income.

The Company monitors whether material changes in market risk have occurred since September 30, 2006. The Company does not believe that any material changes in market risk exposures occurred since September 30, 2006.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the

30

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

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

PART II.OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

We are subject to the restrictions and conditions of a Supervisory Agreement with, and other commitments we have made to, the Office of Thrift Supervision. Failure to comply with the Supervisory Agreement could result in additional enforcement action against us, including the imposition of monetary penalties, and could hurt our ability to meet our obligations under our trust preferred securities.

We entered into a Supervisory Agreement with the Office of Thrift Supervision on December 8, 2005, which requires us to take certain actions, including complying with the Bank Secrecy Act and the Flood Disaster Protection Act and submitting a business plan to the Office of Thrift Supervision for review and approval. In addition, we have made certain other commitments to the Office of Thrift Supervision, wherein we agreed, among other things, that Baltimore County Savings Bank will not pay any dividend to BCSB Bankcorp or to Baltimore County Savings Bank, M.H.C. without the prior written approval of the Office of Thrift Supervision and that BCSB Bankcorp will not incur any debt without the prior written approval of the Office of Thrift Supervision. For a description of the terms of the Supervisory Agreement and our other commitments, see “Part I. Item 2, Managements Discussion and Analysis of Financial Conditions and Results of Operations — Supervisory Agreement and Other Commitments.” While we believe we have complied with the terms of the Supervisory Agreement and our other commitments, if we fail to comply with the terms and conditions of the Supervisory Agreement, the Office of Thrift Supervision could take additional enforcement action against us, including the imposition of monetary penalties or the issuance of a cease and desist order requiring further corrective action. We incurred significant additional regulatory compliance expense in connection with the Supervisory Agreement and our additional commitments, and although we do not expect it, it is possible regulatory compliance expenses related to the Supervisory Agreement and our other commitments could have a material adverse impact on us in the future. In addition, the Office of Thrift Supervision must approve any deviation from our business plan, which could limit our ability to make any changes to our business, which could negatively impact the scope and flexibility of our business activities. Moreover, if we are unable to complete this offering, BCSB Bankcorp’s commitment not to incur debt, and Baltimore County Savings Bank’s commitment not to pay a dividend to BCSB Bankcorp, without prior Office of Thrift Supervision approval, could hurt our ability to meet our obligations under our trust preferred securities. While we believe that we have taken actions that will result in the Supervisory Agreement and our other commitments being terminated in the near future, it cannot be certain that such actions will result in the Office of Thrift Supervision terminating the Supervisory Agreement.

31

We have had losses or low earnings in recent years, and if we cannot generate and increase our income to competitive levels our stock price may be adversely affected.

We had net losses of $2.6 million and $7.4 million during the nine months ended June 30, 2006 and the year ended September 30, 2006, respectively. We had net income of $601,000 and $885,000 during the years ended September 30, 2005 and 2004, respectively. Our return on average assets was (.48)%, (.92)%, .08% and ..12% for the nine months ended June 30, 2007 (annualized) and for the years ended September 30, 2006, 2005 and 2004 respectively, and our return on average equity was (10.27)%, (19.86)%, 1.40% and 2.03% for the nine months ended June 30, 2007 (annualized) and for the years ended September 30, 2006, 2005, 2004 respectively. We face significant challenges that will hinder our ability to generate competitive returns. These challenges include the fact that we operate under a Supervisory Agreement with the Office of Thrift Supervision, we have limited cash at our holding company and we have a low interest rate spread. While we have identified various strategic initiatives we will pursue in our efforts to overcome these challenges and improve earnings, our strategic initiatives my not succeed in generating and increasing income. If we are unable to generate or increase income, our stock price may be adversely affected.

Our increased emphasis on commercial real estate and commercial lending may expose us to increased lending risks.

In recent years we have significantly increased our emphasis on commercial real estate lending. Commercial real estate loans increased from $57.3 million, or 13.8% of our total loans, at September 30, 2002 to $167.7 million, or 41.1% of our total loans, at June 30, 2007. Moreover, as part of our strategy to increase earnings, we will seek to continue to increase commercial real estate lending, as well as commercial lending, and intend to add commercial lending personnel to assist us in these efforts. These types of loans generally expose a lender to greater risk of non-payment and loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential mortgage loans. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than single-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our commercial and construction borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a single-family residential mortgage loan.

Certain interest rate movements may decrease income and asset value.

Since June 30, 2004, the U.S. Federal Reserve has increased its target for the federal funds rate from 1.00% to 5.25%. While these short-term market interest rates, which we use as a guide to price our deposits, have increased, longer-term market interest rates, which we use as a guide to price our longer-term loans, have not increased to the same degree. As a result, we currently are in an interest rate environment known as an “inverted yield curve,” where short-term market interest rates exceed long-term market interest rates. This inversion of the market yield curve has had a negative impact on our interest rate spread and net interest margin to date, and if short-term interest rates continue to rise, and if rates on our deposits and borrowings continue to reprice upwards faster than the rates on our long-term loans and investments, we would experience further compression of our interest rate spread and net interest margin, which would have a negative effect on our profitability.

Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.

We do not expect to recover all of our losses from a recent check-kiting scheme, and our recovery efforts are expected to take a long period of time and may result in further expenses or litigation.

During the year ended September 30, 2006, we became aware of a check-kiting scheme perpetrated by a

32

single commercial deposit customer. As a result of this check-kiting scheme, we incurred an after-tax loss of $6.9 million. During the quarter ended March 31, 2007, we reached a settlement with our insurance provider, pursuant to which we received a recovery of $3.35 million, or $2.2 million net of taxes, in settlement of a bond claim with our insurance carrier. We are aggressively pursuing collection of the remaining check-kiting losses from the customer, but the customer has filed for bankruptcy and one of the two principals of the customer has committed suicide. It does not appear that the customer, the surviving principal or the estate of the deceased principal has material assets from which we could make any recovery, particularly after payment of bankruptcy expenses by the bankruptcy estate of the customer. Moreover, there are other secured and unsecured creditors who are asserting additional and competing claims against the bankruptcy estate of the customer and certain principals of the customer. The recovery process is uncertain and is expected to require an extended period of time to resolve. Further, we will incur expenses in pursuing our recovery efforts, and it is possible that we may be involved in litigation with other creditors as we seek to recover limited available assets. In addition, the negative publicity from the check-kiting scheme hurt our ability in the short term to attract and retain deposits. We have examined all deposit accounts with more than a minimal negative balance and believe we do not have a risk of additional material check-kiting losses at this time. We also have developed and implemented additional procedures to detect check-kiting that we believe will reduce the risk of future check-kiting losses.

We currently do not pay dividends. No assurance can be given that we will resume the payment of dividends.

On December 1, 2006, we suspended our dividend program and agreed with the Office of Thrift Supervision that we will not issue a dividend to stockholders going forward without Office of Thrift Supervision consent. We have also made an additional commitment to the Office of Thrift Supervision not to pay a dividend to stockholders without the prior written approval of the Office of Thrift Supervision. Besides the Office of Thrift Supervision limitations to which we are subject, our ability to pay dividends will depend on a number of factors, including capital requirements, our financial condition and results of operations, including our ability to generate sufficient earnings to warrant the payment of dividends, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, our ability to pay dividends depends, in part, on our receipt of dividends from Baltimore County Savings Bank. We have made a commitment to the Office of Thrift Supervision that Baltimore County Savings Bank will not pay any dividend to BCSB Bankcorp or to Baltimore County Savings Bank, M.H.C. without the prior written approval of the Office of Thrift Supervision. In addition to the specific commitment we made, Office of Thrift Supervision regulations limit distributions from Baltimore County Savings Bank to BCSB Bancorp.

Future significant losses could indicate impairment of certain assets.

Future significant losses could result in an impairment charge relating to our goodwill and intangible assets. Additionally, future significant losses could result in the establishment of a valuation allowance for our deferred tax assets, which totaled $7.5 million at June 30, 2007, if their future realization is no longer considered more likely than not.

A downturn in the local economy or a decline in real estate values could hurt our profits.

Nearly all of our real estate loans are secured by real estate in Baltimore, Harford and Howard Counties and Baltimore City in Maryland. As a result, a downturn in the local economy, and, particularly, a downturn in the residential construction industry, could cause significant increases in non-performing loans, which would adversely affect our profits. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would negatively affect our profits. A decline in real estate values could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss.

Strong competition within Baltimore County Savings Bank’s market area could hurt profits and slow growth.

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in our earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult for us to grow loans and deposits and to hire and retain experienced employees. Competition also makes it more difficult to hire and retain experienced employees. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in its market area.

33

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our primary federal regulator, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Baltimore County Savings Bank rather than holders of BCSB Bankcorp’s common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security-Holders

None

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed herewith:

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

34

SIGNATURES

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

	BCSB BANKCORP, INC.
Date: July 31, 2007	/s/ Joseph J. Bouffard
	Joseph J. Bouffard President (Principal Executive Officer)
Date: July 31, 2007	/s/ Bonnie M. Klein
	Bonnie M. Klein Senior Vice President and Treasurer (Principal Financial and Accounting Officer)