UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 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: 333-141572
BCSB BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 26-1424764 | |
(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) | (Zip Code) |
Issuer’s telephone number, including area code: (410) 256-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes x No ¨
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 ¨ No x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated, 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
The aggregate market value of voting and non-voting common equity held by non-affiliates was $0 as of March 31, 2007.
Number of shares of Common Stock outstanding as of December 31, 2007: 100
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATION FOR AMENDMENT:
The Annual Report on Form 10-K of BCSB Bancorp, Inc. (the “Company”) for the fiscal year ended September 30, 2007 (the “2007 Form 10-K”) filed with the Securities and Exchange Commission (the “Commission”) on January 7, 2008 is being amended hereby to include the items listed below:
| ITEM | DESCRIPTION | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 10. | Directors and Executive Officers of the Registrant | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions | |
| Item 14. | Principal Accountant Fees and Services | |
| Item 15. | Exhibits and Financial Statement Schedules |
As originally filed, the Company’s 2007 Form 10-K incorporated the information required by Items 10, 11, 12, 13 and 14 of Form 10-K by reference to the Company’s Definitive Proxy Statement for its 2008 Annual Meeting of Stockholders (the “Proxy Statement”) as permitted by Instruction G.(3). Since the Proxy Statement is not expected to be filed with the Commission within 120 days of the close of the Company’s fiscal year ended September 30, 2007 as required by Instruction G.(3), Items 10, 11, 12, 13 and 14 in Part III of the 2007 Form 10-K are hereby amended by deleting the texts thereof in their entirety and substituting therefore the following text. In addition, the Company is furnishing updated Exhibits 31.1, 31.2 and 32, which requires that the full text of Item 15 be amended, pursuant to Exchange Act Rule 12b-15. Therefore, Item 15 in Part IV of the 2007 Form 10-K is also hereby amended by deleting the text thereof in its entirety and substituting the following text. In addition, the Company revised its discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comparison of Operating Results for the Years Ended September 30, 2006 and 2005 — Other Income.”
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company was formed in June 1998 by the Bank to become the holding company for the Bank following the Bank’s reorganization into the mutual holding company form of organization (the “Reorganization”). As part of the Reorganization, the Company became a majority-owned subsidiary of the MHC. The Reorganization was consummated on July 8, 1998.
The Company’s net income is dependent primarily on its net interest income, which is the difference between interest income earned on its interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the Company’s net income also is affected by the level of other income, which primarily consists of fees and charges, and levels of non-interest expenses such as salaries and related expenses.
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The operations of the Company are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company’s market area.
Strategic Overview
With the addition of a new President and Chief Executive Officer, the Company’s Board of Directors has identified certain strategies to improve earnings:
Transformation of the Balance Sheet – We have completed the process of transforming our 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. During the second and third quarters of our fiscal year ended September 30, 2007, we sold approximately $169.1million of mortgage-backed securities and investment securities with an average yield of 3.51%. We used $73.0 million of the proceeds from these sales to prepay $104 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 has been invested in overnight deposits and used, to fund outflows of high cost certificates of deposit.
We also sold $31.9 million of mutual funds and sold $46.4 million fixed-rate, performing 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 approximate yield of 5.4%. We continue to use the remaining proceeds to originate commercial loans as opportunities to do so become available.
As a result of this balance sheet restructuring, we have increased our interest rate spread, reduced our exposure to risks of interest rate fluctuations and improved our capital ratios. The balance sheet restructuring, has reduced our assets and liabilities by approximately $169 million. 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 decline in future periods. We presently do not contemplate any further balance sheet reduction, unless we ultimately decide to sell or close one or more branches in connection with our branch review.
In addition to the balance sheet restructuring, over the long term, we will seek to gradually increase our investment in high quality, commercial real estate loans and commercial business loans, while reducing our current concentrations in single-family mortgage loans and mortgage-backed securities. Commercial real estate loans and commercial business loans generally have higher yields than single-family mortgage loans and mortgage-backed securities and tend to have shorter terms to maturity or adjustable interest rates.
Increase Non-interest Income – We have identified opportunities within the organization to generate increased non-interest income. The Company will seek to capitalize on its existing branch network by developing additional products and/or services to offer its existing customers, such as sales of non-insured annuity and mutual fund products. Introduction of overdraft privilege products and reverse mortgage referral fees during 2007 also helped to improve fee income.
Continued Expense Control – In recent years, management has achieved success in reducing the Company’s non-interest expenses through decreases in personnel cost and data processing charges. The Board of Directors will continue to make it a management priority to identify cost savings opportunities throughout all phases of the Company’s operations.
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While these initiatives represent strategies pursued, they may not increase the Company’s income for a long period of time, if at all. The success of the Company’s strategy is subject to many factors, including all the factors listed under “Forward-Looking Statements” and the risk factors listed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2007.
In addition, it should be noted that commercial real estate 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, 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 a lender 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.
Supervisory Agreement
On December 8, 2005, the Bank entered into a Supervisory Agreement with the Office of Thrift Supervision (“OTS”).
Pursuant to the terms of Supervisory Agreement, the Bank agreed as follows:
| (1) | To review and revise as necessary the Bank’s written policy for compliance with the Bank Secrecy Act (the “BSA”) laws and regulations (the “BSA Compliance Program”). In amending the BSA Compliance Program, the Board of Directors must: (i) review and revise as necessary the Bank’s written methodology for assigning risk levels; (ii) strengthen the Bank’s customer identification program; (iii) review and revise as necessary the Bank’s written internal controls, due diligence processes and oversight and monitoring procedures; (iv) strengthen the Bank’s currency transaction reporting procedures; (v) review and revise as necessary the Bank’s specific review procedures to ensure the accurate completion and timely filing of all currency transaction reports; and (vi) complete all other actions discussed in the Bank’s 2005 examination. The Board also must review the Bank’s BSA Compliance Program on an annual basis to assess its adequacy and compliance with applicable BSA laws and regulations and, within 60 days, review and revise the Bank’s policies and procedures for conducting annual independent testing of the Bank’s BSA Compliance Program. |
| (2) | To review and amend as necessary the Bank’s 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 the Bank. |
| (3) | To review and revise as necessary the Bank’s written indirect automobile loan underwriting policies and procedures. |
| (4) | Within 60 days, to prepare, adopt and submit for review and approval by the OTS a comprehensive three year business plan that considers the Bank’s existing operations, business strategies, current market conditions, local demographics, earnings, available resources and existing capital levels. |
The Supervisory Agreement will remain in effect until terminated, modified, or suspended in writing by the OTS.
The Bank has fully adopted and implemented the various plans, policies and procedures required by the Supervisory Agreement. A failure to comply with the Supervisory Agreement could result in the initiation of a formal enforcement action by the OTS, including the imposition of civil monetary penalties. While the Supervisory Agreement has resulted in additional regulatory compliance expense for the Company, the amount of such expense is not considered to have a material financial impact on the Company. The Bank has filed its business plan with the OTS and under the terms of the agreement may not make deviations from the plan without prior OTS approval.
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The foregoing information does not purport to be a complete summary of the Supervisory Agreement and is qualified in its entirety by reference to the Supervisory Agreement filed as Exhibit 99 to the Company’s Current Report on Form 8-K filed on December 14, 2005.
Significant Events
On June 29, 2006, the Company announced that it had been victimized by a check kiting scheme perpetrated by one of its commercial deposit customers. The Company sustained an after tax loss during the year ended September 30, 2006 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 $3.4 million pre-tax in settlement of a bond claim with our insurance carrier. Additionally, during the quarter ended September 30, 2007, the Company recorded $296,000 of expense related to the check-kiting scheme on a pre-tax basis, $25,000 of which related to legal fees. Notwithstanding, these losses, the Bank continues to satisfy all regulatory capital requirements and will be “well capitalized” under applicable government regulations.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of the Company’s financial condition is based on the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses.
Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on management’s evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimated loss and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management’s estimation of losses. The use of different estimates or assumptions could produce different provisions for loan losses. Refer to the discussion of Allowance for Loan Losses in Note 1 to the Consolidated Financial Statements 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 a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
The Company accounts for income taxes under the asset/liability method. Deferred tax assets are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax 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 the Company’s control. It is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred tax assets could change in the near term.
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Forward-Looking Statements
When used in this Annual Report, 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.
Asset/Liability Management
The Company strives to achieve consistent net interest income and reduce its exposure to adverse changes in interest rates by attempting to match the terms to re-pricing of its interest-sensitive assets and liabilities. Factors beyond the Bank’s control, such as market interest rates and competition, may also have an impact on the Bank’s interest income and interest expense.
In the absence of any other factors, the overall yield or return associated with the Bank’s earning assets generally will increase from existing levels when interest rates rise over an extended period of time, and conversely interest income will decrease when interest rates decrease. In general, interest expense will increase when interest rates rise over an extended period of time, and conversely interest expense will decrease when interest rates decrease. By managing the increases and decreases in its interest income and interest expense which are brought about by changes in market interest rates, the Bank can significantly influence its net interest income.
The senior officers of the Bank meet on a regular basis to monitor the Bank’s interest rate risk position and to set prices on loans and deposits to manage interest rate risk within the parameters set by the Board of Directors. The President of the Bank reports to the Board of Directors on a regular basis on interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Board of Directors reviews the maturities of the Bank’s assets and liabilities and establishes policies and strategies designed to regulate the Bank’s flow of funds and to coordinate the sources, uses and pricing of such funds. The first priority in structuring and pricing the Bank’s assets and liabilities is to maintain an acceptable interest rate spread while reducing the net effects of changes in interest rates. The Bank’s management is responsible for administering the policies and determinations of the Board of Directors with respect to the Bank’s asset and liability goals and strategies.
As previously discussed, the Bank completed the process of transforming the balance sheet during the second and third quarters of the fiscal year ended September 30, 2007. A primary objective of this restructuring was to reduce exposure to changing interest rates. Lower yielding loans and investment securities were sold, with a substantial portion of the proceeds used to purchase higher yielding investments and to pay off debt. In addition to shortening the average repricing period of its assets, the Bank has sought to reduce its dependence on longer term fixed rate certificates of deposit. This should help the Bank respond more quickly to changing interest rate conditions and prevent long term commitments at higher deposit costs.
Market Risk
Management measures the Bank’s interest rate risk by computing estimated changes in the net portfolio value (“NPV”) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is the difference between incoming and outgoing discounted cash flows from assets and liabilities, with adjustments made for off-balance sheet items. These computations estimate the effect on the Bank’s NPV
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of sudden and sustained increases and decreases in market interest rates. The Bank’s Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the Bank’s estimated NPV in the event of increases or decreases in market interest rates. The following table presents the Bank’s projected change in NPV for the various rate shock levels at September 30, 2007. All changes meet the Bank’s policy requirements.
| Net Portfolio Value | NPV as % of PV of Assets | |||||||||||||
Change in Rates | $ Amount | $ Change (1) | % Change (2) | NPV Ratio (3) | Change (4) | |||||||||
| (Dollars in Thousands) | ||||||||||||||
+300 bp | $ | 51,225 | $ | -17,684 | -26 | % | 8.17 | % | -234bp | |||||
+200 bp | 57,353 | -11,557 | -17 | 9.01 | -150bp | |||||||||
+100 bp | 63,496 | -5,413 | -8 | 9.82 | -69bp | |||||||||
0 bp | 68,910 | 10.51 | ||||||||||||
-100 bp | 72,431 | 3,521 | 5 | 10.92 | 41bp | |||||||||
-200 bp | 73,450 | 4,540 | 7 | 10.99 | 48bp | |||||||||
| (1) | Represents the excess (deficiency) of the estimated NPV assuming the indicated change in interest rates minus the estimated NPV assuming no change in interest rates. |
| (2) | Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates. |
| (3) | Calculated as the estimated NPV divided by average total assets. |
| (4) | Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. |
***Risk Measures: 200 bp rate shock***
| At September 30, | ||||||
| 2007 | 2006 | |||||
Pre-Stock NPV Ratio: NPV as % of PV of Assets | 10.51 | % | 8.66 | % | ||
Exposure Measure: Post Shock NPV Ratio | 9.01 | 6.91 | ||||
Sensitivity Measure: Change in NPV Ratio | 150 | bp | 175 | bp | ||
The above table indicates that at September 30, 2007, in the event of sudden and sustained increases in prevailing market interest rates, the Bank’s NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Bank’s NPV would be expected to increase. The Bank’s Board of Directors reviews the Bank’s NPV position quarterly, and, if estimated changes in NPV are not within the targets established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board approved targets. At September 30, 2007, the Bank’s estimated changes in NPV were within the targets established by the Board of Directors.
NPV is calculated by the Office of Thrift Supervision (OTS) by using information provided by the Bank. The calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by Bloomberg quotations and surveys performed during the quarter ended September 30, 2007, with adjustments made to reflect the shift in the Treasury yield curve between the survey date and the quarter-end date.
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in the Bank’s portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the tables. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.
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Average Balance, Interest and Average Yields and Rates
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 average yields earned and rates paid. Such yield and cost are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the years ended September 30, 2007, September 30, 2006 and September 30, 2005. Total average assets are computed using month-end balances. No tax equivalent adjustments have been made as the Company did not invest in any tax exempt assets during the periods presented.
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.
| Year Ended September 30, | |||||||||||||||||||||||||||
| 2007 | 2006 | 2005 | |||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/ Cost | Average Balance | Interest | Average Yield/ Cost | Average Balance | Interest | Average Yield/ Cost | |||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Loans receivable (1) | $ | 444,526 | $ | 28,578 | 6.43 | % | $ | 462,799 | $ | 28,352 | 6.13 | % | $ | 412,093 | $ | 24,286 | 5.89 | % | |||||||||
Mortgage-backed securities | 104,323 | 4,938 | 4.73 | 124,458 | 5,095 | 4.09 | 161,415 | 6,231 | 3.86 | ||||||||||||||||||
Investment securities and FHLB stock | 75,104 | 3,303 | 4.40 | 160,365 | 6,342 | 3.95 | 162,138 | 5,637 | 3.48 | ||||||||||||||||||
Other interest-earning assets | 43,390 | 2,293 | 5.28 | 3,372 | 206 | 6.11 | 2,578 | 69 | 2.68 | ||||||||||||||||||
Total interest earning assets | 667,343 | 39,112 | 5.86 | 750,994 | 39,995 | 5.33 | 738,224 | 36,223 | 4.91 | ||||||||||||||||||
Bank Owned Life Insurance | 13,741 | 12,913 | 12,242 | ||||||||||||||||||||||||
Non-interest-earning assets | 28,619 | 40,006 | 40,869 | ||||||||||||||||||||||||
Total assets | $ | 709,703 | $ | 803,913 | $ | 791,335 | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Deposits | $ | 584,077 | $ | 20,405 | 3.49 | % | $ | 607,952 | $ | 18,379 | 3.02 | % | $ | 589,849 | $ | 14,711 | 2.49 | % | |||||||||
FHLB advances short-term | 22,717 | 1,082 | 4.76 | 63,457 | 2,484 | 3.91 | 53,632 | 1,471 | 2.74 | ||||||||||||||||||
FHLB advances long-term | 36,841 | 1,975 | 5.36 | 67,529 | 2,992 | 4.43 | 72,056 | 2,738 | 3.80 | ||||||||||||||||||
Junior Subordinated Debentures | 23,197 | 2,055 | 8.86 | 23,197 | 1,921 | 8.28 | 23,197 | 1,464 | 6.31 | ||||||||||||||||||
Other liabilities | 1,635 | — | — | 1,824 | — | — | 1,864 | — | — | ||||||||||||||||||
Total interest-bearing liabilities | 668,467 | 25,517 | 3.82 | 763,959 | 25,776 | 3.37 | 740,598 | 20,384 | 2.75 | ||||||||||||||||||
Non-interest-bearing liabilities | 7,183 | 2,723 | 7,856 | ||||||||||||||||||||||||
Total liabilities | 675,650 | 766,682 | 748,454 | ||||||||||||||||||||||||
Stockholders’ equity | 34,053 | 37,231 | 42,881 | ||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 709,703 | $ | 803,913 | $ | 791,335 | |||||||||||||||||||||
Net interest income | $ | 13,595 | $ | 14,219 | $ | 15,839 | |||||||||||||||||||||
Interest rate spread | 2.04 | % | 1.96 | % | 2.16 | % | |||||||||||||||||||||
Net interest margin (2) | 2.04 | % | 1.89 | % | 2.15 | % | |||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 99.83 | % | 98.30 | % | 99.68 | % | |||||||||||||||||||||
| (1) | Includes nonaccrual loans. |
| (2) | Represents net interest income divided by the average balance of interest-earning assets. |
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Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest income and interest expense 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).
| Year Ended September 30, | ||||||||||||||||||||||||||||||||
| 2007 v. 2006 | 2006 v. 2005 | |||||||||||||||||||||||||||||||
Increase (Decrease) Due to | ||||||||||||||||||||||||||||||||
| Volume | Rate | Rate/ Volume | Total | Volume | Rate | Rate/ Volume | Total | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||||
Loans receivable | $ | (1,120 | ) | $ | 1,401 | $ | (55 | ) | $ | 226 | $ | 2,955 | $ | 989 | $ | 122 | $ | 4,066 | ||||||||||||||
Mortgage-backed securities | (825 | ) | 797 | (129 | ) | (157 | ) | (1,422 | ) | 371 | (85 | ) | (1,136 | ) | ||||||||||||||||||
Investment securities and FHLB stock | (3,376 | ) | 722 | (385 | ) | (3,039 | ) | (62 | ) | 775 | (8 | ) | 705 | |||||||||||||||||||
Other interest-earning assets | 2,437 | (27 | ) | (323 | ) | 2,087 | 21 | 89 | 27 | 137 | ||||||||||||||||||||||
Total interest-earning assets | (2,884 | ) | 2,893 | (892 | ) | (883 | ) | 1,492 | 2,224 | 56 | 3,772 | |||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||
Deposits | (722 | ) | 2,860 | (112 | ) | 2,026 | 451 | 3,121 | 96 | 3,668 | ||||||||||||||||||||||
FHLB advances short-term | (1,594 | ) | 538 | (346 | ) | (1,402 | ) | 267 | 632 | 114 | 1,013 | |||||||||||||||||||||
FHLB advances long-term | (1,360 | ) | 628 | (285 | ) | (1,017 | ) | (144 | ) | 420 | (22 | ) | 254 | |||||||||||||||||||
Subordinate Debentures | — | 134 | — | 134 | — | 457 | — | 457 | ||||||||||||||||||||||||
Other liabilities | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total interest-bearing liabilities | (3,676 | ) | 4,160 | (743 | ) | (259 | ) | 574 | 4,630 | 188 | 5,392 | |||||||||||||||||||||
Change in net interest income | $ | 792 | $ | (1,267 | ) | $ | (149 | ) | $ | (624 | ) | $ | 918 | $ | (2,406 | ) | $ | (132 | ) | $ | (1,620 | ) | ||||||||||
Comparison of Financial Condition at September 30, 2007 and 2006
During the twelve months ended September 30, 2007, the Company’s assets decreased by $143.5 million, or 18.3% from $785.9 million at September 30, 2006 to $642.4 million at September 30, 2007. The Company’s interest-bearing deposits in other banks increased $14.3 million, from $2.8 million at September 30, 2006 to $17.1 million at September 30, 2007. Federal funds sold also increased by $49.0 million, from $500,000 at September 30, 2006 to $49.5 million at September 30, 2007. Increases in these areas of liquidity resulted from the Company investing 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 $139.1 million, or 97.2%, from $143.1 million at September 30, 2006 to $4.0 million at September 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 September 30, 2007, as various investments matured and were sold and others were transferred to available for sale as the Company restructured its balance sheet. Net loans receivable, decreased $47.5 million, or 10.2%, from $463.8 million at September 30, 2006 to $416.3 million at September 30, 2007, due to the sale of $46.4 million fixed-rate single family loans in connection with the balance sheet restructuring. 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 $42.9 million at September 30, 2006 and $21.7 million at September 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 $18.2 million, or 21.0%, from $86.8 million at September 30, 2006 to $105.0 million at September 30, 2007. This increase was primarily a result of the reclassification of certain 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%, as all mortgage-backed securities were classified to 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. Federal Home Loan Bank of Atlanta stock
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decreased $4.7 million, or 67.4% from $7.0 million at September 30, 2006 to $2.3 million at September 30, 2007, due to the repayment of borrowed advances with proceeds from assets sold during the balance sheet restructuring. 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 $46.4 million, or 7.7%, from $604.8 million at September 30, 2006 to $558.4 million at September 30, 2007. This decrease was primarily due to lower rates offered to reduce deposit costs and 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 September 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 September 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 $104.0 million in high cost advances as part of the strategy to restructure the balance sheet.
Stockholders’ equity increased by $1.2 million, or 3.5%, from $33.4 million at September 30, 2006 to $34.6 million at September 30, 2007, which was primarily attributable to the decrease in accumulated other comprehensive loss of $3.7 million, from a negative $4.3 million at September 30, 2006 to a negative $682,000 at September 30, 2007, offset, in part, by net losses of $2.9 million for the twelve months ended September 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 September 30, 2007 and are subject to change daily as interest rates fluctuate.
Comparison of Financial Condition at September 30, 2006 and 2005
During the twelve months ended September 30, 2006, the Company’s assets decreased by $26.9 million, or 3.31% from $812.7 million at September 30, 2005 to $785.8 million at September 30, 2006. The Company’s investment portfolio available for sale decreased $8.3 million or 5.5%, from $151.4 million at September 30, 2005 to $143.1 million at September 30, 2006. Loans receivable, net increased by $9.5 million, or 2.1%, from $454.3 million at September 30, 2005 to $463.8 million at September 30, 2006. The Company’s mortgage-backed securities available for sale decreased by $25.3 million, or 22.6%, from $112.1 million at September 30, 2005 to $86.8 million at September 30, 2006. In an effort to protect against risk from rising rates the Company has placed emphasis on short term loans such as variable rate commercial loans, home equity loans and short term mortgages. The Company increased commercial real estate loans by $35.5 million, or 40.7% from $75.0 million at September 30, 2005 to $110.0 million at September 30, 2006. Construction loans decreased by $14.8 million, or 27.5% from $53.8 million to $39.0 million due to decreased demand from individual builders.
Deposits increased by $7.1 million, or 1.2%, from $597.7 million at September 30, 2005 to $604.8 million at September 30, 2006. The increase in deposits was achieved through normal marketing efforts. The growth in deposits helped to fund loan demand. Advances from Federal Home Loan Bank of Atlanta decreased by $26.3 million, or 18.2% from $144.8 million at September 30, 2005 to $118.5 million at September 30, 2006. Advances will be used when necessary to fund loan demand if deposit growth does not meet this demand.
Stockholders’ equity decreased by $8.6 million or 20.5%, from $42.0 million at September 30, 2005 to $33.4 million at September 30, 2006. This decrease was primarily due to the loss of $6.9 million net of taxes due to the check-kiting fraud perpetrated against the bank. See “The Comparison of Other Operating Results for the Years Ended September 30, 2006 and 2005 Non-Interest Expenses”. Also contributing to the decrease in equity was the increase in accumulated other comprehensive income of $476,000 from a loss of $3.9 million at September 30, 2005 to a loss of $4.4 million at September 30, 2006. These unrealized losses are considered temporary as they reflect market values as of September 30, 2006 and are subject to change daily as interest rates fluctuate.
Asset Quality
At September 30, 2007, the Company had $2.4 million in non-performing assets, consisting of nonaccrual loans, repossessed assets and foreclosed real estate, representing .35% of total assets. At September 30, 2006, non-performing assets were $2.6 million or .33% of assets. There was one impaired commercial loan at September 30, 2007, for $2.3 million and $2.4 million at
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September 30, 2006. This loan is collateral dependent and the Company does not expect to incur any losses on this loan. This is a single commercial real estate loan that was classified as nonaccrual during the year ended September 30, 2006. This loan is secured by a mixed retail and office use commercial office building in Timonium, Maryland. 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 The collateral securing this loans was sold in October 2007 at auction with the proceeds being retained at the Bank. The Bank’s net charge offs for the year ended September 30, 2007 was $146,000. The Bank’s allowance for loan losses was $2.7 million at September 30, 2007 and $2.6 million at September 30, 2006. The Bank has no sub-prime or Alt-A loan exposure in its loan portfolio.
Comparison of Operating Results for the Years Ended September 30, 2007 and 2006
Net Income. The Company incurred a net loss of $2.9 million during the fiscal year ended September 30, 2007. This loss resulted from 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. The loss from sales of loans and investment securities was offset to some extent by the partial recovery of $3.4 million on a pre-tax basis from insurance proceeds in connection with a check-kiting scheme perpetrated against the Bank during the preceeding fiscal year. Also contributing to the net loss for the twelve months ended September 30, 2007 was a decrease of $624,000, or 3.9%, in net interest income from $14.2 million for the twelve months ended September 30, 2006 to $13.6 million for the twelve months ended September 30, 2007. During the fiscal year ended Sept 30, 2006 the Company incurred a net loss of $7.4 million. The net loss was primarily attributable to a $10.7 million pre-tax loss from the check-kiting scheme noted above.
Net Interest Income. Net interest income decreased by $624,000 or 3.9% from $14.2 million for the twelve months ended September 30, 2006 compared to $13.6 million for the twelve months ended September 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 Federal Home Loan Bank advances. The net interest margin increased 15 basis points from 1.89% for the twelve months ended September 30, 2006 to 2.04% for the twelve months ended September 30, 2007. The Company’s ratio of average interest-earning assets to average interest-bearing liabilities increased from 98.30% for the twelve months ended September 30, 2006 to 99.8% for the twelve months ended September 30, 2007. 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 continue. Changes in short term rates affect the Company’s interest rate spread as $23.2 million borrowed funds tied to LIBOR re-price quarterly as interest rates fluctuate.
Interest Income. Interest income decreased by $883,000, or 2.21% from $40.0 million for the twelve months ended September 30, 2006 to $39.1 million for the twelve months ended September 30, 2007. Interest and fees on loans increased by $226,000, or .80%, from $28.3 million for the twelve months ended September 30, 2006 to $28.6 million for the twelve months ended September 30, 2007. This was primarily due to an increase in the average yield earned on loans receivable of 30 basis points from 6.13% for the twelve months ended September 30, 2006, to 6.43% for the twelve months ended September 30, 2007. This was partially offset by a decrease in the average balance of loans receivable of $18.3 million from $462.8 million for the twelve months ended September 30, 2006 to $444.5 million for the twelve months ended September 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 a shift within the portfolio from residential mortgages and automobile loans to higher yielding commercial loans. Interest on mortgage-backed securities decreased by $157,000 or 3.1% from $5.1 million for the twelve months ended September 30, 2006 to $4.9 million for the twelve months ended September 30, 2007. This decrease was primarily due to the decrease in the average balance of mortgage-backed securities from $124.4 million for the twelve months ended September 30, 2006 to $104.3 million for the twelve months ended September 30, 2007. The decrease in the average balance more than offset an increase in the average rate from 4.09% at September 30, 2006 to 4.73% at September 30, 2007. Interest and dividends on investment securities decreased $3.0 million, from $6.3 million for the twelve months ended September 30, 2006 to $3.3 million for the
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twelve months ended September 30, 2007. This was primarily due to a decrease in the average balance of investments of $85.3 million, from $160.4 million for the twelve months ended September 30, 2006 to $75.1 million for the twelve months ended September 30, 2007, which was partially offset by an increase in the average yield on investments of 45 basis points from 3.95% for the twelve months ended September 30, 2006 to 4.40% for the twelve months ended September 30, 2007.
Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense, decreased from $25.8 million for the twelve months ended September 30, 2006 to $25.5 million for the twelve months ended September 30, 2007, a decrease of $259,000 or 1.0%. Interest on deposits increased $2.0 million from $18.4 million at September 30, 2006 to $20.4 million at September 30, 2007 due to an increase in the average cost of deposits of 47 basis points from 3.02% for the twelve months ended September 30, 2006 to 3.49% for the twelve months ended September 30, 2007. This was partially offset by a decrease in the average balance of deposits of $23.9 million, or 3.9%, from $608.0 million at September 30, 2006 to $584.1 million at September 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 $1.4 million, or 56.4%, for the twelve months ended September 30, 2007 from $2.5 million at September 30, 2006 to $1.1 million at September 30, 2007. Interest on long-term borrowings decreased by $1.0 million, or 34.0% for the twelve months ended September 30, 2007 from $3.0 million for the twelve months ended September 30, 2006 to $2.0 million for the twelve months ended September 30, 2007. The overall decrease in borrowings was primarily due to a decrease of $71.4 million in the average balances of advances from the Federal Home Loan Bank of Atlanta during the twelve months ended September 30, 2007. Also contributing to interest expense was interest on the Junior Subordinated Debentures, which increased by $134,000 for the twelve months ended September 30, 2007 from $1.9 million for the twelve months ended September 30, 2006 to $2.0 million for the twelve months ended September 30, 2007. The average rate paid on the Junior Subordinated Debentures increased 58 basis points from 8.28% during 2006 to 8.86% during 2007. The rates on the Junior Subordinate Debentures are based on LIBOR and adjust quarterly.
Provision for Loan Losses. The Company’s significant accounting policies are set forth in Note 1 of Notes to Consolidated Financial Statements. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy and estimate, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.
Recent developments in local and national real estate markets have increased loss exposure to certain lenders. In particular, institutions participating in sub-prime lending products have experienced losses which, in some cases, have been material to operating results. The Company’s loan portfolio is considered to have very little exposure to sub-prime loans since the Company has never engaged in this type of lending.
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 for 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 twelve months ended September 30, 2007 as compared to $194,000 for the twelve months ended September 30, 2006. Loan chargeoffs for the twelve months ended September 30, 2007 were $364,000 as compared to $578,000 for the twelve months ended September 30, 2006, a decrease of $214,000. Loan recoveries were $218,000 for the twelve months ended September 30, 2007 compared to $317,000 for the twelve months ended September 30, 2006. Non performing loans at September 30, 2007 were $2.3 million as compared to $2.5 million at September 30, 2006. The total allowance for loan losses is $2.6 million at September 30, 2007. In establishing such provisions, management considered an analysis of the risk inherent in the loan portfolio. See“Asset Quality.”
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Other Income.Other income was $1.5 million for the twelve months ended September 30, 2006 and negative $5.3 million for the twelve months ended September 30, 2007. During the twelve months ended September 30, 2007, the Company incurred a loss of $5.9 million from the sale of investments and mortgage-backed securities and a loss of $1.2 million from the sale of loans as the Bank implemented its restructuring plan. Fees on transaction accounts increased by $138,000 from $561,000 for the twelve months ended September 30, 2006 to $699,000 for the twelve months ended September 30, 2007. The increase is primarily attributable to the implementation of an overdraft protection program in May of 2007. Income from Bank Owned Life Insurance (BOLI) increased $97,000 from $474,000 for the twelve months ended September 30, 2006, to $571,000 for the twelve months ended September 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 $14.1 million, or 52.5%, from $27.0 million for the twelve months ended September 30, 2006 to $12.8 million for the twelve months ended September 30, 2007. The decrease in non-interest expenses was primarily due to the net recovery of $3.0 on the loss from the check-kiting scheme perpetrated on the Bank during the fiscal year ended September 30, 2006, of $10.7 million before taxes. Salaries and related expenses decreased by $530,000, or 6.1%, from $8.7 million for the twelve months ended September 30, 2006 to $8.1 million for the twelve months ended September 30, 2007. This decrease was primarily due to a decrease in the work force as the Bank continued with its cost cutting strategies. Data processing fees decreased by $211,000, from $1.7 million for the twelve months ended September 30, 2006 to $1.5 million for the twelve months ended September 30, 2007. This decrease was due to the change of data processors. Professional fees increased $113,000, or 23.0%, from $490,000 for the twelve months ended September 30, 2006 to $603,000 for the twelve months ended September 30, 2007. Professional fees increased due to additional legal fees arising from the supervisory agreement and the check- kiting scheme perpetrated against the Bank. Advertising expense decreased by $95,000, or 15.5%, from $612,000 for the twelve months ended September 30, 2006 to $517,000 for the twelve months ended September 30, 2007. This decrease was due to decreased advertising during the period. There was an increase in other expenses of $420,000, or 47.6%, from $882,000 for the twelve months ended September 30, 2006 to $1.3 million for the twelve months ended September 30, 2007. This increase was primarily due to increased FDIC deposit insurance premiums.
Income Taxes. The Company’s income tax benefit was $1.7 million and $4.0 million for the twelve months ended September 30, 2007 and 2006, respectively. The Company’s tax benefit decreased for the twelve months ended September 30, 2007 as compared to the same period in the prior year as the Company’s loss decreased due to the recovery of $3.0 million on the loss from the check-kiting scheme perpetrated on the Bank discovered in September 2006. The Company also earned certain income that is exempt from state taxes and $571,000 non-taxable income from the Bank Owned Life Insurance during the twelve months ended September 30, 2007.
Comparison of Operating Results for the Years Ended September 30, 2006 and 2005
Net Income.Net income decreased from income of $601,000 for the year ended September 30, 2005 to a net loss of $7.4 million for the year ended September 30, 2006. The decrease was primarily due to an increase in non-interest expenses of $10.2 million, or 60.4% from $16.8 million for the year ended September 30, 2005 to $27.0 million for the year ended September 30, 2006. Non-Interest expenses for the year ended September 30, 2006 includes a $10.8 million loss on dishonored checks as a result of the check-kiting scheme perpetrated on the Bank.
Net Interest Income.Net interest income decreased by $1.6 million or 10.2% from $15.9 million for the year ended September 30, 2005 to $14.2 million for the year ended September 30, 2006. The decrease in net interest income primarily was the result of increases in the average rate on interest bearing liabilities and an increase in the average balance of interest bearing liabilities. Due to rising interest rates and deposits re-pricing faster than loans, the interest rate spread decreased 20 basis points from 2.16% for the year ended September 30, 2005 to 1.96% for the year ended September 30, 2006. The Company’s ratio of average interest-earning assets to average interest-bearing liabilities decreased from 99.68% for the year ended September 30, 2005 to 98.30% for the year ended September 30, 2006. The primary reason for the decrease in this ratio is that funds are being invested in other income producing assets such as Bank Owned Life Insurance. The Company’s interest rate spread has decreased due to the rising rates paid on borrowed funds and deposits not being completely offset by rising rates for new loans. Improvements in interest spread should occur if long-term interest rates rise and the Company has the resources from either re-pricing assets or new funds received to re-pay the borrowed funds. If short term rates fall, the interest rate spread should increase as borrowed funds tied to LIBOR re-price at lower rates.
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Interest Income. Interest income increased by $3.8 million, or 10.4% from $36.2 million for the year ended September 30, 2005 to $40.0 million for the year ended September 30, 2006. Interest and fees on loans increased by $4.1 million, or 16.7%, from $24.3 million for the year ended September 30, 2005 to $28.4 million for the year ended September 30, 2006. This was primarily due to an increase in the average balance of loans receivable of $50.7 million from $412.1 million at September 30, 2005 to $462.8 at September 30, 2006, and an increase in the average yield earned on loans receivable of 24 basis points from 5.89% at September 30, 2005 to 6.13% at September 30, 2006. The increase in the average balance of loans was primarily attributable to the Bank having competitive rates and current economic conditions and management’s strategy to focus lending on variable rate commercial real estate loans and short term home equity loans. The increase in the average yield was attributable to the prevailing market rates in the economy. Interest on mortgage-backed securities decreased by $1.1 million or 18.2% from $6.2 million for the year ended September 30, 2005 to $5.1 million for the year ended September 30, 2006. This decrease was primarily due to the decrease in the average balance of mortgage-backed securities from $161.4 million at September 30, 2005 to $124.5 million at September 30, 2006. The decrease in the average balance more than offset an increase in the average rate from 3.9% at September 30, 2005 to 4.1% at September 30, 2006. Interest and dividends on investment securities increased by $705,000, or 12.5% from $5.6 million for the year ended September 30, 2005 to $6.3 million for the year ended September 30, 2006. This was primarily due to an increase in the average yield on investments of 47 basis points from 3.48% for the year ended September 30, 2005 to 3.95% for the year ended September 30, 2006 due to step up provisions on some investment securities. However, this was partially offset by a decrease in the average balance of investments of $1.7 million, from $162.1 million for the year ended September 30, 2005 to $160.4 million for the year ended September 30, 2006.
Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense increased from $20.4 million for the year ended September 30, 2005 to $25.8 million for the year ended September 30, 2006 a change of $5.4 million or 26.5%. Interest on deposits increased $3.7 million from $14.7 million at September 30, 2005 to $18.4 million at September 30, 2006 due to an increase in the average cost of deposits of 53 basis points from 2.49% for the year ended September 30, 2005 to 3.02% for the year ended September 30, 2006. Also contributing to the increase in interest expense was an increase in the average balance of deposits of $18.1 million, or 3.1% from $589.8 million at September 30, 2005 to $607.9 million at September 30, 2006. The Company was able to increase its deposits through normal marketing efforts. Interest on short-term borrowings increased by $1.0 million or 68.9% for the year ended September 30, 2006. Interest on long-term borrowings increased by $254,000 or 9.3% for the year ended September 30, 2006. The overall increase in interests on borrowings was primarily due to an increase in the average rate paid on short term borrowings which increased by 117 basis points from 2.7% for the year ended September 30, 2005 to 3.9% for the year ended September 30, 2006. The average rate on long term borrowings also increased by 63 basis points from 3.8% for the year ended September 30, 2005 to 4.4% for the year ended September 30, 2006. An increase in the average balance of advances from the Federal Home Loan Bank of Atlanta of $5.3 million during the year ended September 30, 2006 also contributed to the increase in interest on borrowings. Also contributing to interest expense was interest on the Junior Subordinated Debentures which increased by $457,000 from $1.5 million for the year ended September 30, 2005 to $1.9 million for the year ended September 30, 2006. This increase was due to the increase in the average rate paid on the Junior Subordinated Debentures from 6.3%, during 2005 to 8.3% during 2006. The rates on the Junior Subordinate Debentures are based on LIBOR and adjust quarterly.
Provision for Loan Losses.The provision for loan losses was $453,000 for the year ended September 30, 2005 compared to $194,000 for the year ended September 30, 2006, a decrease of $259,000. The decrease was primarily due to the decrease in the consumer loan portfolio from $88.3 million at September 30, 2005 to $53.5 million at September 30, 2006. In December 2005 the Bank ceased offering indirect consumer lending. Loan chargeoffs for the year ended September 30, 2006 were $578,000 as compared to $677,000 for the year ended September 30, 2005 a decrease of $99,000. 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 as the automobile loan portfolio decreases due to the discontinuation of indirect auto lending. Loan recoveries were $317,000 for the year ended September 30, 2006 compared to $383,000 for the year ended September 30, 2005. Non performing loans at September 30, 2006 were $2.5 million as compared to $738,000 at September 30, 2005. The total loss allowance allocated to loans is $2.7 million at September 30, 2006. 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 decreased by $639,000, or 29.9% from $2.1 million for the year ended September 30, 2005 to $1.5 million for the year ended September 30, 2006. The decrease in other income for the year ended September 30, 2006 was primarily due to the decrease in gain on sale of investments and mortgaged backed securities of $879,000 from $884,000 for the year ended September 30, 2005 to $5,000 for the year ended September 30, 2006. The $884,000 gain on sale of investments for the year ended September 30, 2005 was primarily due to the acquisition of Intrieve, our data processing provider, by Harland for cash. We owned shares of Intrieve. Other income was also affected by loss on repossessed assets which decreased from $276,000 for the year ended September 30, 2005 to $24,000 for the year ended September 30, 2006. The $252,000 decrease is attributable, in part, to our decision to discontinue our indirect automobile lending program and the resulting decline in automobile loans from $88,287,000 as of September 30, 2005 to $53,530,000 as of September 30, 2006.
When an automobile that collateralizes a loan is repossessed, we compare the published wholesale value of the particular car make and model to the loan carrying amount. In the beginning of fiscal year 2006, we began carrying repossessed automobiles on our consolidated statement of financial condition at 80% of their published wholesale value. There were instances, however, that due to the condition of the repossessed automobile, we realized less than our estimate. We do not consider the application of the 20% discount in 2006 to have a significant effect upon our net charge-offs, provision for loan losses and loss on repossessed assets because this estimate only affected those repossessed assets we had in our possession of as of the balance sheet date, which approximated $26,000 and $86,000 as of September 30, 2006 and 2005, respectively. Our losses are also affected by the fact that automobiles tend to depreciate quicker than the amortization of the associated loans. As the balance in automobile loans continues to decline, we expect losses associated with indirect lending and repossessed assets to continue to decline. Once the automobile is sold, any difference between the amount realized and the carrying value including any deficiency in the loan balance is then charged to “Loss on repossessed assets.” We typically have possession of the repossessed automobiles for less than 30 days. We generally rely on third parties to dispose of repossessed assets. Also contributing to the decrease in other income was a decrease in fees on transaction accounts of $125,000 from $686,000 for the year ended September 30, 2005 to $561,000 for the year ended September 30, 2006 as we eliminated fees on certain products in an effort to compete in the market and increase our transaction accounts which are our lowest cost source of funding. Income from bank owned life insurance increased $20,000 for the year ended September 30, 2006 from $454,000 for the year ended September 30, 2005, to $474,000 for the year ended September 30, 2006. This increase was due to an adjustment in the rate of dividends earned on bank owned life insurance investment.
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Non-interest Expenses.Total non-interest expenses increased by $10.2 million, or 60.4%, from $16.8 million for the year ended September 30, 2005 to $27.0 million for the year ended September 30, 2006. The increase in non-interest expenses was primarily due to the occurrence of a $10.8 million loss on dishonored checks during the year ended September 30, 2006. This loss was from a check-kiting fraud perpetrated on the Bank. The Company is aggressively pursuing collection of the check-kiting loss from the customer, and there is also the possible recovery from insurance policies. The customer has filed for bankruptcy, and the recovery process is expected to require an extended period of time to resolve. Notwithstanding this loss, the Bank continues to satisfy all regulatory capital requirements and is “well capitalized” under applicable government regulations. This loss was partially offset by a decrease in salaries and related expenses of $477,000 from $9.2 million for the year ended September 30, 2005 to $8.7 million for the year ended September 30, 2006 as the Bank continued with its cost cutting strategies. Certain positions were eliminated allowing for the hiring of staff in the three new offices with a minimum increase in the overall workforce. Employee benefits were adjusted to be less costly while still offering competitive benefits. In December 2005, the Bank ceased its indirect automobile lending operations due to the current interest rate environment. The loan rates necessary to compete in this market made for marginal profitability. This allowed for less staffing in this area. Data processing cost decreased by $515,000 from $2.2 million for the year ended September 30, 2005 to $1.7 million for the year ended September 30, 2006. This decrease was due to the savings generated from the conversion of data processors. In November 2005 the Company entered into a long-term contract with Fiserv to be its data service provider. The Company anticipates net savings over the life of the contract of approximately $2.8 million. The actual number could be more or less depending on the activity and the number of accounts serviced. Occupancy expense increased by $180,000, from $2.0 million for the year ended September 30, 2005 to $2.1 million for the year ended September 30, 2006. This was mainly due to the opening of three offices and normal increases in rent and electricity. Advertising expense decreased by $30,000 or 4.7%, from $642,000 for the year ended September 30, 2005 to $612,000 for the year ended September 30, 2006. This decrease was due to a reduction in advertising during the period.
Income Taxes. The Company’s income tax (benefit) expense was $(4.0) million and $111,000 for the year ended September 30, 2006 and 2005, respectively. The Company’s effective tax rate decreased for the year ended September 30, 2006 as compared to the same quarter in the prior year due to the tax benefit from the loss on dishonored checks.
Liquidity and Capital Resources
The Company has no business other than that of the Bank and investing the net stock issuance proceeds retained by it. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company.
At September 30, 2007, the Bank exceeded all regulatory minimum capital requirements. For information regarding the Bank’s retained earnings as reported in its financial statements at September 30, 2007 to its tangible, core and risk-based capital levels and a comparison of regulatory requirements, see Note 14 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.
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The primary investing activities of the Company are the origination of loans and the purchase of investment securities and mortgage-backed securities. During the years ended September 30, 2007, 2006, and 2005, the Bank had $92.0 million, $149.1 million and $193.9 million respectively, of loan originations. During the years ended September 30, 2007, 2006 and 2005, the Company purchased investment securities in the amounts of $802,000, $4.7 million, and $11.5 million respectively, and mortgage-backed securities in the amounts of $84.8 million, $6.7 million, and $15.9 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 advances from the FHLB of Atlanta. In addition, the Company maintains a portion of its investments in interest-bearing deposits at other financial institutions that will be available, if needed. 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 September 30, 2007, cash, interest-bearing deposits in other banks and federal funds sold totaled $9.5 million, $17.1 million and $49.4 million , respectively.
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 September 30, 2007 totaled $256.5 million. Based on past experience, management believes that a significant portion of such deposits will remain with the Bank. 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 Bank has in this class of financial instruments and represents the Bank’s exposure to credit loss from nonperformance by the other party. The Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. At September 30, 2007, the Bank had commitments under standby letters of credit, lines of credit and commitments to originate mortgage loans of $1.0 million, $29.9 million and $8.8 million, respectively. See Note 3 of Notes to Consolidated Financial Statements.
The Company announced a stock repurchase program on February 14, 2002. The company repurchased 420 shares at an aggregate cost of $6,000, 371 shares at an aggregate cost of $5,200 and 184 shares at an aggregate cost of $2,100 during the years ended September 30, 2004, 2005 and 2006 respectively. During the year ended September 30, 2007 the Company did not repurchase any stock.
In June, 2002, the Company issued $12,887,000 of junior subordinated debentures (the debentures) to BCSB Bankcorp Capital Trust I (the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures carry a rate of 3.65% over the three month LIBOR rate and resets quarterly. The rate was 9.01% and 9.16% at September 30, 2007 and 2006 respectively.
The debentures are the sole asset of BCSB Bankcorp Capital Trust I. BCSB Bankcorp Capital Trust I issued $12,500,000 of mandatory redeemable preferred securities to investors. The Company’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of BCSB Bankcorp Capital Trust I obligations under the preferred securities. The preferred securities are redeemable by the Company on or after June 30, 2007 or under certain conditions in whole but not in part at any time at a redemption price equal to 103% of the principal amount plus any accrued interest.
In September, 2003, the Company issued $10,310,000 of junior subordinated debentures (the debentures) to BCSB Bankcorp Capital Trust II (the Trust), a Delaware business trust, in which the Company owns all of the common equity. The debentures carry a rate of 3.00% over the three month LIBOR rate, and resets quarterly, the rate was 8.65% and 8.51% at September 30, 2007 and
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2006 respectively. The debentures are the sole asset of BCSB Bankcorp Capital Trust II. BCSB Bankcorp Capital Trust II issued $10,000,000 of mandatory redeemable preferred securities to investors. The Company’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of BCSB Bankcorp Capital Trust II obligations under the Preferred securities. The Preferred securities are redeemable by the Company on or after October 7, 2008 or under certain conditions in whole but not in part at any time at a redemption price equal to 103% of the principal amount plus any accrued interest.
Pursuant to these Trust Preferred securities, the Company makes quarterly payments of principal and interest, which totaled $517,000 during the quarter ended September 30, 2007.
At September 30, 2007, the Company had cash and other liquid assets totaling $3.1 million at the holding company level. Assuming that interests rates remain stable and there are no other changes in the Company’s ongoing holding company level expenses, management estimates that, absent cash dividends from the Bank, the Company would deplete its liquid assets by March 2009. The Company would deplete its liquid assets even sooner should LIBOR increase, thereby increasing the interest rate on the Company’s trust preferred securities obligations. In order to conserve liquid assets at the holding company level, at its November 29, 2006 meeting, the Board of Directors voted to suspend the Company’s cash dividend payments to its stockholders and agreed with the OTS not to make further dividend payments without prior OTS approval. Nevertheless, if the Bank is unable to generate earnings to support future dividend payments to the Company, or if the Bank is otherwise limited in its ability to pay dividends to the Company, in amounts sufficient to meet the Company’s debt service obligations, and the Company is unable to raise capital, the Company could at some point in the future default on its trust preferred securities obligations. In such event, the holders of the trust preferred securities could require immediate redemption of such securities, which could cause the Company to suffer a significant decline in capital.
Shortly after the November 29, 2006 Board of Directors meeting, the Company announced that it has determined to suspend its dividend program and has agreed with its primary regulator, the Office of Thrift Supervision, that it will not issue a dividend to its stockholders going forward without the regulator’s consent as the Company seeks to implement its business plan to improve earnings, capital position and liquidity.
Commitments, Contingencies and Off-Balance Sheet Arrangements
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:
| September 30, | ||||||
| 2007 | 2006 | |||||
| (Dollars in Thousands) | ||||||
Commitments to originate new loans | $ | 8,835 | $ | 7,205 | ||
Unfunded commitments to extend credit under existing equity line and commercial lines of credit | 29,942 | 30,485 | ||||
Commercial letters of credit | 1,010 | 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.
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Contractual Obligations
The following table sets forth the Company’s contractual obligations as of September 30, 2007.
| Payments Due By Period | |||||||||||||||
| (Dollars in Thousands) | |||||||||||||||
| Less than 1 Year | 1 – 3 Years | 4 – 5 Years | Over 5 Years | Total | |||||||||||
Time Deposits | $ | 256,558 | $ | 132,347 | $ | 4,199 | $ | — | $ | 393,104 | |||||
Long-term borrowings | 10,000 | 10,000 | — | — | 20,000 | ||||||||||
Junior Subordinated Debenture | — | — | — | 23,197 | 23,197 | ||||||||||
Lease Obligations | 1,118 | 1,916 | 1,680 | 7,882 | 12,596 | ||||||||||
Total Contractual Cash Obligations | $ | 267,676 | $ | 144,263 | $ | 5,879 | $ | 31,079 | $ | 448,897 | |||||
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Off-Balance Sheet Arrangements
As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, except for the guarantees made by the Company with respect to the trust preferred securities issued by each of the Business Trust and the Statutory Trust, which are discussed in the “Liquidity and Capital Resources” subsection of this Annual Report and in footnote 9 to the audited financial statements. The term “off-balance sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which an entity unconsolidated with the Company is a party under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. Additionally, the Bank does have commitments to originate loans in the ordinary course of business, as disclosed herein.
Impact of New Accounting Standards
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 became effective for fiscal years beginning after September 15, 2006. The adoption of this standard is not anticipated to have a material impact on the 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
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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 became effective for fiscal years beginning after September 30, 2006. The adoption of this standard is not anticipated to 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 the Company on October 1, 2007. The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or liquidity.
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.
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 for financial assets and liabilities and November 15, 2008 for non-financial assets and liabilities, 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 February 2007, the FASB issued SFAS No. 159, “The Fair Value for Financial Assets and Financial Liabilities-Including an amendment to FAS No. 115”. This statement option permits entities to choose to measure many financial instruments and certain other items at fair value. This 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 Statement is expected to expand the use of fair value measurement, which is consistent with FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS No. 157, “Fair Value Measurements.” The Company is evaluating the effects of this statement on its financial statements and has not made a decision on the possible early adoption option.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
BCSB Bancorp’s Board of Directors is composed of eight members. BCSB Bancorp’s Articles of Incorporation requires that directors be divided into three classes, as nearly equal in number as possible, with approximately one-third of the directors elected each year.
The following table sets forth, for each nominee for director and continuing director of BCSB Bancorp, his age, the year he first became a director of Baltimore County Savings Bank and the expiration of his term as a director. No director or executive officer is related to any other director or executive officer by blood, marriage or adoption. Each director of BCSB Bancorp also is a member of the Boards of Directors of BCSB Bankcorp, Inc., Baltimore County Savings Bank and Baltimore County Savings Bank, M.H.C.
Name | Age at September 30, 2007 | Year First Elected as Director of Baltimore County Savings Bank | Current Term to Expire | |||
Henry V. Kahl | 64 | 1989 | 2008 | |||
Michael J. Klein | 52 | 2001 | 2008 | |||
Ernest A. Moretti | 67 | 2007 | 2008 | |||
Joseph J. Bouffard | 57 | 2006 | 2009 | |||
William J. Kappauf, Jr. | 61 | 2002 | 2009 | |||
H. Adrian Cox | 63 | 1987 | 2010 | |||
William M. Loughran | 62 | 1991 | 2010 | |||
John J. Panzer, Jr. | 65 | 1991 | 2010 |
Set forth below is biographical information concerning BCSB Bancorp’s directors. Unless otherwise stated, all directors have held the positions indicated for at least the past five years.
Henry V. Kahl is an Assessor Supervisor with the State of Maryland Department of Assessments & Taxation in Baltimore, Maryland.
Michael J. Klein is Vice President of Klein’s Super Markets, a family owned chain of supermarkets, with locations throughout Harford County, Maryland. Mr. Klein is also Vice President and partner in several other family owned businesses including Forest Hill Lanes, Inc., Colgate Investments, LLP and Riverside Parkway, LTD.
Ernest A. Moretti retired from Bradford Bank, Baltimore, Maryland, where he held the position of executive vice president and managed residential lending and business development. Prior to his tenure with Bradford Bank, Mr. Moretti served as president and chief executive officer of Wyman Park Federal Savings and Loan Association from 1989 to 2003. Mr. Moretti also served in senior leadership capacities over a span of 26 years at Yorkridge Calvert Savings and Loan, Augusta Building and Loan Association and First National Bank. He is a current Board member of the Maryland Financial Bank.
Joseph J. Bouffard was named President of BCSB Bankcorp, Baltimore County Savings Bank and Baltimore County Savings Bank, M.H.C. effective November 27, 2006. Mr. Bouffard served as President and Chief Executive Officer of Patapsco Bancorp, Inc. and The Patapsco Bank until October 30, 2006. He joined The Patapsco Bank’s predecessor, Patapsco Federal Savings and Loan Association in April 1995 as its President and Chief Executive Officer and became President and Chief Executive Officer of Patapsco Bancorp, Inc. upon the
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formation of that company in 1996. Previously, Mr. Bouffard was Senior Vice President of the Bank of Baltimore, and its successor, First Fidelity Bank from 1990 to 1995. Prior to that, he was President of Municipal Savings Bank, FSB in Towson, Maryland. He is a current Board member of the Maryland Financial Bank and a former Board member of the Dundalk Community College Foundation and the Maryland Bankers Association. He is also a former chairman of the Board of Governors of the Maryland Mortgage Bankers Association, Treasurer of the Neighborhood Housing Services of Baltimore and a charter member and Treasurer of the Towson Towne Rotary Club.
William J. Kappauf, Jr. is the former Director of Cash Management of Baltimore Gas & Electric Company, Baltimore, Maryland. He is a certified public accountant.
H. Adrian Cox is an insurance agent with Rohe and Rohe Associates, Inc. in Baltimore, Maryland. Mr. Cox also is employed as a real estate agent with Century 21 Horizon Realty, Inc. in Baltimore, Maryland.
William M. Loughran retired from his position of Executive Vice President in charge of lending operations of Baltimore County Savings Bank, BCSB Bankcorp and Baltimore County Savings Bank, M.H.C. in November 2007. Mr. Loughran joined Baltimore County Savings Bank in 1973.
John J. Panzer, Jr. has been a self-employed builder of residential homes since 1971.
Executive Officers
Below is information regarding the executive officers of Baltimore County Savings Bank who are not also directors. Executive officers are elected annually by the Board of Directors and serve at the Board’s discretion. Unless otherwise stated, each executive officer has held his or her position for at least five years. The ages presented are as of September 30, 2007.
Name | Position with BCSB Bankcorp and/or Baltimore County Savings Bank | |
| Joseph J. Bouffard | President and Chief Executive Officer of BCSB Bankcorp and Baltimore County Savings Bank | |
| Anthony R. Cole | Executive Vice President and Chief Financial Officer of BCSB Bankcorp and Baltimore County Savings Bank | |
| Daniel R. Wernecke | Executive Vice President and Chief Lending Officer of Baltimore County Savings Bank | |
| David M. Meadows | Executive Vice President, General Counsel and Secretary of BCSB Bankcorp and Baltimore County Savings Bank | |
| Bonnie M. Klein | Senior Vice President, Treasurer and Controller of BCSB Bankcorp and Baltimore County Savings Bank | |
Anthony R. Cole joined BCSB Bankcorp and Baltimore County Savings Bank as Executive Vice President and Chief Financial Officer effective September 4, 2007. Previously, Mr. Cole served as Senior Vice President and Chief Financial Officer of Bay Net A Community Bank in Bel Air, Maryland from January 2000 through March 2007. Age 46.
Daniel R. Werneckewas named Executive Vice President and Chief Lending Officer of Baltimore County Savings Bank effective November 21, 2007. Prior to being named Executive Vice President and Chief Lending Officer, he served as Senior Vice President of Baltimore County Savings Bank in charge of lending operations. Mr. Wernecke joined Baltimore County Savings Bank in 2002. Age 51.
David M. Meadows was named Vice President, General Counsel and Secretary of BCSB Bankcorp and Baltimore County Savings Bank effective January 4, 1999 and Executive Vice President of BCSB Bankcorp and Baltimore County Savings Bank effective November 27, 2006. He served as President and Chief Executive Officer of BCSB Bankcorp and Baltimore County Savings Bank on an interim basis from July 24, 2006 through November 26, 2006. Previously, he was a Partner in the law firm of Moore, Carney, Ryan and Lattanzi, L.L.C. Age 51.
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Bonnie M. Klein joined Baltimore County Savings Bank in 1975 and has served in various capacities of increasing responsibility since then. She was named Vice President and Treasurer of BCSB Bankcorp and Baltimore County Savings Bank effective January 4, 1999 and Senior Vice President of BCSB Bankcorp and Baltimore County Savings Bank effective January 1, 2005. She is a Certified Public Accountant. Age 52.
Section 16(a) Beneficial Ownership Reporting Requirements
Pursuant to regulations promulgated under the Exchange Act, BCSB Bankcorp’s officers and directors and all persons who own more than 10% of the Common Stock (“Reporting Persons”) are required to file reports detailing their ownership and changes of ownership in the Common Stock (collectively, “Reports”) and to furnish BCSB Bankcorp with copies of all such Reports that are filed. Based solely on its review of such Reports or written representations that no such Reports were necessary that BCSB Bankcorp received in the past fiscal year or with respect to the past fiscal year, management believes that during fiscal year 2007 all Reporting Persons have complied with these reporting requirements.
Code of Ethics
BCSB Bankcorp and its subsidiaries have adopted a code of ethics which applies to all of their directors, officers and employees and thus applies to BCSB Bankcorp’s principal executive officer, principal financial officer and principal accounting officer. The code of ethics is incorporated herein by reference in Exhibit 14 to BCSB Bankcorp’s Annual Report on Form 10-K.
Audit Committee
We have a separately designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee consists of Directors Kahl, Cox, Panzer, Kappauf and Moretti. The members of the Audit Committee are “independent,” as “independent” is defined in Rule 4200(a)(15) of the National Association of Securities Dealers listing standards. BCSB Bankcorp’s Board of Directors has determined that one member of the Audit Committee, William J. Kappauf, Jr., qualifies as an “audit committee financial expert” as defined in Section 401(h) of Regulation S-K promulgated by the Securities Exchange Commission. Director Kappauf is “independent,” as such term is defined in Item 7(d)(3)(iv)(A) of Schedule 14A under the Exchange Act.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Our Compensation Philosophy. Our compensation philosophy for our named executive officers is founded upon the premise that our success depends, in large part, on the dedication, commitment and performance of the individuals we place in key operating positions to drive our business strategy. We strive to satisfy the demands of our business model by rewarding our named executives for the successful implementation of our corporate objectives. However, we recognize that we operate in a competitive environment for talent. Therefore, our approach to compensation considers the full range of compensation techniques that enable us to compare favorably with our peers as we seek to attract and retain key personnel.
Our compensation objectives are:
| • | To link executive compensation rewards to increases in stockholder value, as measured by favorable long-term operating results and continued strengthening of our financial condition; |
| • | To provide incentives for executive officers to work towards achieving successful annual results as a step in achieving our long-term operating results and strategic objectives; |
| • | To correlate, as closely as possible, executive officers’ receipt of compensation with the attainment of specified performance objectives; |
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| • | To maintain a competitive mix of total executive compensation, with particular emphasis on awards related to increases in long-term stockholder value; |
| • | To attract and retain top performing executive officers for our long-term success; and |
| • | To facilitate stock ownership through the granting of stock options and other stock awards. |
Elements Used to Implement Our Compensation Objectives.Our compensation program relies on two primary elements: (1) a competitive base salary and (2) long-term performance incentives in the form of stock-based compensation. We believe that we can meet the objectives of our compensation philosophy by achieving a balance among these two elements that is competitive with our industry peers and rewards our named executives for achieving their performance goals. We combine these compensation elements for each executive in a manner we believe optimizes the executive’s contribution to BCSB Bankcorp.
Base Salary. Base salaries for our named executive officers depend on the scope of their responsibilities and their performance. The Compensation Committee makes recommendations to the Board concerning executive compensation on the basis of surveys of salaries paid to executive officers of other savings bank holding companies, non-diversified banks and other financial institutions similar in size, market capitalization and other characteristics. The Committee’s objective is to provide for base salaries that are competitive with those paid by our peers. Base salaries are reviewed at least annually by the Compensation Committee. See “Executive Compensation—Summary Compensation Table” for salaries paid to the named executive officers for the 2007 fiscal year.
Long-Term Performance Incentives. Our long-term performance incentive program for the 2007 fiscal year was based on granting awards under our stock option plan and our management recognition plan to our named executive officers who met or exceeded the expectations of our Compensation Committee. Equity compensation directly ties the interests of our executives to the interests of our shareholders. Options are granted with an exercise price equal to the market value of our common stock on the date of grant, and thus acquire value only if our stock price increases. Although there is no specific formula, in determining the level of options granted or restricted stock awards made under the management recognition plan, the Committee takes into consideration an executive’s position, duties and responsibilities, the value of their services to us and other relevant factors. Grants are not guaranteed. In fiscal 2007, our President and Chief Executive Officer, Joseph J. Bouffard, received 5,000 shares of restricted stock under the management recognition plan and 20,000 stock options, and our new Executive Vice President and Chief Financial Officer, Anthony Cole, received 2,500 shares of restricted stock and 10,000 stock options. See “—Compensation for the Named Executive Officers in Fiscal 2007” for a discussion of the long-term performance awards granted for fiscal 2007.
Role of the Compensation Committee. We rely on the Compensation Committee to develop the broad outline of our compensation program and to monitor the success of the program in achieving the objectives of our compensation philosophy. The Compensation Committee is also responsible for the administration of our compensation programs and policies, including the administration of our long-term incentive programs. The Compensation Committee evaluates the compensation and benefits of the directors, officers and employees, recommends changes, and monitors and evaluates employee performance. The Compensation Committee reports its evaluations and findings to the full Board of Directors and all compensation decisions are ratified by the full Board of Directors.
During fiscal 2007, the Compensation Committee met five times. During the 2007 fiscal year, the Compensation Committee members were Messrs. Kahl, Rohe, Kappauf, and Mr. Klein, who served as Chairman of the Committee.
Peer Group Analysis. A critical element of our compensation philosophy and a key driver of specific compensation decisions for our management team is an analysis of our compensation mix and levels relative to other financial institutions. We utilize data provided by American Bankers Association and L.R. Webber Associates, Inc., and considers information about similar financial institutions when making compensation decisions. The published
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guides of American Bankers Association and L.R. Webber Associates, Inc. provide current market surveys of peer group compensation data for financial institutions of comparable asset size, ownership type (i.e., public, private, mutual holding companies, etc.) and geographic location of the organization. The surveys also provide a range of compensation by specific job title common among banks.
Role of Management. Our President and Chief Executive Officer and our Compensation Committee, develop recommendations regarding the appropriate mix and level of compensation for our management team. The recommendations consider our compensation philosophy and the range of compensation programs authorized by the Compensation Committee. Our President and Chief Executive Officer meets with the Compensation Committee to discuss the compensation recommendations for the named executive officers. Our President and Chief Executive Officer does not participate in Compensation Committee discussions or the review of Compensation Committee documents relating to the determination of his own compensation.
Tax and Accounting Considerations. In consultation with our advisors, we evaluate the tax and accounting treatment of each of our compensation programs at the time of adoption and annually to ensure that we understand the financial impact of each program on BCSB Bankcorp. Our analysis includes a review of recently adopted and pending changes in tax and accounting requirements. During fiscal year 2007, we continued to consider the implications of two significant developments in the tax and accounting area – the new rules under Section 409A of the Internal Revenue Code applicable to nonqualified deferred compensation and the revised accounting treatment for equity compensation under FAS 123R. We are continuing to implement changes in plan design or compensation practices to address these developments as they are interpreted and put in practice.
Employment and Severance Agreements. We currently maintain an employment agreement with our President and Chief Executive Officer, Joseph J. Bouffard. See “Executive Compensation—Employment Agreement” and “Executive Compensation—Potential Post-Termination Benefits” for a description of the terms of the agreement and the severance benefits and change in control benefits payable to our President and Chief Executive Officer.
We also maintain change in control severance agreements with Mr. Meadows, Ms. Klein and Mr. Wernecke, who became an Executive Officer on November 21, 2007. On November 29, 2007, the Board also approved a new change of control severance agreement with Anthony Cole, our new Executive Vice President and Chief Financial Officer. The term of the agreement is for three years and may be renewed by our Board of Directors on an annual basis. All payments under the agreement are guaranteed by BCSB Bankcorp. See“Executive Compensation—Potential Post-Termination Benefits” for a description of the severance benefits and change in control benefits payable to these named executive officers.
Retirement Benefits; Employee Welfare Benefits. Our 401(k) Plan and employee stock ownership plan have proven to be important retention tools for us. The 401(K) plan and the employee stock ownership plan are broad based tax-qualified defined contribution plans that provide our employees with valuable retirement benefits. Under the 401(k) Plan, eligible employees may contribute an amount up to 25% of their salary on a pre-tax basis, subject to the limitations imposed by law, and we may make matching contributions equal to a discretionary percentage, which is solely determined by us.
Under the employee stock ownership plan, we provide eligible employees with a retirement benefit allocated in our common stock at no cost to the employee. Participants are 100% vested in their employee stock ownership plan benefits upon completion of six years of service. In connection with the conversion, the plan will subscribe for a number of shares equal to 7% of the shares that will be outstanding following the conversion, less the 182,930 shares, to be adjusted for the exchange ratio, that our employee stock ownership plan purchased historically using funds borrowed from BCSB Bankcorp. The term of the loan will be 15 years, and will be repaid principally through Baltimore County Savings Bank’s contributions to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 15-year term of the loan.
We also maintain supplemental executive retirement benefit and survivor income plans for certain named executive officers that provide additional retirement and death benefits, the amounts of which are determined by the age at retirement, termination of employment or the death of the executive officer. Those executive officers included in each plan during the fiscal year were Messrs. Loughran and Meadows and Ms. Klein.
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In addition to our retirement programs, we provide our employees with coverage under medical, dental, life insurance and disability plans on terms consistent with industry practice. We also maintain a Section 125 cafeteria plan that allows our employees to set aside pre-tax dollars to pay for certain benefits.
Perquisites. We provide our named executive officers with reasonable perquisites that help further our officers’ abilities to promote our business interests in our markets and reflect the competitive practices for similarly-situated officers employed by our peers.
Director Compensation. Our outside directors are compensated through a monthly retainer and meeting fees, and are eligible to receive awards under our stock option plan and management recognition plan. Directors are also eligible to participate in the Baltimore County Savings Bank, F.S.B. Amended and Restated Deferral Compensation Plan, which facilitates the deferral of a portion of their compensation. Additionally, each non-employee director, except Mr. Moretti, is party to a supplemental retirement plan, which provides an annual retirement benefit that varies depending on the age at which the director terminates service. Our Board of Directors has also adopted a policy to reimburse designated directors and officers for expenses they incur in connection with professional tax, estate planning or financial advice they obtain related to the benefits they receive under our stock and non-stock related benefit plans. In determining the level of compensation for our Board, we review peer group data and occasionally utilize the services of independent professionals. In fiscal 2007, we did not engage compensation consultants.
Stock Compensation Grant and Award Practices; Timing Issues.Our Compensation Committee considers whether to make stock option grants to officers and directors on an annual basis. The Compensation Committee considers the recommendations of our Chief Executive Officer and other executive officers with respect to awards contemplated for their subordinates. However, the Compensation Committee is solely responsible for the development of the schedule of stock option grants made to our Chief Executive Officer and the other named executive officers.
As a general matter, the Compensation Committee’s process is independent of any consideration of the timing of the release of material nonpublic information, including with respect to the determination of grant dates or stock option exercise prices. The Compensation Committee’s decisions are reviewed and ratified by the full Board of Directors. Similarly, we have never timed the release of material nonpublic information to affect the value of executive compensation. In general, the release of such information reflects long-established timetables for the disclosure of material nonpublic information such as earnings reports or, with respect to other events reportable under federal securities laws, the applicable requirements of such laws with respect to timing of disclosure. We set the exercise price of stock options solely by reference to the applicable provisions of our stock compensation plans.
We also use equity awards as a means of recruiting highly qualified executive officers. Under the terms of his employment agreement, our new President and Chief Executive Officer received a restricted stock award covering 5,000 shares of common stock and 20,000 stock options. Additionally, our new Executive Vice President and Chief Financial Officer, Anthony Cole, received a stock award covering 2,500 shares of our common stock and 10,000 stock options on September 19, 2007 in connection with the terms of his employment. In fiscal 2007, no other awards of stock or stock options were granted to other named executive officers.
Stock Ownership Requirements. It is our policy that members of the Board of Directors be stockholders of BCSB Bankcorp. Our bylaws require ownership of at least 100 shares of our common stock. However, as a practical matter, our named executive officers and directors hold meaningful interests in our stock, which they have accumulated through participation in stock compensation programs and individual purchases. See our “Stock Ownership Table.”
Compensation for the Named Executives in 2007.President and Chief Executive Officer Compensation. Effective July 24, 2006, Mr. Gary C. Loraditch resigned as our President and Chief Executive Officer.
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Mr. David M. Meadows was appointed to serve as interim President and Chief Executive Officer and compensated at a level that was $60,000 below that of Mr. Loraditch’s salary on an annual basis. On November 27, 2006, Baltimore County Savings Bank executed an employment contract with Joseph J. Bouffard, under which he serves as the President and Chief Executive Officer. The President and Chief Executive Officer’s compensation is determined based on several factors. In determining the President’s base salary, the Committee conducted surveys of compensation paid to chief executive officers of similarly situated savings banks and non-diversified banks and other financial institutions of similar size. The Committee believes that the President’s base salary was generally competitive with or below the average salary paid to executives of similar rank and expertise at banking institutions which the Committee considered to be comparable.
Compensation for the Other Named Executive Officers. In determining compensation for Messrs. Loughran, Meadows, Wernecke and Cole and Ms. Klein, the Compensation Committee reviewed the performance appraisals and the salary recommendations presented by our President and Chief Executive Officer. Mr. Loughran retired effective November 16, 2007, but remains on our Board of Directors and receives remuneration and benefits for those services in accordance with the policies of each board. The Compensation Committee accepted the salary recommendations as presented.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of our Board of Directors during the year ended September 30, 2007 were Michael J. Klein, Henry V. Kahl, William J. Kappauf, Jr. and P. Louis Rohe. None of such individuals was an officer or employee of BCSB Bankcorp or Baltimore County Savings Bank during the year ended September 30, 2007, was formerly an officer of BCSB Bankcorp or Baltimore County Savings Bank or had any relationship involving a transaction with BCSB Bankcorp or Baltimore County Savings Bank required to be disclosed by BCSB Bankcorp under Item 13 of our Annual Report on Form 10-K for the year ended September 30, 2007.
During the year ended September 30, 2007:
| • | No executive officer of BCSB Bankcorp or Baltimore County Savings Bank served as a member of the compensation committee of another entity, one of whose executive officers served on the Compensation Committee of BCSB Bankcorp or Baltimore County Savings Bank; |
| • | No executive officer of BCSB Bankcorp or Baltimore County Savings Bank served as a director of another entity, one of whose executive officers served on the Compensation Committee of BCSB Bankcorp or Baltimore County Savings Bank; and |
| • | No executive officer of BCSB Bankcorp or Baltimore County Savings Bank served as a member of the compensation committee of another entity, one of whose executive officers served as a director of BCSB Bankcorp or Baltimore County Savings Bank. |
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Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis that is required by the rules established by the Securities and Exchange Commission. Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended September 30, 2007.
COMPENSATION COMMITTEEOFTHE BOARDOF DIRECTORS
OF BCSB BANKCORP, INC.
Henry V. Kahl
Michael J. Klein
William J. Kappauf, Jr.
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Executive Compensation
Summary Compensation Table.The following information is furnished for the individuals who served as our principal executive officer or principal financial officer during the year ended September 30, 2007, and for our other executive officers who received a salary of $100,000 or more during the year ended September 30, 2007.
Name and Principal Position | Year | Salary ($) | Stock ($)(1) | Option ($)(2) | Change in ($)(3) | All Other Compen- sation ($)(4) | Total ($) | |||||||||||||
Joseph J. Bouffard President and Chief Executive Officer of BCSB Bankcorp and Baltimore County Savings Bank | 2007 | $ | 175,498 | $ | 7,483 | $ | 24,630 | $ | — | $ | 12,000 | $ | 219,611 | |||||||
Anthony R. Cole Executive Vice President and Chief Financial Officer of BCSB Bankcorp and Baltimore County Savings Bank (5) | 2007 | 8,655 | 394 | 873 | — | — | 9,922 | |||||||||||||
Bonnie M. Klein Senior Vice President and Treasurer of BCSB Bankcorp and Baltimore County Savings Bank | 2007 | 127,834 | — | — | 7,915 | 10,612 | 146,361 | |||||||||||||
William M. Loughran Executive Vice President and Chief Lending Officer of Baltimore County Savings Bank (6) | 2007 | 210,360 | — | — | 45,259 | 162,691 | 418,310 | |||||||||||||
David M. Meadows Executive Vice President, General Counsel and Secretary of BCSB Bankcorp and Baltimore County Savings Bank | 2007 | 178,686 | — | — | 18,332 | 12,685 | 209,703 | |||||||||||||
| (1) | Reflects the dollar amount recognized for financial statement reporting purposes in accordance with SFAS 123(R) for awards of restricted stock. For further information regarding the assumptions used to compute the expense recognized for restricted stock awards, see Note 12 to the Notes to the Consolidated Financial Statements appearing in this prospectus. |
| (2) | Reflects the dollar amount recognized for financial statement reporting purposes in accordance with SFAS 123(R) based upon a fair value of $7.70 for options granted in 2006 to Mr. Bouffard and $4.61 for options granted in 2007 to Mr. Cole using the Black-Scholes option pricing model. For further information regarding the assumptions used to compute fair value, see Note 13 to the Notes to the Consolidated Financial Statements appearing in this prospectus. |
| (3) | Includes $6,715, $45,259 and $12,577, representing the change in the present value of accumulated benefits for Ms. Klein and Messrs. Loughran and Meadows, respectively, under our supplemental executive retirement plan, and $1,200 and $5,655 of earnings in excess of 120% of the federal long term funds rate at September 30, 2007 for Ms. Klein and Mr. Meadows, respectively. |
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| (4) | Details of the amounts reported in the “All Other Compensation” column are provided in the table below. The table excludes perquisites, which did not exceed $10,000 in the aggregate for each named executive officer: |
Item | Joseph J. Bouffard | Anthony Cole | Bonnie M. Klein | William M. Loughran | David M. Meadows | ||||||||||
Market value as of the last business day of the year ended September 30, 2007 of allocations under the employee stock ownership plan | $ | — | $ | — | $ | 4,505 | $ | 6,427 | $ | 5,651 | |||||
Amounts accrued under survivor income plan | — | — | 6,107 | 6,264 | 7,034 | ||||||||||
Automobile allowance | 12,000 | — | — | — | — | ||||||||||
Amount accrued upon entry into a Separation Agreement and Release with William M. Loughran | — | — | — | 150,000 | — | ||||||||||
Total | $ | 12,000 | $ | — | $ | 10,612 | $ | 162,691 | $ | 12,685 | |||||
| (5) | Mr. Cole commenced employment on September 4, 2007. |
| (6) | Mr. Loughran retired from his position as an executive officer effective November 16, 2007. Mr. Loughran continues to serve as a director of BCSB Bankcorp and Baltimore County Savings Bank. |
Grants of Plan-Based Awards.The following table provides information concerning all award grants made to the executive officers named in the Summary Compensation Table above during the fiscal year ended September 30, 2007.
Name | Grant Date | All Other Stock Awards: Number of Shares of Stock or Units (#) (1) | All Other Option Awards: Number of Securities Underlying Options (#) (2) | Exercise or Base Price of Option Awards ($/Sh) (3) | Grant Date Fair Value of Stock and Option Awards (4) | |||||||
Joseph J. Bouffard | 12/05/06 | 5,000 | $ | 74,840 | ||||||||
| 12/05/06 | 20,000 | $ | 14.97 | 154,000 | ||||||||
Anthony Cole | 9/19/07 | 2,500 | 23,625 | |||||||||
| 9/19/07 | 10,000 | 9.45 | 46,100 | |||||||||
Bonnie M. Klein | — | — | — | — | — | |||||||
William M. Loughran | — | — | — | — | — | |||||||
David M. Meadows | — | ��� | — | — | — | |||||||
| (1) | Stock awards were granted under our management recognition plan. The restricted stock awards vest in five annual installments beginning on the first anniversary of the date of grant. Award recipients receive accumulated dividends on restricted shares as awards vest. |
| (2) | Options were awarded under our 1999 Stock Option Plan. The option awards have ten-year terms and vest in five annual installments beginning on the first anniversary of the date of grant. |
| (3) | Option exercise price was closing sale price for BCSB Bankcorp common stock at the market close on the date of grant. |
| (4) | For stock awards, amount shown is the number of shares awarded multiplied by the closing price for our common stock on the date of grant. For option awards, the amount was computed in accordance with FAS 123(R) and is therefore based upon the fair value of each option of $7.70 for Mr. Bouffard and $4.61 for Mr. Cole, using the Black-Scholes option pricing model. For further information regarding the assumptions used to compute fair value, see Note 13 to the Notes to the Consolidated Financial Statements appearing in this Annual Report on Form 10-K. |
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Employment Agreement.On November 27, 2006, Baltimore County Savings Bank executed an employment agreement with Joseph J. Bouffard under which he serves as President and Chief Executive Officer of Baltimore County Savings Bank. The employment agreement provides for a three-year term, subject to annual renewal by the board of directors for an additional year beyond the then-current expiration date. The material terms of the employment agreement also include that:
| • | Mr. Bouffard receives a base salary of $200,000 per year, subject to annual review by the Board of Directors; |
| • | Mr. Bouffard is eligible to receive bonuses or other incentive compensation at the discretion of the Board of Directors; |
| • | Mr. Bouffard received a restricted stock award covering 5,000 shares of BCSB Bankcorp common stock, vesting in installments of 1,000 shares on the first anniversary of the grant date and continuing each anniversary thereafter until fully vested. Mr. Bouffard also received 20,000 stock options, vesting in installments of 4,000 shares on the first anniversary of the grant date and continuing each anniversary thereafter until fully vested. The stock options will remain exercisable for a period of ten years from the grant date and will have an exercise price equal to the fair market value of BCSB Bankcorp’s common stock on the grant date. Restricted stock awards and stock options will vest immediately upon a change in control; |
| • | Mr. Bouffard participates in any life insurance, medical insurance, dental insurance, pension, profit sharing, retirement and other benefit programs and arrangements that Baltimore County Savings Bank may sponsor or maintain for the benefit of senior management employees and its employees generally; |
| • | Mr. Bouffard receives an automobile allowance and will be eligible for certain other fringe benefits described in the employment agreement; and |
| • | Baltimore County Savings Bank may terminate Mr. Bouffard’s employment for cause, in which case Mr. Bouffard would have no right to receive compensation or other benefits for any period after termination, except for already vested benefits. |
For information regarding amounts payable to Mr. Bouffard following termination of employment under various circumstances, see “—Potential Post-termination Benefits—Employment Agreement.”
Separation Agreement and Release. On September 24, 2007, we entered into a Separation Agreement and Release with William M. Loughran, who served as our Executive Vice President and Chief Lending Officer and as a Director of BCSB Bankcorp, Baltimore County Savings Bank, Baltimore County Savings Bank, M.H.C. and BCSB Bancorp. Under the terms of the agreement, effective November 16, 2007, Mr. Loughran retired from his positions as an executive officer. He continues to serve as a director. Under the agreement, in light of Mr. Loughran’s 34 years of service, we paid Mr. Loughran the amount of $155,911, less required withholding and deductions, on the first business day of January 2008.
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Outstanding Equity Awards at Fiscal Year End.The following table provides information concerning unexercised options and stock awards that have not vested as of September 30, 2007 for each named executive officer.
| Option Awards | Stock Awards | |||||||||||||||
Name | Number of Securities (#) Exercisable | Number of (#) Unexercisable | Option Exercise ($) | Option Expiration Date | Number of (#) | Market Value ($) (1) | ||||||||||
Joseph J. Bouffard | — | 20,000 | (2) | $ | 14.97 | 12/05/16 | 5,000 | (3) | $ | 41,250 | ||||||
Anthony Cole | — | 10,000 | (4) | 9.45 | 9/19/17 | 2,500 | (5) | 20,625 | ||||||||
Bonnie M. Klein | 3,000 | — | 11.375 | 7/24/12 | — | — | ||||||||||
William M. Loughran | 6,000 | — | 11.375 | 7/24/12 | — | — | ||||||||||
David M. Meadows | 3,000 | — | 11.375 | 7/24/12 | — | — | ||||||||||
| (1) | Based upon the closing stock price for BCSB Bankcorp common stock of $8.25 on September 28, 2007. |
| (2) | Stock options vest in five equal annual installments beginning on December 5, 2007. |
| (3) | The restricted stock awards vest in five equal annual installments commencing on December 5, 2007. |
| (4) | Stock options vest in five equal annual installments beginning on September 19, 2008. |
| (5) | The restricted stock awards vest in five equal annual installments commencing on September 19, 2008. |
Options Exercised and Stock Vested. No stock or option awards granted to a named executive officer vested during the year ended September 30, 2007. No named executive officer exercised options during the year ended September 30, 2007.
Pension Benefits. The following table provides information with respect to our supplemental executive retirement plan that provides for payments or benefits in connection with the retirement of a named executive officer. No payments were made during the year ended September 30, 2007.
Name | Plan Name | Present Value of Accumulated Benefit ($)(1) | |||
Joseph J. Bouffard | — | $ | — | ||
Anthony R. Cole | — | — | |||
Bonnie M. Klein | Supplemental Executive Retirement Plan | 24,513 | |||
William M. Loughran | Supplemental Executive Retirement Plan | 184,709 | |||
David M. Meadows | Supplemental Executive Retirement Plan | 42,309 | |||
| (1) | The accumulated benefits under our supplemental executive retirement plan are calculated in accordance with Accounting Principles Board No. 12, as amended by Statement of Financial Accounting Standards No. 106, using a 6.00% discount rate. |
Baltimore County Savings Bank has entered into agreements with Messrs. Loughran and Meadows and Ms. Klein to provide them with supplemental retirement benefits. See “—Potential Post-Termination Benefits—Supplemental Retirement Agreements” for a discussion of the benefits payable to these executives under the supplemental retirement agreements.
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Nonqualified Deferred Compensation
The following table provides information with respect to our deferred compensation plan in which the named executive officers participated during fiscal year 2007.
Name | Executive ($) | Aggregate ($) (1) | Aggregate at Last FYE ($) | ||||||
Joseph J. Bouffard | $ | — | $ | — | $ | — | |||
Anthony Cole | — | — | — | ||||||
Bonnie M. Klein | 7,012 | 2,006 | 22,241 | ||||||
William M. Loughran | — | — | 73,903 | ||||||
David M. Meadows | 5,659 | 7,725 | 47,325 | ||||||
| (1) | The amount disclosed in the earnings column represents interest earned. Such amount is reported as compensation for the named executive officer for the fiscal year ended September 30, 2007 under the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table. |
For information regarding our deferred compensation plan, see“—Director Compensation—Deferred Compensation Plan.”
Potential Post-Termination Benefits
Employment Agreement.Under the terms of our employment agreement with Mr. Bouffard, upon involuntary termination of employment or voluntary termination under circumstances that constitute constructive termination, Mr. Bouffard will receive a lump sum salary continuation benefit equal to 12 months’ base salary if the termination date is in the first 12 months of employment, 24 months’ base salary if the termination date is after 12 through 24 months of employment or 36 months’ base salary if the termination date is after 24 months of employment. Had Mr. Bouffard’s employment been terminated under these circumstances on September 30, 2007, he would have been entitled to receive a lump sum payment in the amount of $200,000.
Our employment agreement with Mr. Bouffard further provides that in the event of termination due to disability, Mr. Bouffard will be entitled to the compensation and benefits provided for under the agreement for (i) any period during the term of the agreement and prior to the establishment of Mr. Bouffard’s disability during which he is unable to work due to such disability, or (ii) any period of disability prior to Mr. Bouffard’s termination of employment due to disability; provided, however, that any benefits paid pursuant to our long-term disability plan will continue as provided in such plan.
In addition, if, within one year after a change in control of BCSB Bankcorp, Baltimore County Savings Bank terminates Mr. Bouffard’s employment without cause or Mr. Bouffard voluntarily terminates his employment, he will be entitled to receive a lump sum payment equal to three times his then-current annual base salary plus continued participation for up to three years in any benefit plans of Baltimore County Savings Bank that provide medical, dental and life insurance coverage upon terms no less favorable than the most favorable terms provided to senior executives. If such payments and benefits, either alone or together with other payments and benefits Mr. Bouffard
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has the right to receive from Baltimore County Savings Bank, would constitute an excess “parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), such payments and benefits will be reduced or revised by the amount, if any, which is the minimum necessary to result in no portion of such payments and benefits being non-deductible to Baltimore County Savings Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. If a change in control of BCSB Bankcorp occurred on September 30, 2007, and Mr. Bouffard’s employment was terminated, the total cash payments that would be due under the employment agreement, excluding any benefits under any employee benefit plan which may be payable, would equal approximately $600,000. In addition, Mr. Bouffard would be entitled to continued participation for a three-year period in our medical, dental and life insurance programs, which would have a value over that three-year period of $11,740 based on the cost at September 30, 2007 of those programs. Mr. Bouffard would also immediately vest in any unvested stock options and restricted stock previously granted to him. However, as previously described above, the aggregate amount of all of the change in control related payments would not exceed the limit imposed by Section 280G of the Code.
Change-in-Control Severance Agreements. Baltimore County Savings Bank maintains change in control severance agreements with Messrs. Cole and Meadows and Ms. Klein. The agreements have a term ending on the earlier of (a) November 29, 2010 in the case of Mr. Cole or December 20, 2010 in the case of Mr. Meadows and Ms. Klein or (b) the date on which the employee terminates employment with Baltimore County Savings Bank. The term of the severance agreements may be extended for additional one-year periods beyond the then effective expiration date upon a determination by the Board of Directors that the performance of these individuals has met the required performance standards and that such severance agreements should be extended. The employee becomes entitled to collect severance benefits under the severance agreement in the event within the period beginning 12 months before a change of control and ending 18 months after a change of control the employee (i) is given a “change in duties,” as defined in the agreement, (ii) is involuntarily terminated for reasons other than “cause,” as defined, death or disability, or resigns following a change in duties, or (iii) voluntarily terminates employment for any reason within the 30-day period beginning on the date of a change of control. Under the agreement, a change in duties is defined to include a significant adverse change in the status, title, position, responsibilities, or scope of the employee’s authority or duties, assignment to the employee of any duties or responsibilities which are inconsistent with his or her status, title, or position, a material reduction in the employee’s total compensation, a diminution in the employee’s eligibility to participate in compensation plans, a relocation of the employee’s principal place of employment by more than 30 miles, or a reasonable determination by the board of directors that, as a result of a change of control and change in circumstances thereafter, the employee is unable to exercise the authorities, powers, functions or duties attached to his or her position.
In the event an employee becomes entitled to receive severance benefits, the employee will (i) be paid an amount equal to (i) 2.99 times the annualized cash compensation paid to the employee in the immediately preceding 12-month period (excluding board fees and bonuses), and (ii) will receive either cash in an amount equal to the cost to the employee of obtaining all health, life, disability and other benefits which the employee would have been eligible to participate in through the second annual anniversary date of his termination of employment or continued participation in such benefit plans through the second annual anniversary date of his termination of employment, to the extent the employee would continue to qualify for participation therein. Under the terms of severance agreements the employees will receive a lump sum cash payment within 10 business days of their termination of employment following a change of control.
These provisions may have an anti-takeover effect by making it more expensive for a potential acquiror to obtain control of BCSB Bancorp. In the event that one of these employees prevails over Baltimore County Savings Bank in a legal dispute as to the severance agreement, he or she will be reimbursed for legal and other expenses. In connection with the conversion, the severance agreements have been amended and restated to make BCSB Bankcorp a guarantor of Baltimore County Savings Bank’s obligations under the severance agreements and to limit the payments to the employees in the event payments under the severance agreements together with other change in control benefits may result in a “parachute payment” under 280G of the Code. See“Employment Agreement” above for definition of parachute payment. If a change in control of BCSB Bancorp occurred on September 30, 2007 and Mr. Meadows’ and Ms. Klein’s employment were terminated, the total payments that would be due under the change in control agreements to Mr. Meadows and Ms. Klein,excluding any benefits under any employee
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benefit plan which may be payable,would equal approximately $487,740 and $364,600, respectively. Mr. Cole would not have been entitled to any payment because his agreement was not in effect on September 30, 2007. In addition, Mr. Meadows and Ms. Klein would be entitled to continued participation for a two-year period in our medical, dental and life insurance programs, which would have a value for those individuals over that two-year period of $13,856 and $10,882, respectively, based on the cost at September 30, 2007 of those programs. Each executive also would immediately vest in any unvested stock options and restricted stock previously granted to him or her. However, as described above, the aggregate amount of all of the change in control related payments would not exceed the limits imposed by Section 280G of the Code.
Supplemental Executive Retirement Plan. Baltimore County Savings Bank has entered into agreements with Messrs. Loughran and Meadows and Ms. Klein to provide them with supplemental retirement benefits. Each executive is entitled to his or her supplemental retirement benefit upon termination of employment (other than for cause) at or upon attaining age 65. If the executive terminates employment after attaining age 65, Baltimore County Savings Bank will pay Messrs. Loughran, Meadows and Ms. Klein and annual retirement benefit equal to 16.2%, 11.8% and 7.6%, respectively, of their final compensation. For purposes of the agreements, final compensation equals each executive’s highest three calendar year’s average cash compensation. We will pay the annual retirement benefit monthly over a period of 180 months. If the executive terminates employment before reaching 65 years of age, or is terminated by Baltimore County Savings Bank for any reason other than for cause, Baltimore County Savings Bank will pay Messrs. Loughran and Meadows and Ms. Klein a reduced annual benefit, based on amounts accrued for the executive prior to termination, commencing at age 65, over a 180 month period. Should an executive die while employed by Baltimore County Savings Bank or after payments have begun, a designated beneficiary will receive the balance owed to the executive on the date of death in the same method and manner as if the executive were still alive. Had Messrs. Loughran and Meadows and Ms. Klein terminated employment on September 30, 2007, under the supplemental retirement agreements they would have been entitled to receive at age 65 monthly payments over a 180-month period totaling $184,709, $42,309 and $24,513, respectively.
Survivor Income Plan.Baltimore County Savings Bank maintains a survivor income plan for the benefit of certain officers. Named executive officers Klein, Loughran and Meadows participate in the survivor income plan. The survivor income plan provides a benefit to survivors upon the death of the participant provided the participant is employed by Baltimore County Savings Bank and has been employed by Baltimore County Savings Bank for ten years at the time of death or terminates employment for any reason other than cause after attaining age 55 with ten years of service. Under this plan, upon their death, the respective beneficiaries of Ms. Klein and Messrs. Loughran and Meadows would receive a death benefit of $250,000, $350,000 and $ 100,000, respectively, payable in a lump sum within 90 days following death.
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Director Compensation
The following table provides the compensation received by individuals who served as non-employee directors of the Company during 2007 fiscal year. This table excludes perquisites, which did not exceed $10,000 in the aggregate for each director.
Name | Fees Earned Paid in Cash ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(1) | All Other Compensation ($) | Total ($) | |||||||||
Henry V. Kahl | $ | 29,600 | $ | 8,609 | $ | — | $ | 38,209 | |||||
John J. Panzer | 25,800 | 10,195 | — | 35,995 | |||||||||
Ernest A. Moretti | 11,600 | — | — | 11,600 | |||||||||
H. Adrian Cox | 26,400 | 7,301 | — | 33,701 | |||||||||
Michael J. Klein | 25,000 | 5,193 | 6,222 | (2) | 36,415 | ||||||||
William J. Kappauf, Jr. | 26,400 | 8,489 | 6,222 | (2) | 41,111 | ||||||||
| (1) | Includes (i) the change in the actuarial present value of the director’s accumulated benefit under the supplemental director retirement plan and (ii) for Mr. Kappauf, $2,677 representing earnings in excess of 120% of the federal long term funds rate at September 30, 2007 on his account balance under the deferred compensation plan. |
| (2) | Consists of contributions under our deferred compensation plan. |
Fees. The Chairman of the Board of Directors receives a monthly retainer of $1,200 per month, and all other nonemployee directors receive $1,000 per month. Each nonemployee director also receives a fee of $400 per each regular and special Board meeting attended and $200 per committee meeting attended. Directors who serve as officers of BCSB Bankcorp or Baltimore County Savings Bank do not receive additional compensation for their service as directors.
Deferred Compensation Plan. Baltimore County Savings Bank maintains the Baltimore County Savings Bank, F.S.B. Amended and Restated Deferred Compensation Plan, which incorporates two prior plans - the Baltimore County Savings Bank Deferred Compensation Plan and Baltimore County Savings Bank Cash Deferred Compensation Plan. The Deferred Compensation Plan provides members of the board of directors and selected executives with the ability to defer a portion of their compensation. The plan preserves a stock component of the prior plan. Prior to each plan year, each non-employee director may elect to defer receipt of all or part of his or her future fees (including retainers), and any other participant may elect to defer receipt of up to 25% of salary or 100% of bonus compensation into either the cash or stock-based plan. The plan also provides a 401(k) restoration matching contribution intended to make participants whole with respect to matching contributions Baltimore County Savings Bank would have made under the 401(k) plan but for certain limitations imposed by the qualified plan rules. Participants become fully vested after six years of service. On each September 30, each director participant who has between three and 12 years of service as a director will have his account credited with $6,222. No director may receive credit for more than 12 years of service. A director participant who, after July 1, 1995, completes three years of service as a director, will have his account credited with $24,000 on the September 30 following his completion of three years of service. At the election of the participant, distributions may be made in a lump sum or installments.
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Baltimore County Savings Bank has established a grantor trust and may, at any time or from time to time, make additional contributions to the trust. In the event of a change in control, Baltimore County Savings Bank will contribute to the trust an amount sufficient to provide the trust with assets having an overall value equal to the aggregate account balances under the Plan. The trust’s assets are subject to the claims of Baltimore County Savings Bank’s general creditors and are available for eventual payments to participants.
Director Retirement Benefits.Baltimore County Savings Bank has entered in agreements with its non-employee directors, except Mr. Moretti, to provide them with supplemental retirement benefits. Under the agreements, each director becomes entitled to an annual retirement benefit equal to $9,000, payable monthly for 15 years, if he terminates service after attaining age 70. If the director terminates service prior to age 70 (including by reason of death), Baltimore County Savings Bank will pay him a reduced annual benefit over 15 years, commencing at age 70.
Stock Benefit Plans.Directors are also eligible to receive awards under BCSB Bankcorp’s stock option plan and management recognition plan, which became effective on July 15, 1999. During the year ended September 30, 2007, non-employee directors did not receive any awards under the option plan or the management recognition plan.
Reimbursement for Tax Advice. Baltimore County Savings Bank’s Board of Directors has also adopted a policy to reimburse designated directors and officers for expenses they incur in connection with professional tax, estate planning or financial advice they obtain related to the benefits they receive under the stock and non-stock related benefit plans of Baltimore County Savings Bank and BCSB Bankcorp. Reimbursements are limited to $1,000 for each eligible individual during any fiscal year, with a one-time allowance not to exceed $5,000 for estate planning expenses. The level of annual reimbursements may be increased to $2,000 on a one-time basis in the event of a change in control of BCSB Bankcorp. No reimbursements were made during the year ended September 30, 2007.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) and (b) Security Ownership of Certain Beneficial Owners and Security Ownership of Management. All of BCSB Bancorp’s stock is owned by Baltimore County Savings Bank, F.S.B.
The following table sets forth information as of December 21, 2007 (i) with respect to any person or entity who was known to BCSB Bankcorp to be the beneficial owner of more than 5% of our common stock, and (ii) as to our common stock beneficially owned by each director of Baltimore County Savings Bank, the executive officers named in the “Summary Compensation Table” and all directors and executive officers as a group.
Persons Owning Greater than 5%: | Amount and Nature of Beneficial Ownership (1) | Percent of Shares of Capital Stock Outstanding | ||||
Baltimore County Savings Bank, M.H.C. 4111 E. Joppa Road, Suite 300 Baltimore, Maryland 21236 | 3,754,960 | 63.3 | % | |||
BCSB Bankcorp, Inc. Employee Stock Ownership Plan et. al. 4111 E. Joppa Road Suite 300 Baltimore, Maryland 21239 | 385,894 | (3) | 6.5 | |||
| Directors: | ||||||
H. Adrian Cox | 24,387 | * | ||||
Henry V. Kahl | 23,392 | * | ||||
William M. Loughran | 29,078 | * | ||||
John J. Panzer, Jr. | 29,017 | * | ||||
Michael J. Klein | 10,148 | * | ||||
William J. Kappauf, Jr. | 8,000 | * | ||||
Joseph J. Bouffard | 5,000 | * | ||||
Ernest A. Moretti | — | * | ||||
| Named Executive Officers: | ||||||
Anthony R. Cole | 1,600 | |||||
David M. Meadows | 10,532 | * | ||||
Bonnie M. Klein | 15,752 | * | ||||
All directors and executive officers of BCSB Bankcorp as a group (12 persons) | 165,065 | 2.8 |
| (1) | In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Common Stock if he or she has or shares voting or investment power with respect to such Common Stock. As used herein, “voting power” is the power to vote or direct the voting of shares and “investment power” is the power to dispose or direct the disposition of shares. Except as otherwise noted, ownership is direct, and the named individuals and group exercise sole voting and investment power over the shares of the Common Stock. The listed amounts include 15,000, 15,500, 6,000, 6,000, 6,000, 6,000, 4,000, 0, 0, 3,000, 3,000, 1,500 and 66,000 shares that Directors Cox, Kahl, Loughran, Panzer, Jr., Klein, Kappauf, Bouffard and Moretti, named executive officers Cole, Meadows and Klein, other executive officer Wernecke and all directors and executive officers of BCSB Bankcorp as a group, respectively, have the right to acquire upon the exercise of options exercisable within 60 days of December 21, 2007. The amounts shown exclude shares held for the benefit of directors under our deferred compensation plan trust. The shares held by the deferred compensation plan trust are held for the benefit of directors in the following amounts: Mr. Cox, 14,432 shares; Mr. Kahl, 13,212 shares; Mr. Loughran, 8,958, shares; Mr. Panzer 38,311 shares; Mr. Klein, 5,602 shares; and Mr. Kappauf, 646 shares. Such directors bear the economic risk associated with such shares. The listed amounts do not include shares with respect to which Directors Henry V. Kahl, H. Adrian Cox and William J. Kappauf, Jr. have voting power by virtue of their positions as trustees of the trusts holding 159,142 shares under our employee stock ownership plan and 117,497 shares under our deferred compensation plan, nor 42,350 shares as to |
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which such individuals, along with Director Michael J. Klein, share dispositive power by virtue of their positions as directors of the Baltimore County Savings Bank Foundation, Inc., nor 18,364 shares with respect to which Directors Kahl, Cox, Panzer have voting power by virtue of their positions as trustees of our management recognition plan trust. Employee stock ownership plan shares are held in a suspense account for future allocation among participants as the loan used to purchase the shares is repaid. Shares held by the employee stock ownership plan trust and allocated to the accounts of participants are voted in accordance with the participants’ instructions, and unallocated shares are voted in the same ratio as employee stock ownership plan participants direct the voting of allocated shares or, in the absence of such direction, in the employee stock ownership plan trustees’ best judgment. As of December 21, 2007, 160,060 shares had been allocated. Shares held by the deferred compensation plan trust are voted in the same proportion as are the shares held by the employee stock ownership plan trust. The shares held by the management recognition plan trust are voted in the same proportion as the employee stock ownership plan trustees vote the shares held in the employee stock ownership plan trust. Shares held by the Foundation are voted in the same ratio as all other shares of common stock are voted. |
| (2) | Based on a total of 5,929,743 shares of Common Stock outstanding at December 21, 2007. |
| (3) | Includes 159,142 shares owned by the employee stock ownership plan, 117,497 shares owned by the deferred compensation plan, 48,541 shares owned by our 401(k) Plan, 18,364 shares owned by the management recognition plan trust and 42,350 shares owned by the Foundation. Henry V. Kahl, H. Adrian Cox and William J. Kappauf, Jr., who serve as directors of BCSB Bankcorp, serve as trustees of the employee stock ownership plan and the deferred compensation plan. Such individuals share voting power over shares held by the employee stock ownership plan and the deferred compensation plan and share dispositive power over shares held by the deferred compensation plan trust. Such individuals and Director Michael J. Klein serve as four of the Foundation’s nine directors and share dispositive power over shares held by the Foundation. Henry V. Kahl, H. Adrian Cox and John J. Panzer, Jr. who serve as directors of BCSB Bankcorp, serve as trustees of the management recognition plan trust. The trustees of the management recognition plan trust share voting and dispositive power over the shares held by the management recognition plan trust. Baltimore County Savings Bank is the trustee of the 401(k) Plan assets invested in common stock, and in their capacities as directors of Baltimore County Savings Bank, Messrs. Kahl, Cox and Kappauf share voting and dispositive power over shares held by the 401(k) Plan. In their individual capacity, such individuals disclaim beneficial ownership of shares held by the employee stock ownership plan, the deferred compensation plan, the management recognition plan trust, the 401(k) Plan and the Foundation. |
| * | Less than 1% of our outstanding common stock. |
| (c) | Changes in Control. |
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
| (d) | Equity Compensation Plans. |
Equity Compensation Plan Table.Set forth below is information as of September 30, 2007 regarding BCSB Bankcorp’s equity compensation plans.
Plan Category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted-average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||
Equity compensation plans approved by security holders | 121,500 | $ | 11.16 | 61,464 | (1) | |||
Total | 121,500 | $ | 11.16 | 61,464 | (1) | |||
| (1) | Consists of 42,100 shares available for stock option grants, 8,864 shares available for future awards under our management recognition plan and 10,500 shares subject to restricted stock awards that have not vested as of September 30, 2007. Subsequent to September 30, 2007, we granted options to acquire 42,100 shares of our common stock and awarded 7,864 shares of restricted stock. |
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We do not maintain any equity compensation plans that have not been approved by security holders.
Item 13. Certain Relationships and Related Transactions
Director Independence
All of the directors of BCSB Bancorp are independent under the listing standards of Nasdaq, except for Joseph J. Bouffard, our President and Executive Officer, and William M. Loughran, who until November 16, 2007 served as our Executive Vice President in charge of lending.
Transactions with Related Parties
Loans and Extensions of Credit.The Sarbanes-Oxley Act of 2002 generally prohibits loans by Baltimore County Savings Bank to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by a depository institution to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. Baltimore County Savings Bank offers loans to its directors and officers. These loans currently are made in the ordinary course of business with the same collateral, interest rates and underwriting criteria as those of comparable transactions prevailing at the time and do not involve more than the normal risk of collectibility or present other unfavorable features. All loans to such persons must be approved in advance by a disinterested majority of the Board of Directors.
In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to the person and his or her related interests, are in excess of the greater of $25,000 or 5% of Baltimore County Savings Bank’s capital and surplus, up to a maximum of $500,000, must be approved in advance by a majority of the disinterested members of the Board of Directors.
The aggregate amount of loans by us to executive officers and directors was $468,000 at September 30, 2007, or approximately 0.83% of pro forma stockholders’ equity, assuming that 2,674,139 shares are sold in the offering. These loans were performing according to their original terms at September 30, 2007. All loans made by Baltimore County Savings Bank to its directors and executive officers and members of their immediate families were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to Baltimore County Savings Bank, and did not involve more than the normal risk of collectibility or present other unfavorable features.
Director Michael J. Klein is a member holding a 20% ownership interest in Colgate Investments, LLC, a limited liability company that owns real property that Baltimore County Savings Bank leases for a branch office site. Baltimore County Savings Bank paid $70,000 in rent to Colgate Investments, LLC during the year ended September 30, 2007. The remaining 80% of Colgate Investments, LLC is owned by Mr. Klein’s immediate family members.
Approval of Related-Party Transactions.Under our Audit Committee Charter, it is the responsibility of the our Audit Committee to review all related party transactions, i.e., transactions required to be disclosed under SEC Regulation S-K, Item 404, for potential conflict of interest situations on an ongoing basis and to determine whether to approve such transactions. Our Code of Ethics also provides that all executive officers and directors must disclose any private interest that presents the possibility of conflicts of interest with BCSB Bankcorp or Baltimore County Savings Bank.
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Item 14. Principal Accountant Fees and Services
The following table represents fees for professional audit services rendered by Stegman & Company (the “Audit Firm”) for the audit of the annual financial statements of BCSB Bankcorp for the years ended September 30, 2007 and 2006.
| 2007 | 2006 | |||||
Audit Fees (1) | $ | 169,501 | $ | 73,177 | ||
Audit-Related Fees (2) | 250 | 2,375 | ||||
Tax Services (3) | 14,875 | 9,750 | ||||
All Other Fees | — | — | ||||
| (1) | Audit fees consist of fees for professional services rendered for the audit of BCSB Bankcorp’s consolidated financial statements and review of financial statements included in BCSB Bankcorp’s quarterly reports on Form 10-Q and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements. In 2007, these fees included costs associated with reviews and services related to registration statements. |
| (2) | Audit-related fess are for assurance and related services by the principal accountant that are related to the performance of audits or reviews of BCSB Bankcorp’s financial statements and are not reported in the preceding Audit Fees category. The fees shown above were for due diligence services for potential acquisitions, technical accounting and reporting, consulting and research and employee benefit plan audits. |
| (3) | Tax services fees consist of fees for compliance tax services, including tax planning and advice and preparation of tax returns. |
Pre-Approval of Services by the Independent Auditor
The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In accordance with its charter, the Audit Committee approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. Such approval process ensures that the external auditor does not provide any non-audit services to the Company that are prohibited by law or regulation.
In addition, the Audit Committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by the independent registered public accounting firm. Requests for services by the independent registered public accounting firm for compliance with the auditor services policy must be specific as to the particular services to be provided. The request may be made with respect to either specific services or a type of service for predictable or recurring services.
During the year ended September 30, 2007, all services were pre-approved, in advance, by the Audit Committee.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)List of Documents Filed as Part of this Report
(1)Financial Statements. The following consolidated financial statements of BCSB Bankcorp, Inc. are incorporated by reference from Item 8 hereof (see Exhibit 13):
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of September 30, 2007 and 2006
Consolidated Statements of Operations for the Years Ended September 30, 2007, 2006 and 2005
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended September 30, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(b)Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index.
No. | Description | |
| 1.2 | Agency Agreement* | |
| 3.1 | Articles of Incorporation of BCSB Bancorp, Inc. (1) | |
| 3.2 | Bylaws of BCSB Bancorp, Inc. (1) | |
| 4.1 | Form of Common Stock Certificate of BCSB Bancorp, Inc. (1) | |
| 10.1 | Employment Agreement by and between Baltimore County Savings Bank, F. S. B. and Joseph J. Bouffard † (1) | |
| 10.2 | Change in Control Severance Agreement by and between Baltimore County Savings Bank, F.S.B. and Bonnie M. Klein † (1) | |
| 10.3 | Change in Control Severance Agreement by and between Baltimore County Savings Bank, F.S.B. and David M. Meadows † (1) | |
| 10.4 | Baltimore County Savings Bank, F.S.B. Amended and Restated Deferred Compensation Plan † (1) | |
| 10.5 | BCSB Bankcorp, Inc. Management Recognition Plan and Trust † (1) | |
| 10.6 | BCSB Bankcorp, Inc. 1999 Stock Option Plan † (1) | |
| 10.7 | Supplemental Executive Retirement Agreement by Baltimore County Savings Bank, F.S.B. and Bonnie M. Klein † (1) | |
| 10.8 | Supplemental Executive Retirement Agreement by Baltimore County Savings Bank, F.S.B and David M. Meadows † (1) | |
| 10.9 | Baltimore County Savings Bank, F.S.B. Incentive Compensation Plan † (2) | |
| 10.10 | Baltimore County Savings Bank, F.S.B. Cash Deferred Compensation Plan † (2) | |
| 10.11 | Change in Control Severance Agreement between Baltimore County Savings Bank, F.S.B., BCSB Bankcorp, Inc. and Anthony Cole † (2) | |
| 10.12 | Change in Control Severance Agreement between Baltimore County Savings Bank, F.S.B. and Daniel R. Werneke † (2) | |
| 14 | Code of Ethics (3) | |
| 31.1 | Rule 13a-14(a) Certification of President | |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
| 32 | Section 1350 Certifications | |
| 99.1 | Supervisory Agreement (4) | |
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| * | Previously filed. |
| † | Management contract or compensatory agreement or arrangement. |
| (1) | Incorporated herein by reference from BCSB Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-141572). |
| (2) | Incorporated herein by reference from BCSB Bankcorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2007 (File No. 0-24589). |
| (3) | Incorporated herein by reference from BCSB Bankcorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2003. |
| (4) | Incorporated herein by reference from BCSB Bankcorp, Inc.’s Current Report on Form 8-K filed on December 14, 2005 (File No. 0-24589). |
(c)Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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. | ||||||
| January 28, 2008 | ||||||
| By: | /s/ Joseph J. Bouffard | |||||
| Joseph J. Bouffard | ||||||
| President and Chief Executive Officer | ||||||
