BCSB Bancorp 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

OR

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

For the transition period from            to            

Commission File Number: 0-53163

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)

(410) 256-5000

Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	x

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

As of July 31, 2010 the issuer had 3,120,945 shares of Common Stock issued and outstanding.

CONTENTS

		PAGE
PART I.FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2010 (unaudited) and September 30, 2009	3
	Consolidated Statements of Operations for the Nine and Three Months Ended June 30, 2010 and 2009 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Nine and Three Months Ended June 30, 2010 and 2009 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009 (unaudited)	6
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Removed and Reserved	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES		38

PART I.    FINANCIAL INFORMATION

Item 1. Financial Information

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30, 2010			September 30, 2009
	(unaudited)
	(dollars in thousands)
Assets
Cash and due from banks	$	13,261		$	5,535
Interest-bearing deposits in other banks		11,937			3,786
Federal funds sold		85,321			30,931
Cash and cash equivalents		110,519			40,252
Interest bearing time deposits		100			100
Loans receivable, net of allowances ($6,287) and ($3,927)		396,618			401,011
Mortgage-backed securities, available for sale		77,394			90,478
Foreclosed real estate and repossessed assets		—			639
Premises and equipment, net		7,932			9,024
Federal Home Loan Bank of Atlanta stock, at cost		1,485			1,485
Bank owned life insurance		15,442			15,001
Core deposit intangible		81			101
Accrued interest and other assets		12,745			11,347
Total assets	$	622,316		$	569,438
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	28,496		$	25,529
Interest-bearing		509,302			462,460
Total deposits		537,798			487,989
Junior subordinated debentures		17,011			17,011
Other liabilities		6,583			5,305
Total liabilities		561,392			510,305
Commitments and Contingencies
Stockholders’ Equity
Preferred stock (par value $.01 - 5,000,000 authorized, 10,800 shares issued and outstanding at June 30, 2010 and September 30, 2009, respectively)		10,446			10,383
Common stock (par value $.01 – 50,000,000 authorized, 3,120,945 issued and outstanding at June 30, 2010 and September 30, 2009, respectively)		31			31
Stock warrants		481			481
Additional paid-in capital		39,061			38,984
Obligation under rabbi trust		989			1,035
Retained earnings		12,286			12,117
Accumulated other comprehensive loss (net of taxes)		(389	)		(1,812	)
Employee stock ownership plan		(1,039	)		(1,100	)
Stock held by Rabbi Trust		(942	)		(986	)
Total stockholders’ equity		60,924			59,133
Total liabilities and stockholders’ equity	$	622,316		$	569,438

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

3

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For the Nine Months Ended June 30,						For the Three Months Ended June 30,
	2010			2009			2010			2009
	(Dollars in thousands except per share data)
Interest Income
Interest and fees on loans	$	18,296		$	18,449		$	5,986		$	6,058
Interest on mortgage backed securities		3,309			3,911			1,016			1,282
Interest and dividends on investment securities		4			33			1			2
Other interest income		140			156			60			38
Total interest income		21,749			22,549			7,063			7,380
Interest Expense
Interest on deposits		6,882			9,720			2,273			3,001
Interest on borrowings – short term		—			284			—			59
Other interest expense – debentures		456			727			153			189
Total interest expense		7,338			10,731			2,426			3,249
Net interest income		14,411			11,818			4,637			4,131
Provision for losses on loans		2,800			900			300			600
Net interest income after provision for losses on loans		11,611			10,918			4,337			3,531
Other Income
Total other-than-temporary impairment charges		(1,052	)		(1,892	)		—			(1,892	)
Less: Portion included in other comprehensive income (pre-tax)		952			1,392			—			1,392
Net other-than-temporary impairment charges on securities available for sale		(100	)		(500	)		—			(500	)
Gain (loss) on repossessed assets		8			196			(6	)		6
Mortgage banking operations		58			25			15			11
Fees on transaction accounts		570			717			187			216
Income from bank owned life insurance		430			331			134			172
Miscellaneous income		802			424			233			233
Total other income		1,768			1,193			563			138
Non-Interest Expenses
Salaries and related expense		6,898			6,026			2,213			2,112
Occupancy expense		1,888			1,778			674			576
Federal deposit insurance premiums		682			789			195			483
Data processing expense		1,239			1,181			399			372
Property and equipment expense		643			708			173			223
Professional fees		437			694			112			237
Advertising		316			404			83			172
Telephone, postage and office supplies		236			284			48			93
Other expenses		209			489			70			175
Total non-interest expenses		12,548			12,353			3,967			4,443
Income (Loss) before tax provision (benefit)		831			(242	)		933			(774	)
Income tax expense (benefit)		193			(166	)		326			(356	)
Net income (loss)		638			(76	)		607			(418	)
Preferred stock dividends and discount accretion		(469	)		(322	)		(156	)		(157	)
Net income (loss) available to common shareholders	$	169		$	(398	)	$	451		$	(575	)
Per Share Data:
Basic earnings (loss) per share of common stock	$	.06		$	(.14	)	$	.15		$	(.20	)
Diluted earnings (loss) per share of common stock	$	.06		$	(.14	)	$	.14		$	(.20	)
Dividends per common share	$	.00		$	.00		$	.00		$	.00

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

4

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	For the Nine Months Ended June 30,
	2010		2009
	(in thousands)
Net Income (Loss)	$	638	$	(76	)
Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) on Available-for-sale portfolios, net of tax (benefit) of $927 and $(582), respectively		1,423		(808	)
Comprehensive Income (Loss )	$	2,061	$	(884	)
	For the Three Months Ended June 30,
	2010		2009
	(in thousands)
Net Income ( Loss)	$	607	$	(418	)
Other comprehensive income (loss), net of tax:
Unrealized net holding gains on Available-for-sale portfolios, net of tax of $615 and $116, respectively		945		178
Comprehensive Income (Loss)	$	1,552	$	(240	)

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

5

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months Ended June 30,
	2010			2009
	(dollars in thousands)
Operating Activities
Net income (loss)	$	638		$	(76	)
Adjustments to reconcile net income to net cash provided by operating activities
Other-than-temporary impairment charges on securities available for sale		100			500
Amortization of deferred loan fees and cost, net		(156	)		157
Non-cash compensation under stock-based benefit plan		181			169
Provision for losses on loans		2,800			900
Amortization of purchase premiums and discounts, net		10			(58	)
Provision for depreciation		672			761
Gains on sale of real estate and repossessed assets		(8	)		(196	)
Increase in cash surrender value of bank owned life insurance		(430	)		(331	)
Increase in accrued interest and other assets		(2,323	)		(583	)
Gain on sale of loans		(49	)		—
Loans originated for sale		(4,829	)		—
Proceeds from loans sold		4,878			—
Decrease in other liabilities		(773	)		(813	)
Decrease in obligation under Rabbi Trust		(45	)		(65	)
Net cash provided by operating activities		666			365
Cash Flows from Investing Activities
Purchase of bank owned life insurance		(12	)		(51	)
Proceeds from maturities of investment securities-available for sale		—			1,000
Net decrease (increase) in loans		1,766			(112	)
Purchase of mortgage-backed securities-available for sale		—			(16,216	)
Principal collected on mortgage-backed securities		15,288			13,205
Proceeds from sales of foreclosed real estate		639			1,467
Proceeds from sales of repossessed assets		47			49
Investment in premises and equipment		(145	)		(240	)
Proceeds from sale of fixed assets		564			—
Redemption of Federal Home Loan Bank of Atlanta Stock		—			74
Net cash provided (used) by investing activities		18,147			(824	)

6

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

	For the Nine Months Ended June 30,
	2010			2009
	(dollars in thousands)
Cash Flows from Financing Activities
Net increase in deposits	$	49,809		$	19,249
Net increase in advances by borrowers for taxes and insurance		2,050			1,751
Repayment of Federal Home Loan Bank of Atlanta advances		—			(10,000	)
Net proceeds from preferred stock offering (Troubled Asset Relief Program “TARP”)		—			10,800
Dividends paid on preferred stock		(405	)		(213	)
Net cash provided by financing activities		51,454			21,587
Increase in cash equivalents		70,267			21,128
Cash and cash equivalents at beginning of period		40,252			34,983
Cash and cash equivalents at end of period	$	110,519		$	56,111
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest	$	7,120		$	9,750
Income taxes	$	869		$	20

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

7

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 -Principles of Consolidation

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

Note 2 -Basis for Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The financial statements of the Company are presented on a consolidated basis with those of the Bank. The results for the nine months ended June 30, 2010 are not necessarily indicative of the results of operations that may be expected for the year ending September 30, 2010. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in BCSB Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2009.

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

Note 3 -Organization

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s non-interest earning demand deposit accounts currently have unlimited FDIC insurance.

8

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 –Mortgage-Backed Securities-Available for Sale

The amortized cost and estimated fair values of mortgage-backed securities are as follows as of June 30, 2010 and September 30, 2009:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
June 30, 2010
GNMA certificates	$	3,638	$	65	$	—		$	3,703
Collateralized mortgage obligations		20,252		—		(4,098	)		16,154
FNMA certificates		38,341		2,335		—			40,676
FHLMC participating certificates		15,806		1,055		—			16,861
	$	78,037	$	3,455	$	(4,098	)	$	77,394
September 30, 2009
GNMA certificates	$	3,716	$	250	$	—		$	3,966
Collateralized mortgage obligations		21,866		—		(6,095	)		15,771
FNMA certificates		49,450		2,026		(44	)		51,432
FHLMC participating certificates		18,438		871		—			19,309
	$	93,470	$	3,147	$	(6,139	)	$	90,478

There were no sales of available for sale mortgage-backed securities during the nine months ended June 30, 2010 or the year ended September 30, 2009.

9

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 –Mortgage-Backed Securities-Available for Sale-continued

Below are schedules of mortgage-backed securities and collateralized mortgage obligations with unrealized losses as of June 30, 2010 and the length of time the securities have been in a continuous unrealized loss position.

	Less than 12 months				12 months or more					Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Mortgage-backed securities		—		—		—		—			—		—
Collateralized mortgage obligations		—		—		16,154		(4,098	)		16,154		(4,098	)
Total temporarily impaired securities	$	—	$	—	$	16,154	$	(4,098	)	$	16,154	$	(4,098	)

At June 30, 2010 the Company has seven securities in an unrealized loss position.

During the nine months ended June 30, 2010, we determined that, based on our most recent estimate of cash flows, other-than-temporary-impairment (“OTTI”) had occurred with respect to one of our mortgage-backed securities and resulted in a pre-tax charge to earnings of $100,000. This security was rated “AAA” by Standard & Poors at origination. This security had an original principle balance of $5.0 million and has a current principle balance of $3.0 million. This security has an estimated fair value of $1.4 million at June 30, 2010. Most of the decline in fair value related to this security is principally due to non-credit factors. Under the revised guidance for recognition and presentation of other-than-temporary impairments for debt securities, impairment recognition for the Company’s mortgage-backed securities are now segmented into credit and non-credit related components. Any fair value adjustment due to identified credit-related components will be recorded as an adjustment to current period earnings, while non-credit-related fair value adjustments will be recorded through other comprehensive income as the Company does not have the intent to sell the securities nor does it believe it is more likely than not that it will be required to sell the securities.

The following table presents the change in the credit portion of the other-than-temporary impairments recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income (loss) for the three months ended June 30, 2010.

	(in thousands)
Credit loss on debt securities held as of March 31, 2010	$	600
Addition for credit loss for which an other-than-temporary-impairment was previously recognized		—
Addition for credit loss for which an other-than-temporary-impairment was not previously recognized		—
Credit loss on debit securities held as of June 30, 2010	$	600

There were no credit losses on debt securities for the three months ended June 30, 2010.

Credit losses for debt securities for the three months ended June 30, 2009 were $500,000.

10

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 –Mortgage-Backed Securities–Available for Sale-continued

The Company engages the service of independent third party valuation professionals to analyze the OTTI status of the non-agency mortgage-backed securities. The OTTI methodology is formulated within The FASB Accounting Standards Codification (“FASB ASC”). The valuation is meant to be “Level Three” pursuant to FASB ASC –Topic 820 – Fair Value Measurements and Disclosures. As part of the valuation process and OTTI determination, assumptions related to prepayment, default and loss severity on the collateral supporting the non-agency mortgage-backed securities are input into an industry standard valuation model.

Prepayment Assumptions

Assumptions are based on evaluation of the conditional prepayment rates (CPR) and conditional repayment rates (CRR) over a 1 month, 3 month 6 month, 1 year and lifetime basis – to the extent these values are provided by the servicer; estimated prepayment rates provided by the Securities Industry & Financial Markets Association (SIFMA), forecasts from other industry experts, and judgment given recent deterioration in credit conditions and declines in property values.

Default Rates

Estimates for the conditional default rate (CDR) vectors are based on the status of the loans at the valuation date – current, 30-59 days delinquent, 60-89 days delinquent, 90+ days delinquent, foreclosure or REO – and a proprietary loss migration models (i.e. percentage of 30 day delinquents that will ultimately migrate to default, percentage of 60 day delinquents that will ultimately migrate to default, etc.). The model assumes that the 60 day plus population will move to repossession inventory subject to our loss migration assumptions and liquidate over the next 24 months. Defaults vector from month 25 to month 36 to our month 37 CDR value and ultimately vector to zero over an extended period of time of at least 15 years.

Default assumptions are benchmarked to the recent results experienced by major servicers of non-Agency MBS for securities with similar attributes and forecasts from other industry experts and industry research.

Loss Severity

Estimates for loss severity are based on the initial loan to value ratio, the loan’s lien position, private mortgage insurance proceeds available (if any), and the estimated change in the price of the property since origination. The historical change in the value of the property is estimated using theHousing Pricing Indices by Metropolitan Statistical Area (‘MSA”)produced by the Federal Housing Finance Agency (FHFA).

Estimates for future changes in the prices of the residences collateralizing the mortgages is based on the Case Shiller forecasts and forecasts by MSA provided by the Housing Predictor website.

The loss severity assumption is static for twelve months then decreases monthly based on future market appreciation. The annual market appreciation assumption is 3.50% after 12 months. The loss severity is subject to a floor value of 23.00%

Loss severity is benchmarked to the recent results of the loan collateral supporting the securities and the results experienced by major servicers of non-agency mortgage-backed-securities for securities with similar attributes.

The prepayment, default and loss severity assumptions result in forecasted cumulative loss rates. These cumulative loss rates are benchmarked to the projected cumulative losses by product, by year of origination, released by other industry experts.

11

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 –Mortgage-Backed Securities–Available for Sale-continued

The collateral cash flows that result from the prepayment, default and loss severity assumptions are applied to securities supporting the collateral by priority based upon the cash flow waterfall rules provided in the prospectus supplement. The cash flows are then discounted at the appropriate interest rate in order to determine if the impairment on a security is other than temporary.

Note 5 –Cash Flow Presentation

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

12

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6 -Earnings Per Share

Basic per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options and warrants, unless the effect is to reduce a loss or increase earnings per share. The basic and diluted weighted average common shares outstanding for the nine and three month periods ended June 30, 2010 and 2009 are as follows:

	For the Nine Months Ended June 30,
	2010							2009
	(in thousands except per share data)
	Income (Loss)			Shares	Per Share			Income (Loss)			Shares	Per Share
Basic EPS
Net Income (loss)	$	638		2,919	$	.22		$	(76	)	2,906	$	(.03	)
Less preferred dividend		(469	)	2,919		(.16	)		(322	)	2,906		(.11	)
Income (loss) available to common shareholders		169		2,919		.06			(398	)	2,906		(.14	)
Diluted EPS
Effect of dilutive shares		—		88		—			—		—		—
Income (loss) available to common shareholders plus assumed conversions	$	169		3,007	$	.06		$	(398	)	2,906		(.14	)
	For the Three Months June 30,
	2010							2009
	(in thousands except per share data)
	Income (Loss)			Shares	Per Share			Income (Loss)			Shares	Per Share
Basic EPS
Net Income (loss)	$	607		2,921	$	.21		$	(418	)	2,909	$	(.14	)
Less preferred dividend		(156	)	2,921		(.06	)		(157	)	2,909		(.06	)
Income (loss) available to common shareholders		451		2,921		.15			(575	)	2,909		(.20	)
Diluted EPS
Effect of dilutive shares		—		211		(.01	)		—		—		—
Income (loss) available to common shareholders plus assumed conversions	$	451		3,132	$	.14		$	(575	)	2,909	$	(.20	)

Options to purchase 64,436 shares that were outstanding at June 30, 2010 and 85,971 shares that were outstanding June 30, 2009, were not included in the computation of diluted EPS because the effect of which would have been anti-dilutive.

13

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7 -Preferred Stock

On December 23, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement, and the related Securities Purchase Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued (i) 10,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase 183,465 shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $10,800,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Under the original terms of the Purchase Agreement, the Company is prohibited from redeeming the Series A preferred stock within the first three years unless it completed a qualified equity offering whereby it received aggregate gross proceeds of not less than $2.7 million. However, the provisions introduced by the American Recovery and Reinvestment Act of 2009 indicate that once the Company notifies Treasury that it would like to redeem the Series A preferred stock, the Treasury must permit the Company to do so subject to consultation with the OTS. The Company will be subject to existing supervisory procedures for approving redemption requests for capital instruments. The OTS will weigh the Company’s desire to redeem the Series A preferred stock against the contribution of Treasury capital to the Company’s overall soundness, capital adequacy and ability to lend, including confirming that the Company has a comprehensive internal capital assessment process.

The warrant is exercisable at $8.83 per share at any time on or before December 23, 2018. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

The Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the warrant will be subject to any contractual restrictions on transfer.

Note 8 -Regulatory Capital

The following table sets forth the Bank’s capital position at June 30, 2010.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Actual Amount		% of Assets		Required Amount		% of Assets		Required Amount		% of Assets
	(Unaudited)(dollars in thousands)
Tangible (1)	$	66,771	10.79	%	$	9,279	1.50	%	$	N/A	N/A	%(3)
Tier I capital (2)		66,771	17.60			N/A	N/A	(3)		22,766	6.00
Core (1)		66,771	10.79			24,743	4.00			30,929	5.00
Risk-weighted (2)		70,482	18.58			30,355	8.00			37,943	10.00

(1) To adjusted total assets

(2) To risk-weighted assets

(3) Not applicable

14

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9 -Stock Option Plans

On July 15, 1999, the Company established a Stock Option Plan (the “1999 Plan”) whereby 120,366 shares of common stock have been reserved for issuance under the 1999 Plan. Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. Options are exercisable in four or five annual installments at the market price of common stock at the date of grant. The Options must be exercised within ten years from the date of grant. There were 43,428 options granted during the year ended September 30, 2002. There were 15,792 options granted during the year ended September 30, 2007, 22,193 options granted during the year ended September 30, 2008 and 11,796 options granted during the year ended September 30, 2009. No options were granted during the years ended September 30, 2003 through 2006. There were no options granted during the nine months ended June 30, 2010.

The following table summarizes the shares under the Company’s stock option plan at June 30, 2010:

Number of Shares	Price		Weighted Average Contractual Life
26,452	$	21.61	1.9
10,528		28.41	6.4
5,264		17.95	7.4
22,193		11.61	7.5
11,796		8.25	9.0

The total exercisable shares of 48,920 have a weighted average contractual life of 4.4 years, and an aggregate intrinsic value of $0.

At the annual shareholders meeting held in May 2009 the Company approved an additional Stock Option Plan (the “2009 Plan”) whereby 191,740 shares of common stock have been reserved for issuance under the 2009 Plan. Options granted under the Plan may be Incentive Stock Options within the meaning of Section 422 of the Internal Revenue Code of 1986 as amended or Non-Qualified Stock Options. The Options must be exercised within ten years from the date of grant. There were no options granted during the nine months ended June 30, 2010.

The following table presents the activity related to options under all plans for the nine months ended June 30, 2010.

	Shares	Weighted Average Exercise Price
Outstanding at September 30, 2009	76,233	$	17.32
Options exercised	—		—
Forfeited	—		—
Granted	—		—
Outstanding at June 30, 2010	76,233	$	17.32
Exercisable at June 30, 2010	48,920	$	19.97

There were no options granted during the nine months ended June 30, 2010 and 2009.

15

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10 -Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In June 2009, the FASB issued guidance on, “Accounting for Transfers of Financial Assets” that requires enhanced disclosures about the transfer of financial assets and a company’s continuing involvement in transferred assets. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. This statement changes the derecognition guidance for transferors of financial assets, including entities that sponsor securitizations.

In June 2009 FASB issued guidance which eliminates the concept of a qualifying special purpose entity (“QSPE”). The guidance eliminates any reference to a QSPE and requires a transferor to evaluate transfers to such entities under the amended guidance. This guidance also introduces the concept of a participating interest. A participating interest is defined as a proportionate interest ownership interest in a financial asset in which the cash flows from the asset are allocated to the participating interest holders in proportion to their ownership share.

Additionally, this guidance significantly modifies the conditions required for a transfer of a financial asset or a participating interest therein to qualify as a sale and also changes the measurement guidance for transfers of financial assets in that it requires that a transferor recognize and initially measure at fair value any servicing assets, servicing liabilities, and any other assets obtained and liabilities incurred in a sale. The statement amends the disclosure requirements that will allow financial statement users to understand the nature and extent of the transferor’s continuing involvement with financial assets that have been transferred. The Company does not expect that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

In June 2009, the FASB issued guidance, which 1) replaces the quantitative-based risks and rewards calculations for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosure about an enterprise’s involvement in variable interest entities. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. We do not expect the adoption of the guidance to have a material impact, if any on the Company’s consolidated financial condition or results of operations.

Pending Accounting Pronouncements

All pending but not yet effective Accounting Standards Updates (“ASU”) were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operations.

In April 2010, FASB issued ASU No. 2010-18, “Receivables” (Topic 310),Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. ASU No. 2010-18 is effective for modifications of loans accounted for within pools for the first interim or annual period ending on or after July 15, 2010 and are to be applied prospectively although early application is permitted. The adoption of this guidance is not anticipated to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

16

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11 -Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company has $960,000 of standby letters of credit as of June 30, 2010. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of June 30, 2010 for guarantees under standby letters of credit issued is not considered to be material.

Note 12 -Fair Value Measurements

Effective October 1, 2008, the Company adopted FASB guidance for – “Fair Value Measurements” . This guidance defined the concept of fair value, established a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. This guidance applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets. The disclosure’s emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of this guidance did not have any effect on the Company’s financial position or results of operations.

GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:

• Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted process of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Each financial instrument’s level assignment with the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement for the particular category. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

There were no transfers between levels during the nine months ended June 30, 2010. The Company’s policy is to recognize transfers in and transfers out at the actual date of the event or change in the circumstances that caused the transfer.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of each instrument under the valuation hierarchy.

Securities Available for Sale

Fair values of investment securities are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are generally classified within Level 2 of the valuation hierarchy. (See note 4 above.)

17

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the financial instruments measured at fair value by class on the recurring basis as of June 30, 2010 on the Consolidated Statement of Financial Condition utilizing the hierarchy discussed above.

($ in thousands)	Total		At June 30, 2010						Total changes In fair values Included in Period
			Level 1		Level 2		Level 3		Earnings
GNMA certificates available for sale	$	3,703	$	—	$	3,703	$	—	$	—
FNMA certificates available for sale		40,676		—		40,676		—		—
FHLMC certificates available for sale		16,861		—		16,861		—		—
Collateralized mortgage obligations available for sale		16,154		—		16,154		—		—
	$	77,394	$	—	$	77,394	$	—	$	—

Nonrecurring fair value changes

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis, but are subject to fair value in certain circumstances, such as when there is evidence of impairment that may require write downs. The write-downs for the Company’s more significant assets or liabilities measured on a non-recurring basis are based on the lower of amortized cost or estimated fair value.

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price of the loan, or the fair value of the underlying collateral asset.

Foreclosed Real Estate and Repossessed Assets

Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to Foreclosed Real Estate and Repossessed Assets. These assets are carried at lower of cost or fair value of the collateral, less costs to sell. There was no Foreclosed Real Estate at June 30, 2010.

18

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired loans , Foreclosed Real Estate and Repossessed Assets are classified as Level 3 within the valuation hierarchy.

	At June 30, 2010
($ in thousands)	Total		Level 1		Level 2		Level 3
Impaired Residential Loans	$	817	$	—	$	—	$	817
Impaired Commercial and Lease Loans		12,455		—		—		12,455
Impaired Construction Loans		603		—		—		603
Foreclosed Real Estate and Repossessed Assets		—		—		—	$	—
Total	$	13,875	$	—	$	—	$	13,875

($ in thousands)	Impaired Loans, Foreclosed  Real Estate and Repossessed Assets
Balance at September 30, 2009	$	8,329
Total net gains for the year		—
Net transfers in/(out) Level 3		5,546
Balance at June 30, 2010	$	13,875
Net realized gains included in net income for the year to date relating to sales of repossessed assets.	$	8

Note 13 -Disclosures About Fair Value of Financial Instruments

The estimated fair values of the Bank’s financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques prescribed by the FASB and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The carrying amount is a reasonable estimate of fair value for cash, federal funds and interest-bearing deposits in other banks. Fair value is based on bid prices and pricing models received from third party pricing services for investment securities and mortgage backed securities. The carrying amount of Federal Home Loan Bank of Atlanta stock is a reasonable estimate of fair value. Loans receivable were discounted using a single discount rate, comparing the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. These rates were used for each aggregated category of loans as reported on the Office of Thrift Supervision Quarterly Report. The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The Junior Subordinated Debentures are considered to be at fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered on deposits of similar remaining maturities. The fair value of Federal Home Loan Bank advances is estimated using rates currently offered on advances of similar remaining maturities. The carrying amounts of accrued interest receivable, accrued interest payable, and mortgage servicing rights approximate fair value. Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.

19

BCSB BANCORP, INC. AND SUBSIDIARIES

Baltimore, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 -Disclosures About Fair Value of Financial Instruments - Continued

The estimated fair values of the Bank’s financial instruments are as follows:

	June 30, 2010				September 30, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Amounts in Thousands)
Financial Assets
Cash	$	13,261	$	13,261	$	5,535	$	5,535
Interest-bearing deposits in other banks		11,937		11,937		3,786		3,786
Federal funds sold		85,321		85,231		30,931		30,931
Interest-bearing time deposits		100		100		100		100
Loans Receivable
Mortgage loans		391,508		413,029		391,560		399,425
Share loans		397		397		661		661
Consumer loans		4,713		4,918		8,790		9,053
Mortgage-backed securities – available for sale		77,394		77,394		90,478		90,478
Federal Home Loan Bank of Atlanta stock		1,485		1,485		1,485		1,485
Accrued interest receivable		2,165		2,165		2,306		2,306
Mortgage servicing rights		238		238		296		296
Financial Liabilities
Deposits	$	537,798	$	540,132	$	487,989	$	488,756
Junior Subordinated Debt		17,011		17,011		17,011		17,011
Accrued interest payable		83		83		51		51

20

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

General

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. The Bank operates as a federally chartered stock savings association. The Bank’s deposit accounts are insured up to a maximum of $250,000 by the FDIC. The Bank’s noninterest earning demand deposit accounts have unlimited FDIC insurance.

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

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

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, whether regulatory approval will be obtained for the branch sales described above under “ Sale of Branches”, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected and the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. 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.

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.

21

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.

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. Under the revised guidance, for recognition and presentation of other-than-temporary impairments the amount of other-than-temporary impairment that is recognized through earnings for debt securities is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The revised guidance also requires that an evaluation be done to determine whether the Company has the intent to sell or will be more likely than not required to sell these securities. The discount rate used to determine the credit loss is the expected book yield on the security.

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

Available Information

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

22

Recent Developments

Sale of Branches

On January 12, 2010, BCSB Bancorp, Inc. (the “Company”) announced that on January 12, 2010 its subsidiary, Baltimore County Savings Bank, F.S.B. (the “Bank”) entered into a definitive Purchase and Assumption Agreement (the “Agreement”) with American Bank (“American”) under which the Bank will sell four branch offices, located at 6335 Baltimore National Pike, Catonsville, Maryland, 9416 Baltimore National Pike, Ellicott City, Maryland, 4228 Harford Road, Baltimore, Maryland, and 9231 Lakeside Boulevard, Owings Mills, Maryland (collectively, the “Branches”), to American. The agreement provides that American will assume the deposits associated with the Branches, which totaled approximately $89.8 million at June 30, 2010. Under the agreement, American will purchase the personal property, furniture, fixtures, leasehold improvements and equipment located at the Branches and the Bank’s right, title and interest in and to the real property on which the Hamilton Branch is located and the buildings and improvements situated thereon. American also will assume the leases for the premises for the Catonsville, Ellicott City and Owings Mills Branches. American will pay a premium equal to the lesser of 2% of the deposit liabilities it assumes or $1,350,000. The application for this transactions remains under review by the Office of Thrift Supervision. Due to the extended review period, the agreement can be terminated by either party at any time after June 30, 2010. For further information regarding the proposed sale of branches, including a copy of the Purchase and Assumption Agreement, see the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2010.

Comparison of Financial Condition at June 30, 2010 and September 30, 2009

During the nine months ended June 30, 2010, assets increased by $52.9 million, or 9.3%, from $569.4 million at September 30, 2009 to $622.3 million at June 30, 2010. Our cash and cash equivalents increased $70.3 million, or 174.1% from $40.3 million at September 30, 2009 to $110.5 million at June 30, 2010, primarily due to an increase in deposits and principal repayments on loans receivable and mortgage-backed securities. Net loans receivable decreased $4.4 million, or 1.1%, from $401.0 million at September 30, 2009 to $396.6 million at June 30, 2010. Management’s lending strategy remains focused on commercial real estate, commercial business and home equity lending. Mortgage-backed securities available for sale decreased by $13.1 million, or 14.5%, from $90.5 million at September 30, 2009 to $77.4 million at June 30, 2010 resulting primarily from principal payments received during the period. At June 30, 2010, all mortgage-backed securities were classified as available for sale for liquidity purposes. The cash surrender value on the bank owned life insurance increased $441,000, or 2.9% from $15.0 million at September 30, 2009 to $15.4 million at June 30, 2010. Accrued interest and other assets increased $1.4 million , or 12.3% from $11.3 million at September 30, 2009 to $12.7 million at June 30, 2010 primarily due to the prepayment of the FDIC insurance premiums during the current fiscal year.

The Company has accumulated higher than normal levels of liquidity in anticipation of the pending sale of four branches. The amount of liquidity actually utilized in connection with this transaction will be dependant upon the amount of liquidity available at the time of settlement and the total amount of deposits transferred. In any event, a substantial amount of the liquidity on hand at June 30, 2010 is expected to be deployed in connection with this transaction.

Deposits increased by $49.8 million, or 10.2%, from $488.0 million at September 30, 2009 to $537.8 million at June 30, 2010. The Bank has been successful in attracting new deposits without increasing the overall cost for such funds.

Stockholders’ equity increased by $1.8 million, or 3.0%, from $59.1 million at September 30, 2009 to $60.9 million at June 30, 2010. This increase was due primarily to a decline in accumulated other comprehensive loss during the period. Our accumulated other comprehensive loss net of taxes was $389,000 at June 30, 2010, compared to accumulated other comprehensive loss net of taxes of $1.8 million at September 30, 2009. At June 30, 2010, we had $4.1 million of gross unrealized losses related to collateralized mortgage obligations with an amortized cost of $20.2 million as of that date. These securities contain mortgages with Alt-A characteristics. Gross unrealized losses for these same securities were approximately $6.1 million as of September 30, 2009. We recorded other-than-temporary impairment (“OTTI”) charges of $500,000 on these securities during the year ended September 30, 2009 and $100,000

23

during the nine months ended June 30, 2010. We do not intend to sell, nor is it more likely than not we will be required to sell, these securities before maturity or recovery. If in the future it is determined that future declines in market values or credit losses with respect to these or any other securities are other than temporary, the Company would be required to recognize additional losses in its Consolidated Statement of Operations.

Comparison of Operating Results for the Nine Months Ended June 30, 2010 and 2009

Net Income. Net income available to common shareholders was $169,000 for the nine months ended June 30, 2010 and a loss of $398,000 for the nine months ended June 30, 2009. The increase was primarily due to improved net interest margin resulting from reduced cost of funds on the deposit portfolio during the period and reduced OTTI charges. The increase was partially offset by an increase in the provision for loan losses of $1.9 million.

Net Interest Income. Net interest income increased by $2.6 million, or 21.9%, from $11.8 million for the nine months ended June 30, 2009 to $14.4 million for the nine months ended June 30, 2010. The increase in net interest income primarily was due to an improved net interest margin resulting from reduced cost of funds on the deposit portfolio during the period. The net interest margin increased 52 basis points from 2.93% for the nine months ended June 30, 2009 to 3.45% for the nine months ended June 30, 2010.

Interest Income. Interest income decreased by $800,000, or 3.6%, from $22.5 million for the nine months ended June 30, 2009 to $21.7 million for the nine months ended June 30, 2010. This was primarily due to a decrease in the average rate earned on interest earning assets during the period. The average rate earned on total interest-earning assets declined by 38 basis points from 5.58% for the nine months ended June 30, 2009 to 5.20% for the nine months ended June 30, 2010.

Interest Expense.Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased from $10.7 million for the nine months ended June 30, 2009 to $7.3 million for the nine months ended June 30, 2010, a decrease of $3.4 million or 31.6%. Interest on deposits decreased $2.8 million from $9.7 million for the nine months ended June 30, 2009 to $6.9 million for the nine months ended June 30, 2010. This decrease was due to the decrease in the average cost of deposits of 85 basis points from 2.63% for the nine months ended June 30, 2009 to 1.78% for the nine months ended June 30, 2010. This was partially offset by an increase in the average balance of deposits of $22.1 million from $492.1 million for the nine months ended June 30, 2009 to $514.2 million for the nine months ended June 30, 2010. Interest on short-term borrowings decreased by $284,000 for the nine months ended June 30, 2010 as there were no short-term borrowings outstanding during the period. Other interest expense decreased by $271,000 or 37.3% from $727,000 for the nine months ended June 30, 2009 to $456,000 for the nine months ended June 30, 2010. This was due to the decline in interest expense on Junior Subordinated Debentures. The average cost of funds on the debt decreased by 213 basis points, from 5.70% for the nine months ended June 30, 2009 to 3.57% for the nine months ended June 30, 2010. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

24

Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the nine month periods ended June 30, 2010 and 2009. Total average assets are computed using month-end balances.

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

	For the Nine Months Ended June 30,
	2010						2009
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	399,995	$	18,296	6.10	%	$	397,040	$	18,449	6.20	%
Mortgage-backed securities		85,909		3,309	5.14			92,277		3,911	5.65
FHLB stock and Investment securities		1,485		4	.36			2,541		33	1.73
Other interest earning assets		70,132		140	.27			47,049		156	.44
Total Interest-earning assets		557,521		21,749	5.20			538,907		22,549	5.58
Bank Owned Life Insurance		15,356						14,658
Noninterest-earning assets		23,771						29,017
Total assets	$	596,648					$	582,282
Interest-bearing liabilities:
Deposits	$	514,251	$	6,882	1.78	%	$	492,150	$	9,720	2.63	%
Short-term FHLB Advances		—		—	—			8,425		284	4.49
Junior Subordinated Debentures		17,011		456	3.57			17,011		727	5.70
Other liabilities		1,582		—	—			1,839		—	—
Total interest-bearing liabilities		532,844		7,338	1.84			519,425		10,731	2.75
Noninterest-bearing liabilities		3,529						5,338
Total liabilities		536,373						524,763
Stockholders’ Equity		60,275						57,519
Total liabilities and stockholders’ equity	$	596,648					$	582,282
Net interest income			$	14,411					$	11,818
Interest rate spread					3.36	%					2.83	%
Net interest margin					3.45	%					2.93	%
Ratio average interest earning assets/interest-bearing liabilities					104.63	%					103.69	%

25

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

	For Nine Months Ended June 30,
	2010						Vs.	2009
	Increase (Decrease) Due to
	Volume			Rate				Rate/Volume			Total
	(In Thousands)
Interest income:
Loans receivable, net	$	137		$	(288	)		$	(2	)	$	(153	)
Mortgage-backed securities		(270	)		(357	)			25			(602	)
Investment securities		(11	)		(27	)			9			(29	)
Other interest-earning assets		75			(61	)			(30	)		(16	)
Total interest-earning assets		(69	)		(733	)			2			(800	)
Interest expense:
Deposits		436			(3,133	)			(141	)		(2,838	)
Short-term FHLB advances		(284	)		—				—			(284	)
Junior Subordinated Debentures		—			(271	)			—			(271	)
Total interest-bearing liabilities		152			(3,404	)			(141	)		(3,393	)
Change in net interest income	$	(221	)	$	2,671			$	143		$	2,593

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We established a $2.8 million provision for losses on loans during the nine months ended June 30, 2010 as compared to a provision of $900,000 for the nine months ended June 30, 2009. The increased loan loss provisions were necessary to address the continued decline in overall economic conditions and increases in troubled assets, particularly in relation to the commercial loan portfolio. Nonperforming loans were $13.9 million at June 30, 2010 versus $7.7 million at September 30, 2009, the Company’s prior fiscal year end. Most of the nonperforming assets consisted of commercial loans, which increased to $13.1 million at June 30, 2010 from $6.3 million at September 30, 2009 partially due to the addition to nonperforming assets of one $3.5 million loan relationship. The loan is secured with commercial real estate utilized as an owner occupied manufacturing facility. Loan charge-offs for the nine months ended June 30, 2010 were $532,000 as compared to $291,000 for the nine months ended June 30, 2009, an increase of $241,000. Loan recoveries were $92,000 for the nine months ended June 30, 2010 compared to $176,000 for the nine months ended June 30, 2009. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality”.

Other Income.Other income increased $575,000, or 48.2%, from $1.2 million for the nine months ended June 30, 2009 to $1.8 million for the nine months ended June 30, 2010. The increase in other income for the nine months ended June 30, 2010 was primarily attributable to decreased OTTI charges of $400,000, or 80.0%, and increased income from Bank Owned Life Insurance of $99,000, or 29.9%. Miscellaneous income also increased by $378,000, or 89.1%, which was primarily due to additional commissions from investment services. These increases were partially offset by a decrease in gains on repossessed assets of $188,000, or 95.9%, and a decrease of $147,000, or 20.5%, in fees on transaction accounts.

Non-interest Expenses.Total non-interest expenses increased by $195,000, or 1.6%, from $12.3 million for the nine months ended June 30, 2009 to $12.5 million for the nine months ended June 30, 2010. This was primarily due to an increase of $872,000, or 14.5% in salaries and related expenses due to additional personnel and increased benefit costs. Occupancy expense also increased by $110,000, or 6.2% from $1.8 million for the nine months ended June 30,

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2009 to $1.9 million for the nine months ended June 30, 2010. These increases were partially offset by a decrease in professional fees of $257,000, or 37.0% from $694,000 for the nine months ended June 30, 2009 to $437,000 for the nine months ended June 30, 2010. The decrease in professional fees was primarily due to current year legal fees reimbursements from our commercial insurance provider for prior period litigation. Other expenses also decreased by $280,000, or 57.3%, from $489,000 for the nine months ended June 30, 2009 to $209,000 for the nine months ended June 30, 2010. This was primarily due to decreased real estate foreclosure expenses and a decrease in bank service charges. Federal deposit insurance premiums decreased by $107,000, or 13.6% from $789,000 for the nine months ended June 30, 2009 to $682,000 for the nine months ended June 30, 2010. This decrease was due primarily to a special assessment in 2009 to all banks to replenish the reserve fund.

Income Taxes. Our income tax expense (benefit) was $193,000 and $(166,000) for the nine months ended June 30, 2010 and 2009, respectively. The change in income taxes for the nine months ended June 30, 2010 as compared to the same period in the prior year was primarily due to increased pretax earnings and fluctuations in income from bank owned life insurance, which impacts our effective tax rate since it is not subject to income taxes.

Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009

Net Income. Net income available to common shareholders increased by $1.0 million, from a loss of $575,000 for the three months ended June 30, 2009 to income of $451,000 for the three months ended June 30, 2010. The increase reflects improved net interest income, which increased by $506,000, from $4.1 million for the three months ended June 30, 2009 to $4.6 million for the three months ended June 30, 2010. There was also a decrease in the provision for loan loss of $300,000, a decrease in the OTTI impairment charges of $500,000 and reduced non-interest expenses of $476,000.

Net Interest Income. Net interest income increased by $506,000, or 12.2%, from $4.1 million for the three months ended June 30, 2009 to $4.6 million for the three months ended June 30, 2010. The increase in net interest income primarily was attributable to reduced cost of funds on the deposit portfolio during the period. The net interest margin increased 20 basis points from 3.02% for the three months ended June 30, 2009 to 3.22% for the three months ended June 30, 2010.

Interest Income. Interest income decreased by $317,000, or 4.3% from $7.4 million for the three months ended June 30, 2009 to $7.1 million for the three months ended June 30, 2010. This was primarily due to a decrease in the average rate earned on all interest earning assets and the decline in outstanding principal balances of mortgage-backed securities during the period. The average rate earned on total interest-earning assets declined by 50 basis points from 5.40% for the three months ended June 30, 2009 to 4.90% for the three months ended June 30, 2010. Interest and fees on loans remained stable at $6.0 million for the three months ended June 30, 2009 and 2010. There was an increase in the average balance of loans receivable of $2.1 million from $395.0 million for the three months ended June 30, 2009 to $397.2 million for the three months ended June 30, 2010. The average rate earned on loans declined by 10 basis points from 6.13% for the three months ended June 30, 2009 to 6.03% for the three months ended June 30, 2010. Interest income on mortgage-backed securities decreased by $266,000 or 20.7% from $1.3 million for the three months ended June 30, 2009 to $1.0 million for the three months ended June 30, 2010. This decline was due to a decrease in the average balance of mortgage-backed securities from $92.3 million for the three months ended June 30, 2009 to $80.8 million for the three months ended June 30, 2010. The yield on mortgage-backed securities also decreased by 52 basis points from 5.55% for the three months ended June 30, 2009 to 5.03% for the three months ended June 30, 2010.

Interest Expense. Interest expense, which consists of interest on deposits, interest on borrowed money and other interest expense decreased, from $3.2 million for the three months ended June 30, 2009 to $2.4 million for the three months ended June 30, 2010, a decrease of $823,000 or 25.3%. Interest on deposits decreased $728,000 from $3.0 million for the three months ended June 30, 2009 to $2.3 million for the three months ended June 30, 2010. This decrease was due to the decrease in the average cost of deposits of 69 basis points from 2.39% for the three months ended June 30, 2009 to 1.70% for the three months ended June 30, 2010. This was partially offset by an increase in the average balance of deposits of $33.1 million from $501.6 million for the three months ended June 30, 2009 to $534.7 million for the three months ended June 30, 2010. Interest on short-term borrowings decreased by $59,000 for the three months ended June 30, 2010 as there were no short-term borrowings outstanding during the three months ended June 30, 2010. Other interest expense decreased by $36,000 or 19.0% from $189,000 for the three months ended June 30, 2009 to $153,000

27

for the three months ended June 30, 2010. This was due to the decline in rates paid on Junior Subordinated Debentures. The average cost of funds on the debt decreased by 84 basis points, from 4.44% for the three months ended June 30, 2009 to 3.60% for the three months ended June 30, 2010. The rates on the Junior Subordinated Debentures are based on LIBOR and adjust quarterly.

Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the three month periods ended June 30, 2010 and 2009. Total average assets are computed using month-end balances.

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

	For the Three Months Ended June 30,
	2010						2009
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	397,230	$	5,986	6.03	%	$	395,094	$	6,058	6.13	%
Mortgage-backed securities		80,851		1,016	5.03			92,355		1,282	5.55
FHLB stock and Investment securities		1,485		1	.27			1,628		2	.49
Other interest-earning assets		96,950		60	.25			57,560		38	.26
Total Interest-earning assets		576,516		7,063	4.90			546,637		7,380	5.40
Bank Owned Life Insurance		15,356						14,658
Noninterest-earning assets		23,487						26,468
Total assets	$	615,359					$	587,763
Interest-bearing liabilities:
Deposits	$	534,693	$	2,273	1.70	%	$	501,634	$	3,001	2.39	%
Short-term FHLB Advances		—		—	—			5,275		59	4.47
Junior Subordinated Debentures		17,011		153	3.60			17,011		189	4.44
Other liabilities		2,376		—	—			2,154		—	—
Total interest-bearing liabilities		554,080		2,426	1.75			526,074		3,249	2.47
Noninterest-bearing liabilities		701						2,017
Total liabilities		554,781						528,091
Stockholders’ Equity		60,578						59,672
Total liabilities and stockholders’ equity	$	615,359					$	587,763
Net interest income			$	4,637					$	4,131
Interest rate spread					3.15	%					2.93	%
Net interest margin					3.22	%					3.02	%
Ratio average interest-earning assets/interest-bearing liabilities					104.05	%					103.91	%

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

	For Three Months Ended June 30,
	2010						Vs.	2009
	Increase (Decrease) Due to
	Volume			Rate				Rate/Volume			Total
	(In Thousands)
Interest income:
Loans receivable, net	$	33		$	(105	)		$	—		$	(72	)
Mortgage-backed securities		(161	)		(120	)			15			(266	)
Investment securities					(1	)			—			(1	)
Other interest-earning assets		32			(6	)			(4	)		22
Total interest-earning assets		(96	)		(232	)			11			(317	)
Interest expense:
Deposits		198			(869	)			(57	)		(728	)
Short-term FHLB advances		(59	)		—				—			(59	)
Junior Subordinated Debentures		—			(36	)			—			(36	)
Total interest-bearing liabilities		139			(905	)			(57	)		(823	)
Change in net interest income	$	(235	)	$	673			$	68		$	506

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. During the three months ended June 30, 2010 we established additional provisions for losses on loans of $300,000, as compared to a provision of $600,000 for the three months ended June 30, 2009. Additional loan loss provisions were necessary to address the continued decline in overall economic conditions and increases in troubled assets, particularly in relation to the commercial loan portfolio. Nonperforming loans were $13.9 million at June 30, 2010 versus $9.6 million at March 31, 2010. Most of the nonperforming assets consisted of commercial loans, which increased to $12.5 million at June 30, 2010 from $8.1 million at March 31, 2010 primarily due to the addition to nonperforming assets of one $2.5 million loan relationship. The loan is secured with commercial real estate . Loan charge-offs for the three months ended June 30, 2010 were $483,000 as compared to $162,000 for the three months ended June 30, 2009. Loan recoveries were $30,000 for the three months ended June 30, 2010 compared to $46,000 for the three months ended June 30, 2009. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see “Asset Quality.”

Other Income.Other income was $563,000 for the three months ended June 30, 2009 compared to $138,000 for the three months ended June 30, 2010. The increase in other income for the three months ended June 30, 2010 was primarily attributable to a decrease in the “OTTI” charge on investment securities of $500,000. This was partially offset by a decrease in fees on transaction accounts of $29,000, or 13.4% from $216,000 for the three months ended June 30, 2009 to $187,000 for the three months ended June 30, 2010 and a decrease in income from Bank Owned Life Insurance which declined by $38,000, or 22.1%.

Noninterest Expenses.Total non-interest expenses decreased by $476,000, or 10.7%, from $4.4 million for the three months ended June 30, 2009 to $4.0 million for the three months ended June 30, 2010. This was primarily due to decreased Federal deposit insurance premiums by $288,000, or 59.6% from $483,000 for the three months ended June 30, 2009 to $195,000 for the three months ended June 30, 2010. This decrease was due to a special assessment during the three months ended June 30, 2009 assessed to all banks to replenish the reserve fund. Professional fees also decreased by $125,000, or 52.7% from $237,000 for the three months ended June 30, 2009 to $112,000 for the three months ended

29

June 30, 2010. The decrease in professional fees was due to reimbursement of legal fees from our commercial insurance provider for prior period litigation. Other expenses also decreased by $105,000, or 60.0%, from $175,000 for the three months ended June 30, 2009 to $70,000 for the three months ended June 30, 2010. This was primarily due to decreased losses on dishonored checks and ATM disputes and a decrease in bank service charges. Property and equipment expense decreased by $50,000, or 22.4% from $223,000 for the three months ended June 30, 2009 to $173,000 for the three months ended June 30, 2010 due to decreased depreciation expense as certain assets have become fully depreciated. Advertising also decreased by $89,000, or 51.7% from $172,000 for the three months ended June 30, 2009 to $83,000 for the three months ended June 30, 2010 due to decreased advertising. These decreases were partially offset by an increase of $101,000, or 4.8% in salaries and related expenses from $2.1 million for the three months ended June 30, 2009 to $2.2 million for the three months ended June 30, 2010 due to additional personnel and increased benefit costs. Occupancy expense also increased by $98,000, or 17.0% from $576,000 for the three months ended June 30, 2009 to $674,000 for the three months ended June 30, 2010 due primarily to real estate taxes associated with nonperforming loans.

Income Taxes. Our income tax expense (benefit) was $326,000 and $(356,000) for the three months ended June 30, 2010 and 2009, respectively. The change in income taxes for the three months ended June 30, 2010 as compared to the same period in the prior year was primarily due to increased income. Our effective tax rate is impacted by income received from Bank Owned Life Insurance, which is not subject to income taxes.

Commitments, Contingencies and Off-Balance Sheet Risk

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

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

	At June 30, 2010		At September 30, 2009
	(In thousands)
Commitments to originate new loans	$	4,335	$	5,866
Unfunded commitments to extend credit under existing equity line and commercial lines of credit		36,016		33,859
Commercial letters of credit		960		1,038

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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Loans Receivable

Loans receivable at June 30, 2010 and September 30, 2009 consist of the following:

(in thousands)		June 30, 2010			September 30, 2009
Single-family residential mortgages		$	121,471		$	140,991
Single-family rental property loans			64,284			51,698
Commercial real estate loans			144,962			136,106
Construction loans			27,198			28,869
Commercial loans secured			105			296
Commercial loans unsecured			80			322
Commercial lease loans			1,476			2,855
Commercial lines of credit			8,313			8,832
Automobile loans			3,201			7,322
Home equity lines of credit			32,272			29,167
Other consumer loans			2,035			2,443
			405,397			408,901
Add	– purchase accounting premiums, net		7			62
Less	– undisbursed portion of loans in process		(2,325	)		(3,664	)
	– unearned interest		(27	)		(127	)
	– deferred loan origination fees and costs		(147	)		(234	)
	– allowance for loans losses		(6,287	)		(3,927	)
		$	396,618		$	401,011

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Asset Quality

At June 30, 2010, we had $13.9 million in non-performing assets, consisting of nonaccrual loans and repossessed assets representing 2.23% of total assets. At September 30, 2009 non-performing assets were $8.3 million or 1.46% of total assets. Our net charge-offs for the nine months ended June 30, 2010 and June 30, 2009 were $440,000 and $115,000, respectively. Our allowance for loan losses was $6.3 million at June 30, 2010 compared to $3.9 million at September 30, 2009.

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

	At June 30, 2010			At September 30, 2009
	(In thousands)
Nonperforming loans (1):
Nonaccrual loans:
Single family residential	$	817		$	1,186
Multi-family residential		—			—
Commercial real estate		12,455			6,269
Construction		—			—
Commercial leases		603			235
Land		—			—
Consumer Loans		—			—
Total nonaccrual loans		13,875			7,690
Loans 90 days past due and accruing		—			—
Restructured loans		—			—
Total non-performing loans		13,875			7,690
Other non-performing assets		—			639
Total nonperforming assets	$	13,875		$	8,329
Nonperforming loans to loans receivable, (net)		3.50	%		1.88	%
Nonperforming assets as a percentage of loans , foreclosed real estate and repossessed assets		3.50	%		2.07	%
Nonperforming assets to total assets		2.23	%		1.46	%
Loans modified in Troubled Debt Restructurings not included as nonperforming assets above.	$	—		$	—

(1) Nonperforming status denotes loans on which, in the opinion of management, the collection of additional interest is questionable. Also included in this category are Troubled Debt Restructurings (TDRs). At June 30, 2010 TDRs totaled $3.7 million, of which $3.2 million were not delinquent. At September 30, 2009, TDR’s totaled $3.9 million, of which $3.7 million were not delinquent. Reporting guidance requires disclosure of these loans as nonperforming even though they may be current in terms of principal and interest payments.

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

	For the Nine months Ended June 30,
	2010			2009
	(Dollars in thousands)
Balance at beginning of period	$	3,927		$	2,672
Loans charged-off:
Real estate mortgages:
Single-family residential		—			—
Multi-family residential		—			—
Commercial		(469	)		(240	)
Construction		—			—
Commercial Leases		(15	)		—
Consumer		(48	)		(51	)
Total charge-offs		(532	)		(291	)
Recoveries:
Real estate mortgage:
Single-family residential		—			—
Multi-family residential		—			—
Commercial		5			31
Construction		—			—
Commercial loans secured		—			—
Consumer		87			145
Total recoveries		92			176
Net loans charged-off		(440	)		(115	)
Provision for loan losses		2,800			900
Balance at end of period	$	6,287		$	3,457
Ratio of net charge-offs to average loans outstanding during the period		.15	%		—	%

Regulations require that we classify assets on a regular basis. There are three classifications for problem assets: substandard, doubtful and loss. We regularly review our assets to determine whether any assets require classification or re-classification. At June 30, 2010, the Company had $29.0 million in classified assets, consisting of $16.9 million in substandard collateralized mortgage obligations (CMOs), $12.1 million in substandard and loss loans, and $0 in repossessed assets. At September 30, 2009, the Company had $4.9 million in classified assets consisting of $4.3 million in substandard and loss loans, and $639,000 in foreclosed property or other real estate owned.

During the nine months ended June 30, 2010, the Company added $17.3 million in CMOs to its substandard asset category. Although these securities have performed in accordance with contractual terms to date, they have Alt-A characteristics and are rated below investment grade. Additionally, $600,000 in cumulative OTTI charges have been recorded in connection with these securities. As a result, they have been classified as substandard in accordance with regulatory guidelines.

In addition to regulatory classifications, we also classify as “special mention” assets that are currently performing in accordance with their contractual terms but may exhibit some form of credit weakness and may become classified or non-performing assets in the future. At June 30, 2010, we have identified approximately $15.7 million in assets classified as special mention. At September 30, 2009, $14.7 million in assets were classified as special mention.

The Bank’s methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but are expected to have occurred. Management conducts regular reviews of the Banks’ assets and evaluates the need to establish

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allowances on the basis of these reviews. Allowances are established by management and reviewed by the Board of Directors on a quarterly basis based on an assessment of risk in the Bank’s assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Additional provisions for losses on loans are made in order to bring the allowance to a level deemed adequate. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the collateral.

Liquidity and Capital Resources

At June 30, 2010, the Bank exceeded all regulatory minimum capital requirements. For information comparing the Bank’s tangible, core and risk-based capital levels to the regulatory requirements, see Note 8 of the Notes to Consolidated Financial Statements.

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

The primary investing activities of the Company are the origination of loans and the purchase of investment securities and mortgage-backed securities. During the nine months ended June 30, 2010 and 2009, the Company had $47.3 million and $53.1 million, respectively, of gross loan originations. The Company purchased $16.2 million in mortgage-backed securities during the nine months ended June 30, 2009 and $0 during the nine months ended June 30, 2010. 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 excess of $140 million as of June 30, 2010. In addition, securities in the available for sale portfolio provide liquidity and the Company has the immediately liquid resources of cash and cash due from banks, interest-bearing deposits in other banks and federal funds sold, if needed.

The Bank is required to maintain adequate levels of liquid assets as defined by OTS regulations. 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 ninety days that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Company’s operating, financing and investing activities during any given period. At June 30, 2010, cash, interest-bearing deposits in other banks and federal funds sold were $13.3 million, $11.9 million and $85.3 million, respectively.

We anticipate that we will have sufficient funds available to meet our current commitments. Certificates of deposit which are scheduled to mature in less than one year at June 30, 2010 totaled $166.6 million. Based on past experience, management believes that a significant portion of such deposits will remain with Baltimore County Savings Bank. Baltimore County Savings 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 Baltimore County Savings Bank has in this class of financial instruments and represents Baltimore County Savings Bank’s exposure to credit loss from nonperformance by the other party. Baltimore County Savings Bank generally requires collateral or other security to support financial instruments with off-balance-sheet credit risk. At June 30, 2010, Baltimore County Savings Bank had commitments under standby letters of credit, lines of credit and commitments to originate loans of $960,000, $36.0 million and $4.3 million, respectively.

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The Company has accumulated higher than normal levels of liquidity in anticipation of the pending sale of four branches. The amount of liquidity actually utilized in connection with this transaction will be dependant upon the amount of liquidity available at the time of settlement and the total amount of deposits transferred. In any event, a substantial amount of the liquidity on hand at June 30, 2010 is expected to be deployed in connection with this transaction.

In March 2002, BCSB Bankcorp issued $12,887,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust I, a Delaware business trust, in which BCSB Bancorp now owns all of the common equity. The debentures carry a rate of 3.65% over the three month LIBOR rate, and reset quarterly. The rate was 3.9% at June 30, 2010. 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. BCSB Bancorp’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by BCSB Bancorp of BCSB Bankcorp Capital Trust I obligations under the preferred securities. The Company used a portion of the net proceeds that it retained from the 2008 completed stock offering to redeem $6.0 million of the $12.5 million in outstanding trust preferred securities issued by a trust wholly owned by the Company.

In September 2003, BCSB Bankcorp issued $10,310,000 of junior subordinated debentures to BCSB Bankcorp Capital Trust II, a Delaware business trust, in which BCSB Bancorp now owns all of the common equity. The debentures carry a rate of 3.00% over the three month LIBOR rate, and reset quarterly. The rate was 3.30% at June 30, 2010. 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. BCSB Bancorp’s obligation under the debentures and related documents, taken together, constitute a full and unconditional guarantee by BCSB Bancorp of BCSB Bankcorp Capital Trust II obligations under the preferred securities.

Pursuant to these trust preferred securities, the Company, must make quarterly interest payments, which totaled $892,000 during the year ended September 30, 2009 and $377,000 during the nine months ended June 30, 2010.

The Company has outstanding (i) 10,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase 183,465 shares of the Company’s common stock, par value $0.01 per share, for an aggregate purchase price of $10,800,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. The Company must remit dividends quarterly. Payments remitted totaled $405,000 during the nine months ended June 30, 2010. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Under the original terms of the Purchase Agreement, the Company is prohibited from redeeming the Series A preferred stock within the first three years unless it completed a qualified equity offering whereby it received aggregate gross proceeds of not less than $2.7 million. However, the provisions introduced by the American Recovery and Reinvestment Act of 2008 indicate that once the Company notifies Treasury that it would like to redeem the Series A preferred stock, the Treasury must permit the Company to do so subject to consultation with the OTS. The Company will be subject to existing supervisory procedures for approving redemption requests for capital instruments. The OTS will weigh the Company’s desire to redeem the Series A preferred stock against the contribution of Treasury capital to the Company’s overall soundness, capital adequacy and ability to lend, including confirming that the Company has a comprehensive internal capital assessment process.

The warrant is exercisable at $8.83 per share at any time on or before March 23, 2018. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

The Series A preferred stock and the warrants were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the warrants will be subject to any contractual restrictions on transfer.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 3 is not necessary as the registrant is a smaller reporting company.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

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

PART II.OTHER INFORMATION

Item 1. Legal Proceedings

From time to time the Company and/or Bank are a party to various legal proceedings incident to its business. There were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject which were expected by management to result in a material loss to the Company or Bank. There are no pending regulatory proceedings to which the Company, the Bank and their subsidiaries are a part or to which any of their properties are subject which are currently expected to result in a material loss.

Item 1A. Risk Factors

For information regarding the Company’s risk factors see “Risk Factors,” in the Company’s Form 10-K for the fiscal year ended September 30, 2009 filed with the Securities and Exchange Commission on December 23, 2009. As of June 30, 2010, the risk factors of the Company have not changed materially from those reported in the Form 10-K.

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

(a) None

(b) None

(c) None

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Removed and Reserved

Item 5. Other Information

The Company’s 2011 Annual meeting of Shareholders will be held on February 9, 2011.

Item 6. Exhibits

The following exhibits are filed herewith:

Exhibit Number	Title
3.1	Articles of Incorporation of BCSB Bancorp, Inc. (1)
3.2	Amended and Restated Bylaws of BCSB Bancorp, Inc. (2)
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32	Section 1350 Certifications

(1) Incorporated herein by reference from the Company’s Registration Statement on Form S-1 (File No. 333-148745).

(2) Incorporated herein by reference from the Company’s Current Report on Form 8-K filed on March 25, 2009 (File No. 0-24589).

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SIGNATURES

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

	BCSB BANCORP, INC.
Date: August 13, 2010	/s/ Joseph J. Bouffard
	Joseph J. Bouffard
	President
	(Principal Executive Officer)
Date: August 13, 2010	/s/ Anthony R. Cole
	Anthony R. Cole
	Executive Vice President
	(Principal Financial and Accounting Officer)

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