UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to ______
Commission File Number: 0-24589
BCSB BANKCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
UNITED STATES 52-2108333
- ---------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4111 E. JOPPA ROAD, SUITE 300, BALTIMORE, MARYLAND 21236
--------------------------------------------------------
(Address of Principal Executive Offices)
(410) 256-5000
---------------------------
Issuer'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
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of August 11, 2004, the issuer had 5,899,173 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, 2004 (unaudited) and September 30, 2003................................................2
Consolidated Statements of Operations for the Nine Months and Three Months Ended
June 30, 2004 and 2003 (unaudited).............................................................3
Consolidated Statements of Comprehensive Income for the Nine Months and Three Months Ended
June 30, 2004 and 2003 (unaudited)............................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2004 and 2003 (unaudited)............................................................. 5
Notes to Consolidated Financial Statements...................................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................25
Item 4. Controls and Procedures.................................................................................25
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.......................................................................................26
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities........................26
Item 3. Defaults Upon Senior Securities.........................................................................26
Item 4. Submission of Matters to a Vote of Security Holders.....................................................26
Item 5. Other Information.......................................................................................26
Item 6. Exhibits and Reports on Form 8-K........................................................................26
SIGNATURES.......................................................................................................27
CERTIFICATIONS...................................................................................................28
1
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
JUNE 30, SEPTEMBER 30,
2004 2003
------------- -------------
(Unaudited)
Assets
------
Cash $ 13,870,244 $ 11,032,415
Interest bearing deposits in other banks 2,545,144 11,288,223
Federal funds sold 192,640 987,636
Investment securities, held to maturity 2,497,510 2,500,000
Investment securities, available for sale 162,373,479 121,289,555
Loans receivable, net 366,546,933 365,054,645
Loans held for sale -- 247,600
Mortgage backed securities, held to maturity 21,111,695 18,394,439
Mortgage backed securities, available for sale 142,937,352 116,204,401
Premises and equipment, net 8,900,515 9,226,887
Federal Home Loan Bank of Atlanta stock 4,905,000 3,304,900
Accrued interest receivable 2,468,468 2,114,609
Prepaid and deferred income taxes 4,610,003 1,752,582
Bank Owned Life Insurance 11,784,083 --
Goodwill 2,294,327 2,294,327
Core deposit intangible 379,000 421,000
Other assets 2,540,255 2,084,630
------------- -------------
Total assets $ 749,956,648 $ 668,197,849
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposits $ 582,002,199 $ 551,928,619
Advances from the Federal Home Loan Bank of Atlanta 98,817,477 32,267,861
Trust Preferred Securities -- 22,500,000
Junior Subordinated Debentures 23,197,000 --
Advance payments by borrowers for taxes and insurance 2,662,941 854,694
Income taxes payable 164,686 193,051
Payables to disbursing agents 566,996 136,352
Accounts payable Trade Date Securities -- 13,998,307
Dividends payable 267,954 266,329
Other liabilities 1,950,197 1,284,720
------------- -------------
Total liabilities 709,629,450 623,429,933
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock (Par value $.01 - 13,500,000 authorized, 5,899,093 and 5,885,593
shares issued and outstanding
at June 30, 2004 and September 30, 2003) 58,991 58,856
Additional paid-in capital 20,875,268 20,652,137
Obligation under Rabbi Trust 1,258,752 1,243,469
Retained earnings (substantially restricted) 25,400,915 25,556,888
Accumulated Other Comperhensive Income/(Loss) (net of taxes) (5,431,364) (770,874)
Employee Stock Ownership Plan (638,864) (776,060)
Stock held by Rabbi Trust (1,196,500) (1,196,500)
------------- -------------
Total Stockholders' Equity 40,327,198 44,767,916
------------- -------------
Total liabilities and Stockholders' Equity $ 749,956,648 $ 668,197,849
============= =============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
FOR NINE MONTHS ENDED FOR THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
2004 2003 2004 2003
-------- -------- ------ ------
Interest Income
- ---------------
Interest and fees on loans $16,529,243 $20,157,718 $ 5,464,975 $ 6,240,920
Interest on mortgage backed securities 3,972,045 3,061,049 1,501,174 995,680
Interest and dividends on investment securities 3,161,591 2,043,325 1,290,170 865,696
Other interest income 82,588 267,263 18,935 90,654
----------- ----------- ----------- ------------
Total interest income 23,745,467 25,529,355 8,275,254 8,192,950
Interest Expense
- ----------------
Interest on deposits 10,098,875 10,770,764 3,399,515 3,530,442
Interest on borrowings - short term 291,563 162,643 218,810 51,989
Interest on borrowings-long term 816,184 791,249 261,750 251,632
Other Interest Expense 794,407 501,285 265,084 160,851
----------- ----------- ----------- ------------
Total interest expense 12,001,029 12,225,941 4,145,159 3,994,914
----------- ----------- ----------- ------------
Net interest income 11,744,438 13,303,414 4,130,095 4,198,036
Provision for losses on loans 356,046 1,198,713 88,579 786,348
----------- ----------- ----------- ------------
Net interest income after provision
for losses on loans 11,388,392 12,104,701 4,041,516 3,411,688
Other Income
- ------------
Loss on sale of repossessed assets (44,425) -- (123,865) --
Gain on Sale of Loans 41,800 340,109 -- 68,751
Fees and charges on loans 174,594 165,547 54,073 53,219
Fees on transaction accounts 568,325 379,349 172,438 133,142
Rental income 88,867 93,321 28,123 32,999
Gain from sale of investments 11,409 40,652 3,609 15,652
Gain on sale of Mortgage Backed Securities 7,548 232,900 -- 79,290
Income from Bank Owned Life Insurance 359,083 -- 116,553 --
Miscellaneous income 34,496 92,423 17,123 9,438
----------- ----------- ----------- ------------
Net other income 1,241,697 1,344,301 268,054 392,491
Non-Interest Expenses
- ---------------------
Salaries and related expense 6,583,619 6,268,066 2,287,745 2,171,688
Occupancy expense 1,385,013 1,204,969 417,683 419,859
Deposit insurance premiums 163,095 151,811 55,159 50,996
Data processing expense 1,145,357 1,140,083 388,601 335,594
Equipment expense 888,747 973,579 288,499 340,901
Professional fees 167,749 186,127 48,800 49,081
Advertising 688,895 598,271 208,281 176,888
Telephone, postage and office supplies 443,627 488,030 143,173 163,262
Other expenses 405,962 415,319 177,481 63,065
----------- ----------- ----------- ------------
Total non-interest expenses 11,872,064 11,426,255 4,015,422 3,771,334
----------- ----------- ----------- ------------
Income before tax provision 758,025 2,022,747 294,148 32,845
Income tax provision 137,513 769,810 61,110 11,000
----------- ----------- ----------- ------------
Net income $ 620,512 $ 1,252,937 $ 233,038 $ 21,845
=========== =========== =========== ============
Basic earnings per share $ .11 $ .22 $ .04 $ --
=========== =========== =========== ============
Diluted earnings per share $ .11 $ .22 $ .04 $ --
=========== =========== =========== ============
Dividends per share $ .25 $ .25 $ .125 $ .125
=========== =========== =========== ============
The accompanying notes to the consolidated financial statements are an integral
part of these statements
3
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
------------------------------------------------------
(UNAUDITED)
-----------
FOR NINE MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
----------- -----------
Net Income $ 620,512 $ 1,252,937
Other comprehensive (loss) income, net of tax:
Unrealized net holding (losses) gains on
available-for-sale portfolios, net of tax $(2,921,512) and 129,621 (4,648,854) 203,410
Reclassification adjustment for gains
included in net income, net of tax $ (7,321) and (105,646) (11,636) (167,906)
----------- -----------
Comprehensive (loss) income $(4,039,978) $ 1,288,441
=========== ===========
FOR THREE MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
----------- -----------
Net Income $ 233,038 $ 21,845
Other comprehensive (loss) income, net of tax:
Unrealized net holding (losses) gains on
available-for-sale portfolios, net of tax $(3,489,452) and 229,657 (5,548,801) 364,859
Reclassification adjustment for gains
included in net income, net of tax $(1,394) and (36,667) (2,215) (58,275)
----------- --------
Comprehensive (loss) income $(5,317,978) $328,429
=========== ========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR NINE MONTHS ENDED
JUNE 30,
2004 2003
------------ ------------
Operating Activities
- --------------------
Net Income $ 620,512 $ 1,252,937
Adjustments to Reconcile Net Income to Net
Cash Used by Operating Activities
---------------------------------
Accretion of discount on investments (52,963) (57,900)
Dividends on Investment Securities (826,435) (723,316)
Gain on sale of investments (11,409) (40,652)
Loans originated for sale (3,201,800) (10,526,862)
Loans sold 3,491,200 10,294,052
Gain on sale of loans (41,800) (340,109)
Loan fees and costs deferred, net (38,625) 274,798
Amortization of deferred loan fees and cost, net (132,198) (506,871)
Provision for losses on loans 356,046 1,198,713
Non-cash compensation under Stock-Based Benefit Plan 247,400 187,718
Amortization of premium on mortgage backed securities 326,723 398,032
Amortization of purchase premiums and discounts, net (27,675) (452,083)
Gain on sale of mortgaged backed securities (7,548) (232,900)
Provision for depreciation 707,388 737,259
Loss on sale of repossessed assets 44,425 --
Income from bank owned life insurance (359,083) --
(Increase) decrease in accrued interest receivable (353,859) 307,628
Decrease in prepaid income taxes 71,412 198,092
Decrease in other assets 241,375 155,682
Decrease in accrued interest payable on deposits (18,166) (29,331)
(Decrease) increase in income taxes payable (28,365) 85,225
Increase in other liabilities and payables to
disbursing agents 1,096,121 5,028,478
Increase in obligation under Rabbi-Trust 15,283 29,350
------------ ------------
Net cash provided by operating activities 2,117,959 7,237,940
5
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR NINE MONTHS ENDED
JUNE 30,
------------------------------
2004 2003
------------- -------------
Cash Flows from Investing Activities
- ------------------------------------
Purchase of Bank Owned Life Insurance $ (11,425,000) $ --
Purchases of investment securities - available for sale (75,286,086) (133,076,372)
Proceeds from maturities of investment securities - available for sale 21,130,000 56,185,019
Proceeds from sale of investment securities- available for sale 10,481,524 5,040,652
Purchases of investment securities - held to maturity (2,497,875) (500,000)
Proceeds from maturities of investment securities - held to maturity 2,500,000 2,500,000
Longer term loans originated (47,502,530) (52,531,646)
Principal collected on longer term loans 45,347,616 82,462,075
Net increase (decrease) in short-term loans (25,556) (7,937,955)
Principal collected on mortgage backed securities - available for sale 19,655,365 19,211,814
Purchase of mortgage backed securities - available for sale (52,250,758) (57,820,305)
Proceeds from sale of mortgaged backed securities- available for sale 1,447,365 18,038,332
Purchase of mortgage backed securities- held to maturity (7,062,150) (1,038,404)
Principal collected on mortgage backed securities - held to maturity 4,313,049 14,384,179
Proceeds from sale of repossessed assets 171,418 --
Investment in premises and equipment (381,016) (720,844)
(Purchase)/Redemption of Federal Home Loan Bank of Atlanta stock (1,600,100) 634,800
Decrease in accounts payable Trade Date Securities (13,998,307) --
------------- -------------
Net cash used by investing activities (106,983,041) (55,168,655)
Cash Flows from Financing Activities
- ------------------------------------
Decrease in checks written in excess of bank balance -- (390,799)
Net increase in demand deposits, money market, passbook
accounts and advances by borrowers for taxes and
insurance 16,726,338 18,679,105
Net increase in certificates of deposit 15,400,296 32,634,162
Advances from Federal Home Loan Bank of Atlanta 152,877,000 --
Repayment of Federal Home Loan Bank of Atlanta advances (86,177,000) (3,000,000)
Exercised Stock Options 113,062 8,000
Dividends paid on stock (774,860) (772,569)
------------- -------------
Net cash provided by financing activities 98,164,836 47,157,899
------------- -------------
Decrease in cash and cash equivalents (6,700,246) (772,816)
Cash and cash equivalents at beginning of period 23,208,274 25,703,327
------------- -------------
Cash and cash equivalents at end of period $ 16,508,028 $ 24,930,511
============= =============
6
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
JUNE 30,
-------------------------
2004 2003
----------- -----------
The following is a summary of cash and cash equivalents:
Cash $13,870,244 $10,642,180
Interest bearing deposits in other banks 2,545,144 9,380,636
Federal funds sold 192,640 5,007,695
----------- -----------
Balance of cash items reflected on Statement of
Financial Condition 16,608,028 25,030,511
Less - certificate of deposit with an original maturity of
more than ninety days 100,000 100,000
----------- -----------
Cash and cash equivalents reflected on the
Statement of Cash Flows $16,508,028 $24,930,511
=========== ===========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest $11,867,401 $12,286,181
=========== ===========
Income taxes $ 182,500 $ 826,700
=========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
7
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 1 - Principles of Consolidation
---------------------------
BCSB Bankcorp, Inc. (the "Company") owns 100% of Balltimore County
Savings Bank, F.S.B. and subsidiaries (the "Bank") , and also invests
in federal funds sold, interest-bearing deposits in other banks and
U.S. Agency bonds. The Bank owns 100% of Baltimore County Service
Corporation and Ebenezer Road, Inc. The accompanying consolidated
financial statements include the accounts and transactions of these
companies on a consolidated basis. All intercompany transactions have
been eliminated in the consolidated financial statements. Ebenezer
Road, Inc. sells insurance products. It's operations are not material
to the consolidated financial statements.
The "Company" owns 100% of the common stock of BCSB Capital Trust I
and BCSB Capital Trust II and in accordance with FASB Interpertaion
Number 46 these entities have not been consolidated in the
accompanying 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 three
and nine months ended June 30, 2004 are not necessarily indicative of
the results of operations that may be expected for the year ending
September 30, 2004. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and
related notes which are incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended September 30, 2003.
Note 3 - Cash Flow Presentation
----------------------
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository institutions,
investments in federal funds, and certificates of deposit with
original maturities of 90 days or less.
8
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 4 - Earnings Per Share
------------------
Basic per share amounts are based on the weighted average shares of
common stock outstanding. Diluted earnings per share assume the
conversion, exercise or issuance of all potential common stock
instruments such as options, unless the effect is to reduce a loss or
increase earnings per share. No adjustments were made to net income
(numerator) for all periods presented. The basic and diluted weighted
average shares outstanding for the nine and three months ended June
30, 2004 and 2003 is as follows:
For the Nine Months Ended June 30,
----------------------------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Basic EPS
---------
$ 620,512 5,785,943 $ 0.11 $1,252,937 5,723,135 $ 0.22
Effect of dilutive shares -- 57,488 -- -- 45,683 --
---------- ------------- ---------- ---------- ------------- ---------------
Diluted EPS
-----------
$ 620,512 5,843,431 $ 0.11 $1,252,937 5,768,818 $ 0.22
========== ============= ========== ========== ============= ===============
For the Three Months Ended June 30,
----------------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
Basic EPS
---------
$ 233,038 5,791,312 $ 0.04 $ 21,845 5,723,085 $ 0.00
Effect of dilutive shares -- 50,204 -- -- 59,739 --
---------- ------------- ---------- ---------- ------------- ---------------
Diluted EPS
-----------
$ 233,038 5,841,516 $ 0.04 $ 21,845 5,782,824 $ 0.00
========== ============= ========== ========== ============= ===============
9
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 5 - Regulatory Capital
------------------
The following table sets forth the Bank's capital position at June 30, 2004.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ------------------------ ------------------------
Actual % of Required % of Required % of
Amount Assets Amount Assets Amount Assets
------ ------ -------- ------ -------- ------
(unaudited)
Tangible (1) $ 53,089,474 7.21% $11,044,110 1.50% N/A N/A
Tier 1 capital (2) 53,089,474 14.71 N/A N/A 21,655,484 6.00%
Core (1) 53,089,474 7.21 29,450,959 4.00 36,813,699 5.00
Total (2) 54,987,510 15.24 29,873,978 8.00 36,092,473 10.00
- ------------
(1) To adjusted total assets.
(2) To risk-weighted assets.
Note 6- Stock Option Plan
-----------------
Stock-Based Employee Compensation- At June 30, 2004 and 2003 the
company has four stock-based employee compensation plans, which are
described more fully in the 2003 Annual Report. The company accounts
for those plans under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No compensation cost is reflected in income
for the granted options as all granted options had an exercise price
equal to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
For the Nine months ended June 30, For the Three Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Income, as reported $ 620,512 $ 1,252,937 $ 233,038 $ 21,845
Add: Stock-based Compensation
Included in the determination
of Net income as reported,
net of tax 199,742 172,520 59,534 77,568
Deduct: Total stock-based compensation
Expense determined under
fair value method for all
awards, net of tax (239,335) (211,443) (72,731) (90,095)
--------- ----------- -------------- -----------
Pro forma net income $ 580,919 $ 1,214,014 $ 219,841 $ 9,318
========= =========== ============== ===========
Earnings per share:
Basic-as reported $ .11 $ .22 $.04 $.00
=== === === ===
Basic-pro forma .10 .21 .04 .00
=== === === ===
Diluted-as reported .11 .22 .04 .00
=== === === ===
Diluted-proforma .10 .21 .04 .00
=== === === ===
10
Note 7- Recent Accounting Pronouncements
--------------------------------
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003. This
Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). BCSB Bankcorp Capital Trust I ("BCSB I"), and BCSB Capital
Trust II ("BCSB II") qualify as variable interest entities under FIN 46. BCSB I
and BCSB II issued mandatorily redeemable preferred securities (Trust Preferred
Securities) to third-party investors and loaned the proceeds to the Company.
BCSB I and BCSB II hold, as there sole assets, subordinated debentures issued by
the Company. Accordingly the Trust Preferred Securities have been reclassified
as Junior Subordinated Debentures.
Note 8- Guarantees
----------
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all letters
of credit, when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as those that are
involved in extending loans facilities to customers. The Company, generally
holds collateral and/or personal guarantees supporting these commitments. The
Company has $419,000 of standby letters of credit as of June 30, 2004.
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, 2004 for guarantees under
standby letters of credit issued is not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was formed by the Bank to become the holding company of the
Bank following the Bank's reorganization to the mutual holding company form of
organization (the "Reorganization"). The Reorganization was consummated on July
8, 1998.
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
securities and mortgage-backed securities portfolio and interest paid on
interest-bearing liabilities. Net interest income is determined by (i) the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Company's net income also is affected by the
level of other income, which primarily consists of fees and charges, and levels
of non-interest expenses such as salaries and related expenses.
The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are set forth in Note 1 of
the consolidated financial statements as of September 30, 2003 which was filed
on Form 10-K. Of these significant accounting policies, the Company considers
its policy regarding the allowance for loan losses to be its most critical
accounting policy, because it requires management's most subjective and complex
judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan
losses and results of operations. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers that is
not known to management at the time of the issuance of the consolidated
financial statements. The Company adopted the disclosure only provisions of FASB
Statement No. 123, see note 6 to the consolidated financial statements. The
Company does not expect to expense the fair market value of stock options until
required by accounting principles generally accepted in the United States of
America.
11
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND SEPTEMBER 30, 2003
During the nine months ended June 30, 2004, the Company's assets increased
by $81.8 million, or 12.2% from $668.2 million at September 30, 2003 to $750.0
million at June 30, 2004. The Company's interest bearing deposits in other banks
decreased by $8.7 million, or 77.5%, from $11.3 million at September 30, 2003 to
$2.5 million at June 30, 2004. The Company's mortgage-backed securities
available for sale increased by $26.7 million, or 23.0%, from $116.2 million at
September 30, 2003 to $142.9 million at June 30, 2004. The Company's investment
portfolio available for sale increased $41.1 million or 33.9%, from $121.3
million at September 30, 2003 to $162.4 million at June 30, 2004. During the
nine months ended June 30, 2004 the Company purchased $11.5 million of bank
owned life insurance. The preceding was accomplished in an effort to reduce
interest rate risk in the balance sheet. Management was reluctant to make long
term low rate loans in the low interest rate environment that prevailed during
the nine month period ended June 30, 2004. Emphasis has been placed on short
term loans such as automobile loans, home equity loans and short term mortgages.
The Company's deposits increased by $30.1 million, or 5.5%, from $551.9 million
at September 30, 2003 to $582.0 million at June 30, 2004. The increase in
deposits was achieved through normal marketing efforts. Advances from the
Federal Home Loan Bank of Atlanta increased by $66.5 million, or 206.2% from
$32.3 million at September 30, 2003 to $98.8 million at June 30, 2004. The funds
were used to purchase securities and fund loans. Accounts Payable Trade Date
Securities decreased by $14.0 million or 100.0% from $14.0 million at September
30, 2003 to $0 at June 30, 2004. Trade Date Securities are commitments to settle
security purchases in the near future. Stockholders' equity decreased by $4.5
million, or 10.0% from $44.8 million at September 30, 2003 to $40.3 million at
June 30, 2004, which was primarily attributable to the increase in accumulated
other comprehensive loss of $4.7 million from, a negative $771,000 at September
30, 2003 to a negative $5.4 million at June 30, 2004. These unrealized losses
are considered temporary as they reflect market values on June 30, 2004 and are
subject to change daily as interest rates fluctuate. This decrease is due to the
adjustment for the available for sale securities recorded at market value in a
rising rate environment and has no impact on the Bank's regulatory capital..
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND 2003
Net Income. Net income decreased by $632,000, or 50.4%, from $1.2 million
for the nine months ended June 30, 2003 to $621,000 for the nine months ended
June 30, 2004. The decrease in net income was primarily attributable to
decreased net interest income of $1.6 million. This was partially offset by
decreases in the provision for loan losses and income taxes.
Net Interest Income. Net interest income was $11.7 million for the nine
months ended June 30, 2004, compared to $13.3 million for the nine months ended
June 30, 2003, representing a decrease of $1.6 million, or 11.7%. The decrease
was primarily due to the decrease in the average rate on interest earning-assets
and an increase in the average balance of interest bearing liabilities. This was
partially offset by an increase in the average balance of assets and a decrease
in the average rate paid on interest bearing assets. Due to declining interest
rates and loans re-pricing faster than deposits the interest rate spread
decreased 47 basis points from 2.94% for the nine months ended June 30, 2003 to
2.47% for the nine months ended June 30, 2004.
12
Interest Income. Interest income decreased by $1.8 million, or 7.1% from
$25.5 million for the nine months ended June 30, 2003 to $23.7 million for the
nine months ended June 30, 2004. Interest and fees on loans decreased by $3.7
million, or 18.3%, from $20.2 million for the nine months ended June 30, 2003 to
$16.5 million for the nine months ended June 30, 2004. This was primarily due to
a decrease in the average yield on loans of 78 basis points from 6.91% at June
30, 2003 to 6.13% at June 30, 2004, and a $29.2 million decrease in the average
balance of loans receivable from $388.8 million at June 30, 2003 to $359.6
million at June 30, 2004. The decrease in the average balance of loans was
primarily attributable to increased competition in the refinancing market,
current economic conditions and management's reluctance to make long term low
rate loans in the low interest rate environment that prevailed during the
period. The decrease in the average yield was attributed to the prevailing
market rates in the economy. Interest on mortgage-backed securities increased by
$911,000 or 29.8% from $3.1 million for the nine months ended June 30, 2003 to
$4.0 million for the nine months ended June 30, 2004. This increase was
primarily due to the increase in the average balance of mortgage-backed
securities from $94.0 million at June 30, 2003 to $135.0 million at June 30,
2004. The increase in the average balance more than offset a decrease in the
average rate from 4.34% at June 30, 2003 to 3.92% at June 30, 2004. Interest and
dividends on investment securities increased by $1.2 million or 60.0% from $2.0
million for the nine months ended June 30, 2003 to $3.2 million for the nine
months ended June 30, 2004. This was primarily due to an increase in the average
balance of investments of $59.6 million, or 78.9% from $75.5 million for the
nine months ended June 30, 2003 to $135.1 million for the nine months ended June
30, 2004. The increase in the average balance more than offset a decrease in the
average yield on investments from 3.61% for the nine months ended June 30, 2003
to 3.12% for the nine months ended June 30, 2004.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense decreased from $12.2
million for the nine months ended June 30, 2003 to $12.0 million for the nine
months ended June 30, 2004 a change of $200,000 or 1.6%. Interest on deposits
decreased $672,000 due to a decrease in the average yield on deposits of 37
basis points from 2.74% for the nine months ended June 30, 2003 to 2.37% for the
nine months ended June 30, 2004. This was partially offset by an increase in the
average balance of deposits of $44.2 million, or 8.4% from $523.6 million at
June 30, 2003 to $567.8 million at June 30, 2004. The Company was able to
increase its deposits through normal marketing efforts. Interest on short-term
borrowings increased by $129,000 for the nine months ended June 30, 2004.
Interest on long-term borrowings increased by $25,000 for the nine months ended
June 30, 2004. This increase was primarily due to an increase of $26.0 million
in the average balances of advances from the Federal Home Loan Bank of Atlanta
during the nine months ended June 30, 2004. Also contributing to interest
expense was interest on the Trust Preferred Securities which increased by
$293,000 from $501,000 for the nine month period ending June 30, 2003 to
$794,000 for the nine months ended June 30, 2004. This increase was due to the
increase in the average balance of Trust Preferred Securities from $12.5 million
during 2003 to $22.5 million during 2004.
13
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 average
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, 2004, and June 30, 2003.
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 its
net interest income divided by the average balance of interest-earning assets.
NINE MONTHS ENDED JUNE 30
---------------------------------------------------------------------------
2004 2003
--------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans.................................... $ 359,648 $ 16,529 6.13% $ 388,859 $ 20,158 6.91%
Mortgage-backed securities............... 135,042 3,972 3.92 93,963 3,061 4.34
Investment securities.................... 135,071 3,162 3.12 75,506 2,043 3.61
Other Investments........................ 8,415 83 1.32 25,456 267 1.40
--------- --------- ---------- --------
Total interest-earning assets........ 638,176 23,746 4.96 583,784 25,529 5.83
Noninterest-earning assets.................. 60,548 32,219
--------- ----------
Total assets......................... $ 698,724 $ 616,003
========= ==========
Interest-bearing liabilities:
Deposits................................. $ 567,842 10,099 2.37 523,584 10,771 2.74
FHLB Advances............................ 50,980 1,108 2.90 25,442 953 4.99
Jr. Sub. Debt/Trust Preferred Securities. 22,500 794 4.71 12,500 501 5.34
Other liabilities........................ 1,545 0 0.00 1,853 1 0.07
--------- --------- ---------- --------
Total interest-bearing liabilities.......... 642,867 12,001 2.49 563,379 12,226 2.89
--------- -------- -------- -------
Noninterest-bearing liabilities............. 12,311 7,845
--------- ----------
Total liabilities.................... 655,178 571,224
Stockholders' equity ....................... 43,546 44,779
--------- ----------
Total liabilities and stockholders'
equity.......................... $ 698,724 $ 616,003
========= ==========
Net interest income......................... $ 11,745 $ 13,303
========= ========
Interest rate spread........................ 2.47% 2.94%
=======
Net interest margin......................... 2.45% 3.04%
======= ====
Ratio average interest earning assets/
interest bearing liabilities............ 99.27% 103.62%
===== ======
14
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Company 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,
---------------------------------------------------
2004 vs. 2003
---------------------------------------------------
Increase (Decrease)
Due to
---------------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable.......................... $ (1,543) $ (2,255) $ 169 $ (3,629)
Mortgage-backed securities................ 1,343 (301) (131) 911
Investment securities and
FHLB Stock............................ 1,618 (279) (220) 1,119
Other interest-earning assets............. (179) (15) 10 (184)
-------- -------- -------- --------
Total interest-earning assets........... 1,239 (2,850) (172) (1,783)
Interest expense:
Deposits.................................. 910 (1,459) (123) (672)
FHLB advances............................. 957 (400) (402) 155
Trust Preferred Securities................ 401 (60) (48) 293
Other liabilities......................... 0 (1) 0 (1)
-------- -------- -------- --------
Total interest-bearing
liabilities.......................... 2,268 (1,920) (573) (225)
-------- -------- -------- --------
Change in net interest income............... $ (1,029) $ (930) $ 401 $ (1,558)
======== ======== ======== ========
Provision for Loan Losses. The Company charges provisions for loan losses
to earnings to maintain the total allowance for loan losses at a level
management considers adequate to provide for probable loan losses. In
determining the provision, management considers prior loss experience, current
economic conditions and the probability of these conditions affecting future
loan performance. The Company established provisions for losses on loans of
$356,000 for the nine months ended June 30, 2004, as compared to $1.2 million
for the nine months ended June 30, 2003, representing a decrease of $843,000.
This decrease was partially attributable to the decrease in the average balance
of loans of $29.2 million, or 7.5% from $388.8 million to $359.6 million. Loan
chargeoffs for the nine months ended June 30, 2004 were $907,000 as compared to
$1.5 million for the nine months ended June 30, 2003 a decrease of $593,000.
Loan charge offs decreased due to the absence of a commercial loan loss of
$569,000 which was charged off during the nine months ended June 30, 2003. Loan
recoveries were $241,000 for the nine months ended June 30, 2004 compared to
$267,000 for the nine months ended June 30, 2003. Non performing loans at June
30, 2004 were $1.1 million as compared to $348,000 at June 30, 2003. The
increase in non performing loans was partially due to two delinquent commercial
real estate loans which are well collateralized and the Bank does not expect to
incur a loss. The total loss allowance allocated to loans is $2.4 million. In
establishing such provisions, management considered an analysis of the risk
inherent in the loan portfolio.
Other Income. Other income decreased by $103,000, or 7.6% from $1.3 million
for the nine months ended June 30, 2003 to $1.2 million for the nine months
ended June 30, 2004. The decrease in other income for the nine months ended June
30, 2004 was primarily attributable to a decrease of $225,000 in Gains from the
Sale of Mortgage Backed Securities from $233,000 for the nine months ended June
30, 2003 to $7,500 for the nine months ended June 30, 2004. Gains from the sale
of loans also decreased $298,000 from $340,000 for the nine months ended June
30, 2003 to $42,000
15
for the nine months ended June 30, 2004. These decreases were partially offset
by increases in fees on transaction accounts and income from Bank Owned Life
Insurance. Fees on transaction accounts increased by $189,000 for the nine
months ended June 30, 2004, due to an increase in the volume of transaction
accounts. Income from Bank Owned Life Insurance increased $359,000 from $0 for
the nine months ended June 30, 2003 to $359,000 for the nine months ended June
30, 2004.
Non-interest Expenses. Total non-interest expenses increased by $446,000,
or 3.9%, from $11.4 million for the nine months ended June 30, 2003 to $11.9
million for the nine months ended June 30, 2004. The increase in non-interest
expenses was due to increases in salaries and related expenses of $316,000, or
5.0%. Occupancy expense also increased by $180,000, from $1.2 million for the
nine months ended June 30, 2003 to $1.4 million for the nine months ended June
30, 2004. This was mainly due to normal increases in rent and electricity.
Advertising expense also increased by $91,000 or 15.2%, from $598,000 for the
nine months ended June 30, 2003 to $689,000 for the nine months ended June 30,
2004. This increase was due to additional advertising and increased advertising
cost during the period. These increases were partially offset by decreases in
Equipment expenses and telephone postage and office supplies. Equipment expense
decreased by $85,000, or 8.7% from $974,000 for the nine months ended June 30,
2003 to $889,000 for the nine months ended June 30, 2004. This decrease was
primarily due to decreased equipment repairs and decreased depreciation expense.
Telephone postage and office supplies decreased by $44,000 or 9.1% from $488,000
for the nine months ended June 30, 2003 to $444,000 for the nine months ended
June 30, 2004. This decrease was achieved through the increased use of
interoffice mail and e-mail.
Income Taxes. The Company's income tax expense was $137,000 and $770,000
for the nine months ended June 30, 2004 and 2003, respectively. The Company's
effective tax rates were 18.1% and 38.1% for the nine months ended June 30, 2004
and 2003, respectively. The decrease in the effective tax rate was primarily
attributable to the Bank's earning non -taxable income from the Bank Owned Life
Insurance.
16
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND
2003
Net Income. Net income increased by $211,000, or 966.8%, from $22,000 for
the three months ended June 30, 2003 to $233,000 for the three months ended June
30, 2004. The increase in net income was primarily attributable to a decrease in
the provision for loan losses of $698,000. This was partially offset by an
increase in non interest expenses and a decrease in non interest income.
Net Interest Income. Net interest income was $4.1 million for the three
months ended June 30, 2004, compared to $4.2 million for the three months ended
June 30, 2003, representing a decrease of $68,000, or 1.6%. The decrease was
primarily due to an increase in the average balance of interest bearing
liabilities and a decrease in the average rate on interest earning-assets. This
was offset somewhat by an increase in the average balance on interest earning
assets and a decline in the weighted average rate on liabilities. Due to
declining interest rates and loans re-pricing faster than deposits, the interest
rate spread decreased 34 basis points from, 2.72% for the three months ended
June 30, 2004 to 2.38% for the three months ended June 30, 2004.
Interest Income. Interest income increased by $82,000, or 1.0% from $8.2
million for the three months ended June 30, 2003 to $8.3 million for the three
months ended June 30, 2004. Interest and fees on loans decreased by $776,000, or
12.4%, from $6.2 million for the three months ended June 30, 2003 to $5.5
million for the three months ended June 30, 2004. This was primarily due to a
decrease in the average yield on loans of 59 basis points from 6.64% for the
three months ended June 30, 2003 to 6.05% for the three months ended June 30,
2004, and a $14.7 million decrease in the average balance of loans receivable
from $376 .0 million at June 30, 2003 to $361.3 million at June 30, 2004. The
decrease in the average balance of loans was primarily attributable to increased
competition in the refinancing market, current economic conditions and
management's reluctance to make long term low rate loans in the low interest
rate environment that prevailed during the period. The decrease in the average
yield was attributed to the prevailing market rates in the economy. Interest on
mortgage-backed securities increased by $505,000 or 50.7% from $1.0 million for
the three months ended June 30, 2003 to $1.5 million for the three months ended
June 30, 2004. This increase was primarily due to the increase in the average
balance of mortgage-backed securities from $97.5 million at June 30, 2003 to
$162.3 million at June 30, 2004. Interest and dividends on investment securities
increased by $424,000 or 49.0% from $866,000 million for the three months ended
June 30, 2003 to $1.3 million for the three months ended June 30, 2004. This was
primarily due to an increase in the average balance of investments of $63.3
million from, $101.9 million at June 30, 2003 to $165.2 million at June 30,
2004.
Interest Expense. Interest expense, which consists of interest on deposits,
interest on borrowed money and other interest expense increased from $4.0
million for the three months ended June 30, 2003 to $4.1 million for the three
months ended June 30, 2004 a change of $150,000 or 3.8%. Interest on deposits
decreased $130,000 due to a decrease in the average yield on deposits of 27
basis points from 2.60% at June 30, 2003 to 2.33% at June 30, 2004. This was
partially offset by an increase in the average volume of deposits of $38.7
million from $544.0 million at June 30, 2003 to $582.7 million at June 30, 2004.
The Company was able to increase its deposits through normal marketing efforts.
Interest on short-term borrowings increased by $167,000 for the three months
ended June 30, 2004, and interest on long-term borrowings increased by $10,000
for the three months ended June 30, 2004. The increase in interest on long-term
borrowings and short term borrowings was due to an increase in the average
balance of advances from the Federal Home Loan Bank of Atlanta of $60.1 million,
or 240.4%. This was partially offset by a decrease of 259 basis points in the
average yield paid on advances from the Federal Home Loan Bank of Atlanta during
the three months ended June 30, 2004. Also contributing to interest expense was
interest on the Junior Subordinated Debenture/Trust Preferred Securities which
was $265,000 for the three month period ending June 30, 2004, compared to
$161,000 for the three month period ending June 30, 2003. This increase was due
to an increase in the average balance of Trust Preferred Securities from $12.5
million during to $22.5 million during 2004.
17
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 average
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, 2004 and 2003. 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 its
net interest income divided by the average balance of interest-earning assets.
THREE MONTHS ENDED JUNE 30,
----------------------------------- ------------------------------------
2004 2003
----------------------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans.................................... $ 361,278 $ 5,465 6.05% $ 376,016 $ 6,241 6.64%
Mortgage-backed securities............... 162,253 1,501 3.70 97,489 996 4.09
Investment securities.................... 165,217 1,290 3.12 101,913 865 3.40
Other Investments........................ 4,286 19 1.77 25,657 91 1.42
--------- --------- ---------- --------
Total interest-earning assets........ 693,034 8,275 4.78 601,075 8,193 5.45
Noninterest-earning assets.................. 58,052 34,364
--------- ----------
Total assets......................... $ 751,086 $ 635,439
========= ==========
Interest-bearing liabilities:
Deposits................................. $ 582,722 3,399 2.33 544,011 3,530 2.60
FHLB Advances............................ 85,083 481 2.26 24,992 303 4.85
Jr. Sub. Debt/Trust Preferred Securities. 22,500 265 4.71 12,500 161 5.15
Other liabilities........................ 2,238 0 0.00 2,462 1 0.16
--------- --------- ---------- --------
Total interest-bearing liabilities.......... 692,543 4,145 2.39 583,965 3,995 2.74
--------- -------- -------- -------
Noninterest-bearing liabilities............. 17,391 7,457
--------- ----------
Total liabilities.................... 709,934 591,422
Stockholders' equity ....................... 41,152 44,017
--------- ----------
Total liabilities and stockholders'
equity.......................... $ 751,086 $ 635,439
========= ==========
Net interest income......................... $ 4,130 $ 4,198
========= ========
Interest rate spread........................ 2.38% 2.72%
======= ====
Net interest margin......................... 2.38% 2.79%
======= ====
Ratio average interest earning assets/
interest bearing liabilities............ 100.07% 102.93%
====== ======
18
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Company 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,
---------------------------------------------------
2004 VS. 2003
---------------------------------------------------
INCREASE (DECREASE)
DUE TO
---------------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
(In thousands)
Interest income:
Loans receivable.......................... $ (247) $ (551) $ 22 $ (776)
Mortgage-backed securities................ 651 (88) (58) 505
Investment securities and
FHLB Stock............................ 538 (69) (44) 425
Other interest-earning assets............. (76) 23 19 (72)
-------- -------- -------- --------
Total interest-earning assets........... 866 (685) (99) 82
Interest expense:
Deposits.................................. 251 (357) (25) (131)
FHLB advances............................. 723 (160) (385) 178
Jr. Sub. Debt./ Trust Preferred Securities 129 (14) (11) 104
Other liabilities......................... 0 (1) 0 (1)
-------- -------- -------- --------
Total interest-bearing
liabilities.......................... 1,103 (532) (421) 150
-------- -------- --------- --------
Change in net interest income............... $ (237) $ (153) $ 322 $ (68)
======== ======== ======== ========
Provision for Loan Losses. The Company charges provisions for loan losses
to earnings to maintain the total allowance for loan losses at a level
management considers adequate to provide for probable loan losses. In
determining the provision, management considers a number of factors such as
existing loan levels, prior loss experience, current economic conditions and the
probability of these conditions affecting future loan performance. The Company
established provisions for losses on loans of $89,000 for the three months ended
June 30, 2004, as compared to $786,000 for the three months ended June 30, 2003,
representing a decrease of $697,000.The decrease was partially attributable to
the absence of a commercial loan write off of $569,000 during the three months
ended June 30, 2003 and a decrease in the average balance of loans of $14.7
million or 3.9% from $376.0 million at June 30, 2003 to $361.3 million at June
30, 2003. Loan chargeoffs for the three months ended June 30, 2004 were $225,000
as compared to $886,000 for the three months ended June 30, 2003 a decrease of
$661,000. Loan chargeoffs decreased due to improving economic conditions. Loan
recoveries were $86,000 for the three months ended June 30, 2004 compared to
$110,000 for the three months ended June 30, 2003. Non performing loans at June
30, 2004 were $1.1 million as compared to $348,000 at June 30, 2003. The total
loss allowance allocated to loans is $2.4 million. In establishing such
provisions, management considered an analysis of the risk inherent in the loan
portfolio. For additional information see "Asset Quality" disclosure.
Other Income. Other income decreased by $124,000, or 31.7% from $392,000
for the three months ended June 30, 2003 to $268,000 for the three months ended
June 30, 2004. The decrease in other income for the three months ended June 30,
2004 was partially attributable to an increase in the loss on repossessed assets
of $124,000 from $0 for the three months ended June 30, 2003 to $124,000 for the
three months ended June 30, 2004 and a decrease in the gain on sale of mortgaged
backed securities of $79,000 for the three months ended June 30, 2004 from
$79,000 for the three months ended June 30, 2003 to $0 for the three
19
months ended June 30, 2004. This was partially offset by an increase in the cash
surrender value of bank owned life insurance of $117,000 for the three months
ended June 30, 2004, compared to $0 for the three months ended June 30, 2003.
Fees on transaction accounts also increased $39,000 from $133,000 for the three
months ended June 30, 2003 to $172,000 for the three months ended June 30, 2004.
Fees on transaction accounts increased due to the increase in the volume of
transaction accounts.
Non-interest Expenses. Total non-interest expenses increased by $244,000
for the three months ended June 30, 2004, from $3.8 million for the three months
ended June 30, 2003 to $4.0 million for the three months ended June 30, 2004.
The Company experienced increases of $116,000 in salaries and related expenses
for the three months ended June 30, 2004, from $2.2 million for the three months
ended June 30, 2003 to $2.3 million for the three months ended June 30, 2004.
Advertising expense increased by $31,000 from $177,000 for the three months
ended June 40, 2003 to $208,000 for the three months ended June 30, 2004. This
was primarily due to the increased cost of advertising. Data processing expense
also increased $53,000 for the three months ended June 30, 2004 from $336,000
for the three months ended June 30, 2003 to $389,000 for the three months ended
June 30, 2004. This increase was primarily due to the increased volume of
accounts. Other expenses also increased by $114,000 for the three months ended
June 30, 2004, from $63,000 for the three months ended June 30, 2003 to $177,000
for the three months ended June 30, 2004. These increases were partially offset
by a decrease equipment expense of $53,000, from $341,000 for the three months
ended June 30, 2003 to $288,000 for the three months ended June 30, 2004. This
decrease was primarily due to a decrease in equipment repairs.
Income Taxes. The Company's income tax expense was $61,000 and $11,000 for
the three months ended June 30, 2004 and 2003, respectively. The Company's
effective tax rates were 20.8% and 33.5% for the three months ended June 30,
2004 and 2003, respectively. The decrease in the effective tax rate was
primarily attributable to the Bank's earning non-taxable income from the Bank
Owned Life Insurance.
20
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
The Company is a party to financial instruments with off-balance sheet risk
including commitments to extend credit under existing lines of credit and
commitments to sell loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
Off-balance sheet financial instruments whose contract amounts represent
credit and interest rate risk are summarized as follows:
June 30, 2004 September 30, 2003
------------- ------------------
(dollars in thousands)
Commitments to originate new loans $ 24,635 $ 10,600
Unfunded commitments to extend credit under existing
equity line and commercial lines of credit 21,431 20,410
Commercial letters of credit 419 419
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.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual obligations as of
June 30, 2004.
Payments due by period
----------------------
(Dollars in thousands)
Less than
1 year 1-3 years 4-5 years Over 5 years Total
----------------- --------- --------- ------------ -----
Time Deposits $ 197,566 $ 108,989 $ 84,248 $ -- $390,803
Long-term borrowings 79,950 -- 9,000 9,000 97,950
Junior Subordinated Debenture -- -- -- 23,197 23,197
Lease obligations 933 3,086 1,390 6,558 11,967
----------- --------- --------- -------- --------
Total contractual cash
obligations $ 278,449 $ 112,075 $ 94,638 $ 38,755 $523,917
=========== ========= ========= ======== ========
21
ASSET QUALITY
At June 30, 2004, the Company had approximately $1.2 million in
non-performing assets (nonaccrual loans, repossessed assets and foreclosed real
estate) or .17% of total assets. At September 30, 2003, non-performing assets
were $583,000 or .09% of total assets. Non accrual loans increased by $800,000
from $300,000 for the period ended September 30, 2003 to $1.1 million for the
period ended June 30, 2004. This was due to two commercial real estate loans
which are delinquent. These loans are well collateralized and the Bank does not
expect to incur a loss. The Bank's allowance for loan losses was $2.4 million at
June 30, 2004 and $2.7 million at September 30, 2003.
The following table presents an analysis of the Company's non-performing
assets:
At At
June 30, September 30,
2004 2003
---- ----
(Dollars in Thousands)
Nonperforming loans:
Nonaccrual loans:
Single-family residential $ 339 $ 300
Multi-family residential -- --
Commercial Real Estate 670 --
Construction -- --
Commercial Loans 67 --
Consumer 27 --
-------- -------
Total Nonaccrual loans 1,103 300
Loans 90 days past due and accruing -- --
Restructured loans -- --
-------- -------
Total nonperforming loans 1,103 300
Other non-performing assets 141 283
-------- -------
Total nonperforming assets $ 1,244 $ 583
======== =======
Nonperforming loans to loans receivable, net .30% .08%
Nonperforming assets as a percentage
of loans and foreclosed real estate .34% .15%
Nonperforming assets to total assets .17% .09%
22
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
For the Nine Months Ended For the Three Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning of period ...... $ 2,698 $ 2,199 $ 2,439 $ 2,153
------- ------- ------- -------
Loans charged-off:
Real estate mortgage:
Single-family residential ....... -- -- -- --
Multi-family residential ........ -- -- -- --
Commercial ...................... -- -- -- --
Construction .................... -- -- -- --
Commercial loans ................ -- 569 -- 569
Consumer ........................ 907 932 225 316
------- ------- ------- -------
Total charge-offs ................... 907 1,501 225 885
Recoveries:
Real estate mortgage:
Single-family residential ....... -- -- -- --
Multi-family residential ........ -- -- -- --
Commercial ...................... -- -- -- --
Construction .................... -- -- -- --
Commercial loans secured ............ -- -- -- --
Consumer .......................... 241 267 86 110
------- ------- ------- -------
Total recoveries .................... 241 267 86 110
Net loans charged off ............... (666) (1,234) (139) 775
Provision for loan losses .......... 356 1,199 88 786
------- ------- ------- -------
Balance at end of period ............ $ 2,388 $ 2,164 $ 2,388 $ 2,164
======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding during the
period ........................... .18% .39% .03% .24%
======= ======= ======= =======
Regulations require that the Company classify its assets on a regular
basis. There are three classifications for problem assets: substandard, doubtful
and loss. The Company regularly reviews its assets to determine whether any
assets require classification or re-classification. At June 30, 2004, the
Company had $1.7 million in classified assets, consisting of $1.6 million in
substandard and loss loans, and $ 141,000 in other repossessed assets. At
September 30, 2003, the Company had $583,000 in substandard assets, consisting
of $300,000 in loans, and $283,000 in other repossessed assets.
In addition to regulatory classifications, the Company also classifies as
"special mention" assets that are currently performing in accordance with their
contractual terms but may become classified or non-performing assets in the
future. At June 30, 2004, the Company has identified approximately $2.5 million
in assets classified as special mention.
23
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, the Bank exceeded all regulatory minimum capital
requirements. For information comparing the Bank's tangible, core and risk-based
capital levels to the regulatory requirements, see Note 5 of Notes to
Consolidated Financial Statements.
The Company's primary sources of funds are deposits and proceeds from
maturing investment securities and mortgage-backed securities and principal and
interest payments on loans. While maturities and scheduled amortization of
mortgage-backed securities and loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
The primary investing activities of the Company are the origination of
loans and the purchase of investment securities and mortgage-backed securities.
During the nine months ended June 30, 2004 and 2003, the Company had $47.5
million and $52.5 million, respectively, of loan originations. During the nine
months ended June 30, 2004 and 2003, the Company purchased investment securities
in the amounts of $77.8 million and $133.6 million, respectively, and
mortgage-backed securities in the amounts of $59.3 million and $58.8 million,
respectively. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds.
The Bank has the ability to obtain advances from the FHLB of Atlanta. In
addition, the Company maintains a portion of its investments in interest-bearing
deposits at other financial institutions that will be available, if needed.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be changed at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Bank's average daily
liquidity ratio for the month of June was approximately 49.7%, which exceeded
the required level for such period. Management seeks to maintain a relatively
high level of liquidity in order to retain flexibility in terms of investment
opportunities and deposit pricing. Because liquid assets generally provide for
lower rates of return, the Bank's relatively high liquidity will, to a certain
extent, result in lower rates of return on assets.
The Company's most liquid assets are cash, interest-bearing deposits in
other banks and federal funds sold, which are short-term, highly liquid
investments with original maturities of less than three months that are readily
convertible to known amounts of cash. The levels of these assets are dependent
on the Company's operating, financing and investing activities during any given
period. At June 30, 2004, cash, interest-bearing deposits in other banks and
federal funds sold were $13.8 million, $2.5.million and $193,000, respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. Certificates of deposit which are scheduled to
mature in less than one year at June 30, 2004 totaled $197.5 million. Based on
past experience, management believes that a significant portion of such deposits
will remain with the Bank. The Bank is a party to financial instruments with
off-balance-sheet risk made in the normal course of business to meet the
financing needs of its customers. These financial instruments are standby
letters of credit, lines of credit and commitments to fund mortgage loans and
involve to varying degrees elements of credit risk in excess of the amount
recognized in the statement of financial position. The contract amounts of those
instruments express the extent of involvement the Company has in this class of
financial instruments and represents the Company's exposure to credit loss from
nonperformance by the other party.
The Company generally requires collateral or other security to support
financial instruments with off-balance-sheet credit risk. At June 30, 2004, the
Company had commitments under standby letters of credit and lines of credit and
commitments to originate mortgage loans of $419,000, $21.4 million and $24.6
million respectively.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the possible chance of loss from unfavorable changes in
market prices and rates. These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.
The Company considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The structure of the Company's loan and deposit portfolios is such that a
significant change in interest rates may adversely impact net market values and
net interest income.
The Company monitors whether material changes in market risk have occurred
since September 30, 2003. The Company does not believe that any material adverse
changes in market risk exposures occurred since September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. It should be noted that the design of the
Company's disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Company's principal executive and
financial officers have concluded that the Company's disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.
In addition, there have been no changes in the Company's internal control
over financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
The following exhibits are filed herewith:
Exhibit Title
Number -----
------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2003.
The following current reports on Form 8-K were filed during the quarter
ended June 30, 2004:
(b) Form 8-K
On May 13, 2004 the Company filed a Current Report on Form
8-K reporting under Item 5, Item 7 and Item 12.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BCSB BANKCORP, INC.
Date: August 11, 2004 /s/ Gary C. Loraditch
-----------------------------------
Gary C. Loraditch
President
(Principal Executive Officer)
Date: August 11, 2004 /s/ Bonnie M. Klein
-----------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting Officer)
27