<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-KSB/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
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 No. 0-24589
BCSB BANKCORP, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UNITED STATES 52-2108333
- --------------------------------- -------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4111 E. JOPPA ROAD, SUITE 300, BALTIMORE, MARYLAND 21236
- -------------------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 256-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
For the fiscal year ended September 30, 1998, the registrant had $19,721,140 in
revenues.
As of December 23, 1998, the aggregate market value of voting stock held by non-
affiliates was approximately $17,133,588, computed by reference to the most
recent sales price on December 23, 1998 as reported on the Nasdaq National
Market System. For purposes of this calculation, it is assumed that directors,
executive officers and beneficial owners of more than 5% of the registrant's
outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of December 23, 1998: 6,116,562.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the
Part of the Form 10-KSB into which the document is incorporated:
1. Portions of the registrant's Annual Report to Stockholders for
the Fiscal Year ended September 30, 1998. (Parts II and III)
2. Portions of Proxy Statement for registrant's 1999 Annual Meeting
of Stockholders. (Part III)
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BCSB BANKCORP, INC.
December 30, 1998
By: /s/ Gary C. Loraditch
----------------------
Gary C. Loraditch
Vice President
<PAGE>
EXHIBIT 13
BCSB BANKCORP, INC.
[LOGO]
1998 ANNUAL REPORT
<PAGE>
BCSB BANKCORP, INC.
- --------------------------------------------------------------------------------
BCSB Bankcorp, Inc. (the "Company") was incorporated under Federal law in
May 1998. On July 8, 1998, Baltimore County Savings Bank, F.S.B. ( the "Bank")
converted from mutual to stock form and reorganized into the mutual holding
company form of ownership as a wholly owned subsidiary of the Company, which in
turn became a majority-owned subsidiary of Baltimore County Savings Bank, M.H.C.
(the "MHC"), a mutual holding company (the "Reorganization"). In connection
with the Reorganization, the Company issued and sold 2,286,602 shares of its
common stock at a price of $10.00 per share to the Bank's depositors, the
Company's employee stock ownership plan and the public, thereby recognizing net
proceeds of $22.4 million. The Company also issued at no cost 3,754,960 shares
to the MHC, representing 61.4% of the Company's issued and outstanding common
stock, and 75,000 shares to the Baltimore County Savings Bank Foundation, Inc.,
a nonstock corporation dedicated to charitable and educational purposes in the
Baltimore metropolitan area. The Company has no significant assets other than
its investment in the Bank. The Company is primarily engaged in the business of
directing, planning and coordinating the business activities of the Bank.
The Bank is a federal mutual savings bank operating through six banking
offices serving Baltimore and Harford Counties in Maryland. The Bank's
principal business consists of attracting deposits from the general public and
investing these funds in loans secured by first mortgages on owner-occupied,
single-family residences in the Bank's market area, and, to a lesser extent,
other real estate loans, consisting of construction loans, single-family rental
property loans and commercial real estate loans, and consumer loans,
particularly automobile loans. The Bank derives its income principally from
interest earned on loans and, to a lesser extent, interest earned on mortgage-
backed securities and investment securities and other income. Funds for these
activities are provided principally by operating revenues, deposits and
repayments of outstanding loans and investment securities and mortgage-backed
securities.
MARKET INFORMATION
- --------------------------------------------------------------------------------
The Company's common stock began trading under the symbol "BCSB" on the
Nasdaq National Market System on July 9, 1998. There are currently 6,116,562
shares of the common stock outstanding and approximately 1,278 holders of record
of the common stock. No dividends have been paid on the common stock.
Following are the high and low bid prices, by fiscal quarter, as reported on the
Nasdaq National Market System during the periods indicated.
Fiscal 1998
-------------------------
High Low
---- ---
Fourth quarter.................. $ 12.625 $ 10.00
The stated high and low bid prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
BCSB Bankcorp, Inc.................................................................................... (i)
Market Information.................................................................................... (i)
Letter to Stockholders................................................................................ 1
Selected Consolidated Financial and Other Data........................................................ 2
Management's Discussion and Analysis of Financial Condition and Results of Operations................. 4
Consolidated Financial Statements..................................................................... F-1
Corporate Information..................................................................... Inside Back Cover
</TABLE>
(i)
<PAGE>
[LETTERHEAD]
To Our Depositors, Shareholders and Friends,
As I write this letter, snow is falling and Christmas 1998 is but 2 days
away. Much has happened during the past year. The fiscal year for us began
October 1997. Soon after, the Board's decision to convert to the mutual holding
company form of corporate organization was announced. Applications were filed,
approvals granted, meetings were held with you, stock orders were received, all
culminating in the raising of $22,000,000 in capital. Trading began on the
NASDAQ under the symbol "BCSB" on July 8, 1998.
Raising the capital will allow us to expand and better compete in the
market for financial services. We truly believe that there will be a place for
community owned financial institutions. All of us live and work in the same
neighborhoods. When you come to us for a loan or to open an account, that
personal service that is missing in so many instances today, will always be
provided at BCSB. Additional branches in Abingdon and Forest Hill are planned
to open in the 2nd quarter 1999. A third new office in Hickory is expected to
open in late 1999 or early 2000. We intend to relocate our Timonium office to a
free standing full service facility on the same site in late 1999. All of these
offices will have drive-in and ATM facilities.
During the year, our Bel Air office relocated to a free standing facility
in the same shopping center where we have been doing business since 1975. The
Dundalk branch received a needed renovation and a separate drive-in with ATM was
added. These improvements allow us to better serve our existing and new
customers in these neighborhoods.
To further support our community, the Baltimore County Savings Bank
Foundation was formed. Its purpose is to aid those organizations and people who
help those in need or improve the quality of life for all of us.
Many of you know the bank was founded in 1955. Three of the founders still
serve on the Board of Directors. The knowledge and experience of P. Louis Rohe,
Frank W. Dunton and Martin F. Meyers are invaluable to the Bank. However, Martin
Meyers will be leaving the Board at the end of December 1998 and the Bank's
President, Michael J. Dietz is retiring at the end of December 1998. Mike has
been associated with the Bank since 1966 and has been its CEO since 1972. We
wish both of them the best.
While still in college, I began my career with BCSB in February 1974.
Starting in the Accounting Department, I have served in many different
capacities including Branch Manager, Accounting Manager, Treasurer and Secretary
to the Board of Directors. In 1991, I was elected to the Board. Along the way,
I became a CPA and obtained my law degree. Now the Board has selected me to
guide the Bank into the future. I appreciate the trust and confidence they have
shown. I want you to know that we will continue to offer the financial services
you expect with friendly, personal service.
What follows is a full discussion of our financial condition and results in
the fiscal year ended September 30, 1998. Your Bank has had a good year and
looks forward to many more in the future.
Very truly yours,
/s/ Gary C. Loraditch
Gary C. Loraditch
President
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
At September 30,
----------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Total assets....................................... $268,840 $251,738
Loans receivable, net.............................. 181,969 158,676
Cash............................................... 3,572 3,909
Interest-bearing deposits in other banks........... 20,300 8,206
Federal funds sold................................. 9,134 7,102
Investment securities:
Available for sale................................ -- --
Held to maturity.................................. 12,611 30,323
Mortgage-backed securities:
Available for sale................................ -- --
Held to maturity.................................. 34,198 37,189
FHLB stock......................................... 1,512 1,433
Deposits........................................... 220,805 224,656
FHLB advances...................................... -- --
Stockholders' equity - substantially restricted... 45,143 23,858
</TABLE>
SELECTED CONSOLIDATED OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Interest income............................. $18,810 $19,458
Interest expense............................ 9,867 10,323
------- -------
Net interest income before
provision for loan losses................. 8,943 9,135
Provision for (reduction of) loan losses... 119 286
------- -------
Net interest income......................... 8,824 8,849
Other income (loss)......................... 911 686
Non-interest expense........................ 7,013 6,257
------- -------
Income before income taxes.................. 2,721 3,278
Income tax provision........................ 1,073 1,301
------- -------
Net Income.................................. $ 1,648 $ 1,977
======= =======
</TABLE>
2
<PAGE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
---------------------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income
divided by average total assets).......... .63% .76%
Return on average equity (net income
divided by average equity)................ 5.71 8.64
Interest rate spread (combined
weighted average interest rate
earned less combined weighted
average interest rate cost)............... 3.10 3.41
Net interest margin (net interest
income divided by average
interest-earning assets).................. 3.53 3.67
Ratio of average interest-earning assets
to average interest-bearing liabilities... 110.20 106.20
Ratio of non-interest expense to
average total assets...................... 2.67 2.39
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at
end of period............................. .57 .76
Nonperforming loans to gross loans at
end of period............................. .59 1.11
Allowance for loan losses to gross loans
at end of period.......................... .54 .59
Allowance for loan losses to nonperforming
loans at end of period.................... 92.99 53.07
Provision for loan losses to gross loans..... .06 .17
Net charge-offs to average loans
outstanding............................... .04 .15
CAPITAL RATIOS:
Equity to total assets at end
of period................................. 16.79 9.48
Average equity to average
assets.................................... 10.97 8.75
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The Company was formed in June 1998 by the Bank to become the holding
company of the Bank following the Reorganization. The Reorganization was
consummated on July 8, 1998. All references to the Company prior to July 8,
1998, except where otherwise indicated, are to the Bank.
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.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, competition and information provided by third-party
vendors that could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
YEAR 2000 READINESS DISCLOSURE
The following information constitutes "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act.
The Company's operations, like those of most financial institutions, are
substantially dependent upon computer systems for lending and deposit
activities. The Company is addressing the potential problems associated with
the
4
<PAGE>
possibility that the computers which control its data processing activities,
facilities and networks may not be programmed to read four-digit dates and, upon
the arrival of the year 2000, may recognize the two-digit code "00" as the year
1900 rather than 2000. This could cause systems to fail to function or generate
erroneous information.
The Company has formed a Year 2000 Committee with senior representatives
from every functional area of the Company. At the direction of the Board, this
Committee is leading the efforts to ensure that the Company is ready for the
Year 2000. The Board of Directors has approved the Company's five phase Year
2000 Plan that was developed in accordance with the guidelines set forth by the
Federal Financial Institutions Examination Council.
The first phase, awareness, was intended to provide on-going information to
employees, directors and customers of the impact of the Year 2000 issue. The
Company has conducted Year 2000 training for all directors and employees.
The second phase, assessment, required the review of all systems that are
believed to be potential risks in order to minimize any Year 2000 operating
difficulties. This review included all major computer and non-computer based
systems, such as vaults, security systems and telephone systems. This phase is
complete.
The third phase, renovation and/or replacement, includes obtaining vendor
certification and/or the necessary upgrades and enhancements to ensure that
existing systems are Year 2000 compliant. The Company is continuing to follow
up with third party vendors as necessary. At this time the Company believes
that all mission critical systems are compliant.
The fourth phase, testing, is currently underway. The hardware has been
successfully tested, and the Company has begun testing the software. The
Company has received representations from mission critical third party vendors
that they are Year 2000 compliant. All testing is expected to be completed by
March 31, 1999.
The last phase, implementation, has commenced and is expected to be
completed in the third quarter of calendar year 1999. The Company has developed
contingency plans for processes that are not yet Year 2000 compliant. This plan
is updated as test results are obtained. The contingency plan sets forth the
procedures that would allow the Company to conduct operations in the event of
one or more system failures, should such a failure occur notwithstanding prior
assurance from third party vendors.
The Company estimates that the total future cost of Year 2000 compliance,
excluding internal staffing costs, will not exceed $50,000. The Company
believes that its policies, plans and actions are in compliance with regulatory
guidelines and milestone dates.
The Bank's customers may also experience Year 2000 problems, which could
adversely affect their ability to comply with their obligations to the Bank.
Management does not believe that the failure of any single customer to be Year
2000 compliant would materially adversely affect the Company's financial
conditions or results of operations.
The Company believes that the potential effects on internal operations from
Year 2000 issues can and will be addressed prior to the Year 2000. However, as
unforeseen circumstances arise, the Year 2000 issue could disrupt the Company's
normal business operations. The most reasonably likely worst case Year 2000
scenarios foreseeable at this time would include the inability to systematically
process, in some combination, various types of customer transactions. This could
affect the Company's ability to accept deposits or process withdrawals,
originate new loans or accept loan payments in the automated manner currently
utilized. Depending upon how long this scenario lasted, this could have a
material adverse effect on the Company's operations. The contingency plan
addresses alternative methods to enable the Company to continue to offer basic
services to the Company's customers. The costs of the Year 2000 project and the
benchmark dates are based on management's best estimates, which are based on a
number of assumptions including future events. The Company cannot guarantee
that these estimates will be achieved at the cost disclosed or within the time
frames indicated.
5
<PAGE>
ASSET/LIABILITY MANAGEMENT
The Company strives to achieve consistent net interest income and reduce
its exposure to adverse changes in interest rates by attempting to match the
terms to repricing of its interest-sensitive assets and liabilities. Factors
beyond the Bank's control, such as market interest rates and competition, may
also have an impact on the Bank's interest income and interest expense.
In the absence of any other factors, the overall yield or return associated
with the Bank's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease. By
controlling the increases and decreases in its interest income and interest
expense which are brought about by changes in market interest rates, the Bank
can significantly influence its net interest income.
The three senior officers of the Bank meet on a weekly basis to monitor the
Bank's interest rate risk position and to set prices on loans and deposits to
manage interest rate risk within the parameters set by the Board of Directors.
The President of the Bank reports to the Board of Directors on a regular basis
on interest rate risk and trends, as well as liquidity and capital ratios and
requirements. The Board of Directors reviews the maturities of the Bank's
assets and liabilities and establishes policies and strategies designed to
regulate the Bank's flow of funds and to coordinate the sources, uses and
pricing of such funds. The first priority in structuring and pricing the Bank's
assets and liabilities is to maintain an acceptable interest rate spread while
reducing the net effects of changes in interest rates. The Bank's management is
responsible for administering the policies and determinations of the Board of
Directors with respect to the Bank's asset and liability goals and strategies.
The Bank's principal strategy in managing interest rate risk has been to
emphasize the acquisition of short- and intermediate-term assets, including
locally originated 15-year fixed-rate mortgage loans and consumer loans,
particularly automobile loans. In addition, in managing its portfolio of
investment securities and mortgage-backed securities, the Bank in recent periods
has purchased short-term investment securities so as to reduce the Bank's
exposure to increases in interest rates. The Bank currently retains all loans
originated in its portfolio, although the Bank's loans generally conform to
secondary market requirements.
In addition to shortening the average repricing period of its assets, the
Bank has sought to lengthen the average maturity of its liabilities by adopting
a tiered pricing program for its certificates of deposit, which provides higher
rates of interest on its longer term certificates in order to encourage
depositors to invest in certificates with longer maturities.
MARKET RISK
Management measures the Bank's interest rate risk by computing estimated
changes in the net portfolio value ("NPV") of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. NPV represents the market value of portfolio
equity and is the difference between incoming and outgoing discounted cash flows
from assets and liabilities, with adjustments made for off-balance sheet items.
These computations estimate the effect on the Bank's NPV of sudden and sustained
1% to 4% increases and decreases in market interest rates. The Bank's Board of
Directors has adopted an interest rate risk policy which establishes maximum
decreases in the Bank's estimated NPV of 25%, 50%, 75% and 90% in the event of
1%, 2%, 3% and 4% increases in market interest rates, respectively, and of 25%,
25%, 25% and 25% in the event of 1%, 2%, 3% and 4% decreases in market interest
rates, respectively. The following table presents the Bank's projected change
in NPV for the various rate shock levels at September 30, 1998.
6
<PAGE>
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of PV of Assets
Change -------------------------------------------- ---------------------------
in Rates $ Amount $ Change (1) % Change (2) NPV Ratio (3) Change (4)
- -------- -------- ------------ ------------ ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
+400 bp $29,507 $(10,350) (26)% 11.64% (329) bp
+300 bp 32,545 (7,312) (18) 12.65 (228) bp
+200 bp 35,457 (4,400) (11) 13.59 (134) bp
+100 bp 37,861 (1,996) (5) 14.33 (60) bp
0 bp 39,857 14.93
- -100 bp 41,546 1,689 4 15.42 49 bp
- -200 bp 43,845 3,988 10 16.08 115 bp
- -300 bp 47,116 7,259 18 17.03 210 bp
- -400 bp 50,388 10,530 26 17.95 302 bp
- ---------------
</TABLE>
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
<TABLE>
<CAPTION>
***Risk Measures: 200 bp rate shock*** At At
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Pre-Shock NPV Ratio: NPV as % of PV of Assets................. 14.93% 10.98%
Exposure Measure: Post Shock NPV Ratio........................ 13.59 8.89
Sensitivity Measure: Change in NPV Ratio...................... 134 bp 210 bp
</TABLE>
The above table indicates that at September 30, 1998, in the event of
sudden and sustained increases in prevailing market interest rates, the Bank's
NPV would be expected to decrease, and that in the event of sudden and sustained
decreases in prevailing market interest rates, the Bank's NPV would be expected
to increase. The Bank's Board of Directors reviews the Bank's NPV position
quarterly, and, if estimated changes in NPV are not within the targets
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board approved targets. At
September 30, 1998, the Bank's estimated changes in NPV were within the targets
established by the Board of Directors.
NPV is calculated by the OTS by using information provided by the Bank.
The calculation is based on the net present value of discounted cash flows
utilizing market prepayment assumptions and market rates of interest provided by
Bloomberg quotations and surveys performed during the quarter ended September
30, 1998, with adjustments made to reflect the shift in the Treasury yield curve
between the survey date and the quarter-end date.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections set
forth in the table, should market conditions vary from assumptions used
7
<PAGE>
in the preparation of the table. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates on
a short-term basis and over the life of the asset. In addition, the proportion
of adjustable-rate loans in the Bank's portfolio could decrease in future
periods if market interest rates remain at or decrease below current levels due
to refinance activity. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in the tables. Finally, the ability of many borrowers to repay
their adjustable-rate debt may decrease in the event of an interest rate
increase.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily balances has caused any material difference
in the information presented.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ---------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)..... $166,612 $13,462 8.08% $156,227 $13,240 8.47% $149,571 $13,094 8.75%
Mortgage backed
securities.............. 35,627 2,298 6.45 37,440 2,428 6.49 36,936 2,309 6.25
Investment securities
(2) and FHLB stock...... 19,898 1,393 7.00 39,177 2,773 7.08 34,966 2,439 6.98
Other interest-earning
assets.................. 31,315 1,657 5.29 16,150 1,016 6.29 20,349 1,222 6.01
-------- ------- -------- ------- -------- -------
Total
interest-earning
assets.............. 253,452 18,810 7.42 248,994 19,457 7.81 241,822 19,064 7.88
Non-interest-earning assets 9,672 12,317 12,636
-------- -------- --------
Total assets......... $263,124 $261,311 $254,458
======== ======== ========
Interest-bearing
liabilities:
Deposits................. $228,356 9,857 4.32 $232,929 10,312 4.43 $228,913 10,621 4.64
Other liabilities........ 1,640 10 .61 1,523 10 0.66 1,406 15 1.07
-------- ------- -------- ------- -------- -------
Total
interest-bearing
liabilities......... 229,996 9,867 4.29 234,452 10,322 4.40 230,319 10,636 4.62
------- ------- -------
Non-interest-bearing
liabilities............... 4,072 3,989 2,861
-------- -------- --------
Total liabilities.... 234,068 238,441 233,180
Stockholders' equity....... 29,056 22,870 21,278
-------- -------- --------
Total liabilities
and retained
earnings............ $263,124 $261,311 $254,458
======== ======== ========
Net interest income........ $ 8,943 $ 9,135 $ 8,428
======= ======= =======
Interest rate spread....... 3.13% 3.41% 3.26%
======= ======= =======
Net interest margin (3).... 3.53% 3.67% 3.49%
======= ======= =======
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............. 110.17% 107.20% 104.99%
======= ======= =======
</TABLE>
(1) Includes nonaccrual loans.
(2) Consists of U.S. Government and agency securities and, for the year ended
September 30, 1996, investments in mutual funds.
(3) Represents net interest income divided by the average balance of interest-
earning assets.
8
<PAGE>
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).
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------------- --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
----------- ------- ------- --------- --------- ------ ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable................ $ 880 $(616) $ (41) $ 223 $ 583 $(418) $(19) $ 146
Mortgage-backed securities...... (118) (13) 1 (130) 32 86 1 119
Investment securities and
FHLB Stock................... (1,365) (36) 20 (1,381) 293 36 4 333
Other interest-earning assets... 1,009 (177) (191) 641 (237) 92 (60) (205)
------- ----- ----- ------- ----- ----- ---- -----
Total interest-earning assets.. 406 (842) (211) (647) 671 (204) (74) 393
Interest expense:
Deposits........................ (202) (258) 5 (455) 186 (487) (8) (309)
Other liabilities............... -- -- -- -- (2) (6) 3 (5)
------- ----- ----- ------- ----- ----- ---- -----
Total interest-bearing
liabilities................. (202) (258) 5 (455) 184 (493) (5) (314)
------- ----- ----- ------- ----- ----- ---- -----
Change in net interest income.... $ 403 $(584) $ (11) $ (192) $ 487 $ 218 $ 2 $ 707
======= ===== ===== ======= ===== ===== ==== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
Total assets increased by $17.1 million, or 6.8%, to $268.8 million at
September 30, 1998. The asset increase during 1998 reflected the receipt of
the net proceeds from the Company's stock issuance undertaken in connection with
the Reorganization.
Loans receivable, net increased by $23.3 million, or 14.7%, from $158.7
million at September 30, 1997 to $182.0 million at September 30, 1998. The
increases in the Company's loan portfolio were due primarily to increased
originations of single-family residential mortgage loans as a result of
increased loan demand. Single-family residential mortgage loans increased by
$22.6 million, or 21.8%, from $103.7 million at September 30, 1997 to $126.3
million at September 30, 1998. The Company has emphasized the origination of
automobile loans because of the higher rates and shorter terms to maturity of
those loans. Automobile loans totaled $32.6 million and $33.7 million at
September 30, 1997 and 1998, respectively, which comprised 19.6% and 17.8%,
respectively, of the Bank's gross loan portfolio.
The Company's investment securities decreased by $17.7 million, or 58.4%,
from $30.3 million at September 30, 1997 to $12.6 million at September 30, 1998,
as proceeds from maturing investment securities were utilized to meet a
reduction in deposits.
The Company's mortgage-backed securities decreased by $3.0 million, or
8.0%, from $37.2 million at September 30, 1997 to $34.1 million at September 30,
1998, as funds from maturing mortgage-backed securities were utilized to meet a
reduction in deposits.
9
<PAGE>
The Company's cash, interest-bearing deposits in other banks and federal
funds sold increased by $13.8 million, or 71.8%, to $33.0 million at September
30, 1998, due to the receipt of the net proceeds from the stock issuance
undertaken as part of the Reorganization.
Deposits decreased by $3.9 million, or 1.7%, to $220.8 million at September
30, 1998 due to the sale of the deposits of the Severna Park branch office. The
Bank utilized minimal amounts of FHLB advances during the years ended September
30, 1998 and 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income. Net income decreased by $329,000, from $2.0 million for the
year ended September 30, 1997 to $1.6 million for the year ended September 30,
1998. The decrease was due to the establishment of a charitable foundation (the
"Foundation") during 1998 in connection with the Reorganization. The Company
incurred a $457,000 after-tax expense during the second quarter of calendar year
1998 in connection with the establishment of the Foundation. The decrease in
net income during the year ended September 30, 1998 also reflected a $225,000
increase in other income and a $192,000 decrease in net interest income.
Net Interest Income. Net interest income was $8.9 million for the year
ended September 30, 1998, as compared to $9.1 million for the year ended
September 30, 1997, representing a decrease of $192,000, or 2.1%. The decrease
in net interest income was the result of a decrease in the Company's interest
rate spread during the year. The interest rate spread decreased from 3.4% for
the year ended September 30, 1997 to 3.1% for the year ended September 30, 1998.
The Company's interest rate spread decreased as the yield on interest-earning
assets, primarily loans receivable, decreased during a decreasing market
interest rate environment while competitive pressures did not permit the Company
to lower deposit rates as quickly. The Company's ratio of average interest-
earning assets to average interest-bearing liabilities increased from 106.2% for
the year ended September 30, 1997 to 110.2% for the year ended September 30,
1998 primarily due to the investment of the proceeds from the stock issuance
into interest-earning assets.
Interest Income. Interest income decreased by $648,000, or 3.3%, from
$19.5 million for the year ended September 30, 1997 to $18.8 million for the
year ended September 30, 1998. This decrease was due primarily to a 39 basis
point decrease in the average yield on interest-earning assets.
Interest Expense. Interest expense decreased by $456,000, or 4.4%, from
$10.3 million for the year ended September 30, 1997 to $9.9 million for the year
ended September 30, 1998. This decrease was due primarily to a $4.6 million, or
2.0%, decrease in the average balance of deposits from $232.9 million for the
year ended September 30, 1997 to $228.4 million for the year ended September 30,
1998, primarily due to decreases in the average balances of passbook savings
accounts and certificates of deposits as a result of the sale of the deposits of
the Severna Park branch office in October 1997.
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by management to provide for probable loan losses, based on prior loss
experience, volume and type of lending conducted by the Company, industry
standards and past due loans in the Company's loan portfolio. The Company
established provisions for loan losses of $119,000 and $286,000 for the years
ended September 30, 1998 and 1997, respectively. In establishing such
provisions, management considered the level of the Company's non-performing
loans which were $1.1 million and $1.8 million at September 30, 1998 and 1997,
respectively, and the levels of the Company's net charge-offs, which totaled
$63,000 and $234,000 during the years ended September 30, 1998 and 1997,
respectively.
Other Income. Total other income increased by $225,000, or 32.8%, from
$686,000 for the year ended September 30, 1997 to $911,000 for the year ended
September 30, 1998. The increase in other income for the year ended September
30, 1998 was attributable to a gain on sale of branch deposits, as the Bank sold
the deposits of its Severna Park branch in October 1997. In connection with
such sale, the Bank sold deposits totaling $6.2 million and
10
<PAGE>
recognized a gain of $339,000 representing a premium paid by the buyer on the
deposits sold. Such increase was offset, in part, by the absence during the year
ended September 30, 1998 of a gain on sale of investment securities; the Bank
earned a $51,000 gain on sale of investment securities during the year ended
September 30, 1997.
Non-interest Expenses. Total non-interest expenses increased by $756,000,
or 12.1%, from $6.3 million for the year ended September 30, 1997 to $7.0
million for the year ended September 30, 1998. The increase was due to the
establishment of the Foundation during 1998 in connection with the
Reorganization. The Company incurred a pre-tax $750,000 expense during the
second quarter of calendar year 1998 in connection with the establishment of the
Foundation. The increase in non-interest expenses was offset, in part, by a
decrease during the year in salaries and related expenses and occupancy
expenses, as the Bank closed its Severna Park branch office following the sale
of the deposits of that office in October 1997, as well as to reduced pension
plan costs.
Management believes that salaries and related expense will increase in
future periods as a result of the adoption of the ESOP and other stock benefit
plans, if adopted. Furthermore, the Company expects other expenses will
increase as a result of the costs associated with being a public institution.
Income Taxes. The Company's income tax expense was $1.3 million and $1.1
million for the years ended September 30, 1997 and 1998, respectively. The
Company's effective tax rates were 39.7% and 39.4% for the years ended September
30, 1997 and 1998, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Net Income. The Bank had net income of $2.0 million for the year ended
September 30, 1997, compared to net income of $1.2 million for the year ended
September 30, 1996, representing an increase of $773,000, or 64.2%. The
increase primarily was due to an increase in net interest income and a decrease
in deposit insurance premiums, offset in part by a decrease in gain from the
liquidation of a real estate development joint venture and an increased income
tax provision.
Net Interest Income. Net interest income was $9.1 million for the year
ended September 30, 1997, as compared to $8.4 million for the year ended
September 30, 1996, representing an increase of $707,000, or 8.4%. The increase
was due primarily to an increase in the Bank's interest rate spread from 3.26%
for the year ended September 30, 1996 to 3.41% for the year ended September 30,
1997. The Bank was able to improve its interest rate spread during the year
ended September 30, 1997 by taking advantage of decreasing market interest rates
as interest-bearing liabilities repriced more quickly during the year than did
interest-earning assets. The ratio of average interest-earning assets to
average interest-bearing liabilities increased from 104.99% for the year ended
September 30, 1996 to 106.20% for the year ended September 30, 1997.
Interest Income. Total interest income was $19.5 million for the year
ended September 30, 1997, as compared to $19.1 million for the year ended
September 30, 1996, representing an increase of $394,000, or 2.1%. Such
increase was due primarily to a $7.2 million, or 3.0%, increase in the average
balance of interest-earning assets during such year, offset in part by a 7 basis
point decrease in the average yield on interest-earning assets.
Interest on loans receivable increased by $146,000, or 1.1%, from $13.1
million for the year ended September 30, 1996 to $13.2 million for the year
ended September 30, 1997. The increase was due primarily to an increase in the
average balance of loans receivable of $6.6 million, or 4.4%, from $149.6
million for the year ended September 30, 1996 to $156.2 million for the year
ended September 30, 1997. Such increase was offset, in part, by a 28 basis
point decrease in the average yield on loans receivable, reflecting decreases in
prevailing market interest rates. Interest on mortgage-backed securities
increased by $119,000, or 5.2%, from $2.3 million for the year ended September
30, 1996 to $2.4 million for the year ended September 30, 1997. The increase
was due primarily to a 24 basis point increase in the average yield on mortgage-
backed securities. During the year ended September 30, 1997, the Bank purchased
five-and seven-year callable mortgage-backed securities which earned higher
rates than did the Bank's mortgage-backed securities that matured during the
year, thereby allowing the Bank to increase the yield on mortgage-backed
securities, notwithstanding that rates decreased during the year. Such increase
also reflected a $504,000, or 1.4%, increase in the average balance of mortgage-
backed securities from $36.9 million for the year ended September 30, 1996 to
$37.4 million for the year ended September 30, 1997, as the Bank used excess
liquidity to purchase mortgage-backed securities. Interest on investment
securities (consisting of U.S. Government and agency securities, and for the
year ended September 30, 1996, the Bank's investment in mutual funds) and FHLB
stock increased by $438,000, or 18.0%, from $2.4 million for the year ended
September 30, 1996 to $2.9 million for the year ended September 30, 1997. Such
increase was due primarily to an increase in the average balance of investment
securities and FHLB stock of $4.2 million, or 12.0%, from $35.0 million for the
year ended September 30, 1996 to $39.2 million for the year ended September 30,
1997, as the Bank used excess liquidity to purchase investment securities. The
increase in interest on investment securities and FHLB stock also was due to a
36 basis point increase in the average yield on investment securities and FHLB
stock from 6.98% for the year ended September 30, 1996 to 7.34% for the year
ended September 30, 1997, due to the Bank's purchasing investment securities
with longer terms (generally three to five years) to maturity, which have higher
rates than short-term securities. Interest on other interest-earning assets,
which consist of interest-bearing deposits in other banks and federal funds
sold, decreased by $310,000, or 25.4%, from $1.2 million for the year ended
September 30, 1996 to $912,000 for the year ended September 30, 1997. Such
decrease was due primarily to a $4.2 million, or 20.6%, decrease in the average
balance of other interest-earning assets, as the Bank utilized excess liquidity
to purchase investment securities and mortgage-backed securities and to a 36
basis point decrease in the average yield on other interest-earning assets due
to declines in prevailing market interest rates. The Bank took this action in
order to take advantage of the higher yield available on investment securities
and mortgage-backed securities as compared to the yield available on interest-
bearing deposits in other banks and federal funds sold.
Interest Expense. Interest expense, which consists primarily of interest
on deposits, decreased by $313,000, or 2.9%, from $10.6 million for the year
ended September 30, 1996 to $10.3 million for the year ended September 30, 1997.
Such decrease was due primarily to decreases in prevailing market interest
rates, as the Bank was able to take advantage of decreasing market rates to
lower its cost of funds. The average cost of the Bank's deposits decreased by
21 basis points from 4.64% for the year ended September 30, 1996 to 4.43% for
the year ended September 30, 1997. The decrease in interest on deposits
attributable to the rate decrease was offset, in part, by a $4.0 million, or
1.7%, increase after interest credited in the average balance of deposits from
$228.9 million for the year ended September 30, 1996 to $232.9 million for the
year ended September 30, 1997, primarily due to an increase in certificates of
deposit, offset, in part, by a decrease in passbook savings deposits. The Bank
made very limited use of FHLB advances during the year ended September 30, 1996,
while no FHLB advances were utilized during the year ended September 30, 1997.
Provision for Loan Losses. The Bank established provisions for loan losses
of $434,000 and $286,000 for the years ended September 30, 1996 and 1997,
respectively. The decrease in the provision for loan losses in 1997 reflected a
decrease in the Bank's nonperforming loans. In establishing such provisions,
management considered the levels of the Bank's nonperforming loans, which were
$2.3 million and $1.8 million at September 30, 1996 and 1997, respectively, and
the levels of the Bank's net charge-offs, which totaled $296,000 and $234,000
during the years ended September 30, 1996 and 1997, respectively. The decrease
in nonperforming loans reflected decreases in nonaccruing single-family
residential real estate loans and nonaccruing commercial real estate loans.
Other Income. Total other income decreased by $389,000, or 36.1%, from
$1.1 million for the year ended September 30, 1996 to $687,000 for the year
ended September 30, 1997. The decrease in other income primarily was
attributable to a $652,000 gain from liquidation of a real estate development
joint venture, consisting mostly of reversals of previously established
valuation allowances, earned during the year ended September 30, 1996, while the
Bank earned only $35,000 from such activities during the year ended September
30, 1997. The Bank has ceased real estate development activities and does not
expect to earn income from this activity in future years. The Bank also earns
income from servicing fees, fees and charges on loans and fees on transaction
accounts; income from such activities remained relatively stable during the year
ended September 30, 1997 as compared to the prior year. Also contributing to the
decrease in other income was a decrease in gain on sale of foreclosed real
estate from a gain of $112,000 for the year ended September 30, 1996 to a $1,000
loss during the year ended September 30, 1997. Offsetting the effects of these
items was an increase in gain on sale of investment securities from a loss of
$194,000 for the year ended September 30, 1996 to a gain of $51,000 for the year
ended September 30, 1997. In addition, fees and charges on loans increased by
$31,000, or 19.3%, from $161,000 for the year ended September 30, 1996 to
$192,000 for the year ended September 30, 1997, and fees on transaction accounts
increased by $12,000, or 7.7%, from $156,000 for the year ended September 30,
1996 to $168,000 for the year ended September 30, 1997, reflecting increases in
the levels of loans and transaction accounts.
Non-interest Expenses. Total non-interest expenses decreased by $896,000,
or 14.2%, from $7.2 million for the year ended September 30, 1996 to $6.3
million for the year ended September 30, 1997. Such decrease was attributable
primarily to a decrease in deposit insurance premiums. The Bank paid deposit
insurance premiums of $1.9 million during the year ended September 30, 1996,
while paying only $289,000 in deposit insurance premiums during the year ended
September 30, 1997. The expense related to deposit insurance premiums during
1996 reflected the payment by the Bank of a one-time special assessment in the
amount of $1.3 million assessed by the FDIC on all SAIF-insured institutions to
capitalize the SAIF insurance fund of the FDIC up to the required reserve ratio.
During the year ended September 30, 1996, the Bank paid continuing SAIF
insurance premiums at a rate of 23 cents per $100 of SAIF deposits. However,
that rate dropped to 6.4 cents per $100 effective January 1, 1997 through
September 30, 1999 and, based on the Bank's current condition, will further
decrease to 2.4 cents per $100 thereafter. This revised deposit insurance rate
structure enabled the Bank to recognize a substantial reduction in deposit
insurance premiums going forward. The largest component of non-interest
expenses is salaries and related expense, which increased by $477,000, or 14.5%,
from $3.3 million for the year ended September 30, 1996 to $3.7 million for the
year ended September 30, 1997, due primarily to the implementation and initial
funding of a directors' retirement plan. Expenses related to the directors'
retirement plan in future years are not expected to be as high as the initial
funding costs.
Income Taxes. The Bank's income tax expense was $712,000 and $1.3 million
for the years ended September 30, 1996 and 1997, respectively. The Bank's
effective tax rates were 37.2% and 39.7% for the years ended September 30, 1996
and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company initially has no business other than that of the Bank and
investing the net stock issuance proceeds retained by it. The Bank is subject
to certain regulatory limitations with respect to the payment of dividends to
the Company.
At September 30, 1998, the Bank exceeded all regulatory minimum capital
requirements. For information reconciling the Bank's retained earnings as
reported in its financial statements at September 30, 1998 to its tangible, core
and risk-based capital levels and compares such totals to the regulatory
requirements, see Note 13 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 activity of the Company are the origination of loans
and the purchase of investment securities and mortgage-backed securities.
During the years ended September 30, 1998 and 1997, the Bank had $78.0 million
and $51.8 million, respectively, of loan originations. During the years ended
September 30, 1998 and 1997, the Company purchased investment securities in the
amounts of $22.4 million and $44.0 million, respectively, and mortgage-backed
securities in the amounts of $9.6 million and $4.0 million, respectively. Other
investing activities include originations of loans and purchases of mortgage-
backed securities. 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 required minimum ratio is
currently 4.0%. The
11
<PAGE>
Bank's average daily liquidity ratio for the month of September 1998 was
approximately 31.8%, 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 September 30, 1998, cash, interest-bearing deposits in other banks
and federal funds sold totaled $3.6 million, $20.3 million and $9.1 million,
respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. Certificates of deposit which are scheduled to
mature in less than one year at September 30, 1998 totaled $42.0 million. Based
on past experience, management believes that a significant portion of such
deposits will remain with the Bank. The Bank is a party to financial instruments
with off-balance-sheet risk made in the normal course of business to meet the
financing needs of its customers. These financial instruments are standby
letters of credit, lines of credit and commitments to fund mortgage loans and
involve to varying degrees elements of credit risk in excess of the amount
recognized in the statement of financial position. The contract amounts of
those instruments express the extent of involvement the Bank has in this class
of financial instruments and represents the Bank's exposure to credit loss from
nonperformance by the other party.
The Bank generally requires collateral or other security to support
financial instruments with off-balance-sheet credit risk. At September 30,
1998, the Bank had commitments under standby letters of credit and lines of
credit and commitments to originate mortgage loans of $2.1 million, $14.7
million and $2.9 million, respectively. See Note 3 of Notes to Consolidated
Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This Statement requires that comprehensive income -- made up of all revenues,
expenses, gains and losses -- be reported and displayed in an entity's financial
statements with the same prominence as its other financial statements.
Currently, the only item that would be presented as a component of the Company's
comprehensive income which is not also a component of its net income is the
change during the year in unrealized gain or loss on available for sale
securities. The Statement, which is effective for years beginning after
December 15, 1997, will not affect the Company's financial position or its
results of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was also issued in June 1997. This Statement requires that public
business enterprises report financial and descriptive information about their
reportable operating segments. Reportable operating segments are defined as
components of an enterprise about which separate financial information is
available and is evaluated regularly by the chief operating decision maker as a
basis for allocating resources and assessing performance. It also requires
those enterprises to report information about
12
<PAGE>
countries in which they do business and about major customers. The Statement
which is effective for financial statements for periods beginning after December
15, 1997, will not affect the Company's financial position or its results of
operations.
SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" was issued in February 1998. This Statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable. The Statement, which is effective for
fiscal years beginning after December 15, 1997, will not affect the Company's
financial position or its results of operations.
SFAS No. 133, "Accounting For Derivative Instruments and Hedging
Activities" was issued in June 1998. This Statement standardizes the accounting
for derivative instruments including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize these items as assets or
liabilities in the statement of financial position and measure them at fair
value. This Statement generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of the changes
in the fair value of the hedged asset or liability that are attributable to the
hedged risk or the earning effect of the hedged forecast transaction. The
Statement, which is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, will not affect the Company's financial position
or its results of operations.
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." This Statement provides guidance on the financial reporting of
start-up cost and organization cost. It requires cost of start-up activities
and organization cost to be expensed as incurred. The "SOP" also requires the
initial application to be reported as a cumulative effect of a change in
accounting principle. This "SOP" which is effective for fiscal years beginning
after December 15, 1998 will not affect the Company's financial position or
results of operations.
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
BCSB Bankcorp, Inc.
Baltimore, Maryland
We have audited the consolidated statements of financial condition of BCSB
Bankcorp, Inc. and Subsidiaries as of September 30, 1998 and September 30, 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the two year period ended September 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BCSB
Bankcorp, Inc. and Subsidiaries as of September 30, 1998 and 1997, and the
results of its operations and its cash flows for each of the two years in the
two year period ended September 30, 1998, in conformity with generally accepted
accounting principles.
/s/ Anderson Associates, LLP
December 3, 1998
Baltimore, Maryland
F-1
<PAGE>
BCSB BANKCORP, INC.
-------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Assets
------
Cash $ 3,572,309 $ 3,909,276
Interest bearing deposits in other banks 20,299,970 8,206,119
Federal funds sold 9,134,202 7,102,231
Investment securities, held to maturity (Note 2) 12,610,823 30,323,460
Loans receivable, net (Note 3) 181,969,226 158,676,168
Mortgage backed securities, held to maturity (Note 4) 34,197,844 37,189,081
Foreclosed real estate, net (Note 5) 370,690 -
Investment in real estate development and
loans to joint ventures (Note 6) 8,195 12,732
Premises and equipment, net (Note 7) 2,988,558 2,856,988
Federal Home Loan Bank of Atlanta stock 1,511,900 1,433,200
Accrued interest receivable - loans 725,065 738,906
- investments 528,231 456,687
- mortgage backed securities 196,136 218,686
Prepaid income taxes 175,870 314,384
Intangible assets acquired, net 24,497 51,209
Other assets 526,733 249,097
------------ ------------
Total assets $268,840,249 $251,738,224
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposits (Note 8) $220,804,724 $224,656,081
Advance payments by borrowers for
taxes and insurance 850,397 727,272
Income taxes payable (Note 14) 60,792 1,909
Deferred income taxes (Note 14) 143,929 83,538
Payables to disbursing agents 249,430 120,459
Other liabilities 1,587,929 2,290,516
------------ ------------
Total liabilities 223,697,201 227,879,775
Commitments and contingencies (Notes 3, 7 and 11)
Stockholders' Equity (Notes 12 and 13)
- --------------------
Common stock (Par value $.01 - 13,500,000 authorized,
6,116,562 shares issued and outstanding) 61,166 -
Additional paid-in capital 22,645,088 -
Retained earnings (substantially restricted) 25,221,308 23,858,449
------------ ------------
47,927,562 23,858,449
Employee Stock Ownership Plan (1,829,280) -
Stock held by Rabbi Trust (955,234) -
------------ ------------
45,143,048 23,858,449
------------ ------------
Total liabilities and stockholders' equity $268,840,249 $251,738,224
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-2
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For Years Ended
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Interest and fees on loans (Note 3) $13,462,636 $13,239,659
Interest on mortgage backed securities 2,297,838 2,427,932
Interest and dividends on investment securities 1,393,167 2,773,223
Other interest income 1,656,594 1,016,695
----------- -----------
Total interest income 18,810,235 19,457,509
Interest on deposits (Note 8) 9,856,690 10,312,464
Interest on borrowings - short term 10,670 10,474
----------- -----------
Total interest expense 9,867,360 10,322,938
----------- -----------
Net interest income 8,942,875 9,134,571
Provision for losses on loans (Note 3) 118,995 285,942
----------- -----------
Net interest income after provision for losses on loans 8,823,880 8,848,629
Other Income (Loss)
- -------------------
Loss on sale of foreclosed real estate - (694)
Servicing fee income 13,600 17,928
Fees and charges on loans 179,224 191,596
Fees on transaction accounts 161,375 167,888
Rental income 124,254 144,395
Gain from real estate development and joint venture - 34,900
Gain on sale of investment securities - 51,376
Gain on sale of branch deposits 339,000 -
Miscellaneous income 93,452 79,128
----------- -----------
Net other income (loss) 910,905 686,517
Non-Interest Expenses
- ---------------------
Salaries and related expense 3,488,964 3,746,128
Provision for losses on foreclosed real estate 33,248 -
Occupancy expense 588,352 570,539
Deposit insurance premiums 228,419 289,038
Data processing expense 425,746 407,501
Property and equipment expense 400,655 338,764
Professional fees 116,703 78,203
Advertising 327,907 197,642
Telephone, postage and office supplies 308,441 288,975
Baltimore County Savings Bank Foundation contribution (Note 12) 750,000 -
Amortization of excess of cost over fair value of net assets acquired 26,712 27,259
Other expenses 318,268 313,191
----------- -----------
Total non-interest expenses 7,013,415 6,257,240
----------- -----------
Income before tax provision 2,721,370 3,277,906
Income tax provision (Note 14) 1,073,088 1,300,913
----------- -----------
Net income $ 1,648,282 $ 1,976,993
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
BCSB BANKCORP, INC.
-------------------
AND SUBSIDIARIES
----------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized Employee
Additional Gains (Losses) Stock Stock Total
Common Paid-In Retained on Investment Ownership Held By Stockholders'
Stock Capital Earnings Securities Plan Rabbi Trust Equity
---------- ----------- ----------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1996 $ - $ - $21,881,456 $ 31,535 $ - $ - $21,912,991
Change in net unrealized
gains on investment
securities available for sale - - - (31,535) - - (31,535)
Net income for the year ended
September 30, 1997 - - 1,976,993 - - - 1,976,993
---------- ----------- ----------- ---------- ----------- --------- -----------
Balance - September 30, 1997 - - 23,858,449 - - - 23,858,449
Proceeds from stock offering 61,166 22,645,088 - - - - 22,645,088
Borrowings for Employee Stock
Ownership Plan (ESOP) - - - - (1,829,280) - (1,829,280)
Stock held by Rabbi Trust - - - - - (955,234) (955,234)
Capitalize Baltimore County
Savings Bank, MHC - - (285,423) - - - (285,423)
Net income for the year ended
September 30, 1998 - - 1,648,282 - - - 1,648,282
---------- ----------- ----------- ---------- ----------- --------- -----------
Balance - December 31, 1998 $61,166 $22,645,088 $25,221,308 $ - $(1,829,280) $(955,234) $45,143,048
========== =========== =========== ========== =========== ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities
- --------------------
Net income $1,648,282 $1,976,993
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
------------------------------------------
Accretion of discount on investments (31,341) (162,705)
Gain on sale of investment securities - (51,376)
Loans originated for sale (133,000) (225,000)
Proceeds from loans originated for sale 133,000 225,000
Loan fees deferred 84,774 118,796
Amortization of deferred loan fees (304,079) (374,439)
Provision for losses on loans 118,995 285,942
Amortization of premium on mortgage backed
securities 31,280 48,313
Loss on sale of foreclosed real estate - 694
Provision for losses on foreclosed real estate 33,248 -
Gain from real estate development and joint venture - (34,900)
Provision for depreciation 291,980 269,711
(Increase) decrease in accrued interest receivable
on loans 13,841 (4,935)
(Increase) decrease in accrued interest receivable
on investments (71,544) 304,472
Decrease in accrued interest receivable on
mortgage backed securities 22,550 19,996
Decrease in prepaid income taxes 138,514 219,069
Increase in deferred income tax liabilities 60,391 631,628
Amortization of excess of cost over fair value of
net assets acquired 26,712 26,712
(Increase) decrease in other assets (277,636) 465,322
Gain on sale of branch deposits (339,000) -
Increase (decrease) in accrued interest payable
on deposits (21,399) 205,738
Increase (decrease) in income taxes payable 58,883 (934)
Decrease in other liabilities and payables to
disbursing agents (573,616) (557,268)
---------- ----------
Net cash provided by operating activities 910,835 3,386,829
</TABLE>
F-5
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Investing Activities
- ------------------------------------
Proceeds from maturing interest bearing deposits $ 5,347,000 $ 1,882,000
Purchase of interest bearing deposits (198,000) -
Purchases of investment securities - held to
maturity (22,435,091) (44,022,489)
Proceeds from maturities of investment securities -
held to maturity 40,179,069 50,160,000
Proceeds from sale of investment securities -
available for sale - 101,376
Longer term loans originated (36,905,088) (25,519,948)
Principal collected on longer term loans 16,903,601 17,212,666
Net (increase) decrease in short-term loans (3,523,739) 4,185,132
Principal collected on mortgage backed securities 12,540,919 6,554,445
Purchase of mortgage backed securities (9,580,962) (4,020,831)
Proceeds from sales of foreclosed real estate - 139,477
Investment in foreclosed real estate (71,460) -
Net investment and loans to joint ventures 4,537 357,401
Investment in premises and equipment (423,550) (435,590)
Purchase of Federal Home Loan Bank of Atlanta stock (78,700) (132,000)
------------ ------------
Net cash provided by investing activities 1,758,536 6,461,639
Cash Flows from Financing Activities
- ------------------------------------
Proceeds from sale of branch deposits (5,827,235) -
Proceeds from stock offering 22,420,831 -
Employee Stock Ownership Plan (1,829,280) -
Stock held in Rabbi Trust (955,234) -
Net decrease in demand deposits, money market,
passbook accounts and advances by borrowers
for taxes and insurance (3,300,013) (4,113,692)
Net increase (decrease) in certificates of deposit 5,759,415 (4,709,883)
------------ ------------
Net cash provided (used) by financing activities 16,268,484 (8,823,575)
------------ ------------
Increase in cash and cash equivalents 18,937,855 1,024,893
Cash and cash equivalents at beginning of period 12,136,626 11,111,733
------------ ------------
Cash and cash equivalents at end of period $ 31,074,481 $ 12,136,626
============ ============
</TABLE>
F-6
<PAGE>
BCSB BANKCORP, INC.
-------------------
AND SUBSIDIARIES
----------------
BALTIMORE, MARYLAND
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
The following is a summary of cash
and cash equivalents:
Cash $ 3,572,309 $ 3,909,276
Interest bearing deposits in other banks 20,299,970 8,206,119
Federal funds sold 9,134,202 7,102,231
----------- -----------
Balance of cash items reflected on Statement of
Financial Condition 33,006,481 19,217,626
Less - certificate of deposit with a maturity
of more than three months 1,932,000 7,081,000
----------- -----------
Cash and cash equivalents reflected on the
Statement of Cash Flows $31,074,481 $12,136,626
=========== ===========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest $ 9,878,997 $10,117,200
=========== ===========
Income taxes $ 815,300 $ 574,491
=========== ===========
Transfer from loans to real estate acquired
through foreclosure $ 332,478 $ -
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE>
BCSB BANKCORP, INC.
-------------------
AND SUBSIDIARIES
----------------
BALTIMORE, MARYLAND
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
A. Principles of Consolidation BCSB Bankcorp, Inc. (the "Company")
owns 100% of Baltimore County Savings Bank, F.S.B. (the "Bank").
The Bank owns 100% of Baltimore County Service Corporation and
Ebenezer Road, Inc. Baltimore County Service Corporation owns 100%
of Route 543, Inc. The accompanying consolidated financial
statements include the accounts and transactions of these companies
on a consolidated basis since date of acquisition. All intercompany
transactions have been eliminated in the consolidated financial
statements. Ebenezer Road, Inc. sells insurance products. Baltimore
County Service Corporation and Route 543, Inc. have invested in
several joint ventures formed for the purpose of developing real
estate. Route 543, Inc. ceased all operations as of September 30,
1997. These investments have been accounted for on the equity
method and separate summary statements are not presented since the
data contained therein is not material in relation to the
consolidated financial statements.
B. Business The Company's primary purpose is ownership of the Bank.
The Bank's primary business activity is the acceptance of deposits
from the general public in their market area and using the proceeds
for investments and loan originations. The Bank is subject to
competition from other financial institutions. The Bank is subject
to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
C. Basis of Financial Statement Presentation - The consolidated
financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near-term
relate to the determination of the allowance for loan losses and
the valuation of foreclosed real estate and real estate
development.
D. Federal Funds - Federal funds sold are carried at cost which
approximates market.
F-8
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
E. Investments and Mortgage Backed Securities - Investment securities
in equity mutual funds may be held for an indefinite period of time
and are carried at fair value. Investment securities consisting of
federal agency notes and bonds and all of the mortgage backed
securities are carried at cost, since management has the ability and
intention to hold them to maturity. Amortization of related premiums
and discounts are computed using the level yield method over the
life of the security. Gains and losses on all investments and
mortgage backed securities are determined using the specific
identification method.
F. Loans Receivable - Loans receivable are stated at unpaid principal
balances, less undisbursed portion of loans in process, unearned
interest on consumer loans, deferred loan origination fees and the
allowance for loan losses, since management has the ability and
intention to hold them to maturity.
Loans held for sale are carried at the lower of cost or estimated
market value, determined in the aggregate. In computing cost,
deferred loan origination fees are deducted from the principal
balances of the related loans. There were no loans held for sale at
September 30, 1998 and 1997.
The Bank services loans for others and pays the participant its
share of the Bank's collections, net of a stipulated servicing fee.
Loan servicing fees are credited to income when earned and servicing
costs are charged to expense as incurred.
Unearned interest on consumer loans is amortized to income over the
terms of the related loans on the level yield method.
G. Allowance for Loan Losses - An allowance for loan losses is provided
through charges to income in an amount that management believes will
be adequate to absorb losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the
borrowers' ability to pay. Management believes the allowance for
losses on loans is adequate. While management uses available
information to estimate losses on loans, future additions to the
allowances may be necessary based on changes in economic conditions,
particularly in the State of Maryland. In addition, various
regulatory agencies, as an
F-9
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
G. integral part of their examination process, periodically review the
Bank's allowances for losses on loans. Such agencies may require the
Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their
examination.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful or when payment of principal
and interest has become ninety days past due unless the obligation
is well secured and in the process of collection. When a payment is
received on a loan on non-accrual status, the amount received is
allocated to principal and interest in accordance with the
contractual terms of the loan.
Loan origination fees and certain direct loan origination costs are
deferred and recognized by the interest method over the contractual
life of the related loan as an adjustment of yield.
H. Foreclosed Real Estate - Real estate acquired through foreclosure is
recorded at the lower of cost or fair value. Management periodically
evaluates the recoverability of the carrying value of the real
estate acquired through foreclosure using estimates as described
above in Allowance for Loan Losses. In the event of a subsequent
decline, management provides an additional allowance to reduce real
estate acquired through foreclosure to its fair value less estimated
disposal cost. Costs relating to holding such real estate are
charged against income in the current period while costs relating to
improving such real estate are capitalized until a saleable
condition is reached.
I. Investment in Real Estate Development and Loans to Joint Ventures -
Land development costs not in excess of net realizable value are
capitalized and charged to expense as revenue is recognized.
Revenues are recognized when a sale has been consummated. Indirect
costs and administrative expenses are charged as incurred to
periodic income and are not allocated to land development costs. The
Bank capitalizes interest on land development projects in accordance
with Statement 34 of the Financial Accounting Standards Board. No
interest was capitalized for the years ended September 30, 1998 and
1997.
F-10
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
J. Premises and Equipment - Premises and equipment are recorded at
cost. Depreciation is computed on the straight-line method, based on
the useful lives of the respective assets.
K. Intangible Assets Acquired, Net - On September 16, 1994, Baltimore
County Savings Bank, F.S.B. purchased the deposits and certain
assets from the Resolution Trust Corporation, receiver of Second
National Federal Savings Association. The Bank classified as an
intangible asset the fair market value assigned to the capacity of
existing savings accounts acquired to generate future earnings ("the
Core Deposit Value"). The core deposit value of $133,572 is being
amortized on a straight-line method over five years, the estimated
life of the core deposit value. Accumulated amortization was
$109,075 and $82,363 at September 30, 1998 and 1997, respectively.
L. Income Taxes - Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income tax
basis of assets and liabilities based on enacted tax rates expected
to be in effect when such amounts are realized or settled. Deferred
tax assets are recognized only to the extent that is more likely
than not that such amounts will be realized based on consideration
of available evidence. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
M. On October 19, 1997, the Bank sold the deposits of one of its
branches and closed that branch. Deposits sold were approximately
$6,166,000. A gain of $339,000 was realized on the sale.
N. Statement of Cash Flows - In the statement of cash flows, cash and
equivalents include cash, Federal Home Loan Bank of Atlanta
overnight deposits, federal funds and certificates of deposit and
Federal Home Loan Bank of Atlanta time deposits with an original
maturity date less than ninety days.
O. Earnings Per Share - Earnings per share data is not presented for
the year ended September 30, 1998, since the Bank converted to stock
form in July 1998, and such information would not be meaningful.
P. Employee Stock Ownership Plan -The Company accounts for its Employee
Stock Ownership Plan ("ESOP") in accordance with Statement of
Position 93-6 of the Accounting Standards Division of the American
Institute of Certified Public Accountants. (See Note 12)
Q. Reclassification and Restatement - Certain prior years' amounts have
been reclassified to conform to the current year's method of
presentation.
F-11
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 2 - Investment Securities
---------------------
The amortized cost and fair values of investment securities are as
follows as of September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held to Maturity:
September 30, 1998
U.S. Government and Agency
Obligations, held to maturity $12,610,823 $ 50,228 $ - $12,661,051
=========== =========== =========== ===========
September 30, 1997
U.S. Government and Agency
Obligations, held to maturity $30,323,460 $ 100,524 $ 42,194 $30,381,790
=========== =========== =========== ===========
</TABLE>
The following is a summary of investment securities:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Government and Agency Obligations
--------------------------------------
Due within 12 months $ 1,000,000 $ 1,000,313 $10,981,268 $10,961,904
Due beyond 12 months but
within five years 5,060,823 5,073,727 4,250,000 4,244,197
Due beyond five years but
within ten years 6,550,000 6,587,011 14,343,038 14,429,664
Due beyond ten years - - 749,154 746,025
----------- ----------- ----------- -----------
$12,610,823 $12,661,051 $30,323,460 $30,381,790
=========== =========== =========== ===========
</TABLE>
F-12
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 2 - Investment Securities - Continued
---------------------
Proceeds from maturities of held to maturity securities were
$40,179,069 and $50,160,000 for the years ended September 30, 1998 and
1997, respectively. Proceeds from sales and maturities of available for
sale securities was $101,376 for the year ended September 30, 1997. There
were no gross gains or losses realized for the year ended September 30,
1998. Gross gains realized were $51,376 for the year ended September 30,
1997. There were no gross losses realized for the year ended September
30, 1997.
Note 3 - Loans Receivable
----------------
Loans receivable at September 30, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Single-family residential mortgages $126,272,171 $103,677,278
Single-family rental property loans 5,252,511 6,408,729
Commercial loans 9,496,991 10,169,090
Construction loans 7,935,958 8,644,642
Commercial lines of credit 50,000 60,000
Automobile loans 33,747,553 32,632,981
Home equity loans 6,549,261 3,985,840
Savings account loans 680,899 825,154
------------ ------------
189,985,344 166,403,714
Less - undisbursed portion of
loans in process 2,962,757 2,807,231
- unearned interest 3,741,821 3,375,711
- deferred loan origination
fees 277,633 566,965
- allowance for loan
losses 1,033,907 977,639
------------ ------------
$181,969,226 $158,676,168
============ ============
</TABLE>
F-13
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable - Continued
----------------
The following is a summary of the allowance for loan losses:
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $ 977,639 $ 926,491
Provision for losses on loans 118,995 285,942
Charge-offs (278,215) (392,963)
Recoveries 215,488 158,169
---------- ---------
Balance - end of year $1,033,907 $ 977,639
========== =========
</TABLE>
Residential lending is generally considered to involve less risk than
other forms of lending, although payment experience on these loans is
dependent to some extent on economic and market conditions in the Bank's
lending area. Multifamily residential, commercial, construction and
other loan repayments are generally dependent on the operations of the
related properties or the financial condition of its borrower or
guarantor. Accordingly, repayment of such loans can be more susceptible
to adverse conditions in the real estate market and the regional economy.
A significant portion of the Bank's loans receivable are mortgage
loans secured by residential and commercial real estate properties
located in the State of Maryland. Loans are extended only after
evaluation by management of customers' creditworthiness and other
relevant factors on a case-by-case basis. The Bank generally does not
lend more than 90% of the appraised value of a property and requires
private mortgage insurance on residential mortgages with loan-to-value
ratios in excess of 80%. In addition, the Bank generally obtains
personal guarantees of repayment from borrowers and/or others for
multifamily residential, commercial and construction loans and disburses
the proceeds of construction and similar loans only as work progresses on
the related projects. Automobile loans are secured by vehicles and home
equity loans are secured by subordinated real estate properties.
Repayments of automobile loans and home equity loans are expected
primarily from the cash flows of the borrowers.
Non-accrual loans for which interest has been reduced totaled
approximately $1,111,798 and $1,843,000 at September 30, 1998 and 1997,
respectively. There were no impaired loans as defined by SFAS No. 114 at
September 30, 1998 and 1997. There was no interest income recognized on
impaired loans during these periods. The Bank was not committed to fund
additional amounts on these loans.
F-14
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable - Continued
----------------
Interest income that would have been recorded under the original terms
of non-accrual loans and the interest actually recognized for the years
ended September 30, are summarized below:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Interest income that would have been recognized $71,415 $96,732
Interest income recognized 26,805 29,727
------- -------
Interest income not recognized $44,610 $67,005
======= =======
</TABLE>
The following table set forth the amount and activity of the loans
outstanding to officers and directors at September 30, 1998 and 1997.
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Beginning balance $509,375 $ 468,331
New loans 155,600 144,390
Loan repayments (89,509) (103,346)
-------- ---------
Ending balance $575,466 $ 509,375
======== =========
</TABLE>
The Bank services loans for others. The amount of such loans serviced
at September 30, 1998 and 1997 was $5,553,596 and $8,155,940,
respectively. At September 30, 1998 and 1997, the balance of loans sold
by the Bank with recourse amounted to $798,365 and $1,082,187,
respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicings were approximately $41,083 and $54,466 at September 30,
1998 and 1997, respectively.
The Bank is a party to financial instruments with off-balance-sheet
risk made in the normal course of business to meet the financing needs of
its customers. These financial instruments are standby letters of
credit, lines of credit and commitments to fund mortgage loans and
involve to varying degrees elements of credit risk in excess of the
amount recognized in the statement of financial position. The contract
amounts of those instruments express the extent of involvement the Bank
has in this class of financial instruments and represents the Bank's
exposure to credit loss from nonperformance by the other party.
F-15
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable - Continued
----------------
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with off-balance-sheet credit
risk.
<TABLE>
<CAPTION>
Contract Amount At
Financial Instruments Whose Contract ---------------------------------------
Amounts Represent Credit Risk September 30, 1998 September 30, 1997
- ------------------------------------ ------------------ ------------------
<S> <C> <C>
Standby letters of credit $ 2,171,615 $2,744,487
Lines of credit $14,737,500 $8,240,400
Mortgage loan commitments, fixed rate $ 2,222,100 $1,146,600
Mortgage loan commitments, variable rate $ 631,000 $ 564,000
</TABLE>
Standby letters of credit are conditional commitments issued by the
Bank guaranteeing performance by a customer to a third party. Those
guarantees are issued primarily to support private borrowing
arrangements, generally limited to real estate transactions. Unless
otherwise noted, the standby letters of credit are not collateralized.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Lines of credit are loan commitments to individuals and companies and
have fixed expiration dates as long as there is no violation of any
condition established in the contract. The Bank evaluates each
customer's credit worthiness on a case-by-case basis.
Rates on mortgage loan commitments for fixed rate loans ranged from
6.500% to 7.50% and 7.125% to 7.5% at September 31, 1998 and 1997,
respectively. Rates on mortgage loan commitments for variable rate loans
ranged from 1/4% under prime to prime at September 30, 1998.
No amount was recognized in the statement of financial position at
September 30, 1998 and 1997, as liability for credit loss nor was any
liability recognized for fees received for standby letters of credit.
The Bank grants loans to customers, substantially all of whom are
residents of the Metropolitan Baltimore and Harford County areas.
F-16
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 4 - Mortgage Backed Securities
--------------------------
The amortized cost and fair values of mortgage backed securities are
as follows as of September 30, 1998 and 1997:
Held to Maturity:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
September 30, 1998
------------------
GNMA certificates $ 441,742 $ 17,115 $ - $ 458,857
FNMA certificates 24,099,992 479,986 - 24,579,978
FHLMC participating
certificates 9,656,110 179,047 171 9,834,986
----------- -------- -------- -----------
$34,197,844 $676,148 $ 171 $34,873,821
=========== ======== ======== ===========
September 30, 1997
-----------------
FNMA certificates $27,473,254 $ 8,278 $511,521 $26,970,011
FHLMC participating
certificates 9,715,827 96,236 30,352 9,781,711
----------- -------- -------- -----------
$37,189,081 $104,514 $541,873 $36,751,722
=========== ======== ======== ===========
</TABLE>
No gains or losses were realized during the years ended September 30,
1998 and 1997, respectively.
Note 5 - Foreclosed Real Estate
----------------------
Foreclosed real estate at September 30, 1998 and 1997 is summarized by
major classification as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
EPIC loans $ 55,903 $ 55,903
Residential real estate 403,937 -
Allowance for losses (89,151) (55,903)
-------- --------
$370,689 $ -
======== ========
</TABLE>
F-17
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 5 - Foreclosed Real Estate - Continued
----------------------
The following is a summary of the allowances for losses on foreclosed
real estate:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $55,903 $ 87,965
Provision for losses 33,248 -
Recoveries - (32,062)
------- --------
Balance - end of year $89,151 $ 55,903
======= ========
</TABLE>
Note 6 - Investment in Real Estate Development and Loans to Joint Ventures
-----------------------------------------------------------------
The subsidiaries are parties to joint ventures formed for the purpose
of developing lots for resale. The subsidiaries' interest in the profits
or losses of the joint ventures range from 20% to 50%. The subsidiaries'
equity in the joint ventures is $8,195 and $12,732 at the periods ended
September 30, 1998 and 1997, respectively.
During the periods ended September 30, 1998 and 1997, the Bank made no
acquisition, development and construction loans to the joint ventures
mentioned above.
The following is a summary of the allowance for losses on loans to the
joint venture:
<TABLE>
<CAPTION>
September 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $ - $(34,900)
Reduction of provision for losses - 34,900
----- --------
Balance - end of year $ - $ -
===== ========
</TABLE>
F-18
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 6 - Investment in Real Estate Development and Loans to Joint Ventures -
-----------------------------------------------------------------
Continued
Gain from real estate development and joint ventures consisted of a
reduction of provision for loss on real estate development and joint
venture in the amount of $34,900 for the year ended September 30, 1997.
Note 7 - Premises and Equipment
----------------------
Premises and equipment at September 30, 1998 and 1997 are summarized
by major classification as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997 Life
---- ---- ----
<S> <C> <C> <C>
Office building $2,440,860 $2,440,860 50 Years
Leasehold improvements 144,768 88,703 7-31 Years
Furniture, fixtures and equipment 3,103,435 2,800,592 10 Years
---------- ----------
5,689,063 5,330,155
Accumulated depreciation 2,700,505 2,473,167
---------- ----------
$2,988,558 $2,856,988
========== ==========
</TABLE>
The Bank has entered into long-term leases for the land on which the
main office is located and the premises of its branch offices. Rental
expense under long-term leases for property for the years ended September
30, 1998 and 1997 was $191,945 and $187,434, respectively. At September
30, 1998, minimum rental commitments under noncancellable leases are as
follows:
<TABLE>
<CAPTION>
Years Ended September 30, Amount
- ------------------------- ------
<S> <C>
1999 $ 322,718
2000 315,518
2001 283,900
After 2001 1,141,655
----------
$2,063,791
==========
</TABLE>
F-19
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 8 Deposits
--------
Deposits are summarized as follows at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Amount % Amount %
------ ------- ------ -------
Type of Account
---------------
Deposits
--------
<S> <C> <C> <C> <C>
NOW $ 19,689,552 8.92% $ 20,528,412 9.14%
Non-interest bearing NOW 5,652,964 2.56 3,674,511 1.63
Money market 8,727,537 3.95 10,054,713 4.48
Passbook savings 54,812,311 24.82 60,657,069 27.00
Certificates 131,196,477 59.42 128,994,405 57.42
------------ ------ ------------ ------
220,078,841 99.67 223,909,110 99.67
Accrued interest payable 725,883 .33 746,971 .33
------------ ------ ------------ ------
$220,804,724 100.00% $224,656,081 100.00%
============ ====== ============ ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $12,438,466 and $10,485,518 at
September 30, 1998 and 1997, respectively. Deposits in excess of
$100,000 are not insured by the Savings Association Insurance Fund.
At September 30, 1998, scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1998 $ 41,963,517
1999 57,375,156
2000 18,754,645
2001 6,071,904
2002 and thereafter 7,031,255
------------
$131,196,477
============
</TABLE>
Interest expense on deposits for the years ended September 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NOW $ 401,288 $ 476,519
Money market 313,474 346,331
Passbooks savings 2,004,071 1,874,961
Certificates 7,137,857 7,614,653
---------- -----------
$9,856,690 $10,312,464
========== ===========
</TABLE>
F-20
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 9 - Borrowings
----------
At September 30, 1998 and 1997 and for the year ended September 30,
1998, the Bank had no outstanding borrowings. For the year ended
September 30, 1997, the Bank borrowed at various times on their line of
credit from the Federal Home Loan Bank of Atlanta. The line has no
predetermined limit and is secured by a blanket lien on mortgages. Each
borrowing is evaluated on a case-by-case basis by the lender.
Note 10- Pension Plan
------------
The Bank has a noncontributory, defined contribution, pension plan
covering substantially all employees. It is a money purchase plan with
contributions made each year for every participant in accordance with
actuarial recommended formula. There is no past service liability or
unfunded value of vested benefits as of December 31, 1997, the date of
latest available annual review and valuation of the plan.
The expense for the pension plan amounted to $238,844 and $271,826 for
the years ended September 30, 1998 and 1997, respectively.
Note 11- Directors Retirement Plan
-------------------------
Effective July 1995, the Bank adopted a Deferred Compensation Plan
covering all directors. The Plan provides benefits based upon certain
vesting requirements. During 1997, the amount of the Plan's benefit was
increased from $40,000 to $80,000 per director. During 1998, the Plan
was rescinded in favor of a Rabbi Trust that is invested primarily in the
Company's stock. No compensation expense was recognized for the Rabbi
Trust during 1998. Compensation expense recognized in connection with
the Deferred Compensation Plan prior to adoption of the Rabbi Trust for
the years ended September 30, 1998 and 1997 was $51,334 and $412,859,
respectively.
F-21
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 12- Common Stock
------------
In 1998, the Bank reorganized from a federally chartered mutual
savings bank to a federally chartered stock savings bank.
Simultaneously, the Bank consummated the formation of a new holding
company, BCSB Bankcorp, Inc. Also simultaneously, a mutual holding
company was formed, Baltimore County Savings Bank, M.H.C. In connection
with the reorganization, the Company issued 6,116,562 shares of its
common stock. A majority of that stock (3,754,960 shares) was issued to
Baltimore County Savings Bank, M.H.C. The remainder was issued to the
general public. Also, the Bank established the Baltimore County Savings
Bank Foundation through a contribution of 75,000 shares of its common
stock.
At the same time as the reorganization, the Bank established an
Employee Stock Ownership Plan ("ESOP") for its employees. On July 8,
1998 the ESOP acquired 182,928 shares of the Company's common stock in
connection with the Bank's Reorganization to a mutual holding company
form of organization. The ESOP holds the common stock in a trust for
allocation among participating employees, in trust or allocated to the
participants' accounts and an annual contribution from the Bank to the
ESOP and earnings thereon. All of the ESOP shares are unearned at
September 30, 1998. The fair value of ESOP shares at September 30, 1998
is $1,966,476.
All employees of the Bank who attain the age of 18 and complete one
year of service with the Bank will be eligible to participate in the
ESOP. Participants must be employed at least 500 hours in a plan year in
order to receive an allocation. Each participant's vested interest under
the ESOP is determined according to the following schedule: 0% for less
than 2 years of service with the Company or the Bank, 20% for 2 years of
service, 40% for 3 years of service, 60% for 4 years of service, 80% for
5 years of service, and 100% for 6 years of service. For vesting
purposes, a year of service means any plan year in which an employee
completes at least 1,000 hours of service (whether before or after the
ESOP's January 1, 1998 effective date). Vesting accelerates to 100% upon
a participant's attainment of age 65, death or disability.
The ESOP will be funded by contributions made by the Bank in cash or
common stock and dividends on the shares held in the Trust. The Bank
will recognize compensation expense as shares are committed for release
from collateral at their current market price. Dividends on allocated
shares are recorded as a reduction of retained earnings and dividends on
unallocated shares are recorded as a reduction of Debt. There was no
compensation cost for the year ended September 30, 1998.
F-22
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 13- Retained Earnings
-----------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possible
additional discretionary, actions by the regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) and risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
September 30, 1998, that the Bank meets all capital adequacy requirements
to which it is subject.
As of September 30, 1998, the most recent notification from the Office
of Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Association must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category. The Bank's actual capital
amounts and ratios are also presented in the table.
The following table presents the Bank's capital position based on the
September 30, 1998 financial statements and the current capital
requirements.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ------------------------
Actual % of Required % of Required % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tangible (1) $44,244,319 16.46% $ 4,031,889 1.50% $ N/A N/A %
Tier I capital (2) $44,244,319 29.95% $ N/A N/A % $ 8,862,799 6.00%
Core (1) $44,244,319 16.46% $ 8,063,777 3.00% $13,439,628 5.00%
Risk-weighted (2) $45,278,226 30.65% $11,817,065 8.00% $14,771,331 10.00%
</TABLE>
(1) To adjusted total assets.
(2) To risk-weighted assets.
F-23
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 13- Retained Earnings - Continued
-----------------
<TABLE>
<CAPTION>
September 30,
1998
--------------
<S> <C>
Total Stockholders' Equity $ 45,143,048
Less: Non-allowable items
Intangible assets acquired, net (24,497)
Investment in and advances to
non-includable subsidiaries (874,232)
------------
Tangible and core capital 44,244,319
General valuation allowance 1,033,907
------------
Risk-based capital $ 45,278,226
============
Total Assets $268,840,249
Less: Non-allowable items
Intangible assets acquired, net (24,497)
Assets of non-includable subsidiaries not
eliminated for regulatory capital purposes (23,184)
------------
Tangible and adjusted tangible assets $268,792,568
============
Risk-weighted assets $147,713,312
============
</TABLE>
The OTS has adopted an interest rate risk component of regulatory
capital requirements effective January 1, 1994. The rule requires
additional capital to be maintained if the Bank's interest rate risk
exposure, measured by the decline in the market value of the Bank's net
portfolio value, exceeds 2% of assets as a result of a 200 basis point
shift in interest rates. As of September 30, 1998, the Bank is not
subject to the interest rate risk requirement.
OTS regulations limit the payment of dividends and other capital
distributions by the Bank. The Bank is able to pay dividends during a
calendar year without regulatory approval to the extent of the greater of
(i) an amount which will reduce by one-half its surplus capital ratio at
the beginning of the year plus all its net income determined on the basis
of generally accepted accounting principles for that calendar year or
(ii) 75% of net income for the last four calendar quarters.
F-24
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 13- Retained Earnings - Continued
-----------------
The Bank is restricted in paying dividends on its stock to the greater
of the restrictions described in the preceding paragraph, or an amount
that would reduce its retained earnings below its regulatory capital
requirement or the accumulated bad debt deduction.
Note 14- Income Taxes
------------
The current tax provision consists of the following for the years
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current expense $1,012,697 $ 669,285
Deferred expense 60,391 631,628
---------- ----------
Total tax expense $1,073,088 $1,300,913
========== ==========
</TABLE>
The tax effects to temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Deferred loan origination fees $ - $ 140,348
Allowance for loan losses 399,295 376,792
Allowance for uncollected interest 22,253 25,877
--------- ---------
Total gross deferred tax assets 421,548 543,017
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta
stock dividends (151,928) (151,928)
Depreciation (108,903) (93,820)
Bad debt deduction in excess of
base year reserves (304,646) (380,807)
--------- ---------
Total gross deferred tax liabilities (565,477) (626,555)
--------- ---------
Net Deferred Tax Liabilities $(143,929) $ (83,538)
========= =========
</TABLE>
F-25
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 14- Income Taxes - Continued
------------
The amount computed by applying the statutory federal income tax rate
to income before taxes and extraordinary item is greater than the taxes
provided for the following reasons:
<TABLE>
<CAPTION>
For the Years Ended September 30,
--------------------------------------------------
1998 1997
-------------------------- ---------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income
---------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Statutory federal income
tax rate $ 925,266 34.00% $1,114,488 34.00%
Increases (Decreases)
Resulting From
--------------------
State income tax net of
federal income tax benefit 129,738 4.77 157,442 4.80
Other 18,084 .66 28,983 .88
---------- ------------ ---------- -------
$1,073,088 39.43% $1,300,913 39.68%
========== ============ ========== =======
</TABLE>
The Company and its subsidiaries file a consolidated income tax return
on a fiscal year basis. The returns have been audited by the Internal
Revenue Service through the year ended September 30, 1994.
The Bank was allowed a special bad debt deduction limited generally to
8% of otherwise taxable income for the year beginning January 1, 1988
through December 31, 1995. Beginning January 1, 1996 the percentage of
taxable income method of computing the Bank's tax bad debt deduction is
no longer allowed and the amount by which the tax reserve for bad debts
exceeds such amount at September 30, 1988 must be recaptured over a six
year period. A tax liability has been established for the recapture. If
the amounts which qualify as deductions for federal income tax purposes
are later used for purposes other than to absorb loan losses, including
distributions in liquidations, they will be subject to federal income tax
at the then current corporate rate. The accumulated amount of the
retained earnings for which income taxes have not been accrued at
September 30, 1998 and 1997 was $4,227,000. The unrecorded deferred tax
liability on the above amount is approximately $1,633,000 at September
30, 1998 and 1997.
F-26
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 15- 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 upon market prices quoted by dealers 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 fair value of fixed-
maturity certificates of deposit is estimated using the rates currently
offered on deposits of similar remaining maturities.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Financial Assets
- ----------------
Cash $ 3,572 $ 3,572 $ 3,909 $ 3,909
Interest bearing deposits in other banks 20,300 20,300 8,206 8,206
Federal funds sold 9,134 9,134 7,102 7,102
Investment securities - held to maturity 12,611 12,661 30,323 30,382
Loans Receivable
----------------
Mortgage loans 145,141 153,242 125,034 127,858
Share loans 681 681 825 825
Consumer loans 36,147 36,380 32,818 33,280
Mortgage backed securities 34,198 34,874 37,189 36,752
Federal Home Loan Bank of Atlanta stock 1,512 1,512 1,433 1,433
Financial Liabilities
- ---------------------
Deposits $220,805 $221,133 $224,656 $224,765
Mortgage loan commitments - 2,853 - 1,711
</TABLE>
F-27
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 16- Condensed Financial Information (Parent Company Only)
-----------------------------------------------------
Information as to the financial position of BCSB Bankcorp as of
September 30, 1998 and the results of operations and cash flows for the
year ended September 30, 1998 is summarized below.
<TABLE>
<CAPTION>
September 30,
1998
------------------
Statement of Financial Condition
Assets
------
<S> <C>
Cash $ 192,182
Interest bearing deposits in other banks 3,100,089
Federal funds 5,500,000
Employee Stock Ownership Plan loan 1,829,280
Account receivables - intercompany 802,449
Investment in subsidiary 33,725,488
-----------
Total assets $45,149,488
===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Accrued taxes payable $ 6,440
Stockholders' Equity
--------------------
Common stock (6,116,562 shares issued
and outstanding) 61,166
Paid-in capital 22,645,088
Retained earnings (substantially restricted) 25,221,308
-----------
47,927,562
Employee Stock Ownership Plan (1,829,280)
Stock held by Rabbi Trust (955,234)
-----------
Total stockholders' equity 45,143,048
-----------
Total liabilities and stockholders' equity $45,149,488
===========
</TABLE>
F-28
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 16- Condensed Financial Information (Parent Company Only) - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
September 30,
1998
--------------
<S> <C>
Statement of Operations
Other interest income $ 16,724
------------
Net interest income 16,724
Other Income
Income from subsidiary 1,638,047
------------
1,654,771
Non-Interest Expenses
Office expense 49
------------
Net income before tax provision 1,654,722
Income tax provision 6,440
------------
Net income 1,648,282
============
Statement of Cash Flows
Cash Flows from Operation Activities
Net income $ 1,648,282
Equity in net income of subsidiary (542,812)
Increase in accounts receivable intercompany (802,449)
------------
Total cash flows from operations 303,021
Cash Flows from Investing Activities
Purchase of stock of subsidiary (12,108,740)
Increase in accrued taxes payable 6,440
------------
Total cash flows from investing activities (12,102,300)
Cash Flows from Financing Activities
Proceeds from stock offering 22,420,831
Employee Stock Ownership Plan (1,829,280)
------------
Total cash flows from financing activities 20,591,551
Increase in cash and cash equivalents 8,792,272
Cash and cash equivalents at beginning of year -
------------
Cash and cash equivalents at end of year $ 8,792,272
============
</TABLE>
F-29
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 17- Recent Accounting Pronouncements
--------------------------------
SFAS No. 130, "Reporting Comprehensive Income" was issued in June
1997. This Statement requires that comprehensive income - made up of all
revenues, expenses, gains and losses - be reported and displayed in an
entity's financial statements with the same prominence as its other
financial statements. Currently, the only item that would be presented
as a component of the Company's comprehensive income which is not also a
component of its net income is the change during the year in unrealized
gain or loss on available for sale securities. The Statement, which is
effective for years beginning after December 15, 1997, will not affect
the Company's financial position or its results of operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" was also issued in June 1997. This Statement requires that
public business enterprises report financial and descriptive information
about their reportable operating segments. Reportable operating segments
are defined as components of an enterprise about which separate financial
information is available and is evaluated regularly by the chief
operating decision maker as a basis for allocating resources and
assessing performance. It also requires those enterprises to report
information about countries in which they do business and about major
customers. The Statement, which is effective for financial statements for
periods beginning after December 15, 1997, will not affect the Company's
financial position or its results of operations.
SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" was issued in February 1998. This Statement
standardizes the disclosure requirements for pensions and postretirement
benefits to the extent practicable. The Statement, which is effective
for fiscal years beginning after December 15, 1997, will not affect the
Company's financial position or its results of operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June, 1998. This Statement standardizes the
accounting for derivative instruments including certain derivative
instruments embedded in other contracts, by requiring that an entity
recognize these items as assets or liabilities in the statement of
financial position and measure them at fair value. This Statement
generally provides for matching the timing of gain or loss recognition on
the hedging instrument with the recognition of the changes in the fair
value of the hedged asset
F-30
<PAGE>
BCSB BANKCORP, INC.
- -------------------
AND SUBSIDIARIES
- ----------------
BALTIMORE, MARYLAND
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 17- Recent Accounting Pronouncements - Continued
--------------------------------
or liability that are attributable to the hedged risk or the earnings
effect of the hedged forecasted transaction. The Statement, which is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999, will not affect the Company's financial position or its
results of operations.
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-
Up Activities". This Statement provides guidance on the financial
reporting of start-up cost and organization cost. It requires costs of
start-up activities and organization cost to be expensed as incurred.
The "SOP" also requires the initial application to be reported as a
cumulative effect of a change in accounting principle. This "SOP" which
is effective for fiscal years beginning after December 15, 1998 will not
affect the Company's financial position or results of operations.
F-31
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
HENRY V. KAHL GARY C. LORADITCH JOHN J. PANZER, JR.
Chairman of the Board President and Chief Executive Officer Self Employed
of the Company and the Bank
H. ADRIAN COX WILLIAM M. LOUGHRAN P. LOUIS ROHE, JR.
Vice Chairman of the Board Senior Vice President of the Bank Retired
Insurance Agent for Rohe and Rohe and Director
Associates, Baltimore, Maryland
FRANK W. DUNTON
Retired
EXECUTIVE OFFICERS
GARY C. LORADITCH WILLIAM M. LOUGHRAN BONNIE M. KLEIN
President and Chief Executive Officer Senior Vice President Vice President and Treasurer
MICHELLE J. SCOTT DAVID M. MEADOWS
Vice President Vice President, Secretary and
General Counsel
OFFICE LOCATION
4111 E. Joppa Road, Suite 300 4208 Ebenezer Road 563 Bel Air Plaza
Baltimore, Maryland 21236 Perry Hall, Maryland 21128 Bel Air, Maryland 21014
1736 Merrit Blvd. 2165 York Road 712 N. Rolling Road
Dundalk, Maryland 21222 Timmonium, Maryland 21093 Catonsville, Maryland 21228
CORPORATE INFORMATION
INDEPENDENT CERTIFIED ACCOUNTANTS SPECIAL COUNSEL ANNUAL REPORT ON FORM 10-KSB
Anderson Associates, LLP Housley Kantarian & Bronstein, P.C.
7621 Fitch Road 1220 19th Street, N.W., Suite 700 A COPY OF THE COMPANY'S ANNUAL
Baltimore, Maryland 21236 Washington, D.C. 20036 REPORT ON FORM 10-KSB FOR THE
FISCAL YEAR ENDED SEPTEMBER 30,
GENERAL COUNSEL ANNUAL MEETING 1998 AS FILED WITH THE SECURITIES AND
Moore, Carney, Ryan & Lattanzi, LLC The 1999 Annual Meeting of EXCHANGE COMMISSION, WILL BE
411 E. Joppa Road, Suite 201 Stockholders will be held on February 10, FURNISHED WITHOUT CHARGE TO
Baltimore, Maryland 21236 1999 at 4:00 p.m. at the Bank's Perry Hall STOCKHOLDERS AS OF THE RECORD DATE
office located at 4208 Ebenezer Road, FOR THE 1999 ANNUAL MEETING UPON
Baltimore, Maryland WRITTEN REQUEST TO CORPORATE
TRANSFER AGENT AND REGISTRAR SECRETARY, BCSB BANKCORP, INC.,
Chase-Mellon Shareholder Services 4111 E. JOPPA ROAD, SUITE 300,
450 W. 33rd Street, 15th Floor BALTIMORE, MARYLAND 21236
New York, New York 10001
</TABLE>
