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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(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, 1999
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.
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(Name of Small Business Issuer 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
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(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
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(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, 1999, the registrant had $19,942,830 in
revenues.
As of December 16, 1999, the aggregate market value of voting stock held by non-
affiliates was approximately $12,041,441 computed by reference to the average of
the high and low sales price on December 16, 1999 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 15, 1999: 6,053,162
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, 1999. (Parts II and III)
2. Portions of Proxy Statement for registrant's 2000 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Description of Business
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General
BCSB Bankcorp, Inc. BCSB Bankcorp, Inc. (the "Company") serves as the
holding company for its wholly owned subsidiary, Baltimore County Savings Bank,
F.S.B. (the "Bank"). Baltimore County Savings Bank, M.H.C. (the "MHC"), a
federal mutual holding company, owns 62.0% of the Company's outstanding common
stock. The Company's assets consist of its investment in the Bank and its
portfolio of investment securities. The Company is primarily engaged in the
business of directing, planning and coordinating the business activities of the
Bank.
The Company's most significant asset is its investment in the Bank. The
Company is primarily engaged in the business of directing, planning and
coordinating the business activities of the Bank. Accordingly, the information
set forth in this report, including financial statements and related data,
relates primarily to the Bank. In the future, the Company may become an
operating company or acquire or organize other operating subsidiaries, including
other financial institutions. Currently, the Company does not maintain offices
separate from those of the Bank or employ any persons other than its officers
who are not separately compensated for such service. At September 30, 1999, the
Company had total assets of $298.3 million, total deposits of $233.4 million and
stockholders' equity of $45.2 million.
The Company's and the Bank's executive offices are located at 4111 E. Joppa
Road, Suite 300, Baltimore, Maryland 21236, and its main telephone number is
(410) 256-5000.
Baltimore County Savings Bank, F.S.B. The Bank is a federally chartered
stock savings bank operating through eight banking offices serving Baltimore and
Harford Counties in Maryland. The Bank was chartered by the State of Maryland
in 1955 under the name Baltimore County Building and Loan Association. The Bank
received federal insurance of its deposit accounts in 1985 and received a
federal charter in 1987, at which time it adopted its present name of Baltimore
County Savings Bank, F.S.B.
The Bank's principal business consists of attracting deposits from the
general public and investing these funds in loans secured by first mortgages on
owner-occupied, single-family residences in the Bank's market area, and, to a
lesser extent, other real estate loans, consisting of construction loans,
single-family rental property loans and commercial real estate loans, and
consumer loans, 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.
Recent Regulatory and Legislative Changes
On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law. The
Act calls for the modernization of the banking system and could have far-
reaching effects on the financial services industry and the Company's and the
Bank's operations. For additional information on the provisions of this
legislation, see "Depository Institution Regulation -- Recently Enacted
Legislation and Regulatory Changes."
Market Area
The Bank's market area consists of Baltimore County and Harford County,
Maryland, which are part of the Baltimore metropolitan area. At September 30,
1999, management estimates that more than 95% of deposits and 90% of all lending
came from its market area.
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The economy of the Bank's market area is diversified, with a mix of
services, manufacturing, wholesale/retail trade, and federal and local
government. Once the backbone of the regional economy, the manufacturing
industry is relatively stable after almost two decades of decline. The
manufacturing section of Baltimore County received a further boost with General
Motors announcement of its intention to begin construction of a new Allison
Transmission Plant in the White Marsh growth area. Baltimore County currently
maintains 36 percent of the regional manufacturing base. Manufacturing in the
market area is dominated by high technology, particularly within the defense
industry. Similar to national trends, most of the job growth in the Bank's
market area has been realized in service related industries, and service jobs
account for the largest portion of the workforce. Based on the most recent data
available, service jobs accounted for 32.8% of Baltimore County's employment in
1995 as compared to 30.5% in 1991. Comparatively, from 1991 to 1995,
manufacturing jobs declined from 11.3% to 9.7% of Baltimore County's labor
force.
Harford County continued to experience strong economic growth during the
preceding 12-month period, and continues to be one of Maryland's fastest growing
counties. Since 1990 private sector employment has grown by 18.5% with the
largest growth occurring in the transportation, communications and public
utilities sector, 69.8%. While personal income grew over the same period by
27.7%, a rate of growth 6% greater than the Baltimore region and 4.5% greater
than the State of Maryland.
Based on data provided by the Maryland Department of Planning; Harford and
Baltimore County Department of Planning and Zoning, the Bank estimates the
population of the market area to be 959,265, compared to a population of 874,000
in 1990. The median household income in Baltimore and Harford Counties are
$44,889 and $48,191, respectively, compared to $46,618 for the State of
Maryland.
Lending Activities
General. The Bank's gross loan portfolio totaled $225.3 million at
September 30, 1999, representing 75.5% of total assets at that date. At
September 30, 1999, $146.9 million, or 65.2% of the Bank's gross loan portfolio,
consisted of single-family, residential mortgage loans. Other loans secured by
real estate include construction loans, single-family rental property and
commercial real estate loans, which amounted to $5.6 million, $4.8 million and
$10.2 million, respectively, or 2.5%, 2.2% and 4.5%, respectively, of the Bank's
gross loan portfolio at September 30, 1999. The Bank also originates consumer
loans, consisting primarily of automobile loans and home equity lines of credit,
which totaled $46.8 million and $8.0 million, respectively, or 20.8% and 3.5%,
respectively, of the Bank's gross loan portfolio.
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Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At September 30, 1999, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential
(1)........................ $146,868 65.20% $126,272 66.46% $103,677 62.30% $ 94,275 56.74% $ 87,575 55.87%
Single-family rental
property loans............. 4,832 2.15 5,253 2.76 6,409 3.85 7,065 4.25 8,045 5.13
Commercial.................. 10,216 4.54 9,497 5.00 10,169 6.11 10,316 6.21 11,174 7.13
Construction (2)............ 5,592 2.48 7,936 4.18 8,645 5.19 11,427 6.87 7,065 4.51
Commercial lines of credit.... 50 .02 50 .03 60 .04 262 .16 234 .15
Commercial loans secured...... 1,081 .48 -- -- -- -- -- -- -- --
Consumer loans:
Automobile.................. 46,753 20.75 33,748 17.76 32,633 19.61 39,925 24.03 40,793 26.02
Home equity lines of credit. 7,963 3.54 6,549 3.45 3,986 2.40 1,855 1.12 842 .54
Other....................... 1,908 .84 681 .36 825 .50 1,029 .62 1,022 .65
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
225,263 100.00% 189,986 100.00% 166,404 100.00% 166,154 100.00% 156,750 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of
loans in process........... 2,579 2,963 2,807 5,088 3,425
Deferred loan origination
fees....................... 80 278 567 823 1,166
Unearned interest........... 5,948 3,742 3,376 4,757 5,576
Allowance for loan losses... 1,273 1,034 978 926 788
-------- -------- -------- -------- --------
Total..................... $215,383 $181,969 $158,676 $154,560 $145,795
======== ======== ======== ======== ========
</TABLE>
______________
(1) Includes fixed-rate second mortgage loans.
(2) Includes acquisition and development loans.
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Loan Maturity Schedules. The following table sets forth certain
information at September 30, 1999 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. The table does not include any estimate of prepayments
which significantly shorten the average life of mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
Due after
1 through Due after
Due during 5 years after 5 years after
the year ending September September
September 30, 2000 30, 1999 30, 1999 Total
------------------ ------------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans
Single-family residential...... $ 9,358 $ 34,344 $103,166 $146,868
Single-family rental property.. 239 972 3,621 4,832
Commercial..................... 707 2,950 6,559 10,216
Construction................... 3,129 376 2,087 5,592
Commercial lines of credit...... 50 -- -- 50
Commercial loans secured........ 230 851 -- 1,081
Consumer
Automobile..................... 12,420 33,555 778 46,753
Home equity lines of credit.... 1,448 2,989 3,526 7,963
Other.......................... 654 773 481 1,908
--------- --------- -------- --------
Total......................... $ 28,235 $ 76,810 $120,218 $225,263
========= ========= ======== ========
</TABLE>
The following table sets forth at September 30, 1999, the dollar amount of
all loans due one year or more after September 30, 1999 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
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(In thousands)
<S> <C> <C>
Real estate loans:
Single-family residential...... $134,580 $ 2,930
Single-family rental property.. 2,023 2,570
Commercial..................... 6,166 3,343
Construction................... 2,463 --
Commercial lines of credit....... -- --
Commercial loans secured......... 851 --
Consumer:
Automobiles.................... 34,333 --
Home equity lines of credit.... -- 6,515
Other.......................... 1,254 --
-------- -------
Total........................ $181,670 $15,358
======== =======
</TABLE>
5
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank concentrates its lending
activities in its market area.
The following table sets forth certain information with respect to the
Bank's loan origination, purchase and sale activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Single-family residential............ $49,689 $45,691 $22,507
Single-family rental property loans.. -- -- 135
Commercial........................... 2,112 351 1,650
Construction......................... 1,186 1,550 1,228
Commercial lines of credit............ -- -- --
Commercial loans secured 1,137 -- --
Consumer loans:
Automobiles.......................... 36,167 21,267 14,070
Home equity lines of credit.......... 7,475 6,766 11,871
Other................................ 1,822 478 319
------- ------- -------
Total loans originated.............. $99,588 $76,103 $51,780
======= ======= =======
Loans purchased:
Real estate loans..................... $ -- $ -- $ --
Other loans -- -- --
------- ------- -------
Total loans purchased............... $ -- $ -- $ --
======= ======= =======
Loans sold:
Whole loans........................... $ -- $ -- $ --
Participation loans -- 133 225
------- ------- -------
Total loans sold.................... $ -- $ 133 $ 225
======= ======= =======
</TABLE>
The Bank's loan originations are derived from a number of sources,
including referrals by realtors or automobile dealers, depositors and borrowers
and advertising, as well as walk-in customers. The Bank's solicitation programs
consist of advertisements in local media, in addition to occasional
participation in various community organizations and events. Real estate loans
are originated by the Bank's loan personnel. All of the Bank's loan personnel
are salaried, and the Bank does not compensate loan personnel on a commission
basis for loans originated. With the exception of applications for automobile
loans, which loans may be originated on an indirect basis through a limited
number of approved dealers, loan applications are accepted at the Bank's
offices. The Bank has not purchased loans in the past five years and has no
plans to purchase loans in the future.
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The Bank has not sold whole loans in recent years. However, the Bank
occasionally sells participation interests in acquisition and development loans
to reduce its risk on any individual loan and to comply with regulatory loans-
to-one borrower limitations. The Bank sold loan participations totaling $0 ,
$133,000 and $225,000 during the years ended September 30, 1999, 1998 and 1997,
respectively.
Loan Underwriting Policies. The Bank's lending activities are subject
to the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. Real estate loans up to $400,000, as well as all requests for
lines of credit up to $25,000, may be approved by the Bank's Loan Committee,
which consists of the Bank's President, Senior Vice President of Lending and
Vice President and Treasurer and meets weekly. All loans in excess of these
amounts must be approved by the full Board of Directors. Individual officers of
the Bank have been granted authority by the Board of Directors to approve
consumer loans up to varying specified dollar amounts, depending upon the type
of loan. Automobile loans are approved by the Bank's car loan manager or
assistant manager and reviewed by the Bank's Vice President who supervises
lending operations.
Applications for single-family real estate loans generally are
underwritten and closed in accordance with the standards of FHLMC and FNMA. Upon
receipt of a loan application from a prospective borrower, a credit report and
verifications are ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. If a proposed loan is to be
secured by a mortgage on real estate, an appraisal of the real estate is
undertaken by an appraiser approved by the Bank and licensed by the State of
Maryland. In the case of single-family residential mortgage loans, except when
the Bank becomes aware of a particular risk of environmental contamination, the
Bank generally does not obtain a formal environmental report on the real estate
at the time a loan is made. A formal environmental report may be required in
connection with commercial real estate loans, and the Bank obtains a Phase I
environmental study in connection with its underwriting of acquisition and
development loans.
It is the Bank's policy to record a lien on the real estate securing a
loan and to obtain title insurance or an attorney's certification which ensures
that the property is free of prior encumbrances and other possible title
defects. Borrowers must also obtain hazard insurance policies prior to closing
and, when the property is in a flood plain as designated by Federal Emergency
Management Agency, pay flood insurance policy premiums.
With respect to single-family residential mortgage loans, the Bank
makes a loan commitment of between 30 and 60 days for each loan approved. If the
borrower desires a longer commitment, the commitment may be extended for good
cause and upon written approval. No fees are charged in connection with the
issuance of a commitment letter. The interest rate is guaranteed until closing.
The Bank is permitted to lend up to 95% of the lesser of the appraised
value or the purchase price of the real property securing a mortgage loan.
However, if the amount of a residential loan originated or refinanced exceeds
80% of the appraised value, the Bank's policy is to obtain private mortgage
insurance at the borrower's expense on the principal amount of the loan. The
Bank will make a single-family residential mortgage loan with up to a 95% loan-
to-value ratio if the required private mortgage insurance is obtained. The Bank
generally limits the loan-to-value ratio on commercial real estate mortgage
loans to 75%, although the loan-to-value ratio on commercial real estate loans
in limited circumstances has been as high as 80%. The Bank limits the loan-to-
value ratio on single-family rental property loans to 80%. Home equity loans are
made in amounts which, when added to any senior indebtedness, do not exceed 80%
of the value of the property.
Under applicable law, with certain limited exceptions, loans and
extensions of credit by a savings institution to a person outstanding at one
time shall not exceed 15% of the institution's unimpaired capital and surplus.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of unimpaired capital and surplus. Under these
limits, the Bank's loans to one borrower were limited to $5.3 million at
September 30, 1999.
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Applicable law additionally authorizes savings institutions to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
to develop residential housing, provided: (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000; (ii) the savings
institution is and continues to be in compliance with its fully phased-in
regulatory capital requirements; (iii) the loans comply with applicable loan-to-
value requirements; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus; and (v) the Director of
OTS, by order, permits the savings institution to avail itself of this higher
limit. At September 30, 1999, the Bank had no lending relationships in excess
of the loans-to-one-borrower limit. At September 30, 1999, the Bank's largest
loan customer was a $2.8 million relationship consisting of a commercial real
estate loan, a small acquisition/development loan and a $1.5 million
participation acquisition/development loan. This loan is part of a $7.3 million
loan. The loan was made to acquire and develop 318 building lots which will be
sold to builders who will construct single-family residences. The Bank also has
outstanding letters of credit to this developer totaling $544,000. The borrower
has a $531,000 commercial loan secured by real estate. At September 30, 1999,
the loans were current and performing in accordance with their terms.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
Single-Family Residential Real Estate Lending. The Bank historically
has been and continues to be an originator of single-family, residential real
estate loans in its market area. At September 30, 1999, single-family,
residential mortgage loans, excluding single-family rental property loans and
home equity loans, totaled $146.9 million, or 65.2% of the Bank's gross loan
portfolio.
The Bank originates fixed-rate mortgage loans at competitive interest
rates. At September 30, 1999, the Bank had $138.7 million of fixed-rate single-
family mortgage loans, which amounted to 61.6% of the Bank's single-family
mortgage loans. The Bank emphasizes the origination of fixed-rate single-family
residential mortgage loans with maturities of 15 years or less by offering more
competitive rates on these loans as compared to the rates it offers on fixed-
rate mortgage loans with terms in excess of 15 years.
The Bank also offers adjustable-rate, single-family residential
mortgage loans. As of September 30, 1999, $8.2 million, or 3.6% of the Bank's
single-family mortgage loans carried adjustable rates. After the initial term,
the rate adjustments on the Bank's adjustable-rate loans are indexed to a rate
which adjusts annually based upon changes in an index based on the weekly
average yield on U.S. Treasury securities adjusted to a constant comparable
maturity of one year, as made available by the Federal Reserve Board. The
interest rates on most of the Bank's adjustable-rate mortgage loans are adjusted
once a year, and the Bank offers loans that have an initial adjustment period of
one, three or five years. The maximum adjustment is 2% per adjustment period
with a maximum aggregate adjustment of 6% over the life of the loan. The Bank
offers adjustable-rate mortgage loans that provide for initial rates of interest
below the rates that would prevail when the index used for repricing is applied,
i.e., "teaser" rates. All of the Bank's adjustable-rate loans require that any
payment adjustment resulting from a change in the interest rate be sufficient to
result in full amortization of the loan by the end of the loan term and, thus,
do not permit any of the increased payment to be added to the principal amount
of the loan, known as "negative amortization."
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of adjustable-
rate loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate loans may increase due to increases in
interest costs to borrowers. Further, although adjustable-rate loans allow the
Bank to increase the sensitivity of its interest-earning assets to changes in
interest rates, the extent of this interest sensitivity is limited by the
initial fixed-rate period before the first adjustment and the lifetime interest
rate adjustment limitations. Accordingly, there can be no assurance that yields
on the Bank's
8
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adjustable-rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, adjustable-rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although decreases in
the Bank's cost of funds tend to offset this effect.
Single-family Rental Property Loans. The Bank also offers single-family
residential mortgage loans secured by properties that are not owner-occupied,
although it has significantly reduced the originations of such loans during the
past five years. As of September 30, 1999, single-family rental property loans
totaled $4.8 million, or 2.2%, of the Bank's gross loan portfolio. Originations
of single-family rental property loans were $0, $0 and $135,000 for the years
ended September 30, 1999, 1998 and 1997, respectively. Single-family residential
mortgage loans secured by nonowner-occupied properties are made on a fixed-rate
or an adjustable-rate basis and carry interest rates generally from .5% to 1.0%
above the rates charged on comparable loans secured by owner-occupied
properties. The maximum term on such loans is 20 years.
Construction Lending. A substantial portion of the Bank's construction
loans are originated for the construction of owner-occupied, single-family
dwellings in the Bank's primary market area. Residential construction loans are
offered primarily to individuals building their primary or secondary residence,
as well as to selected local developers to build single-family dwellings.
Generally, loans to owner/occupants for the construction of owner-occupied,
single-family residential properties are originated in connection with the
permanent loan on the property and have a construction term of up to 12 months.
Such loans are offered on a fixed-rate or adjustable-rate basis. Interest rates
on residential construction loans made to the owner/occupant have interest rates
during the construction period equal to the same rate on the permanent loan
selected by the customer. Interest rates on residential construction loans to
builders are set at the prime rate plus a margin of between .5% and 1.5%.
Interest rates on commercial construction loans are based on the prime rate plus
a negotiated margin of between .5% and 1.5% and adjust monthly, with
construction terms generally not exceeding 18 months. Advances are made on a
percentage of completion basis. At September 30, 1999, $5.6 million, or 2.5%, of
the Bank's gross loan portfolio consisted of construction loans, virtually all
of which was secured by single-family residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of projected construction costs. The Bank also reviews and inspects each
project at the commencement of construction and as needed prior to disbursements
during the term of the construction loan.
The Bank's originations of construction loans have declined in recent
years. Recent consolidation within the building industry and the increasing
presence in the Bank's market of large builders that are not locally based have
limited the Bank's ability to compete for some loans to builders because the
Bank's loans-to-one-borrower limitation limits its ability to meet the volume
requirements of the large builders. The Bank's construction loans totaled $5.6
million, $7.9 million, $8.6 million, $11.4 million and $7.1 million at September
30, 1999, 1998, 1997, 1996 and 1995, respectively, and construction loan
originations were $1.2 million, $1.6 million and $1.2 million during the years
ended September 30, 1999, 1998 and 1997, respectively.
On occasion, the Bank makes acquisition and development loans to local
developers to acquire and develop land for sale to builders who will construct
single-family residences. Acquisition and development loans, which are
considered by the Bank to be construction loans, are made at a rate that adjusts
monthly, based on the prime rate plus a negotiated margin, for terms of up to
three years. Interest only is paid during the term of the loan, and the
principal balance of the loan is paid down as developed lots are sold to
builders. Generally, in connection with acquisition and development loans, the
Bank issues a letter of credit to secure the developer's obligation to local
governments to complete certain work. If the developer fails to complete the
required work, the Bank would be required to fund the cost of completing the
work up to the amount of the letter of credit. Letters of credit generate fee
income for the Bank but create additional risk. At September 30, 1999, the Bank
had ten such loans outstanding totaling $1.1 million. All acquisition and
development loans were performing in accordance with their terms at such date.
9
<PAGE>
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate and the borrower is unable to meet the Bank's requirements of putting
up additional funds to cover extra costs or change orders, then the Bank will
demand that the loan be paid off and, if necessary, institute foreclosure
proceedings, or refinance the loan. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral having a value which is insufficient to assure full repayment.
The Bank has sought to minimize this risk by limiting construction lending to
qualified borrowers (i.e., borrowers who satisfy all credit requirements and
whose loans satisfy all other underwriting standards which would apply to the
Bank's permanent mortgage loan financing for the subject property) in the Bank's
market area. On loans to builders, the Bank works only with selected builders
with whom it has experience and carefully monitors the creditworthiness of the
builders.
Commercial Real Estate Lending. The Bank's commercial real estate loan
portfolio includes loans to finance the acquisition of small office buildings,
churches, medical condominiums, small shopping centers and small commercial and
industrial buildings. Such loans generally range in size from $100,000 to $2
million, with the largest having an outstanding principal balance of $1.5
million at September 30, 1999. At September 30, 1999, the Bank had $10.2 million
of commercial real estate loans, which amounted to 4.5% of the Bank's gross loan
portfolio. Commercial real estate loans are originated on a fixed-rate or
adjustable-rate basis with terms of up to 20 years at a rate that is at least 1%
above the rate charged by the Bank on single-family residential mortgage loans
having comparable terms and interest rate adjustment periods.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real estate
loans typically involve larger loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans typically is dependent
on the successful operation of the real estate project, retail establishment or
business. These risks can be significantly impacted by supply and demand
conditions in the market for office and retail space and, as such, may be
subject to a greater extent to adverse conditions in the economy generally. To
minimize these risks, the Bank generally limits itself to its market area or to
borrowers with which it has prior experience or who are otherwise known to the
Bank. It is the Bank's policy generally to obtain annual financial statements of
the business of the borrower or the project for which commercial real estate
loans are made. In addition, in the case of commercial real estate loans made to
a partnership or a corporation, the Bank seeks, whenever possible, to obtain
personal guarantees and annual financial statements of the principals of the
partnership or corporation.
Commercial Lines of Credit. On a limited basis and as an accommodation
to its customers, the Bank offers lines of credit to small businesses. Loans in
amounts of up to $25,000 are made on an unsecured basis at an adjustable rate
equal to the prime rate plus a margin of 2%. Up to an additional $25,000 may be
loaned, provided the additional amount is secured. The secured portion of the
loan is made at an adjustable rate equal to the prime rate plus a margin of 1%.
At September 30, 1999, the Bank had $50,000 of outstanding loans and commitments
to fund $25,000 in loans pursuant to unused lines of credit.
The Bank provides commercial lines of credit to businesses within the
Bank's market area. These loans are secured by business assets, including
equipment, automobiles and consumer leases. Generally, all loans are further
personally guaranteed by the owners of the business. The commercial lines have
adjustable interest rates tied to the prime rate and are offered at rates from
prime plus 1% to prime plus 3 1/2%. As of September 30, 1999, the Bank had $1.1
million of such loans outstanding.
Consumer Lending. The consumer loans currently in the Bank's loan
portfolio consist of automobile loans, home equity lines of credit and loans
secured by savings deposit.
10
<PAGE>
Automobile loans totaled $46.8 million, or 20.8%, of the Bank's gross
loan portfolio, at September 30, 1999. Automobile loans are secured by both new
and used cars and, depending on the creditworthiness of the borrower, may be
made for up to 90% of the "sticker price" or purchase price, whichever is lower,
or, with respect to used automobiles, the loan values as published by a
wholesale value listing utilized by the automobile industry. Automobile loans
are made directly to the borrower-owner or indirectly, where the financing is
arranged by the car dealer. Management of the Bank estimates that approximately
80% of automobile loans are originated on an indirect basis through various
dealerships located in its market area. Automobile loans originated on an
indirect basis are considered to entail greater credit risk than automobile
loans originated on a direct basis. New and relatively new cars (less than two
years old or 20,000 miles or less) are financed for a period generally of up to
five years, while used cars are financed for a period generally of up to four
years, or less, depending on the age of the car. Collision insurance is required
for all automobile loans. The Bank also maintains a blanket collision insurance
policy that provides insurance for any borrower who allows his insurance to
lapse. Any expense under the blanket insurance policy of covering a borrower is
billed to the borrower.
The Bank recently has begun placing greater emphasis on the origination
of second mortgage loans and home equity lines of credit. As of September 30,
1999, home equity lines of credit totaled $8.0 million, or 3.5%, of the Bank's
gross loan portfolio. Second mortgage loans are made at fixed rates and for
terms of up to 15 years and totaled $20.4 million, or 9.0%, of the Bank's gross
loans at September 30, 1999.
The Bank's home equity lines of credit currently have adjustable
interest rates tied to the prime rate and are offered anywhere from as low as
the prime rate less .25% up to the prime rate. The interest rate may not adjust
to a rate higher than 18%. The home equity lines of credit require monthly
payments until the loan is paid in full, with a loan term not to exceed 20
years. The minimum monthly payment is 1.5% of the outstanding principal balance.
Home equity lines of credit are secured by subordinate liens against residential
real property. The Bank requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least sufficient to cover its loan.
The Bank makes savings account loans for up to 90% of the depositor's
savings account balance. The interest rate is normally 2.0% above the rate paid
on a passbook savings account, and the account must be pledged as collateral to
secure the loan. Interest generally is billed on a monthly basis. At September
30, 1999, savings account loans accounts totaled $581,000, or .3%, of the Bank's
gross loan portfolio.
As part of the Bank's loan strategy, the Bank has diversified its
lending portfolio to afford the Bank the opportunity to earn higher yields and
to provide a fuller range of banking services. These products have generally
been in the consumer area and include surgical loans, boat loans and loans for
the purchase of recreational vehicles. Such loans totaled $1.3 million at
September 30, 1999.
Consumer lending affords the Bank the opportunity to earn yields higher
than those obtainable on single-family residential lending. However, consumer
loans entail greater risk than do residential mortgage loans, particularly in
the case of loans which are unsecured or secured by rapidly depreciable assets.
Repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by events
such as job loss, divorce, illness or personal bankruptcy. Indirect automobile
lending generally is considered to entail greater risk than direct automobile
lending due to the higher down payments generally made by direct borrowers and
the level of sophistication of the borrowers.
Loan Fees and Servicing. The Bank receives fees in connection with late
payments and for miscellaneous services related to its loans. The Bank also
charges fees in connection with loan originations typically from 0 to 3 points
(one point being equal to 1% of the loan amount) on residential mortgage loan
originations. The Bank generally does
11
<PAGE>
not service loans for others, except for participation loans originated and sold
by the Bank with servicing retained, and earns minimal income from this
activity.
Nonperforming Loans and Other Problem Assets. It is management's policy
to continually monitor its loan portfolio to anticipate and address potential
and actual delinquencies. When a borrower fails to make a payment on a loan, the
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status. Loans which are past due 15 days incur a late fee of 5% of
principal and interest due. As a matter of policy, the Bank will send a late
notice to the borrower after the loan has been past due 15 days and again after
30 days. If payment is not promptly received, the borrower is contacted again,
and efforts are made to formulate an affirmative plan to cure the delinquency.
Generally, after any loan is delinquent 90 days or more, formal legal
proceedings are commenced to collect amounts owed. In the case of automobile
loans, late notices are sent after loans are ten days delinquent, and the
collateral is seized after a loan is delinquent 60 days. Repossessed cars
subsequently are sold at auction.
Loans generally are placed on nonaccrual status if the loan becomes
past due more than 90 days, except in instances where in management's judgment
there is no doubt as to full collectibility of principal and interest, or
management concludes that payment in full is not likely. Consumer loans are
generally charged off, or any expected loss is reserved for, after they become
more than 120 days past due. All other loans are charged off when management
concludes that they are uncollectible. See Note 1 of Notes to Financial
Statements.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate acquired through foreclosure until such time as it is
sold. When such property is acquired, it is initially recorded at the lower of
cost or estimated fair value and subsequently at the lower of book value or fair
value less estimated costs to sell. 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. Any required write-down of the loan to its fair value less estimated
selling costs upon foreclosure is charged against the allowance for loan losses.
See Note 1 of Notes to Financial Statements.
12
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate:
Single-family residential............................... $ 840 769 $1,757 $2,056 $ 717
Single-family rental property........................... -- -- -- -- --
Commercial.............................................. 185 150 86 231 188
Construction............................................ -- 193 -- -- --
Commercial lines of credit.............................. -- -- -- -- --
Commercial loans secured................................ -- -- -- -- --
Consumer................................................. -- -- -- -- --
----- ------- ------ ------ ------
Total................................................... 1,025 $ 1,112 $1,843 $2,287 $ 905
===== ======= ====== ====== ======
Accruing loans which are contractually past due
90 days or more:
Real estate:
Single-family residential............................... $ -- $ -- $ -- $ -- $ --
Single-family rental property........................... -- -- -- -- --
Commercial.............................................. -- -- -- -- --
Construction............................................ -- -- -- -- --
Commercial lines of credit.............................. -- -- -- -- --
Commercial loans secured................................ -- -- -- -- --
Consumer................................................. -- -- -- -- --
------- ------- ------ ------ ------
Total................................................... $ -- $ $ -- $ -- $ --
======= ======= ====== ====== ======
Total non-performing loans.............................. $ 1,025 $ 1,112 $1,843 $2,287 $ 905
======= ======= ====== ====== ======
Percentage of gross loans................................. .45% 0.59% 1.11% 1.38% 0.58%
======= ======= ====== ====== ======
Percentage of total assets................................ .34% 0.41% 0.73% 0.88% 0.38%
======= ======= ====== ====== ======
Other non-performing assets (2)........................... $ 132 $ 441 $ 61 $ 489 $1,410
======= ======= ====== ====== ======
Loans modified in troubled debt
restructuring............................................ $ -- $ -- $ -- $ -- $ --
======= ======= ====== ====== ======
</TABLE>
_________________________
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending
on management's assessment of the collectibility of the loan.
(2) Other nonperforming assets include the Bank's inventory of repossessed
cars, and at September 30, 1996 and 1995, real estate developed and
held for sale.
During the year ended September 30, 1999, gross interest income of
$44,000, would have been recorded on loans accounted for on a nonaccrual basis
if the loans had been current throughout the year. Interest on such loans
included in income during the year ended September 30, 1999 amounted to $34,000.
At September 30, 1999, the Bank had no loans which were not classified
as non-accrual, 90 days past due or restructured but where known information
about possible credit problems of borrowers caused management to have serious
concerns as to the ability of the borrowers to comply with present loan
repayment terms and may result in disclosure as nonaccrual, 90 days past due or
restructured.
At September 30, 1999, nonaccrual loans consisted of 12 single-family
residential mortgage loans aggregating $1.0 million.
13
<PAGE>
Real estate acquired through foreclosure is initially recorded at the
lower of cost or estimated fair value and subsequently at the lower of book
value or fair value less estimated costs to sell. Fair value is defined as the
amount in cash or cash-equivalent value of other consideration that a real
estate parcel would yield in a current sale between a willing buyer and a
willing seller, as measured by market transactions. If a market does not exist,
fair value of the item is estimated based on selling prices of similar items in
active markets or, if there are no active markets for similar items, by
discounting a forecast of expected cash flows at a rate commensurate with the
risk involved. Fair value is generally determined through an appraisal at the
time of foreclosure. The Bank records a valuation allowance for estimated
selling costs of the property immediately after foreclosure. Subsequent to
foreclosure, real estate acquired through foreclosure is periodically evaluated
by management and an allowance for loss is established if the estimated fair
value of the property, less estimated costs to sell, declines. At September 30,
1999, the Bank had $89,000 in real estate owned, which consisted of four single-
family building lots. The Bank also had $1.1 million of other nonperforming
assets, which consisted of non-accrual loans and the Bank's inventory of
repossessed cars.
Federal regulations require savings institutions to classify their
assets on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any. An asset is classified as
doubtful if full collection is highly questionable or improbable. An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future. The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include nonperforming
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Bank regularly reviews its
assets to determine whether any assets require classification or re-
classification. At September 30, 1999, the Bank had $1.5 million in classified
assets consisting of $505,000 in assets classified as special mention, $1.0
million in assets classified as substandard, no assets classified as doubtful
and no assets classified as loss. Special mention assets consisted of seven
single-family residential mortgage loans 60 to 89 days delinquent at September
30, 1999, and substandard assets consisted of the $1.0 million in nonaccrual
loans described above.
Allowance for Loan Losses. In originating loans, the Bank recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions, regular reviews of delinquencies and loan
portfolio quality and evolving standards imposed by federal bank examiners. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality
and allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses and
believes such allowances are adequate, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank's methodology for establishing the allowance for loan losses
takes into consideration probable losses that have been identified in connection
with specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish
14
<PAGE>
allowances on the basis of this review. Allowances are established by the Board
of Directors on a monthly basis based on an assessment of risk in the Bank's
assets taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, loan concentrations,
the state of the real estate market, regulatory reviews conducted in the
regulatory examination process and economic conditions generally. Additional
provisions for losses on loans are made in order to bring the allowance to a
level deemed adequate. Specific reserves will be provided for individual assets,
or portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
of the security. At the date of foreclosure or other repossession, the Bank
would transfer the property to real estate acquired in settlement of loans
initially at the lower of cost or estimated fair value and subsequently at the
lower of book value or fair value less estimated selling costs. Any portion of
the outstanding loan balance in excess of fair value less estimated selling
costs would be charged off against the allowance for loan losses. If, upon
ultimate disposition of the property, net sales proceeds exceed the net carrying
value of the property, a gain on sale of real estate would be recorded.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $1,034 $ 978 $ 926 $ 788 $ 542
------ ------- ------ ------ ------
Loans charged-off:
Real estate mortgage:
Single-family residential................ -- -- -- -- --
Multi-family residential -- -- -- -- --
Commercial -- -- -- (4) --
Construction (15) -- -- -- --
Commercial loans secured -- -- -- -- --
Consumer.................................. (217) (278) (392) (394) (178)
------ ------- ------ ------ ------
Total charge-offs.......................... (232) (278) (392) (398) (178)
Recoveries:
Real estate mortgage:
Single-family residential................ -- -- -- -- --
Multi-family residential -- -- -- -- --
Commercial -- -- -- -- --
Construction -- -- -- -- --
Commercial loans secured -- -- -- -- --
Consumer.................................. 132 215 158 102 169
------ ------- ------ ------ ------
Total recoveries........................... 132 215 158 102 169
Net loans charged off...................... (100) (63) (234) (296) (9)
Provision for (reduction of) loan losses.. 339 119 286 434 255
------ ------- ------ ------ ------
Balance at end of period................... $1,273 $ 1,034 $ 978 $ 926 $ 788
====== ======= ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period....... 0.05% (0.04)% (.15)% (.20)% (.01)%
====== ======= ====== ====== ======
</TABLE>
15
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------- ------------------ ------------------ ------------------ -----------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ---------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Single-family residential $ 452 65.20% $ 413 66.46% $ 432 62.30% $276 56.74% $141 55.87%
Single-family rental
property................ 10 2.15 10 2.76 13 3.85 4 4.25 4 5.13
Commercial............... 118 4.54 124 5.00 79 6.11 120 6.21 158 7.13
Construction............. 75 2.48 78 4.18 28 5.19 36 6.87 40 4.51
Commercial lines of credit. -- .02 -- .03 -- .04 -- .16 -- .15
Commercial loans secured... -- .48 -- -- -- -- -- -- -- --
Consumer................... 618 25.13 409 21.57 426 22.51 490 25.77 445 27.21
------ ------ ------ ------ ----- ------ ---- ------ ---- ------
Total allowance for
loan losses........... $1,273 100.00% $1,034 100.00% $ 978 100.00% $926 100.00% $788 100.00%
====== ====== ====== ====== ===== ====== ==== ====== ==== ======
</TABLE>
16
<PAGE>
Investment Activities
General. The Bank is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Atlanta,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets which savings banks are
required to maintain. See " -- Regulation -- Depository Institution Regulation--
Liquidity Requirements."
The Bank makes investments in order to maintain the levels of liquid
assets required by regulatory authorities and manage cash flow, diversify its
assets, obtain yield and to satisfy certain requirements for favorable tax
treatment. The investment activities of the Bank consist primarily of
investments in mortgage-backed securities and other investment securities,
consisting primarily of securities issued or guaranteed by the U.S. government
or agencies thereof. Typical investments include federally sponsored agency
mortgage pass-through and federally sponsored agency and mortgage-related
securities. In addition, until September 1995, the Bank maintained an investment
in a mutual fund that purchased U.S. government and agency mortgage-backed
securities. Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Bank's investment
policy. The Bank performs analyses on mortgage-related securities prior to
purchase and on an ongoing basis to determine the impact on earnings and market
value under various interest rate and prepayment conditions. Under the Bank's
current investment policy, securities purchases are made by the Bank's
President. The Bank's President and Treasurer have limited authority to sell
investment securities and purchase comparable investment securities with similar
characteristics. The Board of Directors reviews all securities transactions on a
monthly basis.
Securities designated as "held to maturity" are those assets which the
Bank has the ability and intent to hold to maturity. Upon acquisition,
securities are classified as to the Bank's intent, and a sale would only be
effected due to deteriorating investment quality. The held to maturity
investment portfolio is not used for speculative purposes and is carried at
amortized cost. In the event the Bank sells securities from this portfolio for
other than credit quality reasons, all securities within the investment
portfolio with matching characteristics may be reclassified as assets available
for sale. Securities designated as "available for sale" are those assets which
the Bank may not hold to maturity and thus are carried at market value with
unrealized gains or losses, net of tax effect, recognized in retained earnings.
All of the Bank's securities at September 30, 1999 were designated as held to
maturity.
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA
and GNMA which guarantee the payment of principal and interest to investors.
Mortgage-backed securities generally increase the quality of the Bank's assets
by virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Bank.
Mortgage-related securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
17
<PAGE>
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
Mortgage-related securities, which include collateralized mortgage
obligations ("CMOs"), are typically issued by a special purpose entity, which
may be organized in a variety of legal forms, such as a trust, a corporation or
a partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage-related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Accordingly, under this security structure, all
principal paydowns from the various mortgage pools are allocated to a mortgage-
related securities' class or classes structured to have priority until it has
been paid off. These securities generally have fixed interest rates, and, as a
result, changes in interest rates generally would affect the market value and
possibly the prepayment rates of such securities.
Some mortgage-related securities instruments are like traditional debt
instruments due to their stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other mortgage-related securities
instruments are entitled to the excess, if any, of the issuer's cash flows.
These mortgage-related securities instruments may include instruments designated
as residual interest and are riskier in that they could result in the loss of a
portion of the original investment. Cash flows from residual interests are very
sensitive to prepayments and, thus, contain a high degree of interest rate risk.
The Bank does not purchase residual interests in mortgage-related securities.
The Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate mortgage-backed securities. The Bank makes such investments
in order to manage cash flow, diversify assets, obtain yield, to satisfy certain
requirements for favorable tax treatment and to satisfy the qualified thrift
lender test. See "Regulation --Depository Institution Regulation -- Qualified
Thrift Lender Test."
At September 30, 1999, mortgage-backed securities with an amortized
cost of $26.7 million were classified as held to maturity. At September 30,
1999, the Bank's mortgage-backed securities had a weighted average yield of
6.4%.
At September 30, 1999, the Bank did not have any CMOs, and the Bank's
investment policy does not permit investments in individual issues of CMOs or
Real Estate Mortgage Investment Conduits ("REMICs").
18
<PAGE>
The following table sets forth the carrying value of the Bank's
investments at the dates indicated.
At September 30,
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Securities held to maturity:
U.S. government and agency
securities.............. $35,232 $12,611 $30,323
Mortgage-backed securities.. 23,500 34,198 37,189
FHLB stock.................. 1,650 1,512 1,433
------- ------- -------
Total.................... $60,382 $48,321 $68,945
======= ======= =======
19
<PAGE>
The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Bank's investment
portfolio at September 30, 1999.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Portfolio
----------------- ------------------ ----------------- ------------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. government and
agency
obligations.......... $ 500 5.08% $21,986 5.87% $11,996 6.43% $ 750 6.87% $35,232 $34,218 6.07%
Mortgage-backed
securities............. 2,392 6.65 14,512 7.40 1,004 7.48 5,592 7.46 23,500 23,396 7.34
FHLB stock.............. -- -- -- 1,650 7.52 1,650 1,650 7.52
------ ------- ------- ------ -------- -------
Total................ $2,892 $36,498 $13,000 $7,992 $60,382 $59,264
====== ======= ======= ====== ======== =======
</TABLE>
20
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. In addition to
deposits, the Bank derives funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed securities and interest
payments thereon. Although loan repayments are a relatively stable source of
funds, deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions. Borrowings may be used on a short-
term basis to compensate for reductions in the availability of funds, or on a
longer term basis for general operational purposes. The Bank has access to
borrow from the FHLB of Atlanta.
Deposits. The Bank attracts deposits principally from within its
market area by offering a variety of deposit instruments, including checking
accounts, money market accounts, statement and passbook savings accounts,
Individual Retirement Accounts, and certificates of deposit which range in
maturity from seven days to five years. Deposit terms vary according to the
minimum balance required, the length of time the funds must remain on deposit
and the interest rate. Maturities, terms, service fees and withdrawal penalties
for its deposit accounts are established by the Bank on a periodic basis. The
Bank reviews its deposit mix and pricing on a weekly basis. In determining the
characteristics of its deposit accounts, the Bank considers the rates offered by
competing institutions, lending and liquidity requirements, growth goals and
federal regulations. Management believes it prices its deposits comparably to
rates offered by its competitors. The Bank does not accept brokered deposits.
The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially all of the Bank's
depositors are Maryland residents. To provide additional convenience, the Bank
participates in the STAR Automated Teller Machine ("ATM") network at locations
throughout the mid-Atlantic and the South and the CIRRUS Automated Teller
Machine network at locations throughout the United States, through which
customers can gain access to their accounts at any time. The Bank currently has
ATM machines in seven of its eight offices. In addition, during fiscal 1999, the
Bank expanded its ATM network by installing ATMs at three community colleges in
Baltimore County.
21
<PAGE>
Savings deposits in the Bank at September 30, 1999 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Balances Percentage of
Rate Term Category Amount (In thousands) Total Savings
- -------- ------- -------- ------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Demand deposits:
1.32% None NOW and Super NOW accounts $ 250 $ 26,684 11.44%
2.96 None Money market 250 8,531 3.65
--------- ------
Total demand deposits 35,215 15.09
Passbook savings deposits:
2.96 None Regular passbook 25 32,271 13.83
3.39 None Money market passbook 10,000 26,083 11.18
--------- ------
Total passbook savings deposits 58,354 25.01
Certificates of Deposit
-----------------------
4.07 3 months or less Fixed-term, fixed-rate 1,000 17,940 7.68
4.77 6 months Fixed-term, fixed-rate 1,000 11,213 4.80
4.95 12 months Fixed-term, fixed-rate 100 50,130 21.48
5.06 18 months Fixed-term, fixed-rate 100 5,600 2.40
5.27 24 months Fixed-term, fixed-rate 100 11,716 5.02
5.40 30 months Fixed-term, fixed-rate 100 2,308 .99
5.54 36 months Fixed-term, fixed-rate 100 4,209 1.80
5.38 42 months Fixed-term, fixed-rate 100 73 .03
5.77 48 months Fixed-term, fixed-rate 100 810 .35
6.14 60 months Fixed-term, fixed-rate 100 19,781 8.48
5.13 $100,000 and over Fixed-term, fixed-rate N/A 15,251 6.54
--------- ------
Total certificates of deposit $ 139,031 59.57
Accrued interest payable 765 .33
--------- ------
Total deposits $ 233,365 100.00%
========= ======
</TABLE>
_______________
* Represents weighted average interest rate.
22
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
September % of Increase September % of Increase September % of
30, 1999 Deposits (Decrease) 30, 1998 Deposits (Decrease) 30, 1997 Deposits
-------- -------- --------- -------- -------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW............................... $ 26,694 11.44% $ 1,341 $ 25,343 11.48% $ 1,140 $ 24,203 10.77%
Money market deposit.............. 8,531 3.66 (197) 8,728 3.95 (1,327) 10,055 4.48
Passbook savings deposits......... 58,354 25.00 3,542 54,812 24.82 (5,845) 60,657 27.00
Certificates of deposit........... 123,780 53.04 5,022 118,758 53.79 249 118,509 52.75
Certificates of deposit $100,000
and over......................... 15,251 6.54 2,813 12,438 5.63 1,953 10,485 4.67
Accrued interests payable......... 765 .32 39 726 .33 (21) 747 .33
-------- ------ ------- -------- ------ ------- -------- ------
$233,365 100.00% $12,560 $220,805 100.00% $(3,851) $224,656 100.00%
======== ====== ======= ======== ====== ======= ======== ======
</TABLE>
23
<PAGE>
The following tables set forth the average balances and average
interest rates based on month-end balances for various types of deposits as of
the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
Average Average Average Average Average Average
Balance Rate (1) Balance Rate Balance Rate
--------- -------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW.......................... $ 20,391 1.80% $ 25,192 1.59% $ 21,277 2.01%
Money market deposits........ 8,938 3.03 9,360 3.35 10,147 3.44
Passbook savings deposits.... 56,583 3.26 57,383 3.79 62,963 3.72
Non-interest-bearing demand
deposits.................. 6,317 -- 6,581 -- 4,646 --
Certificates of deposit... 138,316 5.16 129,840 5.50 133,896 5.37
-------- -------- --------
Total.................... $230,546 4.17 $224,356 4.32 $232,929 4.43
======== ======== ========
</TABLE>
___________
(1) Annualized.
The following table sets forth the time deposits in the Bank classified
by rates at the dates indicated.
At September 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
3.76 - 6%................ $125,790 $116,691 $116,029
6.01 - 8%............... 13,101 14,376 12,838
8.01 - 10%............... 140 129 127
-------- -------- --------
$139,031 $131,196 $128,994
======== ======== ========
The following table sets forth the amount and maturities of time
deposits at September 30, 1999.
Amount Due
---------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- -------- --------
(In thousands)
3.76 - 6%........ $100,931 $13,521 $5,028 $ 6,310 $125,790
6.01 - 8%........ 9,500 1,905 305 1,391 13,101
8.01 10%......... 140 -- -- -- 140
-------- ------- ------ -------- --------
$110,571 $15,426 $5,333 $ 7,701 $139,031
======== ======= ====== ======== ========
24
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
1999. At such date, such deposits represented 6.54% of total deposits and had a
weighted average rate of 5.13%.
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
Three months or less...................... $ 5,966
Over three through six months............. 3,549
Over six through 12 months................ 3,826
Over 12 months............................ 1,910
-------
Total.................................. $15,251
=======
The following table sets forth the savings activities of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1999 1998 1997
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Deposits........................................... $ 494,431 $ 462,996 $ 417,685
Deposits sold...................................... -- (6,166) --
Withdrawals........................................ (491,795) (470,538) 436,652
--------- --------- ---------
Net increase (decrease) before interest credited... 2,946 (13,708) (18,967)
Interest credited.................................. 9,614 9,857 10,312
--------- --------- ---------
Net increase (decrease) in savings deposits...... $ 12,560 $ (3,851) $ (8,655)
========= ========= =========
</TABLE>
In the unlikely event the Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the sole stockholder of the Bank.
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, the Bank is required to own stock in the FHLB of
Atlanta and is authorized to apply for advances. Advances are pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank has a Blanket Agreement for advances with the FHLB under
which the Bank may borrow up to 25% of assets subject to normal collateral and
underwriting requirements. Advances from the FHLB of Atlanta are secured by the
Bank's stock in the FHLB of Atlanta and other eligible assets. During the years
ended September 30, 1998 and 1997, the Bank had no borrowings other than FHLB
advances. At September 30, 1999, the Bank had $16.0 million in outstanding FHLB
advances.
25
<PAGE>
Subsidiary Activities
As a federally chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in subsidiaries, with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city and community development purposes. Under such limitations, as of
September 30, 1999, the Bank was authorized to invest up to approximately $8.9
million in the stock of or loans to subsidiaries, including the additional 1%
investment for community inner-city and community development purposes.
Institutions meeting their applicable minimum regulatory capital requirements
may invest up to 50% of their regulatory capital in conforming first mortgage
loans to subsidiaries in which they own 10% or more of the capital stock.
The Bank has two subsidiary service corporations, Baltimore County
Service Corp. ("BCSC") and Ebenezer Road, Inc. ("Ebenezer Road"). Further, BCSC
has a wholly owned subsidiary, Route 543, Incorporated ("Route 543"). BCSC was
formed in the mid 1970's for the purpose of participating in joint ventures for
the development of real estate. The last development project was completed
during the year ended September 30, 1996, and at September 30, 1999, BCSC
conducted immaterial activities. Route 543 was formed for the purpose of
participating in joint ventures with BCSC. The activities of Route 543 were
completed during the year ended September 30, 1996, and Route 543 currently is
inactive. At September 30, 1999, BCSC had substantially no assets or
liabilities, except that it may receive a refund, that would not exceed $13,000,
of amounts owed to it by a utility company in connection with a development
project completed approximately ten years ago. The Bank does not intend to
conduct real estate development activities in the future. Ebenezer Road is an
insurance agency that sells primarily vendor's single interest insurance on
automobile loans, as well as mortgage life insurance and annuity products. The
fees from the activities of its subsidiaries were immaterial during the year
ended September 30, 1999.
Competition
The Bank faces strong competition both in originating real estate and
consumer loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates, the types of loans it
originates, the deposit products it offers and the quality of services it
provides to borrowers. The Bank also competes by offering products which are
tailored to the local community. Its competition in originating real estate
loans comes primarily from other savings institutions, commercial banks and
mortgage bankers. Commercial banks, credit unions and finance companies provide
vigorous competition in consumer lending. Competition may increase as a result
of the continuing reduction of restrictions on the interstate operations of
financial institutions.
The Bank attracts its deposits through its offices primarily from the
local community. Consequently, competition for deposits is principally from
other savings institutions, commercial banks, credit unions and brokers in the
local community. The Bank competes for deposits and loans by offering what it
believes to be a variety of deposit accounts at competitive rates, convenient
business hours, a commitment to outstanding customer service and a well-trained
staff. The Bank believes it has developed strong relationships with local
realtors and the community in general.
Management considers its market area for gathering deposits and making
loans to be Baltimore County and Harford County in Maryland. The Bank estimates
that it competes with numerous banks and savings and loan associations for
deposits and loans. Based on data provided by a private marketing firm, the Bank
estimates that at September 30, 1999, it had approximately 2% of deposits held
by all banks and savings institutions in each of Baltimore County and Harford
County.
Employees
As of September 30, 1999, the Company had 86 full-time and 16 part-time
employees, none of whom were represented by a collective bargaining agreement.
Management considers the Bank's relationships with its employees to be good.
26
<PAGE>
Depository Institution Regulation
General. The Bank is a federally chartered savings institution, is a
member of the FHLB of Atlanta and its deposits are insured by the FDIC through
the SAIF. As a federal savings institution, the Bank is subject to regulation
and supervision by the OTS and the FDIC and to OTS regulations governing such
matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities and general investment authority. The OTS
periodically examines the Bank for compliance with various regulatory
requirements and for safe and sound operations. The FDIC also has the authority
to conduct special examinations of the Bank because its deposits are insured by
the SAIF. The Bank must file reports with the OTS describing its activities and
financial condition and must obtain the approval of the OTS prior to entering
into certain transactions, such as mergers with or acquisitions of other
depository institutions.
Regulatory Capital Requirements. Under the OTS's regulatory capital
requirements, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to at least 4.0% or 3.0% (if
the institution is rated composite 1 CAMELS under the OTS examination rating
system) of adjusted total assets and "total" capital (a combination of "core"
and "supplementary" capital) equal to 8.0% of risk-weighted assets. In addition,
the OTS has adopted regulations which impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution is rated composite 1 CAMELS under the OTS examination rating
system). For purposes of these regulations, Tier 1 capital has the same
definitions as core capital. See "--Prompt Corrective Regulatory Action."
Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Core capital is generally reduced by the amount of the
savings association's intangible assets for which no market exists. Limited
exceptions to the deduction of intangible assets are provided for purchased
mortgage servicing rights and qualifying supervisory goodwill. Tangible capital
is given the same definition as core capital but does not include an exception
for qualifying supervisory goodwill and is reduced by the amount of all the
savings association's intangible assets with only a limited exception for
purchased mortgage servicing rights. Both core and tangible capital are further
reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). Investments in and extensions of
credit to such subsidiaries are required to be fully netted against tangible and
core capital. At September 30, 1999, the Bank had no such investments.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includable subsidiaries in which the savings association holds a minority
interest. Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the portion of savings association's investments in
unconsolidated includable subsidiaries, and, for purpose of the core capital
requirement, qualifying supervisory goodwill. At September 30, 1999, the Bank's
adjusted total assets for the purposes of the core and tangible capital
requirements were approximately $290.6 million.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to include both core capital and supplementary
capital in its total capital provided the amount of supplementary capital
included does not exceed the savings association's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments, a portion of the
savings association's general loss allowances and up to 45% of unrealized gains
on equity securities. Total core and supplementary capital are reduced by the
amount of capital instruments held by other depository institutions pursuant to
reciprocal arrangements, all equity investments
27
<PAGE>
and that portion of the institution's land loans and non-residential
construction loans in excess of 80% loan-to-value ratio. As of September 30,
1999, the Bank had no high ratio land or non-residential construction loans and
no equity investments for which OTS regulations require a deduction from total
capital.
The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one-to-four family first mortgages not more
than 90 days past due with loan-to-value ratios under 80% and average annual
occupancy rates of at least 80% and certain qualifying loans for the
construction of one-to-four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer and residential construction loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest by the FNMA or FHLMC are assigned a 20%
risk weight. Cash and U.S. Government securities backed by the full faith and
credit of the U.S. Government (such as mortgage-backed securities issued by
GNMA) are given a 0% risk weight.
For information with respect to the Bank's compliance with its
regulatory capital requirements at September 30, 1999, see Note 15 of Notes to
Consolidated Financial Statements.
The risk-based capital requirements of the OTS also require that
savings institutions with more than a "normal" level of interest rate risk to
maintain additional total capital. A savings institution's interest rate risk is
measured in terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present value
of expected cash inflows from existing assets and off-balance sheet contracts
less the present value of expected cash outflows from existing liabilities. A
savings institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk will be required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the "interest rate
risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be subject to
an additional capital requirement based upon its level of interest rate risk as
compared to its peers. The Bank is exempt from filing the interest rate risk
schedule with its Thrift Financial Reports and the OTS has not required it to
file such a schedule. The interest rate risk rule did not have a material effect
on the Bank's risk based capital at September 30, 1999.
In addition to requiring generally applicable capital standards for
savings institutions, the OTS is authorized to establish the minimum level of
capital for a savings institution at such amount or at such ratio of capital-to-
assets as the OTS determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. Such circumstances
would include a high degree of exposure to interest rate risk, concentration of
credit risk and certain risks arising from non-traditional activity. The OTS may
treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the OTS to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
28
<PAGE>
Liquidity Requirements. The Bank generally is required to maintain
average daily balances of liquid assets (generally, cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, and specified United States government,
state or federal agency obligations) equal to 4% of its net withdrawable
accounts plus short-term borrowings either at the end of the preceding calendar
quarter or on an average daily basis during the preceding quarter. The Bank also
is required to maintain sufficient liquidity to ensure its safe and sound
operation. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily balance of liquid assets ratio of the Bank for
September 1999 was 25.5%.
Qualified Thrift Lender Test. A savings institution that does not meet
the Qualified Thrift Lender ("QTL") test must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as, and to be deemed, a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 (the "BHCA") and other
statutes applicable to bank holding companies. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and a
savings institution and immediately repay any outstanding FHLB advances (subject
to safety and soundness considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments"
must total at least 65% of "portfolio assets." Under OTS regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In order
to maintain QTL status, the savings institution must maintain a weekly average
percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a
monthly average basis in nine out of 12 months. A savings institution that fails
to maintain QTL status will be permitted to requalify once, and if it fails the
QTL test a second time, it will become immediately subject to all penalties as
if all time limits on such penalties had expired.
At September 30, 1999, the percentage of the Bank's portfolio assets
invested in Qualified Thrift Investments was in excess of the percentage
required to qualify the Bank under the QTL test.
Dividend Limitations. Under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distributions
if, after making the distribution, it would have: (i) a total risk-based capital
ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a Tier 1 leverage ratio of less than 4.0%. See "Prompt Corrective
Regulatory Action." The OTS, after consultation with the FDIC, however, may
permit an otherwise prohibited stock repurchase if made in connection with the
issuance of additional shares in an equivalent amount and the repurchase will
reduce the institution's financial obligations or otherwise improve the
institution's financial condition. Under OTS regulations, the Bank is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time of its
conversion to stock form.
Savings institutions must submit notice to the OTS prior to making a
capital distribution if (a) they would not be well-capitalized after the
distribution, (b) the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its regulatory
capital, or (c) the institution is a subsidiary of a holding
29
<PAGE>
company. A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation." The Company
intends to make full use of this favorable tax treatment afforded to the Bank
and the Company and does not contemplate use of any earnings of the Bank in a
manner which would limit either institution's bad debt deduction or create
federal tax liabilities.
Deposit Insurance. FDCIA required the FDIC to establish a risk-based
assessment system for insured depository associations that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the rule, the FDIC assigns an association to one of three
capital categories consisting of (i) well capitalized, (ii) adequately
capitalized, or (iii) undercapitalized, and one of three supervisory
subcategories. The supervisory subgroup to which an association is assigned is
based on a supervisory evaluation provided to the FDIC by the association's
primary federal regulator and information which the FDIC determines to be
relevant to the association's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the association's state supervisor). An association's assessment rate depends
on the capital category and supervisory category to which it is assigned. There
are nine assessment risk classifications (i.e., combinations of capital groups
and supervisory subgroups) to which different assessment rates are applied.
Assessment rates range from zero basis points for an association in the highest
category (i.e., well-capitalized and healthy) to 27 basis points for an
association in the lowest category (i.e., undercapitalized and of substantial
supervisory concern.)
Federal Home Loan Bank System. The Bank is a member of the FHLB
System, which consists of 12 district Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB"). The
Federal Home Loan Banks provide a central credit facility primarily for member
institutions. As a member of the FHLB of Atlanta, the Bank is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever is
greater. The Bank was in compliance with this requirement with investment in
FHLB of Atlanta stock at September 30, 1999, of $1.6 million. The FHLB of
Atlanta serves as a reserve or central bank for its member institutions within
its assigned district. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Atlanta. Long-term advances may only be
made for the purpose of providing funds for residential housing finance. At
September 30, 1999, the Bank had $16.0 million in advances outstanding from the
FHLB of Atlanta.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% on transaction accounts of between $5.0 million and $44.3
million, plus 10% on the amount over $44.3 million. These reserve requirements
are subject to adjustment by the Federal Reserve Board. Because required
reserves must be maintained in the form of vault cash or in a non-interest
bearing account at a Federal Reserve Bank, the effect of the reserve requirement
is to reduce the amount of the institution's interest-earning assets. As of
September 30, 1999, the Bank met its reserve requirements.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure of capital deemed appropriate by the federal banking regulators for
measuring the
30
<PAGE>
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Federal banking regulators, including the OTS, have adopted regulations
implementing the prompt corrective action provisions of FDICIA. Under these
regulations, the federal banking regulators will generally measure a depository
institution's capital adequacy on the basis of the institution's total risk-
based capital ratio (the ratio of its total capital to risk-weighted assets),
Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). Under the regulations, a savings institution that is not subject to an
order or written directive to meet or maintain a specific capital level will be
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is a savings institution that does not meet the definition
of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or
greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a
leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution
has a composite 1 CAMEL rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of "tangible equity" to total
assets of less than 2.0%. "Tangible equity" is defined as core capital plus the
institution's outstanding cumulative perpetual preferred stock (and related
surplus) less all intangibles other than qualifying supervisory goodwill and
certain mortgage servicing rights. The OTS may reclassify a well capitalized
savings institution as adequately capitalized and may require an adequately
capitalized or undercapitalized institution to comply with the supervisory
actions applicable to institutions in the next lower capital category (but may
not reclassify a significantly undercapitalized institution as critically
undercapitalized) if the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in an unsafe or unsound condition or
that the institution has received and not corrected a less-than-satisfactory
rating for
31
<PAGE>
any CAMEL rating category. As of September 30, 1999, the Bank was classified as
"well-capitalized" under these prompt corrective action regulations.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The guidelines require savings institutions to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Under the guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that these regulatory standards do not materially affect the
Bank's operations.
Lending Limits. Savings institutions generally are subject to the
lending limits applicable to national banks. With certain limited exceptions,
the maximum amount that a savings institution or a national bank may lend to any
borrower outstanding at one time and not fully secured by collateral having a
market value at least equal to the amount of the loan or extension of credit
(including certain related entities of the borrower) outstanding at one time and
not fully secured by collateral having a market value at least equal to the
amount of the loan or extension of credit may not exceed 15% of the unimpaired
capital and surplus of the institution. Loans and extensions of credit fully
secured by readily marketable collateral may comprise an additional 10% of
unimpaired capital and surplus. Savings institutions are additionally authorized
to make loans to one borrower, for any purpose: (i) in an amount not to exceed
$500,000, or (ii) by order of the Director of OTS, in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (a) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (b) the savings
institution is and continues to be in compliance with its fully phased-in
capital requirements; (c) the loans comply with applicable loan-to-value
requirements, and; (d) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus, or (iii) loans to
finance the sale of real property acquired in satisfaction of debts previously
contracted in good faith, not to exceed 50% of unimpaired capital and surplus of
the institution.
At September 30, 1999, the maximum amount that the Bank could have
loaned to any one borrower without prior OTS approval was $5.3 million. At such
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was $2.8 million.
Uniform Lending Standards. Under OTS regulations, savings institutions
must adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
32
<PAGE>
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one-to-four family properties, the supervisory
limit is 85%; and (v) for loans secured by other improved property (e.g.,
farmland, completed commercial property and other income-producing property
including non-owner-occupied, one-to-four family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for owner-
occupied, one-to-four family and home equity loans, the Interagency Guidelines
state that for any such loan with a loan-to-value ratio that equals or exceeds
90% at origination, an institution should require appropriate credit enhancement
in the form of either mortgage insurance or readily marketable collateral.
The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits, based on the support provided by
other credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multifamily and other
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
Management believes that the Bank's current lending policies conform to
the Interagency Guidelines.
Transactions with Related Parties. Generally, transactions between a
savings bank or its subsidiaries and its affiliates must be on terms as
favorable to the Bank as transactions with non-affiliates. In addition, certain
of these transactions are restricted to a percentage of the Bank's capital.
Affiliates of the Bank include the Company, the MHC and any company which would
be under common control with the Bank.
The Bank's authority to extend credit to executive officers, trustees
and 10% shareholders, as well as entities under such persons control are
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O promulgated by the Federal Reserve Board. Among other things, these
regulations require such loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and require certain approval procedures to be followed.
Recently Enacted Legislative and Regulatory Changes. On November 12,
1999, President Clinton signed legislation which could have a far-reaching
impact on the financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act
authorizes affiliations between banking, securities and insurance firms and
authorizes bank holding companies and national banks to engage in a variety of
new financial activities. Among the new activities that will be permitted to
bank holding companies are securities and insurance brokerage, securities
underwriting, insurance underwriting and merchant banking. The Federal Reserve
Board, in consultation with the Department of Treasury, may approve additional
financial activities. National bank subsidiaries will be permitted to engage in
similar financial activities but only on an agency basis unless they are one of
the 50 largest banks in the country. National bank subsidiaries will be
prohibited from insurance underwriting, real estate development and merchant
banking. The G-L-B Act, however, prohibits future acquisitions of existing
unitary savings and loan holding companies, like the
33
<PAGE>
Company, by firms that are engaged in commercial activities and prohibits the
formation of new unitary holding companies.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act. The G-L-B Act directs the federal banking agencies, the National Credit
Union Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home Loan
Bank System. The G-L-B Act imposes new capital requirements on the Federal Home
Loan Banks and authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-L-B Act expands the
permissible uses of Federal Home Loan Bank advances by community financial
institutions (under $500 million in assets) to include funding loans to small
businesses, small farms and small agri-businesses. The G-L-B Act makes
membership in the Federal Home Loan Bank System voluntary for federal savings
associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which the Company may affiliate, it may facilitate affiliations with
companies in the financial services industry.
Regulation of the Company
The Company is a savings and loan holding company within the meaning of
Section 10 of the HOLA and, as such, the Company is subject to OTS regulation,
examination and supervision. In addition, because the Bank's deposits are
insured by the SAIF maintained by the FDIC, the Bank is subject to certain
restrictions in dealing with the Company and with other persons affiliated with
the Bank.
One of the requirements for OTS approval of the Reorganization is that
the Company will operate under the activities restrictions applicable to
multiple savings and loan holding companies. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities specifically permissible by statute for
multiple savings and loan holding companies and to activities of bank holding
companies which the Federal Reserve Board has deemed permissible by regulation
under Section 4(c)(8) of the Bank Holding Company Act, as amended the ("BHCA"),
subject to prior approval of the OTS, and to other activities authorized by OTS
regulation. In addition, under the terms of the Company's federal stock charter,
the purpose of the Company is to pursue any or all of the lawful objectives of a
federal mutual holding company.
The Company is permitted to, among other things: (i) invest in the
stock of a savings institution; (ii) acquire a mutual institution through the
merger of such institution into a savings institution subsidiary of such mutual
holding company or an interim savings institution of such mutual holding
company; (iii) merge with or acquire another mutual
34
<PAGE>
holding company, one of whose subsidiaries is a savings institution; (iv)
acquire non-controlling amounts of the stock of savings institutions and savings
institution holding companies, subject to certain restrictions; (v) invest in a
corporation the capital stock of which is available for purchase by a savings
institution under Federal law or under the law of any state where the subsidiary
savings institution or institutions have their home offices; (vi) furnish or
perform management services for a savings institution subsidiary of such
company; (vi) hold, manage, or liquidate assets owned or acquired from a savings
institution subsidiary of such company; (viii) hold or manage properties used or
occupied by a savings institution subsidiary of such company; and (ix) acting as
a trustee under deed or trust.
The HOLA prohibits a savings and loan holding company, such as the
Company, directly or indirectly, from (1) acquiring control (as defined) of a
savings institution (or holding company thereof) without prior OTS approval, (2)
acquiring more than 5% of the voting shares of a savings institution (or holding
company thereof) which is not a subsidiary, subject to certain exceptions,
without prior OTS approval, or (3) acquiring through merger, consolidation or
purchase of assets, another savings institution (or holding company thereof) or
acquiring all or substantially all of the assets, another savings institution
(or holding company thereof) without prior OTS approval, or (4) acquiring
control of an uninsured institution. A savings and loan holding company may not
acquire as a separate subsidiary a savings institution which has its principal
offices outside of the state where the principal offices of its subsidiary
institution is located, except (i) in the case of certain emergency acquisitions
approved by the FDIC, (ii) if the holding company controlled (as defined) such
savings institution as of March 5, 1987, (iii) when the laws of the state in
which the savings institution to be acquired is located specifically authorize
such an acquisition. No director or officer of a savings and loan holding
company or person owning or controlling more than 25% of such holding company's
voting shares may, except with the prior approval of the OTS, acquire control of
any savings institution which is not a subsidiary of such holding company.
Taxation
General. The Company and the Bank, together with the Bank's
subsidiaries, file a consolidated federal income tax return based on a fiscal
year ending September 30. Consolidated returns have the effect of deferring gain
or loss on intercompany transactions and allowing companies included within the
consolidated return to offset income against losses under certain circumstances.
Federal Income Taxation. Thrift institutions are subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code") in the
same general manner as other corporations. However, institutions such as the
Bank which met certain definitional tests and other conditions prescribed by the
Code benefitted from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
of the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience, however, the amount of the bad debt reserve deduction with respect
to qualifying real property loans could be based upon actual loss experience
(the "experience method") or a percentage of taxable income determined without
regard to such deduction (the "percentage of taxable income method").
Legislation recently signed by the President repealed the percentage of taxable
income method of calculating the bad debt reserve. The Bank historically has
elected to use the percentage method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, will be treated the same as
commercial banks. Associations with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Associations
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
35
<PAGE>
The Bank's tax returns were last audited for the year ended September
30, 1994.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for purposes of determining
alternative minimum taxable income, rules relating to payment of estimated
corporate income taxes were revised, and certain acquired intangible assets such
as goodwill and customer-based intangibles were allowed a 15-year amortization
period. Beginning with tax years ending on or after January 1, 1993, RRA also
provides that securities dealers must use mark-to-market accounting and
generally reflect changes in value during the year or upon sale as taxable gains
or losses. The IRS has indicated that financial institutions which originate and
sell loans will be subject to the rule.
State Income Taxation. The State of Maryland imposes an income tax of
approximately 7% on income measured substantially the same as federally taxable
income. In addition, Maryland imposes a franchise tax, at a rate of 0.013% of
the total withdrawal value of the deposits that a savings and loan association
holds in Maryland at December 31 each year.
For additional information regarding taxation, see Note 16 of Notes to
Financial Statements.
Item 2. Description of Property
- --------------------------------
The following table sets forth the location and certain additional
information regarding the Bank's offices at September 30, 1999.
<TABLE>
<CAPTION>
Book Value at Approximate Deposits at
Year Owned or Expiration Date September 30, Square September 30,
Opened Leased (If Leased) (1) 1999 Footage 1999
------ ---------- --------------- ------------- ----------- -------------
(Deposits in
thousands)
<S> <C> <C> <C> <C> <C> <C>
Main Office:
Perry Hall 1955 Leased (2) November 2003 $ 388,512 8,000 $101,557
Branch Offices:
Bel Air 1975 Leased June 2008 -- 2,000 30,365
Dundalk (3) 1976 Leased June 2001 -- 1,700 36,183
Timonium 1978 Leased July 2003 -- 1,250 39,702
Catonsville 1981 Leased February 2001 -- 1,750 24,367
Abingdon 1999 Leased (2) July 2019 497,450 1,800 350
Forest Hill 1999 Leased (2) July 2019 432,281 1,800 841
Essex 1999(4) Leased (2) November 2004 3,200 --
Future Sites:
Hickory 2000(5) Leased (2) 1,800
White Marsh 2000(5) Leased (2) 1,800
Administrative Office:
4111 E. Joppa Road 1994 Owned 1,282,630 18,000 --
Warehouse 1998 Leased September 2002 -- 4,800 --
</TABLE>
36
<PAGE>
_______________
(1) All leases have at least one five-year renewal option.
(2) Building is owned, but land is leased.
(3) The Bank also is leasing a kiosk and drive-in ATM facility at this
location.
(4) Branch opened in November 1999.
(5) Expected opening date
The book value of the Bank's investment in premises and equipment
totaled $4.8 million at September 30, 1999. See Note 7 of Notes to Financial
Statements.
Item 3. Legal Proceedings.
- --------------------------
From time to time, the MHC, the Company and/or the Bank is a party to
various legal proceedings incident to its business. At September 30, 1999, there
were no legal proceedings to which the MHC, the Company or the Bank was a party,
or to which any of their property was subject, which were expected by management
to result in a material loss to the MHC, the Company or the Bank. There are no
pending regulatory proceedings to which the MHC, the Company, the Bank or their
subsidiaries is a party or to which any of their properties is subject which are
currently expected to result in a material loss.
Item 4. Submission of Matters to Vote of Security Holders.
- ----------------------------------------------------------
At the Company's Special Meeting of Stockholders held on July 5, 1999,
the following matters were submitted to a vote of stockholders with the
following results:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C> <C>
Approval of BCSB Bankcorp, Inc. 1999 Stock
Option Plan 4,849,548 428,785 44,592
Approval of the BCSB Bankcorp, Inc.
Management Recognition Plan 4,828,912 438,470 55,543
</TABLE>
There were 24,684 broker nonvotes on the proposal to approve the 1999
Stock Option Plan and 34,684 broker nonvotes on the proposal to approve the
Management Recognition Plan.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the sections captioned "Market
Information" in the Company's Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1999 (the "Annual Report") filed as Exhibit 13 hereto is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 4 through 14 in the Annual Report is incorporated herein by reference.
37
<PAGE>
Item 7. Financial Statements
- -----------------------------
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, Independent Auditors' Report and Selected Consolidated Financial
Data in the Annual Report, which are listed under Item 13 herein, are
incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------------------
For information concerning the Board of Directors and executive
officers of the Company, the information contained under the section captioned
"Proposal I -- Election of Directors" in the Company's Proxy Statement is
incorporated herein by reference.
Item 10. Executive Compensation
- -------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors -- Executive Compensation," "-- Director Compensation,"
"--Employment Agreements" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Security Ownership of
Management" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the registrant.
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Transactions with Management" in the Proxy Statement.
38
<PAGE>
Item 13. Exhibits List and Reports on Form 8-K.
- ----------------------------------------------
(a) List of Documents Filed as Part of this Report
----------------------------------------------
(1) Financial Statements. The following consolidated financial
statements are incorporated by reference from Item 7 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statement of Financial Condition as of September 30,
1999 and 1998
Consolidated Statements of Operations for the Years Ended
September 30, 1999 and 1998
Consolidated Statements of Retained Earnings for the Years Ended
September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-KSB and is also the Exhibit Index.
No. Description
--- ------------
* 3.1 Charter of BCSB Bankcorp, Inc.
* 3.2 Bylaws of BCSB Bankcorp, Inc.
** 4 Form of Common Stock Certificate of BCSB Bankcorp, Inc.
10.1 BCSB Bankcorp, Inc. 1999 Stock Option Plan
10.2 BCSB Bankcorp, Inc. Management Recognition Plan and Trust
Agreement
* 10.3 Amended and Restated Form of Change-in-Control Severance
Agreements between Baltimore County Savings Bank, F.S.B. and
Michael J. Dietz, Gary C. Loraditch and William M. Loughran
* 10.4 Baltimore County Savings Bank, F.S.B. Deferred Compensation Plan
* 10.5 Baltimore County Savings Bank, F.S.B. Incentive Compensation Plan
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Anderson Associates, LLP
27 Financial Data Schedule
_______________
* Incorporated herein by reference from the Company's Registration
Statement on Form SB-2 (File No. 333-44831).
** Incorporated herein by reference from the Company's Registration
Statement on Form 8-A (File No. 0-24589).
(b) Reports on Form 8-K. On August 30, 1999, the Company filed a
-------------------
Current Report on Form 8-K, reporting under Item 5 that the Company was
commencing a stock repurchase program to repurchase up to 5% of its issued and
outstanding shares of Common Stock.
39
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BCSB BANKCORP, INC.
December 27, 1999
By: /s/ Gary C. Loraditch
----------------------------------
Gary C. Loraditch
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Gary C. Loraditch December 27, 1999
- -----------------------------------------------
Gary C. Loraditch
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Bonnie M. Klein December 27, 1999
- -----------------------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ Henry V. Kahl December 27, 1999
- -----------------------------------------------
Henry V. Kahl
Chairman of the Board
/s/ H. Adrian Cox December 27, 1999
- -----------------------------------------------
H. Adrian Cox
Vice Chairman of the Board
- -----------------------------------------------
Frank W. Dunton
Director
/s/ William M. Loughran December 27, 1999
- -----------------------------------------------
William M. Loughran
Vice President and Director
/s/ John J. Panzer, Jr. December 27, 1999
- -----------------------------------------------
John J. Panzer, Jr.
Director
- -----------------------------------------------
P. Louis Rohe, Jr.
Director
<PAGE>
EXHIBIT 10.1
BCSB BANKCORP, INC.
1999 STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of this Plan is to advance the interests of the Company through
providing select key Employees and Directors of the Bank, the Company, and their
Affiliates with the opportunity to acquire Shares. By encouraging such stock
ownership, the Company seeks to attract, retain and motivate the best available
personnel for positions of substantial responsibility and to provide additional
incentives to Directors and key Employees of the Company or any Affiliate to
promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options and SARs, unless the context
clearly indicates a different meaning.
(d) "Bank" shall mean Baltimore County Savings Bank, F.S.B.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean not only the Stock Option Committee consisting
of at least two Non-Employee Directors appointed by the Board in accordance with
Paragraph 5(a) hereof, but also the Board.
(h) "Common Stock" shall mean the common stock of the Company.
(i) "Company" shall mean BCSB Bankcorp, Inc.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case
of sick leave, military leave or any other leave of absence approved by the
Company, in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
(k) "Director" shall mean any member of the Board, and any member of the
board of directors of any Affiliate that the Board has by resolution designated
as being eligible for participation in this Plan.
(l) "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to substantially prevent a Participant from fulfilling
his or her duties or responsibilities to the Company or an Affiliate.
(m) "Effective Date" shall mean the date specified in Paragraph 14 hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank, or
an Affiliate.
<PAGE>
(o) "Exercise Price" shall mean the price per Optioned Share at which an
Option or SAR may be exercised.
(p) "ISO" shall mean an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock,
as determined under Paragraph 8(b) hereof.
(r) "Non-Employee Director" shall have the meaning provided in Rule 16b-
3.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) [reserved].
(w) "Participant" shall mean any person who receives an Award pursuant to
the Plan.
(x) "Plan" shall mean this BCSB Bankcorp, Inc. 1999 Stock Option Plan.
(y) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(z) "Share" shall mean one share of Common Stock.
(aa) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
(bb) "Year of Service" shall mean a full twelve-month period, measured
from the date of an Award and each annual anniversary of that date, during which
a Participant has not terminated Continuous Service for any reason.
3. Term of the Plan and Awards.
(a) Term of the Plan. The Plan shall continue in effect for a term of ten
years from the Effective Date, unless sooner terminated pursuant to Paragraph 16
hereof. No Award shall be granted under the Plan after ten years from the
Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall
be established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing more than
10% of the outstanding Common Stock at the time an ISO is granted, the term of
such ISO shall not exceed five years.
2
<PAGE>
4. Shares Subject to the Plan.
(a) General Rule. Except as otherwise required under Paragraph 11, the
aggregate number of Shares deliverable pursuant to Awards shall not exceed
228,660 Shares, which equals 10% of the Shares issued by the Company to the
public in connection with the Bank's mutual holding company reorganization ("MHC
Reorganization"). Such Shares may either be authorized but unissued Shares,
Shares held in treasury, or Shares repurchased on the open market and held in a
grantor trust created by the Company. If any Awards should expire, become
unexercisable, or be forfeited for any reason without having been exercised, the
Optioned Shares shall, unless the Plan shall have been terminated, be available
for the grant of additional Awards under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which an
SAR is granted, but not the number of Shares which the Company delivers or could
deliver to an Employee or individual upon exercise of an SAR, shall be charged
against the aggregate number of Shares remaining available under the Plan;
provided, however, that in the case of an SAR granted in conjunction with an
Option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available under the Plan. The Shares involved in an Option as to which option
rights have terminated by reason of the exercise of a related SAR, as provided
in Paragraph 10 hereof, shall not be available for the grant of further Options
under the Plan.
5. Administration of the Plan.
(a) Appointment of the Committee. The Plan shall be administered by the
Committee. Members of the Committee shall serve at the pleasure of the Board. In
the absence at any time of a duly appointed Committee, the Plan shall be
administered by the Board.
(b) Powers of the Committee. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion (i) to select Participants and grant
Awards, (ii) to determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan, and (v)
to make other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee without a meeting, shall be
deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The
terms of each such Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined by
the Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular,
the Committee shall set forth in each Agreement (i) the Exercise Price of an
Option or SAR, (ii) the number of Shares subject to the Award, and its
expiration date, (iii) the manner, time, and rate (cumulative or otherwise) of
exercise or vesting of such Award, and (iv) the restrictions, if any, to be
placed upon such Award, or upon Shares which may be issued upon exercise of such
Award. The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
3
<PAGE>
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in connection with the Plan or any
Award, granted hereunder to the full extent provided for under the Company's
governing instruments with respect to the indemnification of Directors.
6. Grant of Options to Employees.
(a) General Rule. Only Employees and Directors shall be eligible to
receive Awards. In selecting those Employees to whom Awards will be granted and
the number of shares covered by such Awards, the Committee shall consider the
position, duties and responsibilities of the eligible Employees, the value of
their services to the Company and its Affiliates, and any other factors the
Committee may deem relevant. Notwithstanding the foregoing, the Committee shall
automatically make the Awards specified in Paragraphs 6(b) and 7 hereof.
(b) Automatic Grants to Employees. On the Effective Date, each of the
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Shares listed
below, at an Exercise Price per Share equal to the Market Value of a Share on
the Effective Date; provided that such grant shall not be made to an Employee
whose Continuous Service terminates on or before the Effective Date:
Number of Shares
Participant Reserved under Paragraph 4(a)
----------- -----------------------------
Gary C. Loraditch 10,000
William M. Loughran 10,000
With respect to each of the above-named Participants, the Option granted to the
Participant hereunder (i) shall vest in accordance with the general rule set
forth in Paragraph 9(a) of the Plan, (ii) shall have a term of ten years from
the Effective Date, and (iii) shall be subject to the general rule set forth in
Paragraph 9(c) with respect to the effect of a Participant's termination of
Continuous Service on the Participant's right to exercise his Options.
(c) Special Rules for ISOs. The aggregate Market Value, as of the date
the Option is granted, of the Shares with respect to which ISOs are exercisable
for the first time by an Employee during any calendar year (under all incentive
stock option plans, as defined in Section 422 of the Code, of the Company or any
present or future Affiliate of the Company) shall not exceed $100,000.
Notwithstanding the foregoing, the Committee may grant Options in excess of the
foregoing limitations, in which case Options granted in excess of such
limitation shall be Non-ISOs.
7. Grants of Options to Non-employee Directors
(a) Automatic Grants. Notwithstanding any other provisions of this Plan,
each Director who is a Non-Employee Director on the Effective Date shall
receive, on said date, Non-ISOs to purchase Shares as follows:
Participant Number of Shares Reserved under Paragraph 4(a)
----------- ----------------------------------------------
H. Adrian Cox 10,000
Frank W. Dunton 10,000
Henry V. Kahl 10,000
John J. Panzer 10,000
P. Louis Rohe 10,000
Advisory Director Number of Shares Reserved under Paragraph 4(a)
----------------- ----------------------------------------------
Martin F. Meyer 10,000
4
<PAGE>
Such Non-ISOs shall have an Exercise Price per Share equal to the Market
Value of a Share on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph (i) shall become exercisable in accordance with paragraph 9(a) of the
Plan, and (ii) may be exercised from time to time by written notice of intent to
exercise the Option with respect to all or a specified number of the Optioned
Shares, and payment to the Company (contemporaneously with the delivery of such
notice), in cash, in Common Stock, or a combination of cash and Common Stock, of
the amount of the Exercise Price for the number of the Optioned Shares with
respect to which the Option is then being exercised. Each such notice and
payment shall be delivered, or mailed by prepaid registered or certified mail,
addressed to the Treasurer of the Company at the Company's executive offices.
Options granted under this Paragraph shall have a term of ten years;
provided that Options granted under this Paragraph shall expire one year after
the date on which a Director terminates Continuous Service on the Board for a
reason other than death, but in no event later than the date on which such
Options would otherwise expire. In the event of such Director's death during
the term of his directorship, Options granted under this Paragraph shall be
immediately exercisable, and may be exercised within two years from the date of
his death by the personal representatives of his estate or person or persons to
whom his rights under such Option shall have passed by will or by laws of
descent and distribution, but in no event later than the date on which such
Options would otherwise expire. In the event of such Director's Disability
during his or her directorship, the Director's Option shall be immediately
exercisable, and such Option may be exercised within one year of the termination
of directorship due to Disability, but not later than the date that the Option
would otherwise expire. Unless otherwise inapplicable or inconsistent with the
provisions of this Paragraph, the Options to be granted to Directors hereunder
shall be subject to all other provisions of this Plan.
(c) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected there by.
8. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant. In the case of an Employee who owns
Shares representing more than 10% of the Company's outstanding Shares of Common
Stock at the time an ISO is granted, the Exercise Price shall not be less than
110% of the Market Value of the Optioned Shares at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the Exercise Price shall be the
mean between the bid and asked price on such date. If the Common Stock is
traded otherwise than on a national securities exchange on the date in question,
then the Market Value per Share shall be the mean between the bid and asked
price on such date, or, if there is no bid and asked price on such date, then on
the next prior business day on which there was a bid and asked price. If no
such bid and asked price is available, then the Market Value per Share shall be
its fair market value as determined by the Committee, in its sole and absolute
discretion.
5
<PAGE>
9. Exercise of Options.
(a) Generally. Unless otherwise provided by the Committee, each Award to a
Participant shall become 25% exercisable on each of the four succeeding
anniversary dates of the grant date that the Participant maintains Continuous
Service thereon. An Option may not be exercised for a fractional Share.
Notwithstanding the foregoing, an Award shall become fully vested and
exercisable upon a change in control or upon the termination of a Participant
due to the Participant's death, Disability, or retirement at or after age 65.
For the purpose of this Paragraph 9(a), "change in control" shall mean:
(i) the acquisition of ownership, holding or power to vote more than
25% of the Bank's or the Company's voting stock;
(ii) the acquisition of the ability to control the election of a
majority of the Bank's or the Company's directors;
(iii) the acquisition of a controlling influence over the management
or policies of the Bank or the Company by any person or by persons acting
as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934); or
(iv) during any period of two consecutive years, individuals (the
"Continuing Directors") who at the beginning of such period constitute the
Board of Directors of the Bank or the Company (the "Existing Board") cease
for any reason to constitute at least two-thirds thereof, provided that any
individual whose election or nomination for election as a member of the
Existing Board was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a Continuing
Director.
Notwithstanding the foregoing, in the case of (i), (ii) and (iii) hereof,
ownership or control of the Bank by the Company itself shall not constitute a
Change of Control. For purposes of this paragraph only, the term "person"
refers to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein. The decision of the
Bank's continuing directors as to whether or not a Change of Control has
occurred shall be conclusive and binding.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at its executive
offices. Common Stock utilized in full or partial payment of the Exercise Price
for Options shall be valued at its Market Value at the date of exercise.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he is an Employee and has maintained Continuous Service from the date of
the grant of the Option, or within one year after termination of such Continuous
Service (but not later than the date on which the Option would otherwise
expire), except if the Employee's Continuous Service terminates by reason of --
6
<PAGE>
(1) "Just Cause" which for purposes hereof shall have the meaning set
forth in any unexpired employment or severance agreement between the
Participant and the Bank and/or the Company (and, in the absence of any
such agreement, shall mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order), then the
Participant's rights to exercise such Option shall expire on the date of
such termination; or
(2) death, then to the extent that the Participant would have been
entitled to exercise the Option immediately prior to his death, such Option
of the deceased Participant may be exercised within two years from the date
of his death (but not later than the date on which the Option would
otherwise expire) by the personal representatives of his estate or person
or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
(e) Mandatory Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, common stock of the Company that is
purchased upon exercise of an Option or SAR may not be sold within the six-month
period following the grant of that Option or SAR.
10. SARs (Stock Appreciation Rights)
(a) Granting of SARs. In its sole discretion, the Committee may from time
to time grant SARs to Employees either in conjunction with, or independently of,
any Options granted under the Plan. An SAR granted in conjunction with an
Option may be an alternative right wherein the exercise of the Option terminates
the SAR to the extent of the number of shares purchased upon exercise of the
Option and, correspondingly, the exercise of the SAR terminates the Option to
the extent of the number of Shares with respect to which the SAR is exercised.
Alternatively, an SAR granted in conjunction with an Option may be an additional
right wherein both the SAR and the Option may be exercised. An SAR may not be
granted in conjunction with an ISO under circumstances in which the exercise of
the SAR affects the right to exercise the ISO or vice versa, unless the SAR, by
its terms, meets all of the following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO at
the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and under
the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall not
be less than the Market Value of the Optioned Shares on the date of grant.
The provisions of Paragraph 9(c) regarding the period of exercisability of
Options are incorporated by reference herein, and shall determine the period of
exercisability of SARs.
7
<PAGE>
(c) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that an SAR may
not be exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the Company except
for applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate Exercise
Price of such number of Optioned Shares. This amount shall be payable by the
Company, in the discretion of the Committee, in cash or in Shares valued at the
then Market Value thereof, or any combination thereof.
(d) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 9(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
11. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Awards, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Awards, together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs
(a) or (b)(1) hereof shall be made in such a manner as not to constitute a
modification, within the meaning of Section 424(h) of the Code, of outstanding
ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Awards or reserved for issuance under the Plan.
(f) Certain Special Dividends. The Exercise Price of shares subject to
outstanding Awards shall be proportionately adjusted upon the payment of a
special large and nonrecurring dividend that has the effect of a return of
capital to the stockholders of the Company.
8
<PAGE>
12. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
Plan, a Participant who holds Awards may transfer such Awards (but not Incentive
Stock Options) to his or her spouse, lineal ascendants, lineal descendants, or
to a duly established trust for the benefit of one or more of these individuals.
Awards so transferred may thereafter be transferred only to the Participant who
originally received the grant or to an individual or trust to whom the
Participant could have initially transferred the Awards pursuant to this
Paragraph 12. Awards which are transferred pursuant to this Paragraph 12 shall
be exercisable by the transferee according to the same terms and conditions as
applied to the Participant.
13. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of the
date on which the Committee makes the determination of granting such Award, and
the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
14. Effective Date.
The Plan shall become effective immediately upon its approval by a
favorable vote of stockholders owning at least a majority of the total votes
eligible to be cast at a duly called meeting of the Company's stockholders held
in accordance with applicable laws. No Awards may be made prior to approval of
the Plan by the stockholders of the Company.
15. Modification of Awards.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder of
said Award any right or benefit which could not be conferred on him by the grant
of a new Award at such time, or impair the Award without the consent of the
holder of the Award.
16. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plan. No amendment, suspension or termination of the Plan shall, without
the consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
17. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Award unless the issuance and delivery of such Shares
shall comply with all relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain approval
from any regulatory body or authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Company of any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
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(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
18. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
19. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options and/or
SARs shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that he already owns,
having a value equal to the amount required to be withheld. The value of the
Shares to be withheld, or delivered to the Company, shall be based on the Market
Value of the Shares on the date the amount of tax to be withheld is to be
determined. As an alternative, the Company may retain, or sell without notice,
a number of such Shares sufficient to cover the amount required to be withheld.
Notwithstanding any other provision of this Plan to the contrary, to the extent
that an Employee or Director elects to have shares of Common Stock withheld to
satisfy tax obligations, such withholding shall be limited to the minimum
required under the federal, state, and local law.
20. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. Except to the extent
provided in Paragraphs 6(b) and 7(a), no Employee or Director shall have a right
to be granted an Award or, having received an Award, the right to again be
granted an Award. However, an Employee or Director who has been granted an
Award may, if otherwise eligible, be granted an additional Award or Awards.
21. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the State of Maryland, except to the extent that federal law shall be deemed to
apply.
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EXHIBIT 10.2
BCSB BANKCORP, INC.
MANAGEMENT RECOGNITION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 The Company hereby establishes this Plan upon the terms and
conditions hereinafter stated.
1.02 Through acceptance of their appointment to the Committee, each member
of the Committee hereby accepts his or her appointment hereunder upon the terms
and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility by providing Employees
and Directors of the Company, the Bank, and their Affiliates with a proprietary
interest in the Company, and as compensation for their past contributions to the
Bank, and as an incentive to make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Internal Revenue Code of 1986, as amended.
3.02 "Bank" means Baltimore County Savings Bank, F.S.B.
3.03 "Beneficiary" means the person or persons designated by a Participant
to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if any
or if none, his estate.
3.04 "Board" means the Board of Directors of the Company.
3.05 "Committee" means the Management Recognition Plan Committee appointed
by the Board pursuant to Article IV hereof.
3.06 "Common Stock" means shares of the common stock of the Company.
3.07 "Company" means BCSB Bankcorp, Inc.
3.08 "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the Company
in the case of transfers between payroll locations of the Company or between the
Company, an Affiliate or a successor, or in the case of a Director's performance
of services in an emeritus or advisory capacity.
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3.09 "Date of the MHC Reorganization" means the date of the Bank's mutual
holding company reorganization.
3.10 "Director" means a member of the Board.
3.11 "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to substantially prevent a Participant from fulfilling
his or her duties or responsibilities to the Company or an Affiliate.
3.12 "Effective Date" means the date on which the Plan first becomes
effective, as determined under Section 8.07 hereof.
3.13 "Employee" means any person who is employed by the Company or an
Affiliate.
3.14 "Non-Employee Director" shall have the meaning provided in Rule 16b-3
of the General Rules and Regulations under the Securities Exchange Act of 1934,
as amended.
3.15 [reserved].
3.16 "Participant" means an Employee or Director who holds a Plan Share
Award.
3.17 "Plan" means this BCSB Bankcorp, Inc. Management Recognition Plan.
3.18 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Participant pursuant to the Plan.
3.19 "Plan Share Award" means a right granted under this Plan to receive
Plan Shares.
3.20 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.02 and 5.03.
3.21 "Trust" and "Trust Agreement" mean that agreement entered into
pursuant to the terms hereof between the Company and the Trustee, and "Trust"
means the trust created thereunder.
3.22 "Trustee" means that person(s) or entity appointed by the Board
pursuant to the Trust Agreement to hold legal title to the Plan assets for the
purposes set forth herein.
3.23 "Year of Service" shall mean a full twelve-month period, measured from
the date of a Plan Share Award and each annual anniversary of that date, during
which a Participant's Continuous Service has not terminated for any reason.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role and Powers of the Committee. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than two members
of the Board who are Non-Employee Directors. In the absence at any time of a
duly appointed Committee, the Plan shall be administered by those members of the
Board who are Non-Employee Directors, and by the Board if there are less than
two Non-Employee Directors.
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The Committee shall have all of the powers allocated to it in this and
other Sections of the Plan. Except as limited by the express provisions of the
Plan or by resolutions adopted by the Board, the Committee shall have sole and
complete authority and discretion (i) to make Plan Share Awards to such
Employees as the Committee may select, (ii) to determine the form and content of
Plan Share Awards to be issued under the Plan, (iii) to interpret the Plan, (iv)
to prescribe, amend and rescind rules and regulations relating to the Plan, and
(v) to make other determinations necessary or advisable for the administration
of the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. Subject to
Section 4.02, the interpretation and construction by the Committee of any
provisions of the Plan or of any Plan Share Award granted hereunder shall be
final and binding. The Committee shall act by vote or written consent of a
majority of its members, and shall report its actions and decisions with respect
to the Plan to the Board at appropriate times, but in no event less than one
time per calendar year. The Committee may recommend to the Board one or more
persons or entity to act as Trustee(s) in accordance with the provisions of this
Plan and the Trust.
4.02 Role of the Board. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of, the Board. The Board may in
its discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other Sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any Plan Share Award
already made or impair a participant's vested rights under a Plan Share Award.
Members of the Board who are eligible for or who have been granted Plan Share
Awards (other than pursuant to Section 6.04) may not vote on any matters
affecting the administration of the Plan or the grant of Plan Shares or Plan
Share Awards (although such members may be counted in determining the existence
of a quorum at any meeting of the Board during which actions with regard thereto
are taken). Further, with respect to all actions taken by the Board in regard
to the Plan, such action shall be taken by a majority of the Board where such a
majority of the directors acting in the matter are Non-Employee Directors.
4.03 Limitation on Liability. No member of the Board or the Committee or
the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Plan Share Awards granted under it.
If a member of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Company shall indemnify such member, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the Company and its
Affiliates and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board shall determine the
amount of shares to be contributed by the Company to the Trust, provided that
the Bank may also make contributions to the Trust. Such amounts shall be paid
to the Trustee at the time of contribution. No contributions to the Trust by
Employees shall be permitted.
5.02 Investment of Trust Assets; Maximum Plan Share Awards. The Trustee
shall invest Trust assets only in accordance with the Trust Agreement; provided
that the Trust shall not purchase, and Plan Share Awards shall not be made with
respect to, more than 91,464 shares. Common Stock purchased by the Trust may be
newly issued shares, treasury shares, or shares repurchased on the open market
and held in a grantor trust.
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5.03 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, the Plan
Share Reserve shall be reduced by the number of Shares subject to the Awards so
allocated. Any Shares subject or attributable to an Award which may not be
earned because of a forfeiture by the Participant pursuant to Section 7.01 shall
be added to the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Except as otherwise provided in Section 6.04 and 6.05
hereof, the Committee shall make Plan Share Awards to Directors and Employees in
its discretion. In selecting those Employees to whom Plan Share Awards will be
granted and the number of shares covered by such Awards, the Committee shall
consider the position, duties and responsibilities of the eligible Employees,
the value of their services to the Company and its Affiliates, and any other
factors the Committee may deem relevant.
6.02 Allocations. The Committee will determine which Employees and
Directors will be granted discretionary Plan Share Awards, and the number of
Shares covered by each Plan Share Award, provided that in no event shall any
Awards be made which will violate the governing instruments of the Bank or its
Affiliates or any applicable federal or state law or regulation. In the event
Plan Shares are forfeited for any reason or additional shares of Common Stock
are purchased by the Trustee, the Committee may, from time to time, determine
which of the Employees or Directors referenced in Section 6.01 above will be
granted additional Plan Share Awards to be awarded from the forfeited or
acquired Plan Shares.
6.03 Form of Allocation. As promptly as practicable after a determination
is made pursuant to Section 6.02 that a Plan Share Award is to be made, the
Committee shall notify the Participant in writing of the grant of the Award, the
number of Plan Shares covered by the Award, and the terms upon which the Plan
Shares subject to the Award may be earned. The date on which the Committee so
notifies the Participant shall be considered the date of grant of the Plan Share
Awards. The Committee shall maintain records as to all grants of Plan Share
Awards under the Plan.
6.04 Automatic Grants to Non-Employee Directors. Notwithstanding any
other provisions of this Plan, each Non-Employee Director, on the Effective Date
shall receive on said date a Plan Share Award as follows:
Non-Employee Directors Number of Shares Subject to Plan Share Award
---------------------- --------------------------------------------
H. Adrian Cox 5,700
Frank W. Dunton 5,700
Henry V. Kahl 5,700
John J. Panzer 5,700
P. Louis Rohe 5,700
Advisory Director Number of Shares Subject to Plan Share Award
----------------- --------------------------------------------
Martin F. Meyers 5,700
Plan Share Awards received under the provisions of this Section shall
become vested and nonforfeitable according to the general rules set forth in
subsections (a), and (b) of Section 7.01, and the Committee shall have no
discretion to alter or accelerate said vesting requirements. Unless otherwise
inapplicable or inconsistent with the provisions of this Section, the Plan Share
Awards to be granted hereunder shall be subject to all other provisions of this
Plan.
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6.05 Automatic Grants to Employees. On the Effective Date, each of the
following individuals shall receive a Plan Share Award as to the number of Plan
Shares listed below, provided that such award shall not be made to an individual
who is not an Employee on the Effective Date:
Employee Number of Shares Subject to Plan Share Award
-------- --------------------------------------------
Gary C. Loraditch 5,700
William M. Loughran 5,700
Plan Share Awards received under the provisions of this Section shall become
vested and nonforfeitable according to the general rules set forth in
subsections (a) and (b) of Section 7.01, and the Committee shall have no
discretion to alter said vesting requirements. Unless otherwise inapplicable or
inconsistent with the provisions of this Section, the Plan Share Awards to be
granted hereunder shall be subject to all other provisions of this Plan.
6.06 Allocations Not Required. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, but subject to Sections 6.04 and 6.05, no Employee or
Director shall have any right or entitlement to receive a Plan Share Award
hereunder, such Awards being at the total discretion of the Committee, nor shall
any Employees or Directors as a group have such a right. The Committee may,
with the approval of the Board (or, if so directed by the Board) return all
Common Stock in the Plan Share Reserve to the Company at any time, and cease
issuing Plan Share Awards.
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Unless otherwise specified by the Committee for a Plan
Share Award, 25% of the Plan Shares subject to a Plan Share Award shall become
vested and nonforfeitable upon the completion of each Year of Service by the
Participant, within the four year period immediately after the date of grant.
(b) Exception for Change in Control or Terminations Due to Death,
Disability, or Retirement. Notwithstanding the general rule contained in Section
7.01(a) above, all Plan Shares subject to a Plan Share Award held by a
Participant whose service with the Company or an Affiliate terminates due to the
Participant's death, Disability, or retirement after age 65, shall be deemed
earned as of the Participant's last day of service with the Company or an
Affiliate and shall be distributed as soon as practicable thereafter. All
outstanding Plan Share Awards shall also be fully vested and become immediately
distributable upon a change in control.
For the purpose of this Section 7.01(b), "change in control" shall mean:
(i) the acquisition of ownership, holding or power to vote more than
25% of the Bank's or the Company's voting stock;
(ii) the acquisition of the ability to control the election of a
majority of the Bank's or the Company's directors;
(iii) the acquisition of a controlling influence over the management
or policies of the Bank or the Company by any person or by persons acting
as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934); or
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(iv) during any period of two consecutive years, individuals (the
"Continuing Directors") who at the beginning of such period constitute the
Board of Directors of the Bank or the Company (the "Existing Board") cease
for any reason to constitute at least two-thirds thereof, provided that any
individual whose election or nomination for election as a member of the
Existing Board was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a Continuing
Director.
Notwithstanding the foregoing, in the case of (i), (ii) and (iii) hereof,
ownership or control of the Bank by the Company itself shall not constitute a
Change of Control. For purposes of this paragraph only, the term "person" refers
to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein. The decision of the
Bank's non-employee directors as to whether or not a Change of Control has
occurred shall be conclusive and binding.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Participant
or Beneficiary under Section 7.03, such Participant or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends (including special large and nonrecurring dividends,
including one that has the effect of a return of capital to the Company's
stockholders) and a number of shares of Common Stock equal to any stock
dividends, declared and paid with respect to a share of Common Stock between the
date the relevant Plan Share Award was initially granted to such Participant and
the date the Plan Shares are being distributed. There shall also be distributed
an appropriate amount of net earnings, if any, of the Trust with respect to any
cash dividends so paid out.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
subsections (c), and (d) below, the Trustee shall distribute Plan Shares and
accumulated cash from dividends and interest to the Participant or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.
(b) Form of Distribution. The Trustee shall distribute all Plan Shares,
together with any shares representing stock dividends, in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned.
Payments representing cash dividends (and earnings thereon) shall be made in
cash.
(c) Withholding. The Trustee shall withhold from any cash payment made
under this Plan sufficient amounts to cover any applicable withholding and
employment taxes, and if the amount of such cash payment is not sufficient, the
Trustee shall require the Participant or Beneficiary to pay to the Trustee the
amount required to be withheld as a condition of delivering the Plan Shares.
The Trustee shall pay over to the Company or Affiliate which employs or employed
such Participant any such amount withheld from or paid by the Participant or
Beneficiary.
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsections
(a) and (b) above, no Plan Shares may be distributed prior to the date which is
five (5) years from the Date of the MHC Reorganization to the extent the
Participant or Beneficiary, as the case may be, would after receipt of such
Shares own in excess of ten percent (10%) of the issued and outstanding shares
of Common Stock unless such action is approved in advance by a majority vote of
non-employee directors of the Board. To the extent this limitation would delay
the date on which a Participant receives Plan Shares, the Participant may elect
to receive from the Trust, in lieu of such Plan Shares, the cash equivalent
thereof. Any Plan Shares remaining undistributed solely by reason of the
operation of this Subsection (d) shall be distributed to the Participant or his
Beneficiary on the date which is five years from the Date of the MHC
Reorganization.
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(e) Regulatory Exceptions. No Plan Shares shall be distributed unless and
until all of the requirements of all applicable law and regulation shall have
been fully complied with, including the receipt of approval of the Plan by the
stockholders of the Company by such vote, if any, as may be required by
applicable law and regulations.
7.04 Voting of Plan Shares. All shares of Common Stock held by the Trust
(whether or not subject to a Plan Share Award) shall be voted by the Trustee in
the same proportion as the trustee of the Company's Employee Stock Ownership
Plan votes Common Stock held in the trust associated therewith, and in the
absence of any such voting, shall be voted in the manner directed by the Board.
7.05 Deferral Elections by Participants.
(a) Elections to Defer. At any time prior to December 31/st/ of any year
prior to the date on which a Participant becomes vested in any shares subject to
his or her Plan Share Award, a Participant who is a nonemployee Director or a
member of a select group of management or highly compensated employees (within
the meaning of the Employees' Retirement Income Security Act of 1973) may
irrevocably elect, on the form attached hereto as Exhibit "A" (the "Election
Form"), to defer the receipt of all or a percentage of the Plan Shares that
would otherwise be transferred to the Participant upon the vesting of such award
(the "Deferred Shares").
(b) Recordkeeping; Holding of Deferred Shares. The MRP Committee shall
establish and maintain an individual account in the name of each Participant who
files an Election Form for the purpose of tracking deferred earnings
attributable to cash dividends paid on Deferred Shares (the "Cash Account"). On
the last day of each fiscal year of the Company, the Committee shall credit to
the Participant's Cash Account earnings on the balance of the Cash Account at a
rate equal to the dividend-adjusted total return on Common Stock, as determined
from time to time by the MRP Committee in its sole discretion. The Trustees
shall hold each Participant's Deferred Shares and Deferred Earnings in the Trust
until distribution is required pursuant to the election set forth in the
Participant's Election Form.
(c) Distributions of Deferred Shares. The Trustee shall distribute a
Participant's Deferred Shares and Deferred Earnings in accordance with the
Participant's Election Form. All distributions made by the Company and/or the
Trustees pursuant to elections made hereunder shall be subject to applicable
federal, state, and local tax withholding and to such other deductions as shall
at the time of such payment be required under any income tax or other law,
whether of the United States or any other jurisdiction, and, in the case of
payments to a beneficiary, the delivery to the Committee and/or Trustees of all
necessary waivers, qualifications and other documentation. Within 90 days after
receiving notice of a Participant's death, the Trustee shall distribute any
balance of the Participant's Deferred Shares and Deferred Earnings to the
Participant's designated beneficiary, if living, or if such designated
beneficiary is deceased or the Participant failed to designate a beneficiary, to
the Participant's estate. If, on the other hand, a Participant's Continuous
Service terminates for a reason other than the Participant's death, Disability,
early retirement, or normal retirement, the Participant's Deferred Shares and
Deferred Earnings shall be distributed to the Participant in a lump sum
occurring as soon as reasonably practicable. The distribution provisions of a
Participant's Election Form shall become irrevocable on the date that occurs (i)
one year before the Participant's termination of Continuous Service for a reason
other than death, and (ii) on the Participant's death if that terminates the
Participant's Continuous Service.
(d) Hardship Withdrawals. Notwithstanding any other provision of the Plan
or a Participant's Election Form, in the event the Participant suffers an
unforeseeable emergency hardship within the contemplation of this paragraph, the
Participant may apply to the Committee for an immediate distribution of all or a
portion of his Deferred Shares and Deferred Earnings. The hardship must result
from a sudden and unexpected illness or accident of the Participant or a
dependent of the Participant, casualty loss of property, or other similar
conditions beyond the control of the Participant. Examples of purposes which
are not considered hardships include post-secondary school expenses or the
desire to purchase a residence. In no event will a distribution be made to the
extent the hardship could be relieved through reimbursement or compensation by
insurance or otherwise, or by liquidation of the Participant's
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nonessential assets to the extent such liquidation would not itself cause a
severe financial hardship. The amount of any distribution hereunder shall be
limited to the amount necessary to relieve the Participant's financial hardship.
The determination of whether a Participant has a qualifying hardship and the
amount which qualifies for distribution, if any, shall be made by the Committee
in its sole discretion. The Committee may require evidence of the purpose and
amount of the need, and may establish such application or other procedures as it
deems appropriate.
(e) Rights to Deferred Shares and Earnings. A Participant may not assign
his or her claim to Deferred Shares and Deferred Earnings during his or her
lifetime, except in accordance with Section 8.03 of this Plan. A Participant's
right to Deferred Shares and Deferred Earnings shall at all times constitute an
unsecured promise of the Company to pay benefits as they come due. The right of
the Participant or his or her beneficiary to receive benefits hereunder shall be
solely an unsecured claim against the general assets of the Company. Neither
the Participant nor his or her beneficiary shall have any claim against or
rights in any specific assets or other fund of the Company, and any assets in
the Trust shall be deemed general assets of the Company.
ARTICLE VIII
MISCELLANEOUS
8.01 Adjustments for Capital Changes.
(a) Recapitalizations; Stock Splits, etc. The number and kind of shares
which may be purchased under the Plan, and the number and kind of shares subject
to outstanding Plan Share Awards, shall be proportionately adjusted for any
increase, decrease, change or exchange of shares of Common Stock for a different
number or kind of shares or other securities of the Company which results from a
merger, consolidation, recapitalization, reorganization, reclassification,
stock dividend, split-up, combination of shares, or similar event in which the
number or kind of shares is changed without the receipt or payment of
consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding Plan
Share Awards shall be adjusted for any change or exchange of shares of Common
Stock for a different number or kind of shares or other securities which results
from the Transaction.
(c) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Section, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the shares pursuant to the Plan Share Award before the adjustment
was made. In addition, the Committee shall have the discretionary authority to
impose on the Shares subject to Plan Share Awards to Employees such restrictions
as the Committee may deem appropriate or desirable, including but not limited to
a right of first refusal, or repurchase option, or both of these restrictions.
(d) Other Issuances. Except as expressly provided in this Section, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into shares of Common Stock or stock of another class,
for cash or property or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, shall not affect, and
no adjustment shall be made with respect to, the number or class of shares of
Common Stock then subject to Plan Share Awards or reserved for issuance under
the Plan.
8.02 Amendment and Termination of Plan. The Board may, by resolution, at
any time amend or terminate the Plan; provided that no amendment or termination
of the Plan shall, without the written consent of a Participant, impair any
rights or obligations under a Plan Share Award theretofore granted to the
Participant.
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The power to amend or terminate the Plan in accordance with this Section
8.02 shall include the power to direct the Trustee to return to the Company all
or any part of the assets of the Trust, including shares of Common Stock held in
the Plan Share Reserve. However, the termination of the Trust shall not affect
a Participant's right to earn Plan Share Awards and to receive a distribution of
Common Stock relating thereto, including earnings thereon, in accordance with
the terms of this Plan and the grant by the Committee or the Board.
8.03 Nontransferability. Plan Share Awards may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution. Notwithstanding the foregoing,
or any other provision of this Plan, a Participant who holds Plan Share Awards
may transfer such Awards to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of one or more of
these individuals. Plan Share Awards so transferred may thereafter be
transferred only to the Participant who originally received the grant or to an
individual or trust to whom the Participant could have initially transferred the
Awards pursuant to this Section 8.03. Plan Share Awards which are transferred
pursuant to this Section 8.03 shall be exercisable by the transferee according
to the same terms and conditions as applied to the Participant.
8.04 No Employment or Other Rights. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee,
the Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Employee or Director to continue
in the service of the Company, the Bank, or an Affiliate thereof.
8.05 Voting and Dividend Rights. No Participant shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share Award prior to the time said Plan Shares are actually
distributed to him.
8.06 Governing Law. The Plan and Trust shall be governed and construed
under the laws of the State of Maryland to the extent not preempted by Federal
law.
8.07 Effective Date. The Plan shall become effective immediately upon its
approval by a favorable vote of stockholders of the Company who own at least a
majority of the total votes eligible to be cast at a duly called meeting of the
Company's stockholders held in accordance with applicable laws. In no event
shall Plan Share Awards be made prior to the Effective Date.
8.08 Term of Plan. This Plan shall remain in effect until the earlier of
(i) termination by the Board, or (ii) the distribution of all assets of the
Trust. Termination of the Plan shall not affect any Plan Share Awards
previously granted, and such Awards shall remain valid and in effect until they
have been earned and paid, or by their terms expire or are forfeited.
8.09 Tax Status of Trust. It is intended that (i) the Trust associated
with the Plan be treated as a grantor trust of the Company under the provisions
of Section 671 et seq. of the Code, as the same may be amended from time to
-- ---
time, and (ii) that in accordance with Revenue Procedure 92-65 (as the same may
be amended from time to time), Participants have the status of general unsecured
creditors of the Company, the Plan constitutes a mere unfunded promise to make
benefit payments in the future, the Plan is unfunded for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended, and the Trust has been and will continue to be maintained in conformity
with Revenue Procedure 92-64 (as the same may be amended from time to time).
9
<PAGE>
BCSB BANKCORP, INC.
[LOGO]
1999 ANNUAL REPORT
<PAGE>
BCSB BANKCORP, INC.
- --------------------------------------------------------------------------------
BCSB Bankcorp, Inc. (the "Company") serves as the holding company for its
wholly owned subsidiary, Baltimore County Savings Bank, F.S.B. (the "Bank").
Baltimore County Savings Bank, M.H.C. (the "MHC"), a federal mutual holding
company, owns 62.0% of the Company's outstanding common stock. 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 eight 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 6,053,162
shares of the common stock outstanding and approximately 1,213 holders of record
of 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, as well as dividends paid on the common stock during each quarter.
<TABLE>
<CAPTION>
High Low Dividends Per Share
------- ------ -------------------
<S> <C> <C> <C>
Fiscal 1999
- ---------------------
First quarter... $10.375 $7.750 $ --
Second quarter.. 9.625 7.875 --
Third quarter... 9.375 8.125 .125
Fourth quarter.. 8.563 6.310 .125
Fiscal 1998
- ---------------------
Fourth quarter.. 12.625 10.00 --
</TABLE>
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>
<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>
<PAGE>
[LETTERHEAD OF BCSB BANKCORP, INC.]
Dear Stockholders, Depositors & Friends,
This letter marks the second annual report since the Bank converted to the
mutual holding company organization in July 1998. A lot has happened in a short
period of time. The plans we made as a result of that reorganization have begun
to be realized. Those plans include diversification of loan products and growth
through expansion of the Bank's branch network. In doing this, Baltimore County
Savings Bank has become a full-service, locally owned and operated community
bank. We provide our customers with a friendly alternative to the "big banks",
and provide you, our stockholders, with long-term growth potential while
continuing to pay a higher-than-industry-average dividend on a regular basis.
I have heard from many of our deposit and loan customers who have told me
they like doing business with us because questions are promptly answered and
they are treated like a person, not a number. This tells me our plan is
working. What's more, the Bank has been an active member of the local
community. Through the Charitable Foundation and other initiatives, much good
will has been realized.
In the past year, we opened three new offices, Abingdon and Forest Hill in
Harford County and Essex in Baltimore County. Hickory in Harford County and
White Marsh in Baltimore County are under construction and are expected to open
in early 2000. This will double our branch network in one year and will provide
full-service facilities for both existing customers and new customers. The
three new offices have all grown faster than we anticipated and we fully expect
the growth to continue as others find out why it pays to Come Home to Baltimore
County Savings Bank.
We have expanded our consumer loan products, by making boat and RV loans
available to our customers. We will be adding home improvement loans to our
product mix and will be enhancing our home equity loans to be even more
competitive in the future. The growth expected as a result of these expansion
efforts will provide long-term benefits to us as stockholders.
What follows is the report on the Company's operations this past year. As
you go through it, remember that our plans are long-term. It will take time to
realize their full potential. Providing our customers with the best loan and
deposit products and to make banking with us easy and convenient is the best
foundation for our investment in BCSB Bankcorp.
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,
--------------------
1999 1998
---------- --------
(In thousands)
<S> <C> <C>
Total assets...................................... $298,302 $268,840
Loans receivable, net............................. 215,383 181,969
Cash.............................................. 5,977 3,572
Interest-bearing deposits in other banks.......... 8,651 20,300
Federal funds sold................................ 449 9,134
Investment securities:
Held to maturity................................. 35,232 12,611
Mortgage-backed securities:
Held to maturity................................. 23,500 34,198
FHLB stock........................................ 1,650 1,512
Deposits.......................................... 233,365 220,805
FHLB advances..................................... 16,000 --
Stockholders' equity - substantially restricted... 45,280 45,143
</TABLE>
Selected Consolidated Operations Data
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1999 1998
------------ ----------
(In thousands)
<S> <C> <C>
Interest income.............................. $19,396 $18,810
Interest expense............................. 9,780 9,867
------- -------
Net interest income before
provision for loan losses................... 9,616 8,943
Provision for loan losses.................... 339 119
------- -------
Net interest income.......................... 9,277 8,824
Other income................................. 547 911
Non-interest expense......................... 7,482 7,013
------- -------
Income before income taxes................... 2,342 2,721
Income tax provision......................... 957 1,073
------- -------
Net Income................................... $ 1,384 $ 1,648
======= =======
</TABLE>
2
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
At or for the Year
Ended September 30,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets)........... .49% .63%
Return on average equity (net income
divided by average equity)................. 3.03 5.71
Interest rate spread (combined
weighted average interest rate
earned less combined weighted
average interest rate cost)................ 2.94 3.10
Net interest margin (net interest
income divided by average
interest-earning assets)................... 3.51 3.53
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 116.05 110.20
Ratio of non-interest expense to
average total assets....................... 2.63 2.67
Asset Quality Ratios:
Nonperforming assets to total assets at
end of period.............................. .39 .57
Nonperforming loans to gross loans at
end of period.............................. .46 .59
Allowance for loan losses to gross loans
at end of period........................... .57 .54
Allowance for loan losses to nonperforming
loans at end of period..................... 124.20 92.99
Provision for loan losses to gross loans.... .15 .06
Net charge-offs to average loans
outstanding................................ .05 .04
Capital Ratios:
Equity to total assets at end
of period.................................. 15.18 16.79
Average equity to average
assets..................................... 16.07 10.97
</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 for the Bank following the Bank's reorganization into the mutual holding
company form of organization (the "Reorganization"). As part of the
Reorganization, the Company became a majority-owned subsidiary of the MHC. The
Reorganization was consummated on July 8, 1998. 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.
4
<PAGE>
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
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, has been completed. The hardware and software
has been successfully tested. The Company has received representations from
mission critical third party vendors that they are Year 2000 compliant. All
mission critical testing has been completed.
The last phase, implementation, has been completed. The Company has
developed contingency plans for processes in the event of system failures. 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 $75,000. 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,
5
<PAGE>
which 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.
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 3% increases and decreases in market interest rates. The Bank's Board of
Directors has adopted an interest rate risk policy which establishes
6
<PAGE>
maximum decreases in the Bank's estimated NPV of 25%, 50% and 75% in the event
of 1%, 2% and 3% increases in market interest rates, respectively, and of 25%,
25% and 25% in the event of 1%, 2% and 3% 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, 1999.
<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>
+300 bp $22,572 $(15,487) (41)% 8.16% (476) bp
+200 bp 27,780 (10,279) (27) 9.83 (309) bp
+100 bp 33,067 (4,992) (13) 11.45 (147) bp
0 bp 38,059 12.92
- -100 bp 42,082 4,023 11 14.05 113 bp
- -200 bp 45,848 7,789 20 15.08 215 bp
- -300 bp 49,652 11,593 30 16.08 315 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.
***Risk Measures: 200 bp rate shock***
<TABLE>
<CAPTION>
At At
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Pre-Shock NPV Ratio: NPV as % of PV of Assets.. 12.92% 14.93%
Exposure Measure: Post Shock NPV Ratio......... 9.83 13.59
Sensitivity Measure: Change in NPV Ratio....... 309 bp 134 bp
</TABLE>
The above table indicates that at September 30, 1999, 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, 1999, 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, 1999, 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.
7
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections set
forth in the table, should market conditions vary from assumptions used in the
preparation of the table. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In addition, the proportion of
adjustable-rate loans in the Bank's portfolio could decrease in future periods
if market interest rates remain at or decrease below current levels due to
refinance activity. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in the tables. Finally, the ability of many borrowers to repay
their adjustable-rate debt may decrease in the event of an interest rate
increase.
8
<PAGE>
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,
---------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)...................... $195,781 $ 14,767 7.54% $166,612 $ 13,462 8.08%
Mortgage backed securities................ 26,711 1,719 6.44 35,627 2,298 6.45
Investment securities and FHLB stock...... 27,202 1,623 5.97 19,898 1,393 7.00
Other interest-earning assets............. 24,026 1,287 5.36 31,315 1,657 5.29
-------- -------- -------- --------
Total interest-earning assets............ 273,720 19,396 7.09 253,452 18,810 7.42
Non-interest-earning assets................ 10,383 9,672
-------- --------
Total assets............................. $284,103 $263,124
======== ========
Interest-bearing liabilities:
Deposits.................................. $230,546 9,614 4.17 $228,356 9,857 4.32
FHLB advances............................. 3,417 158 4.62 -- -- --
Other liabilities......................... 1,899 8 0.42 1,640 10 .61
-------- -------- -------- --------
Total interest-bearing liabilities....... 235,862 9,780 4.15 229,996 9,867 4.29
-------- ---- -------- ------
Non-interest-bearing liabilities........... 2,573 4,072
-------- --------
Total liabilities........................ 238,435 234,068
Stockholders' equity....................... 45,668 29,056
-------- --------
Total liabilities and retained earnings.. $284,103 $263,124
======== ========
Net interest income........................ $ 9,616 $ 8,943
======== ========
Interest rate spread....................... 2.94% 3.13%
==== ====
Net interest margin (2).................... 3.51% 3.53%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities... 116.05% 110.17%
====== ======
- -------------------------
</TABLE>
(1) Includes nonaccrual loans.
(2) Represents net interest income divided by the average balance of interest-
earning assets.
9
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rates (change in
rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by the changes in volume).
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1999 vs. 1998
----------------------------------
Increase (Decrease)
Due to
----------------------------------
Rate/
Volume Rate Volume Total
------ ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable................ $2,357 $ (895) $(157) $1,305
Mortgage-backed securities...... (574) (5) 1 (578)
Investment securities and
FHLB Stock................... 511 (206) (76) 229
Other interest-earning assets... (386) 21 (5) (370)
------ ------- ----- ------
Total interest-earning assets.. 1,908 (1,085) (237) 586
Interest expense:
Deposits........................ 94 (335) (3) (244)
FHLB advances................... -- -- 158 158
Other liabilities............... 2 (3) -- (1)
------ ------- ----- ------
Total interest-bearing
liabilities................. 96 (338) 155 (87)
------ ------- ----- ------
Change in net interest income.... $1,812 $ (747) $(392) $ 673
====== ======= ===== ======
</TABLE>
Comparison of Financial Condition at September 30, 1999 and 1998
Total assets increased by $29.5 million, or 11.0%, from $268.8 million at
September 30, 1998 to $298.3 million at September 30, 1999. The asset increase
during 1999 was due to a $33.4 million, or 18.4%, increase in loans receivable,
net from $182.0 million at September 30, 1999 to $215.4 million at September 30,
1999.
The increase in the Company's loan portfolio was 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
$20.6 million, or 16.3%, from $126.3 million at September 30, 1998 to $146.9
million at September 30, 1999. The Company also has emphasized the origination
of automobile loans because of the higher rates and shorter terms to maturity of
those loans. Automobile loans increased by $13.0 million, or 38.5%, from $33.7
million at September 30, 1998 to $46.8 million at September 30, 1999 and
represented 17.8% and 20.8% of the Bank's gross loan portfolio at September 30,
1999 and 1998, respectively.
The Company's investment securities increased by $22.6 million, or 179.4%,
from $12.6 million at September 30, 1998 to $35.2 million at September 30, 1999
as the Company invested excess liquidity obtained from its initial public
offering into higher yielding assets.
10
<PAGE>
The Company's mortgage-backed securities decreased by $10.7 million, or
31.3%, from $34.2 million at September 30, 1998 to $23.5 million at September
30, 1999, as funds from maturing mortgage-backed securities were utilized to
fund increased loan originations.
The Company's cash, interest-bearing deposits in other banks and federal
funds sold decreased by $17.9 million, or 51.2%, from $33.0 million at September
30, 1998, to $15.1 million at September 30, 1999, as excess liquidity was used
to fund increased loan originations and to purchase investment securities.
Deposits increased by $12.6 million, or 5.7%, from $220.8 million at
September 30, 1998 to $233.4 million at September 30, 1999, reflecting the
results of increased marketing efforts, the opening of new branches and the
offering of more competitive deposit rates. The Bank began utilizing FHLB
advances during the years ended September 30, 1999, with $16.0 million of such
advances being outstanding at September 30, 1999. The Company used FHLB
advances to meet increased loan demand.
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
Net Income. Net income decreased by $264,000, or 16.0%, from $1.6 million
for the year ended September 30, 1998 to $1.4 million for the year ended
September 30, 1999. The decrease was due to a $364,000 decrease in other income
and a $469,000 increase in non-interest expenses, offset, in part, by a
$673,000, or 7.5%, increase in net interest income. The Company incurred an
expense and earned income from two transactions that occurred during the fiscal
year ended September 30, 1998. First, 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. Second, the Company earned a pre-tax gain of
$339,000 from the sale of branch deposits during the year ended September 30,
1998.
Net Interest Income. Net interest income was $8.9 million for the year
ended September 30, 1998, as compared to $9.6 million for the year ended
September 30, 1999, representing an increase of $673,000, or 7.5%. The increase
in net interest income was the result of increases in the volume of interest
earning assets and interest-bearing liabilities. The increase in the volume of
interest-earning assets and interest-bearing liabilities allowed the Company to
improve net interest income notwithstanding a decrease in the interest rate
spread. The interest rate spread decreased from 3.31% for the year ended
September 30, 1998 to 2.94% for the year ended September 30, 1999. 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 110.2% for
the year ended September 30, 1998 to 116.1% for the year ended September 30,
1999 primarily due to the investment of the proceeds from the stock issuance
into interest-earning assets for the full 1999 fiscal year.
Interest Income. Interest income increased by $586,000, or 3.1%, from
$18.8 million for the year ended September 30, 1998 to $19.4 million for the
year ended September 30, 1999. This increase was due primarily to an increase
in interest and fees on loans. The increase in interest on loans was due to an
increase in the average balance of loans, which increased by $29.2 million, or
17.5%, from $166.6 million for the year ended September 30, 1998 to $195.8
million for the year ended September 30, 1999. The increase in the average
balance of loans was achieved through increases in single-family residential
mortgage loans and automobile loans described above. The increase in the
average balance of loans more than offset a 54 basis point decrease in the
average yield on loans due to decreases in prevailing market rates of interest.
Interest on investment securities increased by $230,000, or 16.5%, from $1.4
million for the year ended September 30, 1998 to $1.6 million for the year ended
September 30, 1999, due to an increase in the average balance of investment
securities from $19.9 million for the year ended September 30, 1998 to $27.2
million for the year ended September 30, 1999 as the Company invested excess
liquidity obtained from its initial public offering into higher yielding assets.
Interest on mortgage-backed securities decreased by $579,000, or 25.2%, from
$2.3 million for the year ended September 30, 1998 to $1.7 million for the year
ended September 30, 1999, and interest on other interest-earning assets
decreased by $370,000, or 22.3%, from $1.7 million for the year ended September
30, 1998
11
<PAGE>
to $1.3 million for the year ended September 30, 1999, due to decreases in the
average balances of mortgage-backed securities and cash and cash equivalents as
the Company deployed such assets into loans.
Interest Expense. Interest expense decreased by $87,000, or 0.9%, from
$9.9 million for the year ended September 30, 1998 to $9.8 million for the year
ended September 30, 1999. This decrease was due to a decrease in the average
rate paid on deposits, which comprise the largest component of the Company's
interest-bearing liabilities. The average cost of deposits decreased by 15
basis points during the year ended September 30, 1999 reflecting decreases in
prevailing market interest rates. The decrease in the average cost of deposits
more than offset a $2.2 million increase in the average balance of deposits.
Contributing to the Company's interest expense during the year ended September
30, 1999 was interest expense on FHLB advances. During the year ended September
30, 1999, the Company had an average balance of $3.4 million in FHLB advances,
resulting in interest expense for the year of $158,000. No FHLB advances were
utilized during the prior year. FHLB advances aggregated $16.0 million at
September 30, 1999.
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 $339,000 and $119,000 for the years
ended September 30, 1999 and 1998, respectively. In establishing such
provisions, management considered the increased loan volume and, particularly,
the increase in the volume of consumer loans. In addition, management considered
the level of the Company's non-performing loans, which were $1.0 million and
$1.1 million at September 30, 1999 and 1998, respectively, and the levels of the
Company's net charge-offs, which totaled $100,000 and $63,000 during the years
ended September 30, 1999 and 1998, respectively.
Other Income. Total other income decreased by $364,000, or 40.0%, from
$911,000 for the year ended September 30, 1998 to $547,000 for the year ended
September 30, 1999. The decrease in other income for the year ended September
30, 1998 was attributable to the gain earned by the Bank during the year ended
September 30, 1998 on the 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 recognized a gain of $339,000
representing a premium paid by the buyer on the deposits sold.
Non-interest Expenses. Total non-interest expenses increased by $469,000,
or 6.7%, from $7.0 million for the year ended September 30, 1998 to $7.5 million
for the year ended September 30, 1999. The increase was due to an increase of
$532,000, or 15.2%, in salaries and related expenses, and increase of $117,000,
or 18.9% in occupancy expense and an increase of $216,000, or 53.9%, in property
and equipment expense. The increase in salaries and related expenses was due
primarily to the hiring of new employees in connection with the opening of new
branches and, to a lesser extent, to the implementation during the year ended
September 30, 1999 of the ESOP. The Company incurred increased occupancy
expense and property expense during the year ended September 30, 1999 as a
result of operating two additional branch offices during the year. During the
year ended September 30, 1999, the Company also increased its advertising
expense by $164,000, or 50.0%, in an effort to increase market share and to
promote its new branch offices. During the year ended September 30, 1998, the
Company incurred and expense of $750,000 related to the establishment of the
Foundation. No comparable expense occurred during the year ended September 30,
1999.
Income Taxes. The Company's income tax expense was $957,000 and $1.1
million for the years ended September 30, 1999 and 1998, respectively. The
Company's effective tax rates were 40.9% and 39.4% for the years ended September
30, 1999 and 1998, 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.
12
<PAGE>
At September 30, 1999, 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, 1999 to its tangible, core
and risk-based capital levels and compares such totals to the regulatory
requirements, see Note 15 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, 1999 and 1998, the Bank had $99.6 million
and $76.1 million, respectively, of loan originations. During the years ended
September 30, 1999 and 1998, the Company purchased investment securities in the
amounts of $33.0 million and $22.4 million, respectively, and mortgage-backed
securities in the amounts of $3.0 million and $9.6 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 Bank's average daily liquidity ratio for the month of
September 1999 was approximately 24.6%, 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, 1999, cash, interest-bearing deposits in other banks
and federal funds sold totaled $6.0 million, $8.7 million and $449,000,
respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. Certificates of deposit which are scheduled to
mature in less than one year at September 30, 1999 totaled $110.6 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.
On August 26, 1999 the Company commenced a stock repurchase program to
acquire up to 320,124 shares, or approximately 5% of the Company's outstanding
shares of common stock as part of its capital management strategy. As of
November 22, 1999 the Company had repurchased approximately 154,864 shares of
the common stock for, which it paid an aggregate of $1.2 million. The Company
has, and will utilize, available cash to effect further repurchases.
13
<PAGE>
In keeping with the Company's stated policy, quarterly dividends were
declared on April 16, July 8, and October 7, 1999 of 12 1/24 each. In keeping
with Federal regulations, Baltimore County Savings Bank, M.H.C. (the "MHC")
applied for, and elected to waive receipt of, dividends from the Company as to
its shares, which amounted to 3,754,960 shares as of December 22, 1999, or 62.0%
of all outstanding shares of the Company's common stock. The dividends rate is
based in part on the Bank's strong capital position (see foot note 15) and the
flexibility of the mutual holding company structure whereby the MHC, with
regulatory approval, has waived dividends otherwise payable to it. This has
enabled the Bank to reward its public shareholders with a strong dividend stream
while retaining sufficient capital to support Company operations, earnings
growth and the Bank's branch expansion business plan.
The Bank generally requires collateral or other security to support
financial instruments with off-balance-sheet credit risk. At September 30,
1999, the Bank had commitments under standby letters of credit, lines of credit
and commitments to originate mortgage loans of $1.1 million, $19.3 million and
$3.7 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. 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 earnings effect of the hedged forecasted transaction.
The Statement, which is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, 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.
14
<PAGE>
EXHIBIT 13
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP]
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, 1999 and September 30, 1998
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,
1999. These consolidated 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the two
years in the two year period ended September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Anderson Associates, LLP
Anderson Associates, LLP
December 2, 1999
Baltimore, Maryland
F-1
<PAGE>
BCSB BANKCORP, INC.
-------------------
AND SUBSIDIARIES
----------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Assets
------
Cash $ 5,976,961 $ 3,572,309
Interest bearing deposits in other banks 8,651,267 20,299,970
Federal funds sold 448,945 9,134,202
Investment securities, held to maturity (Note 2) 35,232,306 12,610,823
Loans receivable, net (Note 3) 215,383,087 181,969,226
Mortgage backed securities, held to maturity (Note 4) 23,499,794 34,197,844
Foreclosed real estate, net (Note 5) 89,091 370,690
Investment in real estate development and
loans to joint ventures (Note 6) 5,287 8,195
Premises and equipment, net (Note 7) 4,846,121 2,988,558
Federal Home Loan Bank of Atlanta stock 1,650,300 1,511,900
Accrued interest receivable - loans 834,424 725,065
- investments 635,757 528,231
- mortgage backed securities 140,005 196,136
Prepaid and deferred income taxes (Note 16) 361,211 175,870
Intangible assets acquired, net - 24,497
Other assets 547,171 526,733
------------ ------------
Total assets $298,301,727 $268,840,249
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposits (Note 8) $233,364,564 $220,804,724
Federal Home Loan Bank of Atlanta advances (Note 9) 16,000,000 -
Advance payments by borrowers for
taxes and insurance 1,101,971 850,397
Income taxes payable (Note 16) 60,670 60,792
Deferred income taxes (Note 16) - 143,929
Payables to disbursing agents 163,923 249,430
Dividends payable 294,797 -
Other liabilities 2,035,343 1,587,929
------------ ------------
Total liabilities 253,021,268 223,697,201
Commitments and contingencies (Notes 3, 7 and 11)
Stockholders' Equity (Notes 12, 13, 14 and 15)
- --------------------
Common stock (Par value $.01 - 13,500,000 authorized,
6,116,562 shares issued and outstanding) 61,166 61,166
Additional paid-in capital 21,918,472 22,645,088
Retained earnings (substantially restricted) 25,788,692 25,221,308
------------ ------------
47,768,330 47,927,562
Employee Stock Ownership Plan (1,509,156) (1,829,280)
Stock held by Rabbi Trust (978,715) (955,234)
------------ ------------
45,280,459 45,143,048
------------ ------------
Total liabilities and stockholders' equity $298,301,727 $268,840,249
============ ============
</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,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Interest and fees on loans (Note 3) $ 14,766,745 $ 13,462,636
Interest on mortgage backed securities 1,718,785 2,297,838
Interest and dividends on investment securities 1,622,897 1,393,167
Other interest income 1,287,340 1,656,594
------------ ------------
Total interest income 19,395,767 18,810,235
Interest on deposits (Note 8) 9,614,116 9,856,690
Interest on borrowings - short term 157,944 -
Other interest expense 7,753 10,670
------------ ------------
Total interest expense 9,779,813 9,867,360
------------ ------------
Net interest income 9,615,954 8,942,875
Provision for losses on loans (Note 3) 339,251 118,995
------------ ------------
Net interest income after provision for losses on loans 9,276,703 8,823,880
Other Income
- ------------
Gain on sale of foreclosed real estate 17,437 -
Servicing fee income 8,223 13,600
Fees and charges on loans 149,494 179,224
Fees on transaction accounts 173,419 161,375
Rental income 113,253 124,254
Gain from real estate development and joint venture 5,352 -
Gain on sale of branch deposits - 339,000
Miscellaneous income 79,885 93,452
------------ ------------
Net other income 547,063 910,905
Non-Interest Expenses
- ---------------------
Salaries and related expense 4,020,761 3,488,964
Provision for losses on foreclosed real estate - 33,248
Occupancy expense 705,016 588,352
Deposit insurance premiums 184,498 228,419
Data processing expense 505,928 425,746
Property and equipment expense 616,613 400,655
Professional fees 263,048 116,703
Advertising 491,937 327,907
Telephone, postage and office supplies 350,156 308,441
Baltimore County Savings Bank Foundation contribution (Note 12) - 750,000
Amortization of excess of cost over fair value of net assets acquired 24,497 26,712
Other expenses 319,456 318,268
------------ ------------
Total non-interest expenses 7,481,910 7,013,415
------------ ------------
Income before tax provision 2,341,856 2,721,370
Income tax provision (Note 16) 957,467 1,073,088
------------ ------------
Net income $ 1,384,389 $ 1,648,282
============ ============
Net Income Per Share of Common Stock (Note 1)
Basic $ .24
Diluted $ .23
</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, 1999 AND 1998
-----------------------------------------------
<TABLE>
<CAPTION>
Employee
Additional Stock Stock Total
Common Paid-In Retained Ownership Held By Stockholders'
Stock Capital Earnings Plan Rabbi Trust Equity
---------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1997 $ - $ - $23,858,449 $ - $ - $ 23,858,449
Proceeds from stock offering 61,166 22,645,088 - - - 22,706,254
Borrowings for Employee Stock
Ownership Plan (ESOP) - - - (1,829,280) - (1,829,280)
Acquisition of stock by Rabbi Trust - - - - (897,504) (897,504)
Increase in market value of Rabbi Trust shares - - - - (57,730) (57,730)
Capitalize Baltimore County Savings Bank, M.H.C. - - (285,423) - - (285,423)
Net income - - 1,648,282 - _ 1,648,282
---------- ----------- ----------- ------------ ----------- -------------
Balance - September 30, 1998 61,166 22,645,088 25,221,308 (1,829,280) (955,234) 45,143,048
Compensation under stock based benefit plans - (20,640) - 320,124 - 299,484
Acquisition of stock for Rabbi Trust - - - - (81,211) (81,211)
Adjust market value of Rabbi Trust shares to cost - - - - 57,730 57,730
Refund of duplicate payment from reorganization - 55,000 - - - 55,000
Acquisition of stock for Management Retention Plan - (732,073) - - - (732,073)
Treasury stock purchase - (28,903) - - - (28,903)
Cash dividends declared ($.365 per share) - - (817,005) - - (817,005)
Net income - - 1,384,389 - - 1,384,389
---------- ----------- ----------- ------------ ----------- -------------
Balance - September 30, 1999 $ 61,166 $21,918,472 $25,788,692 $ (1,509,156) $ (978,715) $ 45,280,459
========== =========== =========== ============ =========== =============
</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>
For Years Ended
September 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities
- --------------------
Net income $1,384,389 $1,648,282
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
-------------------------------------
Accretion of discount on investments (254) (31,341)
Loans originated for sale - (133,000)
Proceeds from loans originated for sale - 133,000
Loan fees and costs deferred, net (87,312) 84,774
Amortization of deferred loan fees and costs (180,770) (304,079)
Provision for losses on loans 339,251 118,995
Non-cash compensation under Stock-Based Benefit Plan 299,484 -
Amortization of premium on mortgage backed securities 41,459 31,280
Gain from sale foreclosed real estate (17,437) -
Gain from real estate development and joint venture (5,352) -
Provision for losses on foreclosed real estate - 33,248
Provision for depreciation 405,309 291,980
(Increase) decrease in accrued interest receivable on loans (109,359) 13,841
Increase in accrued interest receivable on investments (107,526) (71,544)
Decrease in accrued interest receivable on
mortgage backed securities 56,131 22,550
Decrease in prepaid income taxes 12,839 138,514
(Increase) decrease in deferred income tax assets (342,109) 60,391
Amortization of excess of cost over fair value of
net assets acquired 24,497 26,712
Increase in other assets (20,438) (277,636)
Gain on sale of branch deposits - (339,000)
Increase (decrease) in accrued interest payable on deposits 39,604 (21,399)
Increase (decrease) in income taxes payable (122) 58,883
Increase (decrease) in other liabilities and payables
to disbursing agents 361,907 (573,616)
---------- ----------
Net cash provided by operating activities 2,094,191 910,835
</TABLE>
F-5
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For Years Ended
September 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Investing Activities
- ------------------------------------
Proceeds from maturing interest bearing deposits $ 2,045,000 $ 5,347,000
Purchase of interest bearing deposits (8,002,000) (198,000)
Purchases of investment securities - held to maturity (32,981,229) (22,435,091)
Proceeds from maturities of investment securities - held to maturity 10,360,000 40,179,069
Longer term loans originated (52,987,170) (47,592,118)
Principal collected on longer term loans 33,913,036 27,590,631
Net increase in short-term loans (14,521,057) (3,523,739)
Principal collected on mortgage backed securities 13,664,157 12,540,919
Purchase of mortgage backed securities (3,007,566) (9,580,962)
Proceeds from sales of foreclosed real estate 409,197 -
Investment in foreclosed real estate - (71,460)
Net investment and loans to joint ventures 8,260 4,537
Investment in premises and equipment (2,262,872) (423,550)
Purchase of Federal Home Loan Bank of Atlanta stock (138,400) (78,700)
------------ ------------
Net cash provided (used) by investing activities (53,500,644) 1,758,536
Cash Flows from Financing Activities
- ------------------------------------
Net increase (decrease) in demand deposits,
money market, passbook accounts and advances
by borrowers for taxes and insurance 4,937,630 (3,300,013)
Net increase in certificates of deposit 7,834,180 5,759,415
Increases in Federal Home Loan Bank of Atlanta advances 16,000,000 -
Increase in dividends payable 294,797 -
Proceeds from stock offering - 22,420,831
Employee Stock Ownership Plan (ESOP) - (1,829,280)
Acquisition of stock for Rabbi Trust (81,211) (897,504)
Change in market value of Rabbi Trust stock 57,730 (57,730)
Refund of stock offering expense 55,000 -
Acquisition of stock for Management Retention Plan (732,073) -
Treasury stock purchase (28,903) -
Dividends on stock (817,005) -
Proceeds from sale of branch deposits - (5,827,235)
------------ ------------
Net cash provided by financing activities 27,520,145 16,268,484
------------ ------------
</TABLE>
F-6
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
------------------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For Years Ended
September 30,
--------------------------
1999 1998
------------- -----------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents $(23,886,308) $18,937,855
Cash and cash equivalents at beginning of period 31,074,481 12,136,626
------------ -----------
Cash and cash equivalents at end of period $ 7,188,173 $31,074,481
============ ===========
The following is a summary of cash
and cash equivalents:
Cash $ 5,976,961 $ 3,572,309
Interest bearing deposits in other banks 8,651,267 20,299,970
Federal funds sold 448,945 9,134,202
------------ -----------
Balance of cash items reflected on Statement of
Financial Condition 15,077,173 33,006,481
Less - certificate of deposit with a maturity
of more than three months 7,889,000 1,932,000
------------ -----------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 7,188,173 $31,074,481
============ ===========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest $ 9,407,893 $ 9,878,997
============ ===========
Income taxes $ 1,284,280 $ 815,300
============ ===========
Transfer from loans to real estate acquired
through foreclosure $ 110,161 $ 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. 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 has invested in several joint ventures
formed for the purpose of developing real estate. 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.
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-8
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
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.
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 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.
F-9
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
G. 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, 1999 and 1998.
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 $133,572 and $109,075 at September 30, 1999 and 1998,
respectively.
F-10
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
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. Earnings Per Share - As required, The Bank adopted Statement of
Financial Accounting Standards No. 128 during the year ended
September 30, 1999. This Statement requires dual presentation of
basic and diluted earnings per share ("ESP") with a reconciliation
of the numerator and denominator of the EPS computations. Basic per
share amounts are based on the weighted average shares of common
stock outstanding. Diluted earnings per share assume the
conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities,
unless the effect is to reduce a loss or increase earnings per
share. No adjustments were made to net income (numerator). Earnings
per share data is not presented for the year ended September 30,
1998, since the Bank converted to the stock form in July 1998, and
such information would not be meaningful. The basic and diluted
weighted average shares outstanding for the year ended September
30, 1999 are as follows:
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
---------
Income available to share holders $1,384,389 5,859,344 $ 0.24
========== ========= ========
Diluted EPS
-----------
Effect of dilutive shares - 89,803
---------- ---------
Income available to shareholders
plus assumed conversions $1,384,389 5,949,147 $ 0.23
========== ========= ========
</TABLE>
N. 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.
F-11
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
O. 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.
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.
Note 2 - Investment Securities
---------------------
The amortized cost and fair values of investment securities are as
follows as of September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held to Maturity:
September 30, 1999
U.S. Government and Agency
Obligations, held to maturity $35,232,306 $ - $1,014,635 $34,217,671
=========== ========== ========== ===========
September 30, 1998
U.S. Government and Agency
Obligations, held to maturity $12,610,823 $ 50,228 $ - $12,661,051
=========== ========== ========== ===========
</TABLE>
F-12
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 2 - Investment Securities - Continued
---------------------
The following is a summary of investment securities:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------ ------------------------
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 $ 500,000 $ 498,594 $ 1,000,000 $ 1,000,313
Due beyond 12 months but
within five years 21,985,811 21,460,136 5,060,823 5,073,727
Due beyond five years but
within ten years 11,996,495 11,542,144 6,550,000 6,587,011
Due beyond ten years 750,000 716,797 - -
----------- ----------- ----------- -----------
$35,232,306 $34,217,671 $12,610,823 $12,661,051
=========== =========== =========== ===========
</TABLE>
Proceeds from maturities of held to maturity securities were
$10,360,000 and $40,179,069 for the years ended September 30, 1999 and
1998, respectively. There were no gross gains or losses realized for
the years ended September 30, 1999 and 1998.
F-13
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable
----------------
Loans receivable at September 30, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Single-family residential mortgages $146,867,904 $126,272,171
Single-family rental property loans 4,831,931 5,252,511
Commercial real estate loans 10,215,951 9,496,991
Construction loans 5,592,033 7,935,958
Commercial loans secured 1,081,205 -
Commercial lines of credit 50,000 50,000
Automobile loans 46,753,355 33,747,553
Home equity loans 7,963,402 6,549,261
Other consumer loans 1,907,405 680,899
------------ ------------
225,263,186 189,985,344
Less - undisbursed portion of
loans in process 2,579,374 2,962,757
- unearned interest 5,948,416 3,741,821
- deferred loan origination
fees and costs 79,578 277,633
- allowance for loan
losses 1,272,731 1,033,907
------------ ------------
$215,383,087 $181,969,226
============ ============
</TABLE>
The following is a summary of the allowance for loan losses:
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Balance - beginning of year $ 1,033,907 $ 977,639
Provision for losses on loans 339,251 118,995
Charge-offs (231,991) (278,215)
Recoveries 131,564 215,488
------------ ------------
Balance - end of year $ 1,272,731 $ 1,033,907
============ ============
</TABLE>
F-14
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable - Continued
----------------
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 $1,025,577 and $1,111,798 at September 30, 1999 and 1998,
respectively. There were no impaired loans as defined by SFAS No. 114
at September 30, 1999 and 1998. There was no interest income recognized
on impaired loans during these periods. The Bank was not committed to
fund additional amounts on these loans.
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:
September 30,
------------------
1999 1998
-------- --------
Interest income that would have been recognized $44,279 $71,415
Interest income recognized 34,102 44,610
------- -------
Interest income not recognized $10,177 $26,805
======= =======
F-15
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable - Continued
----------------
The following table set forth the amount and activity of the loans
outstanding to officers and directors at September 30, 1999 and 1998.
September 30,
---------------------
1999 1998
--------- ---------
Beginning balance $ 318,411 $ 243,777
New loans 208,268 155,600
Loan repayments (110,477) (80,966)
--------- ---------
Ending balance $ 416,202 $ 318,411
========= =========
The Bank services loans for others. The amount of such loans
serviced at September 30, 1999 and 1998 was $2,829,212 and $5,553,596,
respectively. At September 30, 1999 and 1998, the balance of loans sold
by the Bank with recourse amounted to $662,424 and $798,365,
respectively.
Custodial escrow balances maintained in connection with the
foregoing loan servicings were approximately $35,199 and $41,083 at
September 30, 1999 and 1998, 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.
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, 1999 September 30, 1998
------------------------------------ ------------------ ------------------
<S> <C> <C>
Standby letters of credit $ 1,131,169 $ 2,171,615
Lines of credit $19,252,900 $14,737,500
Mortgage loan commitments, fixed rate $ 3,463,600 $ 2,222,100
Mortgage loan commitments, variable rate $ 200,000 $ 631,000
</TABLE>
F-16
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Loans Receivable - Continued
----------------
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
6.5% to 7.875% and 6.500% to 7.50% at September 31, 1999 and 1998,
respectively. Rates on mortgage loan commitments for variable rate
loans ranged from .25% under prime to prime at September 30, 1999.
No amount was recognized in the statement of financial position at
September 30, 1999 and 1998, 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.
Note 4 - Mortgage Backed Securities
--------------------------
The amortized cost and fair values of mortgage backed securities
are as follows as of September 30, 1999 and 1998:
Held to Maturity:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
September 30, 1999
------------------
GNMA certificates $ 1,263,787 $ 5,015 $ 4,283 $ 1,264,519
FNMA certificates 15,482,015 23,016 131,568 15,373,463
FHLMC participating certificates 6,753,992 70,724 66,983 6,757,733
----------- ---------- ---------- -----------
$23,499,794 $ 98,755 $ 202,834 $23,395,715
=========== ========== ========== ===========
</TABLE>
F-17
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 4 - Mortgage Backed Securities - Continued
--------------------------
<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
=========== ========== ========== ===========
</TABLE>
No gains or losses were realized during the years ended September
30, 1999 and 1998, respectively.
Note 5 - Foreclosed Real Estate
Foreclosed real estate at September 30, 1999 and 1998 is summarized
by major classification as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998
---- ----
<S> <C> <C>
EPIC loans $ 50,822 $ 55,903
Residential real estate 89,091 403,938
Allowance for losses (50,822) (89,151)
---------- -----------
$ 89,091 $ 370,690
========== ===========
</TABLE>
The following is a summary of the allowances for losses on
foreclosed real estate:
<TABLE>
<CAPTION>
September 30,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Balance - beginning of year $ 89,151 $ 55,903
Provision for losses - 33,248
Charge-offs (38,329) -
---------- -----------
Balance - end of year $ 50,822 $ 89,151
========== ===========
</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
-----------------------------------------------------------------
The subsidiary is a party to a joint venture formed for the purpose
of developing lots for resale. The subsidiary's interest in the profits
or losses of the joint venture is 20%. The subsidiary's equity in the
joint venture is $5,287 and $8,195 at the periods ended September 30,
1999 and 1998, respectively.
During the periods ended September 30, 1999 and 1998, the Bank made
no acquisition, development and construction loans to the joint venture
mentioned above. There was no provision for or allowance for losses on
loans to the joint venture during the years ended September 30, 1999
and 1998.
Gain from real estate development and joint ventures consisted of a
cash payment of $5,352.
Note 7 - Premises and Equipment
----------------------
Premises and equipment at September 30, 1999 and 1998 are
summarized by major classification as follows:
September 30,
----------------------------------
1999 1998 Life
---- ---- ----
Office building $3,400,332 $2,440,860 50 Years
Leasehold improvements 169,995 144,768 7-31 Years
Furniture, fixtures and equipment 4,381,608 3,103,435 10 Years
---------- ----------
7,951,935 5,689,063
Accumulated depreciation 3,105,814 2,700,505
---------- ----------
$4,846,121 $2,988,558
========== ==========
F-19
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 7 - Premises and Equipment - Continued
----------------------
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, 1999 and 1998 was $381,254 and $280,091, respectively. At
September 30, 1999, minimum rental commitments under noncancellable
leases are as follows:
Years Ended September 30, Amount
------------------------- ------------
2000 $ 419,941
2001 387,212
2002 346,403
2003 359,185
After 2003 701,750
------------
$ 2,214,491
============
Note 8 - Deposits
Deposits are summarized as follows at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Amount % Amount %
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
Type of Account
---------------
Deposits
--------
NOW $ 19,743,190 8.46% $ 19,689,552 8.92%
Non-interest bearing NOW 6,940,410 2.97 5,652,964 2.56
Money market 8,530,901 3.66 8,727,537 3.95
Passbook savings 58,353,919 25.00 54,812,311 24.82
Certificates 139,030,657 59.58 131,196,477 59.42
------------ ------ ------------ ------
232,599,077 99.67 220,078,841 99.67
Accrued interest payable 765,487 .33 725,883 .33
------------ ------ ------------ ------
$233,364,564 100.00% $220,804,724 100.00%
============ ====== ============ ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $15,134,298 and
$12,438,466 at September 30, 1999 and 1998, respectively. Deposits in
excess of $100,000 are not insured by the Savings Association Insurance
Fund.
F-20
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 8 - Deposits - Continued
--------
At September 30, 1999, scheduled maturities of certificates of
deposit are as follows:
2000 $110,571,368
2001 15,425,638
2002 5,732,939
2003 4,186,804
2004 and thereafter 3,513,908
------------
$139,030,657
============
Interest expense on deposits for the years ended September 30, 1999
and 1998 is as follows:
1999 1998
------------- ------------
NOW $ 367,157 $ 401,288
Money market 270,672 313,474
Passbooks savings 1,846,252 2,004,071
Certificates 7,130,035 7,137,857
------------- ------------
$ 9,614,116 $ 9,856,690
============= ============
Note 9 - Federal Home Loan Bank of Atlanta Advances
The Bank has the following outstanding Federal Home Loan Bank
advances as of September 30, 1999:
Due Rate Total
--- ---- -----
Less than one year 5.44% - 6.26%, $ 13,500,000
One to two years 5.86% - 6.13% 2,500,000
------------
Total borrowings $ 16,000,000
============
At September 30, 1998 and for the year ended September 30, 1998,
the Bank had no outstanding borrowings. 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.
F-21
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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, 1998, the date of
latest available annual review and valuation of the plan.
The expense for the pension plan amounted to $213,057 and $238,844
for the years ended September 30, 1999 and 1998, respectively.
Note 11- Directors Retirement Plan
-------------------------
During 1998, the Directors Retirement 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 year
ended September 30, 1998 was $51,334. Compensation expense was reduced
by $269,323 for the year ended September 30, 1999 principally because
of a decline in value of shares held in the Rabbi Trust.
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, F.S.B. Foundation through a contribution of 75,000 shares of its
common stock.
F-22
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 12- Common Stock - Continued
------------
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 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. The
compensation costs for the years ended September 30, 1999 and 1998 were
$262,800 and $36,684, respectively.
The ESOP shares were as follows as of September 30:
1999 1998
---- ----
Shares released and allocated 32,013 -
Unearned shares 150,917 182,930
---------- ----------
182,930 182,930
========== ==========
Fair value of unearned shares $1,037,554 $1,966,476
========== ==========
F-23
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 13- Management Recognition Plan
---------------------------
On July 15, 1999, the Bank established a Management Recognition
Plan ("MRP") to retain personnel of experience and ability in key
positions of responsibility. Members of the Board of Directors and
certain executive officers may be awarded a total of 91,464 shares of
stock, which will be held in a separate trust that manages the MRP. The
Bank funded the MRP during the year ended September 30, 1999 by
purchasing 87,000 shares of common stock in the open market. No shares
have vested. The Bank initially awarded an aggregate of 45,600 shares
of common stock and intends to reserve the remaining 45,864 shares for
possible future awards. Shares awarded to the participants in the MRP
vest at a rate of 25% per year on each anniversary of the effective
date of the MRP. If a participant terminates employment for reasons
other than death, disability, change in control or retirement he or she
forfeits all rights to unvested shares. Compensation expense of $22,444
was recognized for the MRP for the year ended September 30, 1999.
Note 14- Stock Option Plan
-----------------
The Company has a Stock Option Plan (the "Plan") whereby 228,660
shares of common stock have been reserved for issuance under the Plan.
Options granted under the Plan may be Incentive Stock Options within
the meaning of Section 422 of the Internal Revenue Code of 1986 as
amended or Non-Incentive Stock Options. Options are exercisable in four
annual installments at the market price of common stock at the date of
grant. The Options must be exercised within ten years from the date of
grant. During the year ended September 30, 1999, the Company granted
options to purchase 80,000 shares at a weighted average price of $8.00
per share.
The following table summarizes the status of and changes in the
Company's stock option plan during the past two years.
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Outstanding at September 30, 1998 - -
Granted 80,000 $ 8.00
------
Outstanding at September 30, 1999 80,000 $ 8.00
======
Exercisable at September 30, 1999 -0-
======
</TABLE>
F-24
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 14- Stock Option Plan - Continued
-----------------
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to make certain disclosures as if the fair value method of
accounting had been applied to the Company's stock option grants made
subsequent to 1994. Accordingly, the Company estimated the grant date
fair value of each option awarded in fiscal 1999 using the Black-
Scholes Option-Pricing model with the following relevant assumptions:
dividend yield of 6.25%, risk-free interest rate of 5.72% and expected
lives of 10 years. The assumption for expected volatility was 31.55%.
Had 1999 compensation cost been determined including the weighted-
average estimate of fair value of each option granted of $1.62, the
Company's net income would be reduced to proforma amount of $1,304,841.
Proforma earnings, basic and diluted, per share would have been $.22 in
fiscal 1999.
Note 15- 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, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of September 30, 1999, 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 Bank 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.
F-25
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 15- Retained Earnings - Continued
-----------------
The following table presents the Bank's capital position based on
the September 30 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>
September 30, 1999
------------------
Tangible (1) $34,200,742 11.77% $ 4,358,431 1.50% $ N/A N/A%
Tier I capital (2) 34,200,742 19.57 N/A N/A 10,484,460 6.00
Core (1) 34,200,742 11.77 8,716,862 3.00 14,528,103 5.00
Risk-weighted (2) 35,473,473 20.30 13,979,280 8.00 17,474,100 10.00
September 30, 1998
------------------
Tangible (1) $32,826,759 12.57% $ 3,916,205 1.50% $ N/A N/A%
Tier I capital (2) 32,826,759 22.22 N/A N/A 8,862,799 6.00
Core (1) 32,826,759 12.57 7,832,409 3.00 13,054,015 5.00
Risk-weighted (2) 33,860,666 22.92 11,817,065 8.00 14,771,331 10.00
</TABLE>
(1) To adjusted total assets.
(2) To risk-weighted assets.
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, 1999, 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-26
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 15- 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.
The mutual holding company for the Company, Baltimore County
Savings Bank, M.H.C. ("M.H.C.") has waived receipt of its quarterly
dividends, thereby reducing the actual dividend payout by the Company
in 1999. The dividends waived by M.H.C. are considered as a restriction
on the retained earnings of the Bank. The amount of any dividend waived
by M.H.C. is available for declaration as a dividend solely to M.H.C.
At June 30, 1999, the cumulative amount of such waived dividends was
$1,408,110.
Note 16- Income Taxes
------------
The current tax provision consists of the following for the years
ended September 30, 1999 and 1998:
1999 1998
---- ----
Current expense $1,299,576 $1,012,697
Deferred expense (benefit) (342,109) 60,391
---------- ----------
Total tax expense $ 957,467 $1,073,088
========== ==========
The tax effects to temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred Tax Assets:
Charitable deduction carryforward $ 70,047 $ -
Market value change in Rabbi Trust assets 116,028 -
Allowance for loan losses 491,529 399,295
Allowance for uncollected interest 24,307 22,253
-------- --------
Total gross deferred tax assets 701,911 421,548
F-27
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 16- Income Taxes - Continued
------------
1999 1998
---- ----
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta
stock dividends $(151,928) $(151,928)
Depreciation (123,317) (108,903)
Bad debt deduction in excess of
base year reserves (228,486) (304,646)
--------- ---------
Total gross deferred tax liabilities (503,731) (565,477)
--------- ---------
Net Deferred Tax Assets (Liabilities) $ 198,180 $(143,929)
========= =========
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,
----------------------------------------------
1999 1998
---------------------- --------------------
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Statutory federal income tax rate $ 796,231 34.00% $ 925,266 34.00%
Increases (Decreases)
Resulting From
-----------------------
State income tax net of
federal income tax benefit 111,542 4.76 129,738 4.77
Other 49,694 2.12 18,084 .66
--------- --------- ---------- --------
$ 957,467 40.88% $1,073,088 39.43%
========= ========= ========== ========
</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.
Qualified thrift lenders such as the Bank are not required to
provide a deferred tax liability for bad debt reserves for tax purposes
that arose in fiscal years beginning before December 31, 1987. Such bad
debt reserve for the Bank amounted to approximately $4,227,000 with an
income tax effect of approximately $1,633,000 at September 30, 1999.
This bad debt reserve would become taxable if certain conditions are
met by the Bank.
F-28
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 17- 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. Federal
Home Loan Bank advances are considered to be at fair value. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered on deposits of similar remaining maturities.
The estimated fair values of the Bank's financial instruments are
as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Financial Assets
- ----------------
Cash $ 5,977 $ 5,977 $ 3,572 $ 3,572
Interest bearing deposits in other banks 8,651 8,651 20,300 20,300
Federal funds sold 449 449 9,134 9,134
Investment securities - held to maturity 35,232 34,218 12,611 12,661
Loans Receivable
- ----------------
Mortgage loans $164,142 $161,826 $145,141 $153,242
Share loans 581 581 681 681
Consumer loans 50,660 50,736 36,147 36,380
Mortgage backed securities 23,500 23,396 34,198 34,874
Federal Home Loan Bank of Atlanta stock 1,650 1,650 1,512 1,512
</TABLE>
F-29
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 17- Disclosures About Fair Value of Financial Instruments - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Amounts in Thousands)
<S> <C> <C> <C> <C>
Financial Liabilities
---------------------
Deposits $233,364 $233,481 $220,805 $221,133
Federal Home Loan Bank of Atlanta
advances 16,500 16,500 - -
Mortgage loan commitments - 3,664 - 2,853
</TABLE>
Note 18- Condensed Financial Information (Parent Company Only)
-----------------------------------------------------
Information as to the financial position of BCSB Bankcorp as of
September 30 and the results of operations and cash flows for the years
ended September 30 are summarized below.
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Statement of Financial Condition
Assets
------
Cash $ 227,761 $ 192,182
Interest bearing deposits in other banks 1,205,965 3,100,089
Federal funds - 5,500,000
Investment securities, held to maturity 7,247,897 -
Employee Stock Ownership Plan loan 1,646,352 1,829,280
Account receivables - intercompany 245,539 802,449
Investment in subsidiary 35,069,404 33,725,488
----------- -----------
Total assets $45,642,918 $45,149,488
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Accrued taxes payable $ 57,860 $ 6,440
Dividends payable 294,797 -
Other liabilities 9,802 -
----------- -----------
362,459 6,440
</TABLE>
F-30
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 18- Condensed Financial Information (Parent Company Only) - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Stockholders' Equity
--------------------
Common stock (6,116,562 shares issued
and outstanding) $ 61,166 $ 61,166
Paid-in capital 21,918,472 22,645,088
Retained earnings (substantially restricted) 25,788,692 25,221,308
----------- -----------
47,768,330 47,927,562
Employee Stock Ownership Plan (1,509,156) (1,829,280)
Stock held by Rabbi Trust (978,715) (955,234)
----------- -----------
Total stockholders' equity 45,280,459 45,143,048
----------- -----------
Total liabilities and stockholders' equity $45,642,918 $45,149,488
=========== ===========
Statement of Operations
Interest and fees on loans $ 171,096 $ -
Interest and dividends on investment securities 234,152 -
Other interest income 275,790 16,724
----------- -----------
Net interest income 681,038 16,724
Other Income
Income from subsidiary 1,068,093 1,638,047
----------- -----------
1,749,131 1,654,771
Non-Interest Expenses
Professional fees 95,015 -
Other expense 70,617 49
----------- -----------
Total non-interest expense 165,632 49
----------- -----------
Net income before tax provision 1,583,499 1,654,722
Income tax provision 199,110 6,440
----------- -----------
Net income $ 1,384,389 $ 1,648,282
=========== ===========
</TABLE>
F-31
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 18- Condensed Financial Information (Parent Company Only) - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Statement of Cash Flows
Net income $ 1,384,389 $ 1,648,282
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
-------------------------------------
Accretion of discount on investments (199) -
Equity in net income of subsidiary (1,068,093) (542,812)
(Increase) decrease in accounts receivable
intercompany 865,938 (802,449)
Increase in accrued interest receivable on loans (95,694) -
Increase in accrued interest receivable on investments (146,792) -
Increase in other assets (3,053) -
Increase in income taxes payable 51,420 -
Increase in other liabilities and payables
to disbursing agents (53,687) -
----------- ------------
Net cash provided by operating activities 934,229 303,021
Cash Flows from Investing Activities
------------------------------------
Purchase of stock subsidiary $ - $(12,108,741)
Increase in accrued taxes payable - 6,440
Proceeds from maturing interest bearing deposits 293,000 -
Purchase of interest bearing deposits (883,000) -
Purchases of investment securities - held to maturity (7,247,518) -
Principal collected on longer term loans 182,928 -
----------- ------------
Net cash used by investing activities (7,654,590) (12,102,301)
Cash Flows from Financing Activities
------------------------------------
Proceeds from stock offering - 22,420,831
Refund of stock offering expense 55,000 -
Employee Stock Ownership Plan (ESOP) - (1,829,280)
Stock held by Management Retention Plan (732,073) -
Stock repurchase (28,903) -
Dividends on stock (817,005) -
Increase in dividends payable 294,797 -
----------- ------------
Net cash provided (used) by financing activities (1,228,184) 20,591,551
----------- ------------
</TABLE>
F-32
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 18- Condensed Financial Information (Parent Company Only) - Continued
-----------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents $(7,948,545) $8,792,271
Cash and cash equivalents at beginning of period 8,792,271 -
----------- ----------
Cash and cash equivalents at end of period $ 843,726 $8,792,271
=========== ==========
The following is a summary of cash and cash equivalents:
Cash $ 227,761 $ 192,182
Interest bearing deposits in other banks 1,205,965 3,100,089
Federal funds sold - 5,500,000
----------- ----------
Balance of cash items reflected on Statement of
Financial Condition 1,433,726 8,792,271
Less - certificate of deposit with a maturity
of more than three months 590,000 -
----------- ----------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 843,726 $8,792,271
=========== ==========
</TABLE>
Note 19- Recent Accounting Pronouncements
--------------------------------
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 earnings effect of the hedged forecasted
transaction. The Statement, which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, will not affect the
Company's financial position or its results of operations.
F-33
<PAGE>
BCSB BANKCORP, INC. AND SUBSIDIARIES
- ------------------------------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 19- Recent Accounting Pronouncements - Continued
--------------------------------
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-34
<PAGE>
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS
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
Vice Chairman of the Board William M. Loughran P. Louis Rohe, Jr.
Insurance Agent for Rohe and Rohe Senior Vice President of the Bank and Retired
Associates, Baltimore, Maryland Director
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 LOCATIONS
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 Merritt Blvd. 2165 York Road 712 N. Rolling Road
Dundalk, Maryland 21222 Timmonium, Maryland 21093 Catonsville, Maryland 21228
2105 Rock Spring Road 402 Constant Friendship Boulevard
Forest Hill, Maryland 21050 Abingdon, Maryland 21009
CORPORATE INFORMATION
Independent Certified Accountants Special Counsel Annual Report on Form 10-KSB
Anderson Associates, LLP Housley Kantarian & Bronstein, P.C.
7621 Fitch Lane 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 1999 as filed with the Securities
Moore, Carney, Ryan & Lattanzi, LLC The 2000 Annual Meeting of Stockholders and Exchange Commission, will be
4111 E. Joppa Road, Suite 201 will be held on February 9, 2000 at furnished without charge to
Baltimore, Maryland 21236 4:00 p.m. at the Bank's Perry Hall stockholders as of the record date
office located at 4208 Ebenezer Road, for the 2000 Annual Meeting upon
Transfer Agent and Registrar Baltimore, Maryland written request to Corporate
Chase-Mellon Shareholder Services Secretary, BCSB Bankcorp, Inc.,
450 W. 33rd Street, 15th Floor 4111 E. Joppa Road, Suite 300,
New York, New York 10001 Baltimore, Maryland 21236
</TABLE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Incorporation Ownership
------------- ---------
<S> <C> <C>
Parent
- ------
BCSB Bankcorp, Inc. United States
Subsidiary (1)
- ----------
Baltimore County Savings Bank, F.S.B. United States 100%
Subsidiaries of Baltimore County Savings Bank, F.S.B. (1)
- -----------------------------------------------------
Baltimore County Service Corp. United States 100%
Ebenezer Road, Inc. United States 100%
</TABLE>
__________________
(1) The assets, liabilities and operations of the subsidiaries are included
in the consolidated financial statements contained in the Annual Report
to Stockholders attached hereto as Exhibit 13.
<PAGE>
Exhibit 23
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP]
We consent to the incorporation by reference in the registration statements
of BCSB Bankcorp, Inc. on Form S-8 (File No. 333-53295 and File No. 333-85025)
of our report dated December 2, 1999 on our audits of the consolidated financial
statements of BCSB Bankcorp, Inc. as of September 30, 1999 and 1998, and for
each of the two years in the period ended September 30, 1999, which report has
been incorporated by reference in BCSB Bankcorp, Inc.'s Annual Report
on Form 10-KSB filed with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934.
/s/ Anderson Associates, LLP
Anderson Associates, LLP
Baltimore, Maryland
December 27, 1999
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<PAGE>
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