SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
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, 2000
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.
----------------------------------------------
(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
--------------------------------------------------- ----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 256-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
For the fiscal year ended September 30, 2000, the registrant had $21,480,061 in
revenues.
As of December 11, 2000, the aggregate market value of voting stock held by
non-affiliates was approximately $9,937,563 computed by reference to the average
of the high and low sales price on December 11, 2000 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 11, 2000: 5,887,072
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, 2000. (Parts II and III)
2. Portions of Proxy Statement for registrant's 2001 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
--------------------------------
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 63.77% 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.
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, 2000, the Company had total assets of $325.9 million, total
deposits of $268.9 million and stockholders' equity of $43.3 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 ten 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.
MARKET AREA
The Bank's market area consists of the Baltimore metropolitan area. At
September 30, 2000, management estimates that more than 95% of deposits and 90%
of all lending came from its market area.
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 completion of its 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
recent period, and continues to be one of Maryland's fastest growing counties.
Since 1990 private sector employment has grown by 18.5% with the
2
<PAGE>
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 $256.6 million at
September 30, 2000, representing 78.7% of total assets at that date. Ath
September 30, 2000, $152.5 million, or 59.4% 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 $5.9 million, $5.1 million and
$13.6 million, respectively, or 2.3%, 2.0% and 5.3%, respectively, of the Bank's
gross loan portfolio at September 30, 2000. The Bank also originates consumer
loans, consisting primarily of automobile loans and home equity lines of credit,
which totaled $67.9 million and $8.1 million, respectively, or 26.5% and 3.2%,
respectively, of the Bank's gross loan portfolio.
3
<PAGE>
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, 2000, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Real estate loans:
Single-family residential (1)........... $ 152,469 59.42% $ 146,868 65.20% $ 126,272 66.46%
Single-family rental property loans..... 5,080 1.98 4,832 2.15 5,253 2.76
Commercial.............................. 13,649 5.32 10,216 4.54 9,497 5.00
Construction (2)........................ 5,905 2.30 5,592 2.48 7,936 4.18
Commercial lines of credit................ 44 .02 50 .02 50 .03
Commercial loans secured.................. 1,475 .57 1,081 .48 -- --
Consumer loans:
Automobile.............................. 67,852 26.44 46,753 20.75 33,748 17.76
Home equity lines of credit............. 8,147 3.18 7,963 3.54 6,549 3.45
Other................................... 1,976 .77 1,908 .84 681 .36
--------- ------ --------- ------ --------- ------
256,597 100.00% 225,263 100.00% 189,986 100.00%
====== ====== ======
Less:
Undisbursed portion of loans in process. 3,850 2,579 2,963
Deferred loan origination fees.......... 214 80 278
Unearned interest....................... 9,610 5,948 3,742
Allowance for loan losses............... 1,403 1,273 1,034
--------- --------- ---------
Total................................. $ 241,520 $ 215,383 $ 181,969
========= ========= =========
<CAPTION>
At September 30,
---------------------------------------
1997 1996
----------------- ------------------
Amount % Amount %
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
(Dollars in thousands)
Real estate loans:
Single-family residential (1)........... $103,677 62.30% $ 94,275 56.74%
Single-family rental property loans..... 6,409 3.85 7,065 4.25
Commercial.............................. 10,169 6.11 10,316 6.21
Construction (2)........................ 8,645 5.19 11,427 6.87
Commercial lines of credit................ 60 .04 262 .16
Commercial loans secured.................. -- -- -- --
Consumer loans:
Automobile.............................. 32,633 19.61 39,925 24.03
Home equity lines of credit............. 3,986 2.40 1,855 1.12
Other................................... 825 .50 1,029 .62
-------- ------ -------- ------
166,404 100.00% 166,154 100.00%
====== ======
Less:
Undisbursed portion of loans in process. 2,807 5,088
Deferred loan origination fees.......... 567 823
Unearned interest....................... 3,376 4,757
Allowance for loan losses............... 978 926
-------- --------
Total................................. $158,676 $154,560
======== ========
<FN>
--------------
(1) Includes fixed-rate second mortgage loans.
(2) Includes acquisition and development loans.
</FN>
</TABLE>
4
<PAGE>
Loan Maturity Schedules. The following table sets forth certain
information at September 30, 2000 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
Due during 1 through Due after
the year ending 5 Years After 5 Years After
September 30, 2001 September 30, 2000 September 30, 2000 Total
------------------ ------------------ ------------------ -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential......... $ 9,086 $ 34,657 $ 108,726 $ 152,469
Single-family rental property..... 235 880 3,965 5,080
Commercial........................ 875 4,366 8,408 13,649
Construction...................... 2,353 359 3,193 5,905
Commercial lines of credit.......... 44 -- -- 44
Commercial loans secured............ 371 1,103 1 1,475
Consumer:
Automobile........................ 16,180 49,893 1,779 67,852
Home equity lines of credit....... 188 947 7,012 8,147
Other............................. 940 553 483 1,976
----------- ----------- ----------- ----------
Total.......................... $ 30,272 $ 92,758 $ 133,567 $ 256,597
=========== =========== =========== ==========
</TABLE>
The following table sets forth at September 30, 2000, the dollar amount
of all loans due one year or more after September 30, 2000 which have
predetermined interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------ ----------------
(In thousands)
<S> <C> <C>
Real estate loans:
Single-family residential....................... $ 141,077 $ 2,306
Single-family rental property................... 2,052 2,793
Commercial...................................... 9,704 3,070
Construction.................................... 3,404 148
Commercial lines of credit......................... -- --
Commercial loans secured........................... 1,104 --
Consumer:
Automobiles..................................... 51,672 --
Home equity lines of credit..................... 7,959 --
Other........................................... 1,036 --
--------- ---------
Total...................................... $ 218,008 $ 8,317
========= =========
</TABLE>
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.
5
<PAGE>
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,
--------------------------------------------
2000 1999 1998
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Single-family residential...................... $ 22,703 $ 44,283 $ 41,729
Single-family rental property loans............ 1,072 -- --
Commercial..................................... 3,666 2,112 351
Construction................................... 5,497 6,592 5,512
Commercial loans secured........................... 656 1,137 --
Consumer loans:
Automobiles.................................... 52,648 36,167 21,267
Home equity lines of credit.................... 2,278 7,475 6,766
Other.......................................... 1,076 1,822 478
--------- --------- ---------
Total loans originated...................... $ 89,596 $ 99,588 $ 76,103
========= ========= =========
Loans purchased:
Real estate loans................................ $ 764 $ -- $ --
--------- --------- ---------
Total loans purchased.............................. $ 764 $ -- $ --
========= ========= =========
Loans sold:
Whole loans...................................... $ 1,085 $ -- $ --
Participation loans.............................. -- -- 133
--------- --------- ---------
Total loans sold............................ $ 1,085 $ -- $ 133
========= ========= =========
</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. Automobile loans may be originated
on an indirect basis through a limited number of approved dealers, loan
applications are accepted at the Bank's offices.
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.
6
<PAGE>
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 $4.8 million at
September 30, 2000. 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, 2000, the Bank had no lending
relationships in excess of the loans-to-one-borrower limit. At September 30,
2000, the Bank's largest loan customer was a $2.5 million relationship
consisting of a commercial real estate loan, a small acquisition/development
loan and a $1.3 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 borrower has a $518,000 commercial loan secured by real estate.
At September 30, 2000, 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, 2000, single-family,
residential mortgage loans, excluding single-family rental property loans and
home equity loans, totaled $152.5 million, or 59.4% of the Bank's gross loan
portfolio.
The Bank originates fixed-rate mortgage loans at competitive interest
rates. At September 30, 2000, the Bank had $150.1 million of fixed-rate
single-family mortgage loans, which amounted to 98.4% 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.
7
<PAGE>
The Bank also offers adjustable-rate, single-family residential
mortgage loans. As of September 30, 2000, $2.4 million, or 1.6% 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 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, 2000, single-family rental property loans
totaled $5.0 million, or 2.0%, of the Bank's gross loan portfolio. Originations
of single-family rental property loans were $1.0 million, $0 and $0 for the
years ended September 30, 2000, 1999 and 1998, 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 30 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, 2000, $5.9 million, or 2.3%, 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
8
<PAGE>
limitation limits its ability to meet the volume requirements of the large
builders. The Bank's construction loans totaled $5.9 million, $5.6 million, $7.9
million, $8.6 million and $11.4 million at September 30, 2000, 1999, 1998, 1997
and 1996, respectively, and construction loan originations were $5.5 million,
$1.2 million and $1.6 million during the years ended September 30, 2000, 1999
and 1998, 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, 2000, the Bank
had nine such facilities outstanding totaling $219,000. All acquisition and
development loans were performing in accordance with their terms at such date.
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, 2000. At September 30, 2000, the Bank had $13.6 million
of commercial real estate loans, which amounted to 5.3% 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 25 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
9
<PAGE>
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,
2000, the Bank had $44,000 of outstanding loans and commitments.
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, 2000, the Bank had $1.5
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.
Automobile loans totaled $67.8 million, or 26.4%, of the Bank's gross
loan portfolio, at September 30, 2000. 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,
2000, home equity lines of credit totaled $8.1 million, or 3.2%, 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 $21.2 million, or 8.3%, of the Bank's gross
loans at September 30, 2000.
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, 2000, savings account loans accounts totaled $593,000, or 0.2%, 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, 2000.
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
10
<PAGE>
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 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.
11
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate:
Single-family residential.................... $ 383 $ 840 $ 769 $ 1,757 $ 2,056
Single-family rental property................ -- -- -- -- --
Commercial................................... -- 185 150 86 231
Construction................................. -- -- 193 -- --
Commercial lines of credit..................... -- -- -- -- --
Commercial loans secured....................... -- -- -- -- --
Consumer....................................... -- -- -- -- --
-------- --------- -------- -------- ---------
Total........................................ $ 383 $ 1,025 $ 1,112 $ 1,843 $ 2,287
======== ========= ======== ======== =========
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................... $ 383 $ 1,025 $ 1,112 $ 1,843 $ 2,287
======== ========= ======== ======== =========
Percentage of gross loans........................ .15% .45% 0.59% 1.11% 1.38%
======= ========= ======== ======== =========
Percentage of total assets....................... .12% .34% 0.41% 0.73% 0.88%
======= ========= ======== ======== =========
Other non-performing assets (2).................. $ 126 $ 132 $ 441 $ 61 $ 489
======== ========= ======== ======== =========
Loans modified in troubled debt restructuring... $ -- $ -- $ -- $ -- $ --
======== ========= ======== ======== =========
<FN>
_______________
(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, real estate developed and held for
sale.
</FN>
</TABLE>
During the year ended September 30, 2000, gross interest income of
$31,000, 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, 2000 amounted to $29,000.
At September 30, 2000, 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, 2000, nonaccrual loans consisted of five single-family
residential mortgage loans aggregating $383,000.
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
12
<PAGE>
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, 2000, the Bank had $50,000 in real
estate owned, which consisted of two single-family building lots. The Bank also
had $459,000 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, 2000, the Bank had $2.0 million in
classified assets consisting of $1.1 million in assets classified as special
mention, $856,000 in assets classified as substandard, no assets classified as
doubtful and no assets classified as loss. Special mention assets consisted of
eleven single-family residential mortgage loans 60 to 89 days delinquent at
September 30, 2000, and substandard assets consisted of the $383,000 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 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
13
<PAGE>
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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $ 1,273 $ 1,034 $ 978 $ 926 $ 788
-------- --------- -------- -------- ---------
Loans charged-off:
Real estate mortgage:
Single-family residential.................... 7 -- -- -- --
Multi-family residential..................... -- -- -- -- --
Commercial................................... -- -- -- -- (4)
Construction................................. -- (15) -- -- --
Commercial loans secured....................... -- -- -- -- --
Consumer....................................... 201 (217) (278) (392) (394)
-------- --------- -------- -------- ---------
Total charge-offs................................ 208 (232) (278) (392) (398)
Recoveries:
Real estate mortgage:
Single-family residential.................... -- -- -- -- --
Multi-family residential..................... -- -- -- -- --
Commercial................................... -- -- -- -- --
Construction................................. -- -- -- -- --
Commercial loans secured....................... -- -- -- -- --
Consumer....................................... 176 132 215 158 102
-------- --------- -------- -------- ---------
Total recoveries................................. 176 132 215 158 102
Net loans charged off............................ (32) (100) (63) (234) (296)
Provision for (reduction of) loan losses........ 162 339 119 286 434
-------- --------- -------- -------- ---------
Balance at end of period......................... $ 1,403 $ 1,273 $ 1,034 $ 978 $ 926
======== ========= ======== ======== =========
Ratio of net charge-offs to average
loans outstanding during the period............ .01% 0.05% (0.04)% (.15)% (.20)%
======== ========== ======== ======== =========
</TABLE>
14
<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,
-------------------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- -------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ------------ ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Single-family residential............. $ 421 59.42% $ 452 65.20% $ 413 66.46%
Single-family rental property......... 10 1.98 10 2.15 10 2.76
Commercial............................ 136 5.32 118 4.54 124 5.00
Construction.......................... 70 2.30 75 2.48 78 4.18
Commercial lines of credit.............. -- .02 -- .02 -- .03
Commercial loans secured................ -- .57 -- .48 -- --
Consumer................................ 766 30.39 618 25.13 409 21.57
--------- ------ --------- ------- -------- -------
Total allowance for loan losses..... $ 1,403 100.00% $ 1,273 100.00% $ 1,034 100.00%
========= ====== ========= ====== ======== ======
<CAPTION>
At September 30,
---------------------------------------------------
1997 1996
------------------- -----------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Single-family residential............. $ 432 62.30% $ 276 56.74%
Single-family rental property......... 13 3.85 4 4.25
Commercial............................ 79 6.11 120 6.21
Construction.......................... 28 5.19 36 6.87
Commercial lines of credit.............. -- .04 -- .16
Commercial loans secured................ -- -- -- --
Consumer................................ 426 22.51 490 25.77
--------- ------ -------- ------
Total allowance for loan losses..... $ 978 100.00% $ 926 100.00%
========= ====== ======== ======
</TABLE>
15
<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. 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, 2000 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.
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
16
<PAGE>
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, 2000, mortgage-backed securities with an amortized
cost of $19.8 million were classified as held to maturity. At September 30,
2000, the Bank's mortgage-backed securities had a weighted average yield of
7.0%.
At September 30, 2000, 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").
17
<PAGE>
The following table sets forth the carrying value of the Bank's
investments at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------
2000 1999 1998
-------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
U.S. government and agency
securities........................................... $ 41,158 $ 35,232 $ 12,611
Mortgage-backed securities............................... 19,824 23,500 34,198
FHLB stock............................................... 1,834 1,650 1,512
--------- -------- ---------
Total................................................. $ 62,816 $ 60,382 $ 48,321
========= ======== =========
</TABLE>
18
<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, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- -------------------- -------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. government and agency
obligations................. $ 750 5.18% $ 28,636 6.16% $ 11,022 6.82% $ 750 6.89%
Mortgage-backed securities..... 4,551 6.34 7,171 6.09 1,661 7.63 6,441 7.44
FHLB stock..................... -- -- -- -- -- -- 1,834 7.70
-------- --------- --------- ---------
Total....................... $ 5,301 $ 35,807 $ 12,683 $ 9,025
======== ========= ========= =========
<CAPTION>
Total Investment Portfolio
------------------------------
Carrying Market Average
Value Value Yield
-------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Securities held to maturity:
U.S. government and agency
obligations................. $41,158 $40,356 6.33%
Mortgage-backed securities..... 19,824 19,705 7.00
FHLB stock..................... 1,834 1,834
------- -------
Total....................... $62,816 $61,895
======= =======
</TABLE>
19
<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 all of its ten offices. In addition, during fiscal 1999, the
Bank expanded its ATM network by installing ATMs at three community colleges in
Baltimore County. During fiscal year 2000, the Bank introduced Remote Banking
which is an Internet based banking system to provide additional customer
convenience.
20
<PAGE>
Savings deposits in the Bank at September 30, 2000 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:
1.21% None NOW and Super NOW accounts $ 250 $ 30,525 11.35%
2.95 None Money market 250 7,333 2.73
---------- -----
Total demand deposits 37,858 14.08
Passbook savings deposits:
2.95 None Regular passbook 25 34,063 12.67
3.38 None Money market passbook 10,000 23,216 8.63
---------- -----
Total passbook savings deposits 57,279 21.30
Certificates of Deposit
-----------------------
4.51 3 months or less Fixed-term, fixed-rate 1,000 15,895 5.91
5.72 6 months Fixed-term, fixed-rate 1,000 10,625 3.95
5.84 12 months Fixed-term, fixed-rate 100 45,006 16.74
5.66 18 months Fixed-term, fixed-rate 100 6,249 2.32
6.25 24 months Fixed-term, fixed-rate 100 30,744 11.43
5.92 30 months Fixed-term, fixed-rate 100 3,298 1.23
6.08 36 months Fixed-term, fixed-rate 100 9,868 3.67
5.41 42 months Fixed-term, fixed-rate 100 42 .02
6.34 48 months Fixed-term, fixed-rate 100 1,516 .56
6.48 60 months Fixed-term, fixed-rate 100 25,981 9.66
6.20 $100,000 and over Fixed-term, fixed-rate N/A 23,958 8.91
---------- -----
Total certificates of deposit $ 173,182 64.41
Accrued interest payable 563 .21
---------- ------
Total deposits $ 268,882 100.00%
========== ======
<FN>
---------------
* Represents weighted average interest rate.
</FN>
</TABLE>
21
<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, 2000 Deposits (Decrease) 30, 1999 Deposits (Decrease) 30, 1998 Deposits
---------- -------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW............................... $ 30,525 11.35% $ 3,841 $ 26,684 11.44% $ 1,341 $ 25,343 11.48%
Money market deposit.............. 7,333 2.73 (1,198) 8,531 3.66 (197) 8,728 3.95
Passbook savings deposits......... 57,279 21.30 (1,075) 58,354 25.00 3,542 54,812 24.82
Certificates of deposit........... 149,224 55.50 25,444 123,780 53.04 5,022 118,758 53.79
Certificates of deposit $100,000
and over....................... 23,958 8.91 8,707 15,251 6.54 2,813 12,438 5.63
Accrued interests payable......... 563 .21 (202) 765 .32 39 726 .33
--------- ------ ------- --------- ------ -------- --------- ------
$ 268,882 100.00% $35,517 $ 233,365 100.00% $ 12,560 $ 220,805 100.00%
========= ====== ======= ========= ====== ======== ========= ======
</TABLE>
22
<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,
-----------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- -------------------
Average Average Average Average Average Average
Balance Rate (1) Balance Rate Balance Rate
------- --------- ------- ---------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW........................... $ 21,917 2.06% $ 20,391 1.80% $ 25,192 1.59%
Money market deposits......... 8,115 3.03 8,938 3.03 9,360 3.35
Passbook savings deposits..... 58,378 3.40 56,583 3.26 57,383 3.79
Non-interest-bearing demand
deposits................... 8,043 -- 6,317 -- 6,581 --
Certificates of deposit....... 154,859 5.31 138,316 5.16 129,840 5.50
--------- ---------- ----------
Total..................... $ 251,312 -- $ 230,546 4.17 $ 224,356 4.32
========= ========== ==========
<FN>
--------
(1) Annualized.
</FN>
</TABLE>
The following table sets forth the time deposits in the Bank classified
by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------
2000 1999 1998
------ ------ -------
(In thousands)
<S> <C> <C> <C>
3.76 - 6%................................................. $ 93,428 $ 125,790 $ 116,691
6.01 - 8%................................................. 79,754 13,101 14,376
8.01 - 10%................................................. -- 140 129
--------- --------- ---------
$ 173,182 $ 139,031 $ 131,196
========= ========= =========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at September 30, 2000.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- -------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
3.76 - 6%.................... $ 77,445 $ 10,686 $ 2,189 $ 3,108 $ 93,428
6.01 - 8%.................... 22,675 25,674 10,029 21,376 79,754
--------- --------- --------- -------- ----------
$ 100,120 $ 36,360 $ 12,218 $ 24,484 $ 173,182
========= ========= ========= ======== ==========
</TABLE>
23
<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,
2000. At such date, such deposits represented 8.91% of total deposits and had a
weighted average rate of 6.20%.
Certificates
Maturity Period of Deposit
---------------- --------------
(In thousands)
Three months or less......................... $ 5,895
Over three through six months................ 2,838
Over six through 12 months................... 3,623
Over 12 months............................... 11,602
---------
Total.................................. $ 23,958
=========
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.................................................... $ 593,370 $ 494,431 $ 462,996
Deposits sold............................................... -- -- (6,166)
Withdrawals................................................. (568,720) (491,795) (470,538)
---------- ---------- ----------
Net increase (decrease) before interest credited........... 24,650 2,946 (13,708)
Interest credited........................................... 10,867 9,614 9,857
---------- ---------- ----------
Net increase (decrease) in savings deposits............ $ 35,517 $ 12,560 $ (3,851)
========== ========== ==========
</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, 2000, the Bank had $9.5 million in outstanding FHLB
advances.
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, 2000, the Bank was authorized to invest up to approximately $8.9
million in the stock of or loans to subsidiaries, including the additional
24
<PAGE>
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, 2000, BCSC
conducted immaterial activities. Route 543 currently is inactive. At September
30, 2000, 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, 2000.
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, 2000, it had approximately 20% of deposits held
by all banks and savings institutions in each of Baltimore County and Harford
County.
EMPLOYEES
As of September 30, 2000, the Company had 108 full-time and 17
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.
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
25
<PAGE>
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, 2000, 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, 2000, the Bank's
adjusted total assets for the purposes of the core and tangible capital
requirements were approximately $319.0 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 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, 2000, 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.
26
<PAGE>
For information with respect to the Bank's compliance with its
regulatory capital requirements at September 30, 2000, 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, 2000.
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.
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 2000 was 27.9%.
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
27
<PAGE>
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, 2000, 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 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.
28
<PAGE>
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, 2000, of $1.8 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, 2000, the Bank had $9.5
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 up to $42.8 million, plus 10% on
the amount over $42.8 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, 2000,
the Bank met its reserve requirements.
Prompt Corrective Regulatory Action. Under 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 deemed appropriate by the federal banking regulators for measuring the
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
does 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 may 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
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level" established by the appropriate federal
banking regulator, the institution will be subject to conservatorship or
receivership within specified time periods.
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its 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
29
<PAGE>
ratio (the ratio of its core capital to adjusted total assets). The following
table shows the capital ratios required for the various prompt corrective action
categories.
<TABLE>
<CAPTION>
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
<FN>
-----------
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
A "critically undercapitalized" savings institution is defined as an institution
that has a ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative perpetual preferred
stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased 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 any CAMELS rating category.
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 was 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
30
<PAGE>
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, 2000, the maximum amount that the Bank could have
loaned to any one borrower without prior OTS approval was $4.8 million. At such
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was $2.5 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.
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.
31
<PAGE>
Financial Modernization Legislation. 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 Secretary of the Treasury, may approve additional
financial activities. The G-L-B Act, however, prohibits future acquisitions of
existing unitary savings and loan holding companies, like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.
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 in November 2000, with full compliance required by July 1, 2001.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
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 FHLB 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 may acquire control of the Company, 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.
As a condition to OTS approval of the Bank's reorganization into the mutual
holding company structure, the Company must 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.
32
<PAGE>
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 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 substbantially 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 benefited 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.
33
<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, 2000.
<TABLE>
<CAPTION>
Book Value at Approximate Deposits at
Year Owned or Expiration Date September 30, Square September 30,
Opened Leased (If Leased) (1) 2000 Footage 2000
------ ------ --------------- ------ ------- ------
(Deposits in
thousands)
<S> <C> <C> <C> <C> <C> <C>
MAIN OFFICE:
Perry Hall 1955 Leased (2) November 2003 $ 272,420 8,000 $ 110,572
BRANCH OFFICES:
Bel Air 1975 Leased June 2008 -- 2,000 31,614
Dundalk (3) 1976 Leased June 2001 -- 1,700 37,344
Timonium 1978 Leased July 2003 -- 1,250 41,532
Catonsville 1981 Leased February 2001 -- 1,750 25,204
Abingdon 1999 Leased (2) July 2019 486,750 1,800 4,062
Forest Hill 1999 Leased (2) July 2019 423,231 1,800 6,393
Essex 1999 (4) Leased November 2004 -- 3,200 5,199
Hickory 2000 (5) Leased (2) January 2020 486,030 1,800 1,603
White Marsh 2000 (6) Leased (2) January 2015 545,365 1,800 5,359
FUTURE SITES:
Carney 2001 Leased --
ADMINISTRATIVE OFFICE:
4111 E. Joppa Road 1994 Owned 1,345,275 18,000 --
Warehouse 1998 Leased September 2002 -- 4,800 --
34
<PAGE>
<FN>
---------------
(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) Branch opened in April 2000
(6) Branch opened in January 2000.
</FN>
</TABLE>
The book value of the Bank's investment in premises and equipment
totaled $6.7 million at September 30, 2000. 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, 2000, 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.
-----------------------------------------------------------
Not applicable.
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, 2000 (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 12 in the Annual Report is incorporated herein by reference.
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.
35
<PAGE>
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.
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, 2000 and 1999
Consolidated Statements of Operations for the Years Ended
September 30, 2000 and 1999
Consolidated Statements of Retained Earnings for the Years
Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000 and 1999
Notes to Consolidated Financial Statements
36
<PAGE>
(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 2000 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Anderson Associates, LLP
27 Financial Data Schedule
[FN]
__________
* 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).
*** Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended September 30, 2000 (File No. 0-24589).
</FN>
(b) REPORTS ON FORM 8-K. None.
-------------------
<PAGE>
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 28, 2000 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 28, 2000
------------------------------------------------
Gary C. Loraditch
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Bonnie M. Klein December 28, 2000
------------------------------------------------
Bonnie M. Klein
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ Henry V. Kahl December 28, 2000
------------------------------------------------
Henry V. Kahl
Chairman of the Board
/s/ H. Adrian Cox December 28, 2000
------------------------------------------------
H. Adrian Cox
Vice Chairman of the Board
/s/ Frank W. Dunton December 28, 2000
------------------------------------------------
Frank W. Dunton
Director
/s/ William M. Loughran December 28, 2000
------------------------------------------------
William M. Loughran
Vice President and Director
/s/ John J. Panzer, Jr. December 28, 2000
------------------------------------------------
John J. Panzer, Jr.
Director
/s/ P. Louis Rohe, Jr. December 28, 2000
------------------------------------------------
P. Louis Rohe, Jr.
Director
