Counting on Customers

The Baltimore Sun

A single customer got Baltimore County Savings Bank in trouble. Now it is looking to many customers to get it out.

Still wobbling from a check-kiting fraud last year that cost it millions of dollars, the suburban thrift is hoping that depositors will look past its losses and the government's concerns about its operations to buy up most of the stock in a sale that's expected this summer.

Without a successful offering, the bank says, it could deplete its liquid assets within two years.

Offering stock from such a position may be a tough sell. But Joseph J. Bouffard, the longtime Baltimore banker brought in from outside after the fraud was uncovered to take over leadership of Baltimore County Savings, says some extreme steps must be taken for the bank to get on more solid financial footing.

Not only are federal regulators eyeing his progress closely, but potential investors will be basing their decision to invest, in part, on whether they think he's up to the job. "To turn Baltimore County Savings Bank around, we've got to do some radical things," Bouffard said.

Baltimore County Savings, founded more than five decades ago, has grown from one branch with limited hours to 18 branches in three counties and the city.

BCSB holds nearly $600 million in deposits, and about 95 percent of its loans are made in the Baltimore area. Its charitable arm donates tens of thousands of dollars each year, and the bank is a longtime sponsor of the annual Turkey Bowl, a closely watched local high-school football matchup.

Now the bank is in a jam. Last year, the bank discovered nearly $11 million in losses from a scheme in which a commercial customer, identified in court papers as Baltimore-based A&B; Check Cashing, wrote bad checks and covered its tracks with bad checks from other accounts. A&B; is out of business, and the FBI is investigating. The bank has warned it may never recover much of the money.

The scheme severely dented the bank's cash reserves, and the negative publicity hurt its ability to attract and keep depositors. Baltimore County Savings' parent company lost $3.2 million in the six months through March and $7.4 million in the fiscal year before then.

Another bank hit by the kiting scheme, Carrollton Bancorp, which lost $1.8 million, has weathered the incident and still reported a profit for last year of $2.6 million.

Even before the scheme was uncovered, Baltimore County Savings had been operating under heightened regulatory scrutiny for a variety of reasons, including lack of a sufficient business plan.

In light of the battering the bank has taken, an initial appraisal included in the stock offering prospectus suggests that its new stock be priced at a steep discount to competitors that have gone public. Bouffard says the discount should be a draw for investors. "It's a good deal," he said.

The bank's previous CEO, Gary C. Loraditch, resigned in July in the wake of the kiting losses, and the board hired Bouffard, a Highlandtown native, away from his job as CEO of Patapsco Bancorp.

In a wide-ranging interview at the Double-T Diner in Perry Hall, down the street from the bank's main offices, Bouffard spoke about the bank's prospects and why he took the position.

"It's a great opportunity," Bouffard said of the job. "It's a good financial institution with tremendous potential in a great market I'm very familiar with."

He has been in banking for more than three decades, and he has never left Baltimore. He is so Bal'more-centric that he jokingly calls his son's decision to move to Northern Virginia "radical."

Bouffard may not be as flashy as other bankers who seek to expand through mergers and branch building, but he is highly regarded. "He's a very solid and focused type of person, and he's got an excellent background in banking knowledge," said Jan W. Clark, president at County National Bank, soon to be part of Olney-based Sandy Spring Bancorp.

And he had the fortitude to survive Edwin F. Hale Sr. at the old Bank of Baltimore. Hale took over the bank after a nasty shareholder fight in the early 1990s and fired many of the executives, though not Bouffard.

With a smile, Bouffard says it was probably only a matter of time before Hale noticed he was still around and fired him, too. Hale says he knew Bouffard was there all along - and kept him because he was "very effective."

"He's just what the doctor ordered for them," Hale, now CEO of First Mariner Bank, said of Bouffard's new role at Baltimore County Savings.

Bouffard has undertaken a balance sheet restructuring that dumped arbitrage investments on which the bank was losing money. To conserve capital, the board decided to stop paying a dividend, to the chagrin of current shareholders.

To boost profits, Bouffard plans to do more commercial lending and move out of costly certificates of deposit, which often don't lead to customer relationships beyond that one account. The bank's net interest margin, a key performance measure of the difference between interest earned on loans and other investments and interest paid out, has fallen below the margins achieved by peers to about 1.7 percent. That compares with 4.3 percent for Carrollton Bancorp.

In the past, Bouffard said, Baltimore County Savings offered to match the CD rates of any other bank in town, as long as customers showed the competitor's advertisement to prove it. "That's just insanity," he said.

He plans to expand the bank's services, with health savings accounts and overdraft privileges on checking accounts, and to undertake a top-to-bottom review of the bank's branch network.

But first, the bank needs to pull off its stock offering to shore up its depleted reserves.

The offering could raise more than $60 million under initial estimates. If it succeeds, Baltimore County Savings, which sold some stock in a limited offering nearly a decade ago, will become a fully public company called BCSB Bancorp. It will keep its ticker symbol, "BCSB," on the Nasdaq stock market, and holders of the old stock will get new shares.

Oftentimes, depositors snag all of the stock being offered in these mutual conversions. That includes sophisticated investors who open accounts in banks structured as mutual holding companies across the country, so that they can be among the first to buy the shares.

Baltimore County Savings directors and executives plan to buy about 50,000 shares, and the bank's employee retirement plan will buy a sizable stake with a loan from the bank. If there are any shares left, the offering can then be opened to other investors and brokers.

Such stock sales are popular because they are often priced below what appraisers and underwriters expect the market price to eventually be, said Kevin J. Handly, a Boston lawyer who frequently advises on the deals. That creates a "pop" - or an instant profit on paper.

As for the troubles at Baltimore County Savings, including the kiting scheme, Handly said that potential investors are more likely to be concerned with the bank's future potential. "A check-kiting scheme is kind of a one-time event that involves criminal conduct of a third party and doesn't necessarily signal something systemically wrong with the institution, except that their mechanism for detecting such schemes were not strong enough," Handly said. "That is more easily fixed than, say, problems with credit quality."

Bouffard said one of Baltimore County Savings' biggest advantages is loan quality. At the end of the latest quarter, the bank only had $2.7 million in past-due loans, repossessed assets and foreclosed real estate. One $2.3 million loan is secured by a Timonium office worth more than that, and the borrower is in bankruptcy.

The bank also avoided subprime loans, which are extended to borrowers with poor credit and high debt. Subprime lenders have seen widespread defaults in recent months. "Thank God we didn't do that," Bouffard said, knocking on the wooden booth at the diner.

Still, without the stock sale, the bank could deplete its liquid assets by early 2009, it warns in its prospectus. If interest rates rise, that day could come sooner.

Part of that cash crunch stems from obligations to pay interest to holders of its trust preferred securities, who received more than a half-million dollars in a recent quarter. If those payments aren't made, the holders can demand that the bank redeem the securities, which would further deplete its capital. The bank plans to use some of the stock sale proceeds to buy back some of those securities.

Bouffard said he expects that the bank will soon be released from the supervisory agreement with its federal regulator, which would reduce compliance costs and free up management to focus on the business. He also said the bank has improved its internal controls, including its ability to detect kiting schemes, and recovered $3.4 million of the loss from its insurance provider.

"It's not going to happen again," he said, referring to the check scam and knocking again on the wooden booth.

Then, like a conservative banker, Bouffard hesitated. "I shouldn't say that something bad isn't to going to happen again," he said, pausing as he conceived a revised statement. "I can say with confidence that we've done everything we can to ensure it won't happen again."


Baltimore County Savings Bank by the numbers:

6 months CEO Joesph J. Bouffard has been on the job

Latest quarterly loss: $3 million

Loss from check kiting: $10.7 million

Total assets: $726 million

Deposits: $592 million

Branches located in the baltimore area: 18

The year the bank was founded: 1955

Source: Sun Research

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