Counting on customers
by Laura Smitherman, Baltimore Sun reporter
Originally published May 27, 2007
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."
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