Dividend payout halted by bank

Check-kiting hurt Balto. Co. Savings

December 05, 2006|By Laura Smitherman | Laura Smitherman,sun reporter

Baltimore County Savings Bank has suspended dividend payments to shareholders, partly at the behest of federal regulators, as the community financial institution works to implement a new business plan to boost earnings after losing $10.7 million to an alleged check-kiting scheme.

Joseph J. Bouffard, who became chief executive last month in the wake of the check-kiting scandal, said yesterday that the board of directors made the decision to end, at least temporarily, the dividend program. He added that the bank's regulator, the Office of Thrift Supervision, "strongly recommended" the suspension.

The bank has agreed not to issue a dividend without approval by the regulator. It has been operating since last December under the close watch of the federal agency, which found flaws in its internal controls. That scrutiny began before the check-kiting allegations surfaced in June.

Bouffard said the reaction from shareholders to the discontinued dividend has been "mixed."

"The institutional shareholders were very supportive of the idea, while the local shareholders, those with smaller groups of shares, will miss that income," he said. "It's been a mixed bag."

Shareholders had been earning 50 cents annually on the stock in quarterly dividends. That amounts to nearly $4 in payments per share since the bank began paying a regular dividend in 1999, one year after becoming a publicly traded mutual holding company.

By comparison, the bank's stock was priced at $10 a share for its initial public offering and closed at $14.88 on the Nasdaq stock market yesterday. The shares fell 52 cents, or 3.4 percent, during trading yesterday on news about the dividend program, which was announced after markets closed Friday evening.

Among the largest shareholders in BCSB Bankcorp Inc., the bank's parent company, are hedge fund manager Jeffrey Gendell and the Colorado Public Employees' Retirement Association, which provides benefits to state workers.

Gendell couldn't be reached for comment yesterday. Colorado PERA spokeswoman Katie Kaufmanis said the pension plan doesn't comment on its holdings.

By suspending the dividend, Bouffard said, the bank would conserve capital as it restructures the balance sheet and reduces its investment portfolio.

The bank, which has 18 branches in the Baltimore metropolitan area, will concentrate on building its loan portfolio, he said.

"We'll become more of a lender and less of an investor," Bouffard said. "That's how banks make money the old-fashioned way. They bring in deposits and loan it out."

Bouffard replaced Gary C. Loraditch, who resigned in July, and has signed a three-year contract that is subject to renewal by the board.

According to a recent regulatory filing, Bouffard's compensation package includes $200,000 in salary, 5,000 shares of restricted stock and 20,000 stock options, as well as an automobile allowance and membership at a country club in Harford County.

The bank lost $7.4 million in the fiscal year that ended in September, which it attributed primarily to the check-kiting. Commercial customer A&B Check Cashing has been named in court filings as the alleged perpetrator.

A&B Check Cashing, a Baltimore operation, has closed and declared bankruptcy, and the FBI has confirmed that it is investigating the allegations. A&B owner Brian Satisky said he has been advised by his lawyers not to discuss the case.

Carrollton Bancorp, another Baltimore community bank, and Global Express Money Orders Inc. of Silver Spring also say they were hit by the alleged scheme and together lost more than $3.5 million.

In general, check kiting involves writing a bad check on one account, depositing it into another account, and then writing a second check to cover the first.

BCSB has been working to improve its internal systems. The Office of Thrift Supervision had flagged several areas as needing improvement, including the bank's process for identifying customers at high risk of unlawful activity. Kevin Petrasic, a spokesman for the agency, declined to comment on the matter.

laura.smitherman@baltsun.com

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