BCSB Bancorp Inc (BCSBD)

We do not expect to recover all of our losses from a recent check-kiting scheme, and our recovery efforts are expected to take a long period of time and may result in further expenses or litigation.

During the year ended September 30, 2006, we became aware of a check-kiting scheme perpetrated by a

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single commercial deposit customer. As a result of this check-kiting scheme, we incurred an after-tax loss of $6.9 million. During the quarter ended March 31, 2007, we reached a settlement with our insurance provider, pursuant to which we received a recovery of $3.35 million, or $2.2 million net of taxes, in settlement of a bond claim with our insurance carrier. We are aggressively pursuing collection of the remaining check-kiting losses from the customer, but the customer has filed for bankruptcy and one of the two principals of the customer has committed suicide. It does not appear that the customer, the surviving principal or the estate of the deceased principal has material assets from which we could make any recovery, particularly after payment of bankruptcy expenses by the bankruptcy estate of the customer. Moreover, there are other secured and unsecured creditors who are asserting additional and competing claims against the bankruptcy estate of the customer and certain principals of the customer. The recovery process is uncertain and is expected to require an extended period of time to resolve. Further, we will incur expenses in pursuing our recovery efforts, and it is possible that we may be involved in litigation with other creditors as we seek to recover limited available assets. In addition, the negative publicity from the check-kiting scheme hurt our ability in the short term to attract and retain deposits. We have examined all deposit accounts with more than a minimal negative balance and believe we do not have a risk of additional material check-kiting losses at this time. We also have developed and implemented additional procedures to detect check-kiting that we believe will reduce the risk of future check-kiting losses.