Table of Contents
United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10 - Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended March 31, 2009
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 0-28032
PATAPSCO BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 52-1951797 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1301 Merritt Boulevard, Dundalk, Maryland 21222-2194
(Address of Principal Executive Offices)
(410) 285-1010
Registrant’s Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 13, 2009, the issuer had 1,864,974 shares of Common Stock issued and outstanding.
Table of Contents
CONTENTS | ||||
PAGE | ||||
PART I.FINANCIAL INFORMATION | ||||
Item 1. | ||||
Consolidated Statements of Financial Condition at March 31, 2009 and June 30, 2008 | 3 | |||
4 | ||||
5 | ||||
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended March 31, 2009 and 2008 | 6 | |||
7 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 14 | ||
Item 3. | 23 | |||
Item 4T. | 23 | |||
PART II.OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 24 | ||
Item 1A. | Risk Factors | 24 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||
Item 3. | Defaults Upon Senior Securities | 24 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 24 | ||
Item 5. | Other Information | 24 | ||
Item 6. | Exhibits | 24 | ||
Signatures | 25 | |||
Certifications | 26 |
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Item 1. | Financial Statements |
Patapsco Bancorp, Inc. and Subsidiary
Dundalk, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
($ in thousands except for share data) | March 31, 2009 | June 30, 2008 | ||||||
Assets | ||||||||
Cash and Cash Equivalents: | ||||||||
On hand and due from banks | $ | 5,770 | $ | 4,617 | ||||
Federal funds sold | 6,804 | 2,473 | ||||||
Cash and Cash equivalents | 12,574 | 7,090 | ||||||
Interest bearing deposits in other financial institutions | 1,377 | 2,103 | ||||||
Securities, available for sale | 11,478 | 9,601 | ||||||
Loans receivable, net of allowance for loan losses of $3,635 and $1,834, respectively | 228,011 | 227,514 | ||||||
Investment in securities required by law, at cost | 2,816 | 2,649 | ||||||
Property and equipment, net | 4,029 | 4,178 | ||||||
Goodwill and core deposit intangible | 3,212 | 3,251 | ||||||
Accrued interest and other assets | 5,739 | 4,908 | ||||||
Total assets | $ | 269,236 | $ | 261,294 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Non interest bearing deposits | $ | 11,243 | $ | 13,113 | ||||
Interest bearing deposits | 186,326 | 184,773 | ||||||
Total deposits | 197,569 | 197,886 | ||||||
Accrued expenses and other liabilities | 1,834 | 1,717 | ||||||
Short-term debt | 3,000 | — | ||||||
Long term debt | 37,300 | 37,300 | ||||||
Subordinated debentures | 5,000 | 5,000 | ||||||
Total liabilities | 244,703 | 241,903 | ||||||
Stockholders’ equity: | ||||||||
Preferred Stock – Series A Cumulative Perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation preference of $1,000 per share; 6,000 and -0- outstanding, respectively | 5,670 | — | ||||||
Warrant Preferred Stock – Series B Cumulative Perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation preference of $1,000 per share; 300 and -0- outstanding, respectively | 336 | — | ||||||
Common stock $0.01 par value: authorized 4,000,000 shares: issued and outstanding 1,864,974 and 1,861,855 shares, respectively | 18 | 18 | ||||||
Additional paid in capital | 7,397 | 7,346 | ||||||
Obligation under Deferred Compensation | 453 | 442 | ||||||
Deferred Comp contra | (78 | ) | (78 | ) | ||||
Retained income, substantially restricted | 10,818 | 11,851 | ||||||
Accumulated other comprehensive loss, net of taxes | (81 | ) | (188 | ) | ||||
Total stockholders’ equity | 24,533 | 19,391 | ||||||
Total liabilities and stockholders’ equity | $ | 269,236 | $ | 261,294 | ||||
See accompanying notes to financial statements.
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Patapsco Bancorp, Inc. and Subsidiary
Dundalk, Maryland
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
($ in thousands except for per share data) | For Nine Months Ended March 31, | For Three Months Ended March 31, | ||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
Interest income: | ||||||||||||||
Loans receivable, including fees | $ | 11,628 | $ | 12,397 | $ | 3,644 | $ | 4,060 | ||||||
Securities, including securities required by law | 400 | 506 | 128 | 151 | ||||||||||
Federal funds sold and other investments | 32 | 143 | 5 | 70 | ||||||||||
Total interest income | 12,060 | 13,046 | 3,777 | 4,281 | ||||||||||
Interest expense: | ||||||||||||||
Deposits | 4,009 | 4,816 | 1,270 | 1,613 | ||||||||||
Short-term debt | 89 | 188 | 23 | 22 | ||||||||||
Long-term debt | 1,297 | 1,558 | 425 | 533 | ||||||||||
Total interest expense | 5,395 | 6,562 | 1,718 | 2,168 | ||||||||||
Net interest income | 6,665 | 6,484 | 2,059 | 2,113 | ||||||||||
Provision for loan losses | 2,451 | 900 | 891 | 300 | ||||||||||
Net interest income after provision for loan losses | 4,214 | 5,584 | 1,168 | 1,813 | ||||||||||
Non-interest income: | ||||||||||||||
Fees and service charges | 545 | 536 | 181 | 167 | ||||||||||
Gain on sale of other repossessed assets | 10 | 5 | — | 5 | ||||||||||
Merger Termination Fee | — | 2,000 | — | 2,000 | ||||||||||
Other | 72 | 83 | 20 | 37 | ||||||||||
Total non-interest income | 627 | 2,624 | 201 | 2,209 | ||||||||||
Non-interest expense: | ||||||||||||||
Compensation and employee benefits | 3,514 | 3,215 | 1,063 | 1,153 | ||||||||||
Professional fees | 262 | 519 | 120 | 189 | ||||||||||
Federal deposit insurance assessments | 202 | 16 | 184 | 5 | ||||||||||
Equipment expense | 235 | 244 | 65 | 79 | ||||||||||
Net occupancy expense | 457 | 421 | 156 | 143 | ||||||||||
Advertising | 49 | 29 | 15 | 3 | ||||||||||
Data processing | 309 | 228 | 83 | 84 | ||||||||||
Amortization of core deposit intangible | 39 | 39 | 13 | 13 | ||||||||||
Telephone, postage & delivery | 218 | 188 | 79 | 65 | ||||||||||
Other | 664 | 700 | 202 | 321 | ||||||||||
Total non-interest expense | 5,949 | 5,599 | 1,980 | 2,055 | ||||||||||
Income/(loss) before provision/(benefit) for income taxes | (1,108 | ) | 2,609 | (611 | ) | 1,967 | ||||||||
Provision/(benefit) for income taxes | (447 | ) | 958 | (244 | ) | 559 | ||||||||
Net income/(loss) | $ | (661 | ) | $ | 1,651 | $ | (367 | ) | $ | 1,408 | ||||
Preferred Stock dividends | 51 | — | 38 | — | ||||||||||
Net Income/(Loss) Available for Common Shareholders | $ | (712 | ) | $ | 1,651 | $ | (405 | ) | $ | 1,408 | ||||
Basic earnings/(loss) per common share | $ | (0.37 | ) | $ | 0.86 | $ | (0.21 | ) | $ | 0.73 | ||||
Diluted earnings/(loss) per common share | $ | (0.37 | ) | $ | 0.85 | $ | (0.21 | ) | $ | 0.73 | ||||
Cash dividends declared per common share | $ | 0.09 | $ | 0.21 | $ | 0.02 | $ | 0.14 | ||||||
See accompanying notes to financial statements.
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Patapsco Bancorp, Inc. and Subsidiary
Dundalk, Maryland
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in thousands) | For Nine Months Ended March 31 | For Three Months Ended March 31 | ||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
Net income/(loss) | $ | (661 | ) | $ | 1,651 | $ | (367 | ) | $ | 1,408 | ||||
Other comprehensive income/(loss), net of tax: | ||||||||||||||
Unrealized net holding gains/(losses) on securities available-for-sale, net of tax expense/(benefit), of $70, $172, ($33), and $55, respectively | 107 | 265 | (51 | ) | 85 | |||||||||
Comprehensive income/(loss) | $ | (554 | ) | $ | 1,916 | $ | (418 | ) | $ | 1,493 | ||||
See accompanying notes to financial statements.
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Patapsco Bancorp, Inc. and Subsidiary
Dundalk, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended, | ||||||||
($ in thousands) | March 31, 2009 | March 31, 2008 | ||||||
Cash flows from operating activities: | ||||||||
Net Income/(loss) | $ | (661 | ) | $ | 1,651 | |||
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | ||||||||
Amortization of premiums and discounts, net | 39 | 36 | ||||||
Amortization of deferred loan origination fees | 1 | (19 | ) | |||||
Provision for loan losses | 2,451 | 900 | ||||||
Depreciation | 249 | 268 | ||||||
Amortization of core deposit intangible | 39 | 39 | ||||||
Increase in cash surrender value of life insurance | (53 | ) | (55 | ) | ||||
Increase in accrued interest and other assets | (840 | ) | (204 | ) | ||||
Non-cash compensation under stock-based benefit plan | 63 | 48 | ||||||
Merger termination fee earned but not received | 0 | (2,000 | ) | |||||
Increase in accrued expenses and other liabilities | 91 | 686 | ||||||
Net cash provided by operations | 1,379 | 1,350 | ||||||
Cash flows from investing activities: | ||||||||
Net decrease/(increase) in interest bearing deposits in other banks | 726 | (2,416 | ) | |||||
Proceeds from maturity of investments and principal payments on mortgage backed securities | 2,957 | 4,347 | ||||||
Purchase of securities available for sale | (4,681 | ) | 0 | |||||
Net change in loans | (2,970 | ) | 177 | |||||
Purchase of consumer loans | 0 | (577 | ) | |||||
Net increase in investments required by law | (167 | ) | (185 | ) | ||||
Purchase of property and equipment | (100 | ) | (29 | ) | ||||
Net cash (used)/provided by investing activities | (4,235 | ) | 1,317 | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 183 | 6,282 | ||||||
Decrease in advance payments by borrowers | (494 | ) | (537 | ) | ||||
Net increase in short-term borrowings | 3,000 | 0 | ||||||
Proceeds from long-term borrowings | 17,500 | 19,200 | ||||||
Payment on long-term borrowings | (17,500 | ) | (17,700 | ) | ||||
Cash received from the issuance of preferred stock | 5,661 | 0 | ||||||
Cash received from the issuance of warrant preferred stock | 338 | 0 | ||||||
Cash received from exercise of common stock options | 0 | 115 | ||||||
Repurchase of common stock due to ESOP Put Options exercised | 0 | (659 | ) | |||||
Common and preferred dividends paid | (348 | ) | (391 | ) | ||||
Net cash provided by financing activities | 8,340 | 6,310 | ||||||
Net increase in cash and cash equivalents | 5,484 | 8,997 | ||||||
Cash and cash equivalents at beginning of period | 7,090 | 6,563 | ||||||
Cash and cash equivalents at end of period | $ | 12,574 | $ | 15,540 | ||||
Interest paid on deposits and borrowed funds | $ | 5,538 | $ | 6,330 | ||||
Income taxes paid | 380 | 750 |
See accompanying notes to financial statements.
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Patapsco Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1: Principles of Consolidation
The consolidated financial statements include the accounts of Patapsco Bancorp, Inc. (the “Company” or “Patapsco Bancorp”) and its wholly-owned subsidiary, The Patapsco Bank (the “Bank”). The Patapsco Bank’s wholly owned subsidiaries are Prime Business Leasing and Patapsco Financial Services, Inc. All inter-company accounts and transactions have been eliminated in the accompanying consolidated financial statements.
Note 2: The Patapsco Bank
The Bank is regulated by The Federal Reserve Bank of Richmond (the “Federal Reserve Bank”) and The State of Maryland. The primary business of the Bank is to attract deposits from individual and corporate customers and to originate residential and commercial mortgage loans, consumer loans and commercial business loans. The Bank competes with other financial and mortgage institutions in attracting and retaining deposits and originating loans.
Note 3: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with accounting principles generally accepted in the United States of America. However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and nine months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the entire year. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual report on Form 10-K for the year ended June 30, 2008.
Note 4: Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and due from banks and short-term investments, with an original maturity of 90 days or less, which consist of federal funds sold.
Note 5: Preferred Stock
On December 19, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement, and the related Securities Purchase Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued (i) 6,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference of $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase an additional $300,000 in preferred stock (“Series B preferred stock”), for an aggregate purchase price of $6.0 million.
The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 15, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Prior to February 15, 2012, the Company may redeem shares of Series A preferred stock only if it has received aggregate gross proceeds of not less than $ 1,500,000 from one or more qualified equity offerings, and the aggregate redemption price may not exceed the net proceeds received by the Company form such offerings. The redemption of the Series A preferred stock requires prior regulatory approval.
On December 19, 2008, Treasury exercised all of the warrants on the Series B preferred stock at the exercise price of $0.01 per share. The Series B preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 9% per annum. The Series B preferred stock may not be redeemed until all the Series A preferred stock has been redeemed.
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The Series A preferred stock and Series B preferred stock were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the Series B preferred stock will be subject to any contractual restrictions on transfer.
Note 6: Regulatory Capital Requirements
At March 31, 2009, the Bank met each of the three minimum regulatory capital requirements. The following table summarizes the Bank’s regulatory capital position at March 31, 2009:
Actual | For Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||
($ in thousands) | Amount | % | Amount | % | Amount | % | ||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 24,746 | 11.97 | % | $ | 16,544 | 8.00 | % | $ | 20,680 | 10.00 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) | $ | 22,149 | 10.71 | % | $ | 8,272 | 4.00 | % | $ | 12,408 | 6.00 | % | ||||||
Tier 1 Capital (to Average Assets) | $ | 22,149 | 8.42 | % | $ | 10,522 | 4.00 | % | $ | 13,152 | 5.00 | % |
The following table summarizes the Bank’s regulatory capital position at June 30, 2008:
Actual | For Capital Adequacy Purposes | Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||
($ in thousands) | Amount | % | Amount | % | Amount | % | ||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 21,585 | 10.45 | % | $ | 16,532 | 8.00 | % | $ | 20,665 | 10.00 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) | $ | 19,752 | 9.56 | % | $ | 8,266 | 4.00 | % | $ | 12,399 | 6.00 | % | ||||||
Tier 1 Capital (to Average Assets) | $ | 19,752 | 7.63 | % | $ | 10,352 | 4.00 | % | $ | 12,940 | 5.00 | % |
Note 7: Earnings/(Loss) Per Share
The following table presents a summary of per share data and amounts for the periods indicated.
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||
(in thousands except for share data) | 2009 | 2008 | 2009 | 2008 | ||||||||||
Net Income/(Loss) available for Common Shareholders, as Reported | $ | (405 | ) | $ | 1,408 | $ | (712 | ) | $ | 1,651 | ||||
Basic EPS shares | 1,922 | 1,916 | 1,921 | 1,913 | ||||||||||
Basic EPS | $ | (0.21 | ) | $ | 0.73 | $ | (0.37 | ) | $ | 0.86 | ||||
Dilutive shares | 0 | 10 | 0 | 19 | ||||||||||
Diluted EPS shares | 1,922 | 1,926 | 1,921 | 1,932 | ||||||||||
Diluted EPS | $ | (0.21 | ) | $ | 0.73 | $ | (0.37 | ) | $ | 0.85 |
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Note 8: Goodwill and Intangible Assets
SFAS No. 142, “Goodwill and Other Intangible Assets” requires that goodwill no longer be amortized, but rather that it be tested for impairment on an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives. Other intangible assets are amortized using the straight-line method over estimated useful lives of 10 years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.
Note 9: Guarantees
The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company, generally, holds collateral and/or personal guarantees supporting these commitments. The Company had $1,392,000 of standby letters of credit as of March 31, 2009 and $2,055,000 outstanding as of June 30, 2008. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of March 31, 2009 and June 30, 2008 for guarantees under standby letters of credit issued is not material.
Note 10: Deferred Compensation
EITF Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“the EITF”) stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or Accounting Principles Board Opinion (“APB”) No. 12, “Omnibus Opinion—1967.” The EITF concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under FASB Statement No. 106 and, therefore, a liability for the postretirement obligation must be recognized under FASB Statement No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12, if it is not part of a plan. The Company adopted EITF 06-04 on July 1, 2008, which resulted in a cumulative effect adjustment of $148,000 charge to retained earnings. Benefit expense recorded for the three and nine months ending March 31, 2009 totals $4,000 and $12,000, respectively.
Note 11: Recent Accounting Pronouncements
FASB Statement No. 141(R)
FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The impact to the Company is dependent upon acquisitions consummated after the effective date.
SAB 110
In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue use of the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. SAB 110 is effective January 1, 2008. The Company adopted SAB 110 without material impact to the consolidated financial statements.
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FSP 142-3
In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141(R), “Business Combinations,” and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.
International Financial Reporting Standards
In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.
FSP FAS 132(R)-1
In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
EITF 08-6
In November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-6, “Equity Method Investment Accounting Considerations”. EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
EITF 08-7
In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, “Accounting for Defensive Intangible Assets”. EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 required an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. This new pronouncement will impact the Company’s accounting for any defensive intangible assets acquired in a business combination completed beginning January 1, 2009.
FSP FAS 157-4
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FASB Statement 157, “Fair Value Measurements,” defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.
FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.
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This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
FSP FAS 115-2 and FAS 124-2
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
FSP FAS 107-1 and APB 28-1
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
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Note 12: Share-Based Compensation
Stock Options
A summary of share option activity for the nine month period ended March 31, 2009 follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Aggregate Intrinsic Value (000s) | |||||||
Outstanding at June 30, 2008 | 20,832 | $ | 6.29 | 3.1 | $ | 19 | ||||
Granted | — | — | — | |||||||
Exercised | — | — | — | |||||||
Forfeited or expired | — | — | — | |||||||
Balance at March 31, 2009 | 20,832 | $ | 6.29 | 2.4 | $ | 0 |
Stock Incentive Plan
A summary of the status of the Company’s non-vested shares as of March 31, 2009 is presented below:
Common Shares | Weighted Average Grant-Date Fair Value | |||||
Non-Vested as of June 30, 2008 | 12,649 | $ | 13.71 | |||
Awards Granted, July 2008 | 3,250 | 7.10 | ||||
Vested | (2,415 | ) | 13.71 | |||
Forfeited | — | — | ||||
Non-Vested at March 31, 2009 | 13,484 | $ | 12.12 |
As of March 31, 2009 there was $46,000 of total unrecognized compensation costs related to non-vested share-based compensation. The cost is expected to be recognized over a weighted average period of 10 months. At grant date, vesting of the shares was “cliff” vesting at the end of either a two or three year period. Compensation expense totaling $51,000, $14,000, $43,000, and $8,000 in the nine and three month periods ending March 31, 2009 and 2008, respectively, has been recognized as a result of these awards.
Note 13: Termination of Merger Agreement
On January 3, 2008, Patapsco Bancorp, Inc. and Bradford Bancorp, Inc. announced that they mutually terminated the Agreement and Plan of Merger that the parties previously executed on March 19, 2007. Pursuant to the termination agreement, Bradford Mid-Tier Company agreed to pay Patapsco Bancorp a termination fee of $2.0 million payable in the form of a promissory note. This $2.0 million was recognized as income in the quarter ended March 31, 2008. The promissory note matured on December 31, 2008, at which point Bradford Mid-Tier Company renewed the note. The renewed promissory note matures on December 31, 2011 and provides for interest equal to the prime rate but no less than 3.25%. In the event Bradford Mid-Tier Company elects to defer interest payments in 2010 or 2011, the interest rate will be increased to the prime rate plus 0.70%. Repayment of this debt is guaranteed by the FDIC under the FDIC’s Temporary Liquidity Guarantee Program.
Note 14: Fair Value Measurements
Effective July 1, 2008, the Company adopted SFAS No. 157 – “Fair Value Measurements” (“SFAS No. 157”). This statement defined the concept of fair value, established a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. SFAS No. 157 applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets. The disclosure’s emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of SFAS No. 157 did not have any effect on the Company’s consolidated financial position or results of operations.
In December 2007, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities
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(non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of FASB Statement No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company has elected to defer in accordance with FSP 157-2 with regards to other real estate owned and goodwill.
In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately. The application of the provisions of FSP 157-3 did not materially affect our results of consolidated operations or financial condition as of and for the three and nine month periods ended March 31, 2009.
The Company has an established and documented process for determining fair values. Fair value is based on quoted market prices, when available. If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data, which include discount rate, interest rate yield curves, prepayment speeds, bond ratings, credit risk, loss severities, default rates, and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include amounts to reflect counterparty credit quality, creditworthiness, liquidity, and other unobservable inputs that are applied consistently over time. These adjustments are estimated and therefore, subject to managements’ judgment, and at times, may be necessary to mitigate the possibility of error or revision in the model-based estimate of the fair value provided by the model. The Company has various controls in place to ensure that the valuations are appropriate, including review and approval of the valuation models, benchmarking, comparison to similar products, and reviews of actual cash settlements. The methods described above may produce fair value calculations that may not be indicative of the net realizable value or reflective of future fair values. While the Company believes its valuation methods are consistent with other financial institutions, the use of different methods or assumptions to determine fair values could result in different estimates of fair value.
SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:
• | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
• | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
• | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Each financial instrument’s level assignment within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement for that particular category.
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of each instrument under the valuation hierarchy.
Securities Available for Sale
Fair values of investment securities are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are generally classified within Level 2 of the valuation hierarchy.
The following table presents the financial instruments measured at fair value on a recurring basis as of March 31, 2009 on the Consolidated Statement of Financial Condition utilizing the SFAS No. 157 hierarchy discussed above:
At March 31, 2009 | ||||||||||||
($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Securities available for sale | $ | 11,478 | $ | — | $ | 11,478 | $ | — | ||||
Nonrecurring fair value changes
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis, but are subject to fair value in certain circumstances, such as when there is evidence of impairment that may require write downs. The write-downs for the Company’s more significant assets or liabilities measured on a non-recurring basis are based on the lower of amortized cost or estimated fair value.
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Impaired Loans
The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price of the loan, or the fair value of the underlying collateral. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances of $11.2 million less their specific valuation allowances of $1.6 million as determined under SFAS 114. The increase in the allowance of $1.0 million in the quarter ended March 31, 2009 resulted in an impairment charge of $1.0 million, which was included in earnings. The increase in the allowance of $1.6 million in the nine months ended March 31, 2009 resulted in an impairment charge of $1.6 million.
Foreclosed Assets
Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to other assets owned at fair value less costs to sell. These assets are subsequently carried at lower of cost or fair value of the collateral, less cost to sell. The Company had foreclosed assets with a balance of $0 at March 31, 2009.
Impaired loans are classified as Level 3 within the valuation hierarchy.
At March 31, 3009 | ||||||||||||
($ in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Impaired Loans | $ | 9,595 | $ | — | $ | — | $ | 9,595 | ||||
Note 15: Reclassification
Certain prior period amounts have been reclassified to conform to the current period’s presentation. There is no impact to the results of operations.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
The Company’s results of operations depend primarily on its level of net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities and other investments, and the interest paid on interest-bearing liabilities, consisting primarily of deposits and advances from the Federal Home Loan Bank of Atlanta. The net interest income earned on interest-earning assets (“net interest margin”) and the ratio of interest-earning assets to interest-bearing liabilities have a significant impact on net interest income. The Company’s net interest margin is affected by regulatory, economic and competitive factors that influence interest rates, loan and deposit flows. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. The Company’s results of operations are also significantly impacted by the amount of its non-interest income, including loan fees and service charges, and levels of non-interest expense, which consists principally of compensation and employee benefits, insurance premiums, professional fees, equipment expense, occupancy costs, advertising, data processing and other operating expenses.
The Company’s operating results are significantly affected by general economic and competitive conditions, in particular, changes in market interest rates, government policies and actions taken by regulatory authorities. Lending activities are influenced by general economic conditions, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the level of personal income and savings in the Company’s market area.
Forward-Looking Statements
When used in this Form 10-Q, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions
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in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. These estimates, assumptions and judgments are necessary when financial instruments are required to be recorded at fair value or when the decline in the value of an asset carried on the balance sheet at historic cost requires an impairment write-down or a valuation reserve to be established.
The allowance for loan losses (“allowance”) represents an amount, that in the judgment of management, will be adequate to absorb probable losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon two principles of accounting: (1) Statement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies”, that requires losses to be accrued when their occurrence is probable and estimable, and (2) SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, that requires losses be accrued when it is probable that the lender will not collect all principal and interest due under the original terms of the loan. The adequacy of the allowance is determined through careful evaluation of the loan portfolio. This determination is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans based on historical loss experience and consideration of the current economic environment that may be subject to change. Loans and leases deemed uncollectible are charged against the allowance and recoveries of previously charged-off amounts are credited to it. The level of the allowance is adjusted through the provision for loan losses that is recorded as a current period expense.
The methodology for assessing the appropriateness of the allowance includes a specific allowance, a formula allowance and a nonspecific allowance. The specific allowance is for risk rated credits on an individual basis. The formula allowance reflects historical losses by credit category. The nonspecific allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the specific allowance or the formula allowance. The factors used in determining the nonspecific allowance include trends in delinquencies, trends in volumes and terms of loans, the size of loans relative to the allowance, concentration of credits, the quality of the risk identification system and credit administration and local and national economic trends.
In accordance with the provisions of Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by Statement 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures” (collectively referred to as “Statement 114”), the Company determines and recognizes impairment of certain loans. A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during an insignificant period of delay in payment if the Company expects to collect all amounts due, including past-due interest. The Company generally considers a period of delay in payment to include delinquency up to and including 90 days. Statement 114 requires that impairment in a loan be measured at the present value of its expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Statement 114 is generally applicable for all loans except large groups of smaller-balance homogeneous loans that are evaluated collectively for impairment, including residential first and second mortgage loans and consumer installment loans. Impaired loans are therefore generally comprised of commercial mortgage, real estate development, and certain restructured residential loans. In addition, impaired loans are generally loans which management has placed in non-accrual status since loans are placed in non-accrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past-due.
Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of the probable losses in the loan and lease portfolio can vary significantly from amounts that actually occur.
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Comparison of Financial Condition at March 31, 2009 and June 30, 2008
Patapsco Bancorp’s assets increased by $7.9 million, or 3.0% to $269.2 million at March 31, 2009 from $261.3 million at June 30, 2008. Net loans grew by $497,000 or 0.2% to $228.0 million at March 31, 2009 from $227.5 million at June 30, 2008. This modest growth in net loans occurred as the allowance for loan losses increased by $1.8 million or 98.2% from $1.8 million at June 30, 2008 to $3.6 million at March 31, 2009. Securities available for sale increased by $1.9 million or 19.6% to $11.5 million at March 31, 2009 from $9.6 million at June 30, 2008 as maturities of $2.0 million and amortization of the mortgage-backed securities of $1.0 million were replaced by new purchases of investment securities of $4.7 million.
Total deposits decreased $317,000, or 0.2%, to $197.6 million at March 31, 2009 from $197.9 million at June 30, 2008. Excluding brokered certificates of deposit which declined $6.7 million during this period, deposits grew $6.4 million or 3.3%. Short-term borrowings increased to $3.0 million at March 31, 2009 funding loan growth and the slight decline in deposits. Long-term borrowings from the Federal Home Loan Bank of Atlanta were flat at $37.3 million at March 31, 2009 and June 30, 2008.
For the nine month period ending March 31, 2009, stockholders’ equity grew $5.1 million to $24.5 million as the Company completed the sale of 6,000 Shares of Preferred stock, Series A under the TARP Capital Purchase Program for $6 million to the U.S. Treasury. The Preferred Stock carries a 5% annual dividend yield for five years, and 9% thereafter. In addition, the Treasury has received and exercised warrants to purchase an additional $300,000 of preferred stock. These preferred shares carry a 9% annual dividend. Stockholders’ equity also grew as a result of the improvement in the market value of available for sale securities, net of tax, by $107,000. Partially offsetting these increases was a $1.0 million decline in retained earnings due to the year to date loss applicable to common shareholders of $712,000, the adoption of Emerging Issues Task Force (“EITF”) Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” amounting to a $148,000 charge and declared common and preferred dividends amounting to $219,000.
Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2009 and March 31, 2008
Net Income.Patapsco Bancorp’s net income available to common shareholders for the nine month period decreased by $2.4 million from net income of $1.7 million for the quarter ended March 31, 2008 to a net loss of $712,000 for the quarter ended March 31, 2009. Quarterly income available to common shareholders decreased by $1.8 million or 128.8% from net income of $1.4 million for the quarter ended March 31, 2008 to a net loss of $405,000 for the quarter ended March 31, 2009. The prior year periods benefited from the recognition of a $2.0 million merger termination fee. The decline in net income was also attributable to increases in the provision for loan losses which grew $1.6 million or 172.3% to $2.5 million for the nine months ended March 31, 2009 from $900,000 for the nine months ended March 31, 2008 and $591,000 or 197% to $891,000 for the quarter ended March 31, 2009 from $300,000 for the quarter ended March 31, 2008.
Net Interest Income. The Company’s net interest income increased by $181,000 or 2.8% to $6.7 million for the nine months ended March 31, 2009 from $6.5 million for the nine months ended March 31, 2008. Net interest income decreased by $54,000 or 2.6% to $2,059,000 for the quarter ended March 31, 2009 from $2,113,000 during the quarter ended March 31, 2008. The impact of the decline in market interest rates helped the net interest margin as the cost of funds declined by more than the yield on earning assets; however, the impact of non-accrual loans reduced interest income to a greater extent in the current periods versus the prior year’s same periods.
Interest Income. Total interest income decreased by $986,000 or 7.6% to $12.1 million for the nine month period ended March 31, 2009 compared to $13.0 million in the nine month period ended March 31, 2008. Total interest income decreased by $504,000 or 11.8% to $3.8 million for the quarter ended March 31, 2009 compared to $4.3 million for the quarter ended March 31, 2008. The decreases in interest income during the comparable nine and three month periods were due to the decline in the yields on earning assets offset in part by the growth in average earning assets.
Interest income on loans receivable decreased by $769,000 or 6.2% to $11.6 million for the nine months ended March 31, 2009 from $12.4 million for the nine months ended March 31, 2008. Interest income on loans receivable decreased by $416,000 or 10.2% to $3.6 million for the quarter ended March 31, 2009 from $4.1 million for the quarter ended March 31, 2008. The decline in interest income on loans receivable during both the nine and three month periods was consistent with the decline in market interest rates and the increase in the level of non-accrual loans.
Interest income on investment and mortgage-backed securities decreased by $106,000 or 21.0% to $400,000 and by $23,000 or 15.3% to $128,000 in the nine and three month periods ended March 31, 2009, respectively due to both lower average balances outstanding and lower yields.
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Interest income on federal funds sold and other investments decreased by $111,000 or 77.3% for the nine months ended March 31, 2009 to $32,000 from $143,000 for the nine months ended March 31, 2008. Interest income on federal funds sold and other investments decreased by $65,000 or 92.9% for the quarter ended March 31, 2009 from $70,000 for the quarter ended March 31, 2008. The decreases in the nine and three month periods were due to lower short-term market rates and lower average balances.
Interest Expense.Total interest expense decreased by $1.2 million or 17.8% to $5.4 million for the nine months ended March 31, 2009 from $6.6 million for the nine months ended March 31, 2008. Total interest expense decreased $450,000 or 20.8% to $1.7 million for the quarter ended March 31, 2009 from $2.2 million for the quarter ended March 31, 2008. The decrease in interest expense during the comparable nine and three month periods is due to lower rates paid on interest bearing liabilities, which more than offset the higher level of average balances.
Interest expense on deposits decreased by $807,000 or 16.8% to $4.0 million for the nine months ended March 31, 2009 from $4.8 million for the nine months ended March 31, 2008. Interest expense on deposits decreased by $343,000 or 21.3% to $1.3 million from $1.6 million for the quarter ended March 31, 2008. The decrease in interest expense on deposits in both the year to date and quarterly periods is due to lower rates paid on deposit accounts more than offsetting higher average balances. The lower average rates were primarily the result of certificates of deposit repricing at lower rates, and secondarily due to lower money market deposit rates.
Interest expense on short-term borrowings decreased by $99,000 or 52.7% to $89,000 for the nine months ended March 31, 2009 from $188,000 for the nine months ended March 31, 2008. The decrease in the comparable nine month periods was due to both lower rates of interest paid and lower average balances outstanding. Interest expense on short-term borrowings increased $1,000 or 4.5% to $23,000 for the quarter ended March 31, 2009 from $22,000 for the quarter ended March 31, 2008. The increase in the comparable quarters was due to higher average balances outstanding offsetting the benefit of lower rates of interest paid.
Interest expense on long-term borrowings decreased by $261,000 or 16.8% to $1.3 million for the nine months ended March 31, 2009 from $1.6 million for the nine months ended March 31, 2008. This decrease is due to the benefit of lower rates of interest paid more than offsetting the effect of higher average balances outstanding. Interest expense on long-term borrowings decreased by $108,000 or 20.3% to $425,000 for the quarter ended March 31, 2009 from $533,000 for the quarter ended March 31, 2008. This decrease is due to both lower average balances outstanding and lower rates of interest paid. The lower rates paid on borrowings was consistent with the drop in market rates since last year.
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Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to the Company’s average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and cost of liabilities for the periods and at the dates indicated. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the periods presented. Average balances are derived from daily balances.
The table also presents information for the periods indicated with respect to the Company’s net interest margin, which is net interest income divided by the average balance of interest-earning assets. This is an important indicator of commercial bank profitability. The net interest margin is affected by yields on interest-earning assets, the costs of interest-bearing liabilities and the relative amounts of interest earning assets and interest bearing liabilities. Another indicator of the Company’s net interest income is the interest rate spread, or the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.
For The Nine Months Ended March 31, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Average Balance | Interest | Average Rate (1) | Average Balance | Interest | Average Rate (1) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||
Loans receivable, including fees (2) | $ | 233,213 | $ | 11,628 | 6.60 | % | $ | 224,420 | $ | 12,397 | 7.37 | % | ||||||
Investments and mortgage-backed securities | 12,029 | 400 | 4.43 | % | 14,280 | 506 | 4.72 | % | ||||||||||
Federal funds sold and other investments | 4,730 | 32 | 0.90 | % | 5,132 | 143 | 3.73 | % | ||||||||||
Total interest-earning assets | 249,972 | 12,060 | 6.38 | % | 243,832 | 13,046 | 7.13 | % | ||||||||||
Non-interest-earning assets | 15,452 | 15,322 | ||||||||||||||||
Total assets | $ | 265,424 | $ | 259,154 | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Interest-bearing deposits | $ | 185,007 | 4,009 | 2.89 | % | $ | 181,024 | 4,816 | 3.55 | % | ||||||||
Short-term borrowings | 4,285 | 89 | 2.73 | % | 4,745 | 188 | 5.27 | % | ||||||||||
Long-term borrowings | 41,278 | 1,297 | 4.13 | % | 41,047 | 1,558 | 5.06 | % | ||||||||||
Total interest-bearing liabilities | 230,570 | 5,395 | 3.11 | % | 226,816 | 6,562 | 3.86 | % | ||||||||||
Non-interest-bearing liabilities | 13,345 | 13,245 | ||||||||||||||||
Total liabilities | 243,915 | 240,061 | ||||||||||||||||
Stockholders’ equity | 21,509 | 19,093 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 265,424 | $ | 259,154 | ||||||||||||||
Net interest income | $ | 6,665 | $ | 6,484 | ||||||||||||||
Interest rate spread | 3.27 | % | 3.28 | % | ||||||||||||||
Net Interest margin | 3.55 | % | 3.55 | % | ||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 108.41 | % | 107.50 | % | ||||||||||||||
(1) | Yields and rates are annualized. |
(2) | Includes nonaccrual loans. |
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For The Three Months Ended March 31, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Average Balance | Interest | Average Rate (1) | Average Balance | Interest | Average Rate (1) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||
Loans receivable, including fees (2) | $ | 234,103 | $ | 3,644 | 6.23 | % | $ | 226,020 | $ | 4,060 | 6.73 | % | ||||||
Investments and mortgage-backed securities | 12,720 | 128 | 4.02 | % | 12,951 | 151 | 4.67 | % | ||||||||||
Federal funds sold and other investments | 6,463 | 5 | 0.31 | % | 9,156 | 70 | 3.04 | % | ||||||||||
Total interest-earning assets | 253,286 | 3,777 | 5.97 | % | 248,127 | 4,281 | 6.90 | % | ||||||||||
Non-interest-earning assets | 14,368 | 5,948 | ||||||||||||||||
Total assets | $ | 267,654 | $ | 254,075 | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Interest-bearing deposits | $ | 184,936 | 1,270 | 2.79 | % | $ | 184,423 | 1,613 | 3.50 | % | ||||||||
Short-term borrowings | 3,011 | 23 | 3.06 | % | 1,752 | 22 | 4.96 | % | ||||||||||
Long-term borrowings | 42,300 | 425 | 4.02 | % | 43,859 | 533 | 4.87 | % | ||||||||||
Total interest-bearing debt | 230,247 | 1,718 | 3.02 | % | 230,034 | 2,168 | 3.77 | % | ||||||||||
Non-interest-bearing debt | 12,504 | 5,034 | ||||||||||||||||
Total liabilities | 242,751 | 235,068 | ||||||||||||||||
Stockholders’ equity | 24,903 | 19,007 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 267,654 | $ | 254,075 | ||||||||||||||
Net Interest Income | $ | 2,059 | $ | 2,113 | ||||||||||||||
Interest rate spread | 2.95 | % | 3.13 | % | ||||||||||||||
Net interest margin | 3.30 | % | 3.41 | % | ||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 110.01 | % | 107.87 | % | ||||||||||||||
(1) | Yields and rates are annualized. |
(2) | Includes nonaccrual loans. |
Provision for Loan Losses. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management to provide for loan losses. The components of the allowance for loan losses represent an estimation done pursuant to either Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” or SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The adequacy of the allowance for loan losses is determined through a continuous review of the loan and lease portfolio and considers factors such as prior loss experience, type of collateral, industry standards, amount and type of past due loans in Patapsco Bancorp’s loan portfolio, current economic conditions, both national and local, and other factors unique to particular loans and leases in the portfolio. Patapsco Bancorp’s management periodically monitors and adjusts its allowance for loan losses based upon its analysis of the loan portfolio.
The provision for loan losses was $891,000 in the quarter ended March 31, 2009, compared to $300,000 for the quarter ended March 31, 2008. The increase in the provision is due to several factors. Non-accrual loans increased $9.6 million or 424% to $11.9 million at March 31, 2009 from $2.3 million at March 31, 2008. In addition, economic activity slowed significantly in the current quarter as the U.S. economy continues to be in a deep recession. This has resulted in increased stress on the Company’s loan portfolio, which has also led to a higher than normal level of loan modifications that have allowed our customers to better service their loans. Net charge-offs were flat at $155,000 in the current quarter versus $153,000 in the same quarter of the prior year.
Patapsco Bancorp’s allowance for loan losses as a percentage of total loans outstanding grew to 1.57% of total loans as of March 31, 2009 versus 0.80% at June 30, 2008. Patapsco Bancorp’s allowance for loan losses as a percentage of nonperforming loans was 30.6% at March 31, 2009 as compared to 72.4% at June 30, 2008. While this percentage, at first glance seems low, a strong compensating factor is that 96% of non-accrual loans are collateralized by real estate or guaranteed by the SBA at March 31, 2009. Patapsco Bancorp has concluded, after a thorough analysis of the nonperforming loan portfolio, watch list loans, delinquencies and the factors mentioned above, that the allowance is adequate at March 31, 2009.
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Activity in the allowance for loan losses is as follows (dollars in thousands):
Nine Months Ended March 31, | Three Months Ended March 31, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Allowance for loan losses, beginning of period | $ | 1,834 | $ | 1,110 | $ | 2,900 | $ | 1,478 | ||||
Provision for loan losses | 2,451 | 900 | 891 | 300 | ||||||||
Loans Charged Off: | ||||||||||||
Consumer | 413 | 208 | 130 | 83 | ||||||||
Real Estate | 1 | — | 0 | — | ||||||||
Commercial loan | 80 | 37 | 80 | 21 | ||||||||
Commercial lease | 302 | 190 | 22 | 69 | ||||||||
Total Charge-Offs | 796 | 435 | 232 | 173 | ||||||||
Recoveries: | ||||||||||||
Consumer | 55 | 27 | 17 | 7 | ||||||||
Real Estate | — | — | — | — | ||||||||
Commercial loan | 48 | 5 | 46 | 2 | ||||||||
Commercial lease | 43 | 18 | 13 | 11 | ||||||||
Total Recoveries | 146 | 50 | 76 | 20 | ||||||||
Allowance for loan losses, end of period | $ | 3,635 | $ | 1,625 | $ | 3,635 | $ | 1,625 | ||||
The following table sets forth information with respect to the Company’s non-performing assets at the dates indicated.
At March 31, 2009 | At June 30, 2008 | |||||||
(dollars in thousands) | ||||||||
Loans accounted for on a non-accrual basis: (1) | ||||||||
Real estate: | ||||||||
Residential | $ | 134 | $ | 81 | ||||
Commercial | 2,304 | — | ||||||
Construction | 5,232 | 1,989 | ||||||
Consumer | 166 | 6 | ||||||
Commercial Loan/Leases | 4,034 | 457 | ||||||
Total | $ | 11,870 | $ | 2,533 | ||||
Accruing loans which are contractually past due 90 days or more | $ | — | $ | — | ||||
Total non-performing loans | $ | 11,870 | $ | 2,533 | ||||
Percentage of total loans | 5.12 | % | 1.10 | % | ||||
Troubled debt restructurings | $ | 6,450 | $ | 1,550 | ||||
Other non-performing assets (2) | $ | — | $ | 7 | ||||
(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 collectability of the loan. |
(2) | Other non-performing assets represent property acquired by the Company through foreclosure or repossession. |
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At March 31, 2009, nonaccrual loans included construction loans totaling $5.2 million consisting of $2.0 million in residential construction and development loans, a $2.4 million loan collateralized by commercial and residential lots and an $846,000 builder line of credit. There are specific reserves totaling $1.6 million set aside for non-accrual construction loans. Commercial real estate includes $1.4 in mixed use properties and an $866,000 hotel property. All commercial real estate loans are considered well securitized. Commercial loans/leases include a $2.4 million loan supporting a customer’s various business interests including commercial properties. In addition, this category includes two loans amounting to $980,000 to customers operating retail businesses, one totaling $472,000 which includes an SBA guarantee.
During the nine months ended March 31, 2009, the Company modified the terms of six loans totaling $6.5 million resulting in troubled debt restructurings. In each case but one, the interest rate was lowered amongst other concessions to reduce the cash flow requirements of the loans to the borrowers to allow them to deal with lower cash flows generated by their businesses due to the recession. In the other case, the loan whose balance is $866,000 at March 31, 2009, has had all payments deferred giving the borrower time to sell the collateral the value of which well exceeds the loan balance. One commercial business loan, in the amount of $704,000, is guaranteed by the SBA. The Company currently expects to collect all principal and interest on these loans based on the modified loan terms.
The Company accepted a $2 million note receivable from Bradford Mid-Tier Company as payment for the merger termination fee. See Note 13, “Termination of Merger Agreement,” to the consolidated financial statements. Effective December 31, 2008, Bradford Mid-Tier Company renewed the note payable to the Company. The renewed promissory note matures on December 31, 2011 and provides for interest equal to the prime rate but no less than 3.25%. In the event Bradford Mid-Tier Company elects to defer interest payments in 2010 or 2011, the interest rate will be increased to the prime rate plus 0.70%. Repayment of this debt is guaranteed by the FDIC under the FDIC’s Temporary Liquidity Guarantee Program.
Noninterest Income. Patapsco Bancorp’s noninterest income consists of deposit fees, service charges, income from bank owned life insurance (“BOLI”) and gains. During the third quarter of 2008, the Company recognized a $2,000,000 merger termination fee. Total noninterest income decreased by $2.0 million in both the year to date and quarterly comparisons. Fees and service charges had a modest increase of $9,000 or 1.7% for the nine month period and a $14,000 or 8.4% increase for the quarter ended March 31, 2009 to $545,000 and $181,000, respectively compared to same periods ended March 31 2008. Other non-interest income decreased by $11,000 or 13.3% for the nine months ended March 31, 2009 to $72,000 and by $17,000 or 45.9% for the quarter ended March 31, 2009 to $20,000.
Noninterest Expenses. Total noninterest expenses increased by $350,000 or 6.3%, to $5.9 million for the nine months ended March 31, 2009 from $5.6 million for the nine months ended March 31, 2008. Compensation costs increased $299,000 or 9.3% as staffing returned to normal levels during the year to date period. Federal deposit insurance assessments increased by $186,000 or 1163% due to the higher premium rates, implementation of the proposed assessment rate hike by the FDIC and the expiration of credits recognized in the prior year. Data processing costs increased $81,000 or 35.5% due to a conversion of the Company’s primary operating systems earlier in the year.
Total noninterest expense decreased by $75,000 or 3.6% to $2.0 million for the quarter ended March 31, 2009 versus $2.1 million in the quarter ended March 31, 2008. An increase in federal deposit insurance assessments for the quarter of $179,000 was more than offset by decreases in compensation and employee benefits, professional fees and other expenses of $90,000, $69,000 and $119,000, respectively. Compensation costs were lower due to lower incentive costs and to lower staff costs due to the decision to cease origination of commercial leases. The lower level of professional fees and other expenses is due to nonrecurring prior year costs associated with the termination of the merger with Bradford Bancorp.
Income Taxes. A tax benefit of $244,000 (or 39.9% of pre-tax loss) was recorded by the Company in the current quarter versus an expense of $559,000 (or 28.4% of pre-tax income) for the same quarter of the prior year. The Company recorded an income tax benefit of $447,000 (or 40.3% of pre-tax loss) for the nine month period ended March 31, 2009 versus expense of $958,000 (or 36.7% of pre-tax income) in the same period last year.
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Liquidity and Capital Resources
An important component of the Company’s asset/liability structure is the level of liquidity available to meet the needs of customers and creditors. The Company’s Asset/Liability Management Committee has established general guidelines for the maintenance of prudent levels of liquidity. The Committee continually monitors the amount and sources of available liquidity, the time to acquire it and its cost. Management of the Company seeks to maintain an adequate level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide lower rates of return, a high level of liquidity will, to a certain extent, result in lower net interest margins and lower net income.
The Company’s most liquid assets are cash on hand, interest-bearing deposits and Federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Company’s operating, financing and investing activities during any given period. At March 31, 2009, the Company’s cash on hand and Federal funds sold totaled $12.6 million. In addition, the Company had approximately $1.4 million in interest-bearing deposits and $11.5 million of mortgage-backed and investment securities classified as available-for-sale, none of which were pledged.
The Company anticipates that it will have sufficient funds available to meet its current loan commitments of $12.7 million. These funds will be internally generated, raised through deposit operations, or borrowed. Certificates of deposit that are scheduled to mature in less than one year at December 31, 2008 totaled $74.6 million. Historically, a high percentage of maturing deposits have remained with the Company.
The Company’s primary sources of funds are deposits and proceeds from maturing investment securities and mortgage-backed securities and principal and interest payments on loans. While maturities and scheduled amortization of mortgage-backed securities and loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors.
The Company, as the holding company for the Bank, has an annual cash requirement to pay dividends on its common stock and its $5.0 million in subordinated debentures. In April 2009, the Board of Directors declared a regular cash dividend of $0.02 per share to common stockholders. Based on this dividend amount, the Company’s annual cash requirement for dividends on common stock and subordinated debentures totals approximately $473,000. In addition, during December of 2008, the Company issued $6.0 million in 5.0% preferred stock and $300,000 in 9.0% warrant preferred stock to the U.S. Treasury, with a stated annual dividend requirement of $327,000. The primary source of funds for the holding company is dividends from the Bank, as well as earnings on its investments. The amount of dividends that can be paid to the holding company from the bank is limited by the earnings and capital position of the bank. As of March 31, 2009, the holding company had cash on hand of $2.2 million.
As discussed in Note 6 – Regulatory Capital Requirements, the Bank exceeded all regulatory minimum capital requirements.
Contingencies and Off-Balance Sheet Items
The Company is party to financial instruments with off-balance sheet risk including commitments to extend credit under both new facilities and under existing lines of credit. Commitments to fund loans typically expire after 60 days, commercial lines of credit are subject to annual reviews and home equity lines of credit are generally for a term of 20 years. These instruments contain, to varying degrees, credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:
March 31, 2009 | June 30, 2008 | |||||
(dollars in thousands) | ||||||
Commitments to originate new loans | $ | 12,678 | $ | 20,087 | ||
Undisbursed lines of credit | 10,687 | 11,787 | ||||
Financial standby letters of credit | 1,392 | 2,055 |
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Contractual Obligations
The following table sets forth the Company’s contractual obligations as of March 31, 2009:
< 1 year | 1 to 3 Years | 3 – 5 Years | Over 5 Years | Total | |||||||||||
(dollars in thousands) | |||||||||||||||
Time Deposits | $ | 74,643 | $ | 32,377 | $ | 3,121 | $ | 151 | $ | 110,292 | |||||
Borrowings, including subordinated debentures | 23,200 | 8,100 | 0 | 14,000 | 45,300 | ||||||||||
Lease obligations | 182 | 361 | 329 | 1,744 | 2,616 | ||||||||||
Total Contractual Obligations | $ | 98,025 | $ | 40,838 | $ | 3,450 | $ | 15,895 | $ | 158,208 | |||||
Recent Developments
The Federal Deposit Insurance Corporation (“FDIC”) insures deposits at FDIC insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for bank failures, in which case the FDIC would take control of failed banks and ensure payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund, including requiring riskier institutions to pay a larger share of the premiums. An increase in premium assessment would increase the Company’s expenses. The Emergency Economic Stabilization Act of 2008 (“EESA”) included a provision for an increase in the amount of deposits insured by FDIC to $250,000 until December 2009. On October 14, 2008, the FDIC announced a new program – the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed a 10 basis point surcharge on the additional insured deposits. Companies have the option to opt out of this program. The Company has chosen to not opt out. The incremental cost to the Company will be immaterial. In addition, on February 27, 2009, the FDIC adopted an interim rule imposing a 20 basis point emergency special assessment on banks’ deposits on June 30, 2009. The level of this special assessment is subject to change based on pending legislation that is currently under consideration that could lower the assessment. At the twenty basis point level, the incremental cost to the Company would be approximately $400,000. The interim rule would also permit the FDIC to impose an emergency special assessment after June 30, 2009 of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
This item is not applicable as the Company is a smaller reporting company.
Item 4T. | Controls and Procedures |
Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes to Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2009 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
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Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
This item is not applicable as the Company is a smaller reporting company.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Submission of Matters to a Vote of Security Holders |
None
Item 5. | Other Information |
None
Item 6. | Exhibits |
The following exhibits are filed herewith:
Exhibit | Title | |
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PATAPSCO BANCORP, INC. | ||
Date: May 13, 2009 | /s/ Michael J. Dee | |
Michael J. Dee | ||
President and Chief Executive Officer | ||
/s/ William C. Wiedel, Jr. | ||
William C. Wiedel, Jr. | ||
Senior Vice President and Chief Financial Officer |
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