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, 2012

 

¨

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		(I.R.S. Employer
incorporation or organization)		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 x 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   ¨	Smaller Reporting Company x
(Do not check if a smaller reporting company)

 

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 15, 2012, the issuer had 1,971,843 shares of Common Stock issued and outstanding.

 

 

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition at March 31, 2012 and June 30, 2011 (Unaudited)	3
	Consolidated Statements of Operations for the Three and Nine-Month Periods Ended March 31, 2012 and 2011 (Unaudited)	4
	Consolidated Statements of Comprehensive Loss for the Three and Nine-MonthPeriods Ended March 31, 2012 and 2011 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine-Month Periods Ended March 31, 2012 and 2011 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults in Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
Signatures		36
Certifications		37

 

 

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Patapsco Bancorp, Inc. and Subsidiary

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

(in thousands except for share and per share data)

		March 31,				June 30,
		2012				2011
Assets:
Cash on hand and due from banks		$	4,162			$	3,631
Interest bearing deposits in other banks			20,602				24,838
Total cash and cash equivalents			24,764				28,469
Securities available for sale			39,753				39,814
Loans receivable, net of allowance for loan losses of $3,918
and $4,194, respectively			177,855				182,570
Securities required by law, at cost			1,823				2,286
Real estate acquired through foreclosure and other repossessed assets			2,203				1,689
Property and equipment, net			3,447				3,576
Intangible assets			103				142
Accrued interest receivable			766				857
Bank owned life insurance			2,353				2,294
Other assets			1,762				2,933
Total Assets		$	254,829			$	264,630
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing deposits		$	10,972			$	10,494
Interest bearing deposits			216,352				220,812
Total deposits			227,324				231,306
Junior subordinated debentures			5,000				5,000
Long-term debt			9,000				12,000
Accrued expenses and other liabilities			1,804				1,971
Total Liabilities			243,128				250,277
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 shares issued and outstanding			5,884				5,833
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 shares issued and outstanding			313				319
Common stock - $0.01 par value; authorized 4,000,000
shares; issued and outstanding 1,971,843 shares and
1,939,593 shares, respectively			20				19
Additional paid in capital			7,899				7,876
(Accumulated deficit)/Retained earnings, substantially restricted			(2,434	)			267
Accumulated other comprehensive income, net of taxes			19				39
Total Stockholders' Equity			11,701				14,353
Total Liabilities and Stockholders' Equity		$	254,829			$	264,630

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

Patapsco Bancorp, Inc. and Subsidiary

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

(in thousands except for per share data)		For Three Months Ended								For Nine Months Ended
		March 31,								March 31,
		2012				2011				2012				2011
Interest income:
Loans receivable, including fees		$	2,570			$	2,818			$	7,870			$	8,891
Investment securities			258				228				754				639
Federal funds sold and other investments			9				16				33				46
Total interest income			2,837				3,062				8,657				9,576
Interest expense:
Deposits			576				752				1,895				2,589
Long-term debt and junior subordinated debentures			165				189				517				670
Total interest expense			741				941				2,412				3,259
Net interest income			2,096				2,121				6,245				6,317
Provision for loan losses			2,368				1,000				3,964				2,298
Net interest (loss) income after provision
for loan losses			(272	)			1,121				2,281				4,019
Non-interest income:
Fees and service charges			144				164				467				494
Gain on sale of securities available for sale			-				94				73				161
Gain/(loss) on sale of other assets			2				-				2				(22	)
Other			31				23				72				63
Total non-interest income			177				281				614				696
Non-interest expense:
Compensation and employee benefits			925				1,009				2,742				2,951
Professional fees			163				154				632				450
Federal deposit insurance assessments			84				142				264				412
Equipment expense			57				58				168				167
Net occupancy expense			140				141				412				414
Advertising			7				9				16				29
Data processing			105				97				305				287
Amortization of core deposit intangible			13				13				39				39
Telephone, postage & delivery			59				69				194				205
Provision for losses on and cost of real estate acquired
through foreclosure			22				153				177				239
Other			224				186				601				561
Total non-interest expense			1,799				2,031				5,550				5,754
Loss before benefit from income taxes			(1,894	)			(629	)			(2,655	)			(1,039	)
Benefit from income taxes			-				(252	)			-				(421	)
Net loss			(1,894	)			(377	)			(2,655	)			(618	)
Preferred stock dividends			97				97				291				291
Net loss available to common shareholders		$	(1,991	)		$	(474	)		$	(2,946	)		$	(909	)
Basic loss per common share		$	(1.01	)		$	(0.24	)		$	(1.49	)		$	(0.47	)
Diluted loss per common share		$	(1.01	)		$	(0.24	)		$	(1.49	)		$	(0.47	)
Cash dividends declared per common share		$	-			$	-			$	-			$	-

 

See accompanying notes to consolidated financial statements.

 

 

   

Patapsco Bancorp, Inc. and Subsidiary

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

 

(in thousands)

		For Three Months Ended								For Nine Months Ended
		March 31,								March 31,
		2012				2011				2012				2011
Net loss		$	(1,894	)		$	(377	)		$	(2,655	)		$	(618	)
Other comprehensive loss: Reclassification adjustments for gains realized in net loss, net of income taxes of $0, $(37),
$0 and $(63), respectively			-				(57	)			(73	)			(98	)
Unrealized net holding loss on securities available for sale, net of income taxes of $0,
$(21), $0 and $(140), respectively			221				(33	)			27				(214	)
Total other comprehensive income (loss)			221				(90	)			(46	)			(312	)
Total comprehensive loss		$	(1,673	)		$	(467	)		$	(2,701	)		$	(930	)

 

See accompanying notes to consolidated financial statements.

 

 

Patapsco Bancorp, Inc. and Subsidiary

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

(in thousands)		For the Nine Months Ended
		March 31,
		2012				2011
Cash flows from operating activities:
Net loss		$	(2,655	)		$	(618	)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Amortization of premiums and discounts, net			220				199
Gain on sale of securities available for sale			(73	)			(161	)
Amortization of deferred loan origination fees, net of costs			(1	)			-
Provision for loan losses			3,964				2,298
Provision for loss on sale of real estate acquired through foreclosure			37				-
Net gain on sale of real estate acquired through foreclosure			(64	)			(10	)
Decrease in value of real estate acquired through foreclosure			-				167
Depreciation			191				206
Amortization of core deposit intangible			39				39
Increase in cash surrender value of bank owned life insurance			(59	)			(49	)
(Gain) loss on sale of other assets			(2	)			22
Decrease in accrued interest receivable and other assets			1,313				831
Non-cash compensation under stock-based benefit plan			14				4
Decrease in accrued expenses and other liabilities			(181	)			(131	)
Net cash provided by operating activities			2,743				2,797
Cash flows from investing activities:
Proceeds from maturity of securities available for sale and
principal repayments on mortgage-backed securities			22,085				21,727
Purchases of securities available for sale			(25,560	)			(37,662	)
Proceeds from sale of securities available for sale			3,343				2,877
Net (increase) decrease in loans receivable			(546	)			5,337
Proceeds from sale of real estate acquired through foreclosure			811				1,263
Net change in investments required by law			463				185
Purchases of property and equipment			(62	)			(71	)
Net cash provided by/(used in) investing activities			534				(6,344	)
Cash flows from financing activities:
Net (decrease)/increase in deposits			(3,640	)			6,701
Decrease in advance payments by borrowers			(342	)			(460	)
Repayments on long-term borrowings			(3,000	)			(5,100	)
Net cash (used in)/provided by financing activities			(6,982	)			1,141
Net decrease in cash and cash equivalents			(3,705	)			(2,406	)
Cash and cash equivalents at beginning of period			28,469				28,043
Cash and cash equivalents at end of period		$	24,764			$	25,637
Supplemental cash flow information:
Interest paid on deposits and borrowed funds		$	2,324			$	3,108
Income taxes paid			-				-
Loans transferred to real estate acquired through foreclosure, net			1,298			$	265

 

See accompanying notes to consolidated financial statements.

 

 

 

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 Bank’s wholly owned subsidiaries Prime Business Leasing, PFSL Holding Corp. 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, the primary operating unit of the Company, 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 and Summary of Significant Accounting Policies

 

The accompanying consolidated statement of financial condition at June 30, 2011, which has been derived from audited consolidated financial statements, and the unaudited interim 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 (“GAAP”). However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim consolidated 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, 2012 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 fiscal year ended June 30, 2011.

 

Loans Receivable

 

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay off are stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Consumer loans are generally charged off after they become more than 90 days past due. All other loans are charged off when management concludes that they are uncollectible.

 

The Company accounts for loans in accordance with ASC 310, “Receivables,” when due to a deterioration in a borrower’s financial position, the Company grants concessions that would not otherwise be considered. Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms and are considered collectible.

 

Allowance for Loan Losses

 

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) ASC Topic 450 “Contingencies”, that requires losses to be accrued when their occurrence is probable and estimable, and (2) ASC Topic 310, “Receivables,” 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 and other qualitative factors 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 reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of financial condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.

 

 

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. These factors are applied to each segment of the loan portfolio and consider the characteristics contained thereof. If circumstances differ materially from the assumptions used in determining the allowance, future adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

 

Commercial Lending - The Company originates commercial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans, lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

 

Commercial loans are generally secured with short-tem assets. However, in many cases additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, collateral brokers price opinions (“BPO’s”), etc.

 

In underwriting commercial loans, an analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of conditions affecting the borrower is performed. Analysis of the borrower’s past, present, and future cash flows is also an important aspect of the Company’s analysis.

 

Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

 

Commercial Real Estate Lending - The Company engages in commercial real estate lending in its primary market area and surrounding areas. The Company’s commercial real estate loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.

 

In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

 

Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

 

 

Commercial Real Estate Construction Lending - The Company engages in commercial real estate construction lending in its primary market area and surrounding areas. The Company’s commercial real estate construction lending consists of commercial and residential site development loans as well as commercial building construction and residential housing construction loans.

 

 

 

The Company’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as: estimated absorption rates, estimated time to complete, etc.

 

In underwriting commercial real estate construction loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

 

Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

 

Residential Lending - One-to-four family residential loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Company’s market area or with customers primarily from the market area.

 

The Company offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Company’s one-to-four-family residential originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Company’s residential loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.

 

In underwriting one-to-four family residential loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing residential loans made by the Company are appraised by independent fee appraisers. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Company has not engaged in subprime residential originations.

 

Consumer Lending - The Company offers a variety of secured and unsecured consumer loans, including home equity lines of credit, home equity loans, and loans secured by savings deposits primarily within the Company’s market area or with customers primarily from the market area.

 

Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years.

 

In underwriting home equity lines of credit, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial conditions, and credit background. The analysis is based primarily on the customer’s ability to repay and secondarily on the collateral or security.

 

Home equity lines of credit and consumer loans secured by savings deposits generally present a lower level of risk than other types of consumer loans because they are secured by the borrower’s primary residence or deposit accounts held at the Company, respectively.

 

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 a period of insignificant delay in payment if the Company expects to collect all amounts due, including past-due interest. The Company generally considers a period of insignificant delay in payment to include delinquency up to and including 90 days. Impairment is measured through a comparison of the loan’s carrying amount to 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.

 

Large groups of smaller-balance homogeneous loans are evaluated collectively for impairment. Accordingly, the Company does not separately identify individual residential first and second mortgage loans and consumer installment loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

 

 

 

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 nonaccrual status since loans are placed in nonaccrual 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. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. 

 

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weakness may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristics that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

 

In addition, federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

 

Note 4: Subsequent Events

 

In accordance with ASC Topic 855, “Subsequent Events,” management has evaluated potential subsequent events through the date the consolidated financial statements were issued for potential recognition or disclosure in the consolidated financial statements.

 

Note 5: Recent Accounting Pronouncements

 

There were no new accounting pronouncements affecting the Company during the period that were not previously disclosed.

 

Note 6: Securities Available for Sale

 

Securities available for sale are summarized as follows as of:

 

		March 31, 2012
			Amortized				Unrealized				Unrealized				Fair
(In thousands)			Cost				Gains				Losses				Value
Corporate bonds		$	5,752			$	86			($	266	)		$	5,572
U.S. Government agencies			2,000				1				-				2,001
Mortgage-backed securities, residential			8,865				98	(10)							8,953
Collateralized mortgage obligations, agencies			23,117				198				(88	)			23,227
		$	39,734			$	383			($	364	)		$	39,753

 

		June 30, 2011
			Amortized				Unrealized				Unrealized				Fair
(In thousands)			Cost				Gains				Losses				Value
Corporate bonds		$	3,000			$	-			($	45	)		$	2,955
U.S. Government agencies			12,530				10	(20)							12,520
Mortgage-backed securities, residential			4,020				78				-				4,098
Collateralized mortgage obligations, agencies			20,199				107				(65	)			20,241
		$	39,749			$	195			($	130	)		$	39,814

 

 

 

The scheduled maturities of securities available for sale at March 31, 2012 are as follows:

 

(In thousands)		Amortized Cost				Fair Value
Due  in less than one year		$	-			$	-
Due in one to five years			2,752				2,836
Due after five through ten years			3,000				2,736
Due after ten years			2,000				2,001
Mortgage-backed securities, residential			8,865				8,953
Collateralized mortgage obligations, agencies			23,117				23,227
		$	39,734			$	39,753

 

The following table shows the Company’s securities available for sales’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at:

		March 31, 2012
		Less than 12 Months								12 Months or More								Total
(In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Corporate bonds		$	897			$	(103	)		$	837			$	(163	)		$	1,734			$	(266	)
Mortgage-backed securities			3,509				(10	)			-				-				3,509				(10	)
Collateralized mortgage
obligations, agencies			6,360				(51	)			1,726				(37	)			8,086				(88	)
Total Temporarily Impaired Securities		$	10,766			$	(164	)		$	2,563			$	(200	)		$	13,329			$	(364	)

  

		June 30, 2011
		Less than 12 Months								12 Months or More								Total
(In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Corporate bonds		$	1,954			$	(45	)		$	-			$	-			$	1,954			$	(45	)
U.S. Government agencies			4,480				(20	)			-				-				4,480				(20	)
Collateralized mortgage
obligations, agencies			5,956				(65	)			-				-				5,956				(65	)
Total Temporarily Impaired Securities		$	12,390			$	(130	)		$	-			$	-			$	12,390			$	(130	)

 

 

All mortgage-backed securities and collateralized mortgage obligations in the portfolio were comprised of securities issued by U.S. Government agencies.

 

At March 31, 2012, the Company had fourteen securities in an unrealized loss position. Unrealized losses detailed above relate to ten collateralized mortgage obligations, two mortgage-backed securities, and two corporate bonds. The declines in fair value are considered temporary and are primarily due to interest rate fluctuations. The Company does not have the intent to sell these securities, and it is more likely than not, that it will not be required to sell the securities prior to their recovery. All of the individual unrealized losses are less than two percent of stockholders’ equity.

 

The carrying amount of investment securities required by law, which includes Federal Reserve Bank and Federal Home Loan Bank stocks totals $1.8 million and $2.3 million at March 31, 2012 and June 30, 2011, respectively, and such securities are considered restricted as to marketability. Management evaluates the Company’s restricted stock for impairment in accordance with ASC Topic 350, “Accounting by Certain Entities (Including With Trade Receivables) That Lend to or Finance The Activities of Others.” Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the issuer as compared to the capital stock amount for the issuer and the length of time this situation has persisted, (2) commitments by the issuer to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuer, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuer. The Company has concluded that the investment securities required by law are not impaired as of March 31, 2012.

 

 

 

Securities, issued by agencies of the federal government, with a carrying value of $4.2 million and $5.7 million on March 31, 2012 and June 30, 2011, respectively, were pledged to secure the Company’s federal funds accommodation. Securities, issued by agencies of the federal government, with a carrying value of $16.7 million and 19.3 million on March 31, 2012 and June 30, 2011, respectively, were pledged to secure the Company’s borrowing capacity at the Federal Reserve’s discount window.

 

During the three months ended March 31, 2011, $1.4 million in securities were sold at a gross gain of $94,000 using the specific identification method and there were no sales during the three month period ending March 31, 2012. During the nine months ended March 31, 2012 and 2011, $3.3 million and $2.9 million in securities were sold at a gross gain of $73,000 and $161,000, respectively, using the specific identification method.

 

Note 7: Loans and Related Allowance for Loan Losses

 

The following tables summarize the activity by segment of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment for the three and nine months ended March 31, 2012 and as of March 31, 2012 and June 30, 2011.

 

						Commercial
(in thousands)		Commercial				Real Estate				Construction				Residential				Consumer				Total
Allowance for credit losses
Beginning balance, January 1, 2012		$	2,042			$	1,785			$	732			$	105			$	255			$	4,919
Provisions			820				1,018				541	(9)							(2	)			2,368
Charge-offs			(1,542	)			(1,143	)			(703	)			-				(33	)			(3,421	)
Recoveries			32				-				-				-				20				52
Ending balance, March 31, 2012		$	1,352			$	1,660			$	570			$	96			$	240			$	3,918
Beginning balance, July 1, 2011		$	1,512			$	1,835			$	368			$	114			$	365			$	4,194
Provisions			1,830				1,114				1,077				-				(57	)			3,964
Charge-offs			(2,044	)			(1,289	)			(875	)(18)							(119	)			(4,345	)
Recoveries			54				-				-				-				51				105
Ending balance, March 31, 2012		$	1,352			$	1,660			$	570			$	96			$	240			$	3,918
Ending balance: individually
evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-
Ending balance: collectively
evaluated for impairment		$	1,352			$	1,660			$	570			$	96			$	240			$	3,918

 

(in thousands)						Commercial
As of March 31, 2012		Commercial				Real Estate				Construction				Residential				Consumer				Total
Loans receivable:
Ending balance		$	47,805			$	50,941			$	10,186			$	62,028			$	10,813			$	181,773
Ending balance: individually
evaluated for impairment		$	3,385			$	3,094			$	2,362			$	-			$	-			$	8,841
Ending balance: collectively
evaluated for impairment		$	44,420			$	47,847			$	7,824			$	62,028			$	10,813			$	172,932

 

 

(in thousands)							Commercial
As of June 30, 2011			Commercial				Real Estate				Construction				Residential				Consumer				Total
Allowance for credit losses:
Ending balance		$	1,512			$	1,835			$	368			$	114			$	365			$	4,194
Ending balance: individually
evaluated for impairment		$	924			$	271			$	-			$	-			$	-			$	1,195
Ending balance: collectively
evaluated for impairment		$	588			$	1,564			$	368			$	114			$	365			$	2,999

 

 

(in thousands)							Commercial
As of June 30, 2011			Commercial				Real Estate				Construction				Residential				Consumer				Total
Loans receivable:
Ending balance		$	53,422			$	52,367			$	12,281			$	56,068			$	12,626			$	186,764
Ending balance: individually
evaluated for impairment		$	4,064			$	3,786			$	1,335			$	615			$	-			$	9,800
Ending balance: collectively
evaluated for impairment		$	49,358			$	48,581			$	10,946			$	55,453			$	12,626			$	176,964

 

 

The following table sets forth information with respect to the Company’s impaired loans by portfolio class as of March 31, 2012 and June 30, 2011:

 

		March 31, 2012												June 30, 2011
(in thousands)		Recorded				Unpaid Principal				Related				Recorded				Unpaid Principal				Related
		Investment				Balance.				Allowance				Investment				Balance.				Allowance
Impaired loans with no related    allowance recorded:
Commercial		$	3,385			$	5,277			$	-			$	433			$	440			$	-
Commercial real estate			3,094				4,237				-				2,239				2,702				-
Construction			2,362				3,082				-				1,335				1,681				-
Residential			-				-				-				615				615				-
Impaired loans with an allowance  recorded:
Commercial		$	-			$	-			$	-			$	3,631			$	3,731			$	924
Commercial real estate			-				-				-				1,547				1,547				271
Total impaired loans:
Commercial		$	3,385			$	5,277			$	-			$	4,064			$	4,171			$	924
Commercial real estate			3,094				4,237				-				3,786				4,249				271
Construction			2,362				3,082				-				1,335				1,681				-
Residential			-				-				-				615				615				-

 

 

 

Average recorded investment of impaired loans and related interest income recognized for the three and nine months ended March 31, 2012 are summarized as follows:

 

		3 Months Ended March 31, 2012												9 Months Ended March 31, 2012
(in thousands)		Average Recorded				Interest Income				Cash Basis Interest				Average Recorded				Interest Income				Cash Basis Interest
			Investment				Recorded				Income				Investment				Recorded				Income
Impaired loans with no related allowance recorded:
Commercial		$	2,171			$	6			$	6			$	1,551			$	24			$	24
Commercial real estate			2,103				5				5				2,759				21				21
Construction			1,787				-				-				1,791				1				1
Residential			51				-				-				81				-				-
Impaired loans with an allowance  recorded:
Commercial		$	2,151			$	-			$	-			$	2,421			$	-			$	-
Commercial real estate			1,797				-				-				2,076				-				-
Construction			1,066				-				-				710				-				-
Total impaired loans:
Commercial		$	4,322			$	6			$	6			$	3,972			$	24			$	24
Commercial real estate			3,900				5				5				4,835				21				21
Construction			2,853				-				-				2,501				1				1
Residential			51				-				-				81				-				-

 

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. Risks Ratings One through Three are deemed “acceptable”. Four rated credits require a quarterly review, because potential weakness in some form may exist. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, may be on non-accrual, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans greater than 90 days past due are considered Substandard. Loans in the Doubtful category are on non-accrual and have a definite loss of an undetermined amount. The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as a delinquency, bankruptcy, repossession or death occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Commercial Business Loans, Commercial Real Estate Loans, Construction Loans, Residential Mortgage Loans and Consumer Loans that are greater than 30 days past due are individually reviewed on a monthly basis and reported to the Board of Directors. In addition, all Commercial Business, Commercial Real Estate, Construction Loans, Residential and Consumer Loans rated Four through Eight are evaluated with a detailed review, including plans for resolution, and presented to the Watch Committee quarterly. Loans in the Special Mention, Substandard and Doubtful categories are evaluated for impairment and are given separate consideration in the determination of the allowance. The Company engages an external consultant to conduct loan reviews every twelve to eighteen months. Generally, the external consultant randomly reviews relationships within the Commercial Business and Commercial Real Estate portfolios with an emphasis on loans over $500,000, concentrations, criticized assets, non-performing and Regulation O Loans.

 

 

 

The following table sets forth information with respect to the Company’s credit quality indicators as of March 31, 2012 and June 30, 2011.

 

(in thousands)

 

Commercial Credit Exposure

Credit Risk Profile by

Internally Assigned Grade

  

			Commercial								Commercial Real Estate								Construction								Residential
			March 31,				June 30,				March 31,				June 30,				March 31,				June 30,				March 31,				June 30,
			2012				2011				2012				2011				2012				2011				2012				2011
Pass		$	32,406			$	43,887			$	41,887			$	40,960			$	5,289			$	7,556			$	61,144			$	55,297
Special Mention			8,666				1,459				2,736				1,212				2,535				2,826				52				56
Substandard			6,591				7,031				5,392				9,067				2,362				1,899				832				715
Doubtful			142				1,045				926				1,128				-				-				-				-
Total		$	47,805			$	53,422			$	50,941			$	52,367			$	10,186			$	12,281			$	62,028			$	56,068

 

Consumer Credit Exposure

Credit Risk Profile by

Internally Assigned Grade

 

		Consumer
		March 31,				June 30,
		2012				2011
Performing		$	10,787			$	12,586
Nonperforming			26				40
Total		$	10,813			$	12,626

 

 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2012 and June 30, 2011:

 

		March 31, 2012
(in thousands)											Greater Than
			30-59				60-89				90 Days				Total								Non-
			Days				Days				and Still				Past								Accrual				Total
			Past Due				Past Due				Accruing				Due				Current				Loans				Loans
Commercial		$	99			$	484			$	-			$	583			$	43,793			$	3,429			$	47,805
Commercial real estate			1,537				-				-				1,537				46,063				3,341				50,941
Construction			-				-				-				-				7,824				2,362				10,186
Residential			173				-				-				173				61,855				-				62,028
Consumer			215				14				-				229				10,558				26				10,813
Total		$	2,024			$	498			$	-			$	2,522			$	170,093			$	9,158			$	181,773

 

		June 30, 2011 .
(in thousands)										Greater Than
			30-59				60-89				90 Days				Total								Non-
			Days				Days				and Still				Past								Accrual				Total
			Past Due				Past Due				Accruing				Due				Current				Loans				Loans
Commercial		$	648			$	2,048			$	-			$	2,696			$	46,556			$	4,170			$	53,422
Commercial real estate			337				-				-				337				48,244				3,786				52,367
Construction			-				-				-				-				10,946				1,335				12,281
Residential			363				56				-				419				55,034				615				56,068
Consumer			165				41				-				206				12,380				40				12,626
Total		$	1,513			$	2,145			$	-			$	3,658			$	173,160			$	9,946			$	186,764

 

 

The following table summarizes information relative to troubled debt restructurings by loan portfolio class:

 

(in thousands)		Pre-Modification Outstanding Recorded				Post-Modification Outstanding Recorded				Recorded
		Investment				Investment				Investment
March 31, 2012:
Commercial		$	2,681			$	2,681			$	2,640
Commercial real estate		$	1,208			$	1,208			$	1,193
Construction		$	1,722			$	1,722			$	1,241

 

During the first nine months ended March 31, 2012, the Company did not restructure any loans. A commercial land development loan totaling $1.2 million that was restructured in the past twelve months defaulted in the current period. Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan.  

 

As of March 31, 2011, there was a $1.2 million commercial land development loan and a $564,000 residential land development loan which represented defaulted troubled debt restructures. Three forbearance agreements were negotiated during fiscal year 2009, two were negotiated during fiscal year 2010 and modified during fiscal year 2011, while three were negotiated in fiscal year 2011, prior to June 30, 2011.

 

There are forbearance agreements on all loans currently classified as troubled debt restructures. The terms of these forbearance agreements vary whereby principal payments have been decreased, interest rates have been reduced, and/or the loan will be repaid as collateral is sold.

 

As a result of adopting the amendments in Accounting Standards Update No. 2011-02, the Company reassessed all troubled debt restructurings that occurred on or after the beginning of the current fiscal year of July 1, 2011, for identification as troubled debt restructurings. The Company identified no loans for which the allowance for loan losses had previously been measured under a general allowance of credit losses methodology that are now considered troubled debt restructurings in accordance with Account Standards Update No. 2011-02.

 

 

 

Note 8: Junior Subordinated Debentures

 

On October 31, 2005, Patapsco Statutory Trust I (the “Trust”), a Connecticut statutory business trust and an unconsolidated wholly-owned subsidiary of the Company, issued $5 million of capital trust pass-through securities to investors. The interest rate is fixed for the first seven years at 6.465%. Thereafter, the interest rate adjusts on a quarterly basis at the rate of the three month LIBOR plus 1.48%. Patapsco Statutory Trust I purchased $5,155,000 of junior subordinated deferrable interest debentures from the Company. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The Company has also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by the Company on or after October 31, 2010, at par. The capital securities must be redeemed upon final maturity of the subordinated debentures on December 31, 2035.

 

On May 6, 2010, the Company’s Board of Directors determined to suspend interest payments on the trust preferred securities. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory policy guidance. At March 31, 2012, cumulative unpaid interest totaled $661,000. This amount has been accrued in the consolidated financial statements.

 

Note 9: Preferred Stock

 

On December 19, 2008, as part of the Troubled Asset Relief Program’s (“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 for the Treasury 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. Under the original terms of the Purchase Agreement, the Company is prohibited from redeeming the Series A preferred stock within the first three years unless it completed a qualified equity offering whereby it received aggregate gross proceeds of not less than $6.0 million. However, the provisions introduced by the American Recovery and Reinvestment Act of 2009 indicate that once the Company notifies Treasury that it would like to redeem the Series A preferred stock, the Treasury must permit the Company to do so subject to consultation with the Federal Reserve Bank of Richmond. The Company will be subject to existing supervisory procedures for approving redemption requests for capital instruments. The Federal Reserve Bank of Richmond will weigh the Company’s desire to redeem the Series A preferred stock against the contribution of Treasury capital to the Company’s overall soundness, capital adequacy and ability to lend, including confirming that the Company has a comprehensive internal capital assessment process.

 

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.

 

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.

 

On May 6, 2010, the Company’s Board of Directors determined to suspend payment of regular quarterly cash dividends on the $6.0 million in Series A Preferred Stock and $300,000 in Series B Preferred Stock. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory policy guidance. At March 31, 2012, cumulative unpaid dividends totaled $654,000. This amount has not been accrued in the consolidated financial statements.

 

 

 

 

Note 10: Regulatory Capital Requirements

 

At March 31, 2012, the Bank met each of the three minimum regulatory capital requirements. The holding company ratios do not differ significantly from the Bank’s ratios. The following table summarizes the Bank’s regulatory capital position at March 31, 2012.

  

											For Capital								Well Capitalized Under Prompt Corrective
		Actual									Adequacy Purposes								Action Provision
(Dollars in thousands)			Amount				%				Amount				%				Amount				%
Total Capital (to Risk
Weighted Assets)		$	18,969				11.96	%		$	12,684				8.00	%		$	15,854				10.00	%
Tier 1 Capital (to Risk
Weighted Assets)		$	16,963				10.70	%		$	6,342				4.00	%		$	9,513				6.00	%
Tier 1 Capital (to Average
Assets)		$	16,963				6.67	%		$	10,176				4.00	%		$	12,720				5.00	%

 

											For Capital								Well Capitalized Under Prompt Corrective
			Actual								Adequacy Purposes								Action Provision
(Dollars in thousands)			Amount				%				Amount				%				Amount				%
Total Capital (to Risk
Weighted Assets)		$	21,432				12.94	%		$	13,250				8.00	%		$	16,563				10.00	%
Tier 1 Capital (to Risk
Weighted Assets)		$	19,335				11.67	%		$	6,625				4.00	%		$	9,938				6.00	%
Tier 1 Capital (to Average
Assets)		$	19,335				7.26	%		$	10,659				4.00	%		$	13,323				5.00	%

 

 

The following table summarizes the Bank’s regulatory capital position at June 30, 2011.

  

Note 11: 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,
		2012				2011				2012				2011
(in thousands except for per share data)
Net loss available for common
Shareholders		$	(1,991	)		$	(474	)		$	(2,946	)		$	(909	)
Basic weighted average shares outstanding			1,981				1,942				1,980				1,942
Basic loss per share		$	(1.01	)		$	(0.24	)		$	(1.49	)		$	(0.47	)
Dilutive shares			-				-				-				-
Diluted weighted average shares outstanding			1,981				1,942				1,980				1,942
Diluted loss per share		$	(1.01	)		$	(0.24	)		$	(1.49	)		$	(0.47	)

 

At March 31, 2012, there were no stock options outstanding. At March 31, 2011 there were 20,832 stock options outstanding, all of which had exercise prices above the market price of the Company’s common stock on the same date. Additionally, as the Company was in a loss position for all of the periods presented above, there was no dilutive effect to the loss per share calculation.

 

 

 

 

 

Note 12: Guarantees

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit issued by the Company. Standby letters of credit are conditional written 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 $985,000 of standby letters of credit as of March 31, 2012 and $1,421,000 outstanding as of June 30, 2011. 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 amount of the liability as of March 31, 2012 and June 30, 2011 for guarantees under standby letters of credit issued is not material.

 

Note 13: Core Deposit Intangible Asset

 

ASC Topic 350, “Intangibles - Goodwill and Other” requires that other acquired intangible assets with finite lives, such as purchased customer accounts, 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 other intangible assets may be impaired.

 

Note 14: Share-Based Compensation

 

Stock Options

 

The Company's 1996 Stock Options and Incentive Plan (Plan) was approved by the stockholders at the 1996 annual meeting. The Plan provides for the granting of options to acquire common stock to directors and key employees. Option prices are equal or greater than the estimated fair market value of the common stock at the date of the grant. In October 1996, the Company granted options to purchase 137,862 shares at $4.60 per share. There are no remaining options to be issued under this Plan.

 

The Company’s 2000 Stock Option and Incentive Plan was approved by the stockholders at the 2000 annual meeting. The Plan provides for the granting of options to acquire common stock to directors and key employees. Option prices are equal or greater than the estimated fair market value of the common stock at the date of the grant.

The Plan provides for one-fifth of the options granted to be exercisable on each of the first five anniversaries of the date of grant. Under this Plan, in August 2001 the Company granted options to purchase 99,975 shares at $6.29 per share. There are 8,971 options eligible to be issued under this plan.

 

A summary of stock option activity for the nine month period ended March 31, 2012 follows:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term in Months				Aggregate Intrinsic Value (000s)
Outstanding at June 30, 2011			20,832			$	6.29				1.11			$	-
Granted			-				-				-
Exercised			-				-				-
Forfeited or expired			20,832			$	6.29				-			$	-
Outstanding at March 31, 2012			-				-				-
Exercisable at March 31, 2012			-				-

 

Stock Incentive Plan

 

In October 2004, the shareholders of the Company approved the 2004 Stock Incentive Plan. Under this Plan, 90,000 shares of common stock are available for issuance under a variety of awards. An additional 40,146 shares were made available for issuance to settle past deferred compensation obligations. This newer Plan replaced the Director’s retirement plan that became effective in September 1995. At the time of adoption, the directors had the option to reallocate their deferred compensation assets.

 

 

 

In May 2009, the Board of Directors voted to terminate the directors deferred compensation portion of the Plan. Accordingly, 57,255 deferred shares were distributed to the respective directors in May 2010, and are now included as issued shares. The remaining portion of the Plan continues to remain in effect. As of March, 2012 there are 7,000 non-vested shares outstanding under this Plan.

 

A summary of the status of the Company’s non-vested shares as of March 31, 2012 is presented below:

 

			Common Shares				Weighted Average Grant-Date Fair Value
Non-vested as of June 30, 2011			2,250			$	7.10
Awards Granted			10,000				0.84
Vested			2,250				7.10
Forfeited			3,000				0.84
Non-vested at March 31, 2012			7,000			$	0.84

 

As of March 31, 2012 there was $4,000 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 26 months. During the nine months ended March 31, 2012, 10,000 restricted shares were issued to members of executive management. At grant date, vesting of the shares was “cliff” vesting at the end of a three year period. As of March 2, 2012, 3,000 shares were forfeited upon employment termination resulting in no compensation expense recognized for the three month period ended March 31, 2012, compared to $1,000 for the three month period ended March 31, 2011 as a result of these awards. Compensation expense totaling $1,000 and $4,000 has been recognized in the nine month periods ended March 31, 2012 and 2011, respectively, as a result of these awards.

 

Note 15: Fair Value Measurements

 

ASC Topic 825 “Financial Instruments” requires the Company to disclose estimated fair values for certain on- and off- balance sheet financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments as of March 31, 2012 and June 30, 2011.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for

a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.

 

The carrying amount and estimated fair value of financial instruments is summarized as follows at:

 

		March 31, 2012								June 30, 2011
			Carrying								Carrying
(In thousands)			Amount				Fair Value				Amount				Fair Value
Assets:
Cash and cash equivalents		$	24,764			$	24,764			$	28,469			$	28,469
Securities available for sale			39,753				39,753				39,814				39,814
Loans receivable, net			177,855				194,200				182,570				191,181
Securities required by law			1,823				1,823				2,286				2,286
Accrued interest receivable			766				766				857				857
Liabilities:
Deposits			227,324				227,697				231,306				231,358
Long-term debt			14,000				15,048				17,000				15,828
Accrued interest payable			710				710				622				622
Off balance sheet instruments:
Commitments to extend credit			-				-				-				-

 

 

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of March 31, 2012. This table excludes financial instruments for which the carrying amount approximates fair value.

   

										(Level 1)				(Level 2)				(Level 3)
March 31, 2012		Carrying Amount				Fair Value				Quoted Prices in Active Markets for Identical Assets or Liabilities				Significant Other Observable Inputs				Significant Other Unobservable Inputs
Financial instruments – Assets
Loans receivable, net		$	177,855			$	194,200			$	-			$	-			$	194,200
Financial instruments - Liabilities
Deposits			227,324				227,697				142,441				85,256				-
Long-term debt			14,000				15,048				-				15,048				-

 

 

Cash and Cash Equivalents - Due from Banks, Interest Bearings Deposits with Banks and Federal Funds Sold

The statement of financial condition carrying amounts for cash and due from banks, interest bearing deposits with banks and federal funds sold approximate the estimated fair values of such assets.

 

Securities Available for Sale

The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

 

Loans Receivable

Loans receivable were segmented into portfolios with similar financial characteristics. Loans were also segmented by type such as commercial, commercial real estate, construction, residential and consumer. The fair value of loans was calculated by discounting anticipated cash flows based on weighted average contractual maturity, weighted average coupon and market rates.

 

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 commercial and residential mortgage 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. Collateral values are estimated utilizing methods such as appraisals or broker price opinions and taking into consideration the timing of the valuation, the nature of the collateral and such other information as is deemed appropriate. 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 $0 and $5.2 million less their specific valuation allowances of $0 and $1.2 million as determined in accordance with ASC Topic 310 “Receivables” at March 31, 2012 and June 30, 2011, respectively.

 

Real Estate Acquired Through Foreclosure and Other Repossessed Assets

Real estate acquired through foreclosure and other repossessed assets are initially recorded at the estimated fair value, net of estimated selling costs, and subsequently at the lower of carrying cost or fair value less estimated costs to sell. Fair value is determined utilizing third party appraisals, broker price opinions or other similar methods. Fair value is updated at least annually and more often if circumstances dictate.

 

Securities required by Law

The carrying amount of securities required by law approximates its fair value.

 

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

 

 

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing deposits, interest bearing NOW accounts and statement savings accounts, is equal to the carrying amounts. The fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using market rates.

 

Long-Term Debt and Junior Subordinated Debentures

The fair value of long-term debt and junior subordinated debentures was based on the discounted value of contractual cash flows, using market rates.

 

Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value.

 

Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business, including mortgage loan commitments, undisbursed lines of credit on commercial business loans and standby letters of credit. These instruments involve, to various degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The fair values of such commitments are immaterial.

 

The disclosure of fair value amounts does not include the fair values of any intangibles, including core deposit intangibles. Core deposit intangibles represent the value attributable to total deposits based on an expected duration of customer relationships.

 

The Company complies with ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines the concept of fair value, establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. ASC Topic 820 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 of the measurement on earnings for the period.

 

ASC Topic 820 clarifies how an entity would determine fair value in an inactive market and 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. ASC Topic 820 provides additional guidance in determining when the volume and level of activity for the asset or liability has significantly decreased. It also includes guidance on identifying circumstances when a transaction may not be considered orderly. ASC Topic 820 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. This guidance 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 guidance 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.

 

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 estimates and therefore, subject to management’s judgment, and at times, may be necessary to mitigate the possibility of error or revision in the 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.

 

 

 

ASC Topic 820 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.

 

There were no asset transfers between fair value Level 1 and Level 2 for the nine months ended March 31, 2012.

 

For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

 

 

		At March 31, 2012
(In thousands)		Total				Level 1				Level 2				Level 3
Measured at fair value on a recurring basis:
Corporate bonds		$	5,572			$	-			$	5,572			$	-
U.S. Government agencies			2,001				-				2,001				-
Mortgage-backed securities, residential			8,953				-				8,953				-
Collateralized mortgage obligations, agencies			23,227				-				23,227				-
Total securities available for sale		$	39,753			$	-			$	39,753			$	-
Measured at fair value on a nonrecurring basis:
Impaired Loans		$	-			$	-			$	-			$	-
Repossessed real estate and other assets		$	90			$	-			$	-			$	90

 

		At June 30, 2011
(In thousands)		Total				Level 1				Level 2				Level 3
Measured at fair value on a recurring basis:
Corporate bonds		$	2,955			$	-			$	2,955			$	-
U.S. Government agencies			12,520				-				12,520				-
Mortgage-backed securities, residential			4,098				-				4,098				-
Collateralized mortgage obligations, agencies			20,241				-				20,241				-
Total securities available for sale		$	39,814			$	-			$	39,814			$	-
Measured at fair value on a nonrecurring basis:
Impaired loans		$	3,983			$	-			$	-			$	3,983
Repossessed real estate and other assets		$	24			$	-			$	-			$	24

 

 

 

 

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs have been used to determine fair value:

 

March 31, 2012

Fair Value Estimate

Valuation Technique

Unobservable Input

Range

Impaired loans

$

-

Appraisal of collateral (1)

Appraisal adjustments (2)

0 – 15 %

Repossessed real estate and other assets

$

90

Appraisal of collateral (1)

Appraisal adjustments (2)

0 – 15 %

  

(1)

Fair value is generally determined through independent appraisals of the underlying collateral that generally include various level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

Note 16: Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period’s presentation. Such reclasses had no impact on the Company’s operations and stockholders’ equity.

 

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 and junior subordinated debentures. 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 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, competition and the Risk Factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2011, 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 consolidated 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 statement of financial condition 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) ASC Topic 450, “Contingencies”, that requires losses to be accrued when their occurrence is probable and estimable, and (2) ASC 310, “Receivables”, 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, the size of loans relative to the allowance, the quality of the risk identification system and credit administration and local and national economic trends.

 

In accordance with the provisions of ASC 310, 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 a period of insignificant delay in payment if the Company expects to collect all amounts due, including past-due interest. The Company generally considers a period of insignificant delay in payment to include delinquency up to and including 90 days. ASC Topic 310 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.

 

ASC Topic 310 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 on non-accrual status since loans are placed on 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.

 

 

 

Real estate acquired through foreclosure and other repossessed assets are initially recorded at the estimated fair value, net of estimated selling costs, and subsequently at the lower of carrying cost or fair value less estimated costs to sell. Costs relating to holding such property are charged against income in the current period, while costs relating to improving such real estate are capitalized until a salable condition is reached.

 

Marketable equity securities and debt securities not classified as held to maturity or trading are classified as available for sale. Securities available for sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, loan demand, changes in prepayment risk and other factors. Securities available for sale are carried at fair value, with unrealized gains or losses based on the difference between amortized cost and fair value, reported net of deferred tax, as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains and losses, using the specific identification method, are included as a separate component of non-interest income. Related interest and dividends are included in interest income.  Declines in the fair value of individual securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value through either a charge to earnings or recognized in other comprehensive income depending upon the nature of the loss. 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. Other factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency or a significant deterioration in the financial condition of the issuer.

 

Deferred income taxes are reported for temporary differences between items of income or expense reported in the consolidated financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the consolidated financial statements carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution’s income tax returns. Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. As required by GAAP, available evidence is weighted heavily on cumulative losses with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryback and carryforward periods available under tax law. Based upon the available evidence, the Company recorded a valuation allowance of $2.2 million at June 30, 2011. Subsequent to recording this valuation allowance, the deferred tax asset balance was zero at June 30, 2011 and March 31, 2012. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date.

 

Comparison of Financial Condition at March 31, 2012 and June 30, 2011

 

The Company’s assets decreased $9.8 million to $254.8 million at March 31, 2012 compared to $264.6 million at June 30, 2011. Net loans declined $4.7 million or 2.6% to $177.9 million at March 31, 2012 from $182.6 million at June 30, 2011. Growth in residential mortgage loans of $6.0 million was more than offset by decreases in commercial mortgages of $1.4 million, construction loans of $2.1 million, consumer loans of $1.8 million and commercial business loans of $5.6 million. Such decreases were due primarily to soft loan demand.

 

Securities available for sale remained constant at $39.8 million as of March 31, 2012 and June 30, 2011 as maturities of $16.0 million, sales of $3.3 million and pay-downs of the mortgage-backed securities of $6.0 million were replaced by new purchases of investment securities of $25.6 million.

 

Real estate acquired through foreclosure increased $514,000 to $2.2 million as of March 31, 2012 as there were 14 properties totaling $1.3 million in additions and $811,000 that were sold at a $64,000 gain.

 

Total deposits declined $4.0 million, or 1.7%, to $227.3 million at March 31, 2012 from $231.3 million at June 30, 2011 as management lowered deposit rates more aggressively than the competition in order to reduce excess cash reserves. Interest-bearing deposits decreased $4.4 million, or 2.0%, to $216.4 million at March 31, 2012 from $220.8 million at June 30, 2011. Noninterest-bearing deposits increased $478,000 to $11.0 million at March 31, 2012. Long-term debt declined $3.0 million to $9.0 million at March 31, 2012 from $12.0 million at June 30, 2011.

 

Stockholders’ equity decreased by $2.7 million from $14.4 million at June 30, 2011 to $11.7 million at March 31, 2012 primarily reflecting the loss during the current year-to-date period.

 

 

 

Comparison of Operating Results for the Three and Nine Months Ended March 31, 2012 and March 31, 2011

 

Net Income. The Company recorded a net loss available to common shareholders of $2.0 million, or $1.01 per common share, for the quarter ended March 31, 2012 compared to net loss of $474,000, or $0.24 per common share, for the quarter ended March 31, 2011. The increased loss in the current quarter was primarily the result of a higher loan loss provision. In addition, income tax benefit was zero in the current quarter as the Company fully reserved for deferred tax assets at June 30, 2011. Accordingly, the tax benefit on the current quarter’s net loss was offset by a similar reserve.

 

For the nine months ended March 31, 2012, the Company recorded a net loss available to common shareholders of $3.0 million, or $1.49 per common share, compared to a loss of $909,000, or $0.47 per common share, for the same period in 2011 as the loan loss provision increased $1.7 million to $4.0 million in the current period from $2.3 million in the same period of the prior year. In addition, consistent with the current quarter no income tax benefit was recorded for the nine months ended March 31, 2012.

 

Net Interest Income. The Company’s net interest income decreased by $25,000, or 1.2%, comparing the quarter ended March 31, 2012 to the same period of 2011. The slight decrease in net interest income during the comparable three-month period was due to a $10.5 million decline in average earning assets from $255.7 million in the quarter March 31, 2011 to $245.1 million in the current quarter.

 

For the nine months ended March 31, 2012 net interest income declined $72,000 as average interest earning assets declined $7.1 million from $253.7 million for the nine months ended March 31, 2011 versus $246.6 million for the current year to date period.

 

Interest Income. Total interest income decreased by $225,000, or 7.3%, to $2.8 million for the quarter ended March 31, 2012 from $3.1 million for the quarter ended March 31, 2011. Total interest income for the nine months ended March 31, 2012 decreased $919,000 to $8.7 million from $9.6 million in the comparable period of the prior year. The decreases in interest income during the three and nine month periods were due to lower rates of interest earned in addition to a lower level of earning assets. The impact of lower market interest rates in the current three and nine month periods had a negative effect on the yields on earning assets. In addition, a shift in the mix of earning assets from loans to lower yielding investments and a decline in the yield on loans negatively affected the yield on average earning assets.

 

Interest income on loans receivable decreased by $248,000, or 8.8%, to $2.6 million for the quarter ended March 31, 2012 from $2.8 million for the quarter ended March 31, 2011. For the nine months ended March 31, 2012, interest income on loans declined $1.0 million to $7.9 million from $8.9 million in the same period of the prior year. The decreases in interest income on loans for the current quarter and year to date periods were due to lower yields as well as lower average loan balances. The lower yields were due to the decline in market interest rates mentioned above. The lower loan volumes were due to a continued drop in loan demand over the previous year.

 

Interest income on investment securities, including investments required by law, increased $30,000, or 13.2%, to $258,000 and by $115,000, or 18.0%, to $754,000 in the three and nine month periods ended March 31, 2012, as compared to the same periods in the prior year. The increase for the three month period was due to the increase in volume combined with an increase in yield, whereas for the nine month period the increase in volume more than offset the decline in the yield over the comparative period.

 

Interest income on federal funds sold and other investments was $7,000 lower to $9,000 for the three months ended March 31, 2012 and $13,000 lower to $33,000 in the nine month periods ended March 31, 2012 due primarily to lower volumes.

Interest Expense. Total interest expense decreased by $200,000, or 21.3%, to $741,000 for the quarter ended March 31, 2012 from $941,000 for the quarter ended March 31, 2011. For the nine month period ended March 31, 2012 total interest expense decreased $847,000 to $2.4 million from $3.3 million in the nine month period ended March 31, 2011. The decline in interest expense during the comparable three and nine month periods were due to lower rates paid on interest-bearing liabilities as well as a lower volume of borrowings.

 

Interest expense on deposits decreased by $176,000, or 23.4%, to $576,000 in the current quarter from $752,000 in the previous year’s comparable quarter. For the nine months ended March 31, 2012, interest expense on deposits decreased $694,000, or 26.8%, to $1.9 million from $2.6 million in the nine months ended March 31, 2011. The decrease in interest expense on deposits in the quarterly and year to date periods were due to a decline in rates paid on deposits combined with a lower outstanding balance of deposits. The lower rates paid on deposits reflect the lower rate environment in the current periods as well as a continued moderation of the competitive pressures.

 

 

Interest expense on long-term borrowings decreased $24,000, or 12.7%, to $165,000 for the quarter ended March 31, 2012. For the nine months ended March 31, 2012, interest expense on long-term borrowings decreased $153,000, or 22.8% to $517,000 from $670,000 for the nine months ended March 31, 2011. The decreases in interest expense in the comparable three and nine month periods were due to lower average balances outstanding offset by higher average rates.

 

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 in 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.

 

 

 

 

		Three Months Ended March 31,
		2012												2011
			Average								Average				Average								Average
			Balance				Interest				Rate(1)				Balance				Interest				Rate(1)
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, including fees (2)		$	184,798			$	2,570				5.56	%		$	195,067			$	2,818				5.78	%
Securities, including securities required by law			44,090				258				2.35	%			39,861				228				2.28	%
Federal funds sold and other investments			16,232				9				0.17	%			20,726				16				0.30	%
Total interest earning assets			245,120				2,837				4.63	%			255,654				3,062				4.79	%
Non-interest-earning assets			10,818												17,550
Total assets		$	255,938											$	273,204
Interest-bearing liabilities:
Interest bearing deposits		$	216,253				576				1.08	%		$	226,042				752				1.35	%
Long-term borrowings			14,000				165				4.71	%			17,000				189				4.46	%
Total interest-bearing liabilities			230,253				741				1.30	%			243,042				941				1.57	%
Non-interest-bearing liabilities			11,812												10,281
Total liabilities			242,065												253,323
Stockholders' equity			13,873												19,881
Total liabilities and stockholders’ equity		$	255,938											$	273,204
Net Interest Income						$	2,096											$	2,121
Interest rate spread											3.33	%											3.22	%
Net interest margin											3.47	%											3.36	%
Ratio of average interest-earning assets
to average interest-bearing liabilities											106.46	%											105.18	%

_________

(1) Yields and rates are annualized.

(2) Includes nonaccrual loans.

 

 

 

		Nine Months Ended March 31,
		2012												2011
		Average								Average				Average								Average
		Balance				Interest				Rate(1)				Balance				Interest				Rate(1)
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, including fees (2)		$	185,101			$	7,870				5.57	%		$	197,647			$	8,891				5.94	%
Securities, including securities required by law			42,984				754				2.30	%			33,016				639				2.58	%
Federal funds sold and other investments			18,517				33				0.23	%			23,024				46				0.26	%
Total interest earning assets			246,602				8,657				4.60	%			253,687				9,576				4.99	%
Non-interest-earning assets			11,046												16,928
Total assets		$	257,648											$	270,615
Interest-bearing liabilities:
Interest bearing deposits		$	216,929				1,895				1.16	%		$	222,617				2,589				1.55	%
Long-term borrowings			14,796				517				4.57	%			19,606				670				4.49	%
Total interest-bearing liabilities			231,725				2,412				1.38	%			242,223				3,259				1.79	%
Non-interest-bearing liabilities			11,447												10,675
Total liabilities			243,172												252,898
Stockholders' equity			14,476												17,717
Total liabilities and stockholders’ equity		$	257,648											$	270,615
Net interest income						$	6,245											$	6,317
Interest rate spread											3.22	%											3.20	%
Net Interest margin											3.36	%											3.32	%
Ratio of average interest-earning assets
to average interest-bearing liabilities											106.42	%											104.73	%

 ____________

(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 ASC Topic 450 and ASC 310. The adequacy of the allowance for loan losses is determined through a continuous review of the loan portfolio and considers factors such as prior loss experience, type of collateral, industry standards, amount and type of past due loans in the Company’s loan portfolio, current economic conditions, both national and local, and other factors unique to particular loans and leases in the portfolio. The Company’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 $2.4 million in the quarter ended March 31, 2012, compared to $1.0 million for the quarter ended March 31, 2011. During the quarter ended March 31, 2012, the Company’s management determined that several impaired loans required higher specific reserves based on the most recent values of the collateral securitizing the loan. Further, management decided to charge off all of the specific reserves established on impaired loans, based on recommendations from regulators, which caused the historical loss ratios to increase thus increasing the calculation of required loan loss reserves since a key component of the calculation involves the historical loss ratio. The Company’s allowance for loan losses as a percentage of total loans was 2.16% as of March 31, 2012 versus 2.25% at June 30, 2011. Patapsco Bancorp’s allowance for loan losses as a percentage of nonperforming loans was 42.78% at March 31, 2012 as compared to 42.2% at June 30, 2011. Setting the allowance at this level takes into consideration that 95% of non-performing loans are collateralized by real estate at March 31, 2012. In consideration of the appropriate level for the allowance for loan losses, downward adjustments were made to values established by real estate appraisals, where warranted, taking into consideration the age of the appraisal and the nature of the collateral. These adjusted appraisal values, which required management’s judgment, were used to develop estimated losses and related specific loss reserves within the allowance for loan losses. The Company has concluded, after a thorough analysis of the nonperforming loan portfolio, watch list loans, delinquencies and other factors, that the allowance is adequate at March 31, 2012.

 

The following table sets forth information with respect to the Company's non-performing assets at the dates indicated.

 

		March 31,				June 30,
(in thousands)		2012				2011
Loans accounted for on a non-accrual basis (1)		$	9,158			$	9,946
Accruing loans that are contractually past due 90 days or more			-				-
Total non-performing loans			9,158				9,946
Other non-performing assets (2)			2,203				1,689
Total non-performing assets		$	11,361			$	11,635

(1)

Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely. Payments received on a nonaccrual 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. Of the $9,158 and $9,946 of non-accrual loans, $5,074 and $5,324 were considered troubled debt restructurings as of March 31, 2012 and June 30, 2011, respectively.

(2)

Other nonperforming assets represent property acquired through foreclosure or repossession.

 

Refer to Note 7 of the Consolidated Financial Statements for a discussion of troubled debt restructurings.

 

The following table reflects the activity in non-performing loans for the nine months ended March 31, 2012:

 

(in thousands)

 

Balance June 30, 2011		$	9,946
Added to non-accrual during the year to date			6,960
Paid off/down			(1,487	)
Brought to accrual status			(751	)
Transferred to real estate acquired through foreclosure			(1,298	)
Charged-Off			(4,120	)
Net change in non-accrual Consumer & Residential Mortgages, and all other			(92	)
Balance March 31, 2012		$	9,158

 

At March 31, 2012, non-accrual construction loans totaled $2.4 million and consisted of a $1.0 million commercial land development loan, $1.1 residential development loan and a $221,000 residential land development loan. Non-accrual commercial real estate loans include a $1.5 million strip shopping center loan, $407,000 in residential investment loans, $646,000 warehouse building loan, and $770,000 in mixed use commercial mortgage loans. Non-accrual commercial loans include a $1.3 million loan supporting a borrower’s various business interests including commercial properties, a $1.2 million mixed use industrial property loan and several other smaller loans totaling approximately $900,000.

 

 

 

Noninterest Income. The Company’s non-interest income consists of deposit fees, service charges, income from bank owned life insurance (“BOLI”) and gains. Total non-interest income decreased by $104,000, or 37.0%, to $177,000 in the three month period ended March 31, 2012 as the prior year’s quarter included $94,000 in gains on the sale of investment securities. Fees and service charges decreased $20,000 during this period as fees from the Company’s leasing business declined due to the run-off of that portfolio. For the nine months ended March 31, 2012, total non-interest income was $82,000 lower than the prior year due to the prior year including $161,000 in gains on sale of securities as compared to only $73,000 in the current year.

 

Noninterest Expenses. Total non-interest expenses decreased by $232,000, or 11.4%, to $1.8 million for the quarter ended March 31, 2012 from $2.0 million for the quarter ended March 31, 2011. Compensation costs decreased $84,000, or 8.3%, as staff costs were lower due to staff reductions and open positions. Federal deposit insurance assessments were $58,000 lower due to lower rates that went into effect April 1, 2011. The provision for losses on and cost of real estate acquired through foreclosure decreased $131,000 in the current quarter from $153,000 in the previous year’s quarter due to decreased foreclosure activity. For the nine months ended March 31, 2012, non-interest expenses decreased by $204,000, or 3.5%, as compared to the prior period. Compensation costs decreased $209,000, as staff costs were lower due to staff reductions and open positions. Federal deposit insurance assessments were $148,000 lower due to lower rates that went into effect April 1, 2011. The provision for losses on and cost of real estate acquired through foreclosure decreased $62,000 in the current nine month period from $239,000 in the previous year’s comparative period due to decreased foreclosure activity. These declines were partially offset by increases in professional fees. Professional fees were $182,000, or 40.4%, higher for the nine months ended March 31, 2012 compared to the prior period due to legal costs associated with collection activity.

 

Income Taxes. Income tax expense was zero versus a tax benefit of $252,000 (or 40.1% of pre-tax loss) for the three month periods ended March 31, 2012 and 2011, respectively. For the nine month ended March 31, 2012, income tax expense was zero versus a tax benefit of $421,000 (or 40.5% of pre-tax loss) for the same period in the prior year. Income tax expense was zero in the current three and nine month periods due to a taxable loss in each period and the Company fully reserved for its deferred tax asset as of March 31, 2012 and June 30, 2011. Accordingly, the tax benefit on the net loss for three and nine months ended March 31, 2012 was offset by a similar reserve.

 

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 source of available liquidity, the time to acquire it and its cost. Management of the Company seeks to maintain a relatively high 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, the Company's relatively high liquidity will, to a certain extent, result in lower rates of return on assets.

 

The Company's most liquid assets are cash on hand and due from banks, 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, 2012, the Company's cash on hand and due from banks and interest-bearing deposits totaled $24.8 million. In addition, the Company has approximately $39.8 million of investment securities classified as available for sale, $16.7 million of which are pledged as collateral at the Federal Reserve Bank’s discount window and $4.2 million of which are pledged as collateral for the Company’s federal funds line of credit.

 

The Company anticipates that it will have sufficient funds available to meet its current loan commitments of $10.6 million and unused lines of credit of $9.0 million. Certificates of deposit that are scheduled to mature in less than one year at March 31, 2012 totaled $40.2 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 of approximately $654,000 for the payment of preferred dividends, as well as, interest payments on the $5.0 million in junior subordinated debentures. The only source of funds for the holding company is dividends from the Bank. The amount of dividends that can be paid to the holding company from the Bank is limited by the earnings of the Bank.

 

 

 

On May 6, 2010, the Company’s Board of Directors determined to suspend regular quarterly cash dividends on the $6.0 million in Series A Preferred Stock and $300,000 in Series B Preferred Stock. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by regulatory policy guidance.

 

On May 6, 2010, the Company’s Board of Directors determined to suspend interest payments on the trust preferred securities. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by regulatory policy guidance.

 

Under the terms of its trust preferred securities and its Series A and Series B preferred stock, while it has deferred dividends on the trust preferred securities and suspended dividends on its Series A and Series B preferred stock, it generally may not declare or pay any dividends or distributions on, or repurchase, its common stock.

 

The Bank had $63.5 million in borrowing capacity with the Federal Home Loan Bank of Atlanta, with $9.0 million in borrowings outstanding, at March 31, 2012. These borrowings are secured by the Bank’s stock in the Federal Home Loan Bank of Atlanta and other eligible assets. In addition, the Bank has $16.4 million in borrowing capacity at the Fed’s discount window at March 31, 2012. And finally, the Bank has a $4.0 million line of credit, none of which was outstanding at March 31, 2012, with Pacific Coast Bankers Bank.

 

As discussed in Note 10 - Regulatory Capital Requirements, the Bank and the holding company 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, 2012				June 30, 2011
(in thousands)
Commitments to originate new loans		$	10,624			$	8,645
Undisbursed lines of credit			9,042				10,230
Financial standby letters of credit			985				1,421

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

This item is not applicable as the Company is a smaller reporting company.

 

Item 4. 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 and nine months ended March 31, 2012 that have materially affected or are reasonable likely to materially affect the Company’s internal control over financial reporting.

 

 

 

 

 

Part II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

None.

 

Item 1A. Risk Factors

For information regarding the Company's risk factors, see Item 1A in the Company's Annual Report on Form 10-K for the year ended June 30, 2011.  There have been no material changes to the Risk Factors disclosed in Item 1A of the Company's Annual Report on Form 10-K for the year ended June 30, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None

 

Item 6. Exhibits

 

(a)

Exhibits

 

The following exhibits are filed herewith:

 

Exhibit Number		Title
3.1		Articles of Incorporation of Patapsco Bancorp, Inc. and Articles Supplementary (1)
3.2		Bylaws of Patapsco Bancorp, Inc., as amended (2)
4.1		Form of Common Stock Certificate of Patapsco Bancorp, Inc. (3)
4.2		Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Patapsco  Bancorp, Inc. (4)
4.3		Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (4)
4.4		Form of warrant to purchase 300.003 shares of common stock of Patapsco Bancorp, Inc. (4)
4.5		Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series B, of Patapsco Bancorp, Inc. (4)
4.6		Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series B (4)
31.1		Rule 13a-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Chief Financial Officer
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to §906 of Sarbanes Oxley Act
101*		The following materials from Patapsco Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Loss; (iv) Consolidated Statements of Cash Flows; and (v) related Notes, tagged as blocks of text.

 

 

(1)	Incorporated herein by reference from the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2000 (File No. 0-28032).

 

(2)	Incorporated herein by reference from the Company’s Current Report on Form 8-K for the event on July 23, 2008, filed with the SEC on July 25, 2008 (File No. 0-28032).

 

(3)	Incorporated herein by reference from the Company’s Registration Statement on Form 8-A filed with the SEC on April 25, 2006 (File No. 0-28032).

 

(4)	Incorporated by reference from the Company’s Current Report on Form 8-K for the event on December 18, 2008, filed with the SEC on December 23, 2008 (File No. 0-28032).

* Furnished, not filed.

 

  

Signatures

 

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	PATAPSCO BANCORP, INC.
Date: May 15, 2012
	/s/ Michael J. Dee
	Michael J. Dee
	President and Chief Executive Officer
	/s/ John M. Wright
	John M. Wright
	Senior Vice President and Chief Financial Officer