<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10 - QSB
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
------ Exchange Act of 1934
For the quarterly period ended September 30, 1996
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 Small Business Issuer 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
------ ------
As of November 5, 1996, the issuer had 362,553 shares of Common Stock
issued and outstanding.
Traditional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE>
CONTENTS
--------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item I. Financial Statements
Consolidated Statements of Financial Condition at September 30, 1996
and June 30, 1996.................................................................... 2
Consolidated Statements of Income for the Three Month
Periods Ended September 30, 1996 and 1995............................................ 3
Consolidated Statements of Cash Flows for the Three Month
Periods Ended September 30, 1996 and 1995............................................ 4-5
Notes to Consolidated Financial Statements........................................... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 9-16
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.................................................................... 17
Item 2. Changes in Securities................................................................ 17
Item 3. Defaults Upon Senior Securities...................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................. 17
Item 5. Other Information.................................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
SIGNATURES .................................................................................... 18
</TABLE>
<PAGE>
Patapsco Bancorp, Inc. and Subsidiary
Dundalk, Maryland
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------ ------------
(unaudited)
<S> <C> <C>
Assets
------
Cash:
On hand and due from banks $ 528,357 400,286
Interest bearing deposits in other banks 42,489 229,290
Federal funds sold 8,265,810 6,794,889
Investment securities, at fair value 4,463,318 4,423,767
Mortgage-backed securities, at fair value 8,105,593 12,777,828
Loans receivable, net 55,216,181 52,031,297
Investment in securities required by law,
at cost 592,050 490,500
Ground rents owned, at cost 41,200 41,200
Real estate acquired through foreclosure, net 31,081 31,081
Property and equipment, net 1,060,156 1,028,690
Deferred income taxes 34,000 --
Accrued interest, prepaid expenses and other assets 621,152 601,118
------------ ------------
Total assets $79,001,387 78,849,946
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings deposits $64,867,691 64,156,888
Advance payments by borrowers for taxes
insurance and grounds rents 348,069 1,189,735
Accrued expenses and other liabilities 965,044 605,180
Deferred income taxes -- 597,000
------------ ------------
Total liabilities 66,180,804 66,548,803
============ ============
Stockholders' equity:
Common stock $0.01 par value: authorized
4,000,000 shares: issued and outstanding
362,553 shares 3,626 3,626
Additional paid-in capital 6,754,240 6,754,240
Contra equity - ESOP (522,072) (522,072)
Retained income, substantially restricted 6,649,520 6,172,405
Unrealized net holding losses on
available-for-sale portfolios, net of taxes (64,731) (107,056)
------------ ------------
Total stockholders' equity 12,820,583 12,301,143
------------ ------------
Total liabilities and
stockholders equity $79,001,387 78,849,946
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
DUNDALK, MARYLAND
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For Three Months Ended
September 30,
------------------------
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
Interest income:
Loans receivable $1,097,474 820,043
Mortgage-backed securities 169,969 250,245
Investment securities 64,620 213,384
Federal funds sold 94,394 15,135
Dividends on securities required by law 8,956 8,963
---------- ----------
Total interest income 1,435,413 1,307,770
---------- ----------
Interest expense:
Savings deposits 681,473 710,437
Advances from Federal Home
Bank of Atlanta -- 74,101
---------- ----------
Total interest expense 681,473 784,538
---------- ----------
Net interest income 753,940 523,232
Provision for losses on loans 60,000 3,000
---------- ----------
Net interest income after provision
for losses on loans 693,940 520,232
---------- ----------
Noninterest income:
Fees and service charges 46,358 25,896
Net gain on sales of securities and loan 1,844 --
Other 4,616 1,779
---------- ----------
Total noninterest income 52,818 27,675
---------- ----------
Noninterest expenses:
Compensation and employee benefits 299,043 287,504
Insurance 468,123 47,668
Professional fees 27,000 28,739
Equipment expense 26,497 26,242
Net occupancy costs 21,524 20,889
Advertising 10,116 9,993
Data processing 21,864 21,127
Other 72,524 53,376
---------- ----------
Total noninterest expense 946,691 495,538
---------- ----------
Income (loss) before provision
(benefit) for income taxes (199,933) 52,369
Provision (benefit) for income taxes (677,049) 21,583
---------- ----------
Net income $ 477,116 30,786
========== ==========
Net income per share $ 1.42 n/a
========== ==========
Weighted average number of
shares outstanding 336,449 n/a
========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Patapsco Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 477,116 30,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 28,285 27,061
Provision for losses on loans 60,000 3,000
Amortization of premiums and discounts, net 5,029 (25,781)
Deferred loan origination fees, net of costs 20,492 9,915
Gain on sales of mortgage-backed securities (1,844) --
Loss on sales of loans -- 2,344
Loans originated for sale, net -- (272,794)
Proceeds from sale of mortgage loans
originated for sale -- 270,250
Decrease in deferred income taxes (631,000) (17,845)
Decrease in taxes recoverable -- 204
Increase in accrued interest on investments,
prepaid expenses and other assets (20,034) (123,337)
Increase in accrued expenses and other
liabilities 359,864 118,108
-------------- --------------
Net cash provided by operating
activities 297,908 21,911
-------------- --------------
Cash flows from investing activities:
Loan principal disbursements (3,427,612) (1,641,000)
Loan principal repayments 1,921,405 988,146
Purchase of loan participations (390,500) (182,410)
Purchase of whole loans (1,441,005) --
Purchase of property and equipment (59,751) (21,244)
Sale of mortgage-backed securities available-for-sale 4,335,784 --
Principal repayments on:
Mortgage-backed securities available-for-sale 306,825 137,422
Mortgage-backed securities held-to-maturity -- 556,995
-------------- --------------
Net cash provided by (used in)
investing activities 1,245,146 (162,091)
-------------- --------------
Cash flows from financing activities:
Net increase in savings accounts 710,803 386,747
Increase in drafts payable -- 247,057
Decrease in advance payments by borrowers for
taxes, insurance and ground rents (841,666) (805,903)
-------------- --------------
Net cash used in investing
activities (130,863) (172,099)
-------------- --------------
</TABLE>
continued
4
<PAGE>
Patapsco Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Net increase (decrease) in cash and cash
equivalents $ 1,412,191 (312,279)
Cash and cash equivalents at beginning of period 7,424,465 2,482,154
-------------- --------------
Cash and cash equivalents at end of period $ 8,836,656 2,169,875
============== ==============
Supplemental information:
Interest paid on savings deposits and
borrowed funds $ 683,107 783,862
Income taxes paid 5,400 --
============== ==============
Decrease (increase) in unrealized holding losses
on securities available-for-sale, net of income
tax effect $ 42,325 (17,781)
============== ==============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PATAPSCO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: PATAPSCO BANCORP, INC.
Patapsco Bancorp, Inc. (the "Company") was incorporated under the laws of the
State of Maryland in November, 1995 for the purpose of serving as the holding
company of Patapsco Federal Savings and Loan Association ("Association") upon
its conversion from mutual to stock form ("Stock Conversion") and of The
Patapsco Bank (the "Bank") following the Association's conversion to a Maryland
chartered commercial bank ("Bank Conversion"). On April 1, 1996, the Company
completed its Stock Conversion and issued 362,553 shares of common stock, par
value $.01 per share for gross proceeds of $7.3 million and net proceeds of $6.8
million. Immediately following the Stock Conversion, the Company purchased all
of the capital stock of the Association for $3.4 million or 50% of the net
proceeds. All references to the Company prior to April 1, 1996, except where
otherwise indicated are to the Association.
NOTE 2: THE PATAPSCO BANK
On September 30, 1996, the Association completed its conversion from a federally
chartered stock savings and loan association to a Maryland chartered commercial
bank known as The Patapsco Bank. The Bank is regulated by The Federal Reserve
Bank of Richmond ("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. The Bank conducts operations through one office located at
1301 Merritt Boulevard, Dundalk, Maryland 21222.
NOTE 3: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-QSB and therefore, do not include
all disclosures necessary for a complete presentation of the statements of
condition, statements of operations and statements of cash flows in conformity
with generally accepted accounting principles. However, all adjustments which
are, in the opinion of management, necessary for the fair presentation of the
interim financial statements have been included. The results of operations for
the three months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the entire year.
6
<PAGE>
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
In March, 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Earlier application is permitted. SFAS 121 will
require, among other things, that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management adopted the provisions of SFAS 121 as of
July 1, 1996, and the adoption of SFAS 121 did not have a material impact on the
Company's consolidated financial statements.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
Accounting for Mortgage Servicing Rights (SFAS 122). SFAS is effective for
years beginning after December 15, 1995. The Statement requires among other
provisions, that the Company capitalize the estimated fair value of servicing
rights on loans originated for sale, and amortize such amount over the estimated
servicing life of the loan. The Company adopted the provision of SFAS 122 as of
July 1, 1996. Adoption of SFAS 122 did not have a material impact on the
Company's consolidated financial statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In November 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 Accounting for Awards of Stock-Based Compensation to Employees (SFAS
123). SFAS 123 is effective for years beginning after December 15, 1995. The
Statement defines a fair value-based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for an employee stock option or similar equity instrument,
and for all of their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value-based method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees (Opinion 25). Under the fair value-
based method, compensation cost is measured at the date of grant date based on
the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. Most fixed stock option plans, the most common type of
stock compensation plan, have no intrinsic value at grant date, and under
Opinion 25 no compensation cost is recognized for them. Compensation cost is
recognized for other types of stock based compensation plans under Option 25,
including plans with variable, usually performance-based, features. SFAS 123
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them. Management adopted the
7
<PAGE>
provisions of SFAS 123 as of July 1, 1996 using the intrinsic value-based method
and believes that the adoption will not have a material impact on the Company's
consolidated financial statements. The Company will provide disclosure about
its stock-based employee compensation plans in its 1997 consolidated financial
statements, as required by SFAS 123.
NOTE 4: CASH AND CASH EQUIVALENTS
Cash equivalents include short-term investments which consists of Federal funds
sold. Cash equivalents and other liquidity and short-term investments are
carried at cost, which approximates market value.
NOTE 5: NET INCOME PER SHARE
Net income per share for the quarter ended September 30, 1996 is computed based
on 336,449 weighted average shares of common stock outstanding.
NOTE 6: REGULATORY CAPITAL REQUIREMENTS
At September 30, 1996, the Bank met each of the three minimum regulatory capital
requirements. The following table summarizes the Bank's regulatory capital
position at September 30, 1996:
<TABLE>
<CAPTION>
Risk-based capital ratios
-------------------------------
Total Leverage
Tier 1 Capital Ratio
-------------------------------
<S> <C> <C> <C>
Actual 28.93% 29.69% 13.14%
Minimum 4.00% 8.00% 4.00%
- -----------------------------------------------------------------------
Excess 24.93% 21.69% 9.14%
- -----------------------------------------------------------------------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPACT ON RESULTS OF OPERATIONS BASED ON RECENTLY ENACTED FEDERAL GOVERNMENT
- ----------------------------------------------------------------------------
LEGISLATION
- -----------
Reversal of Tax Bad Debt Recapture. On August 20 1996, Federal
legislation was enacted into law which provided that savings and loan
associations that convert to commercial banks will not be required to recapture
the portion of tax bad debt reserve accumulated prior to 1988. On September 30,
1996, the Association converted to a Bank and the Company reversed $600,000 of
the $740,000 tax expense previously recorded in fiscal 1995 when the
Association's Board of Directors made the determination to convert to a Bank.
The reversal of the tax bad debt reserve as described above was reflected as a
reduction of tax expense during the quarter ended September 30, 1996.
Special Savings Association Insurance Fund ("SAIF") Assessment. On
September 30, 1996, Federal legislation was enacted and signed into law which
provides a resolution to the disparity in the Bank Insurance Fund and SAIF
premiums. In particular, the SAIF-insured institutions, such as the Bank, will
pay a one-time assessment of 65.7 cents on every $100 of deposits held at March
31, 1995. Such payment is due no later than November 29, 1996. As a result of
the new law the Company will be required to pay approximately $415,000.
Assuming the special assessment is tax deductible, the cost, net of income tax
benefits, will be approximately $255,000. The Company recorded the one-time
charge to earnings during the quarter ended September 30, 1996. Also, beginning
January 1, 1997, the current annual minimum SAIF premium of 23 basis points will
be reduced to approximately 6.5 basis points.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND JUNE 30, 1996
The Company's assets increased by $151,000 or 0.2% to $79.0 million at
September 30, 1996 from $78.8 million at June 30, 1996. During the quarter
ended September 30, 1996, the Company continued to restructure its balance sheet
by emphasizing the origination and to a lesser extent the purchase of loans, and
reducing its investment in mortgage-backed securities. The Company's net loans
receivable increased by $3.2 million or 6.1% to $55.2 million at September 30,
1996 from $52.0 million at June 30, 1996. The Company's mortgage-backed
securities decreased by $4.7 million or 36.6 % to $8.1 million at September 30,
1996 from $12.8 million at June 30, 1996, as a result of the sale of $4.3
million of securities classified as available-for-sale. The intended use of the
proceeds from the sale of mortgage-backed securities is to fund loan
originations which are anticipated to have higher yields. Savings deposits
increased by $711,000 or 1.1% to $64.9 million at September 30, 1996 from $64.2
million at June 30, 1996. The increase in deposits was primarily the result of
interest credited. The Company's stockholders' equity increased by $519,000 or
4.2% to $12.8 million at September 30, 1996 from $12.3 million at June 30, 1996.
The increase in stockholders' equity was due primarily to the $477,000 in net
income and a $42,000 decrease in the unrealized net holding losses on available-
for-sale investment portfolios, net of taxes during the quarter ended September
30, 1996.
9
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
Net Income
- ----------
The Company reported net income of $477,000 for the quarter ended September
30, 1996 as compared to net income of $31,000 for the quarter ended September
30, 1995. Net income for the quarter ended September 30, 1996 was significantly
affected by a $600,000 reduction in income tax expense and a $415,000 pretax
deposit insurance premium expense. The $600,000 reduction in income tax expense
was a partial reversal of the $740,000 tax bad debt reserve which was recorded
in the fourth quarter of fiscal 1995, as a result of the Company's decision to
convert its charter from a federal savings and loan to a state chartered
commercial bank. The $415,000 deposit insurance premium expense resulted from a
one-time assessment by the Federal Government to recapitalize the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation. During
the quarter ended September 30, 1995, the Company recorded a $74,000 pretax
charge to compensation expense resulting from the adoption of a directors
retirement plan. Excluding these one-time charges, the Company would have
earned approximately $132,000 and $76,000 for the quarters ended September 30,
1996 and 1995, respectively. The $56,000 or 73.7% increase in net income, after
adjustments, for the quarter ended September 30, 1996 is primarily due to a
$231,000 or 44.1% increase in the Company's net interest income offset slightly
by increases of $110,000 and $57,000 in noninterest expense and provision for
losses on loans, respectively. Net income for the quarter ended September 30,
1996 as compared to the quarter ended September 30, 1995, also reflected the
utilization of proceeds from the Company's stock conversion which was completed
during the fourth quarter of fiscal 1996.
Interest Income
- ---------------
Total interest income increased by $128,000 or 9.8% to $1.4 million for the
quarter ended September 30, 1996 from $1.3 million for the quarter ended
September 30, 1995. The increase in the Company's total interest income for the
quarter ended September 30, 1996 as compared to the quarter ended September 30,
1995 was due to an increase of $2.8 million in the average balance of interest-
earning assets to $77.2 million from $74.4 million and an increase of 41 basis
points in the average yield on interest-earning assets to 7.44% from 7.03%. The
increase in the average balance is primarily due to the deployment of stock
conversion proceeds and the increase in the average yield is largely
attributable to the Company's restructuring of its balance sheet from investment
and mortgage-backed securities to loans receivable.
Interest income on loans receivable increased by $277,000 or 33.4% to $1.1
million for the quarter ended September 30, 1996 from $820,000 for the quarter
ended September 30, 1995. The increase in interest income on loans receivable
is primarily due to an increase of $11.7
10
<PAGE>
million in the average balance of loans receivable to $54.4 million from $42.7
million and an increase of 38 basis points in the average yield on loans
receivable to 8.06% from 7.68%.
Interest income on mortgage-backed securities decreased by $80,000 or 32.1%
to $170,000 for the quarter ended September 30, 1996 from $250,000 for the
quarter ended September 30, 1995. The decrease in interest income was primary
attributable to a decrease of $4.8 million in the average balance of mortgage-
backed securities to $10.5 million from $15.3 million and a decrease of 5 basis
points in the average yield to 6.46% from 6.51%.
Interest income on investment securities decreased by $149,000 or 69.7% to
$65,000 for the quarter ended September 30, 1996 from $214,000 for the quarter
ended September 30, 1995. The decrease in interest income was primary
attributable to a decrease of $10.4 million in the average balance of
investment securities to $4.5 million from $14.9 million offset slightly by an
increase of 4 basis points in the average yield to 5.79% from 5.75%.
Interest income on short-term investments and other interest-earning assets
increased by $79,000 or 329.0% to $103,000 for the quarter ended September 30,
1996 from $24,000 for the quarter ended September 30, 1995. Short-term
investments and other interest-earnings assets consists of Federal funds sold
and investments in the Federal Home Loan Bank of Atlanta and Federal Reserve
Bank stock. The increase in interest income was largely due to the increase of
$6.3 million in the average balance of short-term investments and other
interest-earning assets to $7.7 million from $1.4 million. The level of these
balances is a function of liquidity management. The increased level of
liquidity was primarily due to the proceeds resulting from the Company's stock
conversion during the fourth quarter of fiscal 1996 and the sale of $4.3 million
of mortgage-backed securities during the quarter ended September 30, 1996. The
intended use of the liquidity is to fund loan demand which will increase the
average yield on interest-earning assets.
Interest Expense
- ----------------
Total interest expense decreased by $104,000 or 13.1% to $681,000 for the
quarter ended September 30, 1996 from $785,000 for the quarter ended September
30, 1995. The decrease in interest expense was primarily due to a decrease of
$5.0 million in the average balance of interest-bearing liabilities to $62.8
million from $67.8 million and a decrease of 29 basis points in the average rate
paid to 4.34% from 4.63%.
Interest expense on savings deposits decreased by $30,000 or 4.1% to
$681,000 for the quarter ended September 30, 1996 from $711,000 for the quarter
ended September 30, 1995. The decrease in interest expense on savings deposits
was primarily attributable to a decrease of 19 basis points in the average rate
paid on interest-bearing savings deposits offset slightly by an increase of
$39,000 in the average balance of interest-bearing savings deposits. The
average balance of interest-bearing savings deposits remained unchanged at
approximately $62.8 million.
11
<PAGE>
During the quarter ended September 30, 1996, the Company did not have any
borrowings outstanding from The Federal Home Loan Bank of Atlanta ("FHLB") and
therefore no interest expense was recorded. The Company did incur $74,000 of
interest expense on FHLB advances outstanding during the quarter ended September
30, 1995 based on an average balance of $5.0 million with an average rate of
5.93%. The Company used proceeds from maturing investments and the Stock
Conversion to repay the advances.
Net Interest Income
- -------------------
The Company's net interest income increased by $231,000 or 44.1% to
$754,000 for the quarter ended September 30, 1996 from $523,000 for the quarter
ended September 30, 1995, The increase in net interest income was primarily due
to an increase of 70 basis points in the interest rate spread (net yield on
average interest-earning assets less the rate paid on average interest-bearing
liabilities) to 3.1% from 2.4% and an increase in the ratio of average interest-
earning assets to average interest bearing liabilities to 122.9% from 109.8%.
During fiscal 1996, the Company began to implement a strategy to improve
the net interest spread by expanding its lending products to include
construction, consumer and commercial business loans. These loan products
generally earn higher yields than conventional single-family residential loans.
As previously discussed, the Company has also taken steps to restructure its
balance sheet by selling certain lower yielding investment and mortgage-backed
securities and funding loan demand with the proceeds.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
cost of liabilities for the years indicated and the average yields earned and
rates paid. Such yield and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily balances
has caused any material differences in the information presented.
The table also presents information for the periods indicated with respect
to the differences between the average yield earned on interest-earning assets
and average rate paid on interest-bearing liabilities, or "interest rate
spread", which banks have traditionally used as an indicator of profitability.
Another indicator of an institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning assets
and interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive spread will generate net
interest income.
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2) $54,448 $1,097 8.06% $42,698 $ 820 7.68%
Investment securities 4,487 65 5.79% 14,885 214 5.75%
Mortgage-backed securities 10,527 170 6.46% 15,368 250 6.51%
Short-term investments and other
interest-earning assets 7,730 103 5.33% 1,425 24 6.74%
------- -------- ------- --------
Total interest earning assets 77,192 1,435 7.44% 74,376 1,308 7.03%
Noninterest-earning assets 1,809 2,292
------- -------
Total assets $79,001 $76,668
======= =======
Interest-bearing liabilities:
Savings deposits (3) $62,807 $ 681 4.34% $62,768 $ 711 4.53%
Borrowings -- -- -- 5,000 74 5.93%
------- -------- ------- --------
Total interest-bearing liabilities 62,807 681 4.34% 67,768 785 4.63%
-------- --------
Noninterest-bearing liabilities 3,373 2,810
------- -------
Total liabilities 66,180 70,578
Stockholders' equity 12,821 6,090
------- -------
Total liabilities and stockholders'
equity $79,001 $76,668
======= =======
Net interest income $ 754 $ 523
======== ========
Interest rate spread 3.10% 2.40%
======== ========
Net yield on interest-earning assets 3.91% 2.81%
======== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities 122.90% 109.75%
======== ========
</TABLE>
- ---------------------
(1) Yields and rates are annualized.
(2) Includes nonaccrual loans.
(3) Includes interest-bearing escrow accounts.
13
<PAGE>
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 probable loan losses, based on prior loss experience, volume and
type of collateral by the Company, industry standards and past due loans in the
Company's loan portfolio. The Company's management periodically monitors and
adjusts its allowance for loan losses based upon its analysis of the loan
portfolio. The Company increased its provision for loan losses to $60,000 for
the quarter ended September 30, 1996 from $3,000 for the quarter ended September
30, 1995. The increased provision for loan losses for the quarter ended
September 30, 1996 was due to the Company's higher levels of consumer and
commercial loans, which generally entail a greater risk than single-family
residential loans. The Company has increased its allowance for loan losses as a
percentage of total loans outstanding, net of unearned origination fees to 0.47%
at September 30, 1996 from 0.38% at September 30, 1995.
Noninterest Income
- -------------------
The Company's noninterest income consists of deposit fees, service charges,
late fees and gains and losses on sales of securities and loans. Total
noninterest income increased by $25,000 or 90.1% to $53,000 for the quarter
ended September 30, 1996 from $28,000 for the quarter ended September 30, 1995.
The increase in noninterest income is primarily due to a $20,000 increase in
fees and service charges primarily related to checking accounts. As discussed
earlier, the Company recorded an $1,800 gain from the sale of mortgage-backed
securities during the quarter ended September 30, 1996.
Noninterest Expenses
- --------------------
Total noninterest expenses increased by $451,000 or 91.0% to $947,000 for
the quarter ended September 30, 1996 from $496,000 for the quarter ended
September 30, 1995. As discussed earlier, the Company incurred a $415,000 one-
time deposit insurance premium expense during the quarter ended September 30,
1996 and a $74,000 one-time charge relating to the adoption of a directors
retirement plan during the quarter ended September 30, 1995.
Excluding those one time adjustments, the Company's noninterest expenses
would have increased by $110,000 or 26.0% to $531,000 for the quarter ended
September 30, 1996 from $421,000 for the quarter ended September 30, 1995. The
increase in noninterest expenses was primarily due to increases in compensation
and employee benefits expense and other expenses. Compensation and employee
benefits expense increased by $86,000 or 40.1% to $299,000 for the quarter ended
September 30, 1996 from $213,000 for the quarter ended September 30, 1995. The
increase was largely attributable to expenses related to the Company's ESOP,
incentive compensation plan, normal salary increases and those salaries
associated with the hiring of additional lending personnel. The Company's other
expenses, consisting primarily of bank service charges, seminar and meeting
expenses, postage expense, stationery and printing
14
<PAGE>
expenses, transfer agent expenses and real estate owned expenses, increased by
$19,000 or 35.6% to $73,000 for the quarter ended September 30, 1996 from
$54,000 for the quarter ended September 30, 1995. The increase in other
noninterest expenses were primarily related to the cost of operating as a
publicly held company including transfer agent fees, additional postage,
printing and stationery expenses.
Income Taxes
- ------------
The Company had a tax benefit of $677,000 for the quarter ended September
30, 1996 as compared to a provision for income tax of $22,000 for the quarter
ended September 30, 1995. As discussed earlier, the Company reversed $600,000
of income tax expense during the quarter ended September 30, 1996 and recorded a
$160,000 tax benefit from the one-time insurance premium of $415,000. After
adjusting for those one-time charges and the tax benefit of the directors
retirement charge recorded during the quarter ended September 30, 1995, the
Company's provision for income taxes would have been $83,000 for the quarter
ended September 30, 1996 as compared to $50,000 for the quarter ended September
30, 1995.
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.
Patapsco'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, 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 September 30, 1996, the Company's cash on hand, interest-bearing deposits and
Federal funds sold totaled $8.8 million.
The Company anticipates that it will have sufficient funds available to
meet its current loan commitments of $2.7 million. Certificates of deposits
which are scheduled to mature in less than one year at September 30, 1996
totaled $23.7 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
15
<PAGE>
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, competition and other
factors.
The Company's primary uses of cash in investing activities during the
quarter ended September 30, 1996, were the origination and purchase of $3.4
million and $1.8 million of loans, respectively. The Company's primary sources
of cash from investing activities during the quarter ended September 30, 1996
were the sale of $4.3 million of mortgage-backed securities and the repayment of
$1.9 million and $300,000 of loan principal and mortgage-backed securities,
respectively.
The Company's primary use of cash in financing activities during the
quarter ended September 30, 1996 consisted of $842,000 in net disbursements of
advance payments by borrowers for property taxes, insurance and ground rents.
The Company's primary sources of cash provided by financing activities during
the quarter ended September 30, 1996 consisted primarily of a $711,000 net
increase in savings deposits.
As discussed in Note 6 - Regulatory Capital Requirements, the Bank exceeded
all regulatory minimum capital requirements.
Impact of New Accounting Standards
- ----------------------------------
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 125). SFAS 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 and is to be applied prospectively. This Statement will
require, among other things, that the Company record at fair value, assets and
liabilities resulting from a transfer of assets. The Company will adopt the
provisions of SFAS 125 as of January 1, 1997, and management believes that the
adoption of SFAS 125 will not have a material effect on the Company's financial
condition or results of operation.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PATAPSCO BANCORP, INC.
Date: November 5, 1996 /s/ Joseph J. Bouffard
-------------------------------------
Joseph J. Bouffard
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1996 /s/ Timothy C. King
--------------------------------------
Timothy C. King
Controller and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PATAPSCO
BANCORP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 528,357
<INT-BEARING-DEPOSITS> 42,489
<FED-FUNDS-SOLD> 8,265,810
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 12,568,911
<INVESTMENTS-MARKET> 12,568,911
<LOANS> 55,216,181
<ALLOWANCE> 264,466
<TOTAL-ASSETS> 79,001,387
<DEPOSITS> 64,867,691
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,313,113
<LONG-TERM> 0
0
0
<COMMON> 3,626
<OTHER-SE> 12,816,957
<TOTAL-LIABILITIES-AND-EQUITY> 79,001,387
<INTEREST-LOAN> 1,097,474
<INTEREST-INVEST> 234,589
<INTEREST-OTHER> 103,350
<INTEREST-TOTAL> 1,435,413
<INTEREST-DEPOSIT> 681,473
<INTEREST-EXPENSE> 681,473
<INTEREST-INCOME-NET> 753,940
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 1,844
<EXPENSE-OTHER> 946,691
<INCOME-PRETAX> (199,933)
<INCOME-PRE-EXTRAORDINARY> (199,933)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 477,116
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 7.44
<LOANS-NON> 355,000
<LOANS-PAST> 355,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 219,001
<CHARGE-OFFS> 15,173
<RECOVERIES> 638
<ALLOWANCE-CLOSE> 264,466
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
