Company Quick10K Filing
Quick10K
PB Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$11.03 7 $82
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
8-K 2019-04-03 Other Events, Exhibits
8-K 2019-01-02 Other Events, Exhibits
8-K 2018-12-31 Other Events, Exhibits
8-K 2018-12-19 Officers, Exhibits
8-K 2018-11-02 Shareholder Vote
8-K 2018-10-17 Other Events, Exhibits
8-K 2018-10-03 Other Events, Exhibits
8-K 2018-07-11 Other Events, Exhibits
8-K 2018-04-18 Other Events, Exhibits
8-K 2018-04-04 Other Events, Exhibits
8-K 2018-01-03 Other Events, Exhibits
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CATO Cato 314
ARCT Arcturus Therapeutics 84
ATMS Artemis Therapeutics 0
TPIV Tapimmune 0
USO United States Oil Fund 0
NXTM NxStage 0
PBBI 2018-12-31
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Note 1 - Organization
Note 2 - Basis of Presentation
Note 3 - Recent Accounting Pronouncements
Note 4 - Critical Accounting Policies
Note 5 - Earnings per Share (Eps)
Note 6 - Investment Securities
Note 7 - Loans
Note 8 - Non-Performing Assets, Past Due and Impaired Loans
Note 9 - Allowance for Loan Losses
Note 10 - Stock-Based Incentive Plan
Note 11 - Accumulated Other Comprehensive Loss
Note 12 - Fair Value Measurements
Note 13 - Subsequent Events
Note 14 - Commitments To Extend Credit
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II. - Other Information
Item 1.Legal Proceedings - Not Applicable
Item 1A.Risk Factors - Not Applicable To Smaller Reporting Companies
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities - Not Applicable
Item 4.Mine Safety Disclosures - Not Applicable
Item 5.Other Information - Not Applicable
Item 6.Exhibits
EX-10.1 tv512585_ex10-1.htm
EX-10.2 tv512585_ex10-2.htm
EX-31.1 tv512585_ex31-1.htm
EX-31.2 tv512585_ex31-2.htm
EX-32.1 tv512585_ex32-1.htm
EX-32.2 tv512585_ex32-2.htm

PB Bancorp Earnings 2018-12-31

PBBI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv512585_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________

FORM 10-Q

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2018

 

¨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 001-37676

 

PB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland 47-5150586
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

 

40 Main Street, Putnam, Connecticut 06260

(Address of principal executive offices)

(Zip Code)

 

(860) 928-6501

(Issuer’s telephone number)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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.

x YES¨ NO

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x YES¨ NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer         ¨                                                    Accelerated filer                  ¨

Non-accelerated filer           x                                                   Smaller reporting company x

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                          ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  ¨  YESx NO

 

As of February 1, 2019, there were 7,448,491 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 

PB Bancorp, Inc.

 

Table of Contents

 

   

Page No.

     
Part I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
     
  Consolidated Balance Sheets at December 31, 2018 and June 30, 2018. 1
     
  Consolidated Statements of Net Income for the three and six months ended December 31, 2018 and 2017 2
     
  Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2018 and 2017 3
     
  Consolidated Statements of Changes in Stockholders’ Equity for the six months ended December 31, 2018 and 2017 4
     
  Consolidated Statements of Cash Flows for the six months ended December 31, 2018 and 2017 5
     
  Notes to Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
     
Item 4. Controls and Procedures 41

 

Part II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 41
     
Item 1A.   Risk Factors 41
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
     
Item 3. Defaults Upon Senior Securities 42
     
Item 4. Mine Safety Disclosures 42
     
Item 5. Other Information 42
     
Item 6. Exhibits 42
     
SIGNATURES 43

 

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

 

 

 

PB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

 

   December 31,   June 30, 
   2018   2018 
   (in thousands except share data) 
ASSETS        
Cash and due from depository institutions  $4,296   $4,465 
Interest-bearing demand deposits with other banks   1,036    5,637 
Total cash and cash equivalents   5,332    10,102 
Securities available-for-sale, at fair value   41,274    46,546 
Securities held-to-maturity (fair value of $71,188 as of December 31, 2018 and $81,828 as of June 30, 2018)   71,925    82,816 
Federal Home Loan Bank stock, at cost   4,206    4,206 
Loans   371,482    355,213 
Less: Allowance for loan losses   (2,864)   (2,943)
Net loans   368,618    352,270 
Premises and equipment, net   3,114    3,253 
Accrued interest receivable   1,538    1,361 
Other real estate owned   1,297    1,381 
Goodwill   6,912    6,912 
Bank-owned life insurance   13,091    12,912 
Net deferred tax asset   481    1,691 
Other assets   2,599    1,938 
           
Total assets  $520,387   $525,388 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities          
Deposits          
Non-interest-bearing  $72,115   $71,428 
Interest-bearing   293,820    300,157 
Total deposits   365,935    371,585 
Mortgagors' escrow accounts   3,062    3,123 
Federal Home Loan Bank advances   62,172    63,199 
Securities sold under agreements to repurchase   3,310    664 
Other liabilities   2,622    2,528 
Total liabilities   437,101    441,099 
           
Stockholders' Equity          
Preferred stock, 50,000,000 shares authorized,  $0.01 par value, no shares issued and outstanding   -    - 
Common stock, 100,000,000 shares authorized, $0.01 par value, 7,448,491 and 7,624,474 shares issued and outstanding at December 31, 2018 and June 30, 2018, respectively.   74    76 
Additional paid-in capital   58,513    60,329 
Retained earnings   29,854    28,822 
Accumulated other comprehensive loss   (963)   (522)
Unearned ESOP shares   (3,219)   (3,293)
Unearned stock awards   (973)   (1,123)
Total stockholders' equity   83,286    84,289 
           
Total liabilities and stockholders' equity  $520,387   $525,388 

 

See accompanying notes to consolidated financial statements.

 

1

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Net Income

(Unaudited)

 

   Three months ended   Six months ended 
   December 31,   December 31, 
   2018   2017   2018   2017 
   (in thousands, except per share data)         
Interest and dividend income:                    
Interest and fees on loans  $3,731   $3,307   $7,306   $6,484 
Interest and dividends on investments   816    945    1,681    1,935 
Other   70    53    114    61 
Total interest and dividend income   4,617    4,305    9,101    8,480 
                     
Interest expense:                    
Deposits and escrow   577    460    1,134    906 
Borrowed funds   304    344    608    701 
Total interest expense   881    804    1,742    1,607 
Net interest and dividend income   3,736    3,501    7,359    6,873 
(Credit) provision for loan losses   -    -    (600)   175 
Net interest and dividend income after (credit) provision for loan losses   3,736    3,501    7,959    6,698 
                     
Non-interest income:                    
Total other-than-temporary impairment losses on debt securities   (135)   -    (135)   (2)
Portion of losses recognized in other comprehensive income   131    -    131    1 
Net impairment losses recognized in earnings   (4)   -    (4)   (1)
Fees for services   488    478    958    961 
Mortgage banking activities   7    -    12    4 
Net commissions from brokerage services   21    35    45    80 
Income from bank-owned life insurance   90    90    179    179 
Gain (loss) on sales of other real estate owned, net   86    66    107    (47)
Legal settlement   15    155    15    155 
Other income   32    34    92    66 
Total non-interest income   735    858    1,404    1,397 
                     
Non-interest expense:                    
Compensation and benefits   1,946    1,842    3,874    3,654 
Occupancy and equipment   290    298    600    595 
Data processing   293    273    590    506 
LAN/WAN network   22    30    46    65 
Advertising and marketing   46    57    80    99 
FDIC deposit insurance   35    39    74    79 
Other real estate owned   21    61    85    122 
Write-down of other real estate owned   -    8    91    14 
Other   520    483    938    898 
Total non-interest expense   3,173    3,091    6,378    6,032 
Income before income tax expense   1,298    1,268    2,985    2,063 
Income tax expense   208    477    504    688 
NET INCOME  $1,090   $791   $2,481   $1,375 
                     
Earnings per common share:                    
Basic  $0.15   $0.11   $0.34   $0.19 
Diluted  $0.15   $0.11   $0.34   $0.19 

 

See accompanying notes to consolidated financial statements.

 

2

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   Three months ended   Six Months Ended 
   December 31,   December 31, 
   2018   2017   2018   2017 
   (in thousands)         
Net income  $1,090   $791   $2,481   $1,375 
Other comprehensive loss:                    
Net unrealized holding losses on available-for-sale securities   (292)   (285)   (428)   (185)
Reclassification adjustment for losses realized in income on available-for-sale securities (1)   4    -    4    1 
Non-credit portion of other-than-temporary losses on available-for-sale securities   (131)   -    (131)   (1)
Other comprehensive loss before tax   (419)   (285)   (555)   (185)
Income tax benefit related to other comprehensive loss   85    98    114    64 
Other comprehensive loss net of tax   (334)   (187)   (441)   (121)
Total comprehensive income  $756   $604   $2,040   $1,254 

 

(1) Reported in net impairment losses recognized in earnings included in non-interest income on the consolidated statements of net income. There were no income tax benefits associated with the reclassification adjustments.

 

See accompanying notes to consolidated financial statements.

 

3

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended December 31, 2018 and 2017

(Unaudited)

 

   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Unearned
ESOP
Shares
   Unearned
Stock
Awards
   Total
Stockholders'
Equity
 
   (dollars in thousands, except per share data) 
                             
Balances at June 30, 2017  $78   $62,243   $27,195   $(117)  $(3,439)  $(1,423)  $84,537 
Comprehensive income   -    -    1,375    (121)   -    -    1,254 
Cash dividends declared and paid ($0.09 per share)   -    -    (701)   -    -    -    (701)
ESOP shares committed to be released (9,009 shares)   -    21    -    -    73    -    94 
Common stock repurchased (55,000 shares)   -    (572)   -    -    -    -    (572)
Share-based compensation expense   -    74    -    -    -    150    224 
Balances at December 31, 2017  $78   $61,766   $27,869   $(238)  $(3,366)  $(1,273)  $84,836 
                                    
                                    
Balances at June 30, 2018  $76   $60,329   $28,822   $(522)  $(3,293)  $(1,123)  $84,289 
                                    
Comprehensive income   -    -    2,481    (441)   -    -    2,040 
Cash dividends declared and paid ($0.19 per share)   -    -    (1,449)   -    -    -    (1,449)
ESOP shares committed to be released (9,009 shares)   -    30    -    -    74    -    104 
Common stock repurchased (175,983 shares)   (2)   (1,925)   -    -    -    -    (1,927)
Share-based compensation expense   -    79    -    -    -    150    229 
Balances at December 31, 2018  $74   $58,513   $29,854   $(963)  $(3,219)  $(973)  $83,286 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the six months 
   ended December 31, 
   2018   2017 
   (in thousands) 
Cash flows from operating activities          
Net income  $2,481   $1,375 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of securities premiums, net   234    282 
Impairment losses on securities   4    1 
Amortization of deferred loan costs, net   135    116 
(Credit) provision for loan losses   (600)   175 
(Gain) loss on sale of other real estate owned, net   (107)   47 
Write-down of other real estate owned   91    14 
Loss on sale of premises and equipment   1    1 
Depreciation and amortization - premises and equipment   166    163 
Amortization - software   4    5 
Increase in accrued interest receivable and other assets   (842)   (20)
Income from bank-owned life insurance   (179)   (179)
Increase in other liabilities   94    142 
Share-based compensation expense   229    224 
Deferred tax expense   1,324    262 
ESOP expense   104    94 
Net cash provided by operating activities   3,139    2,702 
           
Cash flows from investing activities          
Proceeds from calls, pay downs and maturities of available-for-sale securities   4,609    5,673 
Proceeds from calls, pay downs and maturities of held-to-maturity securities   10,761    16,346 
Purchase of Federal Home Loan Bank stock   -    (133)
Net loan principal originations   (16,787)   (10,313)
Loan purchases   -    (19,699)
Recoveries of loans previously charged off   582    32 
Proceeds from sale of other real estate owned   422    587 
Capital expenditures - premises and equipment   (28)   (59)
Net cash used in investing activities   (441)   (7,566)
           
Cash flows from financing activities          
Net decrease in deposit accounts   (5,650)   (3,443)
Net decrease in mortgagors' escrow accounts   (61)   (63)
Proceeds from issuance of long-term Federal Home Loan Bank advances   -    19,730 
Repayment of long-term Federal Home Loan Bank advances   (1,027)   (13,004)
Change in short term Federal Home Loan Bank advances, net   -    6,000 
Net increase in securities sold under agreements to repurchase   2,646    1,294 
Cash dividends paid on common stock   (1,449)   (701)
Common stock repurchased   (1,927)   (572)
Net cash (used in) provided by financing activities   (7,468)   9,241 
           
Net (decrease) increase in cash and cash equivalents   (4,770)   4,377 
Cash and cash equivalents at beginning of year   10,102    10,173 
Cash and cash equivalents at end of period  $5,332   $14,550 
Supplemental disclosures          
Cash paid during the period for:          
Interest  $1,700   $1,594 
Income taxes   1    370 
Loans transferred to other real estate owned   322    144 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

PB Bancorp, Inc.

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – Organization

 

PB Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated in 2015 to be the successor to PSB Holdings, Inc. upon completion of the second-step mutual-to-stock conversion (the “Conversion”) of Putnam Bancorp, MHC (the “MHC”), the top tier mutual holding company of PSB Holdings, Inc.   PSB Holdings, Inc. was the former mid-tier holding company for Putnam Bank (the “Bank”).  Prior to completion of the Conversion, a majority of the shares of common stock of PSB Holdings, Inc. were owned by the MHC.  In conjunction with the Conversion, the MHC and PSB Holdings, Inc. merged into the Company and the Company became PSB Holdings, Inc.’s successor.  The Conversion was completed on January 7, 2016.  The Company raised gross proceeds of $33.7 million in the related stock offering.  Concurrent with the completion of the stock offering, each share of PSB Holdings, Inc. stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.1907 shares of Company common stock.  The Conversion was accounted for as a capital raising transaction by entities under common control.  The historical financial results of the MHC were immaterial to the results of the Company and therefore the net assets of the MHC were reflected as an increase to stockholders’ equity.  

 

NOTE 2 – Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary, consisting of only normal recurring accruals and the elimination of all significant intercompany accounts, to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The interim results of operations are not necessarily indicative of the operating results to be expected for future periods, including the fiscal year ending June 30, 2019. These financial statements should be read in conjunction with the 2018 consolidated financial statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (‘’SEC’’) on September 21, 2018.

 

NOTE 3 – Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted for all entities. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, based on the current level of long-term leases in place, this is not expected to be material to the Company’s results of operations or financial position.

 

6

 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for certain financial assets (such as loans and held-to-maturity securities) held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Entities will now use forward-looking information to better form their credit loss estimates.  The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Management is currently working to implement these requirements to determine the potential impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  The amendments in this update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  Instead, an entity will be required to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity will consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  For public business entities, the amendments are effective for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.  Early adoption is permitted.  We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which amends the disclosure requirements by adding, changing, or removing certain disclosures about recurring or non-recurring fair value measurements. This ASU will be effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this update will not have a significant impact on the consolidated financial statements.

 

NOTE 4 - Critical Accounting Policies

 

Critical accounting policies are those that involve significant judgments and assumptions by management that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to the allowance for loan losses, realizability of deferred income taxes, valuation of goodwill and the impairment of securities.

 

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.

 

The allowance for loan losses is evaluated on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, specific and unallocated components, as further described below.

 

General component

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, residential construction, commercial and consumer/other. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; concentrations; changes in lending policies and procedures; experience/ability/depth of lending management and staff; loan rating migration; the effect of other external factors; changes in the value of underlying collateral; changes in the loan review system and national and local economic trends and conditions. The Company calculates historical losses using a five-year rolling average, which is considered indicative of the risk in the Company’s current loan portfolio. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses through December 31, 2018.

 

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The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate - The Company does not originate loans with a loan-to-value ratio greater than 100% and does not originate subprime loans. Loans originated with a loan-to-value ratio greater than 80% generally require private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

Commercial real estate - Loans in this segment are primarily income-producing properties throughout New England. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans.

 

Residential Construction – Loans in this segment include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by the accuracy of estimated costs to complete the project, cost overruns, time to sell at an adequate price, and market conditions.

 

Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Consumer/other - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Specific component

 

The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer/other and residential real estate loans for impairment disclosures, unless such loans are non-accrual or subject to a troubled debt restructuring (“TDR”) agreement.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are classified as impaired.

 

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Unallocated component

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general reserves in the portfolio.

 

Goodwill. Goodwill is measured as the excess of the cost of a business acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. Goodwill is not amortized but is subject to a review of qualitative factors annually or more frequently if circumstances warrant, to determine if an impairment test is required. If required, the Company uses the following two-step approach for reviewing goodwill for impairment:

 

The first step (“Step 1”) is used to identify potential impairment, and involves comparing the reporting unit’s (the consolidated Company) estimated fair value to its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill is not deemed to be impaired. Should the carrying amount of the reporting unit exceed its estimated fair value, an indicator of impairment is deemed to exist and a second step is performed to measure the amount of such impairment, if any. The second step (“Step 2”) involves calculating the implied fair value of goodwill. The implied fair value of goodwill is determined in a manner similar to how the amount of goodwill is determined in a business combination (i.e. by measuring the excess of the estimated fair value, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles as of the impairment testing date). If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned to the reporting unit, no impairment exists. If the carrying amount of goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded in an amount equal to such excess. An impairment loss cannot exceed the carrying amount of goodwill, and the loss (write-down) establishes a new carrying amount for the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which are dependent on internal forecasts, estimation of the long-term rate of growth, the period over which cash flows will occur, and determination of our cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions related to goodwill impairment.

 

See Note 3 – Recent Accounting Pronouncements for future changes to the accounting treatment of goodwill.

 

Other-Than-Temporary Impairment of Securities. Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

 

OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes.

 

Income Taxes. The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

9

 

 

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 34% to 21%, effective on January 1, 2018. As a result of this rate reduction, the Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax asset of $211,000, which was recorded as additional tax expense in the Company’s consolidated statements for the three months ended December 31, 2017. Included in the additional tax expense is $47,000 related to net unrealized losses on securities available-for-sale. The accounting treatment effectively stranded $47,000 of deferred tax items in accumulated other comprehensive income. The Company has developed a reasonable estimate of the other provisions of the Act in determining the current year income tax provision.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”), which allows a reclassification from AOCI to retained earnings to eliminate the stranded tax effects resulting from the Act. As permitted, the Company early adopted the ASU and recorded a $47,000 increase in retained earnings and corresponding decrease in AOCI as of January 1, 2018.

 

Management has discussed the development and selection of these critical accounting policies with the Audit Committee.

 

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NOTE 5 – Earnings Per Share (EPS)

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The rights to dividends on unvested options/awards are non-forfeitable, therefore the unvested awards/options are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For purposes of computing diluted EPS, the treasury stock method is used.

 

The following information was used in the computation of EPS on both a basic and diluted basis for the three and six months ended December 31, 2018 and 2017:

 

   Three months ended December 31,   Six months ended December 31, 
   2018   2017   2018   2017 
Net income  $1,090,000   $791,000   $2,481,000   $1,375,000 
                     
Weighted average common shares applicable to basic EPS   7,198,456    7,354,602    7,208,317    7,364,606 
Effect of dilutive potential common shares   -    -    4,306    - 
Weighted average common shares applicable to diluted EPS   7,198,456    7,354,602    7,212,623    7,364,606 
Earnings per share:                    
Basic  $0.15   $0.11   $0.34   $0.19 
Diluted  $0.15   $0.11   $0.34   $0.19 

 

For the three months ended December 31, 2018, options to purchase 387,330 shares were outstanding but not included in the computation of earnings per share because they were anti-dilutive. For the six months ended December 31, 2018, there were no anti-dilutive options not being included in the computation of diluted earnings per share.

 

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NOTE 6 – Investment Securities

 

The carrying value, estimated fair values, and gross unrealized gains and losses of investment securities by maturity and type are as follows:

 

   Amortized   Gross Unrealized   Fair 
   Cost Basis   Gains   (Losses)   Value 
   (in thousands) 
December 31, 2018:                    
Available-for-sale:                    
Debt securities:                    
U.S. government and government-sponsored securities:                    
After ten years  $2,849   $-   $(84)  $2,765 
Corporate bonds:                    
Due from five through ten years   3,999    -    (474)   3,525 
                     
U.S. Government-sponsored and guaranteed mortgage-backed securities:                    
From one through five years   5,942    -    (87)   5,855 
From five through ten years   1,273    -    (32)   1,241 
After ten years   15,711    111    (343)   15,479 
    22,926    111    (462)   22,575 
                     
Non-agency mortgage-backed securities:                    
Due after ten years   2,726    419    (373)   2,772 
Total debt securities   32,500    530    (1,393)   31,637 
                     
Other securities:                    
Auction rate preferred:                    
Due from five through ten years   8,000    -    (358)   7,642 
After ten years   2,000    -    (5)   1,995 
    10,000    -    (363)   9,637 
Total available-for-sale securities  $42,500   $530   $(1,756)  $41,274 
                     
Held-to-maturity:                    
U.S. government and government-sponsored securities:                    
Due in one year or less  $2,997   $-   $(14)  $2,983 
From one through five years   2,986    21    (14)   2,993 
After ten years   4,576    -    (201)   4,375 
    10,559    21    (229)   10,351 
State agency and municipal obligations                    
From one through five years   443    -    (11)   432 
                     
U.S. Government-sponsored and guaranteed mortgage-backed securities:                    
Due from one through five years   624    4    (5)   623 
From five through ten years   10,790    8    (249)   10,549 
After ten years   49,509    430    (706)   49,233 
    60,923    442    (960)   60,405 
Total held-to-maturity securities  $71,925   $463   $(1,200)  $71,188 

 

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   Amortized   Gross Unrealized   Fair 
   Cost Basis   Gains   (Losses)   Value 
   (in thousands) 
June 30, 2018:                    
Available-for-sale:                    
Debt securities:                    
U.S. government and government-sponsored securities:                    
Due in one year or less  $1,000   $-   $(4)  $996 
After ten years   3,419    -    (87)   3,332 
    4,419    -    (91)   4,328 
                     
Corporate bonds:                    
Due from five through ten years   1,999    -    (129)   1,870 
After ten years   2,000    -    (140)   1,860 
                     
    3,999    -    (269)   3,730 
                     
U.S. Government-sponsored and guaranteed mortgage-backed securities:                    
Due from one through five years   3,135    -    (125)   3,010 
From five through ten years   4,919    -    (95)   4,824 
After ten years   17,688    135    (406)   17,417 
    25,742    135    (626)   25,251 
                     
Non-agency mortgage-backed securities:                    
Due after ten years   3,057    483    (303)   3,237 
Total debt securities   37,217    618    (1,289)   36,546 
                     
Other securities:                    
Auction rate preferred:                    
Due from five through ten years   8,000    -    -    8,000 
After ten years   2,000    -    -    2,000 
    10,000    -    -    10,000 
Total available-for-sale securities  $47,217   $618   $(1,289)  $46,546 
                     
Held-to-maturity:                    
U.S. government and government-sponsored securities:                    
Due in one year or less  $2,001   $-   $(9)  $1,992 
From one through five years   4,976    25    (33)   4,968 
After ten years   4,796    -    (189)   4,607 
    11,773    25    (231)   11,567 
                     
State agency and municipal obligations                    
Due from one through five years   446    -    (14)   432 
                     
U.S. Government-sponsored and guaranteed mortgage-backed securities:                    
Due from one through five years   846    5    (8)   843 
From five through ten years   12,123    14    (384)   11,753 
After ten years   57,628    518    (913)   57,233 
    70,597    537    (1,305)   69,829 
Total held-to-maturity securities  $82,816   $562   $(1,550)  $81,828 

 

There were no sales of available-for-sale securities for the three and six months ended December 31, 2018 or 2017. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method. There were other-than-temporary impairment charges on available-for-sale securities of $4,000 realized in income during the three and six months ended December 31, 2018. The write-downs included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $135,000, net of $131,000 recognized in other comprehensive loss, before taxes. There were no other-than temporary impairment losses during the three months ended December 31, 2017 and $1,000 in other-than impairment losses during the six months ended December 31, 2017. The write-downs included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $2,000, net of $1,000 recognized in other comprehensive loss, before taxes.

 

13

 

 

The following is a summary of the estimated fair value and related unrealized losses segregated by category and length of time that individual securities have been in a continuous unrealized loss position at:

 

   Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
  Value   Losses   Value   Losses   Value   Losses 
   (in thousands) 
December 31, 2018:                        
Available-for-sale:                        
U.S. Government and government-sponsored securities  $-   $-   $2,765   $84   $2,765   $84 
Corporate bonds   -    -    3,525    474    3,525    474 
U.S. Government-sponsored and guaranteed mortgage-backed securities   2,441    13    16,334    449    18,775    462 
Other securities   4,637    363    -    -    4,637    363 
Total temporarily impaired available-for-sale   7,078    376    22,624    1,007    29,702    1,383 
Held-to-maturity:                              
U.S. Government and government-sponsored securities   995    5    8,351    224    9,346    229 
State and political subdivisions   -    -    432    11    432    11 
U.S. Government-sponsored and guaranteed mortgage-backed securities   3,155    40    40,191    920    43,346    960 
Total temporarily impaired held-to-maturity   4,150    45    48,974    1,155    53,124    1,200 
Other-than-temporarily impaired debt securities (1):                              
Non-agency mortgage-backed securities   280    6    979    367    1,259    373 
Total temporarily-impaired and other- than-temporarily impaired securities  $11,508   $427   $72,577   $2,529   $84,085   $2,956 

 

   Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
  Value   Losses   Value   Losses   Value   Losses 
   (in thousands) 
June 30, 2018:                              
Available-for-sale:                              
U.S. Government and government-sponsored securities  $-   $-   $4,328   $91   $4,328   $91 
Corporate bonds   -    -    3,730    269    3,730    269 
U.S. Government-sponsored and guaranteed mortgage-backed securities   7,331    123    14,914    503    22,245    626 
Total temporarily impaired available-for-sale   7,331    123    22,972    863    30,303    986 
Held-to-maturity:                              
U.S. Government and government-sponsored securities   5,956    42    4,606    189    10,562    231 
State and political subdivisions   432    14    -    -    432    14 
U.S. Government-sponsored and guaranteed mortgage-backed securities   34,387    708    16,880    597    51,267    1,305 
Total temporarily impaired held-to-maturity   40,775    764    21,486    786    62,261    1,550 
Other-than-temporarily impaired debt securities (1):                              
Non-agency mortgage-backed securities   -    -    1,134    303    1,134    303 
Total temporarily-impaired and other- than-temporarily impaired securities  $48,106   $887   $45,592   $1,952   $93,698   $2,839 

 

(1)Includes other-than-temporary impaired available-for-sale debt securities in which a portion of the other-than-temporary impairment loss remains in accumulated other comprehensive loss.

 

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Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

 

At December 31, 2018, there were 91 individual investment securities with aggregate depreciation of 3.4% from the Company’s amortized cost basis. Management has the intent and ability to hold these securities until cost recovery occurs and considers these declines to be temporary.

 

The unrealized losses on the Company’s investment in U.S. Government-sponsored agency bonds and U.S. government-guaranteed and government-sponsored residential mortgage-backed securities were primarily caused by interest rate fluctuations. These investments are guaranteed or sponsored by the U.S. government or an agency thereof. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2018.

 

The Company’s unrealized losses on investments in corporate bonds and other securities relate to investments in companies within the financial services sector. As of December 31, 2018, the Company had three investments in corporate single-issuer trust preferred securities (TRUPs) with a total book value of $4.0 million and total fair value of $3.5 million, all of which were classified as available-for-sale. The single-issuer trust preferred investments are evaluated for other-than-temporary impairment by performing a present value of cash flows calculation each quarter. None of the issuers have deferred interest payments or announced the intention to defer interest payments. The Company believes the decline in fair value is related to the spread over three-month LIBOR, on which the quarterly interest payments are based, as the spread over LIBOR being received is significantly lower than current market spreads. Management concluded the impairment of these investments was considered temporary and asserts that the Company does not have the intent to sell these investments and that it is more likely than not it will not have to sell the investments before recovery of their cost bases which may be at maturity.

 

At December 31, 2018, there was one state and political subdivision security that had an unrealized loss of 2.5% from the Company’s amortized cost basis. We believe the unrealized loss was primarily caused by interest rate fluctuations. This security is guaranteed by a school district located in Texas. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2018.

 

For the three and six months ended December 31, 2018, there was $4,000 in other-than-temporary impairment losses recognized in earnings. The other-than-temporary impairment losses were on non-agency mortgage-backed securities. The Company estimates the portion of possible loss attributable to credit loss using a discounted cash flow model. Significant inputs include the estimated cash flows of the underlying loans based on key assumptions, such as default rate, loss severity and prepayment rate. Assumptions can vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. The present value of the expected cash flows is compared to the Company’s amortized cost basis to determine if there was a credit-related impairment loss. Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on these securities.

 

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The following table represents a roll-forward of the amount of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive loss:

 

   Six months ended 
   December 31, 
   2018   2017 
   (in thousands) 
Balance at beginning of period  $15,983   $15,982 
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded   4    1 
           
Balance at end of period  $15,987   $15,983 

 

NOTE 7 – Loans

 

The following table sets forth the composition of our loan portfolio at December 31, 2018 and June 30, 2018:

 

   December 31,   June 30, 
   2018   2018 
   (in thousands) 
Real Estate:          
Residential (1)  $229,313   $236,880 
Commercial   127,308    101,647 
Residential construction   937    2,217 
Commercial   11,815    12,215 
Consumer and other   793    831 
           
Total loans   370,166    353,790 
Net deferred loan costs   1,316    1,423 
Allowance for loan losses   (2,864)   (2,943)
           
Loans, net  $368,618   $352,270 

 

(1) Residential real estate loans include one-to four-family mortgage loans, second mortgage loans, and home equity lines of credit.

 

Credit Quality Information

 

The Company utilizes a nine grade internal loan rating system as follows:

 

Loans rated 1 - 5 are considered “pass” rated loans with low to average risk.

 

Loans rated 6 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 7 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

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Loans rated 8 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

Loans rated 9 are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

 

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. Credit quality for residential real estate and consumer/other loans is determined by monitoring loan payment history and ongoing communications with the borrower.

 

The following table presents the Company’s loan classes by internally assigned grades at December 31, 2018 and June 30, 2018:

 

   Residential   Commercial   Residential       Consumer     
   Real Estate   Real Estate   Construction   Commercial   and other   Total 
   (in thousands) 
December 31, 2018                              
Grade:                              
Pass  $225,838   $125,279   $937   $10,804   $793   $363,651 
Special Mention   -    512    -    -    -    512 
Substandard   3,475    1,517    -    1,011    -    6,003 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total  $229,313   $127,308   $937   $11,815   $793   $370,166 
                               
June 30, 2018                              
Grade:                              
Pass  $232,919   $98,626   $2,217   $11,157   $830   $345,749 
Special Mention   2    698    -    1,058    -    1,758 
Substandard   3,959    2,323    -    -    1    6,283 
Doubtful   -    -    -    -    -    - 
Loss   -    -    -    -    -    - 
Total  $236,880   $101,647   $2,217   $12,215   $831   $353,790 

 

There were no material modifications deemed to be troubled debt restructures for the six months ended December 31, 2018 and 2017.

 

There were no material troubled debt restructurings that subsequently defaulted (defined as 30 or more days past due subsequent to restructuring) within one year of modification during the three and six months ended December 31, 2018 and 2017.

 

17

 

 

NOTE 8 – Non-performing Assets, Past Due and Impaired Loans

 

The table below sets forth the amounts and categories of non-performing assets at the dates indicated:

 

   At  December 31,   At June 30, 
   2018   2018 
   (Dollars in thousands) 
Non-accrual loans:          
Real Estate:          
Residential  $3,475   $3,959 
Commercial   406    432 
Consumer   -    1 
Total non-accrual loans   3,881    4,392 
           
Accruing loans past due 90 days or more   -    32 
           
Total non-performing loans   3,881    4,424 
           
Other real estate owned   1,297    1,381 
Total non-performing assets  $5,178   $5,805 
           
Total non-performing loans to total loans   1.05%   1.25%
Total non-performing assets to total assets   1.00%   1.10%

 

Management is focused on working with borrowers and guarantors to resolve non-accrual loans by restructuring or liquidating assets when prudent. Many of our commercial relationships are secured by development loans, in particular condominiums which have experienced a significant reduction in demand. The Company reviews the strength of the guarantors; requires face to face discussions and offers restructuring suggestions that provide the borrowers with short term relief and exit strategies. The Company obtains a current appraisal on all real estate secured loans that are 180 days or more past due if the appraisal on file is older than one year. If the determination is made that there is the potential for collateral shortfall, an allocated reserve will be assigned to the loan for the expected deficiency. It is the policy of the Company to charge off or write down loans or other assets when, in the opinion of the Credit Committee and Loan Review, the ultimate amount recoverable is less than the carrying value, or the collection of the amount is expected to be unduly prolonged. The level of non-performing assets is expected to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with management’s degree of success in resolving problem assets.

 

18

 

 

The following table sets forth information regarding past due loans at December 31, 2018 and June 30, 2018:

 

           90 days     
   30–59 Days   60–89 Days   or Greater   Total 
   Past Due   Past Due   Past Due   Past Due 
   (in thousands) 
At December 31, 2018                    
                    
Real Estate:                    
Residential  $1,627   $146   $510   $2,283 
Commercial   2,027    -    121    2,148 
Consumer and other   2    -    -    2 
Total  $3,656   $146   $631   $4,433 
                     
At June 30, 2018                    
                     
Real Estate:                    
Residential  $50   $238   $1,119   $1,407 
Commercial   -    -   $124    124 
Consumer and other   4    -    -    4 
Total  $54   $238   $1,243   $1,535 

 

The following is a summary of information pertaining to impaired loans at December 31, 2018 and June 30, 2018, none of which had a valuation allowance:

 

   At December 31, 2018   At June 30, 2018 
       Unpaid       Unpaid 
   Recorded   Principal   Recorded   Principal 
   Investment   Balance   Investment   Balance 
   (in thousands) 
Real Estate:                    
Residential  $2,062   $2,208   $2,732   $2,870 
Commercial   406    469    1,230    1,914 
Total impaired loans  $2,468   $2,677   $3,962   $4,784 

 

19

 

 

The following is a summary of additional information pertaining to impaired loans:

 

   Three months ended   Three months ended 
   December 31, 2018   December 31, 2017 
   Average   Interest   Interest Income   Average   Interest   Interest Income 
   Recorded   Income   Recognized   Recorded   Income   Recognized 
   Investment   Recognized   on Cash Basis   Investment   Recognized   on Cash Basis 
   (in thousands) 
Real Estate:                              
Residential  $2,177   $22   $19   $2,093   $8   $3 
Commercial   411    -    -    1,291    22    - 
Total impaired loans  $2,588   $22   $19   $3,384   $30   $3 
                               

 

   Six months ended   Six months ended 
   December 31, 2018   December 31, 2017 
   Average   Interest   Interest Income   Average   Interest   Interest Income 
   Recorded   Income   Recognized   Recorded   Income   Recognized 
   Investment   Recognized   on Cash Basis   Investment   Recognized   on Cash Basis 
   (in thousands) 
Real Estate:                              
Residential  $2,362   $39   $33   $2,149   $16   $7 
Commercial   684    7    -    1,303    45    - 
Total impaired loans  $3,046   $46   $33   $3,452   $61   $7 

 

20

 

 

NOTE 9 – Allowance for Loan Losses

 

An analysis of the allowance for loan losses for the three and six months ended December 31, 2018 and 2017 is as follows:

 

   Residential   Commercial   Residential       Consumer         
   Real Estate   Real Estate   Construction   Commercial   and Other   Unallocated   Total 
   (in thousands) 
Three months ended                            
December 31, 2018                            
                             
Beginning balance  $1,488   $1,094   $7   $77   $131   $109   $2,906 
Charge-offs   (42)   -    -    -    (12)   -    (54)
Recoveries   3    -    -    4    5    -    12 
(Credit) provision   16    102    (2)   29    (92)   (53)   - 
Ending Balance  $1,465   $1,196   $5   $110   $32   $56   $2,864 
                                    
Three months ended                                   
December 31, 2017                                   
                                    
Beginning balance  $1,432   $1,232   $7   $80   $148   $61   $2,960 
Charge-offs   -    -    -    -    (13)   -    (13)
Recoveries   9    -    -    3    6    -    18 
(Credit) provision   (24)   (17)   2    (4)   (10)   53    - 
Ending Balance  $1,417   $1,215   $9   $79   $131   $114   $2,965 
                                    
Six months ended                                   
December 31, 2018                                   
                                    
Beginning balance  $1,385   $1,194   $14   $80   $135   $135   $2,943 
Charge-offs   (42)   -    -    -    (19)   -    (61)
Recoveries   8    560    -    6    8    -    582 
(Credit) provision   114    (558)   (9)   24    (92)   (79)   (600)
Ending Balance  $1,465   $1,196   $5   $110   $32   $56   $2,864 
                                    
Six months ended                                   
December 31, 2017                                   
                                    
Beginning balance  $1,359   $1,164   $6   $76   $86   $89   $2,780 
Charge-offs   -    -    -    -    (22)   -    (22)
Recoveries   17    -    -    6    9    -    32 
(Credit) provision   41    51    3    (3)   58    25    175 
Ending Balance  $1,417   $1,215   $9   $79   $131   $114   $2,965 

 

21

 

 

Further information pertaining to the allowance for loan losses at December 31, 2018 and June 30, 2018 is as follows:

 

                             
   Residential   Commercial   Residential       Consumer         
   Real Estate   Real Estate   Construction   Commercial   and Other   Unallocated   Total 
   (in thousands) 
At December 31, 2018                            
                                    
Amount of allowance for loan losses for impaired loans  $-   $-   $-   $-   $-   $-   $- 
                                    
Amount of allowance for loan losses for                                   
non-impaired loans  $1,465   $1,196   $5   $110   $32   $56   $2,864 
                                    
                                    
Impaired loans  $2,062   $406   $-   $-   $-   $-   $2,468 
                                    
Non-impaired loans  $227,251   $126,902   $937   $11,815   $793   $-   $367,698 
                                    
At June 30, 2018                                   
                                    
Amount of allowance for loan losses for impaired loans  $-   $-   $-   $-   $-   $-   $- 
                                    
Amount of allowance for loan losses for                                   
non-impaired loans  $1,385   $1,194   $14   $80   $135   $135   $2,943 
                                    
Impaired loans  $2,732   $1,230   $-   $-   $-   $-   $3,962 
                                    
Non-impaired loans  $234,148   $100,417   $2,217   $12,215   $831   $-   $349,828 

 

22

 

 

NOTE 10 – Stock-Based Incentive Plan

 

In February 2017, stockholders of the Company approved the PB Bancorp, Inc. 2017 Stock-Based Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to 453,267 stock options and 181,306 shares of restricted stock to its employees, officers and directors for an aggregate amount of up to 634,573 shares of the Company’s common stock for issuance upon the grant or exercise of awards. Both incentive stock options and non-statutory stock options may be granted under the Incentive Plan.

 

There were no stock options or awards granted during the six months ended December 31, 2018 and 2017.

 

Both stock option and restricted stock awards granted to date vest at 20% per year beginning on the first anniversary of the date of the grant.

 

Stock options are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis. Restricted stock awards have non-forfeitable dividend rights, and are considered participating securities outstanding for the purpose of computing basic earnings per share.

 

The Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded to unearned stock awards. Compensation expense related to unearned restricted shares is amortized to compensation and benefits expense over the vesting period of the restricted stock awards, adjusted by actual forfeitures. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for the three months ended December 31, 2018 of $111,000 and for the six months ended December 31, 2018 of $229,000. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for the three months ended December 31, 2017 of $112,000 and for the six months ended December 31, 2017 of $224,000.

 

NOTE 11 – Accumulated Other Comprehensive Loss

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the consolidated balance sheets, such items are components of accumulated other comprehensive loss.

 

The components of accumulated other comprehensive loss and related tax effects are as follows:

 

   December 31,   June 30, 
   2018   2018 
   (in thousands) 
Net unrealized loss on securities available-for-sale  $(1,226)  $(671)
Tax effect   263    149 
Accumulated other comprehensive loss  $(963)  $(522)

 

23

 

 

NOTE 12 – FAIR VALUE MEASUREMENTS

 

The Company groups its assets measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value as follows:

 

Level 1 – Valuations for assets traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

 

Level 2 – Valuations for assets traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets.

 

Level 3 – Valuations for assets that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.

 

The level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets carried at fair value for December 31, 2018 and June 30, 2018.

 

The Company’s mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services, which are not adjusted by management. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

 

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Level 3 assets consisted of available-for-sale auction-rate trust preferred securities (ARPs).  All dividends are current. The Company has the ability and intent to hold these securities for the time necessary to collect the expected cash flows.

 

The fair value of impaired loans and other real estate owned is based on the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based upon appraisals of similar properties obtained from a third party and adjusted by management as needed.

 

The Company did not have any transfers of assets between levels of the fair value hierarchy during the six months ended December 31, 2018.

 

24

 

 

The following summarizes assets measured at fair value on a recurring basis at December 31, 2018 and June 30, 2018:

 

   Total Fair             
   Value   Level 1   Level 2   Level 3 
   (in thousands) 
At December 31, 2018                    
                     
Securities available-for-sale:                    
U.S. government and government-sponsored securities  $2,765   $-   $2,765   $- 
Corporate bonds   3,525    -    3,525    - 
U.S. Government-sponsored and guaranteed mortgage-backed securities   22,575    -    22,575    - 
Non-agency mortgage-backed securities   2,772    -    2,772    - 
Other securities   9,637    -    -    9,637 
Total  $41,274   $-   $31,637   $9,637 
                     
At June 30, 2018                    
                     
Securities available-for-sale:                    
U.S. government and government-sponsored securities  $4,328   $-   $4,328   $- 
Corporate bonds   3,730    -    3,730    - 
U.S. Government-sponsored and guaranteed mortgage-backed securities   25,251    -    25,251    - 
Non-agency mortgage-backed securities   3,237    -    3,237    - 
Other securities   10,000    -    -    10,000 
Total  $46,546   $-   $36,546   $10,000 

 

There were no changes in level 3 assets measured at fair value for the six months ended December 31, 2018 and 2017.

 

25

 

 

The following summarizes assets measured at fair value on a non-recurring basis and the adjustments to the carrying value at and for the three and six months ended December 31, 2018 and 2017:

 

                   Total Losses   Total Losses 
                   for the three   for the six 
   Total Fair               months ended   months ended 
   Value   Level 1   Level 2   Level 3   December 31, 2018   December 31, 2018 
 At December 31, 2018                              
                               
Impaired loans  $223   $-   $-   $223   $38   $38 
Other real estate owned   494    -    -    494    -    63 
   $717   $-   $-   $717   $38   $101 

 

                   Total Losses   Total Losses 
                   for the three   for the six 
   Total Fair               months ended   months ended 
   Value   Level 1   Level 2   Level 3   December 31, 2017   December 31, 2017 
   (in thousands) 
At June 30, 2018                              
                               
Impaired loans  $160   $-   $-   $160   $-   $- 
Other real estate owned   110    -    -    110    8    9 
   $270   $-   $-   $270   $8   $9 

 

The amount of other real estate owned represents the carrying value for which write-downs are based on the estimated fair value of the property.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the asset. 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 asset. Because a market may not readily exist for a significant portion of the Company’s asset, 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 the estimates.

 

There were no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2018 or June 30, 2018.

 

26

 

 

 

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:

 

Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.

 

Investment Securities Held-to-Maturity and FHLBB Stock. The fair value of securities held-to-maturity is estimated based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or available market evidence. Ownership of Federal Home Loan Bank of Boston (“FHLBB”) stock is restricted to member banks; therefore, the stock is not traded. The estimated fair value of FHLBB stock is equal to its carrying value, which represents the price at which the FHLBB is obligated to redeem its stock.

 

Loans. For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential, commercial real estate, residential construction, commercial and consumer and other loans. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable). Fair values were estimated for each component using assumptions developed by management and a valuation model provided by a third party specialist.

 

The fair values of residential, commercial real estate, residential construction, commercial and consumer and other loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows considered factors such as future loan prepayments. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair value of home equity lines of credit was based on the outstanding loan balances. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

Deposits and Mortgagors’ Escrow. The fair value of deposits with no stated maturity such as demand deposits, NOW, regular savings, and money market deposit accounts and mortgagors’ escrow accounts, is equal to the amount payable on demand. The fair value estimates do not include the benefit that results from the generally lower cost of funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The fair value estimate of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits having similar remaining maturities.

 

Federal Home Loan Bank Advances. The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

 

Securities Sold Under Agreements to Repurchase. The Company enters into overnight repurchase agreements with its customers. Since these agreements are short-term instruments, the fair value of these agreements approximates their recorded balance. The Company also secures term repurchase agreements through other financial institutions. The fair value of these agreements are determined by discounting the anticipated future cash payments using rates currently available to the Bank for debt with similar terms and remaining maturities.

 

Accrued Interest. The carrying amounts of accrued interest approximate fair value.

 

Off-Balance Sheet Instruments. The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. In the case of the commitments discussed in Note 14, the fair value equals the carrying amounts which are not significant.

 

Summary of Fair Values of Financial Instruments. The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

 

27

 

 

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, as of December 31, 2018 and June 30, 2018:

 

   December , 2018 
   Carrying   Fair Value Hierarchy   Total Fair 
   Amount   Level 1   Level 2   Level 3   Value 
   (in thousands) 
Financial assets:                         
Cash and cash equivalents  $5,332   $5,332   $-   $-   $5,332 
Securities available-for-sale   41,274    -    31,637    9,637    41,274 
Securities held-to-maturity   71,925    -    71,188    -    71,188 
Federal Home Loan Bank stock   4,206    -    -    4,206    4,206 
Loans, net   368,618    -    -    353,355    353,355 
Accrued interest receivable   1,538    -    -    1,538    1,538 
                          
Financial liabilities:                         
Deposits   365,935    -    -    366,566    366,566 
Mortgagors' escrow accounts   3,062    -    -    3,062    3,062 
Federal Home Loan Bank advances   62,172    -    61,699    -    61,699 
Securities sold under agreements to repurchase   3,310    -    3,310    -    3,310 
Accrued interest payable   200    -    -    200    200 

 

   June 30, 2018 
   Carrying   Fair Value Hierarchy   Total Fair 
   Amount   Level 1   Level 2   Level 3   Value 
   (in thousands) 
Financial assets:                         
Cash and cash equivalents  $10,102   $10,102   $-   $-   $10,102 
Securities available-for-sale   46,546    -    36,546    10,000    46,546 
Securities held-to-maturity   82,816    -    81,828    -    81,828 
Federal Home Loan Bank stock   4,206    -    -    4,206    4,206 
Loans, net   352,270    -    -    346,511    346,511 
Accrued interest receivable   1,361    -    -    1,361    1,361 
                          
Financial liabilities:                         
Deposits   371,585    -    -    372,563    372,563 
Mortgagors' escrow accounts   3,123    -    -    3,123    3,123 
Federal Home Loan Bank advances   63,199    -    62,428    -    62,428 
Securities sold under agreements to repurchase   664    -    664    -    664 
Accrued interest payable   158    -    -    158    158 

 

28

 

 

NOTE 13 – Subsequent Events

 

On January 2, 2019, the Board of Directors of PB Bancorp, Inc. declared a quarterly cash dividend of $0.07 per share for stockholders of record as of January 16, 2019, which is payable on January 30, 2019.

 

NOTE 14 – Commitments to Extend Credit

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

 

The contractual amounts of outstanding commitments were as follows:

 

   December 31,   June 30, 
   2018   2018 
   (in thousands) 
Commitments to extend credit:          
Loan commitments  $4,056   $3,594 
Unadvanced construction loans   8,585    8,822 
Unadvanced lines of credit   19,762    18,881 
Standby letters of credit   395    395 
Outstanding commitments  $32,798   $31,692 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following analysis discusses changes in the financial condition at December 31, 2018 and June 30, 2018 and results of operations for the three and six months ended December 31, 2018 and 2017, and should be read in conjunction with the Company’s Consolidated Financial Statements (unaudited) and the notes thereto, appearing in Part I, Item 1 of this quarterly report. These financial statements should be read in conjunction with the 2018 Consolidated Financial Statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the SEC on September 21, 2018.

 

Forward-Looking Statements

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. PB Bancorp intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of PB Bancorp, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. PB Bancorp’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of PB Bancorp and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan and investment portfolios, demand for loan products, cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems; deposit flows, competition, demand for financial services in PB Bancorp’s market area, the effect of any federal government shutdown and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning PB Bancorp and its business, including additional factors that could materially affect PB Bancorp financial results, is included in PB Bancorp’s filings with the Securities and Exchange Commission, including the risk factors included in PB Bancorp’s Annual Report on Form 10-K filed with the SEC on September 21, 2018.

 

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Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the results of any revisions that 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.

 

Overview

 

Our profitability is highly dependent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds.

 

Our net income increased $299,000, or 37.8%, to $1.1 million, or $0.15 per basic and diluted share for the three months ended December 31, 2018, compared to net income of $791,000, or $0.11 per basic and diluted share for the three months ended December 31, 2017. This was due primarily to an increase in net interest income of $235,000, or 6.7% to $3.7 million for the three months ended December 31, 2018 from $3.5 million for the three months ended December 31, 2017, while non-interest income decreased $123,000, or 14.3% to $735,000, for the three months ended December 31, 2018 from $858,000 for the three months ended December 31, 2017.  Non-interest expense increased $82,000, or 2.7% to $3.2 million for the three months ended December 31, 2018 from $3.1 million for the three months ended December 31, 2017. Income tax expense decreased $269,000, or 56.4% to $208,000 for the three months ended December 31, 2018 from $477,000 for the three months ended December 31, 2017. This was a result of the Tax Cuts and Jobs Act being signed into law on December 22, 2017. The effective tax rate was 16.0% for the three months ended December 31, 2018 compared to 37.6% for the three months ended December 31, 2017. The Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax asset of $211,000, which was recorded as additional tax expense in the Company’s consolidated statements of net income for the three and six months ended December 31, 2017 and a reduction in the federal tax rate.

 

Our net income increased $1.1 million, or 80.4%, to $2.5 million, or $0.34 per basic and diluted share for the six months ended December 31, 2018, compared to net income of $1.4 million, or $0.19 per basic and diluted share for the six months ended December 31, 2017. This was due primarily to a decrease of $775,000 in the provision for loan losses. The Company recorded a credit for loan losses of $600,000 for the six months ended December 31, 2018 compared to a $175,000 provision for loan losses for the six months ended December 31, 2017. Net interest income increased $486,000, or 7.1% to $7.4 million for the six months ended December 31, 2018 from $6.9 million for the six months ended December 31, 2017, while non-interest income remained unchanged at $1.4 million for the six months ended December 31, 2018 and December 31, 2017. Non-interest expense increased $346,000, or 5.7% to $6.4 million for the six months ended December 31, 2018 from $6.0 million for the six months ended December 31, 2017. Income tax expense decreased $184,000, or 26.7% to $504,000 for the six months ended December 31, 2018 from $688,000 for the six months ended December 31, 2017. The effective tax rate was 16.9% for the six months ended December 31, 2018 compared to 33.3% for the three months ended December 31, 2017.

 

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income, which in turn would likely have an adverse effect on our results of operations. As described in “Market Risk,” we expect that our net interest income and our net portfolio value would decrease as a result of an instantaneous increase in interest rates. We use a variety of strategies to help manage interest rate risk, as described in “Market Risk”.

 

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in Eastern Connecticut and the Rhode Island and Massachusetts communities adjacent to Windham County, Connecticut. Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. In addition, changes in economic conditions could result in increased actual losses or increased losses inherent in our loan portfolio, either of which could require us to significantly increase the level of our provision for loan losses.

 

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Comparison of Financial Condition at December 31, 2018 and June 30, 2018

 

Assets

 

Total assets were $520.4 million at December 31, 2018, a decrease of $5.0 million, or 1.0%, from $525.4 million at June 30, 2018. Cash and cash equivalents decreased $4.8 million, or 47.2%, to $5.3 million at December 31, 2018 compared to $10.1 million at June 30, 2018. Investments in held-to-maturity securities decreased $10.9 million, or 13.2%, to $71.9 million at December 31, 2018 compared to $82.8 million at June 30, 2018 and investments in available-for-sale securities decreased $5.3 million, or 11.3%, to $41.3 million at December 31, 2018 compared to $46.5 million at June 30, 2018. The Company continues to use excess cash, as well as cash flows from investments to assist in funding higher yielding loan growth. Net loans outstanding increased $16.3 million, or 4.6%, to $368.6 million at December 31, 2018 from $352.3 million at June 30, 2018. The increase in loans was primarily due to a $25.7 million, or 25.2%, increase in commercial real estate loans to $127.3 million at December 31, 2018 from $101.6 million at June 30, 2018. This was partially offset by a decrease in residential loans of $7.6 million, or 3.2% to $229.3 million at December 31, 2018 from $236.9 million at June 30, 2018.

 

Allowance for Loan Losses

 

The table below indicates the relationship between the allowance for loan losses, total loans outstanding and non-performing loans at December 31, 2018 and June 30, 2018. For additional information, see “Comparison of Operating Results for the three and six months ended December 31, 2018 and 2017 – Provision for Loan Losses.”

 

   December 31,   June 30, 
   2018   2018 
   (Dollars in thousands) 
Allowance for loan losses  $2,864   $2,943 
Total loans   370,166    353,790 
Non-performing loans   3,881    4,424 
Allowance/total loans   0.77%   0.83%
Allowance/non-performing loans   73.8%   66.5%

 

Liabilities

 

Total liabilities decreased $4.0 million, or 0.9%, to $437.1 million at December 31, 2018 from $441.1 million at June 30, 2018. Total deposits decreased $5.7 million, or 1.5%, to $365.9 million at December 31, 2018 from $371.6 million at June 30, 2018. We experienced an increase in non-interest-bearing deposits of $687,000, or 1.0% to $72.1 million at December 31, 2018 compared to $71.4 million at June 30, 2018. Interest-bearing deposits decreased $6.3 million, or 2.1% to $293.8 million at December 31, 2018 compared to $300.2 million at June 30, 2018. Total Federal Home Loan Bank borrowings decreased $1.0 million, or 1.6%, to $62.2 million at December 31, 2018 from $63.2 million at June 30, 2018. Securities sold under agreements to repurchase increased $2.6 million, or 398.5% to $3.3 million at December 31, 2018 compared to $664,000 at June 30, 2018.

 

Stockholders’ Equity

 

Total stockholders’ equity decreased $1.0 million, or 1.2%, to $83.3 million at December 31, 2018 from $84.3 million at June 30, 2018. The decrease was primarily due to repurchasing 175,983 shares at an average cost of $10.95 per share, or $1.9 million. This completed the Company’s second buyback plan. Dividends paid during the six months ended December 31, 2018 were $1.4 million. This was partially offset by net income of $2.5 million during the six months ended December 31, 2018.

 

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Comparison of Operating Results for the Three and Six Months Ended December 31, 2018 and 2017

 

Interest and Dividend Income. Interest and dividend income increased $312,000, or 7.2% to $4.6 million for the three months ended December 31, 2018 compared to $4.3 million for the three months ended December 31, 2017. The average balance of interest-earning assets decreased $10.8 million, or 2.1% to $490.7 million for the three months ended December 31, 2018 from $501.5 million for the three months ended December 31, 2017. The average yield on interest-earning assets increased to 3.73% for the three months ended December 31, 2018 from 3.41% for the three months ended December 31, 2017 as a result of increases in market interest rates.

 

Interest income on loans increased $424,000, or 12.8% to $3.7 million for the three months ended December 31, 2018 compared to $3.3 million for the three months ended December 31, 2017. This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased $23.6 million, or 7.0% to $360.6 million for the three months ended December 31, 2018 from $337.0 million for the three months ended December 31, 2017. The yield on average loans increased 21 basis points to 4.10% for the three months ended December 31, 2018 from 3.89% for the three months ended December 31, 2017 as a result of increases in market interest rates.

 

Interest and dividend income on investments decreased $129,000, or 13.7% to $816,000 for the three months ended December 31, 2018 compared to $945,000 for the three months ended December 31, 2017. This was due to a decrease in the average balance of investments of $35.6 million, or 22.6% to $122.1 million for the three months ended December 31, 2018 from $157.7 million for the three months ended December 31, 2017. This was partially offset by an increase in yield of 27 basis points to 2.65% for the three months ended December 31, 2018 from 2.38% for the three months ended December 31, 2017 as a result of increases in market interest rates.

 

Interest and dividend income increased $621,000, or 7.3% to $9.1 million for the six months ended December 31, 2018 compared to $8.5 million for the six months ended December 31, 2017. The average balance of interest-earning assets decreased $7.3 million, or 1.5% to $492.3 million for the six months ended December 31, 2018 from $499.6 million for the six months ended December 31, 2017. The average yield on interest-earning assets increased to 3.67% for the six months ended December 31, 2018 from 3.37% for the six months ended December 31, 2017 as a result of increases in market interest rates.

 

Interest income on loans increased $822,000, or 12.7% to $7.3 million for the six months ended December 31, 2018 compared to $6.5 million for the six months ended December 31, 2017. This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased $26.8 million, or 8.1% to $357.0 million for the six months ended December 31, 2018 from $330.2 million for the six months ended December 31, 2017. The yield on average loans increased 16 basis points to 4.06% for the six months ended December 31, 2018 from 3.90% for the six months ended December 31, 2017 as a result of increases in market interest rates.

 

Interest and dividend income on investments decreased $254,000, or 13.1% to $1.7 million for the six months ended December 31, 2018 compared to $1.9 million for the six months ended December 31, 2017. This was due to a decrease in the average balance of investments of $38.0 million, or 23.2% to $126.0 million for the six months ended December 31, 2018 from $164.0 million for the six months ended December 31, 2017. This was partially offset by an increase in yield of 31 basis points to 2.65% for the six months ended December 31, 2018 from 2.34% for the six months ended December 31, 2017 as a result of increases in market interest rates.

 

Interest Expense. Interest expense increased $77,000, or 9.6% to $881,000 for the three months ended December 31, 2018 compared to $804,000 for the three months ended December 31, 2017. Total average interest-bearing liabilities decreased $12.2 million, or 3.3% to $361.2 million for the three months ended December 31, 2018 compared to $373.4 million for the three months ended December 31, 2017. The cost of average interest-bearing liabilities increased to 0.97% for the three months ended December 31, 2018 compared to 0.85% for the three months ended December 31, 2017.

 

Interest expense on deposits increased by $117,000, or 25.4%, to $577,000 for the three months ended December 31, 2018 from $460,000 for the three months ended December 31, 2017. Interest expense on time deposits increased $108,000, or 30.3%, to $465,000 for the three months ended December 31, 2018 from $357,000 for the three months ended December 31, 2017. The cost of interest-bearing deposits increased to 0.77% for the three months ended December 31, 2018 from 0.62% for the three months ended December 31, 2017 as we increased the rates we pay on deposits to remain competitive in our market areas.

 

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Interest expense on borrowings decreased by $40,000, or 11.6%, to $304,000 for the three months ended December 31, 2018 from $344,000 for the three months ended December 31, 2017. The rate paid on borrowings increased 17 basis points to 1.88% for the three months ended December 31, 2018 from 1.71% for the three months ended December 31, 2017. Average borrowings decreased $15.7 million, or 19.7%, to $64.1 million for the three months ended December 31, 2018 from $79.8 million for the three months ended December 31, 2017. Average Federal Home Loan Bank advances decreased $15.0 million, or 19.5%, to $62.3 million for the three months ended December 31, 2018 from $77.3 million for the three months ended December 31, 2017. We have been able to fund loan growth, in part, with an increase in deposits. The average rate on Federal Home Loan Bank advances increased 17 basis points to 1.93% for the three months ended December 31, 2018 from 1.76% for the three months ended December 31, 2017. Average other borrowed money decreased $654,000, or 26.1%, to $1.8 million for the three months ended December 31, 2018 from $2.5 million for the three months ended December 31, 2017.

 

Interest expense increased $135,000, or 8.4% to $1.7 million for the six months ended December 31, 2018 compared to $1.6 million for the six months ended December 31, 2017. Total average interest-bearing liabilities decreased $7.6 million, or 2.1% to $363.5 million for the six months ended December 31, 2018 compared to $371.1 million for the six months ended December 31, 2017. The cost of average interest-bearing liabilities increased to 0.95% for the six months ended December 31, 2018 compared to 0.86% for the six months ended December 31, 2017.

 

Interest expense on deposits increased by $228,000, or 25.2%, to $1.1 million for the six months ended December 31, 2018 from $906,000 for the six months ended December 31, 2017. Interest expense on time deposits increased $213,000, or 30.5%, to $912,000 for the six months ended December 31, 2018 from $699,000 for the six months ended December 31, 2017. The cost of interest-bearing deposits increased to 0.75% for the six months ended December 31, 2018 from 0.61% for the six months ended December 31, 2017 as we increased the rates we pay on deposits to remain competitive in our market areas.

 

Interest expense on borrowings decreased by $93,000, or 13.3%, to $608,000 for the six months ended December 31, 2018 from $701,000 for the six months ended December 31, 2017. The rate paid on borrowings increased eight basis points to 1.86% for the six months ended December 31, 2018 from 1.78% for the six months ended December 31, 2017. Average borrowings decreased $13.6 million, or 17.4%, to $64.7 million for the six months ended December 31, 2018 from $78.3 million for the six months ended December 31, 2017. Average Federal Home Loan Bank advances decreased $13.3 million, or 17.6%, to $62.4 million for the six months ended December 31, 2018 from $75.7 million for the six months ended December 31, 2017. We have been able to fund loan growth, in part, with an increase in deposits. The average rate on Federal Home Loan Bank advances increased ten basis points to 1.93% for the six months ended December 31, 2018 from 1.83% for the six months ended December 31, 2017. Average other borrowed money decreased $304,000, or 11.4%, to $2.4 million for the six months ended December 31, 2018 from $2.7 million for the six months ended December 31, 2017.

 

Net Interest Income. Net interest income increased $235,000, or 6.7%, to $3.7 million for the three months ended December 31, 2018 from $3.5 million for the three months ended December 31, 2017. Our interest rate spread increased to 2.76% for the three months ended December 31, 2018 from 2.56% for the three months ended December 31, 2017 and our net interest-earning assets increased $1.4 million, or 1.1%. Our net interest margin increased to 3.02% for the three months ended December 31, 2018 from 2.77% for the three months ended December 31, 2017.

 

Net interest income increased $486,000, or 7.1%, to $7.4 million for the six months ended December 31, 2018 from $6.9 million for the six months ended December 31, 2017. Our interest rate spread increased to 2.72% for the six months ended December 31, 2018 from 2.51% for the six months ended December 31, 2017 and our net interest-earning assets increased $366,000, or 0.3%. Our net interest margin increased to 2.97% for the six months ended December 31, 2018 from 2.73% for the six months ended December 31, 2017.

 

Provision for Loan Losses. There was no provision for loan losses for the three months ended December 31, 2018 and December 31, 2017. This was primarily due to improvement in our net charge-off trends and was partially offset by the increase in loans outstanding.

 

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There was a credit provision for loan losses of $600,000 for the six months ended December 31, 2018 compared to a provision for loan loss of $175,000 for the six months ended December 31, 2017. This was due primarily to $521,000 in net recoveries for the six months ended December 31, 2018.

 

Non-interest Income. Non-interest income decreased $123,000, or 14.3%, to $735,000 for the three months ended December 31, 2018 compared to $858,000 for the three months ended December 31, 2017. This was primarily due to a decrease in legal settlement income of $140,000 to $15,000 for the three months ended December 31, 2018 compared to $155,000 for the three months ended December 31, 2017.

 

Non-interest income was $1.4 million for the six months ended December 31, 2018 and 2017. This included an increase of $154,000 in net gains on other real estate owned sales and a decrease in legal settlement income of $140,000 during the six months ended December 31, 2018.

 

Non-interest Expense. Non-interest expense increased $82,000, or 2.7% to $3.2 million for the three months ended December 31, 2018 from $3.1 million for the three months ended December 31, 2017. Salaries and benefits expense increased $104,000, or 5.6% to $1.9 million for the three months ended December 31, 2018 from $1.8 million for the three months ended December 31, 2017. This was primarily due to an increase in salary expense of $67,000. Occupancy and equipment expense decreased $8,000, or 2.7% to $290,000 for the three months ended December 31, 2018 from $298,000 for the three months ended December 31, 2017. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, professional fees and marketing expense decreased by $14,000, or 1.5%, to $937,000 for the three months ended December 31, 2018 from $951,000 for the three months ended December 31, 2017.

 

Non-interest expense increased $346,000, or 5.7% to $6.4 million for the six months ended December 31, 2018 from $6.0 million for the six months ended December 31, 2017. Salaries and benefits expense increased $220,000, or 6.0% to $3.9 million for the six months ended December 31, 2018 from $3.7 million for the six months ended December 31, 2017. This was primarily due to increases in salary expense of $98,000 and $96,000 in incentive compensation. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, professional fees and marketing expense increased by $121,000, or 6.8%, to $1.9 million for the six months ended December 31, 2018 from $1.8 million for the six months ended December 31, 2017. This was primarily due to increases in service bureau expense of $84,000 and other real estate owned write-downs of $77,000. This was partially offset by a decrease of $37,000 in other real estate owned expense.

 

Tax Expense. Income tax expense decreased by $269,000, or 56.4% to $208,000 for the three months ended December 31, 2018 from $477,000 for the three months ended December 31, 2017. Tax expense for the three months ended December 31, 2017 included a charge of $211,000 to our deferred tax expense because of the reduced corporate tax rate included in the Tax Cuts and Jobs Act enacted on December 22, 2017. Our effective tax rate was 16.0% for the three months ended December 31, 2018 compared to 37.6% for the three months ended December 31, 2017. Tax expense is based on a year-to-date basis at a forecasted effective rate. The effective tax rates differed from the statutory tax rate due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income and the reduced corporate tax rate included in the Tax Cuts and Jobs Act enacted on December 22, 2017. The Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax asset of $211,000, which was recorded as additional tax expense in the Company’s consolidated statements as of and for the three and six months ended December 31, 2017.

 

Income tax expense decreased by $184,000, or 26.7% to $504,000 for the six months ended December 31, 2018 from $688,000 for the six months ended December 31, 2017. Our effective tax rate was 16.9% for the six months ended December 31, 2018 compared to 33.3% for the six months ended December 31, 2017. Tax expense is based on a year-to-date basis at a forecasted effective rate. The effective tax rates differed from the statutory tax rate due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income and the reduced corporate tax rate included in the Tax Cuts and Jobs Act enacted on December 22, 2017.

 

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Average Balances and Yields

 

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and costs are annualized.

 

   For the Three Months Ended December 31, 
   2018   2017 
   Average   Interest   Yield/   Average   Interest   Yield/ 
   Balance   Income/Expense   Cost   Balance   Income/Expense   Cost 
   (Dollars in thousands) 
Interest-earning assets:                              
Investment securities  $122,109   $816    2.65%  $157,703   $945    2.38%
Loans   360,607    3,731    4.10%   336,998    3,307    3.89%
Other earning assets   8,023    70    3.46%   6,812    53    3.09%
Total interest-earning assets   490,739    4,617    3.73%   501,513    4,305    3.41%
Non-interest-earning assets   30,650              30,767           
Total assets  $521,389             $532,280           
                               
Interest-bearing liabilities:                              
NOW accounts  $75,142    72    0.38%  $81,008    75    0.37%
Savings accounts   85,916    17    0.08%   82,774    18    0.09%
Money market accounts   21,798    23    0.42%   20,570    10    0.19%
Time deposits   114,207    465    1.62%   109,158    357    1.30%
Total interest-bearing deposits   297,063    577    0.77%   293,510    460    0.62%
FHLB advances   62,278    303    1.93%   77,336    343    1.76%
Other borrowed money   1,854    1    0.21%   2,508    1    0.16%
Total other borowed money   64,132    304    1.88%   79,844    344    1.71%
Total interest-bearing liabilities   361,195    881    0.97%   373,354    804    0.85%
Non-interest-bearing demand deposits   70,789              70,012           
Other non-interest-bearing liabilities   4,303              4,068           
Capital accounts   85,102              84,846           
Total liabilities and capital accounts  $521,389             $532,280           
                               
Net interest income       $3,736             $3,501      
Interest rate spread             2.76%             2.56%
Net interest-earning assets  $129,544             $128,159           
Net interest margin             3.02%             2.77%
Average earning assets to average interest-bearing liabilities             135.87%             134.33%

 

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   For the Six Months Ended December 31, 
   2018   2017 
   Average   Interest   Yield/   Average   Interest   Yield/ 
   Balance   Income/Expense   Cost   Balance   Income/Expense   Cost 
   (Dollars in thousands) 
Interest-earning assets:                              
Investment securities  $126,013   $1,681    2.65%  $163,974   $1,935    2.34%
Loans   357,041    7,306    4.06%   330,189    6,484    3.90%
Other earning assets   9,224    114    2.45%   5,398    61    2.24%
Total interest-earning assets   492,278    9,101    3.67%   499,561    8,480    3.37%
Non-interest-earning assets   28,544              28,998           
Total assets  $520,822             $528,559           
                               
Interest-bearing liabilities:                              
NOW accounts  $77,132    146    0.38%  $80,948    152    0.37%
Savings accounts   85,210    35    0.08%   82,573    35    0.08%
Money market accounts   22,179    41    0.37%   21,015    20    0.19%
Time deposits   114,211    912    1.58%   108,240    699    1.28%
Total interest-bearing deposits   298,732    1,134    0.75%   292,776    906    0.61%
FHLB advances   62,359    607    1.93%   75,660    699    1.83%
Other borrowed money   2,374    1    0.08%   2,678    2    0.15%
Total other borrowed money   64,733    608    1.86%   78,338    701    1.78%
Total interest-bearing liabilities   363,465    1,742    0.95%   371,114    1,607    0.86%
Non-interest-bearing demand deposits   70,287              70,675           
Other non-interest-bearing liabilities   2,154              2,009           
Capital accounts   84,916              84,761           
Total liabilities and capital accounts  $520,822             $528,559           
                               
Net interest income       $7,359             $6,873      
Interest rate spread             2.72%             2.51%
Net interest-earning assets  $128,813             $128,447           
Net interest margin             2.97%             2.73%
Average earning assets to average interest-bearing liabilities             135.44%             134.61%

 

The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of the table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

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   For the Three Months Ended December 31, 2018 
   Compared to the Three Months Ended December 31, 2017 
   Increase (Decrease) Due to change in 
INTEREST INCOME  Rate   Volume   Net 
   (In thousands) 
             
Investment securities  $521   $(650)  $(129)
Loans   185    239    424 
Other interest-earning assets   7    10    17 
TOTAL INTEREST INCOME   713    (401)   312 
                
INTEREST EXPENSE               
                
NOW accounts   12    (15)   (3)
Savings accounts   (5)   4    (1)
Money market accounts   12    1    13 
Time deposits   91    17    108 
FHLB advances   160    (200)   (40)
Other borrowed money   1    (1)   - 
TOTAL INTEREST EXPENSE   271    (194)   77 
CHANGE IN NET INTEREST INCOME  $442   $(207)  $235 

 

   For the Six Months Ended December 31, 2018 
   Compared to the Six Months Ended December 31, 2017 
   Increase (Decrease) Due to change in 
INTEREST INCOME  Rate   Volume   Net 
   (In thousands) 
             
Investment securities  $553   $(807)  $(254)
Loans   279    543    822 
Other interest-earning assets   6    47    53 
TOTAL INTEREST INCOME   838    (217)   621 
                
INTEREST EXPENSE               
                
NOW accounts   2    (8)   (6)
Savings accounts   (2)   2    - 
Money market accounts   20    1    21 
Time deposits   172    41    213 
FHLB advances   96    (188)   (92)
Other borrowed money   (1)   -    (1)
TOTAL INTEREST EXPENSE   287    (152)   135 
CHANGE IN NET INTEREST INCOME  $551   $(65)  $486 

 

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Market Risk, Liquidity and Capital Resources

 

Market Risk

 

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”). Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.

 

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the Federal Home Loan Bank of Boston, to “match fund” certain investments and/or loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction loans and commercial and industrial loans; (iv) offering a variety of consumer loans, which typically have shorter-terms; and (v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

 

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long- term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained parallel shift in the yield curve (+100 and +200 basis points) at December 31, 2018 and June 30, 2018.

 

Net Interest Income At-Risk 
   Estimated Increase (Decrease)   Estimated Increase (Decrease) 
Change in Interest Rates  in NII   in NII 
(Basis Points)      December 31, 2018    June 30, 2018 
         
+200   (0.60)%   0.20%
+100   1.00%   1.40%
-100   (3.70)%   (4.50)%

- 200

   (9.00)%   (10.40)%

 

Net Portfolio Value Simulation Analysis. We compute the amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Given the current low level of market interest rates, we do not prepare a net portfolio value calculation for an interest rate decrease of greater than 100 basis points. A basis point equals one-hundredth of one percent, and 200 basis points equals two percent, an increase in interest rates from 3% to 5% would mean, for example, a 200 basis point increase in the “Change in Interest Rates” column below.

 

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The tables below set forth, at December 31, 2018, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve based on information produced by an external consultant. This data is for Putnam Bank only and does not include any yield curve changes in the assets of PB Bancorp, Inc.

 

               NPV as a Percentage of Present 
               Value of Assets (3) 
       Estimated Increase (Decrease) in         
Change in      NPV       Increase 
Interest Rates  Estimated               (Decrease) 
(basis points) (1)      NPV (2)       Amount     Percent       NPV Ratio (4)    (basis points) 
                     
+300  $62,334   $(20,707)   -24.94%   13.60%   (290)
+200  $69,672   $(13,369)   -16.10%   14.70%   (180)
+100  $77,279   $(5,762)   -6.94%   15.80%   (70)
0  $83,041   $-    0.00%   16.50%   0 
-100  $85,894   $2,853    3.44%   16.70%   20 
-200  $87,148   $4,107    4.95%   16.50%   0 

 

 
(1)Assumes an instantaneous uniform change in interest rates at all maturities.
(2)NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)NPV ratio represents NPV divided by the present value of assets.

 

The preceding analyses do not represent actual forecasts and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary prepayment/refinancing levels will likely deviate from those assumed, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables.

 

Liquidity

 

The term liquidity refers to the ability of the Company and the Bank to meet current and future short-term financial obligations. The Company and the Bank further define liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses. Liquidity management is both a daily and long-term function of business management. The Bank’s primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-related securities, and Federal Home Loan Bank of Boston borrowings. The Bank can borrow funds from the Federal Home Loan Bank of Boston based on eligible collateral of loans and securities. The Bank had Federal Home Loan Bank of Boston borrowings as of December 31, 2018 of $62.2 million, with unused borrowing capacity of $51.2 million. The Bank has an internal limit of wholesale borrowings to total assets ratio of 30.0%. As of December 31, 2018, the ratio of wholesale borrowings to total assets was 14.0%.

 

The Bank’s primary investing activities are the origination of loans and the purchase of investment securities. During the six months ended December 31, 2018, the Bank’s loan originations net of principal collections were $16.8 million compared to loan originations net of principal collections of $10.3 million for the six months ended December 31, 2017. There were no security purchases during the six months ended December 31, 2018 and 2017. There were no loan purchases for the six months ended December 31, 2018 compared to $19.7 million in loan purchases for the six months ended December 31, 2017.

 

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Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. The Bank monitors its liquidity position frequently and anticipates that it will have sufficient funds to meet its current funding commitments.

 

Certificates of deposit totaled $114.2 million at December 31, 2018. The Bank relies on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on the Bank’s experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict with certainty future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank.

 

Federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6% and a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital, Tier 1 capital or Total capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer was fully phased in effective January 1, 2019. With the Bank’s capital levels remaining characterized as “well-capitalized” throughout the phase in periods.  Due to our asset size, the Company is not subject to capital requirements.

 

As of December 31, 2018, the most recent notification from the Federal Reserve Bank of Boston, categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change our category. The following table shows the Bank’s required minimum capital ratios in order to be considered well-capitalized and the actual capital ratios as of December 31, 2018 and June 30, 2018.

 

   Required   Actual   Actual 
   Ratio   Amount   Ratio 
       (in thousands)     
December 31, 2018               
                
Tier 1 Leverage   5.00%  $64,910    12.75%
Common Equity Tier 1 Capital   6.50   $64,910    18.01 
Tier 1 Risk-based Capital   8.00   $64,910    18.01 
Total Capital   10.00    67,813    18.81 
                
June 30, 2018               
                
Tier 1 Leverage   5.00%  $62,797    12.16%
Common Equity Tier 1 Capital   6.50    62,797    18.19 
Tier 1 Risk-based Capital   8.00    62,797    18.19 
Total Capital   10.00    65,779    19.05 

 

Off-Balance Sheet Arrangements

 

In addition to the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit, and letters of credit.

 

For the six months ended December 31, 2018, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 4.Controls and Procedures

 

Under the supervision and with the participation of PB Bancorp, Inc.’s management, including its Chief Executive Officer and Chief Financial Officer, PB Bancorp, Inc. evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, PB Bancorp’s disclosure controls and procedures were effective.

 

There has been no change in PB Bancorp, Inc.’s internal control over financial reporting in connection with the quarterly evaluation that occurred during PB Bancorp, Inc.’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, PB Bancorp, Inc.’s internal control over financial reporting.

 

Part II. – OTHER INFORMATION

 

Item 1.Legal Proceedings – Not applicable

 

Item 1A.Risk Factors – Not applicable to smaller reporting companies

 

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

 

a) Not applicable

 

b) Not applicable

 

c) The following table shows the Company’s repurchase of its common stock for the three months ended December 31, 2018.

 

           Total Number of     
           Shares Purchased   Maximum Number of 
   Total Number   Average Price   as Part of Publicly   Shares that May Yet Be 
   of Shares   Paid per Share   Announced Plans   Purchased Under Plans 
Period  Purchased   Share   or Programs (1)   or Programs (1) 
October 1, 2018 through October 31, 2018   0   $-    0    174,983 
November 1, 2018 through November 30, 2018   0    -    0    174,983 
December 1, 2018 through December 31, 2018   174,983    10.95    174,983    0 
    174,983   $10.95    174,983    0 

 

On April 4, 2018, the Company adopted a second stock-repurchase program. Under the repurchase program, the Company may repurchase up to 193,012 shares of its common stock, or approximately 2.5% of the current outstanding shares On December 31, 2018, PB Bancorp, Inc. (the “Company”) completed its second stock repurchase program. Under the repurchase program, the Company repurchased 193,012 shares of its common stock at an average price of $10.91 per share.

 

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Item 3.Defaults Upon Senior Securities – Not applicable

 

Item 4.Mine Safety Disclosures – Not Applicable

 

Item 5.Other Information - Not Applicable

 

Item 6.Exhibits

 

Exhibits

 

10.1 Change in Control Agreement by and between PB Bancorp, Inc., Putnam Bank and Thomas A. Borner.
10.2 Change in Control Agreement by and between PB Bancorp, Inc., Putnam Bank and Robert J. Halloran, Jr.
31.1 Chief Executive Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.
101 The following materials from PB Bancorp’s Quarterly Report on Form 10-Q for the three and six months ended December 31, 2018, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

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SIGNATURES

 

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

 

  PB BANCORP, INC.
  (Registrant)
     
Date:   February 12, 2019       /s/ Thomas A. Borner
    Thomas A. Borner
    President and Chief Executive Officer
     
Date:   February 12, 2019       /s/ Robert J. Halloran, Jr.
    Robert J. Halloran, Jr.
    Executive Vice President, Chief Financial Officer and Treasurer

 

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