Price | 11.50 | EPS | 1 | |
Shares | 7 | P/E | 22 | |
MCap | 86 | P/FCF | 21 | |
Net Debt | -44 | EBIT | 9 | |
TEV | 41 | TEV/EBIT | 5 | TTM 2019-09-30, in MM, except price, ratios |
10-Q | 2019-12-31 | Filed 2020-02-12 |
10-Q | 2019-09-30 | Filed 2019-11-12 |
10-K | 2019-06-30 | Filed 2019-09-26 |
10-Q | 2019-03-31 | Filed 2019-05-14 |
10-Q | 2018-12-31 | Filed 2019-02-12 |
10-Q | 2018-09-30 | Filed 2018-11-13 |
10-K | 2018-06-30 | Filed 2018-09-21 |
10-Q | 2018-03-31 | Filed 2018-05-14 |
10-Q | 2017-12-31 | Filed 2018-02-12 |
10-Q | 2017-09-30 | Filed 2017-11-13 |
10-K | 2017-06-30 | Filed 2017-09-25 |
10-Q | 2017-03-31 | Filed 2017-05-12 |
10-Q | 2016-12-31 | Filed 2017-02-13 |
10-Q | 2016-09-30 | Filed 2016-11-14 |
10-K | 2016-06-30 | Filed 2016-09-26 |
10-Q | 2016-03-31 | Filed 2016-05-13 |
10-Q | 2015-12-31 | Filed 2016-02-12 |
10-Q | 2015-09-30 | Filed 2015-12-02 |
8-K | 2020-05-01 | |
8-K | 2020-04-27 | |
8-K | 2020-02-07 | |
8-K | 2020-01-02 | |
8-K | 2019-10-22 | |
8-K | 2019-10-22 | |
8-K | 2019-10-02 | |
8-K | 2019-07-03 | |
8-K | 2019-04-03 | |
8-K | 2019-01-02 | |
8-K | 2018-12-31 | |
8-K | 2018-12-19 | |
8-K | 2018-11-02 | |
8-K | 2018-10-17 | |
8-K | 2018-10-03 | |
8-K | 2018-07-11 | |
8-K | 2018-04-18 | |
8-K | 2018-04-04 | |
8-K | 2018-01-03 |
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-31.1 | tm206546d1_ex31-1.htm |
EX-31.2 | tm206546d1_ex31-2.htm |
EX-32.1 | tm206546d1_ex32-1.htm |
EX-32.2 | tm206546d1_ex32-2.htm |
Balance Sheet | Income Statement | Cash Flow |
---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2019
¨ | 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | PBBI | The NASDAQ Stock Market, LLC |
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)
¨ YES x NO
As of February 1, 2020, there were 7,447,204 shares of the registrant’s common stock outstanding.
PB Bancorp, Inc.
Table of Contents
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
(Unaudited)
December 31, | June 30, | |||||||
2019 | 2019 | |||||||
(in thousands except share data) | ||||||||
ASSETS | ||||||||
Cash and due from depository institutions | $ | 2,401 | $ | 2,173 | ||||
Interest-bearing demand deposits with other banks | 36,249 | 23,499 | ||||||
Total cash and cash equivalents | 38,650 | 25,672 | ||||||
Securities available-for-sale, at fair value | 35,223 | 38,919 | ||||||
Securities held-to-maturity (fair value of $53,628 as of December 31, 2019 and $63,858 as of June 30, 2019) | 53,248 | 63,480 | ||||||
Federal Home Loan Bank stock, at cost | 3,044 | 3,464 | ||||||
Loans held for sale | 97 | - | ||||||
Loans | 373,833 | 381,080 | ||||||
Less: Allowance for loan losses | (3,200 | ) | (3,063 | ) | ||||
Net loans | 370,633 | 378,017 | ||||||
Premises and equipment, net | 3,054 | 3,062 | ||||||
Accrued interest receivable | 1,521 | 1,559 | ||||||
Other real estate owned | 1,009 | 1,271 | ||||||
Goodwill | 6,912 | 6,912 | ||||||
Bank-owned life insurance | 13,443 | 13,267 | ||||||
Net deferred tax asset | 794 | 443 | ||||||
Other assets | 1,833 | 1,964 | ||||||
Total assets | $ | 529,461 | $ | 538,030 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Non-interest-bearing | $ | 72,723 | $ | 73,764 | ||||
Interest-bearing | 309,757 | 310,095 | ||||||
Total deposits | 382,480 | 383,859 | ||||||
Mortgagors' escrow accounts | 3,095 | 3,371 | ||||||
Federal Home Loan Bank advances | 52,618 | 62,145 | ||||||
Securities sold under agreements to repurchase | 2,137 | 804 | ||||||
Other liabilities | 2,728 | 2,779 | ||||||
Total liabilities | 443,058 | 452,958 | ||||||
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, 7,447,204 shares issued and outstanding at December 31, 2019 and June 30, 2019. | 74 | 74 | ||||||
Additional paid-in capital | 58,713 | 58,598 | ||||||
Retained earnings | 31,465 | 30,638 | ||||||
Accumulated other comprehensive loss | (103 | ) | (269 | ) | ||||
Unearned ESOP shares | (3,073 | ) | (3,146 | ) | ||||
Unearned stock awards | (673 | ) | (823 | ) | ||||
Total stockholders' equity | 86,403 | 85,072 | ||||||
Total liabilities and stockholders' equity | $ | 529,461 | $ | 538,030 |
See accompanying notes to consolidated financial statements.
1
Consolidated Statements of Net Income
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Interest and dividend income: | ||||||||||||||||
Interest and fees on loans | $ | 3,935 | $ | 3,731 | $ | 7,920 | $ | 7,306 | ||||||||
Interest and dividends on investments | 673 | 816 | 1,385 | 1,681 | ||||||||||||
Other | 178 | 70 | 348 | 114 | ||||||||||||
Total interest and dividend income | 4,786 | 4,617 | 9,653 | 9,101 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits and escrow | 783 | 577 | 1,587 | 1,134 | ||||||||||||
Borrowed funds | 270 | 304 | 566 | 608 | ||||||||||||
Total interest expense | 1,053 | 881 | 2,153 | 1,742 | ||||||||||||
Net interest and dividend income | 3,733 | 3,736 | 7,500 | 7,359 | ||||||||||||
Provision (credit) for loan losses | - | - | 150 | (600 | ) | |||||||||||
Net interest and dividend income after provision (credit) for loan losses | 3,733 | 3,736 | 7,350 | 7,959 | ||||||||||||
Non-interest income: | ||||||||||||||||
Total other-than-temporary impairment losses on debt securities | (17 | ) | (135 | ) | (216 | ) | (135 | ) | ||||||||
Portion of (gains) losses recognized in other comprehensive income | (17 | ) | 131 | 135 | 131 | |||||||||||
Net impairment losses recognized in earnings | (34 | ) | (4 | ) | (81 | ) | (4 | ) | ||||||||
Fees for services | 469 | 488 | 959 | 958 | ||||||||||||
Mortgage banking activities | 20 | 7 | 30 | 12 | ||||||||||||
Net commissions from brokerage services | 36 | 21 | 85 | 45 | ||||||||||||
Income from bank-owned life insurance | 88 | 90 | 176 | 179 | ||||||||||||
Gain on sales of other real estate owned, net | 69 | 86 | 166 | 107 | ||||||||||||
Other income | 21 | 47 | 68 | 107 | ||||||||||||
Total non-interest income | 669 | 735 | 1,403 | 1,404 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Compensation and benefits | 1,760 | 1,946 | 3,823 | 3,874 | ||||||||||||
Occupancy and equipment | 292 | 290 | 603 | 600 | ||||||||||||
Data processing | 298 | 293 | 598 | 590 | ||||||||||||
LAN/WAN network | 23 | 22 | 45 | 46 | ||||||||||||
Advertising and marketing | 36 | 46 | 77 | 80 | ||||||||||||
Merger related expenses | 491 | - | 491 | - | ||||||||||||
Other real estate owned | 70 | 21 | 100 | 85 | ||||||||||||
Write-down of other real estate owned | - | - | - | 91 | ||||||||||||
Other | 345 | 555 | 790 | 1,012 | ||||||||||||
Total non-interest expense | 3,315 | 3,173 | 6,527 | 6,378 | ||||||||||||
Income before income tax expense | 1,087 | 1,298 | 2,226 | 2,985 | ||||||||||||
Income tax expense | 174 | 208 | 357 | 504 | ||||||||||||
NET INCOME | $ | 913 | $ | 1,090 | $ | 1,869 | $ | 2,481 | ||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.13 | $ | 0.15 | $ | 0.26 | $ | 0.34 | ||||||||
Diluted | $ | 0.13 | $ | 0.15 | $ | 0.26 | $ | 0.34 |
See accompanying notes to consolidated financial statements.
2
Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 913 | $ | 1,090 | $ | 1,869 | $ | 2,481 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Net unrealized holding gains (losses) on available-for-sale securities | 14 | (292 | ) | 265 | (428 | ) | ||||||||||
Reclassification adjustment for losses on available-for-sale securities realized in income on (1) | 34 | 4 | 81 | 4 | ||||||||||||
Non-credit portion of other-than-temporary gains (losses) on available-for-sale securities | 17 | (131 | ) | (135 | ) | (131 | ) | |||||||||
Other comprehensive income (loss) before tax | 65 | (419 | ) | 211 | (555 | ) | ||||||||||
Income tax (loss) benefit related to other comprehensive income (loss) | (13 | ) | 85 | (45 | ) | 114 | ||||||||||
Other comprehensive income (loss) net of tax | 52 | (334 | ) | 166 | (441 | ) | ||||||||||
Total comprehensive income | $ | 965 | $ | 756 | $ | 2,035 | $ | 2,040 |
(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
Consolidated Statements of Changes in Stockholders’ Equity
(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, 2018 | $ | 76 | $ | 60,329 | $ | 28,822 | $ | (522 | ) | $ | (3,293 | ) | $ | (1,123 | ) | $ | 84,289 | |||||||||||
Comprehensive income | - | - | 1,391 | (107 | ) | - | - | 1,284 | ||||||||||||||||||||
Cash dividends declared and paid ($0.06 per share) | - | - | (458 | ) | - | - | - | (458 | ) | |||||||||||||||||||
ESOP shares committed to be released (4,504 shares) | - | 16 | - | - | 37 | - | 53 | |||||||||||||||||||||
Common stock repurchased (1,000 shares) | - | (11 | ) | - | - | - | - | (11 | ) | |||||||||||||||||||
Share-based compensation expense | - | 43 | - | - | - | 75 | 118 | |||||||||||||||||||||
Balances at September 30, 2018 | $ | 76 | $ | 60,377 | $ | 29,755 | $ | (629 | ) | $ | (3,256 | ) | $ | (1,048 | ) | $ | 85,275 | |||||||||||
Comprehensive income | - | - | 1,090 | (334 | ) | - | - | 756 | ||||||||||||||||||||
Cash dividends declared and paid ($0.13 per share) | - | - | (991 | ) | - | - | - | (991 | ) | |||||||||||||||||||
ESOP shares committed to be released (4,505 shares) | - | 14 | - | - | 37 | - | 51 | |||||||||||||||||||||
Common stock repurchased (174,983 shares) | (2 | ) | (1,914 | ) | - | - | - | - | (1,916 | ) | ||||||||||||||||||
Share-based compensation expense | - | 36 | - | - | - | 75 | 111 | |||||||||||||||||||||
Balances at December 31, 2018 | $ | 74 | $ | 58,513 | $ | 29,854 | $ | (963 | ) | $ | (3,219 | ) | $ | (973 | ) | $ | 83,286 |
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, 2019 | $ | 74 | $ | 58,598 | $ | 30,638 | $ | (269 | ) | $ | (3,146 | ) | $ | (823 | ) | $ | 85,072 | |||||||||||
Comprehensive income | - | - | 956 | 114 | - | - | 1,070 | |||||||||||||||||||||
Cash dividends declared and paid ($0.07 per share) | - | - | (521 | ) | - | - | - | (521 | ) | |||||||||||||||||||
ESOP shares committed to be released (4,505 shares) | - | 15 | - | - | 37 | - | 52 | |||||||||||||||||||||
Share-based compensation expense | - | 36 | - | - | - | 75 | 111 | |||||||||||||||||||||
Balances at September 30, 2019 | $ | 74 | $ | 58,649 | $ | 31,073 | $ | (155 | ) | $ | (3,109 | ) | $ | (748 | ) | $ | 85,784 | |||||||||||
Comprehensive income | - | - | 913 | 52 | - | - | 965 | |||||||||||||||||||||
Cash dividends declared and paid ($0.07 per share) | - | - | (521 | ) | - | - | - | (521 | ) | |||||||||||||||||||
ESOP shares committed to be released (4,505 shares) | - | 28 | - | - | 36 | - | 64 | |||||||||||||||||||||
Share-based compensation expense | - | 36 | - | - | - | 75 | 111 | |||||||||||||||||||||
Balances at December 31, 2019 | $ | 74 | $ | 58,713 | $ | 31,465 | $ | (103 | ) | $ | (3,073 | ) | $ | (673 | ) | $ | 86,403 |
See accompanying notes to consolidated financial statements.
4
Consolidated Statements of Cash Flows
(Unaudited)
For the six months | ||||||||
ended December 31, | ||||||||
2019 | 2018 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities | ||||||||
Net income | $ | 1,869 | $ | 2,481 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of securities premiums, net | 184 | 234 | ||||||
Impairment losses on securities | 81 | 4 | ||||||
Net increase in loans held for sale | (97 | ) | - | |||||
Amortization of deferred loan costs, net | 138 | 135 | ||||||
Provision (credit) for loan losses | 150 | (600 | ) | |||||
Gain on sale of other real estate owned, net | (166 | ) | (107 | ) | ||||
Write-down of other real estate owned | - | 91 | ||||||
Loss on sale of premises and equipment | - | 1 | ||||||
Depreciation and amortization - premises and equipment | 159 | 166 | ||||||
Amortization - software | 3 | 4 | ||||||
Net decrease (increase) in accrued interest receivable and other assets | 166 | (842 | ) | |||||
Income from bank-owned life insurance | (176 | ) | (179 | ) | ||||
(Decrease) increase in other liabilities | (51 | ) | 94 | |||||
Share-based compensation expense | 222 | 229 | ||||||
Deferred tax expense | (396 | ) | 1,324 | |||||
ESOP expense | 116 | 104 | ||||||
Net cash provided by operating activities | 2,202 | 3,139 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from calls, pay downs and maturities of available-for-sale securities | 3,749 | 4,609 | ||||||
Proceeds from calls, pay downs and maturities of held-to-maturity securities | 10,125 | 10,761 | ||||||
Redemption of Federal Home Loan stock | 420 | - | ||||||
Net loan principal repayments | 8,780 | (16,787 | ) | |||||
Loan purchases | (1,955 | ) | - | |||||
Recoveries of loans previously charged off | 14 | 582 | ||||||
Proceeds from sale of other real estate owned | 685 | 422 | ||||||
Capital expenditures - premises and equipment | (151 | ) | (28 | ) | ||||
Net cash provided by (used in) investing activities | 21,667 | (441 | ) | |||||
Cash flows from financing activities | ||||||||
Net decrease in deposit accounts | (1,379 | ) | (5,650 | ) | ||||
Net decrease in mortgagors' escrow accounts | (276 | ) | (61 | ) | ||||
Repayment of long-term Federal Home Loan Bank advances | (9,527 | ) | (1,027 | ) | ||||
Net increase in securities sold under agreements to repurchase | 1,333 | 2,646 | ||||||
Cash dividends paid on common stock | (1,042 | ) | (1,449 | ) | ||||
Common stock repurchased | - | (1,927 | ) | |||||
Net cash used in financing activities | (10,891 | ) | (7,468 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 12,978 | (4,770 | ) | |||||
Cash and cash equivalents at beginning of year | 25,672 | 10,102 | ||||||
Cash and cash equivalents at end of period | $ | 38,650 | $ | 5,332 | ||||
Supplemental disclosures | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 2,049 | $ | 1,700 | ||||
Income taxes paid | 351 | 1 | ||||||
Loans transferred to other real estate owned | 257 | 322 |
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.
Acquisition
On October 22, 2019, the Company, Putnam Bank and Centreville Bank announced they had entered into a definitive agreement under which Centreville Bank will acquire the Company and Putnam Bank in an all cash transaction valued at approximately $115.5 million. The Company’s stockholders will receive $15.25 for each share of Company common stock that they own. The transaction is expected to close in the first or second quarter of calendar 2020 and is subject to customary closing conditions, including the approval of the Company’s stockholders and required regulatory approvals. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all. In connection with the acquisition, the Company had incurred $491,000 of merger expenses for the six months ended December 31, 2019, primarily legal and investment banker costs, which are included in the consolidated Statement of Net Income.
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, 2020. These financial statements should be read in conjunction with the 2019 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 26, 2019, as amended on October 5, 2019.
6
NOTE 3 – Recent Accounting Pronouncements
Effective July 1, 2019 the Company adopted Financial Accounting Standards Board (“FASB”) 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. Based on the current level of long-term leases in place, adoption of this guideline was not material to the Company’s results of operations or financial position.
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, and related guidance, are effective for companies that qualify as “smaller reporting companies” under SEC regulations, like the Company, fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. 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.
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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 terms and amount 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, 2019.
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 may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, would 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.
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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.
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.
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. 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, net of applicable taxes.
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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.
Management has discussed the development and selection of these critical accounting policies with the Audit Committee.
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, 2019:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 913,000 | $ | 1,090,000 | $ | 1,869,000 | $ | 2,481,000 | ||||||||
Weighted average common shares applicable to basic EPS | 7,064,390 | 7,198,456 | 7,062,138 | 7,208,317 | ||||||||||||
Effect of dilutive potential common shares | 86,750 | - | 49,407 | 4,306 | ||||||||||||
Weighted average common shares applicable to diluted EPS | 7,151,140 | 7,198,456 | 7,111,545 | 7,212,623 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.13 | $ | 0.15 | $ | 0.26 | $ | 0.34 | ||||||||
Diluted | $ | 0.13 | $ | 0.15 | $ | 0.26 | $ | 0.34 |
For the three months ended December 31, 2018, there were no antidilutive 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, 2019: | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. government and government-sponsored securities: | ||||||||||||||||
Due after ten years | $ | 1,992 | $ | - | $ | (67 | ) | $ | 1,925 | |||||||
Corporate bonds: | ||||||||||||||||
Due from five through ten years | 3,666 | - | (222 | ) | 3,444 | |||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities: | ||||||||||||||||
Due from one through five years | 4,178 | 13 | (6 | ) | 4,185 | |||||||||||
From five through ten years | 1,022 | 1 | - | 1,023 | ||||||||||||
After ten years | 12,259 | 103 | (58 | ) | 12,304 | |||||||||||
17,459 | 117 | (64 | ) | 17,512 | ||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Due after ten years | 2,236 | 399 | (293 | ) | 2,342 | |||||||||||
Other debt 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 | $ | 35,353 | $ | 516 | $ | (646 | ) | $ | 35,223 | |||||||
Held-to-maturity: | ||||||||||||||||
U.S. government and government-sponsored securities: | ||||||||||||||||
Due in one year or less | $ | 2,994 | $ | 14 | $ | - | $ | 3,008 | ||||||||
After ten years | 4,150 | - | (17 | ) | 4,133 | |||||||||||
7,144 | 14 | (17 | ) | 7,141 | ||||||||||||
State agency and municipal obligations | ||||||||||||||||
Due from one through five years | 438 | 2 | - | 440 | ||||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities: | ||||||||||||||||
Due in one year or less | 37 | 1 | - | 38 | ||||||||||||
From one through five years | 222 | 5 | - | 227 | ||||||||||||
From five through ten years | 9,077 | 72 | (17 | ) | 9,132 | |||||||||||
After ten years | 36,330 | 439 | (119 | ) | 36,650 | |||||||||||
45,666 | 517 | (136 | ) | 46,047 | ||||||||||||
Total held-to-maturity securities | $ | 53,248 | $ | 533 | $ | (153 | ) | $ | 53,628 |
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Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost Basis | Gains | (Losses) | Value | |||||||||||||
(in thousands) | ||||||||||||||||
June 30, 2019: | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
Debt securities: | ||||||||||||||||
U.S. government and government-sponsored securities: | ||||||||||||||||
Due after ten years | $ | 2,310 | $ | - | $ | (68 | ) | $ | 2,242 | |||||||
Corporate bonds: | ||||||||||||||||
Due from five through ten years | 3,999 | - | (323 | ) | 3,676 | |||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities: | ||||||||||||||||
Due from one through five years | 5,066 | 13 | (5 | ) | 5,074 | |||||||||||
From five through ten years | 1,147 | - | (5 | ) | 1,142 | |||||||||||
After ten years | 14,235 | 118 | (117 | ) | 14,236 | |||||||||||
20,448 | 131 | (127 | ) | 20,452 | ||||||||||||
Non-agency mortgage-backed securities: | ||||||||||||||||
Due after ten years | 2,503 | 410 | (340 | ) | 2,573 | |||||||||||
Other debt securities: | ||||||||||||||||
Auction rate preferred: | ||||||||||||||||
Due from five through ten years | 8,000 | - | (24 | ) | 7,976 | |||||||||||
After ten years | 2,000 | - | - | 2,000 | ||||||||||||
10,000 | - | (24 | ) | 9,976 | ||||||||||||
Total available-for-sale securities | $ | 39,260 | $ | 541 | $ | (882 | ) | $ | 38,919 | |||||||
Held-to-maturity: | ||||||||||||||||
U.S. government and government-sponsored securities: | ||||||||||||||||
Due in one year or less | $ | 4,000 | $ | - | $ | (4 | ) | $ | 3,996 | |||||||
From one through five years | 989 | 22 | - | 1,011 | ||||||||||||
After ten years | 4,379 | - | (2 | ) | 4,377 | |||||||||||
9,368 | 22 | (6 | ) | 9,384 | ||||||||||||
State agency and municipal obligations | ||||||||||||||||
Due from one through five years | 440 | - | (2 | ) | 438 | |||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities: | ||||||||||||||||
Due from one through five years | 411 | 9 | - | 420 | ||||||||||||
From five through ten years | 9,636 | 24 | (37 | ) | 9,623 | |||||||||||
After ten years | 43,625 | 543 | (175 | ) | 43,993 | |||||||||||
53,672 | 576 | (212 | ) | 54,036 | ||||||||||||
Total held-to-maturity securities | $ | 63,480 | $ | 598 | $ | (220 | ) | $ | 63,858 |
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There were no sales of available-for-sale securities for the three and six months ended December 31, 2019 or 2018. 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 OTTI charges on available-for-sale securities realized in income during the three months ended December 31, 2019 of $34,000 and $4,000 during the three months ended December 31, 2018. The OTTI charges for the three months ended December 31, 2019 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $17,000, net of a $17,000 gain recognized in other comprehensive loss, before taxes. The OTTI charges for the three months ended December 31, 2018 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 other-than-temporary impairment charges on available-for-sale securities realized in income during the six months ended December 31, 2019 of $81,000 and $4,000 during the six months ended December 31, 2018. The OTTI charges for the six months ended December 31, 2019 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $216,000, net of $135,000 recognized in other comprehensive loss, before taxes. The OTTI charges for the six months ended December 31, 2018 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.
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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, 2019: | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
U.S. Government and government-sponsored securities | $ | - | $ | - | $ | 1,925 | $ | 67 | $ | 1,925 | $ | 67 | ||||||||||||
Corporate bonds | - | - | 3,444 | 222 | 3,444 | 222 | ||||||||||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities | 4,722 | 17 | 5,617 | 47 | 10,339 | 64 | ||||||||||||||||||
Total temporarily impaired available-for-sale | 4,722 | 17 | 10,986 | 336 | 15,708 | 353 | ||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||
U.S. Government and government-sponsored securities | 4,133 | 17 | - | - | 4,133 | 17 | ||||||||||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities | 3,936 | 24 | 13,483 | 112 | 17,419 | 136 | ||||||||||||||||||
Total temporarily impaired held-to-maturity | 8,069 | 41 | 13,483 | 112 | 21,552 | 153 | ||||||||||||||||||
Other-than-temporarily impaired debt securities (1): | ||||||||||||||||||||||||
Non-agency mortgage-backed securities | - | - | 840 | 293 | 840 | 293 | ||||||||||||||||||
Total temporarily-impaired and other-than-temporarily impaired securities | $ | 12,791 | $ | 58 | $ | 25,309 | $ | 741 | $ | 38,100 | $ | 799 |
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, 2019: | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
U.S. Government and government-sponsored securities | $ | - | $ | - | $ | 2,242 | $ | 68 | $ | 2,242 | $ | 68 | ||||||||||||
Corporate bonds | - | - | 3,676 | 323 | 3,676 | 323 | ||||||||||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities | 1,425 | 7 | 13,576 | 120 | 15,001 | 127 | ||||||||||||||||||
Other securities | 2,976 | 24 | - | - | 2,976 | 24 | ||||||||||||||||||
Total temporarily impaired available-for-sale | 4,401 | 31 | 19,494 | 511 | 23,895 | 542 | ||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||
U.S. Government and government-sponsored securities | - | - | 8,373 | 6 | 8,373 | 6 | ||||||||||||||||||
State and political subdivisions | - | - | 438 | 2 | 438 | 2 | ||||||||||||||||||
U.S. Government-sponsored and guaranteed mortgage-backed securities | - | - | 29,400 | 212 | 29,400 | 212 | ||||||||||||||||||
Total temporarily impaired held-to-maturity | - | - | 38,211 | 220 | 38,211 | 220 | ||||||||||||||||||
Other-than-temporarily impaired debt securities (1): | ||||||||||||||||||||||||
Non-agency mortgage-backed securities | 268 | 11 | 947 | 329 | 1,215 | 340 | ||||||||||||||||||
Total temporarily-impaired and other-than-temporarily impaired securities | $ | 4,669 | $ | 42 | $ | 58,652 | $ | 1,060 | $ | 63,321 | $ | 1,102 |
(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, 2019, there were 46 individual investment securities with aggregate depreciation of 2.1% 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, 2019.
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, 2019, the Company had three investments in corporate single-issuer trust preferred securities (TRUPs) with a total book value of $3.7 million and total fair value of $3.4 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, 2019, there was one state and political subdivision security that had an unrealized loss of 0.5% 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, 2019.
For the three months ended December 31, 2019, there was $34,000 in other-than-temporary impairment losses recognized in earnings and $4,000 for the three months ended December 31, 2018. For the six months ended December 31, 2019, there was $81,000 in other-than-temporary impairment losses recognized in earnings and $4,000 for the six months ended December 31, 2018. 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, | ||||||||
2019 | 2018 | |||||||
(in thousands) | ||||||||
Balance at beginning of period | $ | 16,016 | $ | 15,983 | ||||
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded | 81 | 4 | ||||||
Balance at end of period | $ | 16,097 | $ | 15,987 |
NOTE 7 – Loans
The following table sets forth the composition of our loan portfolio at December 31, 2019 and June 30, 2019:
December 31, | June 30, | |||||||
2019 | 2019 | |||||||
(in thousands) | ||||||||
Real Estate: | ||||||||
Residential (1) | $ | 211,893 | $ | 221,488 | ||||
Commercial | 147,464 | 145,694 | ||||||
Residential construction | 2,019 | 1,476 | ||||||
Commercial | 10,599 | 10,298 | ||||||
Consumer and other | 814 | 968 | ||||||
Total loans | 372,789 | 379,924 | ||||||
Net deferred loan costs | 1,044 | 1,156 | ||||||
Allowance for loan losses | (3,200 | ) | (3,063 | ) | ||||
Loans, net | $ | 370,633 | $ | 378,017 |
(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, 2019 and June 30, 2019:
Residential | Commercial | Residential | Consumer | |||||||||||||||||||||
Real Estate | Real Estate | Construction | Commercial | and other | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 207,201 | $ | 144,688 | $ | 2,019 | $ | 9,706 | $ | 814 | $ | 364,428 | ||||||||||||
Special Mention | 1,366 | 1,546 | - | - | - | 2,912 | ||||||||||||||||||
Substandard | 3,326 | 1,230 | - | 893 | - | 5,449 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Loss | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 211,893 | $ | 147,464 | $ | 2,019 | $ | 10,599 | $ | 814 | $ | 372,789 | ||||||||||||
June 30, 2019 | ||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 217,800 | $ | 142,829 | $ | 1,476 | $ | 9,355 | $ | 968 | $ | 372,428 | ||||||||||||
Special Mention | - | 1,557 | - | - | - | 1,557 | ||||||||||||||||||
Substandard | 3,688 | 1,308 | - | 943 | - | 5,939 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Loss | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 221,488 | $ | 145,694 | $ | 1,476 | $ | 10,298 | $ | 968 | $ | 379,924 |
Modifications deemed to be troubled debt restructurings were not material for the three and six months ended December 31, 2019 and 2018.
There were no 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, 2019 and 2018.
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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, | |||||||
2019 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Non-accrual loans: | ||||||||
Real Estate: | ||||||||
Residential | $ | 3,326 | $ | 3,530 | ||||
Commercial | 513 | 260 | ||||||
Total non-accrual loans | 3,839 | 3,790 | ||||||
Accruing loans past due 90 days or more: | ||||||||
Real Estate: | ||||||||
Residential | - | 159 | ||||||
Commercial | - | 279 | ||||||
Total accruing loans past due 90 days or more | - | 438 | ||||||
Total non-performing loans | 3,839 | 4,228 | ||||||
Other real estate owned | 1,009 | 1,271 | ||||||
Total non-performing assets | $ | 4,848 | $ | 5,499 | ||||
Total non-performing loans to total loans | 1.03 | % | 1.11 | % | ||||
Total non-performing assets to total assets | 0.92 | % | 1.02 | % |
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.
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The following table sets forth information regarding past due loans at December 31, 2019 and June 30, 2019:
90 days | ||||||||||||||||
30–59 Days | 60–89 Days | or Greater | Total | |||||||||||||
At December 31, 2019 | Past Due | Past Due | Past Due | Past Due | ||||||||||||
(in thousands) | ||||||||||||||||
Real Estate: | ||||||||||||||||
Residential | $ | 1,659 | $ | 588 | $ | 695 | $ | 2,942 | ||||||||
Commercial | 658 | - | 278 | 936 | ||||||||||||
Consumer and other | 4 | - | - | 4 | ||||||||||||
Total | $ | 2,321 | $ | 588 | $ | 973 | $ | 3,882 | ||||||||
At June 30, 2019 | ||||||||||||||||
Real Estate: | ||||||||||||||||
Residential | $ | 39 | $ | 397 | $ | 668 | $ | 1,104 | ||||||||
Commercial | - | - | $ | 279 | 279 | |||||||||||
Consumer and other | 3 | - | - | 3 | ||||||||||||
Total | $ | 42 | $ | 397 | $ | 947 | $ | 1,386 |
The following is a summary of information pertaining to impaired loans at December 31, 2019 and June 30, 2019, none of which had a valuation allowance:
At December 31, 2019 | At June 30, 2019 | |||||||||||||||
Unpaid | Unpaid | |||||||||||||||
Recorded | Principal | Recorded | Principal | |||||||||||||
Investment | Balance | Investment | Balance | |||||||||||||
(in thousands) | ||||||||||||||||
Real Estate: | ||||||||||||||||
Residential | $ | 1,794 | $ | 1,940 | $ | 2,150 | $ | 2,296 | ||||||||
Commercial | 514 | 514 | 260 | 260 | ||||||||||||
Total impaired loans | $ | 2,308 | $ | 2,454 | $ | 2,410 | $ | 2,556 |
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The following is a summary of additional information pertaining to impaired loans:
Three months ended | Three months ended | |||||||||||||||||||||||
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
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 | $ | 1,812 | $ | 7 | $ | 4 | $ | 2,177 | $ | 22 | $ | 19 | ||||||||||||
Commercial | 381 | - | - | 411 | - | - | ||||||||||||||||||
Total impaired loans | $ | 2,193 | $ | 7 | $ | 4 | $ | 2,588 | $ | 22 | $ | 19 |
Six months ended | Six months ended | |||||||||||||||||||||||
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
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 | $ | 1,925 | $ | 27 | $ | 22 | $ | 2,362 | $ | 39 | $ | 33 | ||||||||||||
Commercial | 340 | 1 | 1 | 684 | 7 | - | ||||||||||||||||||
Total impaired loans | $ | 2,265 | $ | 28 | $ | 23 | $ | 3,046 | $ | 46 | $ | 33 |
20
NOTE 9 – Allowance for Loan Losses
An analysis of the allow ance for loan losses for the three and six months ended December 31, 2019 and 2018 is as follows:
Residential | Commercial | Residential | Consumer | |||||||||||||||||||||||||
Real Estate | Real Estate | Construction | Commercial | and Other | Unallocated | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Three months ended December 31, 2019 | ||||||||||||||||||||||||||||
Beginning balance | $ | 1,551 | $ | 1,443 | $ | 14 | $ | 91 | $ | 22 | $ | 91 | $ | 3,212 | ||||||||||||||
Charge-offs | - | - | - | - | (18 | ) | - | (18 | ) | |||||||||||||||||||
Recoveries | 2 | - | - | 1 | 3 | - | 6 | |||||||||||||||||||||
Provision | 69 | (102 | ) | - | (6 | ) | 17 | 22 | - | |||||||||||||||||||
Ending Balance | $ | 1,622 | $ | 1,341 | $ | 14 | $ | 86 | $ | 24 | $ | 113 | $ | 3,200 | ||||||||||||||
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 |