Company Quick10K Filing
PB Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 7 $85
10-Q 2019-11-12 Quarter: 2019-09-30
10-K 2019-09-26 Annual: 2019-06-30
10-Q 2019-05-14 Quarter: 2019-03-31
10-Q 2019-02-12 Quarter: 2018-12-31
10-Q 2018-11-13 Quarter: 2018-09-30
10-K 2018-09-21 Annual: 2018-06-30
10-Q 2018-05-14 Quarter: 2018-03-31
10-Q 2018-02-12 Quarter: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-09-30
10-K 2017-09-25 Annual: 2017-06-30
10-Q 2017-05-12 Quarter: 2017-03-31
10-Q 2017-02-13 Quarter: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-K 2016-09-26 Annual: 2016-06-30
10-Q 2016-05-13 Quarter: 2016-03-31
10-Q 2016-02-12 Quarter: 2015-12-31
10-Q 2015-12-02 Quarter: 2015-09-30
8-K 2020-01-02 Other Events, Exhibits
8-K 2019-10-22
8-K 2019-10-22
8-K 2019-10-02 Other Events, Exhibits
8-K 2019-07-03 Other Events, Exhibits
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
PBBI 2019-09-30
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 tm1919595d1_ex31-1.htm
EX-31.2 tm1919595d1_ex31-2.htm
EX-32.1 tm1919595d1_ex32-1.htm
EX-32.2 tm1919595d1_ex32-2.htm

PB Bancorp Earnings 2019-09-30

PBBI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
SFBC 92 686 611 0 0 7 16 12 0.8 1%
LSBK 91 578 496 1 0 4 9 91 0% 10.4 1%
PBBI 85 538 453 0 0 4 9 59 6.5 1%
MSBF 83 581 515 0 0 4 12 67 5.4 1%
CFBI 76 305 228 0 0 1 4 56 14.7 0%
IROQ 75 724 641 0 0 4 14 16 1.2 0%
FFBW 73 258 197 0 0 1 4 68 16.0 0%
MGYR 68 633 578 0 0 3 11 60 5.6 0%
KFFB 66 331 264 0 0 1 4 56 13.2 0%

10-Q 1 tm1919595-1_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 September 30, 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 November 1, 2019, there were 7,447,204 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 September 30, 2019 and June 30, 2019 1
     
  Consolidated Statements of Net Income for the three months ended September 30, 2019 and 2018 2
     
  Consolidated Statements of Comprehensive Income for the three months ended September 30, 2019 and 2018 3
     
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2019 and 2018 4
     
   Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and 2018 5
     
  Notes to Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
     
Item 4. Controls and Procedures 39
     
     
Part II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 39
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     
Item 3. Defaults Upon Senior Securities 39
     
Item 4. Mine Safety Disclosures 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 39
     
     
SIGNATURES 40

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

  

 

 

 

PB Bancorp, Inc.

 

Consolidated Balance Sheets

(Unaudited)

 

   September 30,   June 30, 
   2019   2019 
   (in thousands except share data) 
ASSETS          
Cash and due from depository institutions  $2,032   $2,173 
Interest-bearing demand deposits with other banks   42,424    23,499 
Total cash and cash equivalents   44,456    25,672 
Securities available-for-sale, at fair value   37,035    38,919 
           
Securities held-to-maturity (fair value of $58,545 as of September 30, 2019 and $63,858 as of June 30, 2019)   58,092    63,480 
Federal Home Loan Bank stock, at cost   3,464    3,464 
Loans   375,554    381,080 
Less: Allowance for loan losses   (3,212)   (3,063)
Net loans   372,342    378,017 
Premises and equipment, net   3,082    3,062 
Accrued interest receivable   1,400    1,559 
Other real estate owned   1,327    1,271 
Goodwill   6,912    6,912 
Bank-owned life insurance   13,355    13,267 
Net deferred tax asset   386    443 
Other assets   2,322    1,964 
           
Total assets  $544,173   $538,030 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities          
Deposits          
Non-interest-bearing  $72,112   $73,764 
Interest-bearing   320,329    310,095 
Total deposits   392,441    383,859 
Mortgagors' escrow accounts   1,701    3,371 
Federal Home Loan Bank advances   60,132    62,145 
Securities sold under agreements to repurchase   1,618    804 
Other liabilities   2,497    2,779 
Total liabilities   458,389    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 September 30, 2019 and June 30, 2019.   74    74 
Additional paid-in capital   58,649    58,598 
Retained earnings   31,073    30,638 
Accumulated other comprehensive loss   (155)   (269)
Unearned ESOP shares   (3,109)   (3,146)
Unearned stock awards   (748)   (823)
Total stockholders' equity   85,784    85,072 
           
Total liabilities and stockholders' equity  $544,173   $538,030 

 

See accompanying notes to consolidated financial statements.

 

1

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Net Income

(Unaudited)

 

   Three months ended 
   September 30, 
   2019   2018 
   (in thousands, except per share data) 
Interest and dividend income:          
Interest and fees on loans  $3,986   $3,575 
Interest and dividends on investments   711    866 
Other   170    43 
Total interest and dividend income   4,867    4,484 
           
Interest expense:          
Deposits and escrow   804    557 
Borrowed funds   297    304 
Total interest expense   1,101    861 
Net interest and dividend income   3,766    3,623 
           
Provision (credit) for loan losses   150    (600)
Net interest and dividend income after provision (credit) for loan losses   3,616    4,223 
           
Non-interest income:          
Total other-than-temporary impairment losses on debt securities   (199)   - 
Portion of losses recognized in other comprehensive income   152    - 
Net impairment losses recognized in earnings   (47)   - 
Fees for services   490    470 
Mortgage banking activities   10    4 
Net commissions from brokerage services   49    25 
Income from bank-owned life insurance   88    89 
Gain on sales of other real estate owned, net   97    21 
Other income   47    60 
Total non-interest income   734    669 
           
Non-interest expense:          
Compensation and benefits   2,063    1,928 
Occupancy and equipment   310    311 
Data processing   300    297 
LAN/WAN network   22    25 
Advertising and marketing   41    34 
FDIC deposit insurance   -    38 
Other real estate owned   30    64 
Write-down of other real estate owned   -    91 
Other   445    418 
Total non-interest expense   3,211    3,206 
Income before income tax expense   1,139    1,686 
           
Income tax expense   183    295 
NET INCOME  $956   $1,391 
           
Earnings per common share:          
Basic  $0.14   $0.19 
Diluted  $0.14   $0.19 

 

See accompanying notes to consolidated financial statements.

 

2

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   Three months ended 
   September 30, 
   2019   2018 
   (in thousands) 
Net income  $956   $1,391 
Other comprehensive income (loss):          
Net unrealized holding gains (losses) on available-for-sale securities   251    (136)
Reclassification adjustment for losses on available-for-sale securities realized in income on  (1)   47    - 
Non-credit portion of other-than-temporary losses on available-for-sale securities   (152)   - 
           
Other comprehensive income (loss) before tax   146    (136)
           
Income tax (loss) benefit related to other comprehensive income (loss)   (32)   29 
Other comprehensive income (loss) net of tax   114    (107)
Total comprehensive income  $1,070   $1,284 
           

 

(1)  Reported in net impairment losses recognized in earnings, included in non-interest income on the consolidated statements of net income.  There was no income tax benefit associated with the reclassification adjustment.  

 

See accompanying notes to consolidated financial statements.

 

3

 

 

PB Bancorp, Inc.

 

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 
                                    
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 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

PB Bancorp, Inc.

 

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the three months 
   ended September 30, 
   2019   2018 
   (in thousands) 
Cash flows from operating activities          
Net income  $956   $1,391 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of securities premiums, net   97    113 
Impairment losses on securities   47    - 
Amortization of deferred loan costs, net   64    84 
Provision (credit) for loan losses   150    (600)
Gain on sale of other real estate owned, net   (97)   (21)
Write-down of other real estate owned   -    91 
Depreciation and amortization - premises and equipment   83    83 
Amortization - software   2    1 
Increase in accrued interest receivable and other assets   (201)   (767)
Income from bank-owned life insurance   (88)   (89)
Decrease in other liabilities   (282)   (403)
Share-based compensation expense   111    118 
Deferred tax expense   25    850 
ESOP expense   52    53 
Net cash provided by operating activities   919    904 
           
Cash flows from investing activities          
Proceeds from calls, pay downs and maturities of available-for-sale securities   1,940    1,834 
Proceeds from calls, pay downs and maturities of held-to-maturity securities   5,334    5,827 
Net loan principal repayments   7,151    4,062 
Loan purchases   (1,955)   - 
Recoveries of loans previously charged off   8    571 
Proceeds from sale of other real estate owned   298    126 
Capital expenditures - premises and equipment   (103)   (7)
Net cash provided by investing activities   12,673    12,413 
           
Cash flows from financing activities          
Net increase (decrease) in deposit accounts   8,582    (4,444)
Net decrease in mortgagors' escrow accounts   (1,670)   (1,625)
Repayment of long-term Federal Home Loan Bank advances   (2,013)   (1,013)
Net increase in securities sold under agreements to repurchase   814    862 
Cash dividends paid on common stock   (521)   (458)
Common stock repurchased   -    (11)
Net cash provided by (used in) financing activities   5,192    (6,689)
           
Net increase in cash and cash equivalents   18,784    6,628 
Cash and cash equivalents at beginning of year   25,672    10,102 
Cash and cash equivalents at end of period  $44,456   $16,730 
Supplemental disclosures          
Cash paid during the period for:          
Interest  $1,008   $803 
Income taxes paid   351    1 
Loans transferred to other real estate owned   257    156 

 

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 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. 

 

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.

 

6

 

 

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 companies that qualify as “smaller reporting companies” under SEC regulations, like the Company, fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted for all entities. 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 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, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. However, the FASB recently voted to propose delaying the standard by three years for small reporting companies, which includes Putnam Bank. 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.

 

7

 

 

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 September 30, 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.

 

8

 

 

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 troubled debt restructuring (“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.

 

9

 

 

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.

 

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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 months ended September 30, 2019:

 

   Three months ended
September 30,
 
   2019   2018 
Net income  $956,000   $1,391,000 
           
Weighted average common shares applicable to basic EPS   7,059,885    7,218,179 
Effect of dilutive potential common shares   12,064    8,611 
Weighted average common shares applicable to diluted EPS   7,071,949    7,226,790 
Earnings per share:          
Basic  $0.14   $0.19 
Diluted  $0.14   $0.19 

 

For the three months ended September 30, 2019 and 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) 
September 30, 2019:                    
Available-for-sale:                    
Debt securities:                    
U.S. government and government-sponsored securities:                    
After ten years  $2,088   $-   $(68)  $2,020 
                     
Corporate bonds:                    
Due from five through ten years   3,999    -    (307)   3,692 
                     
U.S. Government-sponsored and guaranteed mortgage-backed securities:                    
Due from one through five years   4,505    16    (3)   4,518 
From five through ten years   1,085    -    (3)   1,082 
After ten years   13,167    111    (62)   13,216 
    18,757    127    (68)   18,816 
                     
Non-agency mortgage-backed securities:                    
Due after ten years   2,386    398    (277)   2,507 
                     
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  $37,230   $525   $(720)  $37,035 
                     
Held-to-maturity:                    
U.S. government and government-sponsored securities:                    
Due in one year or less  $3,991   $19   $-   $4,010 
After ten years   4,150    32    -    4,182 
    8,141    51    -    8,192 
                     
State agency and municipal obligations                    
From one through five years   439    -    -    439 
                     
                     
U.S. Government-sponsored and guaranteed mortgage-backed securities:                    
Due from one through five years   329    7    -    336 
From five through ten years   9,627    66    (26)   9,667 
After ten years   39,556    492    (137)   39,911 
    49,512    565    (163)   49,914 
Total held-to-maturity securities  $58,092   $616   $(163)  $58,545

 

12

 

 

   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 

 

There were no sales of available-for-sale securities for the three months ended September 30, 2019 and 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 charges on available-for-sale securities realized in income during the three months ended September 30, 2019 of $47,000 and no other-than-temporary charges during the three months ended September 30, 2018. The write-downs for the three months ended September 30, 2019 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $199,000, net of $152,000 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) 
September 30, 2019:                              
Available-for-sale:                              
U.S. Government and government-sponsored securities  $-   $-   $2,020   $68   $2,020   $68 
Corporate bonds   -    -    3,692    307    3,692    307 
U.S. Government-sponsored and guaranteed mortgage-backed securities   2,266    12    5,944    56    8,210    68 
     Total temporarily impaired available-for-sale   2,266    12    11,656    431    13,922    443 
                               
Held-to-maturity:                              
U.S. Government and government-sponsored securities   -    -    1,000    -    1,000    - 
State and political subdivisions   439    -    -    -    439    - 
U.S. Government-sponsored and guaranteed mortgage-backed securities   6,427    23    17,585    140    24,012    163 
     Total temporarily impaired held-to-maturity   6,866    23    18,585    140    25,451    163 
                               
Other-than-temporarily impaired debt securities (1):                              
Non-agency mortgage-backed securities   265    12    952    265    1,217    277 
                               
      Total temporarily-impaired and other-than-temporarily impaired securities  $9,397   $47   $31,193   $836   $40,590   $883 
                               
    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.

 

14

 

 

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

 

At September 30, 2019, there were 50 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 September 30, 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 September 30, 2019, 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 $3.7 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 September 30, 2019, there was one state and political subdivision security that had an unrealized loss of 0.1% 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 September 30, 2019.

 

For the three months ended September 30, 2019, there was $47,000 in other-than-temporary impairment losses recognized in earnings. There were no other-than-temporary impairment losses for the three months ended September 30, 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.

 

15

 

 

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:

 

   Three months ended 
   September 30, 
   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   47    - 
           
Balance at end of period  $16,063   $15,983 

 

NOTE 7 – Loans

 

The following table sets forth the composition of our loan portfolio at September 30, 2019 and June 30, 2019:

 

   September 30,   June 30, 
   2019   2019 
   (in thousands) 
Real Estate:          
   Residential (1)  $216,101   $221,488 
   Commercial   144,360    145,694 
   Residential construction   1,974    1,476 
Commercial   11,216    10,298 
Consumer and other   785    968 
           
Total loans   374,436    379,924 
           
Net deferred loan costs   1,118    1,156 
Allowance for loan losses   (3,212)   (3,063)
           
Loans, net  $372,342   $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 September 30, 2019 and June 30, 2019:

 

   Residential   Commercial   Residential       Consumer     
   Real Estate   Real Estate   Construction   Commercial   and other   Total 
   (in thousands) 
September 30, 2019                              
Grade:                              
     Pass  $211,480   $141,541   $1,974   $10,293   $785   $366,073 
     Special Mention   1,384    1,567    -    -    -    2,951 
     Substandard   3,237    1,252    -    923    -    5,412 
     Doubtful   -    -    -    -    -    - 
     Loss   -    -    -    -    -    - 
          Total  $216,101   $144,360   $1,974   $11,216   $785   $374,436 
                               
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 restructures were not material for the three months ended September 30, 2019 and 2018.

 

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 months ended September 30, 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 September 30,
2019
   At June 30,
2019
 
   (Dollars in thousands) 
Non-accrual loans:          
Real Estate:          
Residential  $3,237   $3,530 
Commercial   526    260 
Consumer   -    - 
Total non-accrual loans   3,763    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   3,763    4,228 
           
Other real estate owned   1,327    1,271 
Total non-performing assets  $5,090   $5,499 
           
Total non-performing loans to total loans   1.00%   1.11%
Total non-performing assets to total assets   0.94%   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.

 

18

 

 

The following table sets forth information regarding past due loans at September 30, 2019 and June 30, 2019:

 

  30–59 Days
Past Due
   60–89 Days
Past Due
   90 days
or Greater
Past Due
   Total
Past Due
 
   (in thousands) 
At September 30, 2019    
Real Estate:                    
Residential  $245   $392   $446   $1,083 
Commercial   -    -    278    278 
Consumer and other   5    1    -    6 
Total  $250   $393   $724   $1,367 
                     
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 September 30, 2019 and June 30, 2019, none of which had a valuation allowance:

 

   At September 30, 2019   At June 30, 2019 
       Unpaid       Unpaid 
   Recorded   Principal   Recorded   Principal 
   Investment   Balance   Investment   Balance 
   (in thousands) 
Real Estate:                    
Residential  $1,830   $1,976   $2,150   $2,296 
Commercial   248    248    260    260 
Total impaired loans  $2,078   $2,224   $2,410   $2,556 

 

19

 

 

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

 

   Three months ended   Three months ended 
   September 30, 2019   September 30, 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  $1,990   $20   $18   $2,512   $17   $14 
Commercial   254    -    -    824    7    - 
Total impaired loans  $2,244   $20   $18   $3,336   $24   $14 

 

NOTE 9 – Allowance for Loan Losses

 

An analysis of the allowance for loan losses for the three months ended September 30, 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
September 30, 2019
    
Beginning balance  $1,456   $1,418   $10   $79   $28   $72   $3,063 
Charge-offs   -    -    -    -    (9)   -    (9)
Recoveries   3    -    -    3    2    -    8 
Provision   92    25    4    9    1    19    150 
Ending Balance  $1,551   $1,443   $14   $91   $22   $91   $3,212 
                                    
Three months ended                                   
September 30, 2018                                   
                                    
Beginning balance  $1,385   $1,194   $14   $80   $135   $135   $2,943 
Charge-offs   -    -    -    -    (8)   -    (8)
Recoveries   5    560    -    2    4    -    571 
(Credit) provision   98    (660)   (7)   (5)   -    (26)   (600)
Ending Balance  $1,488   $1,094   $7   $77   $131   $109   $2,906 

 

20

 

 

Further information pertaining to the allowance for loan losses at September 30, 2019 and June 30, 2019 is as follows:

 

   Residential   Commercial   Residential       Consumer         
  Real Estate   Real Estate   Construction   Commercial   and Other   Unallocated   Total 
   (in thousands) 
At September 30, 2019    
Amount of allowance for loan losses for impaired loans  $-   $-   $-   $-   $-   $-   $- 
                                    
Amount of allowance for loan losses for non-impaired loans  $1,551   $1,443   $14   $91   $22   $91   $3,212 
                                    
                                    
Impaired loans  $1,830   $248   $-   $-   $-   $-   $2,078 
                                    
Non-impaired loans  $214,271   $144,112   $1,974   $11,216   $785   $-   $372,358 
                                    
At June 30, 2019                                   
                                    
Amount of allowance for loan losses for impaired loans  $-   $-   $-   $-   $-   $-   $- 
                                   
Amount of allowance for loan losses for non-impaired loans  $1,456   $1,418   $10   $79   $28   $72   $3,063 
                                    
Impaired loans  $2,150   $260   $-   $-   $-   $-   $2,410 
                                    
Non-impaired loans  $219,338   $145,434   $1,476   $10,298   $968   $-   $377,514 

 

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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. 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 three months ended September 30, 2019 and 2018.

 

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, and become fully vested in the event of a change in control of the Company

 

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 September 30, 2019 of $111,000. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for the three months ended September 30, 2018 of $118,000.

 

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:

 

   September 30,   June 30, 
   2019   2019 
   (in thousands) 
Net unrealized loss on securities available-for-sale  $(195)  $(341)
Tax effect   40    72 
Accumulated other comprehensive loss  $(155)  $(269)

 

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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 September 30, 2019 and June 30, 2019.

 

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 three months ended September 30, 2019.

 

23

 

 

The following summarizes assets measured at fair value on a recurring basis at September 30, 2019 and June 30, 2019:

 

   Total Fair             
   Value   Level 1   Level 2   Level 3 
   (in thousands) 
At September 30, 2019    
Securities available-for-sale:    
U.S. government and government-sponsored securities  $2,020   $      -   $2,020   $- 
Corporate bonds   3,692           -    3,692    - 
                    
U.S. Government-sponsored and guaranteed mortgage-backed securities   18,816    -    18,816    - 
Non-agency mortgage-backed securities   2,507    -    2,507    - 
Other securities   10,000    -    -    10,000 
Total  $37,035   $-   $27,035   $10,000 
                     
At June 30, 2019                    
                     
Securities available-for-sale:                    
U.S. government and government-sponsored securities  $2,242   $-   $2,242   $- 
Corporate bonds   3,676    -    3,676    - 
                    
U.S. Government-sponsored and guaranteed mortgage-backed securities   20,452    -    20,452    - 
Non-agency mortgage-backed securities   2,573    -    2,573    - 
Other securities   9,976    -    -    9,976 
Total  $38,919   $-   $28,943   $9,976 

 

There were no changes in level 3 assets measured at fair value for the three months ended September 30, 2019 and 2018.

 

24

 

 

The Company had no assets measured at fair value on a non-recurring basis at September 30, 2019. 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 months ended September 30, 2018:

 

                   Total Losses 
                   for the three 
  Total Fair               months ended
September 30,
 
   Value   Level 1   Level 2   Level 3   2018 
   (in thousands) 
At June 30, 2019    
Impaired loans  $219   $     -   $     -   $219   $- 
Other real estate owned   984    -    -    984    91 
   $1,203   $-   $-   $1,203   $91 

 

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 September 30, 2019 or June 30, 2019.

 

25

 

 

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.

 

26

 

 

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 September 30, 2019 and June 30, 2019:

 

   September 30, 2019 
   Carrying   Fair Value Hierarchy   Total Fair 
   Amount   Level 1   Level 2   Level 3   Value 
   (in thousands) 
Financial assets:                         
Cash and cash equivalents  $44,456   $44,456   $-   $-   $44,456 
Securities available-for-sale   37,035    -    27,035    10,000    37,035 
Securities held-to-maturity   58,092    -    58,545    -    58,545 
Federal Home Loan Bank stock   3,464    -    -    3,464    3,464 
Loans, net   372,342    -    -    363,409    363,409 
Accrued interest receivable   1,400    -    -    1,400    1,400 
                          
Financial liabilities:                         
Deposits   392,441    -    -    393,429    393,429 
Mortgagors' escrow accounts   1,701    -    -    1,701    1,701 
Federal Home Loan Bank advances   60,132    -    59,946    -    59,946 
Securities sold under agreements to repurchase   1,618    -    1,618    -    1,618 
Accrued interest payable   343    -    -    343    343 

 

   June 30, 2019 
   Carrying   Fair Value Hierarchy   Total Fair 
   Amount   Level 1   Level 2   Level 3   Value 
   (in thousands) 
Financial assets:                         
Cash and cash equivalents  $25,672   $25,672   $-   $-   $25,672 
Securities available-for-sale   38,919    -    28,943    9,976    38,919 
Securities held-to-maturity   63,480    -    63,858    -    63,858 
Federal Home Loan Bank stock   3,464    -    -    3,464    3,464 
Loans, net   378,017    -    -    366,442    366,442 
Accrued interest receivable   1,559    -    -    1,559    1,559 
                          
Financial liabilities:                         
Deposits   383,859    -    -    384,698    384,698 
Mortgagors' escrow accounts   3,371    -    -    3,371    3,371 
Federal Home Loan Bank advances   62,145    -    62,773    -    62,773 
Securities sold under agreements to repurchase   804    -    804    -    804 
Accrued interest payable   251    -    -    251    251 

 

27

 

 

NOTE 13 – Subsequent Events

 

On October 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 October 16, 2019, which is payable on October 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:

 

   September 30,   June 30, 
   2019   2019 
   (in thousands) 
Commitments to extend credit:          
     Commitments to grant loans  $20,262   $1,118 
     Unadvanced construction loans   4,852    6,872 
     Unadvanced lines of credit   21,645    21,819 
     Standby letters of credit   395    395 
          Outstanding commitments  $47,154   $30,204 

 

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

 

The following analysis discusses changes in the financial condition at September 30, 2019 and June 30, 2019 and results of operations for the three months ended September 30, 2019 and 2018, 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 2019 Consolidated Financial Statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the SEC on September 26, 2019, as amended on October 25, 2019.

 

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 26, 2019, as amended on October 25, 2019.

 

28

 

 

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 decreased $435,000, or 31.3%, to $956,000, or $0.14 per basic and diluted share for the three months ended September 30, 2019, compared to net income of $1.4 million, or $0.19 per basic and diluted share for the three months ended September 30, 2018. This was due primarily to an increase of $750,000 in the provision for loan losses. The Company recorded a credit for loan losses of $600,000 for the three months ended September 30, 2018 compared to a $150,000 provision for loan losses for the three months ended September 30, 2019. Net interest income increased $143,000, or 3.9% to $3.8 million for the three months ended September 30, 2019 from $3.6 million for the three months ended September 30, 2018, while non-interest income increased $65,000, or 9.7% to $734,000, for the three months ended September 30, 2019 from $669,000 for the three months ended September 30, 2018.  Non-interest expense remained unchanged at $3.2 million for the three months ended September 30, 2019 and 2018. Income tax expense decreased $112,000, or 38.0% to $183,000 for the three months ended September 30, 2019 from $295,000 for the three months ended September 30, 2018. The effective tax rate was 16.1% for the three months ended September 30, 2019 compared to 17.5% for the three months ended September 30, 2018.

 

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.

 

Comparison of Financial Condition at September 30, 2019 and June 30, 2019

 

Assets

 

Total assets were $544.2 million at September 30, 2019, an increase of $6.1 million, or 1.1%, from $538.0 million at June 30, 2019. Cash and cash equivalents increased $18.8 million, or 73.2%, to $44.5 million at September 30, 2019 compared to $25.7 million at June 30, 2019. The increase was due to accumulating additional funds from maturing securities, loan pay-offs and an increase in deposits for upcoming loan closings. Investments in held-to-maturity securities decreased $5.4 million, or 8.5%, to $58.1 million at September 30, 2019 compared to $63.5 million at June 30, 2019 and investments in available-for-sale securities decreased $1.9 million, or 4.8%, to $37.0 million at September 30, 2019 compared to $38.9 million at June 30, 2019. 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 decreased $5.7 million, or 1.5%, to $372.3 million at September 30, 2019 from $378.0 million at June 30, 2019. This was primarily due to decreases in residential loans of $5.4 million, or 2.4% to $216.1 million at September 30, 2019 compared to $221.5 million at June 30, 2019 and commercial real estate loans of $1.3 million, or 0.9%, to $144.4 million at September 30, 2019 compared to $145.7 million at June 30, 2019.

 

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Allowance for Loan Losses

 

The table below indicates the relationship between the allowance for loan losses, total loans outstanding and non-performing loans at September 30, 2019 and June 30, 2019. For additional information, see “Comparison of Operating Results for the three months ended September 30, 2019 and 2018 – Provision for Loan Losses.”

 

   September 30,   June 30, 
   2019   2019 
   (Dollars in thousands) 
Allowance for loan losses  $3,212   $3,063 
Total loans   374,436    379,924 
Non-performing loans   3,763    4,228 
Allowance/total loans   0.86%   0.81%
Allowance/non-performing loans   85.4%   72.4%

 

Liabilities

 

Total liabilities increased $5.4 million, or 1.2%, to $458.4 million at September 30, 2019 from $453.0 million at June 30, 2019. Total deposits increased $8.6 million, or 2.2%, to $392.4 million at September 30, 2019 from $383.9 million at June 30, 2019. We experienced a decrease in non-interest-bearing deposits of $1.7 million, or 2.2% to $72.1 million at September 30, 2019 compared to $73.8 million at June 30, 2019. Interest-bearing deposits increased $10.2 million, or 3.3% to $320.3 million at September 30, 2019 compared to $310.1 million at June 30, 2019. Total Federal Home Loan Bank borrowings decreased $2.0 million, or 3.2%, to $60.1 million at September 30, 2019 from $62.1 million at June 30, 2019. Mortgagors’ escrow decreased $1.7 million, or 49.5% to $1.7 million at September 30, 2019 compared to $3.4 million at June 30, 2019.

 

Stockholders’ Equity

 

Total stockholders’ equity increased $712,000, or 0.8% to $85.8 million at September 30, 2019 from $85.1 million at June 30, 2019 due to net income of $956,000 for the three months ended September 30, 2019, offset by dividends paid totaling $521,000.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018

 

Interest and Dividend Income. Interest and dividend income increased $383,000, or 8.5% to $4.9 million for the three months ended September 30, 2019 compared to $4.5 million for the three months ended September 30, 2018. The average balance of interest-earning assets increased $21.7 million, or 4.4%, to $515.5 million for the three months ended September 30, 2019 from $493.8 million for the three months ended September 30, 2018. The average yield on interest-earning assets increased to 3.75% for the three months ended September 30, 2019 from 3.60% for the three months ended September 30, 2018.

 

Interest income on loans increased $411,000, or 11.5% to $4.0 million for the three months ended September 30, 2019 compared to $3.6 million for the three months ended September 30, 2018. 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 6.7%, to $377.1 million for the three months ended September 30, 2019 from $353.5 million for the three months ended September 30, 2018. The yield on average loans increased 18 basis points to 4.19% for the three months ended September 30, 2019 from 4.01% for the three months ended September 30, 2018.

 

Interest and dividend income on investments decreased $155,000, or 17.9% to $711,000 for the three months ended September 30, 2019 compared to $866,000 for the three months ended September 30, 2018. This was due to a decrease in the average balance of investments of $27.3 million, or 21.0%, to $102.7 million for the three months ended September 30, 2019 from $129.9 million for the three months ended September 30, 2018. This was partially offset by an increase in yield of 11 basis points to 2.75% for the three months ended September 30, 2019 from 2.64% for the three months ended September 30, 2018.

 

Interest Expense. Interest expense increased $240,000, or 27.9% to $1.1 million for the three months ended September 30, 2019 compared to $861,000 for the three months ended September 30, 2018. Total average interest-bearing liabilities increased $16.1 million, or 4.4% to $381.9 million for the three months ended September 30, 2019 compared to $365.7 million for the three months ended September 30, 2018. The cost of average interest-bearing liabilities increased to 1.14% for the three months ended September 30, 2019 compared to 0.93% for the three months ended September 30, 2018.

 

Interest expense on deposits increased by $247,000, or 44.3%, to $804,000 for the three months ended September 30, 2019 from $557,000 for the three months ended September 30, 2018. The average balance of deposits increased $18.2 million, or 6.1%, from $300.4 million for the three months ended September 30, 2018 to $318.6 million for the three months ended September 30, 2019. The cost of interest-bearing deposits increased to 1.00% for the three months ended September 30, 2019 from 0.74% for the three months ended September 30, 2018. Interest expense on time deposits increased $224,000, or 50.0%, to $672,000 for the three months ended September 30, 2019 from $448,000 for the three months ended September 30, 2018. The average balance of time deposits increased $21.0 million, or 18.4%, from $114.2 million for the three months ended September 30, 2018 to $135.3 million for the three months ended September 30, 2019. The cost of time deposits increased to 1.97% for the three months ended September 30, 2019 from 1.56% for the three months ended September 30, 2018.

 

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Interest expense on borrowings decreased by $7,000, or 2.3%, to $297,000 for the three months ended September 30, 2019 from $304,000 for the three months ended September 30, 2018. The rate paid on borrowings increased one basis point to 1.86% for the three months ended September 30, 2019 from 1.85% for the three months ended September 30, 2018. Average borrowings decreased $2.1 million, or 3.2%, to $63.2 million for the three months ended September 30, 2019 from $65.3 million for the three months ended September 30, 2018. Average Federal Home Loan Bank advances decreased $1.8 million, or 3.0%, to $60.6 million for the three months ended September 30, 2019 from $62.4 million for the three months ended September 30, 2018. 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 one basis point to 1.94% for the three months ended September 30, 2019 from 1.93% for the three months ended September 30, 2018. Average other borrowed money decreased $268,000, or 9.3%, to $2.6 million for the three months ended September 30, 2019 from $2.9 million for the three months ended September 30, 2018.

 

Net Interest Income. Net interest income increased $143,000, or 3.9%, to $3.8 million for the three months ended September 30, 2019 from $3.6 million for the three months ended September 30, 2018. Our interest rate spread decreased to 2.61% for the three months ended September 30, 2019 from 2.67% for the three months ended September 30, 2018 and our net interest-earning assets increased $5.6 million, or 4.4%. Our net interest margin decreased to 2.90% for the three months ended September 30, 2019 from 2.91% for the three months ended September 30, 2018.

 

Provision for Loan Losses. Provision for loan losses increased $750,000 to $150,000 for the three months ended September 30, 2019 from a credit provision of $600,000 for the three months ended September 30, 2018. This was due primarily to $563,000 in net recoveries for the three months ended September 30, 2018.

 

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Non-interest Income. Non-interest income increased $65,000, or 9.7%, to $734,000 for the three months ended September 30, 2019 compared to $669,000 for the three months ended September 30, 2018. This was primarily due to increases in gain on sale of other real estate owned of $76,000, service fee income of $20,000 and net commissions from brokerage services of $24,000. This was partially offset by a charge of $47,000 in other-than-temporary impairment losses on debt securities.

 

Non-interest Expense. Non-interest expense remained unchanged at $3.2 million for the three months ended September 30, 2019 and 2018. Salaries and benefits expense increased $135,000, or 7.0% to $2.1 million for the three months ended September 30, 2019 from $1.9 million for the three months ended September 30, 2018. This was primarily due to an increase in salary expense of $98,000. Occupancy and equipment expense decreased $1,000, or 0.3% to $310,000 for the three months ended September 30, 2019 from $311,000 for the three months ended September 30, 2018. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, professional fees and marketing expense decreased by $129,000, or 13.3%, to $838,000 for the three months ended September 30, 2019 from $967,000 for the three months ended September 30, 2018. This was primarily due to decreases in write-downs on other real estate owned of $91,000 and other real estate owned expense of $34,000.

 

Tax Expense. Income tax expense decreased by $112,000, or 38.0% to $183,000 for the three months ended September 30, 2019 from $295,000 for the three months ended September 30, 2018. Our effective tax rate was 16.1% for the three months ended September 30, 2019 compared to 17.5% for the three months ended September 30, 2018. 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.

 

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Average Balances and Yields

 

The following tables set 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 September 30, 
       2019           2018     
   Average   Interest   Yield/   Average   Interest   Yield/ 
   Balance   Income/Expense   Cost   Balance   Income/Expense   Cost 
   (Dollars in thousands) 
Interest-earning assets:                              
Investment securities  $102,651   $711    2.75%  $129,917   $866    2.64%
Loans   377,059    3,986    4.19%   353,476    3,575    4.01%
Other earning assets   35,801    170    1.88%   10,425    43    1.64%
Total interest-earning assets   515,511    4,867    3.75%   493,818    4,484    3.60%
Non-interest-earning assets   27,655              28,631           
Total assets  $543,166             $522,449           
                               
Interest-bearing liabilities:                              
NOW accounts  $70,611    68    0.38%  $79,122    74    0.37%
Savings accounts   85,522    18    0.08%   84,504    17    0.08%
Money market accounts   27,240    46    0.67%   22,561    18    0.32%
Time deposits   135,263    672    1.97%   114,215    448    1.56%
     Total interest-bearing deposits   318,636    804    1.00%   300,402    557    0.74%
FHLB advances   60,593    296    1.94%   62,440    303    1.93%
Other borrowed money   2,625    1    0.15%   2,893    1    0.14%
    Total other borowed money   63,218