UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended June 30,
2015
| ¨ | 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: 000-50970
PSB Holdings, Inc.
(Name of Registrant as Specified in its
Charter)
Federal |
42-1597948 |
(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification Number) |
40 Main Street, Putnam, Connecticut |
06260 |
(Address of Principal Executive Office) |
(Zip Code) |
(860) 928-6501
(Registrant’s Telephone Number
including area code)
Securities Registered Under to Section 12(b) of
the Act:
Common Stock, par value $0.10 per share
(Title of Class)
The NASDAQ Stock Market LLC
(Name of exchange on which registered)
Securities Registered Under Section 12(g) of
the Exchange Act:
None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 of 15(d) of the Act. YES ¨ NO x
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 for such shorter period that the Registrant was required to file reports), and (2) has been subject
to such requirements for the past 90 days.
(1) YES x NO ¨
(2) YES x NO ¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes x No ¨
Indicate by a check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Smaller reporting company x |
Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES x NO
The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing price of the Common Stock as of December 31,
2014 ($7.72) was $14.0 million.
As of August 31, 2015, there were
6,541,561 shares outstanding of the Registrant’s Common Stock, including 3,729,846 shares owned by Putnam Bancorp, MHC.
DOCUMENTS INCORPORATED BY REFERENCE
| | 1. Proxy Statement for the 2015 Annual Meeting of Stockholders (Parts II and III) |
PSB HOLDINGS, INC.
FORM 10-K
PART I
Forward Looking Statements
This Annual Report
on Form 10-K contains certain “forward-looking statements” which may be identified by the use of words such as “believe,”
“expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.”
Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results
of operations and business that are subject to various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and
local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, competition,
changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive,
governmental, regulatory, and technological factors affecting our operations, pricing products and services.
PSB Holdings, Inc.
PSB Holdings, Inc.
(the “Company”) is the federally chartered stock holding company of Putnam Bank (the “Bank”), and owns
100% of the common stock of Putnam Bank. PSB Holdings, Inc. also owns investment securities valued at $1.1 million as of June 30,
2015. We have not engaged in any significant business activity other than owning the common stock of Putnam Bank and investing
in marketable securities. Our executive office is located at 40 Main Street, Putnam, Connecticut 06260, and our telephone number
is (860) 928-6501. As of June 30, 2015, 57.0% of the outstanding stock of PSB Holdings, Inc. was owned by Putnam Bancorp,
MHC.
Putnam Bancorp, MHC
Putnam Bancorp, MHC
is a federally chartered mutual holding company. Putnam Bancorp, MHC has not engaged in any significant business activity other
than owning the common stock of PSB Holdings, Inc. Putnam Bancorp, MHC owns 57.0% of the outstanding shares of common stock
of PSB Holdings, Inc. So long as Putnam Bancorp, MHC exists, it is required to own a majority of the voting stock of PSB Holdings, Inc.
As a result, stockholders other than Putnam Bancorp, MHC will not be able to exercise voting control over most matters put to a
vote of stockholders and Putnam Bancorp, MHC, through its Board of Directors, will be able to exercise voting control over most
matters put to a vote of stockholders.
Putnam Bancorp, MHC
is headquartered at 40 Main Street in Putnam, Connecticut and its telephone number at that address is (860) 928-6501.
Putnam Bank
Putnam Bank was founded
in 1862 as a state-chartered mutual savings bank. In October 2004, the Bank converted to a federally chartered stock savings
bank in connection with the offering of common stock by PSB Holdings, Inc. The Bank is headquartered at 40 Main Street in
Putnam, Connecticut and conducts substantially all of its business from eight full-service banking offices and one loan origination
center. In addition, the Bank maintains a “Special Needs Limited Branch.” The telephone number at the Bank’s
main office is (860) 928-6501.
“Second-Step” Conversion
of Putnam Bancorp, MHC
On September 9, 2015,
the Boards of Directors of Putnam Bancorp, MHC, the Company and Putnam Bank each adopted a Plan of Conversion and Reorganization
of Putnam Bancorp, MHC (the “Plan”) pursuant to which the Putnam Bancorp, MHC will undertake a “second-step”
conversion and cease to exist. Putnam Bank will reorganize from a two-tier mutual holding company structure to a fully public stock
holding company structure.
Pursuant to the Plan,
(i) Putnam Bank will become a wholly owned subsidiary of a Maryland stock corporation (the “New Holding Company”),
(ii) the shares of common stock of the Company held by persons other than Putnam Bancorp, MHC (whose shares will be canceled) will
be converted into shares of common stock of the New Holding Company pursuant to an exchange ratio designed to preserve the percentage
ownership interests of such persons (excluding shares purchased in the stock offering described below and cash received in lieu
of fractional shares, and as adjusted to reflect certain assets held by Putnam Bancorp, MHC), and (iii) the New Holding Company
will offer and sell shares of common stock representing the ownership interest of Putnam Bancorp, MHC in a subscription offering
and, if necessary, a community and/or syndicated community offering. The Plan is subject to regulatory approval as well
as the approval of the depositors of Putnam Bank, the corporators of Putnam Bancorp, MHC and the Company’s stockholders (including
the approval of a majority of the Company’s outstanding shares of common stock held by persons other than Putnam Bancorp,
MHC).
Available Information
PSB Holdings, Inc.
is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission. These respective
reports are on file and a matter of public record with the Securities and Exchange Commission and may be obtained on the Securities
and Exchange Commission’s website (http://www.sec.gov).
Our website address
is www.putnambank.com. Information on our website should not be considered a part of this annual report.
General
Our principal business
consists of attracting deposits from the general public in the communities where our offices are located, and investing those deposits,
together with funds generated from operations, primarily in loans secured by real estate, including one-to-four family residential
mortgage loans and commercial real estate loans (including multi-family real estate loans). To a lesser extent, we originate
commercial loans, residential construction loans and consumer loans. We also invest in investment securities.
Market Area
Our market area has
a relatively stable population and household base. We currently operate out of eight offices, which are located in Windham County
and New London County, Connecticut. Windham County is located in the Northeastern corner of Connecticut and borders both Massachusetts
(to the north) and Rhode Island (to the east). New London County is to the south of Windham County, located in the Southeastern
corner of Connecticut. Putnam is approximately 45 miles from Hartford, Connecticut, 30 miles from Providence, Rhode Island, and
65 miles from Boston, Massachusetts.
According to SNL Financial,
from 2010 to 2015, the population of Windham County decreased by 1.1%, while New London County’s population remained relatively
unchanged. At the same time, the population of the state of Connecticut increased by 0.8%, while the United States’ population
increased by 3.5%. During the same period, the growth in number of households in Windham and New London Counties, as well as on
a statewide and nationwide basis, also increased. In 2015, per capita income and median household income for Windham County equaled
$28,850 and $60,093, respectively. In the same year, per capita income and median household income for New London County equaled
$35,270 and $67,751, respectively. These compare to 2015 per capita income measures for the state of Connecticut and the United
States of $38,172 and $28,840, respectively, and 2015 median household income measures for the state of Connecticut and the United
States of $69,408 and $53,706, respectively.
Windham County has
a diversified mix of industry groups and employment sectors, including services, wholesale/retail trade and healthcare. According
to SNL Financial, these three sectors comprise approximately 70% of the employment base in Windham County. The same three sectors
comprise approximately 73% of the employment base in New London County.
Windham County’s
June 2015 unemployment rate of 5.9% was higher than the New London County unemployment rate of 5.6%, which were both higher than
the comparable Connecticut unemployment rate of 5.4%, and the national unemployment rate of 5.3%. Notably, the unemployment rates
for the United States, Connecticut, Windham County, and New London County for June 2015 have all decreased relative to their June
2014 unemployment rates of 6.1%, 6.5%, 7.3%, and 6.6%, respectively. Our primary market area for deposits includes the communities
in which we maintain our main office and our branch office locations. Our primary lending area is broader than our primary deposit
market area and includes all of Windham County, and parts of the adjacent Connecticut Counties of New London and Tolland, as well
as the Rhode Island and Massachusetts communities adjacent to Windham County.
Competition
We face intense competition
within our market area for deposits and loans. The Town of Putnam and the surrounding area have a high concentration of financial
institutions, including large commercial banks, community banks and credit unions. Several large holding companies operate banks
in our market area. Many of them are significantly larger than us and, therefore, have greater resources. Additionally, some of
our competitors offer products and services that we currently do not offer, such as trust services and private banking. We face
additional competition for deposits from money market funds, brokerage firms, insurance companies, mutual funds and other corporate
and government securities.
As of June 30, 2014,
based on the Federal Deposit Insurance Corporation’s annual Summary of Deposits Report (the most current data available),
our market share of Federal Deposit Insurance Corporation-insured deposits represented 17.8% of deposits in Windham County, giving
us the third largest market share out of ten financial institutions with offices in that county as of that date, and 1.6% of deposits
in New London County, giving us the 11th largest market share out of 15 financial institutions with offices in that
county as of that date.
Lending Activities
Historically, our
principal lending activity has been the origination of first mortgage loans for the purchase or refinancing of one-to-four family
residential real estate. Recently, we have sold the majority of longer-term, fixed-rate loans (other than bi-weekly loans) in
the secondary market. However, the additional capital raised in the offering would permit us to retain longer term, fixed-rate
loans in our portfolio.
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio at the dates indicated.
| |
At
June 30, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| |
Amount | | |
Percent | | |
Amount | | |
Percent | | |
Amount | | |
Percent | | |
Amount | | |
Percent | | |
Amount | | |
Percent | |
| |
(Dollars in thousands) | |
| |
| |
Real Estate Loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential (1) | |
$ | 178,989 | | |
| 79.17 | % | |
$ | 184,380 | | |
| 78.98 | % | |
$ | 187,116 | | |
| 79.29 | % | |
$ | 200,148 | | |
| 79.24 | % | |
$ | 193,084 | | |
| 74.96 | % |
Commercial | |
| 41,762 | | |
| 18.47 | | |
| 43,887 | | |
| 18.80 | | |
| 43,423 | | |
| 18.40 | | |
| 45,032 | | |
| 17.83 | | |
| 53,248 | | |
| 20.67 | |
Residential construction | |
| 1,318 | | |
| 0.58 | | |
| 2,661 | | |
| 1.14 | | |
| 2,775 | | |
| 1.17 | | |
| 3,044 | | |
| 1.20 | | |
| 2,824 | | |
| 1.10 | |
Commercial | |
| 3,327 | | |
| 1.47 | | |
| 1,904 | | |
| 0.81 | | |
| 1,980 | | |
| 0.84 | | |
| 3,459 | | |
| 1.37 | | |
| 7,356 | | |
| 2.86 | |
Consumer and other | |
| 701 | | |
| 0.31 | | |
| 627 | | |
| 0.27 | | |
| 707 | | |
| 0.30 | | |
| 898 | | |
| 0.36 | | |
| 1,070 | | |
| 0.41 | |
Total loans | |
| 226,097 | | |
| 100.00 | % | |
| 233,459 | | |
| 100.00 | % | |
| 236,001 | | |
| 100.00 | % | |
| 252,581 | | |
| 100.00 | % | |
| 257,582 | | |
| 100.00 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Unadvanced construction loans | |
| (680 | ) | |
| | | |
| (1,658 | ) | |
| | | |
| (1,745 | ) | |
| | | |
| (1,559 | ) | |
| | | |
| (1,476 | ) | |
| | |
| |
| 225,417 | | |
| | | |
| 231,801 | | |
| | | |
| 234,256 | | |
| | | |
| 251,022 | | |
| | | |
| 256,106 | | |
| | |
Net deferred loan costs | |
| 804 | | |
| | | |
| 705 | | |
| | | |
| 608 | | |
| | | |
| 463 | | |
| | | |
| 191 | | |
| | |
Allowance for loan losses | |
| (2,175 | ) | |
| | | |
| (2,380 | ) | |
| | | |
| (2,693 | ) | |
| | | |
| (2,913 | ) | |
| | | |
| (3,072 | ) | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans, net | |
$ | 224,046 | | |
| | | |
$ | 230,126 | | |
| | | |
$ | 232,171 | | |
| | | |
$ | 248,572 | | |
| | | |
$ | 253,225 | | |
| | |
| (1) | Residential real estate loans include one-to-four family
mortgage loans, home equity loans, and home equity lines of credit. |
Loan Portfolio
Maturities and Yields. The following table summarizes the final maturities of our loan portfolio at June 30, 2015. This
table does not reflect scheduled principal payments, unscheduled prepayments, or the ability of certain loans to reprice prior
to maturity dates. Demand loans, and loans having no stated repayment schedule, are reported as being due in one year or less.
| |
Residential
Real Estate | | |
Commercial
Real Estate | | |
Residential
Construction | | |
Commercial | | |
Consumer
and Other | | |
Total
Loans | |
| |
Amount | | |
Weighted
Average Rate | | |
Amount | | |
Weighted
Average Rate | | |
Amount | | |
Weighted
Average Rate | | |
Amount | | |
Weighted
Average Rate | | |
Amount | | |
Weighted
Average Rate | | |
Amount | | |
Weighted
Average Rate | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Due During the Years
Ending After June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
One year or less | |
$ | 177 | | |
| 5.39 | % | |
$ | 3,949 | | |
| 5.09 | % | |
$ | 1,318 | | |
| 4.65 | % | |
$ | 388 | | |
| 3.85 | % | |
$ | 144 | | |
| 5.89 | % | |
$ | 5,976 | | |
| 4.97 | % |
More than one to five years | |
| 4,525 | | |
| 4.86 | % | |
| 4,317 | | |
| 5.21 | % | |
| — | | |
| — | | |
| 877 | | |
| 5.60 | % | |
| 557 | | |
| 4.76 | % | |
| 10,276 | | |
| 5.06 | % |
More than five years | |
| 174,287 | | |
| 3.93 | % | |
| 33,496 | | |
| 5.26 | % | |
| — | | |
| — | | |
| 2,062 | | |
| 4.28 | % | |
| — | | |
| — | | |
| 209,845 | | |
| 4.15 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 178,989 | | |
| 3.95 | % | |
$ | 41,762 | | |
| 5.24 | % | |
$ | 1,318 | | |
| 4.65 | % | |
$ | 3,327 | | |
| 4.58 | % | |
$ | 701 | | |
| 4.99 | % | |
$ | 226,097 | | |
| 4.20 | % |
The following table
sets forth the scheduled repayments of fixed and adjustable rate loans at June 30, 2015 that are contractually due after June 30,
2016.
| |
Fixed | | |
Adjustable | | |
Total | |
| |
(In thousands) | |
| |
| | |
| | |
| |
Real Estate Loans: | |
| | | |
| | | |
| | |
Residential | |
$ | 114,333 | | |
$ | 64,479 | | |
$ | 178,812 | |
Commercial | |
| 19,604 | | |
| 18,209 | | |
| 37,813 | |
Commercial | |
| 2,626 | | |
| 313 | | |
| 2,939 | |
Consumer and other | |
| 557 | | |
| — | | |
| 557 | |
| |
| | | |
| | | |
| | |
Total | |
$ | 137,120 | | |
$ | 83,001 | | |
$ | 220,121 | |
At June 30, 2015, the
total amount of loans that had fixed interest rates was $141.3 million, and the total amount of loans that had floating or adjustable
interest rates was $84.1 million.
Residential Real
Estate Loans. Our primary lending activity consists of the origination of one-to-four family residential real estate loans
that are primarily secured by properties located in Windham and New London Counties, Connecticut. At June 30, 2015, $179.0 million,
or 79.2% of our loan portfolio, consisted of one-to-four family residential real estate loans. At June 30, 2015, our residential
real estate loans included $7.6 million of home equity loans and $10.3 million of home equity lines of credit. Generally, one-to-four
family residential real estate loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price
of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We will not make
loans with a loan-to-value ratio in excess of 100% for loans secured by single family homes. Fixed rate real estate loans generally
are originated for terms of 10 to 30 years. Generally, all fixed rate residential real estate loans are underwritten according
to Fannie Mae policies and procedures.
At June 30, 2015, $76.9
million, or 43.0%, of our residential real estate loans were bi-weekly real estate loans. Bi-weekly real estate loans are loans
that require payments to be made every two weeks, thus shortening the duration of the loan. The borrower is required to maintain
a deposit account with us for automatic withdrawal of the mortgage payment.
Recently, we have sold
the majority of longer-term, fixed-rate loans (other than bi-weekly loans) in the secondary market. However, the additional capital
raised in the offering would permit us to retain longer term, fixed-rate loans in our portfolio. We originated $22.9 million of
fixed rate one-to-four family residential loans during the year ended June 30, 2015, of which $6.8 million were sold in the secondary
market.
We also offer adjustable
rate mortgage loans for one-to-four family properties, with an interest rate based on the one-year Constant Maturity Treasury Bill
Index, which adjusts annually from the outset of the loan or which adjusts annually after a three-, five-, seven-, or ten-year
initial fixed rate period. We originated $10.3 million of adjustable rate one-to-four family residential loans during the year
ended June 30, 2015, of which $360,000 was sold in the secondary market. Our adjustable rate mortgage loans generally provide for
maximum rate adjustments of 100 basis points per adjustment, with a lifetime maximum adjustment up to 6% above the initial rate,
regardless of the initial rate. Our adjustable rate real estate loans amortize over terms of up to 30 years.
Adjustable rate real
estate loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks
because, as interest rates increase, the monthly or bi-weekly payments by the borrower increase, thus increasing the potential
for default by the borrower. At the same time, the value of the underlying collateral may be adversely affected by higher interest
rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments
permitted by our loan documents and, therefore, the effectiveness of adjustable rate real estate loans may be limited during periods
of rapidly rising interest rates. At June 30, 2015, $64.5 million, or 36.0%, of our one-to-four family residential loans had adjustable
rates of interest.
In an effort to provide
financing for moderate income home buyers, we offer Veterans Administration (VA), Federal Housing Administration (FHA), Connecticut
Housing Finance Authority (CHFA) and Rural Development loans. These programs offer residential real estate loans to qualified individuals.
These loans are offered with fixed rates of interest and terms of up to 30 years. Such loans are secured by one-to-four family
residential properties. All of these loans are originated using agency underwriting guidelines. VA, FHA and CHFA loans are closed
in the name of Putnam Bank and are immediately sold on a servicing-released basis. All such loans are originated in amounts of
up to 100% of the lower of the property’s appraised value or the sale price. Private mortgage insurance is required on all
such loans.
All residential real
estate loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately
due and payable if, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and
the loan is not repaid. Regulations limit the amount that a savings association may lend relative to the appraised value of the
real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. All borrowers
are required to obtain title insurance. We also require homeowner’s insurance and fire and casualty insurance and, where
circumstances warrant, flood insurance, on properties securing real estate loans. At June 30, 2015, our largest residential real
estate loan had a principal balance of $682,000 and was secured by a residence located in our primary market area. At June 30,
2015, this loan was performing in accordance with its original terms.
At June 30, 2015, home
equity loans and lines of credit totaled $18.0 million, or 10.0% of our residential real estate loans and 7.7% of total loans.
Additionally, at June 30, 2015, the unadvanced amounts of home equity lines of credit totaled $11.5 million. The underwriting standards
utilized for home equity loans and home equity lines of credit include a determination of the applicant’s credit history,
an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of
the collateral securing the loan. Home equity loans are offered with fixed rates of interest and with terms of up to 15 years.
The loan-to-value ratio for a home equity loan is generally limited to 80%. However, we offer special programs to borrowers, who
satisfy certain underwriting criteria, with loan-to-value ratios of up to 100%. Our home equity lines of credit have adjustable
rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal.
Commercial Real
Estate Loans. We originate commercial real estate loans, including multi-family real estate loans. These loans are generally
secured by one-to-four family non-owner occupied investment properties, multi-family real estate of 20 units or less, small commercial
and industrial owner and non-owner occupied properties, hotels, non-owner occupied condominiums and commercial and industrial vacant
land. The security for these loans is primarily located in our primary market area. At June 30, 2015, commercial mortgage
loans totaled $41.8 million, or 18.5% of total loans. Our commercial real estate underwriting policies provide that such real estate
loans may be made in amounts of up to 80% of the appraised value of the property provided such loan complies with our current loans-to-one-borrower
limit, which at June 30, 2015 was $6.5 million. Our commercial real estate loans may be made with terms of up to five years with
20-year amortization schedules and are offered with interest rates that are fixed or that adjust periodically and are generally
indexed to the prime rate as reported in The Wall Street Journal or to Federal Home Loan Bank advance rates. In reaching
a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s
expertise and credit history, and the profitability of the value of the underlying property. In addition, with respect to commercial
real estate rental properties, we will also consider the term of the lease and the quality of the tenants. We generally require
that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service
to debt service) of at least 1.25x. Environmental surveys are generally required for commercial real estate loans. Generally, multi-family
and commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by
the principals.
A commercial borrower’s
financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews
and periodic face-to-face meetings with the borrower. We require commercial borrowers to provide annually updated financial statements
and federal tax returns. These requirements also apply to all guarantors on commercial loans. We also require borrowers with rental
investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of
leases, as applicable. The largest commercial real estate loan in our portfolio at June 30, 2015 was a $2.5 million loan secured by office buildings located
in our primary market area. At June 30, 2015, this loan was performing in accordance with its original terms.
Loans secured by commercial
real estate, including multi-family properties, generally involve larger principal amounts and a greater degree of risk than one-to-four
family residential real estate loans. Because payments on loans secured by commercial real estate, including multi-family properties,
are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy.
Residential Construction
Loans. We originate construction loans to individuals for the construction and acquisition of personal residences. At June
30, 2015, construction real estate loans totaled $1.3 million, or 0.6%, of total loans. At June 30, 2015, the unadvanced portion
of these construction loans totaled $555,000.
Construction loans
can be made with a maximum loan-to-value ratio of 95%, provided that the borrower obtains private mortgage insurance on the loan
if the loan balance exceeds 80% of the appraised value or sales price, whichever is less, of the secured property. At June 30,
2015, our largest outstanding residential construction real estate loan commitment was for $450,000, and was fully advanced. This
loan was performing according to its original terms at June 30, 2015. Construction loans to individuals are generally made on the
same terms as our one-to-four family real estate loans.
Construction financing
is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion
of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction
cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of
the property. Additionally, if the estimate of value is inaccurate, we may be confronted with a project, when completed, with a
value that is insufficient to assure full payment.
Commercial Loans.
At June 30, 2015, we had $3.3 million in commercial business loans, which amounted to 1.5% of total loans. We make such commercial
loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. Commercial lending
products include term loans and revolving lines of credit. Such loans are generally used for longer-term working capital purposes
such as purchasing equipment or furniture. Commercial loans are made with either adjustable or fixed rates of interest. Variable
rates are based on the prime rate, as published in The Wall Street Journal, plus a margin. Fixed rate commercial loans are
set at a margin above the comparable Federal Home Loan Bank advance rate.
When making commercial
loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities
of the borrower, the projected cash flows of the business and the value of the collateral. Commercial loans are generally secured
by a variety of collateral, primarily accounts receivable, inventory and equipment, and are supported by personal guarantees. Depending
on the collateral used to secure the loans, commercial loans are made in amounts of up to 75% of the value of the collateral securing
the loan. We generally do not make unsecured commercial loans.
Commercial loans generally
have greater credit risk than residential real estate loans. Unlike residential real estate loans, which generally are made on
the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by
real property whose value tends to be more easily ascertainable, commercial loans generally are made on the basis of the borrower’s
ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment
of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our
underwriting standards. At June 30, 2015, our largest commercial loan was a $435,000 loan secured by business assets located in
our primary market area. This loan was performing according to its original terms at June 30, 2015.
Consumer and
Other Loans. We offer a limited range of consumer loans, principally to Putnam Bank customers residing in our primary market
area with acceptable credit ratings. Our consumer loans generally consist of loans on new and used automobiles, loans secured by
deposit accounts and unsecured personal loans. Consumer loans totaled $701,000, or 0.3% of our total loan portfolio, at June 30,
2015.
Origination,
Purchase, Sale and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our
eight branch offices and one loan origination center. All loans originated by us are underwritten pursuant to our policies and
procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is
dependent upon the relative customer demand for such loans, which is affected by current and expected future levels of market interest
rates.
Recently, we have sold
the majority of longer-term, fixed-rate loans (other than bi-weekly loans) in the secondary market. However, the additional capital
raised in the offering would permit us to retain longer term, fixed-rate loans in our portfolio. The one-to-four family loans that
we currently originate for sale include mortgage loans which conform to the underwriting standards specified by Fannie Mae. We
also sell all mortgage loans insured by CHFA, FHA, VA and Rural Development. Generally, all one-to-four family loans that we sell
are sold pursuant to master commitments negotiated with Fannie Mae. Generally, we sell our loans without recourse. We generally
retain the servicing rights on the mortgage loans sold to Fannie Mae, but sell all CHFA, VA, FHA and Rural Development loans on
a servicing-released basis.
At June 30, 2015, Putnam
Bank was servicing loans in the amount of $31.7 million. Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
During the fiscal year
ended June 30, 2015, we originated $33.2 million of one-to-four family loans, of which we retained $26.0 million. We recognize
at the time of sale, the cash gain or loss on the sale of the loans based on the difference between the net cash proceeds received
and the carrying value of the loans sold.
Loan Approval
Procedures and Authority. The board of directors establishes the lending policies and loan approval limits of Putnam Bank.
Loan officers generally have the authority to originate real estate loans, consumer loans and commercial loans up to amounts established
for each lending officer. Loans in amounts above the individual authorized limits require the approval of Putnam Bank’s Credit
Committee. The Credit Committee is authorized to approve all one- to four family real estate loans, commercial real estate loans,
commercial loans and secured consumer loans in amounts up to $500,000. All loans of $500,000 or greater must receive the approval
of Putnam Bank’s board of directors.
The board of directors
annually approves independent appraisers used by Putnam Bank. For larger loans, we may require an environmental site assessment
to be performed by an independent professional for all non-residential real estate loans. It is our policy to require hazard insurance
on all real estate loans.
Loan Origination
Fees and Other Income. In addition to interest earned on loans, Putnam Bank receives loan origination fees. Such fees and
costs vary with the volume and type of loans and commitments made and purchased, principal repayments, and competitive conditions
in the mortgage markets, which in turn respond to the demand and availability of money.
Loans to One
Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited,
by regulation, to 15% of our stated capital and reserves. At June 30, 2015, our regulatory limit on loans to one borrower was $6.5
million. At that date, the largest aggregate amount loaned by Putnam Bank to one borrower was $2.7 million, consisting of a commercial
real estate loan and home equity loans. The loans comprising this lending relationship were performing in accordance with their
original terms as of June 30, 2015.
Delinquencies and Classified Assets
Collection Procedures.
A computer-generated delinquency notice is mailed monthly to all delinquent borrowers, advising them of the amount of their
delinquency. When a loan becomes 60 days delinquent, Putnam Bank sends a letter advising the borrower of the delinquency. The borrower
is given 30 days to pay the delinquent payments or to contact Putnam Bank to make arrangements to bring the loan current over a
longer period of time. If the borrower fails to bring the loan current in 30 days or to make arrangements to cure the delinquency
over a longer period of time, the matter is referred to legal counsel and foreclosure proceedings are started. We may consider
forbearance in cases of a temporary loss of income if a plan is presented by the borrower to cure the delinquency in a reasonable
period of time after his or her income resumes.
Loans Past Due
and Non-Performing Assets. Loans are reviewed on a regular basis. Management determines that a loan
is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original
terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral, if the loan
is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for
loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Non-accrual loans are loans in which collectability is questionable and therefore
interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent
are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual
status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis
or cost recovery method. At June 30, 2015, we had non-performing loans of $5.6 million and a ratio of non-performing
loans to total loans of 2.50%.
Real estate acquired
as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until
such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded
at its fair value, less estimated costs of disposal. If the value of the property is less than the loan, less any related
specific loan loss provisions, the difference is charged against the allowance for loan losses. Any subsequent write-down
of OREO is charged against earnings. At June 30, 2015, we had OREO of $3.2 million. Other real estate owned is included
in non-performing assets.
A loan is classified
as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant
a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as
a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly
a partial forgiveness of debt. Interest income on restructured loans is accrued after the borrower demonstrates the ability to
pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.
Non-Performing
Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. A loan
classified in the table below as “non-accrual” does not necessarily mean that such loan is or has been delinquent.
Once a loan is delinquent 90 days or more or the borrower or collateral securing the loan experiences an event that makes collectability
doubtful, the loan is placed on “non-accrual” status. Our policies require six consecutive months of contractual payments
in order for the loan to be removed from non-accrual status.
| |
At June 30, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| |
Non-accrual loans: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate loans | |
$ | 2,731 | | |
$ | 3,977 | | |
$ | 2,865 | | |
$ | 3,985 | | |
$ | 1,752 | |
Commercial real estate | |
| 2,886 | | |
| 3,051 | | |
| 3,365 | | |
| 3,975 | | |
| 4,635 | |
Residential construction | |
| — | | |
| — | | |
| — | | |
| 424 | | |
| — | |
Commercial | |
| 22 | | |
| 28 | | |
| — | | |
| — | | |
| — | |
Consumer and other | |
| 1 | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
| 5,640 | (1) | |
| 7,056 | | |
| 6,230 | | |
| 8,384 | | |
| 6,387 | |
Accruing loans past due 90 days or more: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate loans | |
| — | | |
| — | | |
| 112 | | |
| — | | |
| 32 | |
Total | |
| — | | |
| — | | |
| 112 | | |
| — | | |
| 32 | |
Total non-performing loans | |
| 5,640 | | |
| 7,056 | | |
| 6,342 | | |
| 8,384 | | |
| 6,419 | |
Other real estate owned | |
| 3,155 | | |
| 1,549 | | |
| 1,665 | | |
| 1,683 | | |
| 1,074 | |
Other non-performing assets | |
| — | | |
| — | | |
| — | | |
| — | | |
| 46 | |
Total non-performing assets | |
| 8,795 | | |
| 8,605 | | |
| 8,007 | | |
| 10,067 | | |
| 7,539 | |
Troubled debt restructurings in compliance with restructured terms | |
| 2,154 | (2) | |
| 839 | | |
| 2,159 | | |
| 3,443 | | |
| 4,644 | |
Troubled debt restructurings and total non-performing assets | |
$ | 10,949 | | |
$ | 9,444 | | |
$ | 10,166 | | |
$ | 13,510 | | |
$ | 12,183 | |
Total non-performing loans to total loans | |
| 2.50 | % | |
| 3.04 | % | |
| 2.71 | % | |
| 3.34 | % | |
| 2.51 | % |
Total non-performing assets to total assets | |
| 1.86 | % | |
| 1.87 | % | |
| 1.76 | % | |
| 2.23 | % | |
| 1.60 | % |
Total non-performing assets and troubled debt restructurings to total assets | |
| 2.31 | % | |
| 2.05 | % | |
| 2.24 | % | |
| 2.99 | % | |
| 2.58 | % |
| (1) | The gross interest income that would have been reported if the non-accrual loans had performed in accordance with their original
terms was $318,000 for the year ended June 30, 2015. Actual income recognized was $63,000 for the year ended June 30, 2015. |
| (2) | The gross interest income that would have been reported if the troubled debt restructurings had performed in accordance with
their original terms was $197,000 for the year ended June 30, 2015. Actual income recognized was $34,000 for the year ended June
30, 2015. |
Total
non-performing assets increased $190,000 to $8.8 million at June 30, 2015 from $8.6 million at June 30, 2014. Non-performing assets
as of June 30, 2015 consisted of $3.2 million of other real estate owned, which reflects the repossession of a five-lot residential
development project at a carrying value of $197,000, a commercial building at a carrying value of $112,000, three lots in a recreational
park at a value of $139,000, a single family home with a carrying value of $495,000, a single family condominium with a carrying
value of $71,000, a single family home with a carrying value of $51,000, a single family home with a carrying value of $374,000,
a commercial building with a carrying value of $1.1 million and 202.5 acres of land with a carrying value of $599,000. Also included
in non-performing assets at June 30 2015 was
$5.6 million in non-performing loans. These loans consisted of 18 residential loans totaling
$2.7 million, 11 commercial real estate loans totaling $2.9 million, one commercial loan for $22,000 and one consumer loan for
$1,000. Non-performing assets as of June 30, 2014 consisted of $1.5 million of other real estate owned, which reflects the repossession
of a six-lot residential development project at a carrying value of $247,000, a single family home with a carrying value of $264,000,
a commercial building at a carrying value of $114,000, three lots in a recreational park at a value of $139,000, a single family
home with a carrying value of $169,000 and 202.5 acres of land with a carrying value of $616,000. Also included in non-performing
assets at June 30, 2014 was $7.1
million in non-performing loans. These loans consisted of 21 residential loans totaling
$4.0 million, 12 commercial real estate loans totaling $3.1 million and one commercial loan for $28,000.
Management is focused
on working with borrowers and guarantors to resolve non-performing 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. We review the strength of the guarantors; require face to face discussions and offer restructuring suggestions
that provide the borrowers with short-term relief and exit strategies. Overall, we expect to see improvement as solutions are identified
and executed. We obtain a current appraisal on all real estate secured loans that are 180 days or more past due if the appraisal
in our 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 our policy 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 book 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. Management takes a proactive approach with respect to the identification and resolution
of problem loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparisons
of Operating Results for the Fiscal Years Ended June 30, 2015 and 2014.”
The following table
sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
| |
Loans Delinquent For | | |
| | |
| |
| |
60-89 Days Past Due | | |
90 Days and Over | | |
Total | |
| |
Number | | |
Amount | | |
Number | | |
Amount | | |
Number | | |
Amount | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| |
At June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 2 | | |
$ | 193 | | |
| 3 | | |
$ | 755 | | |
| 5 | | |
$ | 948 | |
Commercial real estate | |
| — | | |
| — | | |
| 7 | | |
| 2,316 | | |
| 7 | | |
| 2,316 | |
Total | |
| 2 | | |
$ | 193 | | |
| 10 | | |
$ | 3,071 | | |
| 12 | | |
$ | 3,264 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 4 | | |
$ | 571 | | |
| 6 | | |
$ | 1,497 | | |
| 10 | | |
$ | 2,068 | |
Commercial real estate | |
| 2 | | |
| 383 | | |
| 6 | | |
| 2,208 | | |
| 8 | | |
| 2,591 | |
Total | |
| 6 | | |
$ | 954 | | |
| 12 | | |
$ | 3,705 | | |
| 18 | | |
$ | 4,659 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At June 30, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 3 | | |
$ | 195 | | |
| 10 | | |
$ | 1,844 | | |
| 13 | | |
$ | 2,039 | |
Commercial real estate | |
| — | | |
| — | | |
| 17 | | |
| 2,876 | | |
| 17 | | |
| 2,876 | |
Total | |
| 3 | | |
$ | 195 | | |
| 27 | | |
$ | 4,720 | | |
| 30 | | |
$ | 4,915 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At June 30, 2012 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 2 | | |
$ | 162 | | |
| 5 | | |
$ | 940 | | |
| 7 | | |
$ | 1,102 | |
Commercial real estate | |
| — | | |
| — | | |
| 5 | | |
| 1,573 | | |
| 5 | | |
| 1,573 | |
Residential construction | |
| — | | |
| — | | |
| 1 | | |
| 424 | | |
| 1 | | |
| 424 | |
Total | |
| 2 | | |
$ | 162 | | |
| 11 | | |
$ | 2,937 | | |
| 13 | | |
$ | 3,099 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At June 30, 2011 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 2 | | |
$ | 247 | | |
| 5 | | |
$ | 1,126 | | |
| 7 | | |
$ | 1,373 | |
Commercial real estate | |
| 4 | | |
| 488 | | |
| 8 | | |
| 3,324 | | |
| 12 | | |
| 3,812 | |
Total | |
| 6 | | |
$ | 735 | | |
| 13 | | |
$ | 4,450 | | |
| 19 | | |
$ | 5,185 | |
Classified Assets.
Applicable banking regulations and our internal policies require that management utilize an internal asset classification system
to monitor and evaluate the credit risk inherent in its loan portfolio. We currently classify problem and potential problem assets
as “substandard”, “doubtful”, “loss” or “special mention.” An asset is considered
“substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses
inherent in those classified “substandard” with the added characteristic that the weaknesses present make collection
or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable, and there is a high
probability of loss. Assets classified as “loss” are those considered uncollectible and of such little value that their
continuance as loans is not warranted. In addition, assets that do not currently expose us to sufficient risk to warrant classification
in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated “special
mention.”
An insured institution
is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard
or doubtful, as well as for other potential problem loans. General allowances represent loss allowances which have been established
to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated
to particular problem assets. When an insured institution classifies problem assets as “loss”, it is required either
to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.
Our determination as to the classification of its assets and the amount of its valuation allowances is subject to review by our
banking regulators, who can order the establishment of additional general or specific loss allowances.
On the basis of management’s
review of our assets, at June 30, 2015 we classified $6.7 million of our loans as substandard and $1.7 million as doubtful. Of
these loans, $5.6 million were considered non-performing and included in the table of non-performing assets. At June 30, 2015,
$2.6 million of our loans were designated as special mention, and none of our assets were classified as loss.
The loan portfolio
is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations.
Not all classified assets constitute non-performing assets.
Allowance for Loan Losses
Our allowance for loan
losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in
determining the allowance for loan losses, considers the losses inherent in our loan portfolio and changes in the nature and volume
of loan activities, along with the general economic and real estate market conditions. We identify and establish specific loss
allowances on impaired loans, establish general valuation allowances on the remainder of our loan portfolio and establish an unallocated
portion to reflect losses resulting from the inherent imprecision involved in the loss analysis process. Once a loan becomes delinquent
or otherwise identified as impaired, we may establish a specific loan loss allowance based on a review of among other things, expected
cash flows, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General
loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition
of the loan portfolio, current economic conditions and delinquency trends. The allowance is increased through provisions charged
against current earnings and recoveries of previously charged-off loans. The portions of loans that are determined to be uncollectible
are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan
losses, future loss provisions may be necessary based on changing economic conditions. The allowance for loan losses as of June
30, 2015 was maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and
such losses were both probable and reasonably estimable.
In addition, the Federal
Reserve Board and the Connecticut Department of Banking, as an integral part of their examination process, periodically review
our allowance for loan losses. These agencies may require that we recognize additions to the allowance based on their judgment
of information available to them at the time of examination.
The following table sets forth activity
in our allowance for loan losses for the years indicated.
| |
Year Ended June 30, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| |
Balance at beginning of year | |
$ | 2,380 | | |
$ | 2,693 | | |
$ | 2,913 | | |
$ | 3,072 | | |
$ | 2,651 | |
Provision for loan losses | |
| 535 | | |
| 55 | | |
| 770 | | |
| 1,152 | | |
| 915 | |
Charge-offs: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| (98 | ) | |
| (200 | ) | |
| (307 | ) | |
| (364 | ) | |
| (208 | ) |
Commercial real estate | |
| (879 | ) | |
| (199 | ) | |
| (806 | ) | |
| (928 | ) | |
| (62 | ) |
Residential construction | |
| — | | |
| — | | |
| (9 | ) | |
| — | | |
| — | |
Commercial | |
| — | | |
| — | | |
| — | | |
| — | | |
| (212 | ) |
Consumer and other | |
| (44 | ) | |
| (52 | ) | |
| (56 | ) | |
| (60 | ) | |
| (72 | ) |
Total charge-offs | |
| (1,021 | ) | |
| (451 | ) | |
| (1,178 | ) | |
| (1,352 | ) | |
| (554 | ) |
Recoveries: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential real estate | |
| 45 | | |
| 37 | | |
| 77 | | |
| 7 | | |
| 6 | |
Commercial real estate | |
| 211 | | |
| — | | |
| 84 | | |
| — | | |
| — | |
Residential construction | |
| — | | |
| 5 | | |
| 5 | | |
| — | | |
| — | |
Commercial | |
| 12 | | |
| 14 | | |
| 4 | | |
| 11 | | |
| 18 | |
Consumer and other | |
| 13 | | |
| 27 | | |
| 18 | | |
| 23 | | |
| 36 | |
Total recoveries | |
| 281 | | |
| 83 | | |
| 188 | | |
| 41 | | |
| 60 | |
Net charge-offs | |
| (740 | ) | |
| (368 | ) | |
| (990 | ) | |
| (1,311 | ) | |
| (494 | ) |
Balance at end of year | |
$ | 2,175 | | |
$ | 2,380 | | |
$ | 2,693 | | |
$ | 2,913 | | |
$ | 3,072 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses to non-performing loans at end of year | |
| 38.57 | % | |
| 33.73 | % | |
| 42.46 | % | |
| 34.74 | % | |
| 47.86 | % |
Allowance for loan losses to total loans outstanding at the end of the year | |
| 0.96 | % | |
| 1.02 | % | |
| 1.15 | % | |
| 1.16 | % | |
| 1.20 | % |
Net charge-offs to average loans outstanding | |
| 0.32 | % | |
| 0.16 | % | |
| 0.40 | % | |
| 0.51 | % | |
| 0.19 | % |
Allocation of
Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the
percent of the allowance for a category to the total allowance, and the percent of loans in each category to total loans at the
dates indicated. The allowance for loan losses allocated to each loan category is not necessarily indicative of future losses in
any particular category.
| |
Amount | | |
% of Allowance to Total Allowance | | |
% of Loans in Category to Total Loans | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| |
At June 30, 2015 | |
| | | |
| | | |
| | |
Residential real estate (1) | |
$ | 1,096 | | |
| 50.39 | % | |
| 79.75 | % |
Commercial loans (2) | |
| 947 | | |
| 43.54 | | |
| 19.94 | |
Consumer and other | |
| 26 | | |
| 1.20 | | |
| 0.31 | |
Unallocated | |
| 106 | | |
| 4.87 | | |
| — | |
Total allowance for loan losses | |
$ | 2,175 | | |
| 100.00 | % | |
| 100.00 | % |
| |
| | | |
| | | |
| | |
At June 30, 2014 | |
| | | |
| | | |
| | |
Residential real estate (1) | |
$ | 1,292 | | |
| 54.29 | % | |
| 80.12 | % |
Commercial loans (2) | |
| 919 | | |
| 38.61 | | |
| 19.61 | |
Consumer and other | |
| 24 | | |
| 1.01 | | |
| 0.27 | |
Unallocated | |
| 145 | | |
| 6.09 | | |
| — | |
Total allowance for loan losses | |
$ | 2,380 | | |
| 100.00 | % | |
| 100.00 | % |
| |
| | | |
| | | |
| | |
At June 30, 2013 | |
| | | |
| | | |
| | |
Residential real estate (1) | |
$ | 1,223 | | |
| 45.41 | % | |
| 80.46 | % |
Commercial loans (2) | |
| 1,332 | | |
| 49.46 | | |
| 19.24 | |
Consumer and other | |
| 36 | | |
| 1.34 | | |
| 0.30 | |
Unallocated | |
| 102 | | |
| 3.79 | | |
| — | |
Total allowance for loan losses | |
$ | 2,693 | | |
| 100.00 | % | |
| 100.00 | % |
| |
| | | |
| | | |
| | |
At June 30, 2012 | |
| | | |
| | | |
| | |
Residential real estate (1) | |
$ | 1,505 | | |
| 51.67 | % | |
| 80.43 | % |
Commercial loans (2) | |
| 1,364 | | |
| 46.82 | | |
| 19.21 | |
Consumer and other | |
| 37 | | |
| 1.27 | | |
| 0.36 | |
Unallocated | |
| 7 | | |
| 0.24 | | |
| — | |
Total allowance for loan losses | |
$ | 2,913 | | |
| 100.00 | % | |
| 100.00 | % |
| |
| | | |
| | | |
| | |
At June 30, 2011 | |
| | | |
| | | |
| | |
Residential real estate (1) | |
$ | 1,548 | | |
| 50.39 | % | |
| 76.05 | % |
Commercial loans (2) | |
| 1,426 | | |
| 46.42 | | |
| 23.53 | |
Consumer and other | |
| 11 | | |
| 0.36 | | |
| 0.42 | |
Unallocated | |
| 87 | | |
| 2.83 | | |
| — | |
Total allowance for loan losses | |
$ | 3,072 | | |
| 100.00 | % | |
| 100.00 | % |
| (1) | Residential real estate loans include one-to-four family mortgage loans, residential construction loans, home equity loans
and home equity lines of credit. |
| (2) | Commercial loans include commercial real estate loans and commercial loans. |
Each quarter, management
evaluates the total balance of the allowance for loan losses based on several factors, some of which are not loan specific but
are reflective of the inherent losses in the loan portfolio. This process includes, but is not limited to, a periodic review of
loan collectability in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability
of the borrower to repay, underlying value of collateral, if applicable, and economic conditions in our immediate market area.
First, we group loans by delinquency status. All loans 90 days or more delinquent are generally evaluated individually along with
other impaired loans, based primarily on the present value of expected future cash flows or the value of the collateral securing
the loan. Specific loss allowances are established as required by this analysis. All loans which are not individually evaluated
are segregated by type or loan grade and a loss allowance is established by using loss experience data and management’s judgment
concerning other matters it considers significant. The allowance is allocated to each category of loan based on the results of
the above analysis. Differences between the allocated balances and recorded allowances are reflected as unallocated to absorb losses
resulting from the inherent imprecision involved in the loss analysis process.
This analysis process
is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available.
Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions
may be necessary if economic or other conditions in the future differ from the current environment.
Investment Activities
Putnam Bank’s
Executive Committee is responsible for implementing Putnam Bank’s Investment Policy. The Investment Policy is reviewed annually
and any changes to the policy are recommended to, and subject to, the approval of our board of directors. The Executive Committee
is comprised of our Chairman, President, Executive Vice President and one rotating director. Authority to make investments under
the approved Investment Policy guidelines is delegated by the Executive Committee to appropriate officers. While general investment
strategies are developed and authorized by the Asset/Liability Committee, the execution of specific actions rests with the Chief
Executive Officer or Executive Vice President who may act jointly or severally as Putnam Bank’s Investment Officer. The Investment
Officer is responsible for ensuring that the guidelines and requirements included in the Investment Policy are followed and that
all securities are considered prudent for investment. The Investment Officer is authorized to execute investment transactions (purchases
and sales) up to $5 million per transaction without the prior approval of the Executive Committee and within the scope of the established
investment policy. Each transaction in excess of established limits must receive prior approval of the Executive Committee.
In addition, Putnam
Bank utilizes the services of an independent investment advisor to assist in managing the investment portfolio. The investment
advisor is responsible for maintaining current information regarding securities dealers with whom they are conducting business
on our behalf. A list of appropriate dealers is provided annually to the board of directors for approval and authorization prior
to execution of trades. The investment advisor, through its assigned portfolio manager, must contact our President or Treasurer
to review all investment recommendations and transactions and receive approval from the President or Treasurer prior to execution
of any transaction that might be transacted on our behalf. Upon receipt of approval, the investment advisor, or its assigned portfolio
manager, is authorized to conduct all investment business on our behalf.
Our Investment Policy
requires that all securities transactions be conducted in a safe and sound manner. Investment decisions must be based upon a thorough
analysis of each security instrument to determine its quality, inherent risks, fit within our overall asset/liability management
objectives, effect on our risk-based capital measurement and prospects for yield and/or appreciation.
The
investment policy is consistent with our overall business and asset/liability management strategy, which focuses on sustaining
adequate levels of core earnings. During the fiscal year ended June 30, 2015, we recognized
other-than-temporary write-downs of $155,000 on non-agency mortgage-backed securities.
U.S.
Government and government-sponsored securities. At June 30, 2015, our U.S. Government and government-sponsored
securities portfolio classified as available-for-sale totaled $991,000, or 0.5% of total securities. At June 30, 2015, our
U.S. Government and government-sponsored securities portfolio classified as held-to-maturity totaled $10.2 million, or 4.8%
of total securities. While U.S. Government and government-sponsored securities generally provide lower yields than other
investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity
purposes, as collateral for borrowings and prepayment protection.
Corporate
Bonds. At June 30, 2015, we had five investments in corporate single-issuer
trust preferred securities (TRUPs) with a total book value of $6.0 million and total fair value of $5.2 million, or 2.5% of total
securities, 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 each quarter. None of the issuers have deferred interest
payments or announced the intention to defer interest payments. We believe 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 we do 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 basis which may be at maturity.
Although corporate
bonds may offer higher yields than U.S. Treasury or agency securities of comparable duration, corporate bonds also have a higher
risk of default due to possible adverse changes in the creditworthiness of the issuer. In order to mitigate this risk, our investment
policy requires that corporate debt obligations be rated investment grade or better by a nationally recognized rating agency. If
the bond rating goes below investment grade, then the investment is placed on an investment “watch report” and is monitored
by our Investment Officer. The investment is then reviewed quarterly by our board of directors where a determination is made to
hold or dispose of the investment.
Mortgage-Backed
Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We
invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and lower our
credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae. We also invest in collateralized
mortgage obligations (CMOs or non-agency mortgage-backed securities), also insured or issued by Freddie Mac, Fannie Mae and Ginnie
Mae, or private issuers such as Washington Mutual and Countrywide Home Loans. All private issuer CMOs were rated AAA at time of
purchase.
Mortgage-backed securities
are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the interest rates
on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family
or multi-family mortgages, although we focus our investments on mortgage-backed securities backed by one-to-four family mortgages.
The issuers of such securities (generally U.S. government agencies and government-sponsored enterprises, including Fannie
Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors such as Putnam
Bank, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the
loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be used to collateralize our specific liabilities and
obligations.
CMOs are a type of
mortgage-backed security issued by a special purpose entity that aggregates pools of mortgage-backed securities and creates different
classes of CMO securities with varying maturities and amortization schedules as well as a residual interest, with each class, or
“tranche,” possessing different risk characteristics. A particular tranche of CMOs may, therefore, carry prepayment
risk that differs from that of both the underlying collateral and other tranches. We purchase CMO tranches in an attempt to moderate
reinvestment risk associated with mortgage-backed securities resulting from unexpected prepayment activities.
At June 30, 2015, mortgage-backed
securities and CMOs classified as available-for-sale totaled $29.5 million, or 14.0% of total securities. At June 30, 2015, mortgage-backed
securities and CMOs classified as held-to-maturity totaled $153.9 million, or 73.4% of total securities. At June 30, 2015, 64.0%
of the mortgage-backed securities were backed by adjustable rate
loans and 36.0% were backed by fixed rate mortgage loans. The mortgage-backed securities portfolio had a weighted average yield
of 2.64% at June 30, 2015. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated
prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated
with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the market value of such
securities may be adversely affected by changes in interest rates.
Marketable Equity
Securities. At June 30, 2015, our equity securities portfolio totaled $10.0 million, or 4.8% of total securities,
all of which were classified as available-for-sale. At June 30, 2015, the portfolio consisted of auction-rate trust preferred securities
(“ARP”). Auction-rate trust preferred securities are a floating rate preferred stock, on which the dividend rate generally
resets every 90 days based on an auction process to reflect the yield demand for the instruments by potential purchasers. At June
30, 2015, our investments in auction-rate trust preferred securities consisted of investments in three corporate issuers. We originally
purchased these securities because they represented highly liquid, tax-preferred investments secured, in most cases, by preferred
stock issued or guaranteed by high quality, investment grade companies, generally other financial institutions (“collateral
preferred shares”). The ARP shares, or certificates, we purchased are Class A certificates, which, among other rights, entitles
the holder to priority claim on dividends paid into the trust holding the preferred shares.
In most cases, the
trusts which issued the ARP certificates own various callable preferred shares of stock by a single entity. In addition to the
call dates for redemption established by the collateral preferred shares, each trust has a maturity date upon which the trust itself
will terminate. The value of the remaining collateral preferred shares is not guaranteed, and may be more or less than the stated
par value of the collateral preferred shares, and is dependent on the market value of those collateral preferred shares on the
date of the trust’s maturity.
The certificates issued
by the trusts previously traded in an active, open auction market, with each individual trust establishing the frequency of its
auctions, typically every 90 days (the “reset date”). The results of an auction would be the exchange of certificates,
at par, between participants entering or exiting the market, and resetting of the yield to be earned by holders of the Class A
certificates as well as the holders of other classes of trust certificates.
Beginning in February
2008, auctions for these securities began to fail when investors declined to bid on the securities. Five of the largest investment
banks that made a market in these securities (Merrill Lynch, Citigroup, USB, AG and Morgan Stanley) declined to act as bidders
of last resort, as they had in the past. The auction failures did not result in the loss of any principal value to the certificate
holders, but prevented many sellers from exiting, or redeeming, their certificates at the reset date. These unsuccessful sellers
were required to continue to hold the certificates until the next scheduled reset date. To compensate these unsuccessful sellers,
the failed auctions triggered a penalty-rate feature which provided that owners of the Class A certificates were entitled to a
higher portion of the dividends, and thus a higher yield, on the Class A certificates.
During this time, we
attempted to divest the ARPs, but were prevented from doing so due to the continued failure of the auction market. We continued
to carry our investments at par value, despite the increased liquidity risk, because the credit strength of the issuers of the
collateral preferred shares remained high, and the yield remained above-market.
The turmoil in the
financial markets caused the value of the underlying collateral preferred shares to decline dramatically. Market values for the
ARPs from Merrill Lynch, our safekeeping agent, also declined, and we recorded a temporary impairment adjustment to the carrying
value of the ARPs, which are classified as available-for-sale. A temporary impairment reduces the carrying value of the investment
security with an offsetting reduction in our capital accounts.
We had difficulty identifying
market prices of comparable instruments for ARPs due to the inactive market. As a result, during the quarter ended June 30, 2009,
we modified our methodology for determining the fair value of the ARPs classified as Level 3, and used the quoted market values
of the underlying collateral preferred shares, adjusted for the higher yield we earned
through the Class A certificates compared with the nominal rate available to a direct owner of the collateral preferred shares.
We continued to record a temporary impairment adjustment on the ARPs, primarily due to the depressed market values of the underlying
collateral preferred shares.
During 2009, we concluded
that the market value of the underlying collateral preferred shares did not represent orderly transactions and adopted the use
of a discounted cash flow model to determine if there was any other-than-temporary impairment of its investments in the ARPs. The
resulting discounted cash flow for each ARP classified as Level 3 showed no other-than-temporary impairment in the fair value of
the securities.
We have the ability
and intent to hold these securities for the time necessary to collect the expected cash flows.
The table below includes
information on the various issuers of Auction Rate Preferred securities we own as of June 30, 2015:
Issuer | |
Goldman Sachs | | |
Merrill Lynch | | |
Bank of America | |
Par amount | |
$ | 3,000,000 | | |
$ | 5,000,000 | | |
$ | 2,000,000 | |
Book value | |
$ | 3,000,000 | | |
$ | 5,000,000 | | |
$ | 2,000,000 | |
Purchase date | |
| 12-12-07 | | |
| 09-04-07 | | |
| 11-20-07 | |
Maturity date | |
| 08-23-26 | | |
| 05-28-27 | | |
| 08-17-47 | |
Next reset date | |
| 08-21-15 | | |
| 08-27-15 | | |
| 08-14-15 | |
Reset frequency | |
| Quarterly | | |
| Quarterly | | |
| Quarterly | |
Failed auction | |
| Yes | | |
| Yes | | |
| Yes | |
Receiving default rates | |
| Yes | | |
| Yes | | |
| Yes | |
Current rate | |
| 4.43 | % | |
| 4.44 | % | |
| 4.73 | % |
Dividends current | |
| Yes | | |
| Yes | | |
| Yes | |
Our entire auction
rate preferred securities holdings as of June 30, 2015 had failed auctions for the past fiscal year.
Securities Portfolio
Composition. The following tables set forth the composition of our securities portfolio, excluding Federal Home Loan Bank
stock, at the dates indicated,
| |
At June 30, | |
| |
2015 | | |
2014 | | |
2013 | |
| |
Carrying Value | | |
Percent of Total | | |
Carrying Value | | |
Percent of Total | | |
Carrying Value | | |
Percent of Total | |
| |
(Dollars in thousands) | |
Securities, available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government- sponsored securities | |
$ | 991 | | |
| 0.5 | % | |
$ | 976 | | |
| 0.5 | % | |
$ | 961 | | |
| 0.5 | % |
Corporate bonds and other securities | |
| 5,204 | | |
| 2.5 | | |
| 5,163 | | |
| 2.7 | | |
| 4,873 | | |
| 2.8 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 23,602 | | |
| 11.2 | | |
| 25,262 | | |
| 13.3 | | |
| 15,065 | | |
| 8.7 | |
Non-agency mortgage-backed securities | |
| 5,860 | | |
| 2.8 | | |
| 6,680 | | |
| 3.5 | | |
| 7,551 | | |
| 4.3 | |
Equity securities | |
| 10,000 | | |
| 4.8 | | |
| 10,000 | | |
| 5.3 | | |
| 10,000 | | |
| 5.8 | |
Total securities, available-for- sale | |
| 45,657 | | |
| 21.8 | | |
| 48,081 | | |
| 25.3 | | |
| 38,450 | | |
| 22.1 | |
Securities, held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government- sponsored securities | |
| 10,199 | | |
| 4.8 | | |
| 10,191 | | |
| 5.3 | | |
| 6,198 | | |
| 3.6 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 153,897 | | |
| 73.4 | | |
| 131,985 | | |
| 69.4 | | |
| 128,791 | | |
| 74.3 | |
Total securities, held-to-maturity | |
| 164,096 | | |
| 78.2 | | |
| 142,176 | | |
| 74.7 | | |
| 134,989 | | |
| 77.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total securities | |
$ | 209,753 | | |
| 100.0 | % | |
$ | 190,257 | | |
| 100.0 | % | |
$ | 173,439 | | |
| 100.0 | % |
At June 30, 2015, we had no investments
in a single company or entity (other than the U.S. Government or an agency of the U.S. Government) that had an aggregate book value
in excess of 10% or more of total stockholders’ equity.
Portfolio Maturities
and Yields. The composition and maturities of the investment securities portfolio at June 30, 2015 are summarized in the
following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early
redemptions that may occur. State agency and municipal obligations as well as common and preferred stock yields have not been adjusted
to a tax-equivalent basis. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually
within the various maturity ranges. These repricing schedules are not reflected in the table below. At June 30, 2015, mortgage-backed
securities with adjustable rates totaled $117.4 million. At June 30, 2015, we held no securities that mature in one year or less.
| |
After One Year Through Five Years | | |
After Five Years Through Ten Years | | |
After Ten Years | | |
Total | |
| |
(Dollars in thousands) | |
Securities available-for-sale: | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities | |
$ | 991 | | |
$ | — | | |
$ | — | | |
$ | 991 | |
Corporate debt securities | |
| — | | |
| — | | |
| 5,204 | | |
| 5,204 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 405 | | |
| 9,499 | | |
| 13,698 | | |
| 23,602 | |
Non-agency mortgage-backed securities | |
| — | | |
| — | | |
| 5,860 | | |
| 5,860 | |
Total debt securities | |
| 1,396 | | |
| 9,499 | | |
| 24,762 | | |
| 35,657 | |
Equity securities | |
| — | | |
| — | | |
| 10,000 | | |
| 10,000 | (1) |
Total securities available-for-sale | |
| 1,396 | | |
| 9,499 | | |
| 34,762 | | |
| 45,657 | |
| |
| | | |
| | | |
| | | |
| | |
Securities held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities | |
| 9,245 | | |
| 954 | | |
| — | | |
| 10,199 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| — | | |
| 3,304 | | |
| 150,593 | | |
| 153,897 | |
Total securities held to maturity | |
| 9,245 | | |
| 4,258 | | |
| 150,593 | | |
| 164,096 | |
| |
| | | |
| | | |
| | | |
| | |
Total securities | |
$ | 10,641 | | |
$ | 13,757 | | |
$ | 185,355 | | |
$ | 209,753 | |
Weighted average yield | |
| 1.60 | % | |
| 2.71 | % | |
| 2.67 | % | |
| 2.62 | % |
(1) Equity securities consist of ARPs with stated maturity
dates.
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. In addition to deposits,
funds are derived from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning
assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings
from the Federal Home Loan Bank of Boston and brokered certificates of deposit may be used to compensate for reductions in deposits
and to fund loan growth.
Deposits.
A majority of our depositors are persons who work or reside in Windham County and New London County, Connecticut. We offer a selection
of deposit instruments, including checking, savings, money market deposit accounts, negotiable order of withdrawal (NOW) accounts
and fixed-term certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required,
the amount of time the funds must remain on deposit and the interest rate.
Interest rates paid,
maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily
on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. To attract
and retain deposits, we rely upon personalized customer service, long-standing relationships and competitive interest rates.
The flow of deposits
is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition.
The variety of deposit accounts that we offer allows us to be competitive in obtaining funds and responding to changes in consumer
demand. Based on historical experience, management believes our deposits are relatively stable. However, the ability to attract
and maintain money market accounts and certificates of deposit, and the rates paid on these deposits, have been and will continue
to be significantly affected by market conditions. At June 30, 2015, $119.0 million, or 33.3%, of our deposit accounts were certificates
of deposit, of which $54.0 million had maturities of one year or less.
The following table sets forth the average
distribution of total deposit accounts, by account type, for the years indicated.
| |
Years June 30, | |
| |
2015 | | |
2014 | | |
2013 | |
| |
Average
Balance | | |
Percent | | |
Weighted
Average Rate | | |
Average
Balance | | |
Percent | | |
Weighted
Average Rate | | |
Average
Balance | | |
Percent | | |
Weighted
Average Rate | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Demand deposits | |
$ | 55,869 | | |
| 15.84 | % | |
| — | % | |
$ | 48,114 | | |
| 14.14 | % | |
| — | % | |
$ | 42,518 | | |
| 12.58 | % | |
| — | % |
NOW accounts | |
| 88,418 | | |
| 25.08 | | |
| 0.39 | | |
| 88,824 | | |
| 26.10 | | |
| 0.51 | | |
| 92,819 | | |
| 27.45 | | |
| 0.49 | |
Regular savings | |
| 66,895 | | |
| 18.97 | | |
| 0.10 | | |
| 60,847 | | |
| 17.88 | | |
| 0.15 | | |
| 56,325 | | |
| 16.66 | | |
| 0.14 | |
Money market accounts | |
| 18,623 | | |
| 5.28 | | |
| 0.19 | | |
| 16,469 | | |
| 4.84 | | |
| 0.38 | | |
| 14,313 | | |
| 4.23 | | |
| 0.38 | |
Club accounts | |
| 206 | | |
| 0.06 | | |
| 0.06 | | |
| 198 | | |
| 0.06 | | |
| 0.10 | | |
| 192 | | |
| 0.06 | | |
| 0.10 | |
| |
| 230,011 | | |
| 65.23 | | |
| 0.19 | | |
| 214,452 | | |
| 63.02 | | |
| 0.28 | | |
| 206,167 | | |
| 60.98 | | |
| 0.29 | |
Certificates of deposit | |
| 122,626 | | |
| 34.77 | | |
| 1.25 | | |
| 125,822 | | |
| 36.98 | | |
| 1.40 | | |
| 131,932 | | |
| 39.02 | | |
| 1.70 | |
Total | |
$ | 352,637 | | |
| 100.00 | % | |
| 0.57 | % | |
$ | 340,274 | | |
| 100.00 | % | |
| 0.70 | % | |
$ | 338,099 | | |
| 100.00 | % | |
| 0.84 | % |
As of June 30, 2015, the aggregate amount
of outstanding certificates of deposit in amounts greater than or equal to $100,000 was $58.5 million. The following table sets
forth the maturity of those certificates as of June 30, 2015, in thousands.
Three months or less | |
$ | 14,699 | |
Over three through six months | |
| 5,370 | |
Over six months through one year | |
| 7,999 | |
Over one year through three years | |
| 16,153 | |
Over three years | |
| 14,249 | |
Total | |
$ | 58,470 | |
Borrowings.
Our borrowings consist of advances from, and a line of credit with, the Federal Home Loan Bank of Boston (“FHLB”),
and securities sold under agreements to repurchase. At June 30, 2015, we had an available line of credit with the Federal Home
Loan Bank of Boston in the amount of $2.4 million and access to additional Federal Home Loan Bank advances of up to $48.6
million. We also have an available line of credit with Bankers Bank Northeast in the amount of $4.0 million. There were no amounts
advanced on these lines as of June 30, 2015. At June 30, 2015, retail securities sold under agreements to repurchase were $2.8
million. The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for
the years indicated.
| |
At and For the Year Ended June 30, | |
| |
2015 | | |
2014 | | |
2013 | |
| |
(Dollars in thousands) | |
| |
| | |
| | |
| |
Maximum amount of advances outstanding at any month end during the year: | |
| | | |
| | | |
| | |
FHLB advances | |
$ | 56,740 | | |
$ | 56,500 | | |
$ | 56,800 | |
Securities sold under agreements to repurchase with customers | |
| 21,618 | | |
| 17,358 | | |
| 15,783 | |
| |
| | | |
| | | |
| | |
Average advances outstanding during the year: | |
| | | |
| | | |
| | |
FHLB advances | |
$ | 53,181 | | |
$ | 54,015 | | |
$ | 54,068 | |
Securities sold under agreements to repurchase with customers | |
| 15,212 | | |
| 7,951 | | |
| 6,841 | |
| |
| | | |
| | | |
| | |
Balance outstanding at end of year: | |
| | | |
| | | |
| | |
FHLB advances | |
$ | 56,740 | | |
$ | 53,500 | | |
$ | 53,500 | |
Securities sold under agreements to repurchase with customers | |
| 2,797 | | |
| 4,181 | | |
| 4,849 | |
| |
| | | |
| | | |
| | |
Weighted average interest rate during the year: | |
| | | |
| | | |
| | |
FHLB advances | |
| 2.68 | % | |
| 2.86 | % | |
| 3.17 | % |
Securities sold under agreements to repurchase with customers | |
| 0.16 | | |
| 0.18 | | |
| 0.16 | |
| |
| | | |
| | | |
| | |
Weighted average interest rate at end of year: | |
| | | |
| | | |
| | |
FHLB advances | |
| 2.44 | % | |
| 2.81 | % | |
| 2.89 | % |
Securities sold under agreements to repurchase with customers | |
| 0.10 | | |
| 0.18 | | |
| 0.16 | |
Subsidiary Activities
PSB Holdings Inc.’s
only subsidiary is Putnam Bank. Putnam Bank has three subsidiaries, Windham North Properties, LLC, PSB Realty, LLC and Putnam Bank
Mortgage Servicing Company. Windham North Properties, LLC is used to acquire title to selected properties on which Putnam Bank
forecloses. As of June 30, 2015, Windham North Properties, LLC, owned nine such properties. PSB Realty, LLC owns a parcel of real
estate located immediately adjacent to Putnam Bank’s main office. This real estate is utilized as a loan center for Putnam
Bank and there are no outside tenants that occupy the premises. PSB Realty, LLC also owns the 40 High Street, Norwich branch building
and real estate. Putnam Bank Mortgage Servicing Company is a qualified “passive investment company” that is intended
to reduce Connecticut state taxes on interest earned on real estate loans.
Personnel
As of June 30, 2015,
we had 80 full-time employees and 39 part-time employees. Our employees are not represented by any collective bargaining
group. Management believes that we have good working relations with our employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General. PSB Holdings, Inc.
and Putnam Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed
below.
The following discussion
of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description
of the tax rules applicable to PSB Holdings, Inc. or Putnam Bank.
Method of Accounting.
For federal income tax purposes, PSB Holdings, Inc. and Putnam Bank currently report their income and expenses on the accrual
method of accounting and use a tax year ending June 30 for filing their federal income tax returns.
Bad Debt Reserves.
Prior to the Small Business Protection Act of 1996 (the “1996 Act”), Putnam Bank was permitted to establish a reserve
for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted
in arriving at our taxable income. As a result of the 1996 Act, Putnam Bank was required to use the specific charge off method
in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture
any excess reserves over those established as of December 31, 1987 (base year reserve). At June 30, 2015, Putnam Bank had
no reserves subject to recapture in excess of its base year reserves.
Taxable Distributions
and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture
into taxable income if Putnam Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated
these thrift-related recapture rules. At June 30, 2015, our total federal pre-1988 base year reserve was approximately $2.3 million.
However, under current law, pre-1988 base year reserves remain subject to recapture if Putnam Bank makes certain non-dividend distributions,
repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Alternative
Minimum Tax. The Internal Revenue Code of 1986, as amended (the “Code”) imposes an alternative minimum
tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative
minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption
amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable
income. Certain AMT payments may be used as credits against regular tax liabilities in future years. At June 30, 2015, PSB Holdings,
Inc. had $1.2 million of AMT payments available to carry forward to future periods.
Net Operating
Loss Carryovers. A company may carry back net operating losses to the preceding two taxable years and forward to
the succeeding 20 taxable years. At June 30, 2015, PSB Holdings, Inc. had $2.2 million in net operating loss carry forwards for
federal income tax purposes.
Corporate Dividends-Received
Deduction. PSB Holdings, Inc. may exclude from its income 100% of dividends received from Putnam Bank as a
member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends
received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their
behalf.
State Taxation
Connecticut
State Taxation. PSB Holdings, Inc., Putnam Bank and its subsidiaries are subject to the Connecticut corporation
business tax. Both entities are required to pay the regular corporation business tax (income tax).
The Connecticut corporation
business tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications
to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate
of 7.5% to arrive at Connecticut income tax.
In 1998, the State of Connecticut enacted
legislation permitting the formation of passive investment companies by financial institutions. This legislation exempts qualifying
passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment
company from the taxable income of the parent financial institution. Putnam Bank established a passive investment company, Putnam
Bank Mortgage Servicing Company, during 2007 and eliminated the state income tax expense of Putnam Bank effective July 1, 2006.
If the State of Connecticut were to pass legislation in the future to eliminate the passive investment company exemption Putnam
Bank would be subject to state income taxes in Connecticut.
The Company is currently
open to audit under statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended June
30, 2012 through June 30, 2015. The Federal return for the tax year ended 2009 was audited in 2010. The state tax returns have
not been audited for the last five years.
SUPERVISION AND REGULATION
General
Putnam Bank is a stock
savings bank organized under the laws of the State of Connecticut. The lending, investment, and other business operations of Putnam
Bank are governed by Connecticut law and regulations, as well as applicable federal law and regulations, and Putnam Bank is prohibited
from engaging in any operations not authorized by such laws and regulations. Putnam Bank is subject to extensive regulation, supervision
and examination by the Connecticut Department of Banking and, as a member of the Federal Reserve System, by the Federal Reserve
Bank of Boston. This regulation and supervision establishes a comprehensive framework of activities in which an institution may
engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund
and depositors, and not for the protection of security holders. Putnam Bank also is a member of and owns stock in the Federal Home
Loan Bank of Boston, which is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory
authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities
and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments;
govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing
and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical
ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors.
These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result
in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent
a financial institution, such as Putnam Bank or its holding company, from obtaining necessary regulatory approvals to access the
capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must
comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations,
and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions
on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities,
including our ability to acquire other financial institutions or expand our branch network.
Any change in these laws or regulations,
whether by the Connecticut Department of Banking, Federal Reserve Board, Federal Deposit Insurance Corporation or Congress, could
have a material adverse impact on PSB Holdings, Inc. and Putnam Bank and their operations.
Connecticut Bank Regulation
Connecticut Banking
Commissioner. The Connecticut Banking Commissioner regulates the deposit, lending and investment activities of state-chartered
savings banks, including Putnam Bank. The approval of the Connecticut Banking Commissioner is required for, among other things,
the establishment of branch offices and business combination transactions. The Commissioner conducts periodic examinations of Connecticut-chartered
banks, as does the Federal Reserve Board. The Federal Reserve Board also regulates many of the areas regulated by the Connecticut
Banking Commissioner, and federal law may limit some of the authority provided to Connecticut-chartered banks by Connecticut law.
Lending Activities.
Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, secured and unsecured loans of any
one obligor under this statutory authority may not exceed 10.0% and 15.0%, respectively, of a bank’s equity capital and allowance
for loan losses.
Consumer Protection.
We are also subject to a variety of Connecticut statutes and regulations that are intended to protect consumers and prohibit
discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with
their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution
of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual
and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of
violations.
Dividends.
Putnam Bank may pay cash dividends out of its net profits. For purposes of this restriction, “net profits” represents
the remainder of all earnings from current operations. Further, the total amount of all dividends declared by a bank in any year
may not exceed the sum of a bank’s net profits for the year in question combined with its retained net profits from the
preceding two years without the specific approval of the Connecticut Banking Commissioner. Federal law also prevents an institution
from paying dividends or making other capital distributions that, if by doing so, would cause it to become “undercapitalized.”
Federal Reserve Board regulations establish limits on dividends, including requiring Federal Reserve Board approval for aggregate
dividends exceeding net income for the current year and the two prior calendar years. In addition, as a subsidiary of a savings
and loan holding company, Putnam Bank must provide prior notice to the Federal Reserve Board of any dividend. The Federal Reserve
Board has the authority to object to the dividend if deemed unsafe or unsound. No dividends may be paid to Putnam Bank’s
sole stockholder, PSB Holdings, if such dividends would reduce stockholders’ equity below the amount of the liquidation
account required by federal regulations.
Powers.
Connecticut law permits Connecticut banks to sell insurance and fixed and variable rate annuities if licensed to do so by the Connecticut
Insurance Commissioner. With the prior approval of the Connecticut Banking Commissioner, Connecticut banks are also authorized
to engage in a broad range of activities related to the business of banking, or that are financial in nature or that are permitted
under the Bank Holding Company Act or the Home Owners’ Loan Act, both federal statutes, or the regulations promulgated as
a result of these statutes.
Connecticut banks are
also authorized to engage in any activity permitted for a national bank or a federal savings association upon filing notice with
the Connecticut Banking Commissioner unless the Connecticut Banking Commissioner disapproves the activity.
Assessments.
Connecticut banks are required to pay annual assessments to the Connecticut Department of Banking to fund the Connecticut Department
of Banking’s operations. The general assessments are paid pro-rata based upon a bank’s asset size.
Enforcement.
Under Connecticut law, the Connecticut Banking Commissioner has extensive enforcement authority over Connecticut banks
and, under certain circumstances, affiliated parties, insiders and agents. The Connecticut Banking Commissioner’s enforcement
authority includes cease and desist orders, fines, receivership, conservatorship, removal of officers and directors, emergency
closures, dissolution and liquidation.
Federal Bank Regulation
Capital Requirements.
Federal regulations require state banks to meet several minimum capital standards: a common equity Tier 1 capital to risk-based
assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4%
Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result
of regulations implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank
Act.
As noted, the risk-based
capital standards for state banks require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital
to risk-weighted assets of at least 4.5%, 6% and 8%, respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied
by a risk weight factor (from 0.0% to 200.0%) assigned by the regulations based on the risks believed inherent in the type of asset.
Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital
is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common
equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital
(common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments
and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred
stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is
the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised
an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions
and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Federal Reserve takes into
consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital
requirements for individual associations where necessary.
In addition to establishing the
minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus
payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of
common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based
capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of
risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
The Federal Deposit
Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the
risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential
loans. The Federal Reserve Board, along with the other federal banking agencies, adopted a regulation providing that the agencies
will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing
a bank’s capital adequacy. The Federal Reserve Board also has authority to establish individual minimum capital requirements
in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light
of the particular circumstances.
Standards for
Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety
and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit
underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits.
The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard.
Investment Activities.
All Federal Deposit Insurance Corporation insured banks, including savings banks, are generally limited in their investment
activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state
law, subject to certain exceptions. For example, state chartered banks may, with regulatory approval, continue to exercise state
authority to invest in common or preferred stocks listed on a national securities exchange or the NASDAQ Global Market and in the
shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment
is 100% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s regulations, or the maximum amount
permitted by Connecticut law, whichever is less.
In addition, a state
bank may engage in state-authorized activities or investments not permissible for national banks (other than non-subsidiary equity
investments) if it meets all applicable capital requirements and it is determined that such activities or investments do not pose
a significant risk to the Deposit Insurance Fund.
Interstate Banking
and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject
to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are
also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments
made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized
by the law of the host state for the banks chartered by that state.
Prompt Corrective
Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt
corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes
five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
The Federal Reserve
Board has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate
the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to
be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio
of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital
ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution
is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio
of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed
to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution
is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2.0%.
At each successive lower
capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on
growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions
on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized
categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company
must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately
capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound
practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be
guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s
total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized”
bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly
undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to
an order by the Federal Reserve Board to sell sufficient voting stock to become adequately capitalized, requirements to reduce
total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest
rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically
undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment
of a receiver or conservator within 270 days after it obtains such status.
Transaction with
Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed
by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with
the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding
company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not
considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit
the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an
amount equal to 10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates
to an amount equal to 20.0% of such institution’s capital stock and surplus. Section 23B applies to “covered transactions”
as well as to certain other transactions and requires that all such transactions be on terms substantially the same, or at least
as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction”
includes the making of loans to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions.
Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate. In addition,
loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance
with the requirements set forth in Section 23A of the Federal Reserve Act.
Sections 22(h) and (g) of
the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and principal
shareholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than
10.0% shareholder of a financial institution, and certain affiliated interests of these, together with all other outstanding loans
to such person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires
that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions
of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g)
of the Federal Reserve Act places additional restrictions on loans to executive officers.
Enforcement. The
Federal Reserve Board and, secondarily, the Federal Deposit Insurance Corporation have extensive enforcement authority over insured
state savings banks, including Putnam Bank. The enforcement authority includes, among other things, the ability to assess civil
money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices.
Federal Insurance
of Deposit Accounts. Putnam Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation. Deposit accounts in Putnam Bank are insured up to a maximum of $250,000 for each separately insured depositor.
The Federal Deposit Insurance
Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal Deposit Insurance Corporation’s
risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory
capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned
and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying lower
rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points
of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease
the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment
rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act,
from its prior practice of basing the assessment on an institution’s volume of deposits.
The Dodd-Frank Act increased
the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.
The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions
with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio,
instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation
has recently exercised that discretion by establishing a long range fund ratio of 2%.
The Federal Deposit Insurance
Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of Putnam Bank. Future insurance assessment rates cannot be
predicted.
Insurance of deposits may
be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule order
or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination
of deposit insurance.
In addition to the Federal
Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect,
with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial
fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds
issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2015, the annualized FICO assessment
was equal to 0.60 basis points of total assets less tangible capital.
Privacy Regulations.
Federal regulations generally require that Putnam Bank disclose its privacy policy, including identifying with whom it
shares a customer’s “non-public personal information,” to customers at the time of establishing the customer
relationship and annually thereafter. In addition, Putnam Bank is required to provide its customers with the ability to “opt-out”
of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes
to non-affiliated third parties for marketing purposes. Putnam Bank currently has a privacy protection policy in place and believes
that such policy is in compliance with the regulations.
Community Reinvestment
Act. Under the Community Reinvestment Act, or CRA, as implemented by federal regulations, a state member bank has a continuing
and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes
are best suited to its particular community, consistent with the CRA. The CRA does require the Federal Reserve Board, in connection
with its examination of a state member bank, to assess the institution’s record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire
branches and other financial institutions. The CRA requires a written evaluation of an institution’s CRA performance utilizing
a four-tiered descriptive rating system. Putnam Bank’s latest federal CRA rating was “Satisfactory.”
Connecticut has its own
statutory counterpart to the CRA that is also applicable to Putnam Bank. Connecticut law requires the Connecticut Banking Commissioner
to consider, but not be limited to, a bank’s record of performance under Connecticut law in considering any application by
a bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire
the assets and assume the liabilities of any other banking institution. Putnam Bank has not yet been reviewed or received a rating
under Connecticut law.
Consumer Protection
and Fair Lending Regulations. Connecticut savings banks are subject to a variety of federal statutes and regulations that
are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide
for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders,
and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain
of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages
and attorneys’ fees for certain types of violations.
USA Patriot Act.
Putnam Bank is subject to the USA PATRIOT Act, which gave federal agencies additional powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act provided measures intended
to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title
III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents, and parties registered under the Commodity Exchange Act.
Other Regulations
Interest and other charges
collected or contracted for by Putnam Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations
are also subject to state and federal laws applicable to credit transactions, such as the:
| · | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the
housing needs of the community it serves; |
| · | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit; |
| · | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting
agencies; and |
| · | Rules and regulations of the various federal and state agencies charged with the responsibility
of implementing such federal and state laws. |
The deposit operations
of Putnam Bank also are subject to, among others, the:
| · | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records; |
| · | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute
checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
and |
| · | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits
to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines
and other electronic banking services. |
Federal Reserve System
The Federal Reserve Board
regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily
NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (which may
be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $103.6 million require a
10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $14.5 million of
otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements.
Putnam Bank is in compliance with these requirements.
Federal Home Loan Bank System
Putnam Bank is a member
of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides
a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and
hold shares of capital stock in the Federal Home Loan Bank. Putnam Bank was in compliance with this requirement at June 30, 2015.
Based on redemption provisions of the Federal Home Loan Bank of Boston, the stock has no quoted market value and is carried at
cost. Putnam Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank of
Boston stock. As of June 30, 2015, no impairment has been recognized.
At its discretion, the
Federal Home Loan Bank of Boston may declare dividends on the stock. The Federal Home Loan Banks are required to provide funds
for certain purposes including the resolution of insolvent thrifts in the late 1980s and to contributing funds for affordable housing
programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result
in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. As a result of losses incurred,
the Federal Home Loan Bank of Boston suspended and did not pay dividends in 2009 and 2010. However, the Federal Home Loan Bank
of Boston resumed payment of quarterly dividends in 2011, and for the fiscal year ended June 30, 2015 paid dividends equal to an
annual yield of 1.68%. There can be no assurance that such dividends will continue in the future. Further, there can be no assurance
that the impact of recent or future legislation on the Federal Home Loan Banks also will not cause a decrease in the value of the
Federal Home Loan Bank of Boston stock held by Putnam Bank.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act
of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals.
The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting
and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws.
We have existing policies, procedures and systems
designed to comply with these regulations, and we are further enhancing and documenting such policies, procedures and systems to
ensure continued compliance with these regulations.
Holding Company Regulation
General.
Putnam Bancorp, MHC and PSB Holdings, Inc. are savings and loan holding companies within the meaning of the Home Owners’
Loan Act. As such, Putnam Bancorp, MHC and PSB Holdings, Inc. are registered with the Federal Reserve Board and are subject
to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board
has enforcement authority over PSB Holdings, Inc. and Putnam Bancorp, MHC, and their subsidiaries. Among other things, this
authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. Pursuant to the Dodd-Frank Act, the Federal Reserve Board assumed regulatory authority over savings
and loan holding companies from the Office of Thrift Supervision on July 21, 2011. As federal corporations, PSB Holdings, Inc.
and Putnam Bancorp, MHC are generally not subject to state business organization laws.
Permitted Activities.
Pursuant to Section 10(o) of the Home Owners’ Loan Act and federal regulations and policy, a mutual holding company
and a federally chartered mid-tier holding company such as PSB Holdings, Inc. may engage in the following activities: (i) investing
in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation,
the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services
for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from
a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary
of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve
Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding
Company Act of 1956, unless the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan
holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; (x), subject to meeting certain criteria, any activity permissible for financial holding companies
under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (xi) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings
and loan holding company is approved by the Federal Reserve Board.
The Home Owners’
Loan Act prohibits a savings and loan holding company, including PSB Holdings, Inc. and Putnam Bancorp, MHC from, directly
or indirectly, or through one or more subsidiaries, acquiring more than 5% of another savings institution or savings and loan holding
company without prior written approval of the Federal Reserve Board. It also prohibits, with certain exceptions, the acquisition
or retention of, more than 5% of a nonsubsidiary company engaged in activities other than those permitted by the Home Owners’
Loan Act, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future
prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund,
the convenience and needs of the community and competitive factors.
The Federal Reserve Board
is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the
state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
Capital.
Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however,
requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies
that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.
Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, which
is currently permitted for bank holding companies, subject to certain grandfather rules. The previously discussed final rule regarding
regulatory capital requirements implements the Dodd-Frank Act’s directive as to savings and loan holding companies. The consolidated
regulatory capital requirements will apply to savings and loan holding companies As of January 1, 2015. As is the case with institutions
themselves, the capital conservation buffer will be phased in between 2016 and 2019.
Dividends and Stock
Repurchases. The Federal Reserve Board has issued a supervisory letter regarding the payment of dividends and stock repurchases
by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the supervisory
letter provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention
by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.
Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s
net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend
or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial
condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The
guidance also provides for regulatory review prior to a holding company redeeming or repurchasing its stock in certain circumstances.
These regulatory policies could affect the ability of PSB Holdings, Inc. to pay dividends, repurchase shares of common stock or
otherwise engage in capital distributions.
Source of Strength.
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal
Reserve Board has issued regulations requiring that all bank and savings and loan holding companies serve as a source of strength
to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Waiver of Dividends
by Putnam Bancorp, MHC. Federal regulations require Putnam Bancorp, MHC to notify the Federal Reserve Board of any proposed
waiver of its receipt of dividends from PSB Holdings, Inc. The Office of Thrift Supervision, the previous regulator for Putnam
Bancorp, MHC, allowed dividend waivers where the mutual holding company’s board of directors determined that the waiver was
consistent with its fiduciary duties and the waiver would not be detrimental to the safety and soundness of the institution. The
Federal Reserve Board has issued an interim final rule providing that, pursuant to a Dodd-Frank Act grandfathering provision, it
may not object to dividend waivers under similar circumstances, but adding the requirement that a majority of the mutual holding
company’s members eligible to vote have approved a waiver of dividends by the company within 12 months prior to the declaration
of the dividend being waived. Putnam Bancorp, MHC has not waived dividends paid by the Company in recent periods.
Conversion of Putnam
Bancorp, MHC to Stock Form. Federal regulations permit Putnam Bancorp, MHC to convert from the mutual form of organization
to the capital stock form of organization (a “Conversion Transaction”). In a Conversion Transaction a new stock holding
company would be formed as the successor to PSB Holdings, Inc. (the “New Holding Company”), Putnam Bancorp, MHC’s
corporate existence would end, and certain depositors of Putnam Bank would receive the right to subscribe for additional shares
of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than Putnam Bancorp,
MHC (“Minority Stockholders”) would be automatically converted into a number of shares of common stock of the New Holding
Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock
in the New Holding Company as they owned in PSB Holdings, Inc. immediately prior to the Conversion Transaction, subject to
certain adjustments.
See “Item 1. Business—“Second-Step”
Conversion of Putnam Bancorp, MHC.”
Federal Securities Laws
PSB Holdings, Inc.
common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. PSB Holdings, Inc.
is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange
Act of 1934.
Reports to Security Holders
PSB Holdings, Inc. files
annual and quarterly reports with the SEC on Forms 10-K and 10-Q, respectively. PSB Holdings, Inc. also files current reports on
the Form 8-K with the SEC. In addition, PSB Holdings, Inc. files preliminary and definitive proxy materials with the SEC.
PSB Holdings, Inc. is an
electronic filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of the site is http://www.sec.gov.
In addition to factors discussed in the description
of our business and elsewhere in this report, the following are factors that could adversely affect our future results of operations
and financial condition.
A worsening of economic conditions in our
market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans,
which could adversely affect our operations, financial condition and earnings.
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 the ability of the borrowers to repay loans and the value of the collateral securing loans.
Almost all of our loans are to borrowers located in or secured by collateral located in Eastern Connecticut and the Rhode Island
and Massachusetts communities adjacent to Windham County, Connecticut.
A deterioration in economic
conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial
condition, liquidity and results of operations:
| · | demand
for our products and services may decline; |
| · | loan
delinquencies, problem assets and foreclosures may increase; |
| · | collateral
for loans, especially real estate, may decline in value, in turn reducing customers’
future borrowing power, and reducing the value of assets and collateral associated with
existing loans; and |
| · | the
net worth and liquidity of loan guarantors may decline, impairing their ability to honor
commitments to us. |
Moreover, a significant
decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other
international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic
conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures,
while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business
borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Strong competition within our market
area may limit our growth and profitability.
Competition in the banking
and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms
operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have
and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest
rates on more attractive terms than those offered by us, which we expect to continue in the foreseeable future. Competition also
makes it more difficult and costly to attract and retain qualified employees. We expect competition to increase in the future
as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources
and deposit and loan products offered by some of our competitors may limit our ability to increase our interest earning assets.
For additional information see “Item 1—Business.—Competition.”
Because we intend to increase our commercial
real estate and commercial loan originations, our lending risk will increase and downturns in the real estate market or local
economy could adversely affect our earnings.
Commercial real estate
and commercial loans generally have more risk than residential mortgage loans. Because the repayment of commercial real estate
and commercial loans depends on the successful management and operation of the borrower’s properties or related businesses,
repayment of such loans can be affected by adverse conditions in the real estate market or the local economy. Commercial real
estate and commercial loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers.
A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or
the revenues from the borrower’s business thereby increasing the risk of non-performing loans. Also, many of our multi-family
and commercial real estate and commercial business borrowers have more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared
to an adverse development with respect to a residential mortgage loan. Further, unlike residential mortgages or multi-family and
commercial real estate loans, commercial and industrial loans may be secured by collateral other than real estate, such as inventory
and accounts receivable, the value of which may be more difficult to appraise and may be more susceptible to fluctuation in value
at default. As our commercial real estate and commercial loan portfolio increases, the corresponding risks and potential for losses
from these loans may also increase.
Our business strategy includes growth,
and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth
effectively.
Our business strategy
includes growth in assets, deposits and the scale of our operations. Achieving our growth targets requires us to attract customers
that currently bank at other financial institutions in our market, thereby increasing our share of the market. Our ability to
successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued
availability of desirable business opportunities, the competitive responses from other financial institutions in our market area
and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully.
If we do not manage our growth effectively, our financial condition and operating results could be negatively affected.
Future changes in interest rates may
reduce our profits.
Our ability to make a
profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest
income is the difference between:
| · | the
interest income we earn on our interest-earning assets, such as loans and securities;
and |
| · | the
interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. |
The rates we earn on our
assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions,
our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings
volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on
our assets may not increase as rapidly as the interest paid on our liabilities. In a period of declining interest rates, the interest
income earned on our assets may decrease more rapidly than the interest paid on our liabilities, as borrowers speed up prepayments
of mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those
cash flows at lower interest rates. See “Item 7.—Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Market Risk.”
In addition, changes in
interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates
results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt to reduce
their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates
that are comparable to the rates we earned on the prepaid loans or securities.
Any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results
of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, such
changes can still have a material adverse effect on our financial condition and results of operations. Changes in the level of
interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability
to realize gains from the sale of our assets, all of which ultimately affect our earnings.
At June 30, 2015, our
“rate shock” analysis prepared by our third party consultant indicates that our net portfolio value would decrease
by $7.3 million if there was an instantaneous 200 basis point increase in market interest rates. However, our interest rate risk
modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our
balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Market Risk.”
A continuation of the historically low
interest rate environment may adversely affect our net interest income and profitability.
In recent years it has
been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal
funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields
on securities we have purchased have been at lower levels than as available prior to 2008. Consequently, the average yield on
our interest earning assets has decreased to 3.04% for the year ended June 30, 2015 from 3.26% for the year ended June 30, 2012,
which has resulted in decreases in net interest income in some of these years. Our ability to lower our interest expense is limited
at these interest rate levels while the average yield on our interest-earning assets may continue to decrease. A continuation
of a low interest rate environment may adversely affect our net interest income, which in turn would likely have an adverse effect
on our profitability.
We could record future losses on our investment
securities portfolio.
A number of factors could
cause us to conclude that an unrealized loss that exists with respect to our securities constitutes an impairment that is other-than-temporary,
which could result in material losses to us. These factors include, but are not limited to, continued failure to make scheduled
interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous
duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific
factors that would render us unable to forecast a full recovery in value. In addition, the fair values of the auction-rate trust
preferred securities that we hold could decline if the overall economy and the financial condition of some of the issuers continue
to deteriorate and there remains limited liquidity for these securities.
A significant percentage of our assets
is invested in securities, which typically have a lower yield than our loan portfolio.
Our results of operations
are substantially dependent on our net interest income. At June 30, 2015, 45.4% of our assets was invested in investment
securities and cash and cash equivalents. These investments yield substantially less than the loans we hold in our portfolio.
While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we
may not be able to increase originations of loans that are acceptable to us.
Our emphasis on one-to-four family residential
mortgage loans exposes us to increased credit risks.
At June 30, 2015,
$179.0 million, or 79.2% of our loan portfolio, was secured by one-to-four family real estate, which included $7.6 million of
home equity loans and $10.3 million of home equity lines of credit. Recent economic conditions have resulted in declines
in real estate values in our market areas. These declines in real estate values could cause some of our mortgage and home
equity lines of credit to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover
on defaulted loans by selling the real estate collateral.
Continued declines in our loan portfolio
may negatively impact our earnings and results of operations.
Our loan portfolio has
decreased $31.5 million, or 12.2%, to $226.1 million at June 30, 2015 from $257.6 million at June 30, 2011. As a result, we have
invested excess liquidity in low-yielding cash equivalent assets and low-yielding investment securities, which has negatively
impacted our earnings. Prolonged low loan demand could require us to continue to invest excess liquidity in these types of low-yielding
assets, which would continue to adversely affect our earnings and results of operations.
Our cost of operations is high relative
to our revenues.
Our noninterest expenses
totaled $11.2 million for each of the years ended June 30, 2015 and 2014. We continue to analyze our expenses and achieve efficiencies
where available. Although we strive to generate increases in both net interest income and non-interest income, our efficiency
ratio remains high as a result of operating expenses. Our efficiency ratio totaled 91.65% and 90.24% for the years ended June
30, 2015 and 2014, respectively.
The building of market share through expansion
of our commercial real estate and commercial business lending capacity could cause our expenses to increase faster than revenues.
We intend to continue
to build market share in the Eastern Connecticut area through expansion of our commercial real estate and commercial business
lending capacity. There can be considerable costs involved in expansion of lending capacity that generally require a period of
time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence.
Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain
economies of scale are reached. Finally, our business expansion may not be successful after establishment.
If our allowance for loan losses is not
sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions
and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of
the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the
allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If
our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to our allowance. Our allowance for loan losses was 0.96% of total loans and 38.57% of non-performing loans
at June 30, 2015. Material additions to our allowance would materially decrease our net income.
In addition, bank regulators
periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities
may have a material adverse effect on our results of operations and financial condition.
Declines in property values can increase
the loan-to-value ratios on our residential mortgage loan portfolio, which could expose us to greater risk of loss.
Some of our residential
mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated
the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas. Residential
loans with high combined loan-to-value ratios will be more sensitive to declining property values than those with lower combined
loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition,
if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds. As
a result, these loans may experience higher rates of delinquencies, defaults and losses.
Changes in laws and regulations and the
cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.
The Company and Putnam
Bank are subject to extensive regulation, supervision and examination by the Connecticut Department of Banking and the Federal
Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage
and are intended primarily for the protection of insurance funds and the depositors and borrowers of Putnam Bank rather than for
holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities,
including the imposition of restrictions on our operations, the classification of our assets and determination of the level of
our allowance for loan losses. These regulations, along with the currently existing tax, accounting, securities, insurance, monetary
laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement
strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation
by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report
our financial condition and results of our operations as could our interpretation of those changes.
The Dodd-Frank Act is
significantly changing the current bank regulatory structure and affects the lending, deposit, investment, trading and operating
activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt
a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal
agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details
and much of the impact of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act created
a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial
Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer
Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks
with $10 billion or less in assets continue to be examined for compliance with the consumer laws by their primary bank regulators.
The Dodd-Frank Act also weakened the federal preemption rules that have been applicable for national banks and federal savings
associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
The Dodd-Frank Act requires
minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies and savings and loan holding companies
that are no less than those applicable to banks, which will limit our ability to borrow at the holding company level and invest
the proceeds from such borrowings as capital in Putnam Bank, and will exclude certain instruments that previously have been eligible
for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.
The full impact of the
Dodd-Frank Act on our business will not be known until all of the regulations implementing the statute are adopted and implemented.
As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial
condition. However, compliance with these new laws and regulations may require us to make changes to our business and operations
and will likely result in additional costs and divert management’s time from other business activities, any of which may
adversely impact our results of operations, liquidity or financial condition.
We have become subject to more stringent
capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us
from paying dividends or repurchasing shares.
In July 2013, the federal
banking agencies approved a new rule that has substantially amended regulatory risk-based capital rules. The final rule implements
the regulatory capital reforms from the Basel Committee on Banking Supervision (“Basel III”) and changes required
by the Dodd-Frank Act.
The final rule includes
new minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2015, and refines the definition
of what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (i) a new common
equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total
capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized
gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital
requirements unless a one-time opt-out is exercised. Putnam Bank has elected to opt out of the requirement under the final rule
to include certain “available-for-sale” securities holdings for calculating its regulatory capital requirements. The
final rule also establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the
following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of
8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in
January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution
will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital
level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can
be utilized for such actions.
We have analyzed the effects
of these new capital requirements, and we believe that, upon completion of the offering, we would meet all of these new requirements,
including the full 2.5% capital conservation buffer, as if these new requirements had been in effect as of June 30, 2015.
The application of more
stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional
capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition
of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of
our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset
risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional
capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions,
including paying dividends or repurchasing shares. Specifically, beginning in 2016, Putnam Bank’s ability to pay dividends
will be limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit
our ability to pay dividends to stockholders. See “Item 1. Business—Supervision and Regulation—Federal Bank
Regulation—Capital Requirements.”
Non-compliance with the USA PATRIOT Act,
Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank
Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering
and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports
with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions
to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure
to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing
new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws
and regulations. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations
may not be effective in preventing violations of these laws and regulations.
Proposed and final regulations could restrict
our ability to originate and sell loans.
The Consumer Financial
Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act,
which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified
mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial
Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
| · | excessive
upfront points and fees (those exceeding 3% of the total loan amount, less “bona
fide discount points” for prime loans); |
| · | negative
amortization; and |
| · | terms
of longer than 30 years. |
Also, to qualify as a
“qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%.
Lenders must also verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite
the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account
all applicable taxes, insurance and assessments.
In addition, the
Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less
than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies have
issued a final rule to implement this requirement. The final rule provides that the definition of “qualified
residential mortgage” includes loans that meet the definition of qualified mortgage issued by the Consumer Financial Protection
Bureau.
The final rule could
have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make
loans. Similarly, the Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability
or desire to make certain types of loans or loans to certain borrowers, which could limit our growth or profitability.
Our success depends on hiring and retaining
certain key personnel.
Our performance largely
depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate our business,
including major revenue generating functions such as loan and deposit generation, as well as operational functions such as regulatory
compliance and information technology. The loss of key staff may adversely affect our ability to maintain and manage these functions
effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting
and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our
ability to attract new employees and to retain and motivate our existing employees.
Because the nature of the financial services
business involves a high volume of transactions, we face significant operational risks.
We operate in diverse
markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the
risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our
company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches
of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage
may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes
the potential legal actions that could arise as a result of an operational deficiency or as a result of non-compliance with applicable
regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.
In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could
suffer financial loss, face regulatory action, and suffer damage to our reputation.
Cyber-attacks or other security breaches
could adversely affect our operations, net income or reputation.
We regularly collect,
process, transmit and store significant amounts of confidential information regarding our customers, employees and others and
concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is
collected, compiled, processed, transmitted or stored by third parties on our behalf.
Information security risks
have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications
technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks
and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent
e-mail, text or voice mail, is an emerging threat targeting the customers of popular financial entities. A failure in or breach
of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks
or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business,
result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or
cause losses.
If this confidential or
proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational
damage, civil litigation and financial loss.
Although we employ a variety
of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling,
misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not
occur, and that if mishandling, misuse or loss of the information did occur, those events will be promptly detected and addressed.
Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties
on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information,
establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm
the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to
evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate
and remediate any information security vulnerabilities.
Risks associated with system failures,
interruptions, or breaches of security could negatively affect our earnings.
Information technology
systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger,
securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures,
interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In
addition any compromise of our systems could deter customers from using our products and services. Although we rely on security
systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not
protect our systems from compromises or breaches of security.
In addition, we outsource
some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we
have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and
our business operations could be adversely affected. Threats to information security also exist in the processing of customer
information through various other vendors and their personnel.
The occurrence of any
system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business
thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any
of these events could have a material adverse effect on our financial condition and results of operations.
Legal and regulatory proceedings and related
matters could adversely affect us or the financial services industry in general.
We, and other participants
in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and
regulatory proceedings. Most of the proceedings we consider to be in the normal course of our business or typical for the industry;
however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services industry
or we may not prevail in any proceeding or litigation. There could be substantial cost and management diversion in such litigation
and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our
financial condition and results of our operations.
Managing reputational risk is important
to attracting and maintaining customers, investors and employees.
Threats to our reputation
can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee
misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies and questionable or fraudulent
activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical
conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees,
or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental
regulation, all of which could adversely affect our operating results.
Changes in management’s estimates
and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.
In preparing this annual
report as well as other periodic reports we are required to file under the Securities Exchange Act of 1934, including our consolidated
financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions
as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that
date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional
information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of investment
securities, our determination of our income tax provision and goodwill, and our evaluation of the adequacy of our allowance for
loan losses.
We are subject to environmental liability
risk associated with lending activities
A significant portion
of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one
or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing
defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous
conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal
injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances
first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities
and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition,
future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure
to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any
foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental
hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material
adverse effect on us.
Stockholders other than our mutual holding
company own a minority of PSB Holdings, Inc.’s common stock and are not able to exercise voting control over most matters
put to a vote of stockholders.
Public stockholders own
a minority of the outstanding shares of PSB Holdings, Inc. common stock. As a result, stockholders other than Putnam Bancorp,
MHC are not able to exercise voting control over most matters put to a vote of stockholders. Putnam Bancorp, MHC owns a majority
of PSB Holdings, Inc.’s common stock and, through its Board of Directors, is able to exercise voting control over most matters
put to a vote of stockholders. The same directors and officers who manage PSB Holdings, Inc. and Putnam Bank also manage Putnam
Bancorp, MHC. Putnam Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders
could receive a premium for their shares.
Our stock value may be negatively affected
by federal regulations restricting takeovers and our mutual holding company structure.
Federal regulations
restricting takeovers. Regulatory policy prohibits the acquisition of a mutual holding company subsidiary by any person
or entity other than a mutual holding company or a mutual institution. While Putnam Bancorp, MHC’s regulator recently changed,
there can be no assurance that there will be a change in this policy.
The mutual holding
company structure may impede takeovers. Putnam Bancorp, MHC, as the majority stockholder of PSB Holdings, Inc., is able
to control the outcome of virtually all matters presented to stockholders for their approval, including a proposal to acquire
PSB Holdings, Inc. Accordingly, Putnam Bancorp, MHC may prevent the sale of control or merger of PSB Holdings, Inc. or its subsidiaries
even if such a transaction were favored by a majority of the public stockholders of PSB Holdings, Inc.
The corporate governance provisions in
our charter and bylaws may prevent or impede the holders of a minority of our common stock from obtaining representation on our
Board of Directors.
Provisions in our charter
and bylaws may prevent or impede holders of a minority of our common stock from obtaining representation on our board of directors.
For example, our board of directors is divided into three staggered classes. A classified board makes it more difficult for stockholders
to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur.
Second, our charter provides that there will not be cumulative voting by stockholders for the election of our directors which
means that Putnam Bancorp, MHC, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may
elect all of our directors to be elected at that meeting. Third, our bylaws contain procedures and timetables for a stockholder
wanting to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders, the effect
of which may be to give our management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations
if management thinks it is in the best interest of stockholders generally.
Federal policy on remutualization transactions
could prohibit acquisition of PSB Holdings, Inc., which may lower our stock price.
Current federal regulations
permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. However, the Office of
Thrift Supervision, Putnam Bancorp, MHC’s previous regulator, issued a policy statement indicating that it viewed remutualization
transactions as raising significant issues concerning disparate treatment of minority stockholders and the mutual interests of
the mutual holding company, and also raising issues concerning the effect on the mutual interests of the acquiring entity. The
policy statement indicated that, under certain circumstances, these transactions would receive special scrutiny and would be rejected
unless the applicant can clearly demonstrate that the regulatory concerns are not warranted in the particular case. The Federal
Reserve Board, the successor to the Office of Thrift Supervision as the regulator of mutual holding companies, has not formally
indicated whether or not it intends to follow such policy statement.
Should these transactions
be prohibited or otherwise restricted in the future, our per-share stock price may be adversely affected.
The Dodd-Frank Act and related regulations
may have an adverse effect on our ability to pay dividends, which would adversely affect the value of our common stock.
The value of PSB Holdings,
Inc.’s common stock is significantly affected by its ability to pay dividends to its public stockholders. PSB Holdings,
Inc.’s ability to pay dividends to our stockholders is subject to the ability of Putnam Bank to make capital distributions
to PSB Holdings, Inc., or the availability of cash at the holding company level in the event Putnam Bank’s earnings are
not sufficient to pay dividends.
Moreover, the amount of
the dividends that we are able to pay our public stockholders is affected by the ability of Putnam Bancorp, MHC, our mutual holding
company, to waive the receipt of dividends declared by PSB Holdings, Inc. Regulations of the Office of Thrift Supervision, our
previous federal regulator, allowed federally chartered mutual holding companies to waive dividends without taking into account
the amount of waived dividends in determining an appropriate exchange ratio in the event of a conversion of a mutual holding company
to stock form. However, under the Dodd-Frank Act, the powers and duties of the Office of Thrift Supervision relating to mutual
holding companies have been transferred to the Federal Reserve Board, and the Office of Thrift Supervision was eliminated. The
Dodd-Frank Act also provides that a mutual holding company must give the Federal Reserve Board notice before waiving the receipt
of dividends, and sets forth certain standards for allowing a waiver of dividends by a mutual holding company. Under these standards,
waived dividends must be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding
company to stock form, unless a mutual holding company has waived dividends prior to December 1, 2009, which Putnam Bancorp, MHC
has done. However, the Federal Reserve Board’s interim final rule requires that, even where a mutual holding company has
waived dividends prior to December 1, 2009, a majority of the mutual holding company’s members eligible to vote must approve
a waiver of dividends by the mutual holding company within 12 months prior to the declaration of the dividend being waived.
| ITEM 1B. | Unresolved Staff Comments |
Not applicable.
We conduct substantially
all of our business through our main office, seven full service branch offices and one loan origination center. We also conduct
limited business operations through a “Special Needs Limited Branch” and a “Limited Services Branch”.
In 2002, we began Limited Service (Mobile) Branch activities. The Limited Services (Mobile) Branch serves approximately three
locations in our primary market area consisting of schools and retirement facilities. Bank personnel visit these facilities approximately
once per week and, in the case of school locations, conduct deposit taking activities and, in the case of the retirement facilities,
conduct deposit taking, check cashing, notary and certificate of deposit renewal activities. Set forth below is information on
our office locations as of June 30, 2015. The net book value of our premises, land and equipment was approximately $3.8 million
at June 30, 2015.
| |
Leased or | |
|
Year Acquired | |
Square | | |
Net Book Value | |
Location | |
Owned | |
|
or Leased | |
Footage | | |
of Real Property | |
| |
| |
|
| |
| | |
(In thousands) | |
Main Office: | |
| |
|
| |
| | | |
| | |
40 Main Street | |
Owned | |
|
1974 | |
| 14,938 | | |
$ | 858 | |
Putnam, Connecticut 06260 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
Full Service Branches: | |
| |
|
| |
| | | |
| | |
251 Kennedy Drive | |
Leased | |
|
2006 | |
| 473 | | |
| 49 | |
Putnam, Connecticut 06260 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
100 Averill Road | |
Owned | |
|
1981 | |
| 2,487 | | |
| 357 | |
Pomfret Center, Connecticut 06259 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
125 Wauregan Road | |
Owned | |
|
1993 | |
| 2,452 | | |
| 274 | |
Danielson, Connecticut 06239 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
11 Pratt Road | |
Owned | |
|
2000 | |
| 2,162 | | |
| 279 | |
Plainfield, Connecticut 06374 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
461 Voluntown Road, Rte. 138 | |
Leased | |
|
2005 | |
| 2,600 | | |
| 20 | |
Griswold, Connecticut 06351 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
2 Chapman Lane | |
Owned | (2) |
|
2009 | |
| 2,400 | | |
| 497 | |
Gales Ferry, Connecticut 06335 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
40 High Street | |
Owned | |
|
2009 | |
| 2,800 | | |
| 1,020 | |
Norwich, Connecticut 06360 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
Loan Center: | |
| |
|
| |
| | | |
| | |
50 Canal Street | |
Owned | |
|
2000 | |
| 2,940 | | |
| 100 | |
Putnam, Connecticut 06260 | |
| |
|
| |
| | | |
| | |
| |
| |
|
| |
| | | |
| | |
Special Needs Limited Branch (1): | |
| |
|
| |
| | | |
| | |
Creamery Brook Retirement Village | |
__ | |
|
__ | |
| — | | |
| — | |
36 Vina Lane | |
| |
|
| |
| | | |
| | |
Brooklyn, Connecticut 06234 | |
| |
|
| |
| | | |
| | |
Total | |
| |
|
| |
| | | |
$ | 3,454 | |
| | |
|
|
| (1) | Our personnel are at this location for approximately two hours
once a week. The facility provides a furnished room for us at no cost. Our personnel
conduct limited banking activities, such as deposit-taking, check cashing, notary and
certificate of deposit renewals. We began operating at this location in 2002. |
| (2) | The Bank owns the branch building and leases the land. |
From time to time, we are involved as plaintiff
or defendant in various legal proceedings arising in the ordinary course of business. At June 30, 2015, we were not involved in
any legal proceedings the outcome of which would be material to our financial condition or results of operations.
| ITEM 4. | Mine Safety Disclosures |
Not applicable.
PART II
| ITEM 5. | Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded
on the NASDAQ Global Market under the symbol “PSBH.” At June 30, 2015, Putnam Bancorp, MHC owned 3,729,846 shares,
or 57.0% of our outstanding common stock. The approximate number of holders of record of PSB Holdings, Inc.’s common stock
as of September 11, 2015 was 391. Certain shares of PSB Holdings, Inc. are held in “nominee” or “street”
name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following
table presents quarterly market information for PSB Holdings, Inc.’s common stock for the fiscal years ended June 30, 2015
and June 30, 2014, including dividends declared for the periods. The following information with respect to closing trading prices
was provided by the NASDAQ Capital Market.
| |
Price Per Share | | |
Dividends Per | |
| |
High | | |
Low | | |
Share | |
| |
| | |
| | |
| |
Fiscal Year Ended June 30, 2015 | |
| | | |
| | | |
| | |
Fourth quarter | |
$ | 8.90 | | |
$ | 7.50 | | |
$ | 0.03 | |
Third quarter | |
$ | 7.99 | | |
$ | 7.35 | | |
$ | 0.03 | |
Second quarter | |
$ | 7.88 | | |
$ | 7.04 | | |
$ | — | |
First quarter | |
$ | 7.95 | | |
$ | 6.61 | | |
$ | — | |
| |
| | | |
| | | |
| | |
Fiscal Year Ended June 30, 2014 | |
| | | |
| | | |
| | |
Fourth quarter | |
$ | 7.19 | | |
$ | 6.07 | | |
$ | — | |
Third quarter | |
$ | 6.94 | | |
$ | 6.33 | | |
$ | — | |
Second quarter | |
$ | 6.53 | | |
$ | 6.08 | | |
$ | — | |
First quarter | |
$ | 6.50 | | |
$ | 5.61 | | |
$ | — | |
For a discussion of regulatory
factors restricting our ability to pay dividends to our stockholders, see Item 1, “Business—Supervision and Regulation—Holding
Company Regulation—Dividends and Repurchases”, and “—Waivers of Dividends by Putnam Bancorp, MHC”,
and Item 1A. “Risk Factors—The Dodd-Frank Act and related regulations may have an adverse effect on our ability to
pay dividends, which would adversely affect the value of our common stock.”
PSB Holdings, Inc. has
no source of income other than dividends from Putnam Bank, earnings from the investment of proceeds from the sale of shares of
common stock retained by PSB Holdings, Inc. and interest payments with respect to PSB Holdings, Inc.’s loan to the Employee
Stock Ownership Plan. Accordingly, dividend payments by PSB Holdings, Inc. are dependent primarily on dividends it receives
from Putnam Bank. For a discussion of restrictions on the ability of Putnam Bank to pay dividends to PSB Holdings,
Inc., see Item 1, “Business—Supervision and Regulation— Federal Banking Regulation—Capital Distributions.”
Information with respect
to securities authorized for issuance under the Company’s Equity Compensation Plan is contained in Item 12 of this Annual
Report on Form 10-K.
| ITEM 6. | Selected Financial Data |
The Company has derived
the following selected consolidated financial and other data in part from its consolidated financial statements. The following
is only a summary and you should read it in conjunction with the Company’s consolidated financial statements and notes thereto.
The information at June 30, 2015 and 2014 and for the fiscal years ended June 30, 2015 and 2014 is derived in part from the audited
consolidated financial statements that appear in Item 8 of this Annual Report on Form 10-K. The information at June 30, 2013,
2012 and 2011, for the fiscal years ended June 30, 2013, 2012 and 2011, is derived in part from audited consolidated financial
statements that do not appear in this document.
| |
At June 30, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| |
(In thousands) | |
Selected Financial Condition Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 473,601 | | |
$ | 461,039 | | |
$ | 454,378 | | |
$ | 452,343 | | |
$ | 472,499 | |
Cash and cash equivalents | |
| 5,326 | | |
| 7,335 | | |
| 12,793 | | |
| 11,413 | | |
| 8,273 | |
Securities available-for-sale, at fair value | |
| 45,657 | | |
| 48,081 | | |
| 38,450 | | |
| 47,213 | | |
| 58,009 | |
Securities held-to-maturity, at amortized cost | |
| 164,096 | | |
| 142,176 | | |
| 134,989 | | |
| 105,195 | | |
| 114,741 | |
Loans receivable, net | |
| 224,046 | | |
| 230,126 | | |
| 232,171 | | |
| 248,572 | | |
| 253,225 | |
Loans held-for-sale | |
| — | | |
| 100 | | |
| 1,037 | | |
| 776 | | |
| 1,567 | |
Deposits | |
| 357,641 | | |
| 347,256 | | |
| 341,285 | | |
| 342,338 | | |
| 333,773 | |
Borrowings | |
| 59,537 | | |
| 57,681 | | |
| 58,349 | | |
| 57,153 | | |
| 87,744 | |
Total stockholders’ equity | |
| 51,744 | | |
| 51,451 | | |
| 50,081 | | |
| 48,135 | | |
| 46,747 | |
| |
For the Years Ended June 30, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| |
(In thousands) | |
Selected Operating Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Interest and dividend income | |
$ | 13,574 | | |
$ | 13,904 | | |
$ | 15,253 | | |
$ | 17,738 | | |
$ | 19,730 | |
Interest expense | |
| 3,608 | | |
| 3,999 | | |
| 4,794 | | |
| 6,655 | | |
| 8,370 | |
Net interest income | |
| 9,966 | | |
| 9,905 | | |
| 10,459 | | |
| 11,083 | | |
| 11,360 | |
Provision for loan losses | |
| 535 | | |
| 55 | | |
| 770 | | |
| 1,152 | | |
| 915 | |
Net interest income after provision for loan losses | |
| 9,431 | | |
| 9,850 | | |
| 9,689 | | |
| 9,931 | | |
| 10,445 | |
Non-interest income | |
| 2,257 | | |
| 2,492 | | |
| 2,536 | | |
| 2,279 | | |
| 2,503 | |
Non-interest expense | |
| 11,202 | | |
| 11,187 | | |
| 10,583 | | |
| 10,945 | | |
| 11,313 | |
Income before income taxes | |
| 486 | | |
| 1,155 | | |
| 1,642 | | |
| 1,265 | | |
| 1,635 | |
Income tax (benefit) expense | |
| (65 | ) | |
| 152 | | |
| 305 | | |
| 215 | | |
| 537 | |
Net income | |
$ | 551 | | |
$ | 1,003 | | |
$ | 1,337 | | |
$ | 1,050 | | |
$ | 1,098 | |
| |
At or For the Years Ended June 30, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| |
| | |
| | |
| | |
| | |
| |
Selected Financial Ratios and Other Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Performance Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
Return on average assets | |
| 0.12 | % | |
| 0.22 | % | |
| 0.30 | % | |
| 0.23 | % | |
| 0.23 | % |
Return on average equity | |
| 1.06 | | |
| 1.98 | | |
| 2.66 | | |
| 2.25 | | |
| 2.38 | |
Interest rate spread (1) | |
| 2.04 | | |
| 2.13 | | |
| 2.27 | | |
| 2.34 | | |
| 2.29 | |
Net interest margin (2) | |
| 2.23 | | |
| 2.32 | | |
| 2.47 | | |
| 2.57 | | |
| 2.53 | |
Non-interest expense to average assets | |
| 2.36 | | |
| 2.46 | | |
| 2.34 | | |
| 2.37 | | |
| 2.35 | |
Efficiency ratio (3) | |
| 91.65 | | |
| 90.24 | | |
| 81.44 | | |
| 81.91 | | |
| 81.61 | |
Basic earnings per share | |
$ | 0.09 | | |
$ | 0.16 | | |
$ | 0.21 | | |
$ | 0.16 | | |
$ | 0.17 | |
Diluted earnings per share | |
$ | 0.09 | | |
$ | 0.16 | | |
$ | 0.21 | | |
$ | 0.16 | | |
$ | 0.17 | |
Average interest-earning assets to average interest-bearing liabilities | |
| 122.24 | % | |
| 120.42 | % | |
| 118.55 | % | |
| 115.10 | % | |
| 113.11 | % |
Dividend payout ratio | |
| 71.32 | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Capital Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
Equity to total assets | |
| 10.93 | % | |
| 11.16 | % | |
| 11.02 | % | |
| 10.64 | % | |
| 9.89 | % |
Average equity to average assets | |
| 10.91 | | |
| 11.12 | | |
| 11.10 | | |
| 10.11 | | |
| 9.59 | |
Total capital to risk-weighted assets | |
| 15.18 | | |
| 18.68 | | |
| 18.19 | | |
| 16.36 | | |
| 16.04 | |
Tier 1 capital to risk-weighted assets | |
| 14.41 | | |
| 17.62 | | |
| 17.00 | | |
| 15.15 | | |
| 14.79 | |
Common equity tier 1 capital to risk weighted assets | |
| 14.41 | | |
| — | | |
| — | | |
| — | | |
| — | |
Tier 1 capital to adjusted tangible assets | |
| 8.70 | | |
| 8.87 | | |
| 8.70 | | |
| 8.24 | | |
| 7.68 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Asset Quality Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses as a percent of total loans | |
| 0.96 | % | |
| 1.02 | % | |
| 1.15 | % | |
| 1.16 | % | |
| 1.20 | % |
Allowance for loan losses as a percent of non-performing loans | |
| 38.57 | | |
| 33.73 | | |
| 42.46 | | |
| 34.74 | | |
| 47.86 | |
Net charge-offs to average outstanding loans during the period | |
| 0.32 | | |
| 0.16 | | |
| 0.40 | | |
| 0.51 | | |
| 0.19 | |
Non-performing loans as a percent of total loans | |
| 2.50 | | |
| 3.04 | | |
| 2.71 | | |
| 3.34 | | |
| 2.51 | |
Non-performing assets as a percent of total assets | |
| 1.86 | | |
| 1.87 | | |
| 1.76 | | |
| 2.23 | | |
| 1.60 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Other Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Number of full-service offices | |
| 8 | | |
| 8 | | |
| 8 | | |
| 8 | | |
| 8 | |
| (1) | Represents the difference between the weighted average yield on
average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
| (2) | Represents net interest income as a percent of average interest-earning
assets. |
| (3) | Represents non-interest expense divided by the sum of net interest
income and non-interest income. |
ITEM 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following analysis
discusses changes in the financial condition and results of operations at and for the years ended June 30, 2015 and 2014, and should
be read in conjunction with the Company’s Consolidated Financial Statements and the notes thereto, appearing in Part II,
Item 8 of this Annual Report on Form 10-K.
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
$452,000, or 45.1%, to $551,000, or $0.09 per basic and diluted share for the fiscal year ended June 30, 2015, compared to $1.0
million, or $0.16 per basic and diluted share for the fiscal year ended June 30, 2014. The decrease was due primarily to an increase
in our provision for loan losses, which increased $480,000 to $535,000 for the fiscal year ended June 30, 2015 from $55,000 for
the fiscal year ended June 30, 2014. The increased provision for loan losses reflects an increase in net charge-offs of $372,000
to $740,000 for the fiscal year ended June 30, 2015 from $368,000 in net charge-offs for the fiscal year end June 30, 2014.
Our net income was
also negatively affected by a decrease in non-interest income, which decreased $235,000, or 9.4%, to $2.3 million for the fiscal
year ended June 30, 2015 compared to $2.5 million for the fiscal year ended June 30, 2014. This was primarily due to an increase
in other-than-temporary write-downs of investment securities of $145,000 to $155,000 for the fiscal year ended June 30, 2015 compared
to $10,000 for the fiscal year ended June 30, 2014. The write-downs for the fiscal years ended June 30, 2015 and 2014 consisted
of credit losses on non-agency mortgage-backed securities.
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.” In addition,
see “Item 1a.—Risk Factors——Future changes in interest rates may reduce our profits.”
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. Changes in economic conditions could further negatively affect us as described
in “Item 1a.—Risk Factors—A worsening of economic conditions could reduce demand for our products and services
and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations.”
Critical Accounting Policies
Critical accounting
policies are those that involve significant judgments and assumptions by management and 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 our allowance for loan
losses, other-than-temporary impairment of investment securities, valuation of goodwill and the realizability of deferred tax assets.
Management has discussed the development, selection and application of these critical accounting policies with the Audit Committee
of the board of directors.
Allowance for
Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses
inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which
is charged against income.
Management performs
a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations,
the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews
and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be
susceptible to significant change. The allowance for loan losses has three components: general, specific and unallocated as further
discussed below.
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; loan concentrations,
trends in volume and terms of loans; changes in lending practices and procedures; changes in lending management and staff; changes
in the value of underlying collateral; changes in the quality of the loan review system; national and local economic trends and
conditions and the effects of other external factors. There were no changes in our policies or methodology pertaining to the general
component of the allowance for loan losses during the fiscal year ended June 30, 2015.
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, we do not separately identify individual consumer and residential real estate loans for
impairment disclosures, unless such loans are subject to a troubled debt restructuring (“TDR”) agreement.
A loan is considered
impaired when, based on current information and events, it is probable that we 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.
We periodically may
agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial
difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.
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.
Other-Than-Temporary
Impairment of Securities. Management periodically reviews all investment securities with significant declines in fair value
for potential other-than-temporary impairment pursuant to the guidance provided by ASC 320-10 “Investments-Debt and Equity
Securities”. The guidance addresses the determination as to when an investment is considered impaired, whether the impairment
is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized
as other-than-temporary impairments.
Goodwill.
Our goodwill (the amount paid in excess of fair value of acquired net assets) is reviewed at least annually to ensure that there
have been no events or circumstances resulting in an impairment of the recorded amount of excess purchase price. Adverse changes
in the economic environment, operations of acquired business units, or other factors could result in a decline in projected fair
values. If the estimated fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount
to fair value.
Deferred
Tax Assets and Liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet)
method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences
between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in
tax rates and laws. 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.
Comparison of Financial Condition at
June 30, 2015 and June 30, 2014
Assets. Total
assets were $473.6 million at June 30, 2015, an increase of $12.6 million, or 2.7%, from $461.0 million at June 30, 2014. The increase
was due to an increase in held-to-maturity securities, offset by decreases in loans and cash and cash equivalents.
Cash and Cash
Equivalents. Cash and cash equivalents decreased $2.0 million or 27.4% to $5.3 million at June 30, 2015 compared to $7.3
million at June 30, 2014. The decrease in cash was primarily due to a reduction in overnight monies deposited in interest-bearing
accounts at the Federal Reserve Bank of Boston, as we funded an outgoing wire transfer of $16.0 million for a municipality account
on June 30, 2015. The same municipality wired the money back into their account on July 1, 2015.
Loans. Net
loans outstanding decreased $6.1 million, or 2.6%, to $224.0 million at June 30, 2015 from $230.1 million at June 30, 2014. The
decrease in loans was primarily due to a $5.4 million, or 2.9%, decrease in residential real estate loans to $179.0 million at
June 30, 2015 from $184.4 million at June 30, 2014, and a $2.1 million, or 4.8%, decrease in commercial real estate loans to $41.8
million at June 30, 2015 from $43.9 million at June 30, 2014. The decrease in residential real estate loans was primarily due to
a decrease of $8.4 million, or 9.8%, in our bi-weekly loan program, to $76.9 million at June 30, 2015 from $85.3 million at June
30, 2014. This was partially due to normal loan amortization. In addition, we initiated a new no-cost program for newly
originated bi-weekly residential mortgage loans. We believe that some our existing customers who were interested in no-cost
bi-weekly loans refinanced their loans with other financial institutions who also offered their no-cost loans to new customers.
We have subsequently extended our no-cost, bi-weekly loan program to include existing customers. These decreases were offset by
a $1.4 million, or 74.7%, increase in commercial loans to $3.3 million at June 30, 2015 from $1.9 million at June 30, 2014.
Securities. Investments
in held-to-maturity securities increased $21.9 million, or 15.4%, to $164.1 million at June 30, 2015 compared to $142.2 million
at June 30, 2014, while investments in available-for-sale securities decreased $2.4 million, or 5.0%, to $45.7 million at June
30, 2015 compared to $48.1 million at June 30, 2014. We have used excess cash to invest in securities to increase interest income
as loan repayments have exceeded originations in recent years.
Deposits. Total
deposits increased $10.4 million, or 3.0%, to $357.6 million at June 30, 2015 from $347.2 million at June 30, 2014. We experienced
increases in non-maturity deposits, specifically demand deposits ($6.8 million, or 12.9%), NOW accounts ($5.8 million, or 6.7%)
and savings accounts ($4.8 million, or 7.5%). Time deposits decreased $6.3 million, or 5.0%. We believe that, in the current low
interest rate environment, customers are avoiding longer-term deposits in favor of having immediate access to their funds in the
event of increases in interest rates. Deposit growth was used to fund the increase in investment securities described above.
Borrowings.
Total Federal Home Loan Bank borrowings increased $3.2 million, or 6.1%, to $56.7 million at June 30, 2015 from $53.5 million
at June 30, 2014. Total securities sold under agreements to repurchase decreased $1.4 million, or 33.1%, to $2.8 million at June
30, 2015 from $4.2 million at June 30, 2014. On June 30, 2015, we borrowed $4.2 million from the Federal Home Loan Bank of Boston
to partially fund the municipality withdrawal discussed above. We repaid this borrowing on July 1, 2015 when the same municipality
wired the money back to us.
Stockholders’
Equity. Total stockholders’ equity increased $293,000, or 0.6% to $51.7 million at June 30, 2015 from $51.5 million
at June 30, 2014. The increase was primarily due to net income of $551,000 for the fiscal year ended June 30, 2015, offset by $393,000
of dividends paid during the year.
Comparison of Operating Results for
the Fiscal Years Ended June 30, 2015 and 2014
Net Income. Net
income was $551,000, or $0.09 per basic and diluted share, for the fiscal year ended June 30, 2015 compared to $1.0 million or
$0.16 per basic and diluted share, for the fiscal year ended June 30, 2014.
Interest and
Dividend Income. Interest and dividend income decreased by $330,000, or 2.4%, to $13.6 million for the fiscal year ended
June 30, 2015 from $13.9 million for the fiscal year ended June 30, 2014. The increase in interest and dividend income was caused
by a decrease in income on loans, offset by an increase in income on investment securities.
Interest income on
investment securities increased by $253,000, or 6.8%, to $4.0 million for the fiscal year ended June 30, 2015 from $3.7 million
for the fiscal year ended June 30, 2014. The increase was due to an increase in average investment securities of $13.5 million,
or 7.2%, to $201.9 million for the fiscal year ended June 30, 2015 from $188.4 million for the fiscal year ended June 30, 2014,
as the yield on average investment securities remained nearly unchanged at 1.97% for the fiscal year ended June 30, 2015 and 1.98%
for the fiscal year ended June 30, 2014. We have used excess cash to invest in securities to increase interest income as loan repayments
have exceeded originations in recent years
Interest income on
loans decreased by $619,000, or 6.1%, to $9.5 million for the fiscal year ended June 30, 2015 from $10.2 million for the fiscal
year ended June 30, 2014. This was due to decreases on average balance and yield. The average balance of loans decreased $2.0 million
to $230.6 million for the fiscal year ended June 30, 2015 from $232.6 million for the fiscal year ended June 30, 2014. The yield
on average loans decreased 23 basis points to 4.14% for the fiscal year ended June 30, 2015 from 4.37% for the fiscal year ended
June 30, 2014, due to continued repayments of higher-yielding loans and originating newer loans in a lower interest rate environment.
Interest income on
average other interest-earning assets, consisting primarily of excess funds invested overnight with the Federal Reserve Bank of
Boston, increased $36,000, or 327.3%, to $47,000 for the fiscal year ended June 30, 2015 from $11,000 for the fiscal year ended
June 30, 2014. The average balance of other interest-earning assets increased $8.5 million to $13.9 million for the fiscal year
ended June 30, 2015 from $5.4 million for the fiscal year ended June 30, 2014, as the yield on average other interest-earning assets
increased 14 basis points to 0.34% for the fiscal year ended June 30, 2015. The increase was due to our maintaining liquid assets
to fund, for most of the fiscal year, a potential withdrawal of the large balance municipality account discussed above in the comparison
of financial condition.
Interest Expense.
Interest expense decreased by $391,000, or 9.8%, to $3.6 million for the fiscal year ended June 30, 2015 from $4.0 million
for the fiscal year ended June 30, 2014, due to decreases in interest expense on time deposits, borrowings and NOW accounts.
Interest expense on
interest-bearing deposits decreased by $282,000, or 11.5%, to $2.2 million for the fiscal year ended June 30, 2015 from $2.4 million
for the fiscal year ended June 30, 2014. Interest expense on time deposits decreased $222,000, or 12.0%, to $1.6 million for the
fiscal year ended June 30, 2015 from $1.9 million for the fiscal year ended June 30, 2015, due to a decrease in average time deposits
of $3.2 million and a decrease in the rate we paid on time deposits to 1.33% for the fiscal year ended June 30, 2015 from 1.47%
for the fiscal year ended June 30, 2014. Interest expense on NOW accounts decreased $47,000, or 10.6%, to $395,000 for the fiscal
year ended June 30, 2015 from $442,000 for the fiscal year ended June 30, 2014. This was also due to a decrease in rate, as the
rate we paid on NOW accounts decreased five basis points to 0.45% for the fiscal year ended June 30, 2015. Our interest expense
on interest-bearing deposits has benefited from a shift in higher-rate time deposits to lower-rate non-maturity accounts. The cost
of interest-bearing deposits decreased to 0.73% for the fiscal year ended June 30, 2015 from 0.84% for the fiscal year ended June
30, 2014. The decrease in yield also resulted from the continued low interest rate environment. Average savings deposits
increased $6.0 million, or 9.9%, to $66.9 million for the fiscal year ended June 30, 2015 from $60.8 million for the fiscal year
ended June 30, 2014, while average time deposits decreased $3.2 million, or 2.5%, to $122.8 million for the fiscal year ended June
30, 2015 from $126.0 million for the fiscal year ended June 30, 2014.
Interest expense on
interest-bearing borrowings decreased by $109,000, or 7.0%, to $1.4 million for the fiscal year ended June 30, 2015 from $1.5 million
for the fiscal year ended June 30, 2014. The rate paid on interest-bearing borrowings decreased 40 basis points to 2.11% for the
fiscal year ended June 30, 2015 from 2.51% for the fiscal year ended June 30, 2014. Average repurchase agreements increased $7.3
million, or 91.3%, to $15.2 million for the fiscal year ended June 30, 2015 from $7.9 million for the fiscal year ended June 30,
2014. The average rate on retail repurchase agreements decreased two basis points to 0.16% for the fiscal year ended June 30, 2015.
In addition, the average rate of Federal Home Loan Bank borrowings decreased 18 basis points to 2.68% for the fiscal year ended
June 30, 2015 from 2.86% for the fiscal year ended June 30, 2014, as we modified $10.0 million in higher rate advances with an
average rate of 3.17% as we borrowed new advances at lower rates.
Net Interest
Income. Net interest income increased $61,000, or 0.6%, to $10.0 million for the fiscal year ended June 30, 2015 from $9.9
million for the fiscal year ended June 30, 2014, as the interest we paid on interest-bearing liabilities decreased faster than
the dividend and interest income we earned on interest-earning assets. Although our interest rate spread decreased to 2.04% for
the fiscal year ended June 30, 2015 from 2.13% for the fiscal year ended June 30, 2014, and our net interest margin decreased to
2.23% for the fiscal year ended June 30, 2015 from 2.32% for the fiscal year ended June 30, 2014, our net interest-earning assets
increased $8.9 million, or 12.3%.
Provision for
Loan Losses. The provision for loan losses increased $480,000 to $535,000 for the fiscal year ended June 30, 2015 from
$55,000 for the fiscal year ended June 30, 2014. The increased provision for loan losses reflects an increase in net charge-offs
of $372,000 to $740,000 for the fiscal year ended June 30, 2015 from $368,000 in net charge-offs for the fiscal year ended June
30, 2014. Total past due loans 60 days and greater decreased $1.4 million, or 29.9%, to $3.3 million at June 30, 2015 from
$4.7 million at June 30, 2014 although other real estate owned increased $1.6 million, or 103.7%, to $3.2 million at June 30, 2015
compared to $1.5 million at June 30, 2014. The allowance for loan losses was $2.2 million at June 30, 2015 compared to $2.4 million
at June 30, 2014. The ratio of the allowance to total loans outstanding was 0.96% as of June 30, 2015 compared to 1.02% as
of June 30, 2014, and the ratio of the allowance to non-performing loans was 38.57% as of June 30, 2015 compared to 33.73% as of
June 30, 2014. For further information, see “Business of Putnam Bank—Allowance for Loan Losses.”
Non-interest
Income. Non-interest income decreased $235,000, or 9.4%, to $2.3 million for the fiscal year ended June 30, 2015 compared
to $2.5 million for the fiscal year ended June 30, 2014. This was primarily due to an increase in other-than-temporary write-downs
of investment securities of $145,000 to $155,000 for the fiscal year ended June 30, 2015 compared to $10,000 for the fiscal year
ended June 30, 2014. The write-downs for the fiscal years ended June 30, 2015 and 2014 consisted of credit losses on non-agency
mortgage-backed securities. Fees for services decreased $58,000, or 3.3%, to $1.7 million for the fiscal year ended June 30, 2015
compared to $1.8 million for the fiscal year ended June 30, 2014. Other income, which primarily consists of rental income and other
miscellaneous fees, decreased $67,000, or 27.5%, to $177,000 for the fiscal year ended June 30, 2015 compared to $244,000 for the
fiscal year ended June 30, 2014. Net commissions from brokerage services increased $24,000, or 18.9%, to $151,000 for the fiscal
year ended June 30, 2015 compared to $127,000 for the fiscal year ended June 30, 2014.
Non-interest
Expense. Non-interest expense increased by $15,000, or 0.1%, and was $11.2 million for each of the fiscal years ended June
30, 2015 and 2014. Salaries and employee benefits expense increased by $298,000, or 5.0%, to $6.2 million for the fiscal year ended
June 30, 2015 from $5.9 million for the fiscal year ended June 30, 2014. This increase was primarily due to salary expense increasing
$194,000, or 4.3%, to $4.7 million for the fiscal year ended June 30, 2015 compared to $4.5 million for the fiscal year ended June
30, 2014. Occupancy and equipment expense increased by $49,000, or 4.1%, to $1.2 million for the fiscal year ended June 30, 2015.
All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit
insurance, professional fees and marketing expense decreased by $332,000, or 8.1%, to $3.7 million for the fiscal year ended June
30, 2015 from $4.1 million for the fiscal year ended June 30, 2014. This was primarily due to decreases in regulatory assessments
of $113,000, Federal Deposit Insurance Corporation deposit insurance of $173,000 and write-downs of other real estate owned of
$179,000. This was partially offset by an increase in other real estate owned expense of $167,000. Other real estate owned properties
increased to $3.2 million at June 30, 2015 from $1.5 million at June 30, 2014.
Provision for
Income Taxes. We had an income tax benefit of $65,000 for the year ended June 30, 2015 compared to income tax expense of
$152,000 for the year ended June 30, 2014. Our effective tax rate was (13.4%) for the year ended June 30, 2015, compared to 13.2%
for the year ended June 30, 2014. The tax benefit in 2015 was due primarily to a decrease in pre-tax income of $669,000, or 57.9%,
and the relationship of pre-tax income to tax preference items such as certain dividend income, bank-owned life insurance income
and employee stock option expense. The effective tax rates differed from the statutory tax rate of 34% primarily 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.
Average Balance Sheet
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.
| |
For
the years ended June 30, | |
| |
2015 | | |
2014 | | |
2013 | |
| |
Average
Balance | | |
Income/
Expense | | |
Yield/Cost | | |
Average
Balance | | |
Income/
Expense | | |
Yield/Cost | | |
Average
Balance | | |
Income/
Expense | | |
Yield/Cost | |
| |
(Dollars
in thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Interest earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment securities (1) | |
$ | 201,909 | | |
$ | 3,984 | | |
| 1.97 | % | |
$ | 188,434 | | |
$ | 3,731 | | |
| 1.98 | % | |
$ | 169,826 | | |
$ | 3,708 | | |
| 2.18 | % |
Loans | |
| 230,600 | | |
| 9,543 | | |
| 4.14 | % | |
| 232,612 | | |
| 10,162 | | |
| 4.37 | % | |
| 245,881 | | |
| 11,531 | | |
| 4.69 | % |
Other interest earning assets | |
| 13,876 | | |
| 47 | | |
| 0.34 | % | |
| 5,384 | | |
| 11 | | |
| 0.20 | % | |
| 6,929 | | |
| 14 | | |
| 0.20 | % |
Total interest-earnings assets | |
| 446,385 | | |
| 13,574 | | |
| 3.04 | % | |
| 426,430 | | |
| 13,904 | | |
| 3.26 | % | |
| 422,636 | | |
| 15,253 | | |
| 3.61 | % |
Non-interest-earning assets | |
| 28,745 | | |
| | | |
| | | |
| 28,908 | | |
| | | |
| | | |
| 29,182 | | |
| | | |
| | |
Total assets | |
$ | 475,130 | | |
| | | |
| | | |
$ | 455,338 | | |
| | | |
| | | |
$ | 451,818 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NOW accounts | |
| 88,418 | | |
| 395 | | |
| 0.45 | % | |
| 88,824 | | |
| 442 | | |
| 0.50 | % | |
| 92,818 | | |
| 513 | | |
| 0.55 | % |
Savings accounts | |
| 66,895 | | |
| 87 | | |
| 0.13 | % | |
| 60,847 | | |
| 89 | | |
| 0.15 | % | |
| 56,325 | | |
| 102 | | |
| 0.18 | % |
Money market accounts | |
| 18,623 | | |
| 51 | | |
| 0.27 | % | |
| 16,469 | | |
| 62 | | |
| 0.38 | % | |
| 14,313 | | |
| 56 | | |
| 0.39 | % |
Time deposits
(2) | |
| 122,832 | | |
| 1,629 | | |
| 1.33 | % | |
| 126,020 | | |
| 1,851 | | |
| 1.47 | % | |
| 132,124 | | |
| 2,411 | | |
| 1.82 | % |
Total deposits | |
| 296,768 | | |
| 2,162 | | |
| 0.73 | % | |
| 292,160 | | |
| 2,444 | | |
| 0.84 | % | |
| 295,580 | | |
| 3,082 | | |
| 1.04 | % |
Borrowings (3) | |
| 68,393 | | |
| 1,446 | | |
| 2.11 | % | |
| 61,966 | | |
| 1,555 | | |
| 2.51 | % | |
| 60,909 | | |
| 1,712 | | |
| 2.81 | % |
Total
interest-bearing liabilities | |
| 365,161 | | |
| 3,608 | | |
| 0.99 | % | |
| 354,126 | | |
| 3,999 | | |
| 1.13 | % | |
| 356,489 | | |
| 4,794 | | |
| 1.34 | % |
Non-interest-bearing
demand deposits | |
| 55,869 | | |
| | | |
| | | |
| 48,114 | | |
| | | |
| | | |
| 42,518 | | |
| | | |
| | |
Other
non-interest-bearing liabilities | |
| 2,286 | | |
| | | |
| | | |
| 2,460 | | |
| | | |
| | | |
| 2,627 | | |
| | | |
| | |
Capital
accounts | |
| 51,814 | | |
| | | |
| | | |
| 50,638 | | |
| | | |
| | | |
| 50,184 | | |
| | | |
| | |
Total
liabilities and capital accounts | |
$ | 475,130 | | |
| | | |
| | | |
$ | 455,338 | | |
| | | |
| | | |
$ | 451,818 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net interest
income | |
| | | |
$ | 9,966 | | |
| | | |
| | | |
$ | 9,905 | | |
| | | |
| | | |
$ | 10,459 | | |
| | |
Interest rate spread | |
| | | |
| | | |
| 2.04 | % | |
| | | |
| | | |
| 2.13 | % | |
| | | |
| | | |
| 2.27 | % |
Net interest-earning
assets | |
$ | 81,224 | | |
| | | |
| | | |
$ | 72,304 | | |
| | | |
| | | |
$ | 66,147 | | |
| | | |
| | |
Net interest margin | |
| | | |
| | | |
| 2.23 | % | |
| | | |
| | | |
| 2.32 | % | |
| | | |
| | | |
| 2.47 | % |
Average
earning assets to average interest-bearing liabilities | |
| | | |
| | | |
| 122.24 | % | |
| | | |
| | | |
| 120.42 | % | |
| | | |
| | | |
| 118.56 | % |
| (1) | Includes debt securities, marketable equity securities and Federal Home Loan Bank stock. |
| (2) | Includes certificates of deposit and club accounts. |
| (3) | Includes Federal Home Loan Bank advances and securities sold under agreements to repurchase. |
Rate/Volume Analysis
The following table
sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows
the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable
to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For
purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately
based on the changes due to rate and the changes due to volume.
| |
Year Ended June 30, | | |
Year Ended June 30, | |
| |
2015 Compared to 2014 | | |
2014 Compared to 2013 | |
| |
Increase (Decrease) Due to | | |
Increase (Decrease) Due to | |
| |
Rate | | |
Volume | | |
Net | | |
Rate | | |
Volume | | |
Net | |
| |
(In thousands) | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment securities (1) | |
$ | (13 | ) | |
$ | 266 | | |
$ | 253 | | |
$ | (363 | ) | |
$ | 386 | | |
$ | 23 | |
Loans | |
| (532 | ) | |
| (87 | ) | |
| (619 | ) | |
| (766 | ) | |
| (603 | ) | |
| (1,369 | ) |
Other interest-earning assets | |
| 11 | | |
| 25 | | |
| 36 | | |
| — | | |
| (3 | ) | |
| (3 | ) |
Total interest-earning assets | |
| (534 | ) | |
| 204 | | |
| (330 | ) | |
| (1,129 | ) | |
| (220 | ) | |
| (1,349 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NOW accounts | |
| (45 | ) | |
| (2 | ) | |
| (47 | ) | |
| (50 | ) | |
| (21 | ) | |
| (71 | ) |
Savings accounts | |
| (10 | ) | |
| 8 | | |
| (2 | ) | |
| (21 | ) | |
| 8 | | |
| (13 | ) |
Money market accounts | |
| (18 | ) | |
| 7 | | |
| (11 | ) | |
| (2 | ) | |
| 8 | | |
| 6 | |
Time deposits (2) | |
| (176 | ) | |
| (46 | ) | |
| (222 | ) | |
| (453 | ) | |
| (107 | ) | |
| (560 | ) |
Total deposits | |
| (249 | ) | |
| (33 | ) | |
| (282 | ) | |
| (526 | ) | |
| (112 | ) | |
| (638 | ) |
Borrowings (3) | |
| (260 | ) | |
| 151 | | |
| (109 | ) | |
| (186 | ) | |
| 29 | | |
| (157 | ) |
Total interest-bearing liabilities | |
| (509 | ) | |
| 118 | | |
| (391 | ) | |
| (712 | ) | |
| (83 | ) | |
| (795 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Change in net interest income | |
$ | (25 | ) | |
$ | 86 | | |
$ | 61 | | |
$ | (417 | ) | |
$ | (137 | ) | |
$ | (554 | ) |
| (1) | Includes debt securities, marketable equity securities and Federal Home Loan Bank stock. |
| (2) | Includes certificates of deposit and club accounts. |
| (3) | Includes Federal Home Loan Bank advances and securities sold under agreements to repurchase. |
Market Risk
The majority of our
assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”).
Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits
and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net
interest income (“NII”) to changes in market interest rates. Accordingly, our board of directors has established an
Asset/Liability Management Committee which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining
the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives,
and for managing this risk consistent with the guidelines approved by the board of directors. With the assistance of an IRR management
consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review
our asset/liability policies and IRR position.
We have sought to manage
our IRR to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability
management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances
from the Federal Home Loan Bank of Boston, to “match fund” certain investments and/or loans; (ii) continued emphasis
on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction
loans and commercial and industrial loans; and (iv) investing in mortgage-backed securities with variable rates or fixed rates
with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term
loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and
interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.
Net interest income
at-risk measures the risk of a decline in earnings due to potential short-term and long term changes in interest rates. The table
below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained
parallel shift in the yield curve (+100 and +200 basis points and -100 basis points) at June 30, 2015 and June 30, 2014.
Net
Interest Income At-Risk |
Change in Interest
Rates | |
Estimated
Increase (Decrease) in NII | |
Estimated
Increase (Decrease) in NII |
(Basis
Points) | |
June
30, 2015 | |
June
30, 2014 |
| |
| | | |
| | |
+200 | |
(3.50)% | |
(1.99)% |
+100 | |
(0.18)% | |
0.93)% |
-100 | |
(2.93)% | |
(3.63)% |
The preceding income
simulation analysis does not represent a forecast of NII and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and
timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions
vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable rate
loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate
from those assumed.
Net Portfolio Value
Simulation Analysis. We compute the amounts by which the net present value of our cash flow from assets, liabilities and off-balance
sheet items (the institution’s net portfolio values or “NPV”) would change in the event of a range of assumed
changes in market interest rates. Given the current low level of market interest rates, we do not prepare a net portfolio value
calculation for an interest rate decrease of greater than 100 basis points. A basis point equals one-hundredth of one percent,
and 200 basis points equals two percent, an increase in interest rates from 3% to 5% would mean, for example, a 200 basis point
increase in the “Change in Interest Rates” column below.
The tables below set
forth, at June 30, 2015, the estimated changes in our net portfolio value that would result from the designated instantaneous changes
in the United States Treasury yield curve based on information produced by an external consultant. Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates,
loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. This data is for Putnam Bank
only and does not include any yield curve changes in the assets of PSB Holdings, Inc.
| |
| | |
| | |
| | |
NPV as
a Percentage of Present Value of | |
Change in Interest | |
| | |
Estimated
Increase (Decrease) in NPV | | |
Assets
(3) | |
Rates (basis points) | |
Estimated
NPV | | |
| | |
| | |
| | |
Increase
(decrease) | |
(1) | |
(2) | | |
Amount | | |
Percent | | |
NPV
Ratio (4) | | |
(basis
points) | |
(Dollars
in thousands) |
| |
| | |
| | |
| | |
| | |
| |
+300 | |
$ | 41,861 | | |
$ | (13,001 | ) | |
| (23.70 | )% | |
| 9.67 | % | |
| (201 | ) |
+200 | |
$ | 47,562 | | |
$ | (7,301 | ) | |
| (13.31 | )% | |
| 10.67 | % | |
| (100 | ) |
+100 | |
$ | 52,246 | | |
$ | (2,616 | ) | |
| (4.77 | )% | |
| 11.41 | % | |
| (27 | ) |
0 | |
$ | 54,862 | | |
$ | — | | |
| — | % | |
| 11.68 | % | |
| — | |
-100 | |
$ | 59,503 | | |
$ | 4,641 | | |
| 8.46 | % | |
| 12.38 | % | |
| 70 | |
| (1) | Assumes an instantaneous uniform change in interest rates at all maturities. |
| (2) | NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. |
| (3) | Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. |
| (4) | NPV ratio represents NPV divided by the present value of assets. |
Liquidity and Capital Resources
The term “liquidity”
refers to the ability of PSB Holdings and Putnam Bank to meet current and future short-term financial obligations. PSB Holdings
and Putnam Bank further define liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit
withdrawals and operating expenses. Liquidity management is both a daily and long-term function of business management. Putnam
Bank’s primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-related
securities, and Federal Home Loan Bank borrowings. Putnam Bank can borrow funds from the Federal Home Loan Bank based on eligible
collateral of loans and securities. Putnam Bank had Federal Home Loan Bank borrowings as of June 30, 2015 of $56.7 million with
unused borrowing capacity of $51.0 million.
Putnam Bank’s
primary investing activities are the origination of loans and the purchase of investment securities. Putnam Bank’s net loan
principal repayments net of originations were $3.7 million for the fiscal year ended June 30, 2015 and $775,000 for the fiscal
year ended June 30, 2014. During the year ended June 30, 2015, we purchased $1.2 million of commercial loans. Purchases of securities
totaled $54.9 million and $53.3 million for the years ended June 30, 2015 and 2014, respectively.
Loan repayments and
maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities
and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and economic conditions
and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Deposit flows
are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. Putnam
Bank monitors its liquidity position frequently and anticipates that it will have sufficient funds to meet its current funding
commitments.
Certificates of deposit
totaled $119.0 million at June 30, 2015, of which $54.0 million had maturities of one year or less. Putnam Bank relies on competitive
rates, customer service and long-standing relationships with customers to retain deposits. Based on our experience with deposit
retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions
upon renewal, a significant portion of such deposits will remain with us.
PSB Holdings is a separate
legal entity from Putnam Bank and must provide for its own liquidity for its liquidity needs, such as to repurchase stock. PSB
Holdings’ primary source of liquidity is the receipt of dividends paid by Putnam Bank. At June 30, 2015, PSB Holdings (on
an unconsolidated, stand-alone basis) had liquid assets of $1.5 million.
Management is not aware
of any other known trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on PSB Holdings’
or Putnam Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on PSB Holdings’ or Putnam Bank’s liquidity, capital or operations.
Off-Balance Sheet Arrangements
In the normal
course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles
are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate,
and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan
commitments, lines of credit, and letters of credit.
For the year ended June 30, 2015, we engaged
in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations
or cash flows.
Impact of Recent Accounting Pronouncements
For a discussion of the impact of recent
accounting pronouncements, see note 2 of the notes to the consolidated financial statements included in Item 8 of this Annual Report
on Form 10-K.
Effect of Inflation and Changing Prices
The financial statements
and related financial data presented in this Annual Report on Form 10-K have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation
on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial
institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services.
ITEM 7A. Quantitative
and Qualitative Disclosures About Market Risk
Information required by this item is included
in “ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation,” above.
ITEM 8. Financial
Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PSB HOLDINGS, INC.
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders of
PSB Holdings, Inc.
We have audited the consolidated balance sheets
of PSB Holdings, Inc. and Subsidiary (the “Company”) as of June 30, 2015 and 2014, and the related consolidated statements
of net income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of PSB Holdings, Inc. and Subsidiary
as of June 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
September 10, 2015
PSB
Holdings, Inc. and Subsidiary
Consolidated
Balance Sheets
June 30, 2015 and 2014
(In thousands, except share
data)
| |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
Cash and due from depository institutions | |
$ | 4,562 | | |
$ | 4,573 | |
Interest-bearing deposits with other banks | |
| 764 | | |
| 2,762 | |
Cash and cash equivalents | |
| 5,326 | | |
| 7,335 | |
| |
| | | |
| | |
Investments in available-for-sale securities, at fair value | |
| 45,657 | | |
| 48,081 | |
Investments in held-to-maturity securities (fair value of $165,644 as of June 30, 2015 and $143,257 as of June 30, 2014) | |
| 164,096 | | |
| 142,176 | |
Federal Home Loan Bank stock, at cost | |
| 5,371 | | |
| 5,927 | |
Loans held-for-sale | |
| - | | |
| 100 | |
| |
| | | |
| | |
Loans | |
| 226,221 | | |
| 232,506 | |
Allowance for loan losses | |
| (2,175 | ) | |
| (2,380 | ) |
Net loans | |
| 224,046 | | |
| 230,126 | |
Premises and equipment | |
| 3,763 | | |
| 4,037 | |
Accrued interest receivable | |
| 1,051 | | |
| 1,018 | |
Other real estate owned | |
| 3,155 | | |
| 1,549 | |
Goodwill | |
| 6,912 | | |
| 6,912 | |
Bank-owned life insurance | |
| 9,427 | | |
| 9,150 | |
Deferred tax asset | |
| 2,704 | | |
| 2,661 | |
Other assets | |
| 2,093 | | |
| 1,967 | |
Total assets | |
$ | 473,601 | | |
$ | 461,039 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Deposits: | |
| | | |
| | |
Noninterest-bearing | |
$ | 59,854 | | |
$ | 53,021 | |
Interest-bearing | |
| 297,787 | | |
| 294,235 | |
Total deposits | |
| 357,641 | | |
| 347,256 | |
Mortgagors’ escrow accounts | |
| 2,363 | | |
| 2,267 | |
Federal Home Loan Bank advances | |
| 56,740 | | |
| 53,500 | |
Securities sold under agreements to repurchase | |
| 2,797 | | |
| 4,181 | |
Other liabilities | |
| 2,316 | | |
| 2,384 | |
Total liabilities | |
| 421,857 | | |
| 409,588 | |
| |
| | | |
| | |
Commitments and Contingencies (Notes 4, 9 and 11) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Preferred stock, $0.10 par value, 1,000,000 shares authorized, no shares issued and outstanding | |
| - | | |
| - | |
Common stock, $0.10 par value, 12,000,000 shares authorized, 6,943,125 shares issued, 6,541,561 shares outstanding at June 30, 2015 and June 30, 2014 | |
| 694 | | |
| 694 | |
Additional paid-in capital | |
| 30,602 | | |
| 30,602 | |
Retained earnings | |
| 25,919 | | |
| 25,793 | |
Accumulated other comprehensive loss | |
| (198 | ) | |
| (237 | ) |
Unearned ESOP shares | |
| (1,182 | ) | |
| (1,310 | ) |
Treasury stock, at cost (401,564 shares at June 30, 2015 and June 30, 2014) | |
| (4,091 | ) | |
| (4,091 | ) |
Total stockholders’ equity | |
| 51,744 | | |
| 51,451 | |
Total liabilities and stockholders’ equity | |
$ | 473,601 | | |
$ | 461,039 | |
The accompanying notes are an integral part of these consolidated
financial statements.
PSB Holdings, Inc. and Subsidiary
Consolidated Statements of Net Income
Years Ended June 30, 2015 and 2014
(In thousands,
except share data)
| |
2015 | | |
2014 | |
Interest and dividend income: | |
| | | |
| | |
Interest and fees on loans | |
$ | 9,543 | | |
$ | 10,162 | |
Interest on debt securities | |
| 3,434 | | |
| 3,200 | |
Dividends on marketable equity securities | |
| 459 | | |
| 466 | |
Dividends on Federal Home Loan Bank stock | |
| 91 | | |
| 65 | |
Other interest and dividend income | |
| 47 | | |
| 11 | |
Total interest and dividend income | |
| 13,574 | | |
| 13,904 | |
| |
| | | |
| | |
Interest expense: | |
| | | |
| | |
Interest on deposits | |
| 2,162 | | |
| 2,444 | |
Interest on Federal Home Loan Bank advances | |
| 1,421 | | |
| 1,540 | |
Interest on securities sold under agreements to repurchase | |
| 25 | | |
| 15 | |
Total interest expense | |
| 3,608 | | |
| 3,999 | |
Net interest and dividend income | |
| 9,966 | | |
| 9,905 | |
Provision for loan losses | |
| 535 | | |
| 55 | |
Net interest and dividend income after provision for loan losses | |
| 9,431 | | |
| 9,850 | |
| |
| | | |
| | |
Non-interest income: | |
| | | |
| | |
Total other-than-temporary impairment losses on debt securities | |
| (414 | ) | |
| (231 | ) |
Portion of losses recognized in other comprehensive income | |
| 259 | | |
| 221 | |
Net impairment losses recognized in earnings | |
| (155 | ) | |
| (10 | ) |
Fees for services | |
| 1,710 | | |
| 1,768 | |
Mortgage banking activities | |
| 97 | | |
| 72 | |
Net commissions from brokerage services | |
| 151 | | |
| 127 | |
Bank-owned life insurance income | |
| 277 | | |
| 291 | |
Other income | |
| 177 | | |
| 244 | |
Total non-interest income | |
| 2,257 | | |
| 2,492 | |
| |
| | | |
| | |
Non-interest expense: | |
| | | |
| | |
Compensation and benefits | |
| 6,213 | | |
| 5,915 | |
Occupancy and equipment | |
| 1,247 | | |
| 1,198 | |
Data processing | |
| 841 | | |
| 827 | |
LAN/ WAN network | |
| 148 | | |
| 146 | |
Advertising and marketing | |
| 195 | | |
| 174 | |
Regulatory assessment | |
| 78 | | |
| 191 | |
Professional fees | |
| 477 | | |
| 465 | |
FDIC deposit insurance | |
| 378 | | |
| 551 | |
Other real estate owned | |
| 432 | | |
| 265 | |
Write-down of other real estate owned | |
| 49 | | |
| 228 | |
Other | |
| 1,144 | | |
| 1,227 | |
Total non-interest expense | |
| 11,202 | | |
| 11,187 | |
| |
| | | |
| | |
Income before income tax (benefit) expense | |
| 486 | | |
| 1,155 | |
| |
| | | |
| | |
Income tax (benefit) expense | |
| (65 | ) | |
| 152 | |
Net income | |
$ | 551 | | |
$ | 1,003 | |
| |
| | | |
| | |
Earnings per common share: | |
| | | |
| | |
Basic | |
$ | 0.09 | | |
$ | 0.16 | |
Diluted | |
$ | 0.09 | | |
$ | 0.16 | |
Weighted average common shares outstanding: | |
| | | |
| | |
Basic | |
| 6,415,376 | | |
| 6,402,597 | |
Diluted | |
| 6,415,376 | | |
| 6,402,597 | |
The accompanying notes are an integral part
of these consolidated financial statements.
PSB Holdings, Inc. and Subsidiary
Consolidated Statements of Comprehensive
Income
Years Ended June 30, 2015 and 2014
| |
2015 | | |
2014 | |
| |
(In thousands) | |
| |
| | |
| |
Net income | |
$ | 551 | | |
$ | 1,003 | |
| |
| | | |
| | |
Other comprehensive income: | |
| | | |
| | |
Net unrealized holding gains on available-for-sale securities | |
| 166 | | |
| 644 | |
Reclassification adjustment for losses realized in income on available-for-sale securities (1) | |
| 155 | | |
| 10 | |
Non credit portion of other-than-temporary losses on available-for-sale securities | |
| (259 | ) | |
| (221 | ) |
| |
| | | |
| | |
Other comprehensive income before tax | |
| 62 | | |
| 433 | |
Income tax expense related to other comprehensive income | |
| (23 | ) | |
| (147 | ) |
Other comprehensive income net of tax | |
| 39 | | |
| 286 | |
| |
| | | |
| | |
Total comprehensive income | |
$ | 590 | | |
$ | 1,289 | |
(1) | | Amounts are included in net impairment losses recognized in earnings in non-interest
income on the consolidated statements of net income. Income tax benefit associated with these reclassification adjustments was
$53,000 and $3,000 for the years ended June 30, 2015 and 2014, respectively. |
The accompanying
notes are an integral part of these consolidated financial statements.
PSB Holdings, Inc. and Subsidiary
Consolidated Statements of Changes
in Stockholders’ Equity
Years Ended June 30, 2015 and
2014
| |
| | |
| | |
| | |
Accumulated | | |
| | |
| | |
| |
| |
| | |
Additional | | |
| | |
Other | | |
Unearned | | |
| | |
| |
| |
Common | | |
Paid-in | | |
Retained | | |
Comprehensive | | |
ESOP | | |
Treasury | | |
| |
| |
Stock | | |
Capital | | |
Earnings | | |
Loss | | |
Shares | | |
Stock | | |
Total | |
| |
(In thousands) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance at June 30, 2013 | |
$ | 694 | | |
$ | 30,602 | | |
$ | 24,836 | | |
$ | (523 | ) | |
$ | (1,437 | ) | |
$ | (4,091 | ) | |
$ | 50,081 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Comprehensive income | |
| - | | |
| - | | |
| 1,003 | | |
| 286 | | |
| - | | |
| - | | |
| 1,289 | |
ESOP shares committed to be released (12,779 shares) | |
| - | | |
| - | | |
| (46 | ) | |
| - | | |
| 127 | | |
| - | | |
| 81 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at June 30, 2014 | |
| 694 | | |
| 30,602 | | |
| 25,793 | | |
| (237 | ) | |
| (1,310 | ) | |
| (4,091 | ) | |
| 51,451 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Comprehensive income | |
| - | | |
| - | | |
| 551 | | |
| 39 | | |
| - | | |
| - | | |
| 590 | |
Cash dividends declared ($0.06 per share) | |
| - | | |
| - | | |
| (393 | ) | |
| - | | |
| - | | |
| - | | |
| (393 | ) |
ESOP shares committed to be released (12,779 shares) | |
| - | | |
| - | | |
| (32 | ) | |
| - | | |
| 128 | | |
| - | | |
| 96 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at June 30, 2015 | |
$ | 694 | | |
$ | 30,602 | | |
$ | 25,919 | | |
$ | (198 | ) | |
$ | (1,182 | ) | |
$ | (4,091 | ) | |
$ | 51,744 | |
The accompanying notes are an integral part
of these consolidate financial statements.
PSB Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended June 30, 2015 and
2014
| |
2015 | | |
2014 | |
| |
(In thousands) | |
| |
| | |
| |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 551 | | |
$ | 1,003 | |
Adjustments to reconcile net income to cash provided by operating activities: | |
| | | |
| | |
Amortization of securities, net | |
| 1,253 | | |
| 1,236 | |
Impairment losses on securities | |
| 155 | | |
| 10 | |
Net decrease in loans held for sale | |
| 100 | | |
| 937 | |
Amortization of deferred loan costs, net | |
| 138 | | |
| 75 | |
Provision for loan losses | |
| 535 | | |
| 55 | |
Gain on sale of other real estate owned | |
| (104 | ) | |
| (62 | ) |
Write-down of other real estate owned | |
| 49 | | |
| 228 | |
Loss on sale of premises and equipment | |
| - | | |
| 2 | |
Depreciation and amortization - premises and equipment | |
| 341 | | |
| 334 | |
Amortization - software | |
| 121 | | |
| 110 | |
(Increase) decrease in accrued interest receivable and other assets | |
| (247 | ) | |
| 375 | |
Increase in cash surrender value of bank-owned life insurance | |
| (277 | ) | |
| (291 | ) |
Decrease in other liabilities | |
| (68 | ) | |
| (159 | ) |
Deferred tax (benefit) expense | |
| (66 | ) | |
| 94 | |
Amortization of ESOP expense | |
| 96 | | |
| 81 | |
Net cash provided by operating activities | |
| 2,577 | | |
| 4,028 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of available-for-sale securities | |
| (3,067 | ) | |
| (15,987 | ) |
Proceeds from maturities and paydowns of available-for-sale securities | |
| 5,276 | | |
| 6,636 | |
Purchase of held-to-maturity securities | |
| (51,816 | ) | |
| (37,263 | ) |
Proceeds from calls, paydowns and maturities of held-to-maturity securities | |
| 28,765 | | |
| 28,983 | |
Redemption of Federal Home Loan Bank stock | |
| 556 | | |
| 1,026 | |
Loan repayments net of originations | |
| 3,694 | | |
| 775 | |
Loan purchases | |
| (1,209 | ) | |
| - | |
Recoveries of loans previously charged off | |
| 281 | | |
| 83 | |
Proceeds from sale of other real estate owned | |
| 1,109 | | |
| 1,036 | |
Capital expenditures - premises and equipment | |
| (67 | ) | |
| (136 | ) |
Capital expenditures - software | |
| (33 | ) | |
| (60 | ) |
Capital expenditures - other real estate owned | |
| (19 | ) | |
| (29 | ) |
Net cash used in investing activities | |
| (16,530 | ) | |
| (14,936 | ) |
(Continued)
The accompanying notes are an integral part
of these consolidated financial statements.
PSB Holdings, Inc. and Subsidiary
Consolidated
Statement of Cash Flows - (Concluded)
Years Ended
June 30, 2015 and 2014
| |
2015 | | |
2014 | |
| |
(In thousands) | |
| |
| | |
| |
Cash flows from financing activities: | |
| | | |
| | |
Net increase in deposit accounts | |
| 10,385 | | |
| 5,971 | |
Net increase in mortgagors’ escrow accounts | |
| 96 | | |
| 147 | |
Proceeds from long-term Federal Home Loan Bank advances | |
| 10,000 | | |
| 2,500 | |
Repayment of long-term Federal Home Loan Bank advances | |
| (11,000 | ) | |
| (2,500 | ) |
Net increase in short-term Federal Home Loan Bank advances | |
| 4,240 | | |
| - | |
Net decrease in securities sold under agreements to repurchase | |
| (1,384 | ) | |
| (668 | ) |
Cash dividends paid on common stock | |
| (393 | ) | |
| - | |
Net cash provided by financing activities | |
| 11,944 | | |
| 5,450 | |
| |
| | | |
| | |
Decrease in cash and cash equivalents | |
| (2,009 | ) | |
| (5,458 | ) |
Cash and cash equivalents at beginning of year | |
| 7,335 | | |
| 12,793 | |
Cash and cash equivalents at end of year | |
$ | 5,326 | | |
$ | 7,335 | |
| |
| | | |
| | |
Supplemental disclosures: | |
| | | |
| | |
Cash paid (refunded) during the period for: | |
| | | |
| | |
Interest | |
$ | 3,618 | | |
$ | 4,018 | |
Income taxes paid | |
| (554 | ) | |
| 1 | |
Loans transferred to other real estate owned | |
| 2,641 | | |
| 1,057 | |
The accompanying notes are an integral part
of these consolidated financial statements.
PSB Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended June 30, 2015 and
2014
1. NATURE OF OPERATIONS
PSB Holdings, Inc. (the “Company”)
is a federally chartered holding company formed on May 27, 2003 for the purpose of acquiring all of the common stock of Putnam
Bank (the “Bank”) concurrent with the Bank’s reorganization from a mutual savings institution to the mutual holding
company form of organization. No shares were offered to the public as part of this reorganization.
On October 4, 2004, the Company completed a
plan of stock issuance pursuant to which 44.5% of its common stock was sold to eligible depositors and the Putnam Savings Bank
Employee Stock Ownership Plan (“ESOP”). The Company issued a total of 6,943,125 shares.
3,729,846 shares, representing 53.72% of total
shares issued, were issued to Putnam Bancorp MHC in exchange for its ownership of the Bank. The sole purpose of Putnam Bancorp
MHC is to own a majority of the common stock of PSB Holdings, Inc.
As part of the stock issuance, the Bank established
the ESOP, which purchased 257,062 shares of common stock. The ESOP borrowed the necessary funds from the Company. The Bank intends
to make annual contributions adequate to meet the debt service requirements of the ESOP.
In connection with the stock offering the Company
established The Putnam Savings Foundation and contributed 123,588 shares of common stock, representing 4% of shares sold to the
public. The Foundation supports charities in the geographic area the Bank serves.
On August 27, 2014, the Bank filed a notice of intent to convert
from a federally-chartered savings bank to a Connecticut-chartered bank that is a member of the Federal Reserve System. PSB
Holdings, Inc. and Putnam Bancorp, MHC would remain savings and loan holding companies. The charter conversion became
effective on December 30, 2014.
The Bank is a state chartered savings bank
and provides a full range of banking services to individual and small business customers located primarily in Connecticut. The
Bank is subject to competition from other financial institutions throughout the region. There are no concentrations of credit to
borrowers that have similar economic characteristics. The majority of the Company’s loan portfolio is comprised of loans
collateralized by real estate located in the state of Connecticut.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the
Company and its subsidiary conform to accounting principles generally accepted in the United States of America and predominant
practices within the banking industry. The consolidated financial statements of the Company were prepared using the accrual basis
of accounting. The significant accounting policies of the Company are summarized below to assist the reader in better understanding
the consolidated financial statements and other data contained herein.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in
the near term are the allowance for loan losses, other-than-temporary impairment of securities, the valuation of goodwill and the
realizability of deferred tax assets.
Basis of Presentation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, Windham
North Properties, LLC, PSB Realty, LLC, and Putnam
Bank Mortgage Servicing Company. Windham North
Properties, LLC is used to acquire title to selected properties on which Putnam Bank forecloses. PSB Realty, LLC owns a parcel
of real estate located immediately adjacent to Putnam Bank’s main office. This real estate is utilized as a loan center for
Putnam Bank and there are no outside tenants that occupy the premises. PSB Realty, LLC also owns the 40 High Street, Norwich branch
building and real estate. Putnam Bank Mortgage Servicing Company is a qualified “passive investment company” that is
intended to reduce Connecticut state taxes on interest earned on real estate loans. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
Reclassifications
Reclassifications are made to prior year financial
statements when necessary to conform to the current year presentation.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash
and cash equivalents include cash, amounts due from depository institutions and interest-bearing deposits with other banks.
Cash and due from banks as of June 30, 2015
and 2014 includes $425,000 which is subject to withdrawal and usage restrictions to satisfy the reserve requirements and target
balances of Bankers Bank Northeast.
Cash is maintained in bank accounts which,
at times, may exceed insured limits. The Company has not experienced any issues in such accounts and does not believe it is exposed
to any significant credit risk on this cash.
Securities
Investments in debt securities are adjusted
for amortization of premiums and accretion of discounts computed so as to approximate the interest method. Gains or losses on sales
of investment securities are computed on a specific identification basis. All security transactions are recorded on the trade date.
The Company classifies debt and equity securities
into one of three categories: held-to-maturity, available-for-sale, or trading. These security classifications may be modified
after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if
the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held
principally for the purpose of selling them in the near term. All other securities are classified as available-for-sale.
Held-to-maturity securities are measured at
amortized cost on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or in other
comprehensive income/loss, but are disclosed in the notes to the consolidated financial statements.
Available-for-sale securities are carried at
fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings but are included
in other comprehensive income/loss, net of applicable taxes.
Trading securities are carried at fair value
on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings. The Company
held no securities classified as trading at June 30, 2015 and 2014.
Each reporting period, the Company evaluates
all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the
investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).
OTTI is required to be recognized if (1) the
Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the
security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not
sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity
and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings
as realized losses. For impaired debt securities that the Company intends to sell, or more likely than not will be required to
sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related
OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable
taxes.
Federal Home Loan Bank of Boston Stock
The Bank, as a member of the Federal Home Loan
Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB of Boston. Based on redemption
provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB of Boston may declare dividends
on the stock. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the stock. As of June 30,
2015, no impairment has been recognized.
Loans Held-For-Sale
Loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are
provided for in a valuation allowance by charges to income.
Interest income on loans held-for-sale is accrued
currently and classified as interest on loans.
Loans
The Company’s loan portfolio includes
residential real estate, commercial real estate, residential construction, commercial and consumer/other segments. Loans that management
has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs,
are deferred and recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on all loans is discontinued
at the time a loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based
on contractual terms of the loan. In all cases, loans are placed on non-accrual if collection of principal or interest is considered
doubtful. All interest accrued but not collected for loans that are placed on non-accrual is reversed against interest income.
The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established
as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is confirmed.
The allowance for loan losses is evaluated
on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. The allowance consists of general, specific and unallocated components, as further
described below.
General component
The general component of the allowance for
loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments:
residential real estate, commercial real estate, residential construction, commercial and consumer/other. Management uses a rolling
average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical
loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; loan concentrations; trends in volume
and terms of loans; changes in lending practices and procedures; changes in lending management and staff; changes in the value
of underlying collateral; changes in the quality of the loan review system; national and local economic trends and conditions and
the effects of other external factors. There were no changes in the Company’s policies or methodology pertaining to the general
component of the allowance for loan losses during 2015.
The qualitative factors are determined based
on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate - The Company does
not originate loans with a loan-to-value ratio greater than 100% and does not originate subprime loans. Loans originated with a
loan-to-value ratio greater than 80% generally require private mortgage insurance. All loans in this segment are collateralized
by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall
health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial real estate – Loans in this segment
are primarily income-producing properties throughout New England. The underlying cash flows generated by the properties are adversely
impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit
quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans.
Residential construction – Loans in this
segment primarily include speculative real estate development loans for which payment is derived from sale of the property. Credit
risk is affected by 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 secured 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 subject to a troubled debt restructuring (“TDR”) agreement.
A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Company periodically may agree to modify
the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty,
the modification is considered a troubled debt restructuring. 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.
Loan Servicing
The Bank originates and sells mortgage loans
in the secondary market and may retain the servicing of these loans. Mortgage servicing assets are recognized as separate assets
when rights are acquired through the purchase of rights or sale of these loans. Capitalized servicing rights are reported at fair
value in other assets on the consolidated balance sheets, with changes in fair value reported in other non-interest income on the
consolidated statements of net income. Fair value is determined using prices for similar assets with similar characteristics when
available, or based upon discounted cash flows using market-based assumptions.
Premises and Equipment
Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment
retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in earnings. Depreciation
and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets or term of
lease if
shorter. Estimated lives are 5 to 40 years
for buildings and premises, 3 to 20 years for furniture, fixtures and equipment and lease terms range from 1 to 25 years. Expenditures
for replacements or major improvements are capitalized; expenditures for normal maintenance and repairs are charged to expense
as incurred.
Other Real Estate Owned
Other real estate owned includes properties
acquired through foreclosure and properties classified as in-substance foreclosures. These properties are carried at the lower
of cost or estimated fair value less estimated costs to sell. Any write-down from cost to estimated fair value required at the
time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred
in connection with maintaining these assets, subsequent write-downs and gains or losses recognized upon sale are charged to earnings.
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 reviewed for impairment annually or more frequently if circumstances warrant. In 2015
and 2014, the Company used 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. For the years ended June 30, 2015 and 2014,
the Company had no goodwill impairment.
Bank-owned Life Insurance
Bank-owned life insurance policies are reflected
on the consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as
insurance proceeds received, are reflected in non-interest income on the consolidated statements of net income and are not subject
to income taxes.
Fair Value of Financial Instruments
The Company uses fair value measurements to
record fair value adjustments to certain assets and to determine fair value disclosures. Fair value methods and assumptions used
by the Company in estimating its fair value disclosures are as follows:
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 and FHLB Stock: Fair
value measurements on investment securities are generally obtained from a third party pricing source. The fair value of
securities held-to-maturity and available-for-sale 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, pricing models, discounted cash
flow methodologies or other similar techniques as appropriate. Ownership of FHLB of Boston stock is restricted to member banks;
therefore, the stock is not traded. The estimated fair value of FHLB of Boston stock is equal to its carrying value, which represents
the price at which the FHLB of Boston is obligated to redeem its stock.
Loans, net: For valuation purposes,
the loan portfolio was segregated into its significant categories, which are residential real estate, commercial real estate, residential
construction, commercial and consumer/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 real estate,
commercial real estate, residential construction, commercial and consumer/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.
Loans held for sale: Loans held for
sale are accounted for at the lower of cost or market and the fair value of loans held for sale are based on quoted market prices
of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics.
Accrued interest: The carrying amounts
of accrued interest approximate fair value.
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 market 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.
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 11, the fair value equals the carrying amounts which are not significant.
Earnings per Share (EPS)
Basic earnings per share represents income
available to common stockholders divided by the weighted-average number of common shares outstanding during the period. If rights
to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation
of basic earnings per share. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock
method.
Treasury shares and unallocated ESOP shares
are not deemed outstanding for earnings per share calculations.
The calculation of basic and diluted earnings
per share for the years ended June 30, 2015 and 2014 is presented below:
| |
Years Ended June
30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Net income | |
$ | 551,000 | | |
$ | 1,003,000 | |
| |
| | | |
| | |
Weighted average common shares applicable to basic EPS | |
| 6,415,376 | | |
| 6,402,597 | |
Effect of dilutive potential common shares | |
| - | | |
| - | |
Weighted average common shares applicable to diluted EPS | |
| 6,415,376 | | |
| 6,402,597 | |
Earnings per share: | |
| | | |
| | |
Basic | |
$ | 0.09 | | |
$ | 0.16 | |
Diluted | |
$ | 0.09 | | |
$ | 0.16 | |
At June 30, 2015 and 2014, options for 199,106 shares were not included
in the computation of earnings per share as the effects were anti-dilutive.
Transfers of Financial Assets
Transfers of an entire financial asset, a group
of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over
the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated
from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets.
Advertising
The Company directly expenses costs associated
with advertising as they are incurred.
Income Taxes
Deferred income tax assets and liabilities
are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities
and gives current recognition to changes in tax rates and laws. 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.
Income tax benefits related to stock compensation
in excess of grant date fair value less any proceeds on exercise are recognized as an increase to additional paid-in capital upon
vesting or exercising and delivery of the stock. Any income tax effects related to stock compensation that are less than grant
date fair value less any proceeds on exercise would be recognized as a reduction of additional paid-in capital to the extent of
previously recognized income tax benefits and then through income tax expense for the remaining amount.
Employee Benefit Plans
The Company established an ESOP as part of
its minority stock issuance on October 4, 2004. Unearned ESOP shares are not considered outstanding and are therefore not taken
into account when computing earnings per share. Unearned ESOP shares are presented as a reduction to stockholders’ equity
and represent shares to be allocated to ESOP participants in future periods for services provided to the Company. As shares are
committed to be released, compensation expense is recognized for the fair market value of the stock and stockholders’ equity
is increased by a corresponding amount. The loan to the ESOP will be repaid principally from the Bank’s contributions to
the ESOP and dividends payable on common stock held by the ESOP over a period of 20 years.
As more fully described in Note 13, the Company
has a stock-based incentive plan authorizing various types of incentive awards that may be granted to directors, officers and employees.
The Company records 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.
Recent Accounting and Regulatory Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers
(Topic 606). The amendments in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue
recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout
the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers
(Topic 606), Deferral of the Effective Date, which defers the original effective dates of ASU 2014-09. The amendments
in Update 2014-09 are now effective for annual reporting periods, including interim periods, beginning after December 15,
2017. Early application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting
periods within that reporting period. Management is currently evaluating the impact to the consolidated financial statements of
adopting this Update.
3. INVESTMENT SECURITIES
Debt and equity securities have been classified
on the consolidated balance sheets according to management’s intent. The amortized cost of securities and their fair values,
by maturity, are as follows as of the dates indicated:
| |
Amortized | | |
Gross Unrealized | | |
Fair | |
| |
Cost Basis | | |
Gain | | |
(Loss) | | |
Value | |
| |
(In thousands) | |
June 30, 2015: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
U.S. government and government-sponsored securities: | |
| | | |
| | | |
| | | |
| | |
Due from one through five years | |
$ | 1,000 | | |
$ | - | | |
$ | (9 | ) | |
$ | 991 | |
| |
| | | |
| | | |
| | | |
| | |
Corporate bonds and other securities: | |
| | | |
| | | |
| | | |
| | |
Due after ten years | |
| 5,999 | | |
| - | | |
| (795 | ) | |
| 5,204 | |
| |
| | | |
| | | |
| | | |
| | |
U.S. Government-sponsored and guaranteed mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due from one through five years | |
| 391 | | |
| 14 | | |
| - | | |
| 405 | |
From five through ten years | |
| 9,374 | | |
| 125 | | |
| - | | |
| 9,499 | |
After ten years | |
| 13,280 | | |
| 419 | | |
| (1 | ) | |
| 13,698 | |
| |
| 23,045 | | |
| 558 | | |
| (1 | ) | |
| 23,602 | |
Non-agency mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after ten years | |
| 5,913 | | |
| 308 | | |
| (361 | ) | |
| 5,860 | |
Total debt securities | |
| 35,957 | | |
| 866 | | |
| (1,166 | ) | |
| 35,657 | |
| |
| | | |
| | | |
| | | |
| | |
Equity securities: | |
| | | |
| | | |
| | | |
| | |
Auction rate preferred - due after 10 years | |
| 10,000 | | |
| - | | |
| - | | |
| 10,000 | |
| |
| | | |
| | | |
| | | |
| | |
Total available-for-sale securities | |
$ | 45,957 | | |
$ | 866 | | |
$ | (1,166 | ) | |
$ | 45,657 | |
| |
Amortized | | |
Gross Unrealized | | |
Fair | |
| |
Cost Basis | | |
Gain | | |
(Loss) | | |
Value | |
| |
(In thousands) | |
June 30, 2014: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | |
Debt securities: | |
| | | |
| | | |
| | | |
| | |
U.S. government and government-sponsored securities: | |
| | | |
| | | |
| | | |
| | |
Due from five through ten years | |
$ | 1,000 | | |
$ | - | | |
$ | (24 | ) | |
$ | 976 | |
| |
| | | |
| | | |
| | | |
| | |
Corporate bonds and other securities: | |
| | | |
| | | |
| | | |
| | |
Due after ten years | |
| 5,999 | | |
| - | | |
| (836 | ) | |
| 5,163 | |
| |
| | | |
| | | |
| | | |
| | |
U.S. Government-sponsored and guaranteed mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due from one through five years | |
| 684 | | |
| 37 | | |
| - | | |
| 721 | |
From five through ten years | |
| 11,593 | | |
| 189 | | |
| - | | |
| 11,782 | |
After ten years | |
| 12,426 | | |
| 377 | | |
| (44 | ) | |
| 12,759 | |
| |
| 24,703 | | |
| 603 | | |
| (44 | ) | |
| 25,262 | |
Non-agency mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due after ten years | |
| 6,741 | | |
| 321 | | |
| (382 | ) | |
| 6,680 | |
Total debt securities | |
| 38,443 | | |
| 924 | | |
| (1,286 | ) | |
| 38,081 | |
| |
| | | |
| | | |
| | | |
| | |
Equity securities: | |
| | | |
| | | |
| | | |
| | |
Auction rate preferred - due after 10 years | |
| 10,000 | | |
| - | | |
| - | | |
| 10,000 | |
| |
| | | |
| | | |
| | | |
| | |
Total available-for-sale securities | |
$ | 48,443 | | |
$ | 924 | | |
$ | (1,286 | ) | |
$ | 48,081 | |
| |
Amortized | | |
Gross Unrealized | | |
Fair | |
| |
Cost Basis | | |
Gain | | |
(Loss) | | |
Value | |
| |
(In thousands) | |
June 30, 2015: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities: | |
| | | |
| | | |
| | | |
| | |
Due in one through five years | |
$ | 9,245 | | |
$ | 70 | | |
$ | (4 | ) | |
$ | 9,311 | |
From five through ten years | |
| 954 | | |
| 98 | | |
| - | | |
| 1,052 | |
| |
| 10,199 | | |
| 168 | | |
| (4 | ) | |
| 10,363 | |
| |
| | | |
| | | |
| | | |
| | |
U.S. Government-sponsored and guaranteed mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due in five through ten years | |
| 3,304 | | |
| 127 | | |
| - | | |
| 3,431 | |
After ten years | |
| 150,593 | | |
| 1,845 | | |
| (588 | ) | |
| 151,850 | |
| |
| 153,897 | | |
| 1,972 | | |
| (588 | ) | |
| 155,281 | |
| |
| | | |
| | | |
| | | |
| | |
Total held-to-maturity securities | |
$ | 164,096 | | |
$ | 2,140 | | |
$ | (592 | ) | |
$ | 165,644 | |
| |
Amortized | | |
Gross Unrealized | | |
Fair | |
| |
Cost Basis | | |
Gain | | |
(Loss) | | |
Value | |
| |
(In thousands) | |
June 30, 2014: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities: | |
| | | |
| | | |
| | | |
| | |
Due in one through five years | |
$ | 5,262 | | |
$ | 4 | | |
$ | (28 | ) | |
$ | 5,238 | |
From five through ten years | |
| 4,929 | | |
| 122 | | |
| - | | |
| 5,051 | |
| |
| 10,191 | | |
| 126 | | |
| (28 | ) | |
| 10,289 | |
| |
| | | |
| | | |
| | | |
| | |
U.S. Government-sponsored and guaranteed mortgage-backed securities: | |
| | | |
| | | |
| | | |
| | |
Due in five through ten years | |
| 4,445 | | |
| 190 | | |
| - | | |
| 4,635 | |
After ten years | |
| 127,540 | | |
| 1,831 | | |
| (1,038 | ) | |
| 128,333 | |
| |
| 131,985 | | |
| 2,021 | | |
| (1,038 | ) | |
| 132,968 | |
| |
| | | |
| | | |
| | | |
| | |
Total held-to-maturity securities | |
$ | 142,176 | | |
$ | 2,147 | | |
$ | (1,066 | ) | |
$ | 143,257 | |
There were no sales of securities available-for-sale
during the years ended June 30, 2015 and June 30, 2014.
As of June 30, 2015 and 2014, the total carrying
value of securities pledged as collateral to secure public deposits, the Federal Reserve Bank discount window, borrowings, and
repurchase agreements was $124,343,000 and $116,525,000, respectively.
The aggregate fair value and unrealized losses
of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more
are as follows as of the dates indicated:
| |
Less than 12 Months | | |
12 Months or More | | |
Total | |
| |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | |
| |
Value | | |
Loss | | |
Value | | |
Loss | | |
Value | | |
Loss | |
| |
(In thousands) | |
June 30, 2015: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities | |
$ | - | | |
$ | - | | |
$ | 991 | | |
$ | 9 | | |
$ | 991 | | |
$ | 9 | |
Corporate bonds and other securities | |
| - | | |
| - | | |
| 5,204 | | |
| 795 | | |
| 5,204 | | |
| 795 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 2,430 | | |
| 1 | | |
| - | | |
| - | | |
| 2,430 | | |
| 1 | |
Total temporarily impaired available-for-sale securities | |
| 2,430 | | |
| 1 | | |
| 6,195 | | |
| 804 | | |
| 8,625 | | |
| 805 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities | |
| 2,251 | | |
| 4 | | |
| - | | |
| - | | |
| 2,251 | | |
| 4 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 46,247 | | |
| 261 | | |
| 12,630 | | |
| 327 | | |
| 58,877 | | |
| 588 | |
Total temporarily impaired held-to-maturity | |
| 48,498 | | |
| 265 | | |
| 12,630 | | |
| 327 | | |
| 61,128 | | |
| 592 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other-than-temporarily impaired debt securities: (1) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-agency mortgage-backed securities | |
| 563 | | |
| 6 | | |
| 3,001 | | |
| 355 | | |
| 3,564 | | |
| 361 | |
Total temporarily impaired and other-than- temporarily impaired securities | |
$ | 51,491 | | |
$ | 272 | | |
$ | 21,826 | | |
$ | 1,486 | | |
$ | 73,317 | | |
$ | 1,758 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
June 30, 2014: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Available-for-sale: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities | |
$ | - | | |
$ | - | | |
$ | 976 | | |
$ | 24 | | |
$ | 976 | | |
$ | 24 | |
Corporate bonds and other securities | |
| - | | |
| - | | |
| 5,163 | | |
| 836 | | |
| 5,163 | | |
| 836 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 2,370 | | |
| 1 | | |
| 3,931 | | |
| 43 | | |
| 6,301 | | |
| 44 | |
Total temporarily impaired available-for-sale securities | |
| 2,370 | | |
| 1 | | |
| 10,070 | | |
| 903 | | |
| 12,440 | | |
| 904 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Held-to-maturity: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Government and government-sponsored securities | |
| 1,004 | | |
| 1 | | |
| 3,229 | | |
| 27 | | |
| 4,233 | | |
| 28 | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 31,059 | | |
| 103 | | |
| 46,612 | | |
| 935 | | |
| 77,671 | | |
| 1,038 | |
Total temporarily impaired held-to-maturity | |
| 32,063 | | |
| 104 | | |
| 49,841 | | |
| 962 | | |
| 81,904 | | |
| 1,066 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other-than-temporarily impaired debt securities: (1) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-agency mortgage-backed securities | |
| - | | |
| - | | |
| 3,301 | | |
| 382 | | |
| 3,301 | | |
| 382 | |
Total temporarily impaired and other-than- temporarily impaired securities | |
$ | 34,433 | | |
$ | 105 | | |
$ | 63,212 | | |
$ | 2,247 | | |
$ | 97,645 | | |
$ | 2,352 | |
| (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. |
At June 30, 2015, 31 U.S. government-sponsored
and guaranteed securities have unrealized losses with aggregate depreciation of 0.9% from the Company’s amortized cost basis.
The unrealized losses 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 June 30, 2015.
At June 30, 2015, 5 corporate bonds and other
securities have unrealized losses with aggregate depreciation of 13.3% from the Company’s amortized cost basis. These unrealized
losses relate to investments in single issuer trust preferred securities (“TRUPS”) issued by companies within the financial
services sector. Single issuer TRUPs are not considered covered funds under the Volker rule. The single-issuer trust preferred
investments are evaluated for other-than-temporary impairment by performing a present value of cash flows 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.
For the year ended June 30, 2015, securities
with other-than-temporary impairment losses related to credit loss that were recognized in earnings consisted of non-agency mortgage-backed
securities. For these debt securities, the Company estimated the portion of loss attributable to credit loss using a discounted
cash flow model. Significant inputs included 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 was compared to the Company’s amortized cost basis to determine the 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.
For those debt securities for which the fair
value of the security is less than its amortized cost and the Company does not intend to sell such security and it is more likely
than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any credit losses,
the credit component of the other-than-temporary impairment losses is recognized in earnings while the non-credit component is
recognized in other comprehensive income/loss, net of related taxes.
Activity related to the credit component recognized
in earnings on debt securities held by the Company for which a portion of other-than-temporary impairment was recognized in accumulated
other comprehensive loss for the years ended June 30, 2015 and 2014 is as follows (in thousands):
Balance as of June 30, 2013 | |
$ | 15,733 | |
| |
| | |
Credit losses on securities for which other-than-temporary impairment was not previously recorded | |
| - | |
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded | |
| 10 | |
Reductions for securities sold during the period | |
| - | |
| |
| | |
Balance as of June 30, 2014 | |
| 15,743 | |
| |
| | |
Credit losses on securities for which other-than-temporary impairment was not previously recorded | |
| - | |
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded | |
| 155 | |
Reductions for securities sold during the period | |
| - | |
Balance as of June 30, 2015 | |
$ | 15,898 | |
Significant assumptions used in the valuation
of non-agency mortgage-backed securities were as follows as of June 30, 2015:
| |
Weighted | | |
Range | |
| |
Average | | |
Minimum | | |
Maximum | |
| |
| | |
| | |
| |
Prepayment rates | |
| 13.7 | % | |
| 0.1 | % | |
| 20.8 | % |
Default rates | |
| 4.4 | % | |
| 0.0 | % | |
| 24.0 | % |
Loss severity | |
| 33.6 | % | |
| 0.0 | % | |
| 68.8 | % |
4. LOANS
Loans consisted of the following as of June
30:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
Real estate: | |
| | | |
| | |
Residential (1) | |
$ | 178,989 | | |
$ | 184,380 | |
Commercial | |
| 41,762 | | |
| 43,887 | |
Residential construction | |
| 1,318 | | |
| 2,661 | |
Commercial | |
| 3,327 | | |
| 1,904 | |
Consumer and other | |
| 701 | | |
| 627 | |
| |
| | | |
| | |
Total loans | |
| 226,097 | | |
| 233,459 | |
| |
| | | |
| | |
Unadvanced construction loans | |
| (680 | ) | |
| (1,658 | ) |
| |
| 225,417 | | |
| 231,801 | |
| |
| | | |
| | |
Net deferred loan costs | |
| 804 | | |
| 705 | |
Allowance for loan losses | |
| (2,175 | ) | |
| (2,380 | ) |
Loans, net | |
$ | 224,046 | | |
$ | 230,126 | |
(1) Residential real estate loans include one-to-four family
mortgage loans, second mortgage loans, and home equity lines of credit.
During the year ended June 30, 2015, the Company purchased commercial
loans aggregating $1,209,000. No loans were purchased during the year ended June 30, 2014.
The following tables set forth information
regarding the allowance for loan losses and loans by portfolio segment at and for the years ended June 30, 2015 and 2014:
| |
Residential | | |
Commercial | | |
Residential | | |
| | |
Consumer | | |
| | |
| |
| |
Real Estate | | |
Real Estate | | |
Construction | | |
Commercial | | |
and Other | | |
Unallocated | | |
Total | |
| |
(In thousands) | |
Year Ended June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 1,279 | | |
$ | 907 | | |
$ | 13 | | |
$ | 12 | | |
$ | 24 | | |
$ | 145 | | |
$ | 2,380 | |
Charge-offs | |
| (98 | ) | |
| (879 | ) | |
| - | | |
| - | | |
| (44 | ) | |
| - | | |
| (1,021 | ) |
Recoveries | |
| 45 | | |
| 211 | | |
| - | | |
| 12 | | |
| 13 | | |
| - | | |
| 281 | |
Provision (credit) | |
| (135 | ) | |
| 667 | | |
| (8 | ) | |
| 17 | | |
| 33 | | |
| (39 | ) | |
| 535 | |
Ending balance | |
$ | 1,091 | | |
$ | 906 | | |
$ | 5 | | |
$ | 41 | | |
$ | 26 | | |
$ | 106 | | |
$ | 2,175 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: Amount of allowance for loan losses for impaired loans | |
$ | 103 | | |
$ | - | | |
$ | - | | |
$ | 17 | | |
$ | - | | |
$ | - | | |
$ | 120 | |
Ending balance: Amount of allowance for loan losses for non-impaired loans | |
$ | 988 | | |
$ | 906 | | |
$ | 5 | | |
$ | 24 | | |
$ | 26 | | |
$ | 106 | | |
$ | 2,055 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: Ending balance | |
$ | 178,989 | | |
$ | 41,637 | | |
$ | 763 | | |
$ | 3,327 | | |
$ | 701 | | |
$ | - | | |
$ | 225,417 | (1) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: Impaired loans | |
$ | 2,413 | | |
$ | 4,138 | | |
$ | - | | |
$ | 24 | | |
$ | - | | |
$ | - | | |
$ | 6,575 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: Non-impaired loans | |
$ | 176,576 | | |
$ | 37,499 | | |
$ | 763 | | |
$ | 3,303 | | |
$ | 701 | | |
$ | - | | |
$ | 218,842 | |
(1) Does not include deferred fees or costs.
| |
Residential | | |
Commercial | | |
Residential | | |
| | |
Consumer | | |
| | |
| |
| |
Real Estate | | |
Real Estate | | |
Construction | | |
Commercial | | |
and Other | | |
Unallocated | | |
Total | |
| |
(In thousands) | |
Year Ended June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 1,201 | | |
$ | 1,315 | | |
$ | 22 | | |
$ | 17 | | |
$ | 36 | | |
$ | 102 | | |
$ | 2,693 | |
Charge-offs | |
| (200 | ) | |
| (199 | ) | |
| - | | |
| - | | |
| (52 | ) | |
| - | | |
| (451 | ) |
Recoveries | |
| 37 | | |
| - | | |
| 5 | | |
| 14 | | |
| 27 | | |
| - | | |
| 83 | |
Provision (credit) | |
| 241 | | |
| (209 | ) | |
| (14 | ) | |
| (19 | ) | |
| 13 | | |
| 43 | | |
| 55 | |
Ending balance | |
$ | 1,279 | | |
$ | 907 | | |
$ | 13 | | |
$ | 12 | | |
$ | 24 | | |
$ | 145 | | |
$ | 2,380 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: Amount of allowance for loan losses for impaired loans | |
$ | 104 | | |
$ | 104 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 208 | |
Ending balance: Amount of allowance for loan losses for non-impaired loans | |
$ | 1,175 | | |
$ | 803 | | |
$ | 13 | | |
$ | 12 | | |
$ | 24 | | |
$ | 145 | | |
$ | 2,172 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: Ending balance | |
$ | 184,380 | | |
$ | 43,315 | | |
$ | 1,575 | | |
$ | 1,904 | | |
$ | 627 | | |
$ | - | | |
$ | 231,801 | (1) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: Impaired loans | |
$ | 3,752 | | |
$ | 4,387 | | |
$ | - | | |
$ | 397 | | |
$ | - | | |
$ | - | | |
$ | 8,536 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending balance: Non-impaired loans | |
$ | 180,628 | | |
$ | 38,928 | | |
$ | 1,575 | | |
$ | 1,507 | | |
$ | 627 | | |
$ | - | | |
$ | 223,265 | |
(1) Does not include deferred fees or costs.
Credit Quality Information
The Company utilizes a nine grade internal
loan rating risk 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.
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, residential 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 customers.
The following tables present the Company’s
loans by risk rating as of June 30, 2015 and 2014:
| |
Residential | | |
Commercial | | |
Residential | | |
| | |
Consumer | | |
| |
| |
Real Estate | | |
Real Estate | | |
Construction | | |
Commercial | | |
and Other | | |
Total | |
| |
(In thousands) | |
June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Grade: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 175,677 | | |
$ | 34,052 | | |
$ | 763 | | |
$ | 3,246 | | |
$ | 700 | | |
$ | 214,438 | |
Special Mention | |
| 442 | | |
| 2,159 | | |
| - | | |
| - | | |
| - | | |
| 2,601 | |
Substandard | |
| 2,870 | | |
| 3,716 | | |
| - | | |
| 81 | | |
| 1 | | |
| 6,668 | |
Doubtful | |
| - | | |
| 1,710 | | |
| - | | |
| - | | |
| - | | |
| 1,710 | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 178,989 | | |
$ | 41,637 | | |
$ | 763 | | |
$ | 3,327 | | |
$ | 701 | | |
$ | 225,417 | |
| |
Residential | | |
Commercial | | |
Residential | | |
| | |
Consumer | | |
| |
| |
Real Estate | | |
Real Estate | | |
Construction | | |
Commercial | | |
and Other | | |
Total | |
| |
(In thousands) | |
June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Grade: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 180,080 | | |
$ | 33,034 | | |
$ | 1,575 | | |
$ | 1,459 | | |
$ | 627 | | |
$ | 216,775 | |
Special Mention | |
| 175 | | |
| 2,065 | | |
| - | | |
| - | | |
| - | | |
| 2,240 | |
Substandard | |
| 4,125 | | |
| 6,553 | | |
| - | | |
| 445 | | |
| - | | |
| 11,123 | |
Doubtful | |
| - | | |
| 1,663 | | |
| - | | |
| - | | |
| - | | |
| 1,663 | |
Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 184,380 | | |
$ | 43,315 | | |
$ | 1,575 | | |
$ | 1,904 | | |
$ | 627 | | |
$ | 231,801 | |
The following is a summary of past due
and non-accrual loans at June 30, 2015 and 2014:
| |
| | |
| | |
90 days | | |
| | |
| |
| |
30–59 Days | | |
60–89 Days | | |
or Greater | | |
Total | | |
Total | |
| |
Past Due | | |
Past Due | | |
Past Due | | |
Past Due | | |
Non-accrual | |
| |
(In thousands) | |
2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 290 | | |
$ | 193 | | |
$ | 755 | | |
$ | 1,238 | | |
$ | 2,731 | |
Commercial | |
| - | | |
| - | | |
| 2,316 | | |
| 2,316 | | |
| 2,886 | |
Commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| 22 | |
Consumer and other | |
| 4 | | |
| - | | |
| - | | |
| 4 | | |
| 1 | |
Total | |
$ | 294 | | |
$ | 193 | | |
$ | 3,071 | | |
$ | 3,558 | | |
$ | 5,640 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 357 | | |
$ | 571 | | |
$ | 1,497 | | |
$ | 2,425 | | |
$ | 3,977 | |
Commercial | |
| - | | |
| 383 | | |
| 2,208 | | |
| 2,591 | | |
| 3,051 | |
Commercial | |
| - | | |
| - | | |
| - | | |
| - | | |
| 28 | |
Consumer and other | |
| 6 | | |
| - | | |
| - | | |
| 6 | | |
| - | |
Total | |
$ | 363 | | |
$ | 954 | | |
$ | 3,705 | | |
$ | 5,022 | | |
$ | 7,056 | |
At June 30, 2015 and 2014, there were no
loans greater than 90 days past due and still accruing interest.
The following is information pertaining
to impaired loans:
| |
At June 30, 2015 | | |
Year Ended June 30,
2015 | |
| |
| | |
| | |
| | |
| | |
| | |
Interest | |
| |
| | |
Unpaid | | |
| | |
Average | | |
Interest | | |
Income | |
| |
Recorded | | |
Principal | | |
Related | | |
Recorded | | |
Income | | |
Recognized | |
| |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Recognized | | |
on Cash Basis | |
| |
(In thousands) | |
Impaired loans without a valuation allowance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 868 | | |
$ | 873 | | |
| | | |
$ | 1,534 | | |
$ | 29 | | |
$ | - | |
Commercial | |
| 4,138 | | |
| 4,678 | | |
| | | |
| 4,378 | | |
| 81 | | |
| - | |
Commercial | |
| 2 | | |
| 2 | | |
| | | |
| 276 | | |
| 21 | | |
| - | |
Total | |
$ | 5,008 | | |
$ | 5,553 | | |
| | | |
$ | 6,188 | | |
$ | 131 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans with a valuation allowance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 1,545 | | |
$ | 1,619 | | |
$ | 103 | | |
$ | 1,575 | | |
$ | 16 | | |
$ | 1 | |
Commercial | |
| 22 | | |
| 22 | | |
| 17 | | |
| 25 | | |
| - | | |
| - | |
Total | |
$ | 1,567 | | |
$ | 1,641 | | |
$ | 120 | | |
$ | 1,600 | | |
$ | 16 | | |
$ | 1 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total impaired loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 2,413 | | |
$ | 2,492 | | |
$ | 103 | | |
$ | 3,109 | | |
$ | 45 | | |
$ | 1 | |
Commercial | |
| 4,138 | | |
| 4,678 | | |
| - | | |
| 4,378 | | |
| 81 | | |
| - | |
Commercial | |
| 24 | | |
| 24 | | |
| 17 | | |
| 301 | | |
| 21 | | |
| - | |
Total | |
$ | 6,575 | | |
$ | 7,194 | | |
$ | 120 | | |
$ | 7,788 | | |
$ | 147 | | |
$ | 1 | |
| |
At June 30, 2014 | | |
Year Ended June 30,
2014 | |
| |
| | |
| | |
| | |
| | |
| | |
Interest | |
| |
| | |
Unpaid | | |
| | |
Average | | |
Interest | | |
Income | |
| |
Recorded | | |
Principal | | |
Related | | |
Recorded | | |
Income | | |
Recognized | |
| |
Investment | | |
Balance | | |
Allowance | | |
Investment | | |
Recognized | | |
on Cash Basis | |
| |
(In thousands) | |
Impaired loans without a valuation allowance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 2,101 | | |
$ | 2,229 | | |
| | | |
$ | 1,909 | | |
$ | 25 | | |
$ | 6 | |
Commercial | |
| 3,646 | | |
| 4,122 | | |
| | | |
| 3,054 | | |
| 44 | | |
| 38 | |
Commercial | |
| 397 | | |
| 397 | | |
| | | |
| 85 | | |
| - | | |
| - | |
Consumer and other | |
| - | | |
| - | | |
| | | |
| 7 | | |
| 1 | | |
| - | |
Total | |
$ | 6,144 | | |
$ | 6,748 | | |
| | | |
$ | 5,055 | | |
$ | 70 | | |
$ | 44 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans with a valuation allowance: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 1,651 | | |
$ | 1,711 | | |
$ | 104 | | |
$ | 1,682 | | |
$ | 34 | | |
$ | 9 | |
Commercial | |
| 741 | | |
| 804 | | |
| 104 | | |
| 532 | | |
| 2 | | |
| 2 | |
Total | |
$ | 2,392 | | |
$ | 2,515 | | |
$ | 208 | | |
$ | 2,214 | | |
$ | 36 | | |
$ | 11 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total impaired loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 3,752 | | |
$ | 3,940 | | |
$ | 104 | | |
$ | 3,591 | | |
$ | 59 | | |
$ | 15 | |
Commercial | |
| 4,387 | | |
| 4,926 | | |
| 104 | | |
| 3,586 | | |
| 46 | | |
| 40 | |
Commercial | |
| 397 | | |
| 397 | | |
| - | | |
| 85 | | |
| - | | |
| - | |
Consumer and other | |
| - | | |
| - | | |
| - | | |
| 7 | | |
| 1 | | |
| - | |
Total | |
$ | 8,536 | | |
$ | 9,263 | | |
$ | 208 | | |
$ | 7,269 | | |
$ | 106 | | |
$ | 55 | |
The following table represents modifications
that were deemed to be troubled debt restructures during the years ended June 30, 2015 and 2014:
| |
| | |
Pre-Modification | | |
Post-Modification | |
| |
| | |
Outstanding | | |
Outstanding | |
| |
Number of | | |
Recorded | | |
Recorded | |
| |
Contracts | | |
Investment | | |
Investment | |
| |
(Dollars in thousands) | |
Year ended June 30, 2015: | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | |
Residential | |
| 5 | | |
$ | 709 | | |
$ | 741 | |
| |
| | | |
| | | |
| | |
Year ended June 30, 2014: | |
| | | |
| | | |
| | |
Real estate: | |
| | | |
| | | |
| | |
Residential | |
| 1 | | |
$ | 38 | | |
$ | 39 | |
Commercial | |
| 1 | | |
| 198 | | |
| 210 | |
In 2015, three of the residential loans
were modified to reduce the stated interest rate and one residential loan was combined with a second mortgage into a new thirty
year adjustable rate loan. In 2014, the residential loan was modified to capitalize the escrow and to extend the maturity date
and change the amortization schedule. The commercial loan matured and additional funds were made available to complete the infrastructure
with a new maturity date. Management performs a discounted cash flow calculation to determine the amount of impaired reserve required
on each of the troubled debt restructures. Any reserve is recorded through the provision for loan losses.
The following is a summary of troubled
debt restructurings that have subsequently defaulted (30 or more days past due) within one year of modification during the years
ended June 30, 2015 and 2014:
| |
Number of | | |
Recorded | |
| |
Contracts | | |
Investment | |
| |
(Dollars in thousands) | |
Year ended June 30, 2015: | |
| | | |
| | |
Real estate: | |
| | | |
| | |
Residential | |
| 1 | | |
$ | 181 | |
Commercial | |
| 1 | | |
| 207 | |
| |
| | | |
| | |
| |
| | | |
| | |
Year ended June 30, 2014: | |
| | | |
| | |
Real estate: | |
| | | |
| | |
Residential | |
| 1 | | |
$ | 201 | |
The defaults were the result of the borrower’s
delinquent loan payments. As of June 30, 2015, the residential loan was not past due and the commercial real estate loan was more
than 90 days past and on non-accrual. As of June 30, 2014, the residential loan was not past due.
At June 30, 2015, no additional funds are
committed to be advanced in connection with TDR’s.
Loans serviced for others are not included
in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others
were $31,697,000 and $32,447,000 at June 30, 2015 and 2014, respectively. The balances of mortgage servicing rights related to
loans serviced for others were $107,000 and $94,000 at June 30, 2015 and 2014, respectively, and are not material to the consolidated
financial statements.
5. PREMISES AND EQUIPMENT
The following is a summary of premises
and equipment as of June 30:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
| |
| | |
| |
Land | |
$ | 470 | | |
$ | 470 | |
Buildings and leasehold improvements | |
| 6,291 | | |
| 6,283 | |
Equipment | |
| 2,658 | | |
| 2,772 | |
| |
| 9,419 | | |
| 9,525 | |
Accumulated depreciation and amortization | |
| (5,656 | ) | |
| (5,488 | ) |
| |
| | | |
| | |
Premises and equipment, net | |
$ | 3,763 | | |
$ | 4,037 | |
Depreciation and amortization expense on
premises and equipment amounted to $341,000 and $334,000 for the years ended June 30, 2015 and 2014, respectively.
6. DEPOSITS
The balances of deposit accounts at June
30, were as follows:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
Demand deposits | |
$ | 59,854 | | |
$ | 53,021 | |
NOW accounts | |
| 92,463 | | |
| 86,636 | |
Regular savings | |
| 68,804 | | |
| 63,993 | |
Money market accounts | |
| 17,238 | | |
| 18,047 | |
Club accounts | |
| 259 | | |
| 260 | |
| |
| 238,618 | | |
| 221,957 | |
| |
| | | |
| | |
Certificate accounts maturing in the years ending June 30: | |
| | | |
| | |
2015 | |
| - | | |
| 59,532 | |
2016 | |
| 53,966 | | |
| 21,101 | |
2017 | |
| 23,488 | | |
| 21,030 | |
2018 | |
| 14,139 | | |
| 8,329 | |
2019 | |
| 15,816 | | |
| 15,307 | |
2020 | |
| 11,614 | | |
| - | |
| |
| 119,023 | | |
| 125,299 | |
| |
| | | |
| | |
Total deposits | |
$ | 357,641 | | |
$ | 347,256 | |
The aggregate amount of time deposits of
$100,000 or more as of June 30, 2015 and 2014 was $58,470,000 and $61,244,000, respectively.
7. BORROWED FUNDS
Borrowed funds consisted of the following
at June 30:
| |
2015 | | |
2014 | |
| |
| | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Average | | |
| | |
Average | |
| |
Amount Due | | |
Rate | | |
Amount Due | | |
Rate | |
| |
(Dollars in thousands) | |
Short-term borrowings: | |
| | | |
| | | |
| | | |
| | |
Securities sold under agreements to repurchase | |
$ | 2,797 | | |
| 0.10 | % | |
$ | 4,181 | | |
| 0.18 | % |
FHLB of Boston (FHLB) advances | |
| 4,240 | | |
| 0.30 | | |
| - | | |
| - | |
Total | |
| 7,037 | | |
| 0.22 | | |
| 4,181 | | |
| 0.18 | |
| |
| | | |
| | | |
| | | |
| | |
Long-term FHLB of Boston advances | |
| | | |
| | | |
| | | |
| | |
Year of maturity: | |
| | | |
| | | |
| | | |
| | |
2015 | |
| - | | |
| - | | |
| 1,000 | | |
| 3.35 | |
2016 | |
| - | | |
| - | | |
| 10,000 | | |
| 3.17 | |
2017* | |
| 14,500 | | |
| 3.42 | | |
| 14,500 | | |
| 3.42 | |
2018* | |
| 33,000 | | |
| 2.30 | | |
| 28,000 | | |
| 2.34 | |
2020 | |
| 5,000 | | |
| 2.32 | | |
| - | | |
| - | |
Total | |
| 52,500 | | |
| 2.61 | | |
| 53,500 | | |
| 2.81 | |
Total borrowed funds | |
$ | 59,537 | | |
| 2.33 | % | |
$ | 57,681 | | |
| 2.60 | % |
*Includes
$18,000,000 of advances callable by the FHLB of Boston in 2016.
Short term FHLB advances have an original
maturity of less than one year. As of June 30, 2015 and 2014, loans with a principal balance of $38,163,000 and $47,106,000, respectively,
were specifically pledged to secure available borrowings from the FHLB, as well as certain investment securities as disclosed in
Note 3.
During the year ended June 30, 2015, the
Company modified $10,000,000 in FHLB borrowings resulting in capitalized fees of $246,000. These fees were capitalized in the form
of higher interest rates on the new borrowings and are adjusting the cost of funds on these borrowings monthly.
Additionally, the Bank has a line of credit
with Federal Home Loan Bank of Boston in the amount of $2,354,000 and a liquidity line of credit with Bankers Bank Northeast in
the amount of $4,000,000. No amounts were outstanding on these lines of credit at June 30, 2015 and 2014.
Securities sold under agreements to repurchase
as of June 30, 2015 and 2014 have an original maturity of one day, and consist of securities sold by the Bank that have been accounted
for as borrowings. These customer repurchase agreements are collateralized by U.S. government sponsored and guaranteed mortgage
backed securities with fair value of $21,683,000 and $17,402,000 at June 30, 2015 and 2014, respectively. The securities collateralizing
repurchase agreements are subject to fluctuations in fair value. We monitor the fair value of the collateral on a periodic basis,
and would pledge additional collateral if necessary based on changes in fair value of collateral or the balances of the repurchase
agreements.
8. INCOME TAXES
The following are components of income
tax expense (benefit) for the fiscal years ended June 30:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
Current: | |
| | | |
| | |
Federal | |
$ | - | | |
$ | 57 | |
State | |
| 1 | | |
| 1 | |
Total current | |
| 1 | | |
| 58 | |
Deferred: | |
| | | |
| | |
Federal | |
| (66 | ) | |
| 94 | |
State | |
| - | | |
| - | |
Total deferred | |
| (66 | ) | |
| 94 | |
| |
| | | |
| | |
Income tax (benefit) expense | |
$ | (65 | ) | |
$ | 152 | |
Deferred income taxes reflect the tax impact
of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts
as measured by tax laws and regulations.
The Bank established Putnam Bank Mortgage
Servicing Company during the year ended June 30, 2007. The subsidiary qualifies and operates as a Connecticut passive investment
company pursuant to legislation. Because the subsidiary earns sufficient income from passive investments and its dividends to the
parent are exempt from Connecticut Corporation Business Tax, the subsidiary Bank no longer expects to incur Connecticut income
tax expense or to recognize its Connecticut deferred tax asset. The Parent company is still subject to the Connecticut Corporation
Business Tax.
The reasons for the differences between
the statutory federal income tax rate of 34% and the effective tax rates are summarized as follows for the years ended June 30:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
| |
| | |
| |
Federal income tax at statutory rates | |
$ | 165 | | |
$ | 393 | |
Increase (decrease) in tax resulting from: | |
| | | |
| | |
State taxes, net of federal benefit | |
| 1 | | |
| 1 | |
Dividends received deduction | |
| (110 | ) | |
| (111 | ) |
Bank-owned life insurance | |
| (94 | ) | |
| (99 | ) |
Tax-exempt municipal income, net | |
| (1 | ) | |
| (1 | ) |
Other, net | |
| (26 | ) | |
| (31 | ) |
Income tax (benefit) expense | |
$ | (65 | ) | |
$ | 152 | |
Effective tax rates | |
| -13.4 | % | |
| 13.2 | % |
The Company had gross deferred tax assets
and gross deferred tax liabilities as follows as of June 30:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
Deferred tax assets: | |
| | | |
| | |
Allowance for loan losses | |
$ | 739 | | |
$ | 668 | |
Net unrealized holding loss on available-for-sale securities | |
| 102 | | |
| 125 | |
Deferred compensation | |
| 172 | | |
| 167 | |
Stock-based compensation | |
| 76 | | |
| 78 | |
Impairment losses on securities available-for-sale | |
| 859 | | |
| 859 | |
Accrued expenses | |
| 147 | | |
| 177 | |
Post retirement benefits | |
| 62 | | |
| 59 | |
Interest receivable on non-accrual loans | |
| 86 | | |
| 64 | |
Federal carryovers | |
| 1,989 | | |
| 1,818 | |
Other | |
| 117 | | |
| 98 | |
Gross deferred tax asset | |
| 4,349 | | |
| 4,113 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Depreciation and amortization | |
| (1,336 | ) | |
| (1,181 | ) |
Deferred loan costs | |
| (273 | ) | |
| (239 | ) |
Other | |
| (36 | ) | |
| (32 | ) |
Gross deferred tax liability | |
| (1,645 | ) | |
| (1,452 | ) |
Net deferred tax asset | |
$ | 2,704 | | |
$ | 2,661 | |
At June 30, 2015, federal carryovers consist
of Alternative Minimum Tax credit carryovers of $1,196,000 which have no expiration date, $2,231,000 of net operating loss carryovers
which begin to expire on June 30, 2032 and $103,000 of contribution carryovers which expire on June 30, 2017.
Retained earnings at June 30, 2015 includes
a contingency reserve for loan losses of $2,284,000 which represents the tax reserve balance existing at December 31, 1987 and
is maintained in accordance with provisions of the Internal Revenue Code applicable to thrift institutions. It is not anticipated
that the Company will incur a federal income tax liability related to the reduction of this reserve and accordingly, deferred income
taxes of approximately $777,000 have not been recognized as of June 30, 2015 and 2014.
It is the Company’s policy to provide
for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit
is more likely than not to be sustained upon examination by tax authorities. As of June 30, 2015 and 2014, there were no material
uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under statute of
limitations by the Internal Revenue Service and state taxing authorities for the years ended June 30, 2012 through June 30,
2015. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the
years ended June 30, 2015 and 2014.
9. OTHER COMMITMENTS AND CONTINGENT
LIABILITIES
Lease Commitments
As of June 30, 2015 the Company leases
space for its Gales Ferry (land lease), Griswold and Putnam Price Chopper branch offices. The leases for the branch offices expire
March 14, 2020, October 31, 2019 and August 31, 2016, respectively. All leases contain renewal options at the Company’s
discretion. The Company also has miscellaneous equipment leases with various terms. The total minimum rental due in future periods
under these existing agreements is as follows as of June 30, 2015:
| |
Rental | |
| |
Expense Due | |
| |
(In thousands) | |
| |
| |
2016 | |
$ | 154 | |
2017 | |
| 111 | |
2018 | |
| 101 | |
2019 | |
| 100 | |
2020 | |
| 47 | |
Total | |
$ | 513 | |
Total rental expense amounted to $174,000
and $151,000 for the years ended June 30, 2015 and 2014, respectively.
Legal Contingencies
Various legal claims also arise from time
to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s
consolidated financial statements.
10. FAIR VALUE MEASURMENTS
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.
Level 1 – Valuation is based on quoted
prices in active markets for identical assets. Valuations are obtained from readily available pricing sources for market transactions
involving identical assets.
Level 2 – Valuation is based on observable
inputs other than Level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 – Valuation is based on unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets
include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment
or estimation.
A financial instrument’s level within
the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. During the years
ended June 30, 2015 and 2014, there were no transfers between Level 1 and Level 2 of the fair value hierarchy.
Assets Measured at Fair Value on
a Recurring Basis
The following summarizes assets measured
at fair value on a recurring basis for the years ended:
| |
Fair Value Measurements at
Reporting Date Using: | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| |
(In thousands) | |
June 30, 2015 | |
| | | |
| | | |
| | | |
| | |
Securities available-for-sale: | |
| | | |
| | | |
| | | |
| | |
U. S. Government and government-sponsored securities | |
$ | 991 | | |
$ | - | | |
$ | 991 | | |
$ | - | |
Corporate bonds and other securities | |
| 5,204 | | |
| - | | |
| 5,204 | | |
| - | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 23,602 | | |
| - | | |
| 23,602 | | |
| - | |
Non-agency mortgage-backed securities | |
| 5,860 | | |
| - | | |
| 5,860 | | |
| - | |
Equity securities | |
| 10,000 | | |
| - | | |
| - | | |
| 10,000 | |
Total | |
$ | 45,657 | | |
$ | - | | |
$ | 35,657 | | |
$ | 10,000 | |
| |
| | | |
| | | |
| | | |
| | |
June 30, 2014 | |
| | | |
| | | |
| | | |
| | |
Securities available-for-sale: | |
| | | |
| | | |
| | | |
| | |
U. S. Government and government-sponsored securities | |
$ | 976 | | |
$ | - | | |
$ | 976 | | |
$ | - | |
Corporate bonds and other securities | |
| 5,163 | | |
| - | | |
| 5,163 | | |
| - | |
U.S. Government-sponsored and guaranteed mortgage-backed securities | |
| 25,262 | | |
| - | | |
| 25,262 | | |
| - | |
Non-agency mortgage-backed securities | |
| 6,680 | | |
| - | | |
| 6,680 | | |
| - | |
Equity securities | |
| 10,000 | | |
| - | | |
| - | | |
| 10,000 | |
Total | |
$ | 48,081 | | |
$ | - | | |
$ | 38,081 | | |
$ | 10,000 | |
At June 30, 2015 and 2014, Level 3 assets
consisted of available-for-sale auction-rate trust preferred securities (ARPs). Auction-rate trust preferred securities are a floating
rate preferred stock, on which the dividend rate generally resets every 90 days based on an auction process to reflect the yield
demand for the instruments by potential purchasers. These securities were originally purchased by the Company because they represented
highly liquid, tax-preferred investments secured, in most cases, by preferred stock issued by high quality, investment grade companies
(generally other financial institutions) (“collateral preferred shares”). The ARP shares, or certificates, purchased
by the Company are Class A certificates, which, among other rights, entitle the holder to priority claim on dividends paid into
the Trust holding the preferred shares.
Beginning in February 2008, auctions for
these securities began to fail when investors declined to bid on the securities. The auction failures did not result in the loss
of any principal value to the certificate holders, but prevented many sellers from exiting, or redeeming, their certificates at
the reset date. These unsuccessful sellers were required to continue to hold the certificates until the next scheduled reset date.
To compensate these unsuccessful sellers, the failed auctions triggered a penalty-rate feature which provided that owners of the
Class A certificates were entitled to a higher portion of the dividends, and thus a higher yield, on the Class A certificates.
The Company had difficulty identifying
market prices of comparable instruments for ARPs due to the inactive market. As a result, the Company modified its methodology
for determining the fair value of the ARPs classified as Level 3, and used the quoted market values of the underlying collateral
preferred shares, adjusted for the higher yield (dividend) earned by the Company through the Class A certificates compared with
the nominal rate (dividend) available to a direct owner of the collateral preferred shares, with the resulting estimated fair value
not to exceed par. 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 table below represent the changes in Level
3 assets measured at fair value on a recurring basis for the years ended June 30, 2015 and 2014:
| |
Auction Rate Trust | |
| |
Preferred Securities | |
| |
(In thousands) | |
| |
| |
Beginning balance, July 1, 2013 | |
$ | 10,000 | |
| |
| | |
Total gains or losses (realized/unrealized) included in earnings | |
| - | |
Total unrealized gains included in other comprehensive income | |
| - | |
| |
| | |
Ending balance, June 30, 2014 | |
| 10,000 | |
| |
| | |
Total gains or losses (realized/unrealized) included in earnings | |
| - | |
Total unrealized gains included in other comprehensive income | |
| - | |
| |
| | |
Ending balance, June 30, 2015 | |
$ | 10,000 | |
There were no liabilities measured at fair
value on a recurring basis at June 30, 2015 and 2014.
Assets Measured at Fair Value on a Non-Recurring
Basis
Under certain circumstances the Company makes
adjustments to fair value for assets not measured at fair value on a recurring basis. The following table presents the assets carried
on the consolidated balance sheets by caption and by level in the fair value hierarchy at June 30, 2015 and 2014, for which a nonrecurring
fair value adjustment has been recorded:
| |
| | |
| | |
| | |
| | |
Total Losses | |
| |
| | |
| | |
| | |
| | |
for the | |
| |
Fair Value Measurements
at Reporting Date Using: | | |
Year Ended | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
June 30, 2015 | |
| |
(In thousands) | |
June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans | |
$ | 151 | | |
$ | - | | |
$ | - | | |
$ | 151 | | |
$ | 22 | |
Other real estate owned | |
| 599 | | |
| | | |
| | | |
| 599 | | |
| 17 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
$ | 750 | | |
$ | - | | |
$ | - | | |
$ | 750 | | |
$ | 39 | |
| |
| | |
| | |
| | |
| | |
Total Losses | |
| |
| | |
| | |
| | |
| | |
for the | |
| |
Fair Value Measurements
at Reporting Date Using: | | |
Year Ended | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
June 30, 2014 | |
| |
(In thousands) | |
June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans | |
$ | 548 | | |
$ | - | | |
$ | - | | |
$ | 548 | | |
$ | 230 | |
Other real estate owned | |
| 869 | | |
| - | | |
| - | | |
| 869 | | |
| 189 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
$ | 1,417 | | |
$ | - | | |
$ | - | | |
$ | 1,417 | | |
$ | 419 | |
The amount of loans represents the carrying
value of impaired loans net of related write-downs and valuation allowances for which adjustments are based on the estimated fair
value of the underlying collateral. The other real estate owned amount 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 financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular
financial instrument. Because a market may not readily exist for a significant portion of the Company’s financial instruments,
fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision. Changes in assumption could significantly affect the
estimates.
There were no liabilities measured at fair
value on a non-recurring basis at June 30, 2015 and 2014.
The estimated fair values and carrying values
of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows as
of June 30:
| |
2015 | |
| |
Carrying Amount | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
| |
(In thousands) | |
Financial assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 5,326 | | |
$ | 5,326 | | |
$ | - | | |
$ | - | | |
$ | 5,326 | |
Available-for-sale securities | |
| 45,657 | | |
| - | | |
| 35,657 | | |
| 10,000 | | |
| 45,657 | |
Held-to-maturity securities | |
| 164,096 | | |
| - | | |
| 165,644 | | |
| - | | |
| 165,644 | |
Federal Home Loan Bank Stock | |
| 5,371 | | |
| - | | |
| - | | |
| 5,371 | | |
| 5,371 | |
Loans, net | |
| 224,046 | | |
| - | | |
| - | | |
| 226,308 | | |
| 226,308 | |
Accrued interest receivable | |
| 1,051 | | |
| - | | |
| - | | |
| 1,051 | | |
| 1,051 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 357,641 | | |
| - | | |
| - | | |
| 359,253 | | |
| 359,253 | |
Mortgagors’ escrow accounts | |
| 2,363 | | |
| - | | |
| - | | |
| 2,363 | | |
| 2,363 | |
Federal Home Loan Bank advances | |
| 56,740 | | |
| - | | |
| 58,095 | | |
| - | | |
| 58,095 | |
Securities sold under agreements to repurchase | |
| 2,797 | | |
| - | | |
| 2,797 | | |
| - | | |
| 2,797 | |
Accrued interest payable | |
| 114 | | |
| - | | |
| - | | |
| 114 | | |
| 114 | |
| |
2014 | |
| |
Carrying Amount | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
| |
(In thousands) | |
Financial assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 7,335 | | |
$ | 7,335 | | |
$ | - | | |
$ | - | | |
$ | 7,335 | |
Available-for-sale securities | |
| 48,081 | | |
| - | | |
| 38,081 | | |
| 10,000 | | |
| 48,081 | |
Held-to-maturity securities | |
| 142,176 | | |
| - | | |
| 143,257 | | |
| - | | |
| 143,257 | |
Federal Home Loan Bank Stock | |
| 5,927 | | |
| - | | |
| - | | |
| 5,927 | | |
| 5,927 | |
Loans held-for-sale | |
| 100 | | |
| - | | |
| - | | |
| 101 | | |
| 101 | |
Loans, net | |
| 230,126 | | |
| - | | |
| - | | |
| 231,986 | | |
| 231,986 | |
Accrued interest receivable | |
| 1,018 | | |
| - | | |
| - | | |
| 1,018 | | |
| 1,018 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 347,256 | | |
| - | | |
| - | | |
| 349,235 | | |
| 349,235 | |
Mortgagors’ escrow accounts | |
| 2,267 | | |
| - | | |
| - | | |
| 2,267 | | |
| 2,267 | |
Federal Home Loan Bank advances | |
| 53,500 | | |
| - | | |
| 55,196 | | |
| - | | |
| 55,196 | |
Securities sold under agreements to repurchase | |
| 4,181 | | |
| - | | |
| 4,181 | | |
| - | | |
| 4,181 | |
Accrued interest payable | |
| 124 | | |
| - | | |
| - | | |
| 124 | | |
| 124 | |
11. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
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 originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets. The contract amounts of
those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss
in the event of non-performance by the other party to the financial instrument for loan commitments is represented by the contractual
amounts of those instruments. The Company
uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements
to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates
each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include
secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s outstanding letters
of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through
the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take
possession of the collateral, if any, securing the line of credit.
Notional amounts of commitments with off-balance-sheet
credit risk are as follows as of June 30:
| |
2015 | | |
2014 | |
| |
(In thousands) | |
| |
| | |
| |
Commitments to originate loans | |
$ | 3,557 | | |
$ | 2,867 | |
Unadvanced portions of loans: | |
| | | |
| | |
Construction loans | |
| 787 | | |
| 1,658 | |
Lines of credit | |
| 13,482 | | |
| 12,217 | |
Letters of credit | |
| 396 | | |
| 488 | |
Outstanding commitments | |
$ | 18,222 | | |
$ | 17,230 | |
12. REGULATORY MATTERS
The Company, as a federally chartered holding
company, is not subject to capital requirements. The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1
and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier 1 capital to adjusted
total assets (as defined) and Tangible capital (as defined) to Tangible assets (as defined). Management believes, as of June 30,
2015 and 2014, that the Bank meets all capital adequacy requirements to which it is subject.
In July 2013, federal banking regulators approved
final rules that implement changes to the regulatory capital framework for U.S. banks. The rules set minimum requirements
for both the quantity and quality of capital held by community banking institutions. The final rule includes a new minimum
ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, raises the minimum ratio of Tier 1 capital to risk-weighted
assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. Additionally, community
banking institutions must contain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5%
of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to
executive officers. The phase-in period for the rules began for the Bank on January 1, 2015, with full compliance with
all of the final rule’s requirements phased in over a multi-year schedule.
As of June 30, 2015, the most recent notification
from the Office of the Comptroller of the Currency (“OCC”) categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier 1 risk-based, Common Equity Tier 1, tangible equity and Tier 1 capital ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the institution’s category.
The Bank’s actual capital amounts and
ratios as of June 30, 2015 and 2014 are presented in the table:
| |
Actual | | |
For Capital
Adequacy
Purposes | | |
To Be Well
Capitalized
Under
Prompt Corrective
Action Provisions | |
| |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
| |
(In thousands) | | |
| | |
| | |
| | |
| |
As of June 30, 2015: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tangible Equity Capital (to Tangible Assets) | |
$ | 41,201 | | |
| 8.70 | % | |
$ | 7,102 | | |
| 2.00 | % | |
| N/A | | |
| N/A | |
Tier 1 Capital (to Adjusted Total Assets) | |
| 41,201 | | |
| 8.70 | | |
| 18,938 | | |
| 4.00 | | |
$ | 23,672 | | |
| 5.00 | % |
Common Equity Tier 1 Capital (to Risk-Weighted Assets) | |
| 41,201 | | |
| 14.41 | | |
| 12,868 | | |
| 4.50 | | |
| 18,587 | | |
| 6.50 | |
Tier 1 Capital (to Risk-Weighted Assets) | |
| 41,201 | | |
| 14.41 | | |
| 17,157 | | |
| 6.00 | | |
| 22,876 | | |
| 8.00 | |
Total Capital (to Risk-Weighted Assets) | |
| 43,398 | | |
| 15.18 | | |
| 22,876 | | |
| 8.00 | | |
| 28,595 | | |
| 10.00 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As of June 30, 2014: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Tangible Equity Capital (to Tangible Assets) | |
$ | 40,093 | | |
| 8.87 | % | |
$ | 6,781 | | |
| 2.00 | % | |
| N/A | | |
| N/A | |
Tier 1 Capital (to Adjusted Total Assets) | |
| 40,093 | | |
| 8.87 | | |
| 18,083 | | |
| 4.00 | | |
$ | 22,604 | | |
| 5.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) | |
| 40,093 | | |
| 17.62 | | |
| 9,099 | | |
| 4.00 | | |
| 13,649 | | |
| 6.00 | |
Total Capital (to Risk-Weighted Assets) | |
| 42,494 | | |
| 18.68 | | |
| 18,199 | | |
| 8.00 | | |
| 22,749 | | |
| 10.00 | |
The following table provides a reconciliation
of the Company’s total consolidated equity to the capital amounts for the Bank reflected in the preceding table:
| |
June 30, | |
| |
2015 | | |
2014 | |
| |
(In thousands) | |
Total consolidated equity | |
$ | 51,744 | | |
$ | 51,451 | |
Adjustments: | |
| | | |
| | |
Equity capital of PSB Holdings, Inc. | |
| (3,672 | ) | |
| (4,052 | ) |
Intangible assets | |
| (5,390 | ) | |
| (5,791 | ) |
Disallowed servicing assets | |
| - | | |
| (9 | ) |
Disallowed deferred tax assets | |
| (1,675 | ) | |
| (1,731 | ) |
Unrealized losses on available-for-sale securities | |
| 194 | | |
| 225 | |
Tier 1 and Common Equity Tier 1 Capital | |
| 41,201 | | |
| 40,093 | |
Allowance for loan losses and off-balance sheet reserves | |
| 2,197 | | |
| 2,401 | |
Total Risk-Based capital | |
$ | 43,398 | | |
$ | 42,494 | |
The ability of the Company to pay dividends
depends, in part, on the ability of the Bank to pay dividends to the Company. The Bank will not be able to declare or pay a cash
dividend on, or repurchase any of its common stock, if the effect thereof would be to reduce the regulatory capital of the Bank
to an amount below amounts required under regulatory rules and regulations.
13. BENEFIT PLANS
401(k) Plan
The Company has a 401(k) plan covering each
eligible employee. Employees must be 21 years of age, work at least 1,000 hours per year, and have at least one year of service
with the Company to be eligible to participate. Employees may defer compensation up to certain limits defined in the Internal Revenue
Code. The Company’s
matching contribution is discretionary. For
the years ended June 30, 2015 and 2014, the Company chose to contribute 50% of an employee’s deferral on a maximum of 4%
of the employee’s salary. The Company contributed $78,000 and $65,000 to the plan during the years ended June 30, 2015 and
2014, respectively. The Company may also make additional discretionary contributions to the plan. During the years ended June 30,
2015 and 2014, additional discretionary contributions were made in the amounts of $177,000 and $147,000, respectively.
Other Postretirement Benefit Plan
The Company has recorded a liability for its
future postretirement benefit obligations under certain death benefit agreements. The total liability for the arrangements included
in other liabilities was $183,000 at June 30, 2015 and $172,000 at June 30, 2014. Expense under this arrangement was $11,000 for
2015 and $10,000 for 2014. There were no death benefits paid under this arrangement in 2015 and 2014.
Employee Stock Ownership Plan
The Company established the ESOP on October
4, 2004 in connection with its common stock offering. The ESOP purchased 257,062 shares of the common stock of the Company. To
fund the purchase, the ESOP borrowed $2.6 million from the Company at an initial variable rate of 4.75%, to be repaid on a pro-rata
basis in 20 substantially equal annual installments. The borrowing was at a current rate of 3.25% as of June 30, 2015 and 2014.
The collateral for the loan is the common stock of the Company purchased by the ESOP.
The shares of stock purchased by the ESOP are
held in a suspense account until they are released for allocation among participants. The shares will be released annually from
the suspense account and the released shares will be allocated to the participants on the basis of each participant’s compensation
for the year of allocation. As shares are released from collateral, the Company recognizes compensation expense equal to the average
market price of the shares during the period and the shares will be outstanding for earnings-per-share purposes. The shares not
released are reported as unearned ESOP shares in the stockholders’ equity section on the consolidated balance sheets. ESOP
expense for the years ended June 30, 2015 and 2014 was $96,000 and $81,000, respectively. At June 30, 2015 and 2014 there were
138,850 and 126,071 allocated shares, respectively, and 118,212 and 130,991 unallocated shares, respectively. The fair value of
unallocated ESOP shares at June 30, 2015 and 2014 was $958,000 and $880,000, respectively.
Stock-based Incentive Plan
At the annual meeting of stockholders on October
31, 2005, stockholders of the Company approved the PSB Holdings, Inc. 2005 Stock-Based Incentive Plan (the “Incentive Plan”).
Under the Incentive Plan, the Company may grant up to 340,213 stock options and 136,085 shares of restricted stock to its employees,
officers and directors for an aggregate amount of up to 476,298 shares of the Company’s common stock for issuance upon the
grant or exercise of awards. Both incentive stock options and non-statutory stock options may be granted under the Incentive Plan.
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 expenses related to unearned restricted shares are
amortized to compensation and benefits expense over the vesting period of the restricted stock awards. The fair value of each stock
option award is estimated on the date of grant using the Black-Scholes option pricing model which includes several assumptions
such as volatility, expected dividends, expected term and risk-free rate for each stock option award.
A summary of the status of the Incentive Plan
as of June 30, 2015 and 2014 and changes during the years then ended is presented below:
| |
2015 | | |
2014 | |
| |
| | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Average | | |
| | |
Average | |
| |
Number of | | |
Exercise | | |
Number of | | |
Exercise | |
| |
Shares | | |
Price | | |
Shares | | |
Price | |
| |
| | | |
| | | |
| | | |
| | |
Options outstanding at beginning of year | |
| 199,106 | | |
$ | 10.62 | | |
| 222,921 | | |
$ | 10.62 | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| (23,815 | ) | |
| 10.60 | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at end of year | |
| 199,106 | | |
| 10.62 | | |
| 199,106 | | |
| 10.62 | |
| |
| | | |
| | | |
| | | |
| | |
Options exercisable at end of year | |
| 199,106 | | |
$ | 10.62 | | |
| 199,106 | | |
$ | 10.62 | |
The following table summarizes information
about stock options outstanding as of June 30, 2015:
Options Outstanding | | |
Options Exercisable | |
| | |
| | |
Weighted-Average | | |
| | |
| | |
| |
Weighted-Average | | |
Number | | |
Remaining | | |
Aggregate | | |
Number | | |
Weighted-Average | |
Exercise Price | | |
Outstanding | | |
Contractual Life | | |
Intrinsic Value | | |
Exercisable | | |
Exercise Price | |
| | |
| | |
| | |
| | |
| | |
| |
$ | 10.60 | | |
| 170,106 | | |
| 0.36 | | |
$ | - | | |
| 170,106 | | |
$ | 10.60 | |
| 10.70 | | |
| 23,000 | | |
| 1.90 | | |
| - | | |
| 23,000 | | |
| 10.70 | |
| 10.78 | | |
| 6,000 | | |
| 0.94 | | |
| - | | |
| 6,000 | | |
| 10.78 | |
At June 30, 2015 and 2014, there were no unrecognized
compensation costs related to nonvested share based compensation. The Company recorded no share-based compensation expense for
the years ended June 30, 2015 and 2014 in connection with the stock option and restricted stock awards as all awards have fully
vested.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME/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 stockholders’ equity section of the consolidated balance sheets, such items, along
with net income, are components of comprehensive income/loss.
The components of accumulated other comprehensive
loss included in stockholders’ equity and related tax effects are as follows:
| |
At June 30, | |
| |
2015 | | |
2014 | |
| |
(In thousands) | |
Net unrealized loss on securities available-for-sale | |
$ | (300 | ) | |
$ | (362 | ) |
Tax effect | |
| 102 | | |
| 125 | |
Accumulated other comprehensive loss | |
$ | (198 | ) | |
$ | (237 | ) |
The June 30, 2015 and 2014 ending balances
include $53,000 and $60,000, respectively, of pre-tax unrealized losses on securities which other-than-temporary impairment has
been recognized.
PSB Holdings,
Inc. and Subsidiary
(Parent Company Only)
15. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following unconsolidated financial statements
are for the Company (Parent Company) and should be read in conjunction with the consolidated financial statements of the Company.
Balance Sheets
June 30, 2015 and 2014
(In thousands)
| |
2015 | | |
2014 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Cash and due from depository institutions | |
$ | 427 | | |
$ | 805 | |
Investment in Putnam Bank | |
| 48,072 | | |
| 47,399 | |
Investment in available-for-sale securities, at fair value | |
| 1,055 | | |
| 1,044 | |
Loan to ESOP | |
| 1,473 | | |
| 1,607 | |
Other assets | |
| 741 | | |
| 623 | |
Total assets | |
$ | 51,768 | | |
$ | 51,478 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Other liabilities | |
$ | 24 | | |
$ | 27 | |
Stockholders’ equity | |
| 51,744 | | |
| 51,451 | |
Total liabilities and stockholders’ equity | |
$ | 51,768 | | |
$ | 51,478 | |
PSB Holdings,
Inc. and Subsidiary
(Parent Company Only)
Statements of
Net Income
For the Years Ended June 30, 2015 and 2014
(In thousands)
| |
2015 | | |
2014 | |
| |
| | |
| |
Interest and dividends on investments | |
$ | 12 | | |
$ | 12 | |
Interest on ESOP loan | |
| 51 | | |
| 55 | |
Total interest and dividend income | |
| 63 | | |
| 67 | |
| |
| | | |
| | |
Other expense | |
| 227 | | |
| 224 | |
Loss before income tax benefit and equity in undistributed net income of subsidiary | |
| (164 | ) | |
| (157 | ) |
Income tax benefit | |
| (73 | ) | |
| (72 | ) |
| |
| | | |
| | |
Loss before equity in undistributed net income of subsidiary | |
| (91 | ) | |
| (85 | ) |
Equity in undistributed net income of subsidiary | |
| 642 | | |
| 1,088 | |
| |
| | | |
| | |
Net income | |
$ | 551 | | |
$ | 1,003 | |
PSB Holdings,
Inc. and Subsidiary
(Parent Company Only)
Statements of
Cash Flows
June 30, 2015 and 2014
(In thousands)
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
| | | |
| | |
Adjustments to reconcile net income to net cash used in operating activities: | |
$ | 551 | | |
$ | 1,003 | |
Amortization of ESOP expense | |
| 96 | | |
| 81 | |
Increase in other assets | |
| (120 | ) | |
| (71 | ) |
Increase in due from subsidiary | |
| (4 | ) | |
| (67 | ) |
(Decrease) increase in other liabilities | |
| (3 | ) | |
| 4 | |
Undistributed net income of subsidiary | |
| (642 | ) | |
| (1,088 | ) |
Net cash used in operating activities | |
| (122 | ) | |
| (138 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Proceeds from maturities of available-for-sale securities | |
| 3 | | |
| 26 | |
Principal payments received on loan to ESOP | |
| 134 | | |
| 130 | |
Net cash provided by investing activities | |
| 137 | | |
| 156 | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Cash dividends paid on common stock | |
| (393 | ) | |
| - | |
Net cash used in financing activities | |
| (393 | ) | |
| - | |
| |
| | | |
| | |
Net (decrease) increase in cash and cash equivalents | |
| (378 | ) | |
| 18 | |
Cash and cash equivalents at beginning of year | |
| 805 | | |
| 787 | |
Cash and cash equivalents at end of year | |
$ | 427 | | |
$ | 805 | |
16. SUBSEQUENT EVENT
On September 9, 2015, the Boards of Directors
of Putnam Bancorp, MHC, the Company and the Bank adopted a Plan of Conversion (the “Plan”). Pursuant to the Plan, Putnam
Bancorp, MHC will convert from the mutual holding company form of organization to the fully public form. Putnam Bancorp, MHC will
be merged into the Company, and Putnam Bancorp, MHC will no longer exist. The Company will then merge into a new Maryland corporation
named PB Bancorp, Inc. As part of the conversion, Putnam Bancorp, MHC’s ownership interest in the Company will be offered
for sale in a public offering. The existing publicly held shares of the Company, which represent the remaining ownership interest
in the Company, will be exchanged for new shares of common stock of PB Bancorp, Inc., the new Maryland corporation. The Plan provides
for the establishment, upon the completion of the conversion, of special “liquidation accounts” for the benefit of
certain depositors of the Bank in an amount equal to Putnam Bancorp, MHC’s ownership interest in the equity of the Company
as of the date of the latest balance sheet contained in the prospectus plus the value of the net assets of Putnam Bancorp, MHC
as of the date of the latest statement of financial condition of Putnam Bancorp, MHC prior to the consummation of the conversion
(excluding its ownership of the Company). The liquidation accounts will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Direct costs of the conversion and public offering will be deferred and reduce
the proceeds from the shares sold in the public offering.
ITEM 9. Changes
In and Disagreements With Accountants on Accounting and Financial Disclosure
Information concerning principal accountant
fees and services is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Proposal
2-Ratification of Appointment of Independent Registered Public Accounting Firm.”
ITEM 9A. Controls
and Procedures
(a) Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, (1) is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer as appropriate to allow timely discussions regarding required disclosures.
There has been no
change in the Company’s internal control over financial reporting during the Company’s fourth quarter of fiscal year
2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
(b) Management’s annual report
on internal control over financial reporting.
Management of the Company
is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Management, including
the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control
over financial reporting as of June 30, 2015, based on the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (1992).” Based on such assessment,
management believes that, as of June 30, 2015, the Company’s internal control over financial reporting is effective, based
on those criteria.
This annual report
does not include an attestation report of the Company’s registered public accounting firm regarding internal control over
financial reporting. As the Company is a smaller reporting company, management’s report is not subject to attestation by
the Company’s registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide
only the management’s report in this annual report.
ITEM 9B. Other
Information
None.
PART III
ITEM 10. Directors,
Executive Officers and Corporate Governance
PSB Holdings,
Inc. has adopted a Code of Ethics that applies to PSB Holdings, Inc.’s principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions. The Code of Ethics can be accessed on PSB Holdings,
Inc.’s website at www.putnambank.com. The Code of Ethics is Exhibit 14 to this Form 10-K.
Information concerning
directors and executive officers of PSB Holdings is incorporated herein by reference from our definitive Proxy Statement to be
dated October 6, 2015 related to the 2015 Annual Meeting of Stockholders (the “Proxy Statement”), specifically the
section captioned “Proposal I—Election of Directors.”
ITEM 11. Executive
Compensation
Information concerning
executive compensation is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Proposal
I—Election of Directors.”
ITEM 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning
security ownership of certain beneficial owners and management is incorporated herein by reference from the Proxy Statement, specifically
the sections captioned “Voting Securities and Principal Holders Thereof” and “Proposal I—Election of Directors.”
Management of PSB Holdings,
Inc. knows of no arrangements, including any pledge by any person or securities of PSB Holdings, Inc., the operation of which may
at a subsequent date result in a change in control of the registrant.
Set forth below is
information as of June 30, 2015 regarding equity compensation plans. Other than the ESOP, the Company does not have any equity
compensation plans that were not approved by its stockholders.
|
|
Number of Securities to be |
|
|
|
|
|
|
|
|
|
Issued upon Exercise of |
|
|
|
|
|
Number of Securities |
|
|
|
Outstanding Options and |
|
|
Weighted Average |
|
|
Remaining Available for |
|
Plan |
|
Rights |
|
|
Exercise Price |
|
|
Issuance under the Plans |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by stockholders |
|
|
199,106 |
(1) |
|
$ |
10.62 |
(2) |
|
|
156,824 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by stockholders |
|
|
------- |
|
|
|
----- |
|
|
|
------- |
|
Total |
|
|
199,106 |
(1) |
|
$ |
10.62 |
(2) |
|
|
156,824 |
(3) |
| (1) | Reflects options to purchase shares of common stock awarded under the Incentive Plan. |
| (2) | Relates to 199,106 outstanding stock options. |
| (3) | Includes 15,717 shares of restricted stock and 141,107 options available for issuance under the Incentive Plan. |
ITEM 13. Certain
Relationships and Related Transactions, and Director Independence
Information concerning
relationships and transactions is incorporated herein by reference from the Proxy Statement, specifically the sections captioned
“Proposal I – Election of Directors” and “Transactions with Certain Related Persons.”
ITEM 14. Principal
Accountant Fees and Services
Information concerning
principal accountant fees and services is incorporated herein by reference from our Proxy Statement, specifically the section captioned
“Proposal 2-Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV
ITEM 15. Exhibits
and Financial Statement Schedules
(a)(1) Financial Statements
(A) Management Responsibility Statement
(B) Report of Independent Registered Public
Accounting Firm
(C) Consolidated Balance Sheets
(D) Consolidated Statements of Net Income
(E) Consolidated Statements of Comprehensive
Income
(F) Consolidated Statements of Changes
In Stockholders’ Equity
(G) Consolidated Statements of Cash Flows
(H) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not required or applicable, or the required information is shown
in the consolidated financial statements or the notes thereto.
(a)(3) Exhibits.
3.1 |
Charter of PSB Holdings, Inc.* |
|
|
3.2 |
Bylaws of PSB Holdings, Inc.* |
|
|
3.3 |
Amended Bylaws of PSB Holdings, Inc.***** |
|
|
4. |
Form of Common Stock Certificate of PSB Holdings, Inc.* |
|
|
10.1 |
Employee Stock Ownership Plan, including amendments***** |
|
|
10.2 |
Deferred Compensation Plan* |
|
|
10.3 |
PSB Holdings, Inc. 2005 Stock-Based Incentive Plan** |
|
|
14. |
Code of Ethics*** |
|
|
21 |
Subsidiaries of Registrant****** |
|
|
23.1 |
Consent of Wolf & Company, P.C. |
|
|
31.1 |
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
31.2 |
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
32. |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
101 |
The following materials from the Company’s Annual Report on Form 10-K for the year ended June 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements. |
* |
Incorporated by reference to the Registration Statement on Form SB-2 of PSB Holdings, Inc. (file no. 333-116364), originally filed with the Securities and Exchange Commission on June 10, 2004, as amended. |
** |
Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement dated September 20, 2005 as filed with the Securities and Exchange Commission on September 19, 2005. |
*** |
Incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K for year ended June 30, 2007, filed with the Securities and Exchange Commission on September 21, 2007. |
**** |
Incorporated by reference to Exhibit 3 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 7, 2012. |
***** |
Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (file no. 333-206892) of PB Bancorp, Inc. filed with the Securities and Exchange Commission on September 9, 2015. |
****** |
Incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 (file no. 333-206892) of PB Bancorp, Inc. filed with the Securities and Exchange Commission on September 9, 2015. |
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
PSB HOLDINGS, INC. |
|
|
|
|
Date:
September 28, 2015 |
|
By: |
/S/ Thomas
A. Borner |
|
|
|
|
Thomas A. Borner |
|
|
|
|
President
and Chief Executive Officer and Director
(Duly
Authorized Representative) |
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/S/ Thomas A. Borner
Thomas A. Borner |
|
President, Chief Executive Officer and Vice Chairman of the Board (Principal Executive Officer) |
|
September 28, 2015 |
|
|
|
|
|
/S/ Robert
J. Halloran, Jr.
Robert J. Halloran, Jr. |
|
Executive Vice President and Treasurer (Principal Financial and Accounting Officer) |
|
September 28, 2015 |
|
|
|
|
|
/S/ Charles
W. Bentley, Jr.
Charles W. Bentley, Jr. |
|
Director |
|
September 28, 2015 |
|
|
|
|
|
/S/ Jitendra K.
Sinha
Jitendra K. Sinha |
|
Director |
|
September 28, 2015 |
|
|
|
|
|
/S/ Paul
M. Kelly
Paul M. Kelly |
|
Director |
|
September 28, 2015 |
|
|
|
|
|
/S/ Richard
A. Loomis
Richard A. Loomis |
|
Director |
|
September 28, 2015 |
|
|
|
|
|
/S John
P. Miller
John P. Miller
|
|
Director |
|
September 28, 2015 |
/S/ Charles
H. Puffer
Charles H. Puffer |
|
Chairman of the Board |
|
September 28, 2015 |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We consent to the incorporation by reference in Registration
Statement No. 333-137816 of our report dated September 10, 2015, relating to the consolidated financial statements of PSB
Holdings, Inc. and Subsidiary, appearing in this Annual Report on Form 10-K of PSB Holdings, Inc. for the year ended June 30, 2015.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
September 28, 2015
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Thomas A. Borner, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of PSB Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: September 28, 2015 |
|
/s/ Thomas
A. Borner |
|
|
Thomas A. Borner |
|
|
President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Robert J. Halloran, Jr., certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of PSB Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: September 28, 2015 |
|
/s/ Robert
J. Halloran, Jr. |
|
|
Robert J. Halloran, Jr. |
|
|
Executive Vice President and Chief Financial Officer |
Exhibit 32
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
Thomas A. Borner, President and Chief Executive
Officer and Robert J. Halloran, Jr., Executive Vice President and Treasurer of PSB Holdings, Inc. (the “Company”) each
certify in their capacity as officers of the Company that they have reviewed the annual report of the Company on Form 10-K for
the fiscal year ended June 30, 2015 and that to the best of their knowledge:
| 1. | the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and |
| 2. | the information contained in the report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
|
|
/s/ Thomas
A. Borner |
Date: September 28, 2015 |
|
Thomas A. Borner |
|
|
President and Chief Executive Officer |
|
|
|
|
|
/s/ Robert
J. Halloran, Jr. |
Date: September 28, 2015 |
|
Robert J. Halloran, Jr. |
|
|
Executive Vice President and Treasurer |
The purpose of this statement is solely
to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley
Act of 2002.
A signed original of this written statement
required by Section 906 has been provided to PSB Holdings, Inc. and will be retained by PSB Holdings, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.
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