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,” “potential,”
and words of similar meaning. Examples of forward-looking statements include, but are not limited to, estimates with respect to
our financial condition, results of operations, business, prospects, growth and operating strategies 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, changes in the level of loan delinquencies and charge-offs and
changes in estimates of the adequacy of the allowance for loan losses, 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. In addition, see Item 1A. Risk Factors.
PB Bancorp, Inc.
PB Bancorp, Inc.
(the “Company”) is a Maryland corporation incorporated in 2015 to be the successor to PSB Holdings, Inc. upon
completion of the second-step mutual-to-stock conversion (the “Conversion”) of Putnam Bancorp, MHC (the
“MHC”), the top tier mutual holding company of PSB Holdings, Inc. PSB Holdings, Inc. was the former mid-tier
holding company for Putnam Bank (the “Bank”). Prior to completion of the Conversion, approximately 57% of the
shares of common stock of PSB Holdings, Inc. were owned by the MHC. In conjunction with the Conversion, the MHC and PSB
Holdings, Inc. merged into the Company and the Company became PSB Holdings, Inc.’s successor. The Conversion was
completed on January 7, 2016. The Company raised gross proceeds of $33.7 million by selling 4,215,387 shares of common stock
at $8.00 per share. Also, an additional 317,287 shares were purchased by the Bank’s Employee Stock Ownership Plan with
the proceeds of a loan from the Company. Concurrent with the completion of the stock offering, each share of PSB Holdings,
Inc. stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.1907 shares of Company common
stock.
PB Bancorp, Inc. also owns investment securities valued at $5.2 million as of June 30, 2019. We have not engaged in
any significant business activity other than owning the common stock of Putnam Bank, providing the loan to allow the purchase
of shares of common stock by the Employee Stock Ownership Plan 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.
Putnam Bank
Putnam Bank was founded
in 1862 as a state-chartered mutual savings bank. In 2014, the Bank converted from a federally-chartered savings bank to a Connecticut-chartered
bank that is a member of the Federal Reserve System. 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. Putnam Bank is a wholly-owned
subsidiary of the Company. In addition, the Bank maintains a “Special Needs Limited Branch” and a limited services
mobile office. The telephone number at the Bank’s main office is (860) 928-6501.
Available Information
PB Bancorp, 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 S&P
Global Market Intelligence, from 2014 to 2019, the population of Windham County decreased by 0.6%, and New London County’s
population decreased 2.3%. At the same time, the population of the state of Connecticut decreased by 0.3%, while the United
States’ population increased by 3.8%. During the same period, the number of households declined in both Windham County
and New London County (by 0.3% and 1.7%, respectively) and Connecticut showed a slight decline (0.1%) as well. Comparatively,
the number of households increased on a nationwide basis, by 4.0%. In 2019, per capita income and median household income
for Windham County equaled $33,235 and $66,793, respectively. In the same year, per capita income and median household income
for New London County equaled $42,459 and $76,305, respectively. These compare to 2019 per capita income measures for the
state of Connecticut and the United States of $45,112 and $34,902, respectively, and 2019 median household income measures for
the state of Connecticut and the United States of $78,970 and $63,174, respectively.
Windham County has
a diversified mix of industry groups and employment sectors, including education/healthcare/social services, services and wholesale/retail
trade. According to S&P Global Market Intelligence, these three sectors comprise approximately 66% of the employment
base in Windham County. The same three sectors comprised approximately 66% of the employment base in New London County.
June 2019 unemployment
rates for Windham County at 4.4% and Connecticut at 3.9% were above the national unemployment rate of 3.8%, while New London County’s
unemployment rate of 3.8% matched the national rate. Notably, the June 2019 unemployment rates for the United States, Connecticut,
Windham County, and New London County have all decreased relative to their June 2018 unemployment rates of 4.2%, 4.4%, 4.8% and
4.2%, 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, 2018,
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 18.9% of deposits in Windham County, giving
us the second largest market share out of ten financial institutions with offices in that county as of that date, and 1.4% 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, and we have recently increased our origination of commercial real estate loans. Historically, 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 has permitted 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
$
|
221,488
|
|
|
|
58.30
|
%
|
|
$
|
236,880
|
|
|
|
66.96
|
%
|
|
$
|
225,745
|
|
|
|
72.53
|
%
|
|
$
|
197,359
|
|
|
|
78.15
|
%
|
|
$
|
178,989
|
|
|
|
79.40
|
%
|
Commercial
|
|
|
145,694
|
|
|
|
38.35
|
|
|
|
101,647
|
|
|
|
28.73
|
|
|
|
71,558
|
|
|
|
22.99
|
|
|
|
43,839
|
|
|
|
17.36
|
|
|
|
41,637
|
|
|
|
18.47
|
|
Residential construction
|
|
|
1,476
|
|
|
|
0.39
|
|
|
|
2,217
|
|
|
|
0.63
|
|
|
|
1,000
|
|
|
|
0.32
|
|
|
|
853
|
|
|
|
0.34
|
|
|
|
763
|
|
|
|
0.34
|
|
Commercial
|
|
|
10,298
|
|
|
|
2.71
|
|
|
|
12,215
|
|
|
|
3.45
|
|
|
|
12,123
|
|
|
|
3.89
|
|
|
|
9,799
|
|
|
|
3.88
|
|
|
|
3,327
|
|
|
|
1.48
|
|
Consumer and other
|
|
|
968
|
|
|
|
0.25
|
|
|
|
831
|
|
|
|
0.23
|
|
|
|
829
|
|
|
|
0.27
|
|
|
|
691
|
|
|
|
0.27
|
|
|
|
701
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
379,924
|
|
|
|
100.00
|
%
|
|
|
353,790
|
|
|
|
100.00
|
%
|
|
|
311,255
|
|
|
|
100.00
|
%
|
|
|
252,541
|
|
|
|
100.00
|
%
|
|
|
225,417
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
1,156
|
|
|
|
|
|
|
|
1,423
|
|
|
|
|
|
|
|
1,317
|
|
|
|
|
|
|
|
1,106
|
|
|
|
|
|
|
|
804
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(3,063
|
)
|
|
|
|
|
|
|
(2,943
|
)
|
|
|
|
|
|
|
(2,780
|
)
|
|
|
|
|
|
|
(2,303
|
)
|
|
|
|
|
|
|
(2,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
378,017
|
|
|
|
|
|
|
$
|
352,270
|
|
|
|
|
|
|
$
|
309,792
|
|
|
|
|
|
|
$
|
251,344
|
|
|
|
|
|
|
$
|
224,046
|
|
|
|
|
|
|
(1)
|
Residential
real estate loans include one-to-four family mortgage loans, second mortgages, 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, 2019. 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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
279
|
|
|
|
7.14
|
%
|
|
$
|
11,115
|
|
|
|
5.63
|
%
|
|
$
|
1,476
|
|
|
|
4.27
|
%
|
|
$
|
1,136
|
|
|
|
6.85
|
%
|
|
$
|
284
|
|
|
|
5.20
|
%
|
|
$
|
14,290
|
|
|
|
5.61
|
%
|
More than one to five years
|
|
|
5,895
|
|
|
|
4.21
|
|
|
|
17,289
|
|
|
|
5.34
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
2,875
|
|
|
|
5.07
|
|
|
|
675
|
|
|
|
5.23
|
|
|
|
26,734
|
|
|
|
5.06
|
|
More than five years
|
|
|
215,314
|
|
|
|
3.95
|
|
|
|
117,290
|
|
|
|
4.55
|
|
|
|
-
|
|
|
|
0.00
|
|
|
|
6,287
|
|
|
|
4.19
|
|
|
|
9
|
|
|
|
3.50
|
|
|
|
338,900
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
221,488
|
|
|
|
3.96
|
%
|
|
$
|
145,694
|
|
|
|
4.73
|
%
|
|
$
|
1,476
|
|
|
|
4.27
|
%
|
|
$
|
10,298
|
|
|
|
4.73
|
%
|
|
$
|
968
|
|
|
|
5.21
|
%
|
|
$
|
379,924
|
|
|
|
4.28
|
%
|
The following table
sets forth the amounts of fixed and adjustable rate loans at June 30, 2019 that are contractually due after June 30, 2020.
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
132,391
|
|
|
$
|
88,818
|
|
|
$
|
221,209
|
|
Commercial
|
|
|
60,195
|
|
|
|
74,384
|
|
|
|
134,579
|
|
Commercial
|
|
|
8,504
|
|
|
|
658
|
|
|
|
9,162
|
|
Consumer and other
|
|
|
684
|
|
|
|
-
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,774
|
|
|
$
|
163,860
|
|
|
$
|
365,634
|
|
At June 30, 2019, the
total amount of loans that had fixed interest rates was $204.1 million, and the total amount of loans that had floating or adjustable
interest rates was $175.8 million.
Residential
Real Estate Loans. Our primary residential 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,
2019, $221.5 million, or 58.3% of our loan portfolio, consisted of one-to-four family residential real estate loans. At June
30, 2019, our residential real estate loans included $8.1 million of second mortgages and $7.0 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 one-to-four family residential real estate loans.
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. There were no residential real estate loans purchased during
the fiscal year ended June 30, 2019.
At June 30, 2019, $56.6
million, or 25.6%, 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.
Historically, 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 has permitted us to retain longer term, fixed-rate loans in our portfolio. We originated $14.6 million
of fixed rate one-to-four family residential loans during the year ended June 30, 2019, of which $1.5 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 $7.9 million of adjustable rate one-to-four family residential loans during the year ended
June 30, 2019, none of which were 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, 2019, $88.8 million, or 40.1%, 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”), Connecticut Housing Finance Authority
(“CHFA”) and Rural Development (“RD”) 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. RD, VA 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.
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, 2019, our largest residential real
estate loan had a principal balance of $1.1 million and was secured by a one-to-four family residence located in Massachusetts.
At June 30, 2019, this loan was performing in accordance with its original terms.
At June 30, 2019, second
mortgages and home equity lines of credit totaled $15.1 million, or 6.8% of our residential real estate loans and 4.0% of total
loans. Additionally, at June 30, 2019, the unadvanced amounts of home equity lines of credit totaled $10.8 million. The underwriting
standards utilized for second mortgages 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. Second mortgages 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 owner and non-owner occupied properties, hotels, non-owner occupied condominiums and commercial vacant land.
The security for these loans is primarily located in our primary market area. At June 30, 2019, commercial mortgage loans totaled
$145.7 million, or 38.4% 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, 2019 was $11.1 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 loans in our portfolio at June 30, 2019 were loans totaling $8.5 million,
secured by a hotel located in Connecticut. These loans consisted of $7.4 million outstanding, with an unadvanced portion of $1.1
million as of June 30, 2019. At June 30, 2019, these loans were 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.
Commercial
Loans. At June 30, 2019, we had $10.3 million in commercial business loans, which amounted to 2.7% 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 condition 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, 2019, our largest commercial loan was a $943,000 loan secured by business assets located in
our primary market area. This loan was performing according to its original terms at June 30, 2019.
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. There were no loans purchased during the fiscal year ended June 30, 2019. The Bank performs its own underwriting
analysis before purchasing a loan and, therefore, believes there should not be a greater risk of default on these obligations compared
to loans the Bank originates itself. However, generally in a purchased loan, the Bank does not service the loan and thus is subject
to the policies and practices of the originating lender with regard to pursuing collections and foreclosure proceedings.
Historically, 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 has permitted 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, VA and Rural Development. Generally, we sell our loans without recourse.
We retain the servicing rights on the mortgage loans sold to Fannie Mae, but sell all CHFA, VA, and Rural Development loans on
a servicing-released basis.
At June 30, 2019, Putnam
Bank was servicing loans in the amount of $20.0 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, 2019, we originated $22.5 million of one-to-four family loans, of which we retained $21.0 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 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 loans-to-one borrower relationships in amounts up to $750,000. Putnam Bank’s Board
of Directors must approve all loans and relationships that are $750,000 or greater.
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, 2019, our regulatory limit on loans to
one borrower was $11.1 million. At that date, the largest aggregate amount loaned by Putnam Bank to one borrower was $8.5 million,
consisting of commercial real estate loans. These loans consisted of $7.4 million outstanding, with an unadvanced portion of $1.1
million as of June 30, 2019. The loans comprising this lending relationship were performing in accordance with their original terms
as of June 30, 2019.
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, 2019, we had non-performing loans of $4.2 million
and a ratio of non-performing loans to total loans of 1.1%.
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, 2019, we had OREO of $1.3 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
$
|
3,530
|
|
|
$
|
3,959
|
|
|
$
|
3,837
|
|
|
$
|
3,367
|
|
|
$
|
2,731
|
|
Commercial real estate
|
|
|
260
|
|
|
|
432
|
|
|
|
594
|
|
|
|
876
|
|
|
|
2,886
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
22
|
|
Consumer and other
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Total
|
|
|
3,790
|
(1)
|
|
|
4,392
|
|
|
|
4,433
|
|
|
|
4,260
|
|
|
|
5,640
|
|
Accruing loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
|
159
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
279
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
438
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total non-performing loans
|
|
|
4,228
|
|
|
|
4,424
|
|
|
|
4,433
|
|
|
|
4,260
|
|
|
|
5,640
|
|
Other real estate owned
|
|
|
1,271
|
|
|
|
1,381
|
|
|
|
1,814
|
|
|
|
1,895
|
|
|
|
3,155
|
|
Total non-performing assets
|
|
|
5,499
|
|
|
|
5,805
|
|
|
|
6,247
|
|
|
|
6,155
|
|
|
|
8,795
|
|
Troubled debt restructurings in compliance with restructured terms
|
|
|
1,415
|
(2)
|
|
|
1,685
|
|
|
|
2,245
|
|
|
|
2,709
|
|
|
|
2,154
|
|
Troubled debt restructurings
and total non-performing assets
|
|
$
|
6,914
|
|
|
$
|
7,490
|
|
|
$
|
8,492
|
|
|
$
|
8,864
|
|
|
$
|
10,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans to total loans
|
|
|
1.11
|
%
|
|
|
1.25
|
%
|
|
|
1.42
|
%
|
|
|
1.69
|
%
|
|
|
2.50
|
%
|
Total non-performing assets to total assets
|
|
|
1.02
|
%
|
|
|
1.10
|
%
|
|
|
1.19
|
%
|
|
|
1.22
|
%
|
|
|
1.86
|
%
|
Total non-performing assets and
troubled debt restructurings to total assets
|
|
|
1.29
|
%
|
|
|
1.43
|
%
|
|
|
1.62
|
%
|
|
|
1.76
|
%
|
|
|
2.31
|
%
|
|
(1)
|
The gross interest income that would have been reported if the non-accrual loans had performed
in accordance with their original terms was $209,000 for the year ended June 30, 2019. Actual income recognized on these loans
was $120,000 for the year ended June 30, 2019.
|
|
(2)
|
The gross interest income that would have been reported if the troubled debt restructurings had
performed in accordance with their original terms was $91,000 for the year ended June 30, 2019. Actual income recognized on these
loans was $12,000 for the year ended June 30, 2019.
|
Total
non-performing assets decreased by $306,000, or 5.3%, to $5.5 million at June 30, 2019 from $5.8 million at June 30, 2019. Non-performing
assets as of June 30, 2019 consisted of $1.3 million of other real estate owned, which reflects the repossession of a three-lot
residential development project at a carrying value of $97,000, commercial land with a carrying value of $394,000, 202.5 acres
of land with a carrying value of $494,000, a residential home with a carrying value of $166,000 and vacant land with a carrying
value of $121,000. Also included in non-performing assets at June 30, 2019 was $4.2 million in non-performing loans. These
loans consisted of 28 residential loans totaling $3.7 million and three commercial real estate loans totaling $539,000. Non-performing
assets as of June 30, 2018 consisted of $1.4 million of other real estate owned, which reflects the repossession of a three-lot
residential development project at a carrying value of $110,000, a commercial building with a carrying value of $81,000, commercial
land with a carrying value of $418,000, 202.5 acres of land with a carrying value of $557,000, a residential home with a carrying
value of $106,000 and another residential home at a carrying value of $110,000. Also included in non-performing assets at June
30, 2018 was $4.4 million in non-performing loans. These loans consisted of 31 residential loans totaling $4.0 million, three commercial
real estate loans totaling $432,000 and one consumer loan for $1,000.
Management is focused
on working with borrowers and guarantors to resolve non-performing loans by restructuring or liquidating assets when prudent. 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 external 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
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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
3
|
|
|
$
|
397
|
|
|
|
4
|
|
|
$
|
668
|
|
|
|
7
|
|
|
$
|
1,065
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
279
|
|
|
|
1
|
|
|
|
279
|
|
Total
|
|
|
3
|
|
|
$
|
397
|
|
|
|
5
|
|
|
$
|
947
|
|
|
|
8
|
|
|
$
|
1,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
2
|
|
|
$
|
238
|
|
|
|
9
|
|
|
$
|
1,119
|
|
|
|
11
|
|
|
$
|
1,357
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
124
|
|
|
|
1
|
|
|
|
124
|
|
Total
|
|
|
2
|
|
|
$
|
238
|
|
|
|
10
|
|
|
$
|
1,243
|
|
|
|
12
|
|
|
$
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
4
|
|
|
$
|
349
|
|
|
|
4
|
|
|
$
|
455
|
|
|
|
8
|
|
|
$
|
804
|
|
Total
|
|
|
4
|
|
|
$
|
349
|
|
|
|
4
|
|
|
$
|
455
|
|
|
|
8
|
|
|
$
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
$
|
-
|
|
|
|
6
|
|
|
$
|
437
|
|
|
|
6
|
|
|
$
|
437
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
62
|
|
|
|
1
|
|
|
|
62
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
7
|
|
|
$
|
499
|
|
|
|
7
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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, 2019, we classified $5.9 million of our loans as substandard and no loans as doubtful. Of these
loans, $3.8 million were considered non-performing and included in the table of non-performing assets. At June 30, 2019, $1.6 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, 2019 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of year
|
|
$
|
2,943
|
|
|
$
|
2,780
|
|
|
$
|
2,303
|
|
|
$
|
2,175
|
|
|
$
|
2,380
|
|
Provision for loan losses
|
|
|
(400
|
)
|
|
|
225
|
|
|
|
548
|
|
|
|
663
|
|
|
|
535
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
(42
|
)
|
|
|
(83
|
)
|
|
|
(100
|
)
|
|
|
(102
|
)
|
|
|
(98
|
)
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(625
|
)
|
|
|
(879
|
)
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
-
|
|
Consumer and other
|
|
|
(39
|
)
|
|
|
(42
|
)
|
|
|
(32
|
)
|
|
|
(45
|
)
|
|
|
(44
|
)
|
Total charge-offs
|
|
|
(81
|
)
|
|
|
(125
|
)
|
|
|
(143
|
)
|
|
|
(772
|
)
|
|
|
(1,021
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
14
|
|
|
|
33
|
|
|
|
46
|
|
|
|
44
|
|
|
|
45
|
|
Commercial real estate
|
|
|
560
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165
|
|
|
|
211
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
13
|
|
|
|
15
|
|
|
|
10
|
|
|
|
12
|
|
|
|
12
|
|
Consumer and other
|
|
|
14
|
|
|
|
15
|
|
|
|
16
|
|
|
|
16
|
|
|
|
13
|
|
Total recoveries
|
|
|
601
|
|
|
|
63
|
|
|
|
72
|
|
|
|
237
|
|
|
|
281
|
|
Net recoveries (charge-offs)
|
|
|
520
|
|
|
|
(62
|
)
|
|
|
(71
|
)
|
|
|
(535
|
)
|
|
|
(740
|
)
|
Balance at end of year
|
|
$
|
3,063
|
|
|
$
|
2,943
|
|
|
$
|
2,780
|
|
|
$
|
2,303
|
|
|
$
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to non-performing loans at
end of year
|
|
|
72.45
|
%
|
|
|
66.52
|
%
|
|
|
62.71
|
%
|
|
|
54.06
|
%
|
|
|
38.57
|
%
|
Allowance for loan losses to total loans outstanding
at the end of the year
|
|
|
0.81
|
%
|
|
|
0.83
|
%
|
|
|
0.89
|
%
|
|
|
0.91
|
%
|
|
|
0.96
|
%
|
Net recoveries (charge-offs) to average loans outstanding
|
|
|
0.14
|
%
|
|
|
(0.02
|
)%
|
|
|
(0.03
|
)%
|
|
|
(0.23
|
)%
|
|
|
(0.32
|
)%
|
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, 2019
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,466
|
|
|
|
47.86
|
%
|
|
|
58.69
|
%
|
Commercial loans (2)
|
|
|
1,497
|
|
|
|
48.87
|
|
|
|
41.06
|
|
Consumer and other
|
|
|
28
|
|
|
|
0.92
|
|
|
|
0.25
|
|
Unallocated
|
|
|
72
|
|
|
|
2.35
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
3,063
|
|
|
|
100.00
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,399
|
|
|
|
47.53
|
%
|
|
|
67.58
|
%
|
Commercial loans (2)
|
|
|
1,274
|
|
|
|
43.29
|
|
|
|
32.18
|
|
Consumer and other
|
|
|
135
|
|
|
|
4.59
|
|
|
|
0.24
|
|
Unallocated
|
|
|
135
|
|
|
|
4.59
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,943
|
|
|
|
100.00
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,365
|
|
|
|
49.10
|
%
|
|
|
72.85
|
%
|
Commercial loans (2)
|
|
|
1,240
|
|
|
|
44.61
|
|
|
|
26.88
|
|
Consumer and other
|
|
|
86
|
|
|
|
3.09
|
|
|
|
0.27
|
|
Unallocated
|
|
|
89
|
|
|
|
3.20
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,780
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,177
|
|
|
|
51.11
|
%
|
|
|
78.49
|
%
|
Commercial loans (2)
|
|
|
1,045
|
|
|
|
45.37
|
|
|
|
21.24
|
|
Consumer and other
|
|
|
20
|
|
|
|
0.87
|
|
|
|
0.27
|
|
Unallocated
|
|
|
61
|
|
|
|
2.65
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,303
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,096
|
|
|
|
50.39
|
%
|
|
|
79.74
|
%
|
Commercial loans (2)
|
|
|
947
|
|
|
|
43.54
|
|
|
|
19.95
|
|
Consumer and other
|
|
|
26
|
|
|
|
1.20
|
|
|
|
0.31
|
|
Unallocated
|
|
|
106
|
|
|
|
4.87
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,175
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
(1)
|
Residential real estate loans include one-to-four family mortgage loans, residential construction loans, second mortgages and
home equity lines of credit.
|
|
(2)
|
Commercial loans include commercial real estate loans and commercial loans.
|
Each quarter, management
evaluates 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. Additionally, our regulators,
as a part of their examination process, periodically review our allowance for loan losses and may require us to recognize additions
to the allowance based on their judgements at the time of their examination.
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 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 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, 2019, we recognized $33,000 in other-than-temporary
write-downs on non-agency mortgage-backed securities.
U.S.
Government and government-sponsored securities. At June 30, 2019, our U.S. Government and government-sponsored
securities portfolio classified as available-for-sale totaled $2.2 million, or 2.2% of total securities. At June 30, 2019, our
U.S. Government and government-sponsored securities portfolio classified as held-to-maturity totaled $9.4 million, or 9.1% 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 and as collateral
for borrowings.
Corporate
Bonds. At June 30, 2019, we had three investments in corporate single-issuer trust preferred securities with a
total book value of $4.0 million and total fair value of $3.7 million, or 3.6% 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, 2019, mortgage-backed
securities and CMOs classified as available-for-sale totaled $23.0 million, or 22.5% of total securities. At June 30, 2019, mortgage-backed
securities and CMOs classified as held-to-maturity totaled $53.7 million, or 52.4% of total securities. At June 30, 2019, 59.6%
of the mortgage-backed securities were backed by adjustable rate loans and 40.4% were backed by fixed rate mortgage loans. The
mortgage-backed securities portfolio had a weighted average yield of 2.96% at June 30, 2019. 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.
State
agency and municipal obligations. At June 30, 2019, our state agency and municipal obligations portfolio classified
as held-to-maturity totaled $440,000, or 0.4% of total securities.
Other
Debt securities. At June 30, 2019, other debt securities portfolio totaled $10.0 million, or 9.7% of total
securities, all of which were classified as available-for-sale. At June 30, 2019, 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, 2019, 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 determine the fair
value of the ARPs classified as Level 3 using 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 have not changed this pricing methodology.
As of June 30, 2019,
there was an unrealized loss of $24,000, or 0.8% on these 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, 2019:
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
|
|
08-22-19
|
|
08-28-19
|
|
08-19-19
|
Reset Frequency
|
|
Quarterly
|
|
Quarterly
|
|
Quarterly
|
Failed Auction
|
|
Yes
|
|
Yes
|
|
Yes
|
Receiving Default Rates
|
|
Yes
|
|
Yes
|
|
Yes
|
Current Rate
|
|
4.54%
|
|
4.30%
|
|
4.50%
|
Dividends Current
|
|
Yes
|
|
Yes
|
|
Yes
|
Our entire auction
rate preferred securities holdings as of June 30, 2019 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Carrying
|
|
|
Percent
|
|
|
Carrying
|
|
|
Percent
|
|
|
Carrying
|
|
|
Percent
|
|
|
|
Value
|
|
|
of Total
|
|
|
Value
|
|
|
of Total
|
|
|
Value
|
|
|
of Total
|
|
|
|
(Dollars in thousands)
|
|
Securities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
$
|
2,242
|
|
|
|
2.2
|
%
|
|
$
|
4,328
|
|
|
|
3.4
|
%
|
|
$
|
4,766
|
|
|
|
2.8
|
%
|
Corporate bonds and other securities
|
|
|
3,676
|
|
|
|
3.6
|
|
|
|
3,730
|
|
|
|
2.9
|
|
|
|
5,578
|
|
|
|
3.3
|
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
20,452
|
|
|
|
20.0
|
|
|
|
25,251
|
|
|
|
19.5
|
|
|
|
35,915
|
|
|
|
21.1
|
|
Non-agency mortgage-backed securities
|
|
|
2,573
|
|
|
|
2.5
|
|
|
|
3,237
|
|
|
|
2.5
|
|
|
|
3,891
|
|
|
|
2.3
|
|
Other debt securities (1)
|
|
|
9,976
|
|
|
|
9.7
|
|
|
|
10,000
|
|
|
|
7.7
|
|
|
|
10,000
|
|
|
|
5.8
|
|
Total securities, available-for-sale
|
|
|
38,919
|
|
|
|
38.0
|
|
|
|
46,546
|
|
|
|
36.0
|
|
|
|
60,150
|
|
|
|
35.3
|
|
Securities, held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
|
9,368
|
|
|
|
9.2
|
|
|
|
11,773
|
|
|
|
9.1
|
|
|
|
14,411
|
|
|
|
8.5
|
|
State agency and municipal obligations
|
|
|
440
|
|
|
|
0.4
|
|
|
|
446
|
|
|
|
0.3
|
|
|
|
451
|
|
|
|
0.3
|
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
53,672
|
|
|
|
52.4
|
|
|
|
70,597
|
|
|
|
54.6
|
|
|
|
95,160
|
|
|
|
55.9
|
|
Total securities, held-to-maturity
|
|
|
63,480
|
|
|
|
62.0
|
|
|
|
82,816
|
|
|
|
64.0
|
|
|
|
110,022
|
|
|
|
64.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
102,399
|
|
|
|
100.0
|
%
|
|
$
|
129,362
|
|
|
|
100.0
|
%
|
|
$
|
170,172
|
|
|
|
100.0
|
%
|
|
(1)
|
Other debt securities consist of ARPs with stated maturity
dates.
|
At June 30, 2019, 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.
The following table sets forth the amortized
cost and estimated fair value of securities of issuers (other than direct obligations of the U.S. Government) as of June 30, 2019,
that exceeded 10% of our total equity as of that date.
|
|
At
June 30, 2019
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair
Value
|
|
|
(in
thousands)
|
|
Fannie Mae
|
|
$
|
32,597
|
|
|
$
|
32,659
|
|
|
|
|
|
|
|
|
|
|
Freddie Mac
|
|
$
|
26,089
|
|
|
$
|
26,112
|
|
Portfolio
Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2019 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, 2019, mortgage-backed securities with adjustable rates totaled $45.7 million. At June 30, 2019, we held three securities that
mature in one year or less, totaling $4.0 million.
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,242
|
|
|
$
|
2,242
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,676
|
|
|
|
-
|
|
|
|
3,676
|
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
-
|
|
|
|
5,074
|
|
|
|
1,142
|
|
|
|
14,236
|
|
|
|
20,452
|
|
Non-agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,573
|
|
|
|
2,573
|
|
Other debt securities (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
7,976
|
|
|
|
2,000
|
|
|
|
9,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
|
-
|
|
|
|
5,074
|
|
|
|
12,794
|
|
|
|
21,051
|
|
|
|
38,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
|
4,000
|
|
|
|
989
|
|
|
|
-
|
|
|
|
4,379
|
|
|
|
9,368
|
|
State agency and municipal obligations
|
|
|
-
|
|
|
|
440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
440
|
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
-
|
|
|
|
411
|
|
|
|
9,636
|
|
|
|
43,625
|
|
|
|
53,672
|
|
Total securities held to maturity
|
|
|
4,000
|
|
|
|
1,840
|
|
|
|
9,636
|
|
|
|
48,004
|
|
|
|
63,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
4,000
|
|
|
$
|
6,914
|
|
|
$
|
22,430
|
|
|
$
|
69,055
|
|
|
$
|
102,399
|
|
Weighted average yield
|
|
|
1.81
|
%
|
|
|
2.57
|
%
|
|
|
3.28
|
%
|
|
|
3.13
|
%
|
|
|
3.07
|
%
|
|
(1)
|
Other 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, 2019, $130.3 million, or 34.0%, of our deposit accounts were certificates
of deposit, of which $78.4 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
Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits
|
|
$
|
70,651
|
|
|
19.13
|
%
|
|
-
|
%
|
|
$
|
69,458
|
|
|
19.06
|
%
|
|
-
|
%
|
|
$
|
70,283
|
|
|
19.53
|
%
|
|
-
|
%
|
NOW accounts
|
|
|
73,589
|
|
|
|
19.93
|
|
|
|
0.38
|
|
|
|
81,478
|
|
|
|
22.35
|
|
|
|
0.37
|
|
|
|
83,499
|
|
|
|
23.20
|
|
|
|
0.35
|
|
Regular savings
|
|
|
83,739
|
|
|
|
22.67
|
|
|
|
0.08
|
|
|
|
81,667
|
|
|
|
22.40
|
|
|
|
0.08
|
|
|
|
77,639
|
|
|
|
21.57
|
|
|
|
0.08
|
|
Money market accounts
|
|
|
22,165
|
|
|
|
6.00
|
|
|
|
0.60
|
|
|
|
22,144
|
|
|
|
6.08
|
|
|
|
0.20
|
|
|
|
18,876
|
|
|
|
5.25
|
|
|
|
0.19
|
|
Club accounts
|
|
|
206
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
209
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
217
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
|
250,350
|
|
|
|
67.79
|
|
|
|
0.19
|
|
|
|
254,956
|
|
|
|
69.95
|
|
|
|
0.16
|
|
|
|
250,514
|
|
|
|
69.61
|
|
|
|
0.16
|
|
Certificates of deposit
|
|
|
118,956
|
|
|
|
32.21
|
|
|
|
1.93
|
|
|
|
109,552
|
|
|
|
30.05
|
|
|
|
1.53
|
|
|
|
109,390
|
|
|
|
30.39
|
|
|
|
1.29
|
|
Total
|
|
$
|
369,306
|
|
|
|
100.00
|
%
|
|
|
0.75
|
%
|
|
$
|
364,508
|
|
|
|
100.00
|
%
|
|
|
0.57
|
%
|
|
$
|
359,904
|
|
|
|
100.00
|
%
|
|
|
0.50
|
%
|
As of June 30, 2019, the aggregate amount
of outstanding certificates of deposit in amounts greater than or equal to $250,000 was $35.0 million. The following table sets
forth the maturity of those certificates as of June 30, 2019, in thousands.
Three months or less
|
|
$
|
1,130
|
|
Over three through six months
|
|
|
6,808
|
|
Over six months through one year
|
|
|
19,894
|
|
Over one year through three years
|
|
|
4,769
|
|
Over three years
|
|
|
2,418
|
|
Total
|
|
$
|
35,019
|
|
Borrowings.
Our borrowings consist of advances from, and a line of credit with, the Federal Home Loan Bank of Boston, and securities sold under
agreements to repurchase. At June 30, 2019, 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 $43.7 million. We also have an available
line of credit with Atlantic Community Bankers Bank in the amount of $4.0 million. There were no amounts advanced on these lines
as of June 30, 2019. At June 30, 2019, retail securities sold under agreements to repurchase were $804,000. 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,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
(Dollars in thousands)
|
|
Maximum amount of advances outstanding at any month end during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
62,194
|
|
|
$
|
79,730
|
|
|
$
|
67,000
|
|
Securities sold under agreements to repurchase with customers
|
|
|
8,224
|
|
|
|
5,592
|
|
|
|
16,022
|
|
Average advances outstanding during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
62,533
|
|
|
$
|
73,020
|
|
|
$
|
59,747
|
|
Securities sold under agreements to repurchase with customers
|
|
|
2,075
|
|
|
|
2,308
|
|
|
|
4,018
|
|
Balance outstanding at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
62,145
|
|
|
$
|
63,199
|
|
|
$
|
67,000
|
|
Securities sold under agreements to repurchase with customers
|
|
|
804
|
|
|
|
664
|
|
|
|
1,582
|
|
Weighted average interest rate during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
1.93
|
%
|
|
|
1.84
|
%
|
|
|
2.36
|
%
|
Securities sold under agreements to repurchase with customers
|
|
|
0.10
|
|
|
|
0.09
|
|
|
|
0.10
|
|
Weighted average interest rate at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
1.93
|
%
|
|
|
1.92
|
%
|
|
|
2.10
|
%
|
Securities sold under agreements to repurchase with customers
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.10
|
|
Subsidiary Activities
PB Bancorp, 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, 2019, Windham North Properties, LLC, owned five 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,
2019, we had 81 full-time employees and 32 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
PB Bancorp, 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 and state income tax matters and is not a comprehensive
description of the tax rules applicable to PB Bancorp, Inc. or Putnam Bank.
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, 2016 through June 30, 2019. 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.
Federal Taxation
Method
of Accounting. For federal income tax purposes, PB Bancorp, 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.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law, which decreased the federal tax rate
to 21.0% beginning January 1, 2018. The fiscal year ending June 30, 2018 results reflect the initial impact of TCJA, which resulted
in an additional $211,000 tax provision booked as of December 31, 2017 due to the revaluation of its net deferred tax asset at
the enactment date.
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, 2019, 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, 2019, 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 credits may be used as credits against regular tax liabilities in
future years. At June 30, 2019, PB Bancorp, Inc. had no AMT payments and no net operating losses available for carry forward
to future periods. As of June 30, 2018, we had AMT credit carryforwards of $1.2 million. Under the Tax Cuts and Jobs Act,
the AMT has been eliminated and any credits will be fully recovered by 2021.
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. Net operating losses incurred in tax years arising after December 31, 2017, are
providing no carryback and an indefinite carryforward.
Corporate
Dividends-Received Deduction. PB Bancorp, 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 65% 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 50% of dividends received or accrued
on their behalf.
State Taxation
Connecticut
State Taxation. PB Bancorp, 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 multiplied by the state tax
rate of 7.5% to arrive at Connecticut income tax. At June 30, 2019, PB Bancorp, Inc. and subsidiaries had $88 million of
net operating losses. These available Connecticut net operating loss carryforwards allows the taxpayer to offset 50% of
their CT taxable income.
The State of Connecticut
permits 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’s passive investment company, Putnam Bank Mortgage Servicing
Company, eliminated the state income tax expense of Putnam Bank. 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.
Maryland
State Taxation. As a Maryland business corporation, PB Bancorp is required to file an annual report with
and pay franchise taxes to the state of Maryland.
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.
As a savings and loan
holding company, PB Bancorp is required to comply with the rules and regulations of the Federal Reserve Board. It is required
to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal
Reserve Board. PB Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the
federal securities laws.
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 PB Bancorp, Inc. and Putnam Bank and their operations.
Set forth below is
a brief description of material regulatory requirements that are applicable to Putnam Bank and PB Bancorp. The description is limited
to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such
statutes and regulations and their effects on Putnam Bank and PB Bancorp.
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 to 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, PB Bancorp, Inc, 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, a federal savings association or an out of state state-chartered
bank 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, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio
and a Tier 1 capital to total assets leverage ratio.
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 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.
Legislation enacted
in May 2018 requires the federal banking agencies, including the Federal Reserve Board, to establish for institutions with less
than $10 billion of assets a “community bank leverage ratio” of tangible equity capital to total average consolidated
assets of between 8 to 10%. Institutions with capital meeting the specified requirement and electing to follow the alternative
regulatory capital structure will be considered to comply with the applicable regulatory capital requirements, including the risk-based
requirements. The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal
regulators and the agencies issued a proposed rule in February 2019 that would set the “community bank leverage ratio”
at 9%. 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 was 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.
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. More recent legislative amendments
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%. The Dodd-Frank Act provides that an institution that elects and complies
with the “community bank leverage ratio” alternative will be deemed to be “well capitalized.”
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. 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 determines, after
notice and opportunity for hearing, that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
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.
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, 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 on behalf of an affiliate,
and 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
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 assessed based on perceived risk to the Deposit Insurance
Fund. Perceived risk to the deposit insurance fund is currently determined by the FDIC using a combination of examination ratings
and financial modeling designed to estimate the probability that an institution fails over a three year period. The range of assessments
for banks of less than $10 billion in assets is 1 1/2 basis points to 30 basis points of total assets
less tangible capital, effective July 1, 2016.
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 by year end 2019. For the quarter ended June 30, 2019, the annualized FICO assessment was
equal to 0.12 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's most recent CRA rating under Connecticut
law was "Satisfactory."
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:
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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;
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Equal Credit Opportunity Act, prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act of 1978, governing the use
and provision of information to credit reporting agencies; and
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Rules and regulations of the various federal and state
agencies charged with the responsibility of implementing such federal and state laws.
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The deposit operations of Putnam Bank also
are subject to, among others, the:
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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;
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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
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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.
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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 amount of required reserves is adjusted annually. For 2019, the Federal Reserve
Board’s regulations require that reserves be maintained against aggregate transaction accounts as follows: for that portion
of transaction accounts aggregating $124.2 million or less, the reserve requirement is 3.0%; amounts greater than $124.2 million
require a 10.0% reserve. The first $16.3 million of otherwise reservable balances is 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, 2019.
Based on redemption provisions of the Federal Home Loan Bank of Boston, the stock has no quoted market value and is carried at
cost. 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 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. For the fiscal year ended June 30, 2019, the Federal Home
Loan Bank paid quarterly dividends equal to an average annual yield of 6.34%. 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
PB Bancorp is a unitary
savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board
has enforcement authority over PB Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits
the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Putnam Bank.
As a savings and loan
holding company, PB Bancorp’s activities are limited to those activities permissible by law for financial holding companies
(if PB Bancorp makes an election to be treated as a financial holding company and meets the other requirements to be a financial
holding company) or multiple savings and loan holding companies. A financial holding company may engage in activities that are
financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending
and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, and selling insurance
and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified
by federal regulation.
Federal law prohibits
a savings and loan holding company from directly or indirectly acquiring more than 5% of another savings institution or savings
and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of
any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies
to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources
and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit
insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not
acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory
acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes
such acquisitions by out-of-state companies.
Savings and loan holding
companies historically had not been subjected to consolidated regulatory capital requirements. However, the Dodd-Frank Act required
the Federal Reserve Board to establish minimum consolidated capital requirements for all depository institution holding companies
that are as stringent as those required for the insured depository subsidiaries. Subsequent legislation was enacted in December
2014 that required the Federal Reserve Board to extend the applicability of its “Small Bank Holding Company” exemption
from consolidated holding company capital requirements from holding companies of up to $500 million of consolidated assets to holding
companies of up to $1 billion. Regulations implementing this amendment were effective May 15, 2015. Legislation enacted in May
2018 directed the Federal Reserve to extend the exemption to holding companies of up to $3 billion in consolidated assets, which
was done in August 2018. Consequently, savings and loan holding companies with under $3 billion in consolidated assets, such as
PB Bancorp, remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in
particular cases.
The Dodd-Frank Act
extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated
regulations implementing the “source of strength” policy that require holding companies to act as a source of strength
to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The Federal Reserve
Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding
companies and savings and loan holding companies. In general, the policy 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 consultation with
respect to 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 policy statement also states
that a holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock
or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would
result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning
of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of PB Bancorp to
pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
In order for PB Bancorp
to be regulated by the Federal Reserve Board as a savings and loan holding company, rather than as a bank holding company, Putnam
Bank must qualify as a “qualified thrift lender” under federal regulations or satisfy the “domestic building
and loan association” test under the Internal Revenue Code. Under the qualified thrift lender test, a savings institution
is required to maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets
up to 20% of total assets; (ii) intangible assets, including goodwill; and (iii) the value of property used to conduct
business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including
certain mortgage-backed and related securities) in at least nine out of each twelve month period. At June 30, 2019, Putnam Bank
maintained 73.3% of its portfolio assets in qualified thrift investments and was in compliance with the qualified thrift lender
requirement.
Change in Control Regulations
Under the Change in
Bank Control Act, no person may acquire control of a savings and loan holding company such as PB Bancorp unless the Federal Reserve
Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking
into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects
of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing
more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors,
or a determination by the regulator that the acquiror has the power, directly or indirectly, to exercise a controlling influence
over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s
voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where,
as will be the case with PB Bancorp, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal
regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the
Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject
to registration, examination and regulation by the Federal Reserve Board.
Acquisition of 10%
or more of the stock of Connecticut-chartered institutions or companies controlling Connecticut institutions may also require the
prior approval of the Connecticut Banking Commissioner.
Reports to Security Holders
PB Bancorp, Inc. files
annual and quarterly reports with the SEC on Forms 10-K and 10-Q, respectively. PB Bancorp, Inc. also files current reports on
the Form 8-K with the SEC. In addition, PB Bancorp, Inc. files preliminary and definitive proxy materials with the SEC.
PB Bancorp, 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 financial condition and results of operations.
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 our 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 and New London 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:
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demand
for our products and services may decline;
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loan delinquencies, problem assets and
foreclosures may increase;
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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
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the net worth and liquidity of loan guarantors
may decline, impairing their ability to honor commitments to us.
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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. 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.
The financial services
industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued
consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services
traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies
of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and
services than we can. 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. For additional information see “Item
1—Business.—Competition.”
We
have increased our commercial real estate and commercial loan originations, and intend to continue to increase these
types of originations. These loans involve credit risk that 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 continues to increase, the corresponding risks and potential
for losses from these loans may also increase.
The increasing amount of commercial loans may result in errors
in judging its collectability, which may lead to additional provisions for loan losses or charge-offs, which would reduce our profits.
Our commercial loan portfolio, which includes
commercial real estate and commercial business loans, has increased in recent periods. A large portion of our commercial loan portfolio
was originated recently. Our limited experience with these borrowers does not provide us with a significant payment history pattern
with which to judge future collectability. Further, these loans have not been subjected to unfavorable economic conditions. As
a result, it is difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency
or charge-off levels above our historical experience, which could adversely affect our future performance.
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:
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the interest income we earn on our interest-earning assets, such as loans and securities; and
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the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
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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,
as 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. Furthermore, increases in interest rates may adversely affect our
ability to originate loans and/or the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest
owed on such loans would increase as interest rates increase. 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. Furthermore, an inverted interest rate yield curve,
where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term
interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial
institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate
mortgage loans.
Any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results
of operations. Changes in the level of interest rates also may negatively affect 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, 2019, our
“rate shock” analysis prepared by our third-party consultant indicates that our net portfolio value would decrease
by $12.0 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.”
Our asset size may make it more difficult for us to
compete.
Our asset size may
make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the
marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income
we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate
the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios.
Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also
make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult
to generate meaningful non-interest income from non-traditional banking activities. Finally, as a smaller institution, we are disproportionately
affected by the continually increasing costs of compliance with new banking and other regulations.
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 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, 2019, 23.8% of our assets were 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, 2019, $221.5
million, or 58.3% of our loan portfolio, was secured by one-to-four family real estate, which included $8.1 million of second mortgages
and $7.0 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.
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 our loans. In determining the amount of the allowance for loan losses,
we review the size and composition of our loan portfolio 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. 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. Our allowance for loan losses was 0.81% of total loans and 72.45% of non-performing loans at June 30,
2019. Material additions to our allowance would materially decrease our net income.
The Financial Accounting
Standards Board has adopted a new accounting standard that will be effective for PB Bancorp, Inc. and Putnam Bank beginning in
January 2023. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to
estimate lifetime expected credit losses on loans at the time of origination, and recognize the expected credit losses as allowances
for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may
require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review
to determine the appropriate level of the allowance for loan losses. The Financial Accounting Standards Board has proposed delaying
the implementation date for smaller reporting companies, like the Company.
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 registered public accounting firm. 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.
We are 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.
We are subject to the
following capital requirements: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio
of 6% ; (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. Unrealized gains
and losses on certain “available-for-sale” securities holdings are included for calculating regulatory capital requirements
unless a one-time opt-out is exercised. Putnam Bank elected to opt out of the requirement. We are also subject to a “capital
conservation buffer” of 2.5% that has resulted in the following additional 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%. An institution
is 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 establish a maximum percentage of eligible retained income that can be utilized
for such actions.
We meet all of these
requirements, including the capital conservation buffer, as of June 30, 2019.
The application of
these capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital,
and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply
with such requirements. 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. 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.
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 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 our
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 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 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 accounting standards could affect reported earnings.
The bodies responsible
for establishing and interpreting accounting standards, including the Financial Accounting Standards Board, the Securities and
Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs
the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report
our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively,
which could negatively impact our results of operation.
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, we are 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 other-than-temporary impairment of securities,
valuation of deferred tax assets 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.
Our stock-based benefit plans have increased
our expenses and reduced our income, and may dilute your ownership interests.
In
February 2017, our stockholders approved the PB Bancorp, Inc. 2017 Equity Incentive Plan. Stockholders approved the issuance of
181,306 shares of common stock pursuant to restricted stock and the issuance of 453,267 shares of common stock pursuant to stock
options. During fiscal 2019, we recognized $451,000 in noninterest expense relating to this stock benefit plan and we expect to
incur additional expenses in the future.
We
may fund the 2017 Equity Incentive Plan through open market purchases of our common stock or from the issuance of authorized
but unissued shares of common stock. Our ability to repurchase shares of our common stock to fund these plans will be subject to
many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading
price of the stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is
to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 7.5% dilution in ownership
interest if newly issued shares of our common stock are used to fund all of such stock options and shares of restricted common
stock.
Various factors may make takeover attempts more difficult
to achieve.
Certain provisions
of our articles of incorporation and bylaws and state and federal banking laws, including regulatory approval requirements, could
make it more difficult for a third party to acquire control of PB Bancorp without our board of directors’ approval. Under
federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control
of a savings and loan holding company. There also are provisions in our articles of incorporation and bylaws that may be used to
delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding
shares of common stock. Furthermore, shares of restricted stock and stock options that we have granted or may grant to employees
and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons
to acquire control of PB Bancorp without the consent of our board of directors. Taken as a whole, these statutory provisions and
provisions in our articles of incorporation and bylaws could result in our being less attractive to a potential acquirer and thus
could adversely affect the market price of our common stock.
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. Growing our operations could also cause our expenses to increase faster than our revenues.
Our business strategy
includes growth in assets, deposits and the scale of our operations. Achieving such growth 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. Accordingly,
any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached.
If our enterprise risk management framework is not effective
at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely
affected.
Our enterprise risk
management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder
value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk
to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational. However, as with any
risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the
future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we
could suffer unexpected losses and our business and results of operations could be materially adversely affected.
The Federal Reserve Board may require
us to commit capital resources to support Putnam Bank, and we may not have sufficient access to such capital resources.
Federal law requires
that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support
such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company
to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound
practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company
may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. It is possible
that we will be unable to borrow funds when we need to do so.
Monetary policies and regulations of the Federal Reserve
Board could adversely affect our business, financial condition and results of operations.
In addition to being
affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An
important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used
by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments
of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying
combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use
also affects interest rates charged on loans or paid on deposits.
The monetary policies
and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in
the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition
and results of operations cannot be predicted.
We may be adversely affected by recent changes in U.S. tax
laws.
Changes
in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that
will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes
include (i) a lower limit on the deductibility of mortgage interest on single-family residential real estate loans, (ii) the
elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense
and (iv) a limitation on the deductibility of property taxes and state and local income taxes. The recent changes in the
tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans
in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive, demand
for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as
a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would
reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
We may be required to transition from the use of the LIBOR
interest rate index in the future.
We have certain loans
and investment securities indexed to LIBOR to calculate the loan interest rate. The continued availability of the LIBOR index is
not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the
administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what
rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected
to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments
has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected.
If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index
or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation
of interest rates under our loan agreements with our borrowers may result in our incurring significant expenses in effecting the
transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes
or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which
could have an adverse effect on our results of operations.
A protracted government shutdown may result in reduced loan
originations and related gains on sale and could negatively affect our financial condition and results of operations.
During
any protracted federal government shutdown, we may not be able to close certain loans and we may not be able to recognize non-interest
income on the sale of loans. Some of the loans we originate are sold directly to government agencies, and some of these sales may
be unable to be consummated during a shutdown. In addition, we believe that some borrowers may determine not to proceed
with their home purchase and not close on their loans, which would result in a permanent loss of the related non-interest income.
A federal government shutdown could also result in reduced income for government employees or employees of companies that engage
in business with the federal government, which could result in greater loan delinquencies, increases in our nonperforming, criticized
and classified assets and a decline in demand for our products and services.
Deterioration in the performance or
financial position of the Federal Home Loan Bank of Boston might restrict the Federal Home Loan Bank of Boston’s ability
to meet the funding needs of its members, cause a suspension of its dividend, and cause its stock to be determined to be impaired.
Significant components
of our liquidity needs are met through access to funding pursuant to our membership in the Federal Home Loan Bank of Boston. The
Federal Home Loan Bank of Boston is a cooperative that provides services to its member banking institutions. The primary reason
for joining the Federal Home Loan Bank of Boston is to obtain funding. The purchase of stock in the Federal Home Loan Bank of Boston
is a requirement for a member to gain access to funding. Any deterioration in the Federal Home Loan Bank of Boston’s performance
or financial condition may affect our ability to access funding and/or require us to deem the required investment in Federal Home
Loan Bank of Boston stock to be impaired. If we are not able to access funding, we may not be able to meet our liquidity needs,
which could have an adverse effect on the results of operations or financial condition. Similarly, if we deem all or part of our
investment in Federal Home Loan Bank of Boston stock impaired, such action could have a material adverse effect on our results
of operations or financial condition.
Our funding sources may prove insufficient to replace deposits
at maturity and support our future growth.
We must maintain sufficient
funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources
in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily
of Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit,
including deposits obtained through the Certificate of Deposit Registry Service, also known as CDARS. As we continue to grow, we
are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to
difficulty or an inability in accessing these additional funding sources. Our financial flexibility will be severely constrained
if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable
interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues
may not increase proportionately to cover our costs. In this case, our operating margins and results of operations would be adversely
affected.
If our government
banking deposits were lost within a short period of time, this could negatively impact our liquidity and earnings.
As of June 30, 2019,
we held $12.9 million of deposits from municipalities throughout Connecticut. These deposits may be more volatile than other deposits
and generally are larger than our other consumer and business deposits. If a significant amount of these deposits were withdrawn
within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings.