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EX-31.1 - EXHIBIT 31.1 - PSB Holdings, Inc.t81347_ex31-1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _____________
 
Commission file number 0-50970
 
PSB Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
United States 42-1597948
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
 
40 Main Street, Putnam, Connecticut  06260
(Address of principal executive offices)
(Zip Code)
 
(860) 928-6501 
(Issuer’s telephone number)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer Accelerated filer    
Non-accelerated filer  Smaller reporting company  
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ YES ☒ NO
 
As of January 31, 2015, there were 6,541,561 shares of the registrant’s common stock outstanding.
 


 
 

 

 
PSB Holdings, Inc.
 
Table of Contents
     
Part I.
FINANCIAL INFORMATION
 
   
Page No.
Item 1.
Financial Statements (Unaudited)
 
     
 
Consolidated Balance Sheets at December 31, 2014 and June 30, 2014
1
     
 
Consolidated Statements of Net Income for the three and six months ended December 31, 2014 and 2013
2
     
 
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended December 31, 2014 and 2013
3
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the six months December 31, 2014 and 2013
4
     
 
Consolidated Statements of Cash Flows for the six months ended December 31, 2014 and 2013
5
     
 
Notes to Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
43
     
Item 4.
Controls and Procedures
43
     
Part II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43
     
Item 1A.
Risk Factors
43
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
     
Item 3.
Defaults Upon Senior Securities
43
     
Item 4.
Mine Safety Disclosures
43
     
Item 5.
Other Information
43
     
Item 6.
Exhibits
43
     
SIGNATURES
44
 
 
 

 

 
Part I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements (unaudited)
 
 
 

 

 
PSB Holdings, Inc.
 Consolidated Balance Sheets
(Unaudited)
             
   
December 31,
   
June 30,
 
   
2014
   
2014
 
   
(in thousands except share data)
 
ASSETS
           
Cash and due from depository institutions
  $ 4,223     $ 4,573  
Interest-bearing demand deposits with other banks
    13,857       2,762  
     Total cash and cash equivalents
    18,080       7,335  
Securities available-for-sale, at fair value
    48,264       48,081  
Securities held-to-maturity (fair value of $149,233 as of
               
    December 31, 2014 and $143,257 as of June 30, 2014)
    147,732       142,176  
Federal Home Loan Bank stock, at cost
    5,371       5,927  
Loans held-for-sale
    -       100  
Loans
    229,934       232,506  
Less: Allowance for loan losses
    (2,124 )     (2,380 )
               Net loans
    227,810       230,126  
Premises and equipment
    3,921       4,037  
Accrued interest receivable
    1,053       1,018  
Other real estate owned
    3,197       1,549  
Goodwill
    6,912       6,912  
Bank-owned life insurance
    9,291       9,150  
Deferred tax asset
    2,580       2,661  
Other assets
    2,110       1,967  
                 
Total assets
  $ 476,321     $ 461,039  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
Liabilities
               
Deposits
               
     Non-interest-bearing
  $ 54,812     $ 53,021  
     Interest-bearing
    292,331       294,235  
               Total deposits
    347,143       347,256  
Mortgagors escrow accounts
    2,259       2,267  
Federal Home Loan Bank advances
    53,500       53,500  
    Securities sold under agreements to repurchase
    19,270       4,181  
Other liabilities
    2,327       2,384  
Total liabilities
    424,499       409,588  
                 
Stockholders’ Equity
               
Preferred stock, $0.10 par value, 1,000,000 shares authorized,
         
   no shares issued and outstanding
    -       -  
Common stock, $0.10 par value, 12,000,000 shares authorized,
         
   6,943,125 shares issued, 6,541,561 shares outstanding
               
   at December 31, 2014 and June 30, 2014
    694       694  
Additional paid-in capital
    30,602       30,602  
Retained earnings
    26,200       25,793  
Accumulated other comprehensive loss
    (337 )     (237 )
Unearned ESOP shares
    (1,246 )     (1,310 )
Treasury stock, at cost (401,564 shares at
               
   December 31, 2014 and June 30, 2014)
    (4,091 )     (4,091 )
Total stockholders’ equity
    51,822       51,451  
                 
Total liabilities and stockholders’ equity
  $ 476,321     $ 461,039  
 
See accompanying notes to consolidated financial statements.
 
1
 

 

 
PSB Holdings, Inc.
Consolidated Statements of Net Income
(Unaudited)
                         
   
Three months ended
   
Six months ended
 
   
December 31,
   
December 31,
 
   
2014
   
2013
   
2014
   
2013
 
   
(in thousands, except per share data)
 
Interest and dividend income:
                       
   Interest and fees on loans
  $ 2,401     $ 2,575     $ 4,883     $ 5,194  
   Interest and dividends on investments
    1,028       914       2,045       1,753  
Total interest and dividend income
    3,429       3,489       6,928       6,947  
                                 
Interest expense:
                               
   Deposits and escrow
    560       613       1,130       1,278  
   Borrowed funds
    365       393       749       786  
Total interest expense
    925       1,006       1,879       2,064  
Net interest and dividend income
    2,504       2,483       5,049       4,883  
                                 
Provision for loan losses
    70       20       70       40  
Net interest and dividend income after provision
                               
   for loan losses
    2,434       2,463       4,979       4,843  
                                 
Non-interest income:
                               
    Total other-than-temporary impairment losses on debt securities
    (173 )     (47 )     (414 )     (50 )
    Portion of losses recognized in other comprehensive loss
    121       43       259       43  
    Net impairment losses recognized in earnings
    (52 )     (4 )     (155 )     (7 )
    Fees for services
    423       449       878       892  
    Mortgage banking activities
    21       12       54       39  
    Net commissions from brokerage service
    32       53       50       80  
    Income from bank-owned life insurance
    71       74       141       152  
    Other income
    48       45       96       80  
Total non-interest income
    543       629       1,064       1,236  
                                 
Non-interest expense:
                               
   Compensation and benefits
    1,582       1,510       3,105       2,957  
   Occupancy and equipment
    293       287       599       590  
   Data processing
    220       213       455       402  
   LAN/WAN network
    39       37       75       73  
   Advertising and marketing
    52       38       91       81  
   OCC assessment
    32       48       65       95  
   FDIC deposit insurance
    96       151       163       304  
   Other real estate owned
    90       40       158       63  
   Write-down of other real estate owned
    32       30       32       96  
   Other
    444       466       833       873  
Total non-interest expense
    2,880       2,820       5,576       5,534  
Income before income tax expense
    97       272       467       545  
                                 
Income tax (benefit) expense
    (25 )     32       42       62  
NET INCOME
  $ 122     $ 240     $ 425     $ 483  
                                 
Earnings per common share:
                               
   Basic
  $ 0.02     $ 0.04     $ 0.07     $ 0.08  
   Diluted
  $ 0.02     $ 0.04     $ 0.07     $ 0.08  
 
See accompanying notes to consolidated financial statements.
 
2
 

 

 
PSB Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
                         
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2014
   
2013
   
2014
   
2013
 
   
(in thousands)
Net Income
  $ 122     $ 240     $ 425     $ 483  
                                 
Other comprehensive loss:
                               
Net unrealized holding losses on
                               
        available-for-sale securities
    (222 )     (588 )     (47 )     (557 )
Reclassification adjustment for losses
                               
        realized in income on available-for-sale securities (1)
    52       4       155       7  
Non-credit portion of other-than-temporary losses on
                         
            available-for-sale securities
    (121 )     (43 )     (259 )     (43 )
                                 
Other comprehensive loss before tax
    (291 )     (627 )     (151 )     (593 )
Income tax benefit related to other
                               
    comprehensive loss
    98       214       51       202  
Other comprehensive loss net of tax
    (193 )     (413 )     (100 )     (391 )
Total comprehensive (loss) income
  $ (71 )   $ (173 )   $ 325     $ 92  
 
 
(1)
Reported in net impairment losses recognized in earnings included in non-interest income on the consolidated statements of net income.  Income tax benefit associated with the reclassification adjustments were $20,000 and $1,000 for the three months ended December 31, 2014 and 2013, respectively.  Income tax benefit associated with the reclassification adjustments were $60,000 and $3,000 for the six months ended December 31, 2014 and 2013, respectively.
 
See accompanying notes to consolidated financial statements.
 
3
 

 

 
PSB Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the six months ended December 31, 2014 and 2013
(Unaudited)
 
                     
Accumulated
                   
         
Additional
         
Other
   
Unearned
         
Total
 
   
Common
   
Paid-in
   
Retained
   
Comprehensive
   
ESOP
   
Treasury
   
Stockholders
 
   
Stock
   
Capital
   
Earnings
   
Loss
   
Shares
   
Stock
   
Equity
 
      (dollars in thousands)
                                           
Balances at June 30, 2013
  $ 694     $ 30,602     $ 24,836     $ (523 )   $ (1,437 )   $ (4,091 )   $ 50,081  
                                                         
Comprehensive income (loss)
    -       -       483       (391 )     -       -       92  
ESOP shares committed to be released (6,390 shares)
    -       -       (24 )     -       63       -       39  
                                                         
Balances at December 31, 2013
  $ 694     $ 30,602     $ 25,295     $ (914 )   $ (1,374 )   $ (4,091 )   $ 50,212  
                                                         
Balances at June 30, 2014
  $ 694     $ 30,602     $ 25,793     $ (237 )   $ (1,310 )   $ (4,091 )   $ 51,451  
                                                         
Comprehensive income (loss)
    -       -       425       (100 )     -       -       325  
ESOP shares committed to be released (6,390 shares)
    -       -       (18 )     -       64       -       46  
                                                         
Balances at December 31, 2014
  $ 694     $ 30,602     $ 26,200     $ (337 )   $ (1,246 )   $ (4,091 )   $ 51,822  
 
See accompanying notes to consolidated financial statements.
 
4
 

 

 
PSB Holdings, Inc.
 Consolidated Statements of Cash Flows
(Unaudited)
             
   
For the Six Months
 
   
Ended December 31,
 
   
2014
   
2013
 
   
(in thousands)
 
Cash flows from operating activities
           
Net income
  $ 425     $ 483  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Amortization of securities, net
    574       707  
    Impairment losses on securities
    155       7  
    Net decrease in loans held-for-sale
    100       887  
    Amortization of deferred loan costs, net
    71       24  
Provision for loan losses
    70       40  
Gain on sale of other real estate owned, net
    (48 )     (15 )
    Write-down of other real estate owned
    32       96  
    Loss on sale of premises and equipment
    -       1  
Depreciation and amortization - premises and equipment
    172       166  
Amortization - software
    61       51  
(Increase) decrease in accrued interest receivable and other assets
    (206 )     751  
Increase in cash surrender value of bank-owned life insurance
    (141 )     (152 )
Decrease in other liabilities
    (57 )     (51 )
Deferred tax expense
    133       92  
Amortization of ESOP expense
    46       39  
Net cash provided by operating activities
    1,387       3,126  
Cash flows from investing activities
               
Purchase of available-for-sale securities
    (3,067 )     (15,986 )
Proceeds from sales, calls, pay downs and maturities of available-for-sale securities
    2,523       4,106  
Purchase of held-to-maturity securities
    (18,736 )     (11,335 )
Proceeds from calls, pay downs and maturities of held-to-maturity securities
    12,661       15,614  
Redemption of Federal Home Loan Bank Stock
    556       -  
Loan principal (originations) repayments, net
    (27 )     3,649  
Recoveries of loans previously charged off
    38       41  
Proceeds from sale of other real estate owned
    531       275  
Capital expenditures - premises and equipment
    (56 )     (105 )
Capital expenditures - software
    (33 )     -  
Net cash used in investing activities
    (5,610 )     (3,741 )
Cash flows from financing activities
               
Net decrease in deposit accounts
    (113 )     (5,393 )
Net decrease in mortgagors’ escrow accounts
    (8 )     (31 )
Proceeds from long-term Federal Home Loan Bank advances
    10,000       -  
Repayment of long-term Federal Home Loan Bank advances
    (10,000 )     -  
Net increase in securities sold under agreements to repurchase
    15,089       5,285  
Net cash provided by (used in) financing activities
    14,968       (139 )
Net increase (decrease) in cash and cash equivalents
    10,745       (754 )
Cash and cash equivalents at beginning of year
    7,335       12,793  
Cash and cash equivalents at end of period
  $ 18,080     $ 12,039  
Supplemental disclosures
               
Cash paid during the period for:
               
   Interest
  $ 1,882     $ 2,074  
   Income taxes (refunded) paid, net
    (554 )     1  
Loans transferred to other real estate owned
    2,164       823  
 
See accompanying notes to consolidated financial statements.
 
5
 

 

 
PSB Holdings, Inc.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 1 – Organization
 
PSB Holdings, Inc. (the “Company”) is a federally chartered holding company formed on May 27, 2003 for the purpose of acquiring all of the common stock of Putnam Bank (the “Bank”) concurrent with the Bank’s reorganization from a mutual savings institution to the mutual holding company form of organization.  No shares were offered to the public as part of this reorganization.
 
On October 4, 2004, the Company issued 6,943,125 shares of common stock, 3,729,846 shares (53.7%) of which were issued to Putnam Bancorp, MHC and 3,089,691 shares (44.5%) of which were sold to eligible depositors of the Bank and others at $10.00 per share. In addition, the Company issued 123,588 shares (1.8%) to a charitable foundation established by the Bank.
 
On August 27, 2014, the Bank filed a notice of intent to convert from a federally-chartered savings bank to a Connecticut-chartered bank that is a member of the Federal Reserve System.  PSB Holdings, Inc. and Putnam Bancorp, MHC would remain savings and loan holding companies.  The charter conversion became effective on December 30, 2014.
 
NOTE 2 – Basis of Presentation
 
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary, consisting of only normal recurring accruals and the elimination of all significant intercompany accounts, to present fairly the financial position, results of operations and cash flows of the Company for the periods presented.  The interim results of operations are not necessarily indicative of the operating results to be expected for future periods, including the year ending June 30, 2015.  These financial statements should be read in conjunction with the 2014 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 24, 2014.
 
NOTE 3 – Recent Accounting Pronouncements
 
Capital.  In July 2013, federal banking regulators approved an interim rule to set minimum requirements for both the quantity and quality of capital held by banks. The interim final rule includes a new minimum ratio of common equity Tier 1 capital to risk weighted assets of 4.5%, raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. Additionally, banks must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The Company began complying with the final rule on January 1, 2015, and believes that it will continue to exceed all the minimum capital ratio requirements.
 
Transfers and Servicing. In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU requires disclosure of information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements, as well as increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
 
6
 

 

 
Receivables – Troubled Debt Restructurings by Creditors. In January 2014, FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure which clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real property recognized. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
 
Receivables – Troubled Debt Restructurings by Creditors. In August 2014, FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure which provides guidance on when government guaranteed loans should be derecognized upon foreclosure. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
 
Note 4 - Critical Accounting Policies
 
Critical accounting policies are those that involve significant judgments and assumptions by management that have, or could have, a material impact on our income or the carrying value of our assets.  Our critical accounting policies are those related to our loans, allowance for loan losses, income taxes, goodwill and the impairment of securities.
 
Loans.  The Company’s loan portfolio includes residential real estate, commercial real estate, construction, commercial and consumer/other segments. Residential real estate loans include one-to four-family owner occupied loans, second mortgage loans and equity lines of credit.  Consumer/other loans include personal loans.  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
 
The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual if collection of principal or interest is considered doubtful.  All interest accrued but not collected for loans that are placed on non-accrual is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Allowance for Loan Losses.  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.
 
The allowance for loan losses is evaluated on a quarterly basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, specific and unallocated components, as further described below.
 
7
 

 

 
General component
 
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer/other. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; concentrations; changes in lending policies and procedures; experience/ability/depth of lending management and staff; loan rating migration; the effect of other external factors; changes in the value of underlying collateral; changes in the loan review system and national and local economic trends and conditions.
 
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
 
Residential real estate - The Company does not originate loans with a loan-to-value ratio greater than 100% and does not originate subprime loans. Loans originated with a loan-to-value ratio greater than 80% generally require private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
 
Commercial real estate - Loans in this segment are primarily income-producing properties throughout New England.  The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Management obtains rent rolls annually and continually monitors the cash flows of these loans.
 
Construction – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
 
Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
 
Consumer/other - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
 
Specific component
 
The specific component relates to loans that are classified as impaired.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable.  An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer/other and residential real estate loans for impairment disclosures, unless such loans are 90 days or more past due or subject to a troubled debt restructuring (“TDR”) agreement.
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
 
8
 

 

 
The Company periodically may agree to modify the contractual terms of loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR.  All TDRs are classified as impaired.
 
Unallocated component
 
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general reserves in the portfolio.
 
Goodwill.  The Company’s goodwill was recorded as a result of business acquisitions and combinations.  The Company’s goodwill (consideration paid in excess of fair value of acquired net assets) is reviewed at least annually to ensure that there have been no events or circumstances resulting in an impairment of the recorded amount of excess purchase price.  Adverse changes in the economic environment, operations of the Company or other factors could result in a decline in projected fair values.  If the estimated fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount to implied fair value.
 
Other-Than-Temporary Impairment of Securities.  Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance provided by ASC 320-10 “Investments-Debt and Equity Securities”.  The guidance addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss.  It also includes accounting considerations subsequent to the recognition of other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.
 
Income Taxes.  The Company recognizes income taxes under the asset and liability method.  Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when the amounts related to such temporary differences are realized or settled.  A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
Management has discussed the development and selection of these critical accounting policies with the Audit Committee.
 
9
 

 

 
NOTE 5 – Earnings Per Share (EPS)
 
As presented below, basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share.  Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For purposes of computing diluted EPS, the treasury stock method is used.
 
The following information was used in the computation of EPS on both a basic and diluted basis for the three months and six months ended December 31, 2014 and 2013:
                         
   
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
   
December 31, 2014
   
December 31, 2013
   
December 31, 2014
   
December 31, 2013
 
Net income
  $ 122,000     $ 240,000     $ 425,000     $ 483,000  
                                 
Weighted average common shares applicable to EPS
    6,413,800       6,401,021       6,412,202       6,399,423  
Effect of dilutive potential common shares (1)     -       -       -       -  
Weighted average common shares applicable to diluted EPS
    6,413,800       6,401,021       6,412,202       6,399,423  
Earnings per share:
                               
Basic
  $ 0.02     $ 0.04     $ 0.07     $ 0.08  
Diluted
  $ 0.02     $ 0.04     $ 0.07     $ 0.08  
                                 
(1)  For the three months and six months ended December 31, 2014 and 2013, options to purchase 199,106 shares were outstanding but not included in the computation of earnings per share because they were anti-dilutive.
 
10
 

 

 
NOTE 6 – Investment Securities
 
The carrying value and estimated fair values of investment securities by maturity are as follows:
                   
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost Basis
   
Gain
   
(Loss)
   
Value
 
         
(in thousands)
       
December 31, 2014
                       
Available-for-sale:
                       
Debt securities:
                       
U.S. government and government-sponsored securities:
                       
Due from one through five years
  $ 1,000     $ -     $ (20 )   $ 980  
Corporate bonds and other securities:
                               
Due after ten years
    5,999       -       (1,049 )     4,950  
U.S. Government-sponsored and guaranteed mortgage-backed securities:
                               
Due from one through five years
    536       24       -       560  
From five through ten years
    10,435       163       -       10,598  
After ten years
    14,531       456       (29 )     14,958  
      25,502       643       (29 )     26,116  
Non-agency mortgage-backed securities:
                               
Due after ten years
    6,276       358       (341 )     6,293  
Total debt securities
    38,777       1,001       (1,439 )     38,339  
Equity securities:
                               
Auction rate preferred
    10,000       -       (75 )     9,925  
Total available-for-sale securities
  $ 48,777     $ 1,001     $ (1,514 )   $ 48,264  
                                 
Held-to-maturity:
                               
U.S. government and government-sponsored securities:
                               
Due from one through five years
  $ 7,238     $ 21     $ (28 )   $ 7,231  
From five through ten years
    2,957       116       -       3,073  
      10,195       137       (28 )     10,304  
U.S. Government-sponsored and guaranteed mortgage-backed securities:
                               
Due from five through ten years
    3,875       166       -       4,041  
After ten years
    133,662       1,828       (602 )     134,888  
      137,537       1,994       (602 )     138,929  
Total held-to-maturity securities
  $ 147,732     $ 2,131     $ (630 )   $ 149,233  

11
 

 

 
                   
 
 
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost Basis
   
Gain
   
(Loss)
   
Value
 
         
(in thousands)
       
June 30, 2014:
                       
Available-for-sale:
                       
Debt securities:
                       
U.S. government and government-sponsored securities:
                       
Due from five through ten years
  $ 1,000     $ -     $ (24 )   $ 976  
Corporate bonds and other securities:
                               
Due after ten years
    5,999       -       (836 )     5,163  
U.S. Government-sponsored and guaranteed mortgage-backed securities:
                               
Due from one through five years
    684       37       -       721  
From five through ten years
    11,593       189       -       11,782  
After ten years
    12,426       377       (44 )     12,759  
      24,703       603       (44 )     25,262  
Non-agency mortgage-backed securities:
                               
Due after ten years
    6,741       321       (382 )     6,680  
Total debt securities
    38,443       924       (1,286 )     38,081  
Equity securities:
                               
Auction rate preferred
    10,000       -       -       10,000  
Total available-for-sale securities
  $ 48,443     $ 924     $ (1,286 )   $ 48,081  
                                 
Held-to-maturity:
                               
U.S. government and government-sponsored securities:
                               
Due from one through five years
  $ 5,262     $ 4     $ (28 )   $ 5,238  
From five through ten years
    4,929       122       -       5,051  
      10,191       126       (28 )     10,289  
U.S. Government-sponsored and guaranteed mortgage-backed securities:
                               
Due from five through ten years
    4,445       190       -       4,635  
After ten years
    127,540       1,831       (1,038 )     128,333  
      131,985       2,021       (1,038 )     132,968  
Total held-to-maturity securities
  $ 142,176     $ 2,147     $ (1,066 )   $ 143,257  
 
There were no sales of available-for-sale securities for the three months ended December 31, 2014 or 2013.  Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method.  There were other-than-temporary impairment charges on available-for-sale securities of $52,000 and $4,000 realized in income during the three months ended December 31, 2014 and 2013, respectively.  The write-downs of securities included total other-than-temporary impairment losses of $173,000 and $47,000, net of $121,000 and $43,000 recognized in other comprehensive income/loss for the three months ended December 31, 2014 and 2013, respectively, before taxes.
 
There were no sales of available-for-sale securities for the six months ended December 31, 2014 or 2013.  There were other-than-temporary impairment charges on available-for-sale securities of $155,000 and $7,000 realized in income during the six months ended December 31, 2014 and 2013, respectively.  The write-downs of securities included total other-than-temporary impairment losses of $414,000 and $50,000, net of $259,000 and $43,000 recognized in other comprehensive income/loss for the six months ended December 31, 2014 and 2013, respectively, before taxes.   See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview.”
 
12
 

 


The following is a summary of the estimated fair value and related unrealized losses segregated by category and length of time that individual securities have been in a continuous unrealized loss position at:
                                     
December 31, 2014:
 
Less than 12 months
   
12 months or more
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Available-for-sale:
    (in thousands)  
Debt securities:
                                   
U.S. Government and government-sponsored securities
  $ -     $ -     $ 980     $ 20     $ 980     $ 20  
Corporate bonds and other securities
    -       -       4,950       1,049       4,950       1,049  
U.S. Government-sponsored and guaranteed mortgage-backed securities
    3,049       17       2,597       12       5,646       29  
Equity securities
    2,925       75       -       -       2,925       75  
Total temporarily impaired available-for-sale
    5,974       92       8,527       1,081       14,501       1,173  
                                                 
Held-to-maturity:
                                               
U.S. Government and government-sponsored securities
    996       4       2,231       24       3,227       28  
                                                 
U.S. Government-sponsored and guaranteed mortgage-backed securities
    21,210       82       26,006       520       47,216       602  
Total temporarily impaired held-to-maturity
    22,206       86       28,237       544       50,443       630  
                                                 
Other-than-temporarily impaired debt securities (1):
                                               
Non-agency mortgage-backed securities
    557       3       3,135       338       3,692       341  
Total temporarily-impaired and other- than-temporarily impaired securities
  $ 28,737     $ 181     $ 39,899     $ 1,963     $ 68,636     $ 2,144  
                                                 
June 30, 2014:
 
Less than 12 months
    12 months or more    
Total
 
   
Fair
   
Unrealized
    Fair    
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
    Value    
Losses
   
Value
   
Losses
 
Available-for-sale:
    (in thousands)  
Debt securities:
                                   
U.S. Government and government-sponsored securities
  $ -     $ -     $ 976     $ 24     $ 976     $ 24  
Corporate bonds and other obligations
    -       -       5,163       836       5,163       836  
U.S. Government-sponsored and guaranteed mortgage-backed securities
    2,370       1       3,931       43       6,301       44  
Total temporarily impaired available-for-sale
    2,370       1       10,070       903       12,440       904  
                                                 
Held-to-maturity:
                                               
U.S. Government and government-sponsored securities
    1,004       1       3,229       27       4,233       28  
U.S. Government-sponsored and guaranteed mortgage-backed securities
    31,059       103       46,612       935       77,671       1,038  
Total temporarily impaired held-to-maturity
    32,063       104       49,841       962       81,904       1,066  
                                                 
Other-than-temporarily impaired debt securities (1):
                                               
Non-agency mortgage-backed securities
    -       -       3,301       382       3,301       382  
                                                 
Total temporarily-impaired and other- than-temporarily impaired securities
  $ 34,433     $ 105     $ 63,212     $ 2,247     $ 97,645     $ 2,352  
 
(1)  Includes other-than-temporary impaired available-for-sale debt securities in which a portion of the other-than-temporary impairment loss remains in accumulated other comprehensive income/loss.
 
13
 

 

 
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
 
At December 31, 2014 and June 30, 2014, there were 39 and 57 individual investment securities, respectively, with aggregate depreciation of 3.0% and 1.3%, respectively, from the Company’s amortized cost basis.  Management has the intent and ability to hold these securities until cost recovery occurs and considers these declines to be temporary.
 
The unrealized losses on the Company’s investment in U.S. Government-sponsored agency bonds and U.S. government-guaranteed and government-sponsored residential mortgage-backed securities were primarily caused by interest rate fluctuations.  These investments are guaranteed or sponsored by the U.S. government or an agency thereof.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2014.
 
The Company’s unrealized losses on investments in corporate bonds and other securities relate to investments in companies within the financial services sector.  As of December 31, 2014, the Company had five investments in corporate single-issuer trust preferred securities (TRUPs) with a total book value of $6.0 million and total fair value of $5.0 million, all of which were classified as available-for-sale.  The single-issuer trust preferred investments are evaluated for other-than-temporary impairment by performing a present value of cash flows each quarter.  None of the issuers have deferred interest payments or announced the intention to defer interest payments.  The Company believes the decline in fair value is related to the spread over three-month LIBOR, on which the quarterly interest payments are based, as the spread over LIBOR being received is significantly lower than current market spreads.  Management concluded the impairment of these investments was considered temporary and asserts that the Company does not have the intent to sell these investments and that it is more likely than not it will not have to sell the investments before recovery of their cost bases which may be at maturity.
 
At December 31, 2014, our auction-rate trust preferred securities (ARP) portfolio had unrealized losses totaling $75,000.  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 December 31, 2014, our investments in auction-rate trust preferred securities consisted of investments in three corporate issuers.  These securities were originally purchased by the Company because they represented highly liquid, tax-preferred investments secured, in most cases, by preferred stock issued by high quality, investment grade companies (generally other financial institutions) (“collateral preferred shares”).  The ARP shares, or certificates, purchased by the Company are Class A certificates, which, among other rights, entitle the holder to priority claim on dividends paid into the Trust holding the preferred shares.  Management concluded the impairment of these investments was considered temporary and asserts that the Company does not have the intent to sell these investments and that it is more likely than not it will not have to sell the investments before recovery of their cost bases which may be at maturity.
 
For the six months ended December 31, 2014, securities with other-than-temporary impairment losses recognized in earnings consisted of non-agency mortgage-backed securities.  For these debt securities, the Company estimated the portion of loss attributable to credit loss using a discounted cash flow model.  Significant inputs included the estimated cash flows of the underlying loans based on key assumptions, such as default rate, loss severity and prepayment rate.  Assumptions can vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type.  The present value of the expected cash flows was compared to the Company’s amortized cost basis to determine the credit-related impairment loss.  Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on these securities.
 
14
 

 

 
The following table represents a roll-forward of the amount of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income (loss) (in thousands):
 
Balance as of June 30, 2013
  $ 15,733  
Credit losses on securities for which other-than-temporary impairment was not previously recorded
    -  
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded
    10  
Reductions for securities sold during the period
    -  
         
Balance as of June 30, 2014
    15,743  
         
Credit losses on securities for which other-than-temporary impairment w as not previously recorded
    -  
Additional credit losses on securities for which an other-than-temporary impairment charge w as previously recorded
    155  
Reductions for securities sold during the period
    -  
         
Balance as of December 31, 2014
  $ 15,898  
         
NOTE 7 – Loans
 
The following table sets forth the composition of our loan portfolio at December 31, 2014 and June 30, 2014:
 
   
December 31,
   
June 30,
 
   
2014
   
2014
 
   
(in thousands)
 
             
Real Estate:
           
Residential (1)
  $ 181,415     $ 184,380  
Commercial
    43,421       43,887  
Residential construction
    2,049       2,661  
Commercial
    2,225       1,904  
Consumer and other
    614       627  
                 
Total loans
    229,724       233,459  
                 
Unadvanced construction loans
    (581 )     (1,658 )
      229,143       231,801  
Net deferred loan costs
    791       705  
Allowance for loan losses
    (2,124 )     (2,380 )
                 
Loans, net
  $ 227,810     $ 230,126  
                 
(1) Residential real estate loans include one-to four-family mortgage loans, second mortgage loans, and home equity lines of credit.
 
15
 

 

 
Credit Quality Information
 
The Company utilizes a nine grade internal loan rating system as follows:
 
Loans rated 1 - 5 are considered “pass” rated loans with low to average risk.
 
Loans rated 6 are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.
 
Loans rated 7 are considered “substandard.”  Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged.  There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
 
Loans rated 8 are considered “doubtful.”  Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
 
Loans rated 9 are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
 
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans.  Annually, the Company engages an independent third-party to review a significant portion of loans within these segments.  Management uses the results of these reviews as part of its annual review process.  Credit quality for residential real estate and consumer/other loans is determined by monitoring loan payment history and ongoing communications with the borrower.
 
The following table presents the Company’s loan classes by internally assigned grades at December 31, 2014 and June 30, 2014:

   
Residential
   
Commercial
   
Residential
         
Consumer
       
December 31, 2014
 
Real Estate
   
Real Estate
    Construction    
Commercial
   
and other
   
Total
 
   
(in thousands)
 
Grade:
       
 
   
 
                   
     Pass
  $ 178,078     $ 34,762     $ 1,656     $ 1,732     $ 613     $ 216,841  
     Special Mention
    321       2,168       -       -       -       2,489  
     Substandard
    3,016       3,827       -       493       1       7,337  
     Doubtful
    -       2,476       -       -       -       2,476  
     Loss
    -       -       -       -       -       -  
          Total
  $ 181,415     $ 43,233     $ 1,656     $ 2,225     $ 614     $ 229,143  
                                                 
   
Residential
   
Commercial
   
Residential
           
Consumer
         
June 30, 2014
 
Real Estate
   
Real Estate
    Construction    
Commercial
   
and other
   
Total
 
   
(in thousands)
 
Grade:
                                               
     Pass
  $ 180,080     $ 33,034     $ 1,575     $ 1,459     $ 627     $ 216,775  
     Special Mention
    175       2,065       -       -       -       2,240  
     Substandard
    4,125       6,553