PB BANCORP, INC. The following analysis discusses changes in the financial condition atDecember 31, 2019 andJune 30, 2019 and results of operations for the three and six months endedDecember 31, 2019 and 2018, and should be read in conjunction with the Company's Consolidated Financial Statements (unaudited) and the notes thereto, appearing in Part I, Item 1 of this quarterly report. These financial statements should be read in conjunction with the 2019 Consolidated Financial Statements and notes thereto included inPB Bancorp, Inc.'s Annual Report on Form 10-K filed with theSEC onSeptember 26, 2019 , as amended onOctober 25, 2019 . Forward-Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.PB Bancorp intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations ofPB Bancorp , are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions.PB Bancorp's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations ofPB Bancorp and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of theU.S. Government , including policies of theU.S. Treasury and theFederal Reserve Board , the quality and composition of the loan and investment portfolios, demand for loan products, cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems; deposit flows, competition, demand for financial services inPB Bancorp's market area, the effect of any federal government shutdown, and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerningPB Bancorp and its business, including additional factors that could materially affectPB Bancorp financial results, is included inPB Bancorp's filings with theSecurities and Exchange Commission , including the risk factors included inPB Bancorp's Annual Report on Form 10-K filed with theSEC onSeptember 26, 2019 , as amended onOctober 25, 2019 . 29 Except as required by applicable law and regulation, the Company does not undertake - and specifically disclaims any obligation - to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Overview
Our profitability is highly dependent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Our net income decreased$177,000 , or 16.2%, to$913,000 , or$0.13 per basic and diluted share for the three months endedDecember 31, 2019 , compared to net income of$1.1 million , or$0.15 per basic and diluted share for the three months endedDecember 31, 2018 . This was due primarily to merger related expenses of$491,000 for the three months endedDecember 31, 2019 . Net interest income remained unchanged at$3.7 million for the three months endedDecember 31, 2019 andDecember 31, 2018 while non-interest income decreased$66,000 , or 9.0% to$669,000 , for the three months endedDecember 31, 2019 from$735,000 for the three months endedDecember 31, 2018 . Non-interest expense increased$142,000 , or 4.5% to$3.3 million for the three months endedDecember 31, 2019 from$3.2 million for the three months endedDecember 31, 2018 . Income tax expense decreased$34,000 , or 16.3% to$174,000 for the three months endedDecember 31, 2019 from$208,000 for the three months endedDecember 31, 2018 . The effective tax rate was 16.0% for the three months endedDecember 31, 2019 and 16.1% for the three months endedDecember 31, 2018 . Our net income decreased$612,000 , or 24.7%, to$1.9 million , or$0.26 per basic and diluted share for the six months endedDecember 31, 2019 , compared to net income of$2.5 million , or$0.34 per basic and diluted share for the six months endedDecember 31, 2018 . This was due primarily to an increase of$750,000 in the provision for loan losses. The Company recorded a credit for loan losses of$600,000 for the six months endedDecember 31, 2018 compared to a$150,000 provision for loan losses for the six months endedDecember 31, 2019 . Net interest income increased$141,000 , or 1.9% to$7.5 million for the six months endedDecember 31, 2019 from$7.4 million for the six months endedDecember 31, 2018 , while non-interest income remained unchanged at$1.4 million for the six months endedDecember 31, 2019 andDecember 31, 2018 . Non-interest expense increased$149,000 , or 2.3% to$6.5 million for the six months endedDecember 31, 2019 from$6.4 million for the six months endedDecember 31, 2018 . This included$491,000 in merger related expenses. Income tax expense decreased$147,000 , or 29.2% to$357,000 for the six months endedDecember 31, 2019 from$504,000 for the six months endedDecember 31, 2018 . The effective tax rate was 16.0% for the six months endedDecember 31, 2019 compared to 16.9% for the six months endedDecember 31, 2018 . An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income, which in turn would likely have an adverse effect on our results of operations. As described in "Market Risk," we expect that our net interest income and our net portfolio value would decrease as a result of an instantaneous increase in interest rates. We use a variety of strategies to help manage interest rate risk, as described in "Market Risk". Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions inEastern Connecticut and theRhode Island andMassachusetts communities adjacent toWindham County, Connecticut . Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. In addition, changes in economic conditions could result in increased actual losses or increased losses inherent in our loan portfolio, either of which could require us to significantly increase the level of our
provision for loan losses.
30
Comparison of Financial Condition at
Assets Total assets were$529.5 million atDecember 31, 2019 , a decrease of$8.6 million , or 1.6%, from$538.0 million atJune 30, 2019 . Cash and cash equivalents increased$13.0 million , or 50.6%, to$38.7 million atDecember 31, 2019 compared to$25.7 million atJune 30, 2019 . The increase was due to accumulating additional funds from maturing securities, loan pay-offs and an increase in deposits for upcoming loan closings. Investments in held-to-maturity securities decreased$10.2 million , or 16.1%, to$53.2 million atDecember 31, 2019 compared to$63.5 million atJune 30, 2019 and investments in available-for-sale securities decreased$3.7 million , or 9.5%, to$35.2 million atDecember 31, 2019 compared to$38.9 million atJune 30, 2019 . The Company used excess cash, as well as cash flows from investments to assist in repaying higher cost borrowings. Net loans outstanding decreased$7.4 million , or 2.0%, to$370.6 million atDecember 31, 2019 from$378.0 million atJune 30, 2019 . This was primarily due to a decrease in residential loans of$9.6 million , or 4.3%, to$211.9 million atDecember 31, 2019 compared to$221.5 million atJune 30, 2019 . Commercial real estate loans increased$1.8 million , or 1.2%, to$147.5 million atDecember 31, 2019 compared to$145.7 million atJune 30 ,
2019. Allowance for Loan Losses The table below indicates the relationship between the allowance for loan losses, total loans outstanding and non-performing loans atDecember 31, 2019 andJune 30, 2019 . For additional information, see "Comparison of Operating Results for the three and six months endedDecember 31, 2019 and 2018 - Provision for Loan Losses." December 31, June 30, 2019 2019 (Dollars in thousands) Allowance for loan losses$ 3,200 $ 3,063 Total loans 372,789 379,924 Non-performing loans 3,839 4,228 Allowance/total loans 0.86 % 0.81 % Allowance/non-performing loans 83.4 % 72.4 % Liabilities Total liabilities decreased$9.9 million , or 2.2%, to$443.1 million atDecember 31, 2019 from$453.0 million atJune 30, 2019 . Total deposits decreased$1.4 million , or 0.4%, to$382.5 million atDecember 31, 2019 from$383.9 million atJune 30, 2019 . We experienced a decrease in non-interest-bearing deposits of$1.0 million , or 1.4%, to$72.7 million atDecember 31, 2019 compared to$73.8 million atJune 30, 2019 . Interest-bearing deposits decreased$338,000 , or 0.1% to$309.8 million atDecember 31, 2019 compared to$310.1 million atJune 30, 2019 .Total Federal Home Loan Bank borrowings decreased$9.5 million , or 15.3%, to$52.6 million atDecember 31, 2019 from$62.1 million atJune 30, 2019 , as we required less borrowings to fund our operations. Securities sold under agreement to repurchase increased$1.3 million , or 165.8% to$2.1 million atDecember 31, 2019 compared to$804,000 atJune 30, 2019 . Stockholders' Equity Total stockholders' equity increased$1.3 million , or 1.6%, to$86.4 million atDecember 31, 2019 from$85.1 million atJune 30, 2019 due primarily to net income of$1.9 million for the six months endedDecember 31, 2019 , offset by dividends paid totaling$1.0 million . 31
Comparison of Operating Results for the Three and Six Months Ended
Interest and Dividend Income. Interest and dividend income increased$169,000 , or 3.7% to$4.8 million for the three months endedDecember 31, 2019 compared to$4.6 million for the three months endedDecember 31, 2018 . The average balance of interest-earning assets increased$18.1 million , or 3.7%, to$508.9 million for the three months endedDecember 31, 2019 from$490.7 million for the three months endedDecember 31, 2018 . The average yield on interest-earning assets remained the same for the three months endedDecember 31, 2019 and 2018, at 3.73%. Interest income on loans increased$204,000 , or 5.5% to$3.9 million for the three months endedDecember 31, 2019 compared to$3.7 million for the three months endedDecember 31, 2018 . This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased$14.7 million , or 4.1%, to$375.3 million for the three months endedDecember 31, 2019 from$360.6 million for the three months endedDecember 31, 2018 . The yield on average loans increased six basis points to 4.16% for the three months endedDecember 31, 2019 from 4.10% for the three months endedDecember 31, 2018 . Interest and dividend income on investments decreased$143,000 , or 17.5% to$673,000 for the three months endedDecember 31, 2019 compared to$816,000 for the three months endedDecember 31, 2018 . This was due to a decrease in the average balance of investments of$27.3 million , or 22.3%, to$94.8 million for the three months endedDecember 31, 2019 from$122.1 million for the three months endedDecember 31, 2018 . This was partially offset by an increase in yield of 17 basis points to 2.82% for the three months endedDecember 31, 2019 from 2.65% for the three months endedDecember 31, 2018 . Interest income on other earning assets increased$108,000 , or 154.3% to$178,000 for the three months endedDecember 31, 2019 compared to$70,000 for the three months endedDecember 31, 2018 . This was due to an increase in the average balance of other earning assets of$30.8 million , or 383.3%, to$38.8 million for the three months endedDecember 31, 2019 from$8.0 million for the three months endedDecember 31, 2018 . The yield on other earning assets decreased 164 basis points to 1.82% for the three months endedDecember 31, 2019 from 3.46% for the three months endedDecember 31, 2018 . Interest and dividend income increased$552,000 , or 6.1% to$9.7 million for the six months endedDecember 31, 2019 compared to$9.1 million for the six months endedDecember 31, 2018 . The average balance of interest-earning assets increased$19.9 million , or 4.0% to$512.2 million for the six months endedDecember 31, 2019 from$492.3 million for the six months endedDecember 31, 2018 . The average yield on interest-earning assets increased to 3.74% for the six months endedDecember 31, 2019 from 3.67% for the six months endedDecember 31, 2018 as a result of increases in market interest rates. Interest income on loans increased$614,000 , or 8.4% to$7.9 million for the six months endedDecember 31, 2019 compared to$7.3 million for the six months endedDecember 31, 2018 . This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased$19.1 million , or 5.4% to$376.2 million for the six months endedDecember 31, 2019 from$357.0 million for the six months endedDecember 31, 2018 . The yield on average loans increased 12 basis points to 4.18% for the six months endedDecember 31, 2019 from 4.06% for the six months endedDecember 31, 2018 as a result of increases in market interest rates.
Interest and dividend income on investments decreased$296,000 , or 17.6% to$1.4 million for the six months endedDecember 31, 2019 compared to$1.7 million for the six months endedDecember 31, 2018 . This was due to a decrease in the average balance of investments of$27.3 million , or 21.6% to$98.7 million for the six months endedDecember 31, 2019 from$126.0 million for the six months endedDecember 31, 2018 . This was partially offset by an increase in yield of 13 basis points to 2.78% for the six months endedDecember 31, 2019 from 2.65% for the six months endedDecember 31, 2018 as a result of increases in market interest rates. Interest income on other earning assets increased$234,000 , or 205.3% to$348,000 for the six months endedDecember 31, 2019 compared to$114,000 for the six months endedDecember 31, 2018 . This was due to an increase in the average balance of other earning assets of$28.1 million , or 304.2%, to$37.3 million for the six months endedDecember 31, 2019 from$9.2 million for the six months endedDecember 31, 2018 . This was partially offset by a decrease in yield of 60 basis points to 1.85% for the six months endedDecember 31, 2019 from 2.45% for the six months endedDecember 31, 2018 . 32 Interest Expense. Interest expense increased$172,000 , or 19.5% to$1.0 million for the three months endedDecember 31, 2019 compared to$881,000 for the three months endedDecember 31, 2018 . Total average interest-bearing liabilities increased$13.1 million , or 3.6% to$374.3 million for the three months endedDecember 31, 2019 compared to$361.2 million for the three months endedDecember 31, 2018 . The cost of average interest-bearing liabilities increased 15 basis points to 1.12% for the three months endedDecember 31, 2019 compared to 0.97% for the three months endedDecember 31, 2018 . Interest expense on deposits increased by$206,000 , or 35.7%, to$783,000 for the three months endedDecember 31, 2019 from$577,000 for the three months endedDecember 31, 2018 . The average balance of deposits increased$20.2 million , or 6.8%, from$297.1 million for the three months endedDecember 31, 2018 to$317.3 million for the three months endedDecember 31, 2019 . The cost of interest-bearing deposits increased 21 basis points to 0.98% for the three months endedDecember 31, 2019 from 0.77% for the three months endedDecember 31, 2018 . Interest expense on time deposits increased$188,000 , or 40.4%, to$653,000 for the three months endedDecember 31, 2019 from$465,000 for the three months endedDecember 31, 2018 . The average balance of time deposits increased$17.8 million , or 15.6%, from$114.2 million for the three months endedDecember 31, 2018 to$132.0 million for the three months endedDecember 31, 2019 . The cost of time deposits increased to 1.96% for the three months endedDecember 31, 2019 from 1.62% for the three months endedDecember 31, 2018 . Interest expense on borrowings decreased by$34,000 , or 11.2%, to$270,000 for the three months endedDecember 31, 2019 from$304,000 for the three months endedDecember 31, 2018 . The rate paid on borrowings remained unchanged at 1.88% for the three months endedDecember 31, 2019 and the three months endedDecember 31, 2018 . Average borrowings decreased$7.1 million , or 11.1%, to$57.0 million for the three months endedDecember 31, 2019 from$64.1 million for the three months endedDecember 31, 2018 .Average Federal Home Loan Bank advances decreased$6.7 million , or 10.7%, to$55.6 million for the three months endedDecember 31, 2019 from$62.3 million for the three months endedDecember 31, 2018 . We have been able to fund loan growth, in part, with an increase in deposits. The average rate onFederal Home Loan Bank advances decreased one basis point to 1.92% for the three months endedDecember 31, 2019 from 1.93% for the three months endedDecember 31, 2018 . Average other borrowed money decreased$421,000 , or 22.7%, to$1.4 million for the three months endedDecember 31, 2019 from$1.8 million for the three months endedDecember 31, 2018 . Interest expense increased$411,000 , or 23.6% to$2.1 million for the six months endedDecember 31, 2019 compared to$1.7 million for the six months endedDecember 31, 2018 . Total average interest-bearing liabilities increased$14.6 million , or 4.0% to$378.1 million for the six months endedDecember 31, 2019 compared to$363.5 million for the six months endedDecember 31, 2018 . The cost of average interest-bearing liabilities increased 18 basis points to 1.13% for the six months endedDecember 31, 2019 compared to 0.95% for the six months endedDecember 31, 2018 . Interest expense on deposits increased by$453,000 , or 39.9%, to$1.6 million for the six months endedDecember 31, 2019 from$1.1 million for the six months endedDecember 31, 2018 . The average balance of deposits increased$19.2 million , or 6.4%, to$318.0 million for the six months endedDecember 31, 2019 from$298.7 million for the six months endedDecember 31, 2018 . The cost of interest-bearing deposits increased 24 basis points to 0.99% for the six months endedDecember 31, 2019 from 0.75% for the six months endedDecember 31, 2018 . Interest expense on time deposits increased$414,000 , or 45.4%, to$1.3 million for the six months endedDecember 31, 2019 from$912,000 for the six months endedDecember 31, 2018 . The average balance of time deposits increased$19.4 million , or 17.0%, to$133.6 million for the six months endedDecember 31, 2019 from$114.2 million for the six months endedDecember 31, 2018 . The cost of time deposits increased to 1.97% for the six months endedDecember 31, 2019 from 1.58% for the six months endedDecember 31, 2018 . Interest expense on borrowings decreased by$42,000 , or 6.9%, to$566,000 for the six months endedDecember 31, 2019 from$608,000 for the six months endedDecember 31, 2018 . The rate paid on borrowings increased one basis point to 1.87% for the six months endedDecember 31, 2019 from 1.86% for the six months endedDecember 31, 2018 . Average borrowings decreased$4.6 million , or 7.1%, to$60.1 million for the six months endedDecember 31, 2019 from$64.7 million for the six months endedDecember 31, 2018 .Average Federal Home Loan Bank advances decreased$4.3 million , or 6.8%, to$58.1 million for the six months endedDecember 31, 2019 from$62.4 million for the six months endedDecember 31, 2018 . We have been able to fund loan growth, in part, with an increase in deposits. The average rate onFederal Home Loan Bank advances remained unchanged at 1.93% for the six months endedDecember 31, 2019 and for the six months endedDecember 31, 2018 . Average other borrowed money decreased$344,000 , or 14.5%, to$2.0 million for the six months endedDecember 31, 2019 from$2.4 million for the six months endedDecember 31, 2018 . 33
Net Interest Income. Net interest income remained unchanged at$3.7 million for the three months endedDecember 31, 2019 andDecember 31, 2018 . Our interest rate spread decreased to 2.61% for the three months endedDecember 31, 2019 from 2.76% for the three months endedDecember 31, 2018 and our net interest-earning assets increased$5.0 million , or 3.9%. Our net interest margin decreased to 2.91% for the three months endedDecember 31, 2019 from 3.02% for the three months endedDecember 31, 2018 . Net interest income increased$141,000 , or 1.9%, to$7.5 million for the six months endedDecember 31, 2019 from$7.4 million for the six months endedDecember 31, 2018 . Our interest rate spread decreased to 2.61% for the six months endedDecember 31, 2019 from 2.72% for the six months endedDecember 31, 2018 and our net interest-earning assets increased$5.3 million , or 4.1%. Our net interest margin decreased to 2.90% for the six months endedDecember 31, 2019 from 2.97% for the six months endedDecember 31, 2018 .
Provision for Loan Losses. There was no provision for loan loss for the three
months ended
Provision for loan losses increased$750,000 to$150,000 for the six months endedDecember 31, 2019 from a credit provision of$600,000 for the six months endedDecember 31, 2018 . This was due primarily to$521,000 in net recoveries for the six months endedDecember 31, 2018 . Non-interest Income. Non-interest income decreased$66,000 , or 9.0%, to$669,000 for the three months endedDecember 31, 2019 compared to$735,000 for the three months endedDecember 31, 2018 . This was primarily due to an increase of$30,000 in other-than-temporary impairment losses on debt securities and decreases in fees for service of$19,000 and gain on sales of oreo of$17,000 . Non-interest income remained unchanged at$1.4 million for the six months endedDecember 31, 2019 andDecember 31, 2018 . This included an increase of$77,000 in other-than-temporary impairment losses on debt securities and increases in gain on sale of other real estate owned of$59,000 and net commissions from brokerage services of$40,000 . Non-interest Expense. Non-interest expense increased$142,000 , or 4.5% to$3.3 million for the three months endedDecember 31, 2019 compared to$3.2 million for the three months endedDecember 31, 2018 . Salaries and benefits expense decreased$186,000 , or 9.6% to$1.8 million for the three months endedDecember 31, 2019 from$1.9 million for the three months endedDecember 31, 2018 . This was primarily due to decreases in bonus expense of$98,000 and profit sharing expense of$145,000 . This was partially offset by an increase in salary expense of$33,000 . Occupancy and equipment expense increased$2,000 , or 0.7% to$292,000 for the three months endedDecember 31, 2019 from$290,000 for the three months endedDecember 31, 2018 . All other non-interest expense, consisting primarily of data processing expense,Federal Deposit Insurance Corporation deposit insurance, merger related expenses, professional fees and marketing expense increased by$326,000 , or 34.8%, to$1.3 million for the three months endedDecember 31, 2019 from$937,000 for the three months endedDecember 31, 2018 . This was primarily due to$491,000 in merger related expenses during the three months endedDecember 31, 2019 . This was partially offset by decreases inFDIC insurance expense of$35,000 and investor related expenses of$31,000 . Non-interest expense increased$149,000 , or 2.3% to$6.5 million for the six months endedDecember 31, 2019 compared to$6.4 million for the six months endedDecember 31, 2018 . Salaries and benefits expense decreased$51,000 , or 1.3% to$3.8 million for the six months endedDecember 31, 2019 from$3.9 million for the six months endedDecember 31, 2018 . Occupancy and equipment expense increased$3,000 , or 0.5% to$603,000 for the six months endedDecember 31, 2019 from$600,000 for the six months endedDecember 31, 2018 . All other non-interest expense, consisting primarily of data processing expense,Federal Deposit Insurance Corporation deposit insurance, merger related expenses, professional fees and marketing expense increased by$197,000 , or 10.3%, to$2.1 million for the six months endedDecember 31, 2019 from$1.9 million for the six months endedDecember 31, 2018 . This was primarily due to$491,000 in merger related expenses during the six months endedDecember 31, 2019 . This was offset by decreases in write-downs on other real estate owned of$91,000 andFDIC insurance expense of$74,000 . 34
Tax Expense. Income tax expense decreased by$34,000 , or 16.3% to$174,000 for the three months endedDecember 31, 2019 from$208,000 for the three months endedDecember 31, 2018 . Our effective tax rate was 16.0% for the three months endedDecember 31, 2019 and 16.1% for the three months endedDecember 31, 2018 . Tax expense is based on a year-to-date basis at a forecasted effective rate. The effective tax rates differed from the statutory tax rate due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income.
Income tax expense decreased by$147,000 , or 29.2% to$357,000 for the six months endedDecember 31, 2019 from$504,000 for the six months endedDecember 31, 2018 . Our effective tax rate was 16.0% for the six months endedDecember 31, 2019 compared to 16.9% for the six months endedDecember 31, 2018 . Tax expense is based on a year-to-date basis at a forecasted effective rate. The effective tax rates differed from the statutory tax rate due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income. 35 Average Balances and Yields The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and costs are annualized. For the Three Months Ended December 31, 2019 2018 Average Interest Yield/ Average Interest Yield/ Balance Income/Expense Cost
Balance Income/Expense Cost
(Dollars in thousands)
Interest-earning assets:
Investment securities $ 94,827 $ 673 2.82 % $ 122,109 $ 816 2.65 %
Loans 375,267 3,935 4.16 % 360,607 3,731 4.10 %
Other earning assets 38,775 178 1.82 % 8,023 70 3.46 %
Total interest-earning assets 508,869 4,786 3.73 % 490,739 4,617 3.73 %
Non-interest-earning assets 28,392 30,650
Total assets $ 537,261 $ 521,389
Interest-bearing liabilities:
NOW accounts $ 71,413 67 0.37 % $ 75,142 72 0.38 %
Savings accounts 86,642 18 0.08 % 85,916 17 0.08 %
Money market accounts 27,187 45 0.66 % 21,798 23 0.42 %
Time deposits 132,033 653 1.96 % 114,207 465 1.62 %
Total interest-bearing deposits 317,275 783 0.98 % 297,063 577 0.77 %
FHLB advances 55,585 269 1.92 % 62,278 303 1.93 %
Other borrowed money 1,433 1 0.28 % 1,854 1 0.21 %
Total other borowed money 57,018 270 1.88 % 64,132 304 1.88 %
Total interest-bearing
liabilities 374,293 1,053 1.12 % 361,195 881 0.97 %
Non-interest-bearing demand
deposits 72,049 70,789
Other non-interest-bearing
liabilities 4,859 4,303
Capital accounts 86,060 85,102
Total liabilities and capital
accounts $ 537,261 $ 521,389
Net interest income $ 3,733 $ 3,736
Interest rate spread 2.61 % 2.76 %
Net interest-earning assets $ 134,576 $ 129,544
Net interest margin 2.91 % 3.02 %
Average earning assets to
average interest-bearing
liabilities 135.95 % 135.87 %
36
For the Six Months Ended December 31,
2019 2018
Average Interest Yield/ Average Interest Yield/
Balance Income/Expense Cost Balance Income/Expense Cost
(Dollars in thousands)
Interest-earning assets:
Investment securities $ 98,740 $ 1,385 2.78 % $ 126,013 $ 1,681 2.65 %
Loans 376,163 7,920 4.18 % 357,041 7,306 4.06 %
Other earning assets 37,287 348 1.85 % 9,224 114 2.45 %
Total interest-earning assets 512,190 9,653 3.74 % 492,278 9,101 3.67 %
Non-interest-earning assets 28,024 28,544
Total assets $ 540,214 $ 520,822
Interest-bearing liabilities:
NOW accounts $ 71,012 134 0.37 % $ 77,132 146 0.38 %
Savings accounts 86,082 36 0.08 % 85,210 35 0.08 %
Money market accounts 27,214 91 0.66 % 22,179 41 0.37 %
Time deposits 133,648 1,326 1.97 % 114,211 912 1.58 %
Total interest-bearing deposits 317,956 1,587 0.99 % 298,732 1,134 0.75 %
FHLB advances 58,089 565 1.93 % 62,359 607 1.93 %
Other borrowed money 2,030 1 0.10 % 2,374 1 0.08 %
Total other borrowed money 60,119 566 1.87 % 64,733 608 1.86 %
Total interest-bearing
liabilities 378,075 2,153 1.13 % 363,465 1,742 0.95 %
Non-interest-bearing demand
deposits 71,697 70,287
Other non-interest-bearing
liabilities 4,603 2,154
Capital accounts 85,839 84,916
Total liabilities and capital
accounts $ 540,214 $ 520,822
Net interest income $ 7,500 $ 7,359
Interest rate spread 2.61 % 2.72 %
Net interest-earning assets $ 134,115 $ 128,813
Net interest margin 2.90 % 2.97 %
Average earning assets to
average interest-bearing
liabilities 135.47 % 135.44 %
37
The following table sets forth the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of the table, changes attributable to changes in
both rate and volume that cannot be segregated have been allocated
proportionately based on the changes due to rate and the changes due to volume.
For the Three
Months Ended
Compared to the
Three Months Ended
Increase (Decrease) Due to change in
Rate Volume Net
(In thousands)
INTEREST INCOME
Investment securities $ 283 $ (426 ) $ (143 )
Loans 51 153 204Other interest-earning assets (222 )
330 108
TOTAL INTEREST INCOME 112 57 169
INTEREST EXPENSE
NOW accounts (1 ) (4 ) (5 )
Savings accounts 1 - 1
Money market accounts 15 7 22
Time deposits 109 79 188
FHLB advances (2 ) (32 ) (34 )
Other borrowed money 1 (1 ) -
TOTAL INTEREST EXPENSE 123 49 172CHANGE IN NET INTEREST INCOME $ (11 )
$ 8 $ (3 )
38
For the Six
Months Ended
Compared to the
Six Months Ended
Increase (Decrease) Due to change in
Rate Volume Net
(In thousands)
INTEREST INCOME
Investment securities $ 221 $ (517 ) $ (296 )
Loans 215 399 614Other interest-earning assets (85 )
319 234
TOTAL INTEREST INCOME 351 201 552
INTEREST EXPENSE
NOW accounts - (12 ) (12 )
Savings accounts 1 - 1
Money market accounts 39 11 50
Time deposits 243 171 414
FHLB advances - (42 ) (42 )
Other borrowed money - - -
TOTAL INTEREST EXPENSE 283 128 411CHANGE IN NET INTEREST INCOME $ 68
$ 73 $ 141
39
Market Risk, Liquidity and Capital Resources
Market Risk
The majority of our assets and liabilities are monetary in nature. Consequently,
our most significant form of market risk is interest rate risk ("IRR"). Our
assets, consisting primarily of mortgage loans, have longer maturities than our
liabilities, consisting primarily of deposits and other borrowings. As a result,
a principal part of our business strategy is to manage IRR and reduce the
exposure of our net interest income ("NII") to changes in market interest rates.
Accordingly, our Board of Directors has established an Asset/Liability
Management Committee, which is responsible for evaluating the IRR inherent in
our assets and liabilities, for determining the level of risk that is
appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors. With the assistance of an IRR
management consultant, the committee monitors the level of IRR on a regular
basis and generally meets at least on a quarterly basis to review our
asset/liability policies and IRR position.
We have sought to manage our IRR in order to minimize the exposure of our
earnings and capital to changes in interest rates. As part of our ongoing
asset/liability management, we currently use the following strategies to manage
our IRR: (i) using alternative funding sources, such as advances from the
Federal Home Loan Bank of Boston , to "match fund" certain investments and/or
loans; (ii) continued emphasis on increasing core deposits; (iii) offering
adjustable rate and shorter-term home equity loans, commercial real estate
loans, construction loans and commercial and industrial loans; (iv) offering a
variety of consumer loans, which typically have shorter-terms; and (v) investing
in mortgage-backed securities with variable rates or fixed rates with shorter
durations. Shortening the average maturity of our interest-earning assets by
increasing our investments in shorter-term loans and securities, as well as
loans and securities with variable rates of interest, helps to better match the
maturities and interest rates of our assets and liabilities, thereby reducing
the exposure of our NII to changes in market interest rates.
Net interest income at-risk measures the risk of a decline in earnings due to
potential short-term and long- term changes in interest rates. The table below
represents an analysis of our IRR as measured by the estimated changes in NII,
resulting from an instantaneous and sustained parallel shift in the yield curve
(+100 and +200 basis points) at December 31, 2019 and June 30, 2019 .
Net Interest Income At-Risk
Estimated Increase (Decrease) Estimated Increase (Decrease)
Change in Interest Rates in NII in NII
(Basis Points) December 31, 2019 June 30, 2019
+200 (0.80%) 0.90%
+100 0.60% 1.60%
-100 (3.60%) (4.30%)
-200 (7.60%) (9.40%)
Net Portfolio Value Simulation Analysis. We compute the amounts by which the net
present value of our cash flows from assets, liabilities and off-balance sheet
items (the institution's net portfolio value or "NPV") would change in the event
of a range of assumed changes in market interest rates. A basis point equals
one-hundredth of one percent, and 200 basis points equals two percent, an
increase in interest rates from 3% to 5% would mean, for example, a 200 basis
point increase in the "Change in Interest Rates" column below.
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The table below sets forth, atDecember 31, 2019 , the estimated changes in our net portfolio value that would result from the designated instantaneous changes inthe United States Treasury yield curve based on information produced by an external consultant. This data is forPutnam Bank only and does not include any yield curve changes in the assets ofPB Bancorp, Inc. NPV as a Percentage of Present Value of Assets (3)
Change in Estimated Increase (Decrease) in Increase Interest Rates Estimated NPV (Decrease) (basis points) (1) NPV (2) Amount Percent
NPV Ratio (4) (basis points)
+300 $ 63,523 $ (18,538 ) -22.59 % 13.30 % (250 )
+200 $ 70,928 $ (11,133 ) -13.57 % 14.40 % (140 )
+100 $ 77,631 $ (4,430 ) -5.40 % 15.40 % (40 )
0 $ 82,061 $ - 0.00 % 15.80 % 0
-100 $ 83,883 $ 1,822 2.22 % 15.80 % 0
-200 $ 86,185 $ 4,124 5.03 % 15.90 % 10
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) NPV is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming
cash flows on interest-earning assets.
(4) NPV ratio represents NPV divided by the present value of assets.
The preceding analysis does not represent actual forecasts and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels, the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels will likely deviate from these assumed, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables. Liquidity The term liquidity refers to the ability of the Company and the Bank to meet current and future short-term financial obligations. The Company and the Bank further define liquidity as the ability to generate adequate amounts of cash to fund loan originations, deposit withdrawals and operating expenses. Liquidity management is both a daily and long-term function of business management. The Bank's primary sources of liquidity are deposits, scheduled amortization and prepayments of loan principal and mortgage-related securities, andFederal Home Loan Bank of Boston borrowings. The Bank can borrow funds from theFederal Home Loan Bank of Boston based on eligible collateral of loans and securities. The Bank hadFederal Home Loan Bank of Boston borrowings as ofDecember 31, 2019 of$52.6 million , with unused borrowing capacity of$45.7 million . The Bank has an internal limit of wholesale borrowings to total assets ratio of 30.0%. As ofDecember 31, 2019 , the ratio of wholesale borrowings to total assets was 12.3%. The Bank's primary investing activities are the origination of loans and the purchase of investment securities. During the six months endedDecember 31, 2019 , the Bank's net loan principal repayments were$8.8 million compared to net loan originations of$16.8 million for the six months endedDecember 31, 2018 . There were no security purchases during the six months endedDecember 31, 2019 and 2018. There were$2.0 million in loan purchases for the six months endedDecember 31, 2019 compared to no loan purchases for the six months endedDecember 31, 2018 . Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds. Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors and by other factors. The Bank monitors its liquidity position frequently and anticipates that it will have sufficient funds to meet its current funding commitments. 41 Certificates of deposit totaled$129.5 million atDecember 31, 2019 . The Bank relies on competitive rates, customer service and long-standing relationships with customers to retain deposits. Based on the Bank's experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict with certainty future terms and conditions upon renewal, a significant portion of such deposits will remain with the Bank. Federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6% and a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital, Tier 1 capital or Total capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. Due to our asset size, the Company is not subject to capital requirements. As ofDecember 31, 2019 , the most recent notification from theFederal Reserve Bank of Boston , categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change our category. The following table shows the Bank's required minimum capital ratios in order to be considered well-capitalized and the actual capital ratios as ofDecember 31, 2019 andJune 30, 2019 . Required Actual Actual Ratio Amount Ratio (in thousands) December 31, 2019 Tier 1 Leverage 5.00 %$ 67,620 12.86 % Common Equity Tier 1 Capital 6.50 67,620 18.79 Tier 1 Risk-based Capital 8.00 67,620 18.79 Total Capital 10.00 70,854 19.69 June 30, 2019 Tier 1 Leverage 5.00 %$ 65,318 12.57 % Common Equity Tier 1 Capital 6.50 65,318 17.69 Tier 1 Risk-based Capital 8.00 65,318 17.69 Total Capital 10.00 68,417 18.53
Off-Balance Sheet Arrangements
In addition to the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, lines of credit, and letters
of credit.
For the six months ended
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