PB Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - PB Bancorp, Inc.	tv493245_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - PB Bancorp, Inc.	tv493245_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - PB Bancorp, Inc.	tv493245_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - PB Bancorp, Inc.	tv493245_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 March 31, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission file number 001-37676

PB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland		47-5150586
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

40 Main Street, Putnam, Connecticut 06260

(Address of principal executive offices)

(Zip Code)

(860) 928-6501

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x YES ¨ NO

Indicate by check mark whether the registrant has submitted electronically 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).

x YES ¨ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a smaller reporting company)		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES x NO

As of May 1, 2018, there were 7,641,503 shares of the registrant’s common stock outstanding.

PB Bancorp, Inc.

Table of Contents

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at March 31, 2018 and June 30, 2017	1

	Consolidated Statements of Net Income for the three and nine months ended March 31, 2018 and 2017	2

	Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2018 and 2017	3

	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended March 31, 2018 and 2017	4

	Consolidated Statements of Cash Flows for the nine months ended March 31, 2018 and 2017	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

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)

PB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

	March 31,			June 30,
	2018			2017
	(in thousands except share data)
ASSETS
Cash and due from depository institutions	$	3,237		$	4,331
Interest-bearing demand deposits with other banks		6,276			5,842
Total cash and cash equivalents		9,513			10,173
Securities available-for-sale, at fair value		50,335			60,150
Securities held-to-maturity (fair value of $86,956 as of March 31, 2018 and $110,823 as of June 30, 2017)		87,724			110,022
Federal Home Loan Bank stock, at cost		4,486			4,353
Loans		352,176			312,572
Less: Allowance for loan losses		(2,939	)		(2,780	)
Net loans		349,237			309,792
Premises and equipment, net		3,332			3,483
Accrued interest receivable		1,297			1,258
Other real estate owned		1,381			1,814
Goodwill		6,912			6,912
Bank-owned life insurance		12,822			12,555
Net deferred tax asset		1,641			1,862
Other assets		1,811			1,774

Total assets	$	530,491		$	524,148

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing	$	71,299		$	71,783
Interest-bearing		299,660			293,978
Total deposits		370,959			365,761
Mortgagors' escrow accounts		1,754			2,850
Federal Home Loan Bank advances		70,712			67,000
Securities sold under agreements to repurchase		755			1,582
Other liabilities		2,310			2,418
Total liabilities		446,490			439,611

Stockholders' Equity
Preferred stock, 50,000,000 shares authorized, $0.01 par value, no shares issued and outstanding		-			-
Common stock, 100,000,000 shares authorized, $0.01 par value, 7,641,503 and 7,826,769 shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively.		76			78
Additional paid-in capital		60,459			62,243
Retained earnings		28,492			27,195
Accumulated other comprehensive loss		(499	)		(117	)
Unearned ESOP shares		(3,329	)		(3,439	)
Unearned stock awards		(1,198	)		(1,423	)
Total stockholders' equity		84,001			84,537

Total liabilities and stockholders' equity	$	530,491		$	524,148

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Net Income

(Unaudited)

	Three months ended						Nine months ended
	March 31,						March 31,
	2018			2017			2018			2017
	(in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans	$	3,360		$	2,794		$	9,844		$	8,040
Interest and dividends on investments		926			1,045			2,861			3,221
Other		21			4			82			63
Total interest and dividend income		4,307			3,843			12,787			11,324

Interest expense:
Deposits and escrow		468			435			1,374			1,331
Borrowed funds		330			362			1,031			1,075
Total interest expense		798			797			2,405			2,406
Net interest and dividend income		3,509			3,046			10,382			8,918

Provision for loan losses		50			-			225			436
Net interest and dividend income after provision for loan losses		3,459			3,046			10,157			8,482

Non-interest income:
Total other-than-temporary impairment losses on debt securities		-			-			(2	)		-
Portion of losses recognized in other comprehensive income		-			-			1			-
Net impairment losses recognized in earnings		-			-			(1	)		-
Fees for services		467			422			1,428			1,289
Mortgage banking activities		9			11			12			58
Net commissions from brokerage services		47			50			127			109
Income from bank-owned life insurance		88			89			267			266
Gain on sale of securities		(6	)		-			(7	)		-
Gain on sales of other real estate owned, net		48			77			1			109
Legal settlement		-			-			155			517
Other income		82			32			150			148
Total non-interest income		735			681			2,132			2,496

Non-interest expense:
Compensation and benefits		1,871			1,724			5,526			5,126
Occupancy and equipment		293			323			888			933
Data processing		269			273			775			738
LAN/WAN network		30			35			96			107
Advertising and marketing		47			47			146			124
FDIC deposit insurance		41			(9	)		120			114
Other real estate owned		35			67			157			178
Write-down of other real estate owned		-			-			14			43
Other		431			397			1,327			1,261
Total non-interest expense		3,017			2,857			9,049			8,624
Income before income tax expense		1,177			870			3,240			2,354

Income tax expense		212			235			900			611
NET INCOME	$	965		$	635		$	2,340		$	1,743

Earnings per common share:
Basic	$	0.13		$	0.09		$	0.32		$	0.23
Diluted	$	0.13		$	0.09		$	0.32		$	0.23

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended						Nine Months Ended
	March 31,						March 31,
	2018			2017			2018			2017
	(in thousands)
Net income	$	965		$	635		$	2,340		$	1,743
Other comprehensive (loss) income:
Reclassification adjustment for gains realized in income		(6	)		-			(7	)		-
Net unrealized holding (losses) gains on available-for-sale securities		(268	)		3			(452	)		(295	)
Reclassification adjustment for losses realized in income on available-for-sale securities (1)		-			-			1			-
Non-credit portion of other-than-temporary losses on available-for-sale securities		-			-			(1	)		-

Other comprehensive (loss) income before tax		(274	)		3			(459	)		(295	)
Income tax benefit (expense) related to other comprehensive (loss) income		107			(1	)		124			107
Other comprehensive (loss) income net of tax		(167	)		2			(335	)		(188	)
Total comprehensive income	$	798		$	637		$	2,005		$	1,555

(1) Reported in net impairment losses recognized in earnings included in non-interest income on the consolidated statements of net income. There were no income tax benefits associated with the reclassification adjustments.

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

for the Nine Months Ended March 31, 2018 and 2017

(Unaudited)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP Shares			Unearned Stock Awards			Total Stockholders' Equity
	(dollars in thousands, except per share data)

Balances at June 30, 2016	$	79		$	62,837		$	25,901		$	(143	)	$	(3,586	)	$	-		$	85,088

Comprehensive income		-			-			1,743			(188	)		-			-			1,555
Cash dividends declared and paid ($0.09 per share)		-			-			(709	)		-			-			-			(709	)
ESOP shares committed to be released (13,513 shares)		-			16			-			-			110			-			126
Common stock repurchased (197,000 shares)		(2	)		(2,073	)		-			-			-			-			(2,075	)
Issuance of common stock in connection with stock option exercises (8,343 shares)		-			63			-			-			-			-			63
Issuance of common stock in connection with restricted stock awards (147,750 shares)		1			1,499			-			-			-			(1,500	)		-
Share-based compensation expense		-			1			-			-			-			1			2

Balances at March 31, 2017	$	78		$	62,343		$	26,935		$	(331	)	$	(3,476	)	$	(1,499	)	$	84,050

Balances at June 30, 2017	$	78		$	62,243		$	27,195		$	(117	)	$	(3,439	)	$	(1,423	)	$	84,537

Comprehensive income		-			-			2,340			(335	)		-			-			2,005
Cash dividends declared and paid ($0.14 per share)		-			-			(1,090	)		-			-			-			(1,090	)
ESOP shares committed to be released (13,513 shares)		-			32			-			-			110			-			142
Common stock repurchased (182,620 shares)		(2	)		(1,899	)		-			-			-			-			(1,901	)
Cancellation of shares for tax withholding (2,646 shares)		-			(28	)		-			-			-			-			(28	)
Share-based compensation		-			111			-			-			-			225			336
Reclassification related to Tax Cuts and Jobs Act (Note 4)		-			-			47			(47	)		-			-			-

Balances at March 31, 2018	$	76		$	60,459		$	28,492		$	(499	)	$	(3,329	)	$	(1,198	)	$	84,001

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months
	ended March 31,
	2018			2017
	(in thousands)
Cash flows from operating activities
Net income	$	2,340		$	1,743
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net		409			639
Gain of sale of securities		(7	)		-
Impairment losses on securities		1			-
Amortization of deferred loan costs, net		178			141
Provision for loan losses		225			436
Gain on sale of other real estate owned, net		(1	)		(109	)
Write-down of other real estate owned		14			43
Loss on sale of premises and equipment		1			10
Depreciation and amortization - premises and equipment		245			248
Amortization - software		7			49
Increase in accrued interest receivable and other assets		(83	)		(416	)
Income from bank-owned life insurance		(267	)		(266	)
(Decrease) increase in other liabilities		(108	)		467
Share-based compensation expense		336			2
Deferred tax expense		345			48
ESOP expense		142			126
Net cash provided by operating activities		3,777			3,161

Cash flows from investing activities
Proceeds from sales of available-for-sale securities		3,626			-
Proceeds from calls, pay downs and maturities of available-for-sale securities		5,604			7,717
Proceeds from calls, pay downs and maturities of held-to-maturity securities		22,021			26,652
Purchase of Federal Home Loan Bank stock		(133	)		(448	)
Loan principal originations, net of repayments		(18,777	)		(26,764	)
Loan purchases		(21,480	)		(15,233	)
Recoveries of loans previously charged off		50			50
Purchase of bank-owned life insurance		-			(2,500	)
Proceeds from sale of other real estate owned		779			810
Capital expenditures - premises and equipment		(95	)		(148	)
Capital expenditures - software		-			(32	)
Net cash used in investing activities		(8,405	)		(9,896	)

Cash flows from financing activities
Net increase in deposit accounts		5,198			4,542
Net decrease in mortgagors' escrow accounts		(1,096	)		(1,003	)
Proceeds from issuance of long-term Federal Home Loan Bank advances		25,730			18,500
Repayment of long-term Federal Home Loan Bank advances		(28,018	)		(12,000	)
Change in short term Federal Home Loan Bank advances, net		6,000			(160	)
Net decrease in securities sold under agreements to repurchase		(827	)		(546	)
Cash dividends paid on common stock		(1,090	)		(709	)
Issuance of common stock in connection with stock option exercises		-			63
Common stock repurchased		(1,901	)		(2,075	)
Cancellation of shares for tax withholding		(28	)		-
Net cash provided by financing activities		3,968			6,612

Net decrease in cash and cash equivalents		(660	)		(123	)
Cash and cash equivalents at beginning of year		10,173			5,133
Cash and cash equivalents at end of period	$	9,513		$	5,010
Supplemental disclosures
Cash paid during the period for:
Interest	$	2,402		$	2,419
Income taxes		370			4
Loans transferred to other real estate owned		359			467

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – Organization

PB Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated in 2015 to be the successor to PSB Holdings, Inc. upon completion of the second-step mutual-to-stock conversion (the “Conversion”) of Putnam Bancorp, MHC (the “MHC”), the top tier mutual holding company of PSB Holdings, Inc. PSB Holdings, Inc. was the former mid-tier holding company for Putnam Bank (the “Bank”). Prior to completion of the Conversion, approximately 57% of the shares of common stock of PSB Holdings, Inc. were owned by the MHC. In conjunction with the Conversion, the MHC and PSB Holdings, Inc. merged into the Company and the Company became PSB Holdings, Inc.’s successor. The Conversion was completed on January 7, 2016. The Company raised gross proceeds of $33.7 million by selling a total of 4,215,387 shares of common stock at $8.00 per share in the second step offering. Also, an additional 317,287 shares were purchased by the Bank’s Employee Stock Ownership Plan with the proceeds of a loan from the Company. Concurrent with the completion of the stock offering, each share of PSB Holdings, Inc. stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.1907 shares of Company common stock. A total of 3,347,728 shares of Company common stock were issued in the exchange. The Conversion was accounted for as a capital raising transaction by entities under common control. The historical financial results of the MHC were immaterial to the results of the Company and therefore the net assets of the MHC were reflected as an increase to stockholders’ equity.

NOTE 2 – Basis of Presentation

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary, consisting of only normal recurring accruals and the elimination of all significant intercompany accounts, to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The interim results of operations are not necessarily indicative of the operating results to be expected for future periods, including the fiscal year ending June 30, 2018. These financial statements should be read in conjunction with the 2017 consolidated financial statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (‘SEC’) on September 25, 2017.

NOTE 3 – Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which defers the original effective dates of ASU 2014-09. The amendments in Update 2014-09 are now effective for annual reporting periods, including interim periods within those fiscal years, beginning after December 15, 2017. The Company’s primary source of revenue is interest income on financial assets, which is explicitly excluded from the scope of the new guidance. Accordingly, this is not expected to be material to the Company’s results of operations or financial position.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall, (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income cost and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently evaluating the impact to the consolidated financial statements of adopting this Update. The effect of the requirement to recognize equity investments at fair value through the income statement is dependent upon the amount and market performance of investments held each period. At March 31, 2018, there were no unrealized gains or losses on equity investments.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted for all entities. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, based on the current level of long-term leases in place, this is not expected to be material to the Company’s results of operations or financial position.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for certain financial assets (such as loans and held-to-maturity securities) held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management is currently working to implement these requirements to determine the potential impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This Update provides guidance on eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial Interests in securitization transactions; separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that in the statement of cash flows, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this Update will not have a significant impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this Update simplify the subsequent measurement of Goodwill by eliminating Step 2 from the goodwill impairment test. Instead, an entity will be required to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity will consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. For public business entities, the amendments are effective for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted. We do not expect the application of this guidance to have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change in terms or conditions of a share-based payment award. For public business entities, the amendments are effective for fiscal periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of this Update will impact the consolidated financial statements on a prospective basis dependent upon the terms of an award modification.

Note 4 - Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to the allowance for loan losses, realizability of deferred income taxes, valuation of goodwill and the impairment of securities.

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.

The allowance for loan losses is evaluated on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, specific and unallocated components, as further described below.

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, 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. During the quarter ended December 31, 2016, the Company changed its calculation of historical losses from a two-year rolling average to a five-year rolling average. The change was made to enable the Company to include more meaningful and relevant loss data over a time period indicative of the risk in the Company’s current loan portfolio. The change in calculation did not have a material effect on our allowance for loan losses. There were no other changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses through March 31, 2018.

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 include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by the accuracy of estimated costs to complete the project, cost overruns, time to sell at an adequate price, and market conditions.

Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer/other - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Specific component

The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent or foreclosure is probable. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer/other and residential real estate loans for impairment disclosures, unless such loans are non-accrual or subject to a troubled debt restructuring (“TDR”) agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are classified as impaired.

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general reserves in the portfolio.

Goodwill. Goodwill is measured as the excess of the cost of a business acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. Goodwill is not amortized but is subject to a review of qualitative factors annually or more frequently if circumstances warrant, to determine if an impairment test is required. If required, the Company uses the following two-step approach for reviewing goodwill for impairment:

The first step (“Step 1”) is used to identify potential impairment, and involves comparing the reporting unit’s (the consolidated Company) estimated fair value to its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill is not deemed to be impaired. Should the carrying amount of the reporting unit exceed its estimated fair value, an indicator of impairment is deemed to exist and a second step is performed to measure the amount of such impairment, if any. The second step (“Step 2”) involves calculating the implied fair value of goodwill. The implied fair value of goodwill is determined in a manner similar to how the amount of goodwill is determined in a business combination (i.e. by measuring the excess of the estimated fair value, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles as of the impairment testing date). If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned to the reporting unit, no impairment exists. If the carrying amount of goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded in an amount equal to such excess. An impairment loss cannot exceed the carrying amount of goodwill, and the loss (write-down) establishes a new carrying amount for the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which are dependent on internal forecasts, estimation of the long-term rate of growth, the period over which cash flows will occur, and determination of our cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions related to goodwill impairment.

See Note 3 – Recent Accounting Pronouncements for future changes to the accounting treatment of goodwill.

Other-Than-Temporary Impairment of Securities. Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes.

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.

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 34% to 21%, effective on January 1, 2018. As a result of this rate reduction, the Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax asset of $211,000, which was recorded as additional tax expense in the Company’s consolidated statements for the three months ended December 31, 2017. Included in the additional tax expense is $47,000 related to net unrealized losses on securities available-for-sale. The accounting treatment effectively stranded $47,000 of deferred tax items in accumulated other comprehensive income. The Company has developed a reasonable estimate of the other provisions of the Act in determining the current year income tax provision.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”), which allows a reclassification from AOCI to retained earnings to eliminate the stranded tax effects resulting from the Act. As permitted, the Company early adopted the ASU and recorded a $47,000 increase in retained earnings and corresponding decrease in AOCI as of January 1, 2018.

Management has discussed the development and selection of these critical accounting policies with the Audit Committee.

NOTE 5 – Earnings Per Share (EPS)

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The rights to dividends on unvested options/awards are non-forfeitable, therefore the unvested awards/options are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For purposes of computing diluted EPS, the treasury stock method is used.

The following information was used in the computation of EPS on both a basic and diluted basis for the three and nine months ended March 31, 2018 and 2017:

	Three months ended March 31,				Nine months ended March 31,
	2018		2017		2018		2017
Net income	$	965,000	$	635,000	$	2,340,000	$	1,743,000

Weighted average common shares applicable to basic EPS		7,295,257		7,411,018		7,341,827		7,431,341
Effect of dilutive potential common shares		-		2,765		-		1,156
Weighted average common shares applicable to diluted EPS		7,295,257		7,413,783		7,341,827		7,432,497
Earnings per share:
Basic	$	0.13	$	0.09	$	0.32	$	0.23
Diluted	$	0.13	$	0.09	$	0.32	$	0.23

For the three and nine months ended March 31, 2018, options to purchase 392,330 shares were outstanding but not included in the computation of earnings per share because they were anti-dilutive.

NOTE 6 – Investment Securities

The carrying value, estimated fair values, and gross unrealized gains and losses of investment securities by maturity and type are as follows:

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gains		(Losses)			Value
	(in thousands)
March 31, 2018:
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due in one year or less	$	1,000	$	-	$	(7	)	$	993
After ten years		3,461		-		(44	)		3,417
		4,461		-		(51	)		4,410

Corporate bonds and other securities:
Due from five through ten years		3,000		-		(191	)		2,809
After ten years		2,999		-		(192	)		2,807
		5,999		-		(383	)		5,616

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due in one year or less		2		-		-			2
From one through five years		2,269		-		(85	)		2,184
From five through ten years		4,733		-		(68	)		4,665
After ten years		20,293		145		(418	)		20,020
		27,297		145		(571	)		26,871

Non-agency mortgage-backed securities:
Due after ten years		3,217		487		(266	)		3,438
Total debt securities		40,974		632		(1,271	)		40,335

Equity securities:
Auction rate preferred:
Due from five through ten years		8,000		-		-			8,000
After ten years		2,000		-		-			2,000
		10,000		-		-			10,000
Total available-for-sale securities	$	50,974	$	632	$	(1,271	)	$	50,335

Held-to-maturity:
U.S. government and government-sponsored securities:
Due in one year or less	$	1,000	$	-	$	(2	)	$	998
From one through five years		5,974		32		(30	)		5,976
After ten years		4,796		-		(160	)		4,636
		11,770		32		(192	)		11,610

State agency and municipal obligations
Due from five through ten years		447		-		(16	)		431

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from one through five years		966		10		(6	)		970
From five through ten years		9,600		20		(227	)		9,393
After ten years		64,941		534		(923	)		64,552
		75,507		564		(1,156	)		74,915
Total held-to-maturity securities	$	87,724	$	596	$	(1,364	)	$	86,956

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gains		(Losses)			Value
	(in thousands)
June 30, 2017:
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due from one through five years	$	1,000	$	-	$	(5	)	$	995
After ten years		3,788		-		(17	)		3,771
		4,788		-		(22	)		4,766

Corporate bonds and other securities:
Due from five through ten years		3,000		-		(193	)		2,807
After ten years		2,999		-		(228	)		2,771

		5,999		-		(421	)		5,578

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due in one year or less		40		1		-			41
From five through ten years		8,280		29		(73	)		8,236
After ten years		27,574		224		(160	)		27,638
		35,894		254		(233	)		35,915

Non-agency mortgage-backed securities:
Due after ten years		3,649		473		(231	)		3,891
Total debt securities		50,330		727		(907	)		50,150

Equity securities:
Auction rate preferred:
Due from five through ten years		8,000		-		-			8,000
After ten years		2,000		-		-			2,000
		10,000		-		-			10,000
Total available-for-sale securities	$	60,330	$	727	$	(907	)	$	60,150

Held-to-maturity:
U.S. government and government-sponsored securities:
Due in one year or less	$	2,250	$	-	$	(2	)	$	2,248
From one through five years		6,966		108		-			7,074
After ten years		5,195		-		(50	)		5,145
		14,411		108		(52	)		14,467

State agency and municipal obligations
Due from five through ten years		451		-		(6	)		445

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from one through five years		1,119		40		-			1,159
From five through ten years		6,709		65		-			6,774
After ten years		87,332		1,001		(355	)		87,978
		95,160		1,106		(355	)		95,911

Total held-to-maturity securities	$	110,022	$	1,214	$	(413	)	$	110,823

There were gains on sales of available-for-sale securities of $6,000 and $7,000 for the three and nine months ended March 31, 2018, respectively and none for the three and nine months ended March 31, 2017. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method. There were $1,000 in other-than-temporary impairment charges on available-for-sale securities realized in income during the nine months ended March 31, 2018. There were no other-than-temporary impairment charges on available-for-sale securities during the three and nine months ended March 31, 2017. The write-downs for the nine months ended March 31, 2018 included total other-than-temporary impairment losses on non-agency mortgage-back securities of $2,000, net of $1,000 recognized in other comprehensive loss, before taxes.

The following is a summary of the estimated fair value and related unrealized losses segregated by category and length of time that individual securities have been in a continuous unrealized loss position at:

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
March 31, 2018:
Available-for-sale:
U.S. Government and government-sponsored securities	$	-	$	-	$	4,410	$	51	$	4,410	$	51
Corporate bonds and other securities		-		-		5,616		383		5,616		383
U.S. Government-sponsored and guaranteed mortgage-backed securities		7,968		107		15,721		464		23,689		571
Total temporarily impaired available-for-sale		7,968		107		25,747		898		33,715		1,005

Held-to-maturity:
U.S. Government and government-sponsored securities		5,964		32		4,636		160		10,600		192
State and political subdivisions		431		16		-		-		431		16
U.S. Government-sponsored and guaranteed mortgage-backed securities		35,578		581		18,139		575		53,717		1,156
Total temporarily impaired held-to-maturity		41,973		629		22,775		735		64,748		1,364

Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		-		-		1,208		266		1,208		266

Total temporarily-impaired and other-than-temporarily impaired securities	$	49,941	$	736	$	49,730	$	1,899	$	99,671	$	2,635

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
June 30, 2017:
Available-for-sale:
U.S. Government and government-sponsored securities	$	995	$	5	$	3,771	$	17	$	4,766	$	22
Corporate bonds and other securities		-		-		5,578		421		5,578		421
U.S. Government-sponsored and guaranteed mortgage-backed securities		17,798		192		3,539		41		21,337		233
Total temporarily impaired available-for-sale		18,793		197		12,888		479		31,681		676

Held-to-maturity:
U.S. Government and government-sponsored securities		7,393		52		-		-		7,393		52
State and political subdivisions		445		6		-		-		445		6
U.S. Government-sponsored and guaranteed mortgage-backed securities		27,910		211		7,928		144		35,838		355
Total temporarily impaired held-to-maturity		35,748		269		7,928		144		43,676		413

Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		-		-		1,331		231		1,331		231

Total temporarily-impaired and other-than-temporarily impaired securities	$	54,541	$	466	$	22,147	$	854	$	76,688	$	1,320

(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).

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

At March 31, 2018, there were 94 individual investment securities with aggregate depreciation of 2.6% 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 March 31, 2018.

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 March 31, 2018, 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 $5.6 million, all of which were classified as available-for-sale. The single-issuer trust preferred investments are evaluated for other-than-temporary impairment by performing a present value of cash flows calculation each quarter. None of the issuers have deferred interest payments or announced the intention to defer interest payments. The Company believes the decline in fair value is related to the spread over three-month LIBOR, on which the quarterly interest payments are based, as the spread over LIBOR being received is significantly lower than current market spreads. Management concluded the impairment of these investments was considered temporary and asserts that the Company does not have the intent to sell these investments and that it is more likely than not it will not have to sell the investments before recovery of their cost bases which may be at maturity.

At March 31, 2018, there was one state and political subdivision security that had an unrealized loss of 3.6% from the Company’s amortized cost basis. The unrealized loss was primarily caused by interest rate fluctuations. This security is guaranteed by a school district located in Texas. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the 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 at maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2018.

For the nine months ended March 31, 2018, 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.

The following table represents a roll-forward of the amount of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive loss:

	Nine months ended
	March 31,
	2018		2017
	(in thousands)

Balance at beginning of period	$	15,982	$	15,982
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded		1		-

Balance at end of period	$	15,983	$	15,982

NOTE 7 – Loans

The following table sets forth the composition of our loan portfolio at March 31, 2018 and June 30, 2017:

	March 31,			June 30,
	2018			2017
	(in thousands)

Real Estate:
Residential (1)	$	240,369		$	225,745
Commercial		95,687			71,558
Residential construction		1,573			1,000
Commercial		12,267			12,123
Consumer and other		849			829

Total loans		350,745			311,255

Net deferred loan costs		1,431			1,317
Allowance for loan losses		(2,939	)		(2,780	)

Loans, net	$	349,237		$	309,792

(1) Residential real estate loans include one-to four-family mortgage loans, second mortgage loans, and home equity lines of credit.

Credit Quality Information

The Company utilizes a nine grade internal loan rating system as follows:

Loans rated 1 - 5 are considered “pass” rated loans with low to average risk.

Loans rated 6 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

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 March 31, 2018 and June 30, 2017:

	Residential		Commercial		Residential				Consumer
	Real Estate		Real Estate		Construction		Commercial		and other		Total
	(in thousands)
March 31, 2018
Grade:
Pass	$	236,092	$	92,548	$	1,573	$	12,267	$	848	$	343,328
Special Mention		377		1,074		-		-		-		1,451
Substandard		3,900		2,065		-		-		1		5,966
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	240,369	$	95,687	$	1,573	$	12,267	$	849	$	350,745

June 30, 2017
Grade:
Pass	$	221,514	$	68,675	$	1,000	$	12,123	$	827	$	304,139
Special Mention		394		715		-		-		-		1,109
Substandard		3,837		2,168		-		-		2		6,007
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	225,745	$	71,558	$	1,000	$	12,123	$	829	$	311,255

There were no material modifications deemed to be troubled debt restructures for the nine months ended March 31, 2018 and 2017.

There were no material troubled debt restructurings that subsequently defaulted (defined as 30 or more days past due subsequent to restructuring) within one year of modification during the three and nine months ended March 31, 2018 and 2017.

NOTE 8 – Non-performing Assets, Past Due and Impaired Loans

The table below sets forth the amounts and categories of non-performing assets at the dates indicated:

	At March 31,			At June 30,
	2018			2017
	(Dollars in thousands)
Non-accrual loans:
Real Estate:
Residential	$	3,900		$	3,837
Commercial		442			594
Consumer		1			2
Total non-accrual loans		4,343			4,433

Accruing loans past due 90 days or more		-			-

Total non-performing loans		4,343			4,433

Other real estate owned		1,381			1,814
Total non-performing assets	$	5,724		$	6,247

Total non-performing loans to total loans		1.24	%		1.42	%
Total non-performing assets to total assets		1.08	%		1.19	%

Management is focused on working with borrowers and guarantors to resolve non-accrual loans by restructuring or liquidating assets when prudent. Many of our commercial relationships are secured by development loans, in particular condominiums which have experienced a significant reduction in demand. The Bank reviews the strength of the guarantors; requires face to face discussions and offers restructuring suggestions that provide the borrowers with short term relief and exit strategies. The Bank obtains a current appraisal on all real estate secured loans that are 180 days or more past due if the appraisal on file is older than one year. If the determination is made that there is the potential for collateral shortfall, an allocated reserve will be assigned to the loan for the expected deficiency. It is the policy of the Bank to charge off or write down loans or other assets when, in the opinion of the Credit Committee and Loan Review, the ultimate amount recoverable is less than the carrying value, or the collection of the amount is expected to be unduly prolonged. The level of non-performing assets is expected to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with management’s degree of success in resolving problem assets.

The following table sets forth information regarding past due loans at March 31, 2018 and June 30, 2017:

					90 days
	30–59 Days		60–89 Days		or Greater		Total
	Past Due		Past Due		Past Due		Past Due
	(in thousands)
At March 31, 2018

Real Estate:
Residential	$	4,168	$	540	$	718	$	5,426
Commercial		688		-		-		688
Consumer and other		2		-		-		2
Total	$	4,858	$	540	$	718	$	6,116

At June 30, 2017

Real Estate:
Residential	$	230	$	349	$	455	$	1,034
Consumer and other		3		-		-		3
Total	$	233	$	349	$	455	$	1,037

The following is a summary of information pertaining to impaired loans at March 31, 2018 and June 30, 2017, none of which had a valuation allowance:

	At March 31, 2018				At June 30, 2017
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal
	Investment		Balance		Investment		Balance
	(in thousands)
Real Estate:
Residential	$	2,322	$	2,460	$	2,262	$	2,367
Commercial		1,252		1,935		1,329		2,013
Total impaired loans	$	3,574	$	4,395	$	3,591	$	4,380

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

	Three months ended						Three months ended
	March 31, 2018						March 31, 2017
	Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Real Estate:
Residential	$	2,194	$	5	$	-	$	1,943	$	7	$	-
Commercial		1,265		22		-		1,598		19		-
Commercial		-		-		-		12		-		-
Total impaired loans	$	3,459	$	27	$	-	$	3,553	$	26	$	-

	Nine months ended						Nine months ended
	March 31, 2018						March 31, 2017
	Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Real Estate:
Residential	$	2,193	$	21	$	7	$	2,028	$	18	$	-
Commercial		1,290		66		-		2,075		85		-
Commercial		-		-		-		13		-		-
Total impaired loans	$	3,483	$	87	$	7	$	4,116	$	103	$	-

NOTE 9 – Allowance for Loan Losses

An analysis of the allowance for loan losses for the three and nine months ended March 31, 2018 and 2017 is as follows:

	Residential			Commercial			Residential						Consumer
	Real Estate			Real Estate			Construction			Commercial			and Other			Unallocated			Total
	(in thousands)
Three months ended
March 31, 2018

Beginning balance	$	1,417		$	1,215		$	9		$	79		$	131		$	114		$	2,965
Charge-offs		(83	)		-			-			-			(11	)		-			(94	)
Recoveries		10			-			-			4			4			-			18
Provision (credit)		147			(58	)		1			(8	)		6			(38	)		50
Ending Balance	$	1,491		$	1,157		$	10		$	75		$	130		$	76		$	2,939

Three months ended
March 31, 2017

Beginning balance	$	1,414		$	1,024		$	11		$	88		$	57		$	56		$	2,650
Charge-offs		-			-			-			-			(9	)		-			(9	)
Recoveries		10			-			-			3			7			-			20
Provision (credit)		(63	)		72			(3	)		(11	)		7			(2	)		-
Ending Balance	$	1,361		$	1,096		$	8		$	80		$	62		$	54		$	2,661

Nine months ended
March 31, 2018

Beginning balance	$	1,359		$	1,164		$	6		$	76		$	86		$	89		$	2,780
Charge-offs		(83	)		-			-			-			(33	)		-			(116	)
Recoveries		27			-			-			10			13			-			50
Provision (credit)		188			(7	)		4			(11	)		64			(13	)		225
Ending Balance	$	1,491		$	1,157		$	10		$	75		$	130		$	76		$	2,939

Nine months ended
March 31, 2017

Beginning balance	$	1,171		$	967		$	6		$	78		$	20		$	61		$	2,303
Charge-offs		(100	)		-			-			-			(28	)		-			(128	)
Recoveries		30			-			-			8			12			-			50
Provision (credit)		260			129			2			(6	)		58			(7	)		436
Ending Balance	$	1,361		$	1,096		$	8		$	80		$	62		$	54		$	2,661

Further information pertaining to the allowance for loan losses at March 31, 2018 and June 30, 2017 is as follows:

	Residential		Commercial		Residential				Consumer
	Real Estate		Real Estate		Construction		Commercial		and Other		Unallocated		Total
	(in thousands)
At March 31, 2018

Amount of allowance for loan losses for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Amount of allowance for loan losses for non-impaired loans	$	1,491	$	1,157	$	10	$	75	$	130	$	76	$	2,939

Impaired loans	$	2,322	$	1,252	$	-	$	-	$	-	$	-	$	3,574

Non-impaired loans	$	238,047	$	94,435	$	1,573	$	12,267	$	849	$	-	$	347,171

At June 30, 2017

Amount of allowance for loan losses for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Amount of allowance for loan losses for non-impaired loans	$	1,359	$	1,164	$	6	$	76	$	86	$	89	$	2,780

Impaired loans	$	2,262	$	1,329	$	-	$	-	$	-	$	-	$	3,591

Non-impaired loans	$	223,483	$	70,229	$	1,000	$	12,123	$	829	$	-	$	307,664

NOTE 10 – Stock-Based Incentive Plan

At the annual meeting of stockholders on February 17, 2017, stockholders of the Company approved the PB Bancorp, Inc. 2017 Stock-Based Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to 453,267 stock options and 181,306 shares of restricted stock to its employees, officers and directors for an aggregate amount of up to 634,573 shares of the Company’s common stock for issuance upon the grant or exercise of awards. Both incentive stock options and non-statutory stock options may be granted under the Incentive Plan.

On March 30, 2017, the Company awarded 392,330 options to purchase the Company’s common stock and 147,750 shares of restricted stock. Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant ($10.15) with a maximum term of ten years.

Both stock option and restricted stock awards granted to date vest at 20% per year beginning on the first anniversary of the date of the grant.

Stock options are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis. Restricted stock awards have non-forfeitable dividend rights, and are considered participating securities outstanding for the purpose of computing basic earnings per share.

The Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded to unearned stock awards. Compensation expense related to unearned restricted shares is amortized to compensation and benefits expense over the vesting period of the restricted stock awards, adjusted by actual forfeitures. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for the three months ended March 31, 2018 of $112,000 and for the nine months ended March 31, 2018 of $336,000.

NOTE 11 – Accumulated Other Comprehensive Loss

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the consolidated balance sheets, such items are components of accumulated other comprehensive loss.

The components of accumulated other comprehensive loss and related tax effects are as follows:

	March 31,			June 30,
	2018			2017
	(in thousands)
Net unrealized loss on securities available-for-sale	$	(639	)	$	(180	)
Tax effect		140			63
Accumulated other comprehensive loss	$	(499	)	$	(117	)

NOTE 12 – FAIR VALUE MEASUREMENTS

The Company groups its assets measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value as follows:

Level 1 – Valuations for assets traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

Level 2 – Valuations for assets traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets.

Level 3 – Valuations for assets that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets carried at fair value for March 31, 2018.

The Company’s mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services, which are not adjusted by management. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Level 3 assets consisted of available-for-sale auction-rate trust preferred securities (ARPs). All dividends are current. The Company has the ability and intent to hold these securities for the time necessary to collect the expected cash flows.

The Company’s impaired loans and other real estate owned are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based upon appraisals of similar properties obtained from a third party and adjusted by management as needed.

The Company did not have any transfers of assets between levels of the fair value hierarchy during the three and nine months ended March 31, 2018.

The following summarizes assets measured at fair value on a recurring basis at March 31, 2018 and June 30, 2017:

	Total Fair
	Value		Level 1		Level 2		Level 3
	(in thousands)
At March 31, 2018

Securities available-for-sale:
U.S. government and government-sponsored securities	$	4,410	$	-	$	4,410	$	-
Corporate bonds and other securities		5,616		-		5,616		-
U.S. Government-sponsored and guaranteed mortgage-backed securities		26,871		-		26,871		-
Non-agency mortgage-backed securities		3,438		-		3,438		-
Equity securities		10,000		-		-		10,000
Total	$	50,335	$	-	$	40,335	$	10,000

At June 30, 2017

Securities available-for-sale:
U.S. government and government-sponsored securities	$	4,766	$	-	$	4,766	$	-
Corporate bonds and other securities		5,578		-		5,578		-
U.S. Government-sponsored and guaranteed mortgage-backed securities		35,915		-		35,915		-
Non-agency mortgage-backed securities		3,891		-		3,891		-
Equity securities		10,000		-		-		10,000
Total	$	60,150	$	-	$	50,150	$	10,000

There were no changes in level 3 assets measured at fair value for the nine months ended March 31, 2018 and 2017.

The following summarizes assets measured at fair value on a non-recurring basis and the adjustments to the carrying value at and for the three and nine months ended March 31, 2018 and 2017:

									Total Losses		Total Losses
									for the three		for the nine
	Total Fair								months ended		months ended
	Value		Level 1		Level 2		Level 3		March 31, 2018		March 31, 2018
	(in thousands)
At March 31, 2018

Other real estate owned		110		-		-		110		-		9
	$	110	$	-	$	-	$	110	$	-	$	9

									Total Losses		Total Losses
									for the three		for the nine
	Total Fair								months ended		months ended
	Value		Level 1		Level 2		Level 3		March 31, 2017		March 31, 2017
	(in thousands)
At June 30, 2017

Other real estate owned	$	345	$	-	$	-	$	345		-		43
	$	345	$	-	$	-	$	345	$	-	$	43

The amount of other real estate owned represents the carrying value for which write-downs are based on the estimated fair value of the property.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the asset. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular asset. Because a market may not readily exist for a significant portion of the Company’s asset, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

There were no liabilities measured at fair value on a recurring or non-recurring basis at March 31, 2018 or June 30, 2017.

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:

Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.

Investment Securities Held-to-Maturity and FHLBB Stock. The fair value of securities held-to-maturity is estimated based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or available market evidence. Ownership of Federal Home Loan Bank of Boston (“FHLBB”) stock is restricted to member banks; therefore, the stock is not traded. The estimated fair value of FHLBB stock is equal to its carrying value, which represents the price at which the FHLBB is obligated to redeem its stock.

Loans. For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential, commercial real estate, residential construction, commercial and consumer and other loans. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable). Fair values were estimated for each component using assumptions developed by management and a valuation model provided by a third party specialist.

The fair values of residential, commercial real estate, residential construction, commercial and consumer and other loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows considered factors such as future loan prepayments. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair value of home equity lines of credit was based on the outstanding loan balances. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits and Mortgagors’ Escrow. The fair value of deposits with no stated maturity such as demand deposits, NOW, regular savings, and money market deposit accounts and mortgagors’ escrow accounts, is equal to the amount payable on demand. The fair value estimates do not include the benefit that results from the generally lower cost of funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The fair value estimate of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits having similar remaining maturities.

Federal Home Loan Bank Advances. The fair values of the Company’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Securities Sold Under Agreements to Repurchase. The Company enters into overnight repurchase agreements with its customers. Since these agreements are short-term instruments, the fair value of these agreements approximates their recorded balance. The Company also secures term repurchase agreements through other financial institutions. The fair value of these agreements are determined by discounting the anticipated future cash payments using rates currently available to the Bank for debt with similar terms and remaining maturities.

Accrued Interest. The carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Instruments. The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. In the case of the commitments discussed in Note 13, the fair value equals the carrying amounts which are not significant.

Summary of Fair Values of Financial Instruments. The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, as of March 31, 2018 and June 30, 2017:

	March 31, 2018
	Carrying		Fair Value Hierarchy						Total Fair
	Amount		Level 1		Level 2		Level 3		Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	9,513	$	9,513	$	-	$	-	$	9,513
Securities available-for-sale		50,335		-		40,335		10,000		50,335
Securities held-to-maturity		87,724		-		86,956		-		86,956
Federal Home Loan Bank stock		4,486		-		-		4,486		4,486
Loans, net		349,237		-		-		344,599		344,599
Accrued interest receivable		1,297		-		-		1,297		1,297

Financial liabilities:
Deposits		370,959		-		-		372,194		372,194
Mortgagors' escrow accounts		1,754		-		-		1,754		1,754
Federal Home Loan Bank advances		70,712		-		69,524		-		69,524
Securities sold under agreements to repurchase		755		-		755		-		755
Accrued interest payable		120		-		-		120		120

	June 30, 2017
	Carrying		Fair Value Hierarchy						Total Fair
	Amount		Level 1		Level 2		Level 3		Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	10,173	$	10,173	$	-	$	-	$	10,173
Securities available-for-sale		60,150		-		50,150		10,000		60,150
Securities held-to-maturity		110,022		-		110,823		-		110,823
Federal Home Loan Bank stock		4,353		-		-		4,353		4,353
Loans, net		309,792		-		-		310,015		310,015
Accrued interest receivable		1,258		-		-		1,258		1,258

Financial liabilities:
Deposits		365,761		-		-		367,233		367,233
Mortgagors' escrow accounts		2,850		-		-		2,850		2,850
Federal Home Loan Bank advances		67,000		-		68,079		-		68,079
Securities sold under agreements to repurchase		1,582		-		1,582		-		1,582
Accrued interest payable		115		-		-		115		115

NOTE 13 – Subsequent Events

On April 4, 2018, PB Bancorp, Inc. (the “Company”) announced that its Board of Directors has adopted a second stock repurchase program. Under the repurchase program, the Company may repurchase up to 193,012 shares of its common stock, or approximately 2.5% of the current outstanding shares. Repurchases will be made no sooner than the termination of the Company’s regular quarterly trading blackout after the Company publicly releases its results of operations for the fiscal quarter ended March 31, 2018, and consistent with the Company’s trading policies.

On April 18, 2018, the Board of Directors of PB Bancorp, Inc. declared a cash dividend of $0.06 per share for stockholders of record as of May 2, 2018, which is payable on May 16, 2018.

NOTE 14 – Commitments to Extend Credit

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The contractual amounts of outstanding commitments were as follows:

	March 31,		June 30,
	2018		2017
	(in thousands)
Commitments to extend credit:
Loan commitments	$	1,308	$	3,859
Unadvanced construction loans		12,857		9,469
Unadvanced lines of credit		19,192		18,025
Standby letters of credit		395		710
Outstanding commitments	$	33,752	$	32,063

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

The following analysis discusses changes in the financial condition at March 31, 2018 and June 30, 2017 and results of operations for the three and nine months ended March 31, 2018 and 2017, 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 2017 Consolidated Financial Statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the SEC on September 25, 2017.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. PB Bancorp intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of PB Bancorp, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. PB Bancorp’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of PB Bancorp and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan and investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in PB Bancorp’s market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning PB Bancorp and its business, including additional factors that could materially affect PB Bancorp financial results, is included in PB Bancorp’s filings with the Securities and Exchange Commission, including the risk factors included in PB Bancorp’s Annual Report on Form 10-K filed with the SEC on September 25, 2017.

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 increased $330,000, or 52.0%, to $965,000, or $0.13 per basic and diluted share for the three months ended March 31, 2018, compared to net income of $635,000, or $0.09 per basic and diluted share for the three months ended March 31, 2017. This was due primarily to an increase in net interest income of $463,000, or 15.2% to $3.5 million for the three months ended March 31, 2018 from $3.0 million for the three months ended March 31, 2017, while non-interest income increased $54,000, or 7.9% to $735,000, for the three months ended March 31, 2018 from $681,000 million for the three months ended March 31, 2017. The provision for loan loss for the three months ended March 31, 2018 was $50,000 compared to no provision for loan loss for the three months ended March 31, 2017. Non-interest expense increased $160,000, or 5.6% to $3.0 million for the three months ended March 31, 2018 from $2.9 million for the three months ended March 31, 2017. Income tax expense decreased $23,000, or 9.8% to $212,000 for the three months ended March 31, 2018 from $235,000 for the three months ended March 31, 2017.

Our net income increased $597,000, or 34.3%, to $2.3 million, or $0.32 per basic and diluted share for the nine months ended March 31, 2018, compared to net income of $1.7 million, or $0.23 per basic and diluted share for the nine months ended March 31, 2017. This was due primarily to an increase in net interest income of $1.5 million, or 16.4% to $10.4 million for the nine months ended March 31, 2018 from $8.9 million for the nine months ended March 31, 2017, while non-interest income decreased $364,000, or 14.6% to $2.1 million, for the nine months ended March 31, 2018 from $2.5 million for the nine months ended March 31, 2017. The provision for loan losses decreased $211,000, or 48.4% to $225,000 for the nine months ended March 31, 2018 from $436,000 for the nine months ended March 31, 2017. Non-interest expense increased $425,000, or 4.9% to $9.0 million for the nine months ended March 31, 2018 from $8.6 million for the nine months ended March 31, 2017. Income tax expense increased $289,000, or 47.3% to $900,000 for the nine months ended March 31, 2018 from $611,000 for the nine months ended March 31, 2017. As a result of the Tax Cuts and Jobs Act being signed into law on December 22, 2017, the Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax asset of $211,000, which was recorded as additional tax expense in the Company’s consolidated statements for the quarter ended December 31, 2017.

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income, which in turn would likely have an adverse effect on our results of operations. As described in “Market Risk,” we expect that our net interest income and our net portfolio value would decrease as a result of an instantaneous increase in interest rates. We use a variety of strategies to help manage interest rate risk, as described in “Market Risk”.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in Eastern Connecticut and the Rhode Island and Massachusetts communities adjacent to Windham County, Connecticut. Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. In addition, changes in economic conditions could result in increased actual losses or increased losses inherent in our loan portfolio, either of which could require us to significantly increase the level of our provision for loan losses.

Comparison of Financial Condition at March 31, 2018 and June 30, 2017

Assets

Total assets were $530.5 million at March 31, 2018, an increase of $6.3 million, or 1.2%, from $524.1 million at June 30, 2017. Cash and cash equivalents decreased $660,000, or 6.5%, to $9.5 million at March 31, 2018 compared to $10.2 million at June 30, 2017. Investments in held-to-maturity securities decreased $22.3 million, or 20.3%, to $87.7 million at March 31, 2018 compared to $110.0 million at June 30, 2017 and investments in available-for-sale securities decreased $9.8 million, or 16.3%, to $50.3 million at March 31, 2018 compared to $60.2 million at June 30, 2017. Net loans outstanding increased $39.4 million, or 12.7%, to $349.2 million at March 31, 2018 from $309.8 million at June 30, 2017. The increase in loans was primarily due to a $14.6 million, or 6.5%, increase in residential real estate loans to $240.4 million at March 31, 2018 from $225.7 million at June 30, 2017. This increase reflected $21.3 million in residential loan purchases. Commercial real estate loans increased $24.1 million, or 33.7%, to $95.7 million at March 31, 2018 from $71.6 million at June 30, 2017. With increased loan demand, we have been using excess cash to fund loan originations instead of investing in securities.

Allowance for Loan Losses

The table below indicates the relationship between the allowance for loan losses, total loans outstanding and non-performing loans at March 31, 2018 and June 30, 2017. For additional information, see “Comparison of Operating Results for the three and nine months ended March 31, 2018 and 2017 – Provision for Loan Losses.”

	March 31,			June 30,
	2018			2017
	(Dollars in thousands)
Allowance for loan losses	$	2,939		$	2,780
Total loans		350,745			311,255
Non-performing loans		4,343			4,433
Allowance/total loans		0.84	%		0.89	%
Allowance/non-performing loans		67.7	%		62.7	%

Liabilities

Total liabilities increased $6.9 million, or 1.6%, to $446.5 million at March 31, 2018 from $439.6 million at June 30, 2017. Total deposits increased $5.2 million, or 1.4%, to $371.0 million at March 31, 2018 from $365.8 million at June 30, 2017. We experienced a decrease in non-interest-bearing deposits of $484,000, or 0.7% to $71.3 million at March 31, 2018 compared to $71.8 million at June 30, 2017. Interest-bearing deposits increased $5.7 million, or 1.9% to $299.7 million at March 31, 2018 compared to $294.0 million at June 30, 2017. Brokered CD’s increased $4.5 million during the nine months ended March 2018. Total Federal Home Loan Bank borrowings increased $3.7 million, or 5.5%, to $70.7 million at March 31, 2018 from $67.0 million at June 30, 2017. Securities sold under agreements to repurchase decreased $827,000, or 52.3% to $755,000 at March 31, 2018 compared to $1.6 million at June 30, 2017. Mortgagors’ escrow accounts decreased $1.1 million, or 38.5% to $1.8 million at March 31, 2018 compared to $2.9 million at June 30, 2017.

Stockholders’ Equity

Total stockholders’ equity decreased $536,000, or 0.6%, to $84.0 million at March 31, 2018 from $84.5 million at June 30, 2017. We had $2.3 million of net income during the nine months ended March 31, 2018. The Company repurchased 182,620 shares for $1.9 million during the nine months ended March 31, 2018. Dividends paid during the nine months ended March 31, 2018 were $1.1 million.

Comparison of Operating Results for the Three and Nine Months Ended March 31, 2018 and 2017

Interest and Dividend Income. Interest and dividend income increased $464,000, or 12.1% to $4.3 million for the three months ended March 31, 2018 compared to $3.8 million for the three months ended March 31, 2017. The average balance of interest-earning assets increased $14.6 million, or 3.0% to $500.5 million for the three months ended March 31, 2018 from $485.9 million for the three months ended March 31, 2017. The average yield on interest-earning assets increased to 3.49% for the three months ended March 31, 2018 from 3.21% for the three months ended March 31, 2017.

Interest income on loans increased $566,000, or 20.3% to $3.4 million for the three months ended March 31, 2018 compared to $2.8 million for the three months ended March 31, 2017. This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased $57.5 million, or 20.0% to $345.6 million for the three months ended March 31, 2018 from $288.1 million for the three months ended March 31, 2017. The yield on average loans increased one basis point to 3.94% for the three months ended March 31, 2018 from 3.93% for the three months ended March 31, 2017.

Interest and dividend income on investments decreased $119,000, or 11.4% to $926,000 for the three months ended March 31, 2018 compared to $1.0 million for the three months ended March 31, 2017. This was due to a decrease in the average balance of investments of $41.3 million, or 21.9% to $147.8 million for the three months ended March 31, 2018 from $189.1 million for the three months ended March 31, 2017. This was partially offset by an increase in yield of 30 basis points to 2.54% for the three months ended March 31, 2018 from 2.24% for the three months ended March 31, 2017.

Interest and dividend income increased $1.5 million, or 12.9% to $12.8 million for the nine months ended March 31, 2018 compared to $11.3 million for the nine months ended March 31, 2017. The average balance of interest-earning assets increased $17.9 million, or 3.7% to $499.9 million for the nine months ended March 31, 2018 from $481.9 million for the nine months ended March 31, 2017. The average yield on interest-earning assets increased to 3.41% for the nine months ended March 31, 2018 from 3.13% for the nine months ended March 31, 2017.

Interest income on loans increased $1.8 million, or 22.4% to $9.8 million for the nine months ended March 31, 2018 compared to $8.0 million for the nine months ended March 31, 2017. This was due to an increase in average loans outstanding which was partially offset by a decrease in yield. The average balance of loans increased $64.7 million, or 23.9% to $335.3 million for the nine months ended March 31, 2018 from $270.5 million for the nine months ended March 31, 2017. The yield on average loans decreased five basis points to 3.91% for the nine months ended March 31, 2018 from 3.96% for the nine months ended March 31, 2017, due to continued repayments of higher-yielding loans and purchasing and originating newer loans in a lower interest rate environment.

Interest and dividend income on investments decreased $360,000, or 11.2% to $2.9 million for the nine months ended March 31, 2018 compared to $3.2 million for the nine months ended March 31, 2017. This was due to a decrease in the average balance of investments of $42.3 million, or 21.0% to $158.7 million for the nine months ended March 31, 2018 from $200.9 million for the nine months ended March 31, 2017 as we have invested excess liquidity into loans. This was partially offset by an increase in yield of 26 basis points to 2.40% for the nine months ended March 31, 2018 from 2.14% for the nine months ended March 31, 2017.

Interest Expense. Interest expense increased $1,000 to $798,000, for the three months ended March 31, 2018 compared to $797,000 for the three months ended March 31, 2017. Total average interest-bearing liabilities increased $17.8 million, or 5.0% to $375.1 million for the three months ended March 31, 2018 compared to $357.3 million for the three months ended March 31, 2017. The cost of average interest-bearing liabilities decreased to 0.86% for the three months ended March 31, 2018 compared to 0.90% for the three months ended March 31, 2017.

Interest expense on deposits increased by $33,000, or 7.6%, to $468,000 for the three months ended March 31, 2018 from $435,000 for the three months ended March 31, 2017. Interest expense on time deposits increased $38,000, or 11.7%, to $364,000 for the three months ended March 31, 2018 from $326,000 for the three months ended March 31, 2017. The cost of interest-bearing deposits increased to 0.64% for the three months ended March 31, 2018 from 0.60% for the three months ended March 31, 2017.

Interest expense on borrowings decreased by $32,000, or 8.8%, to $330,000 for the three months ended March 31, 2018 from $362,000 for the three months ended March 31, 2017. The rate paid on borrowings decreased 54 basis points to 1.72% for the three months ended March 31, 2018 from 2.26% for the three months ended March 31, 2017. Average borrowings increased $12.7 million, or 19.7%, to $77.6 million for the three months ended March 31, 2018 from $64.9 million for the three months ended March 31, 2017. Average Federal Home Loan Bank advances increased $13.2 million, or 21.4%, to $74.7 million for the three months ended March 31, 2018 from $61.5 million for the three months ended March 31, 2017. The average rate on Federal Home Loan Bank advances decreased 59 basis points to 1.79% for the three months ended March 31, 2018 from 2.38% for the three months ended March 31, 2017. Average other borrowed money decreased $409,000, or 12.1%, to $3.0 million for the three months ended March 31, 2018 from $3.4 million for the three months ended March 31, 2017.

Interest expense remained unchanged at $2.4 million for the nine months ended March 31, 2018 and 2017. Total average interest-bearing liabilities increased $18.1 million, or 5.1% to $372.4 million for the nine months ended March 31, 2018 compared to $354.3 million for the nine months ended March 31, 2017. The cost of average interest-bearing liabilities decreased to 0.86% for the nine months ended March 31, 2018 compared to 0.90% for the nine months ended March 31, 2017.

Interest expense on deposits increased by $43,000, or 3.2%, to $1.4 for the nine months ended March 31, 2018 from $1.3 for the nine months ended March 31, 2017. Interest expense on time deposits increased $62,000, or 6.2%, to $1.1 million for the nine months ended March 31, 2018 from $1.0 million for the nine months ended March 31, 2017. The cost of interest-bearing deposits increased to 0.62% for the nine months ended March 31, 2018 from 0.61% for the nine months ended March 31, 2017 despite increasing market rates.

Interest expense on borrowings decreased by $44,000, or 4.1%, to $1.0 million for the nine months ended March 31, 2018 from $1.1 million for the nine months ended March 31, 2017. The rate paid on borrowings decreased 52 basis points to 1.76% for the nine months ended March 31, 2018 from 2.28% for the nine months ended March 31, 2017. Average borrowings increased $15.4 million, or 24.5%, to $78.1 million for the nine months ended March 31, 2018 from $62.7 million for the nine months ended March 31, 2017. Average Federal Home Loan Bank advances increased $17.3 million, or 29.9%, to $75.3 million for the nine months ended March 31, 2018 from $58.0 million for the nine months ended March 31, 2017. This increase was used to fund some of the loan growth this fiscal year. The average rate on Federal Home Loan Bank advances decreased 64 basis points to 1.82% for the nine months ended March 31, 2018 from 2.46% for the nine months ended March 31, 2017. Average other borrowed money decreased $1.9 million, or 41.1%, to $2.8 million for the nine months ended March 31, 2018 from $4.7 million for the nine months ended March 31, 2017.

Net Interest Income. Net interest income increased $463,000, or 15.2%, to $3.5 million for the three months ended March 31, 2018 from $3.0 million for the three months ended March 31, 2017. Our interest rate spread increased to 2.63% for the three months ended March 31, 2018 from 2.31% for the three months ended March 31, 2017 and our net interest-earning assets decreased $3.2 million, or 2.5%. Our net interest margin increased to 2.84% for the three months ended March 31, 2018 from 2.54% for the three months ended March 31, 2017.

Net interest income increased $1.5 million, or 16.4%, to $10.4 million for the nine months ended March 31, 2018 from $8.9 million for the nine months ended March 31, 2017. Our interest rate spread increased to 2.55% for the nine months ended March 31, 2018 from 2.23% for the nine months ended March 31, 2017 and our net interest-earning assets decreased $202,000, or 0.2%. Our net interest margin increased to 2.77% for the nine months ended March 31, 2018 from 2.47% for the nine months ended March 31, 2017.

Provision for Loan Losses. The provision for loan losses was $50,000 for the three months ended March 31, 2018 compared to no provision for loan loss for the three months ended March 31, 2017.

The provision for loan losses decreased $211,000, or 48.4% to $225,000 for the nine months ended March 31, 2018 compared to $436,000 for the nine months ended March 31, 2017. This decrease was due to an improvement in our historical trend in net charge-offs that is part of our analysis each quarter-end.

Non-interest Income. Non-interest income increased $54,000, or 7.9%, to $735,000 for the three months ended March 31, 2018 compared to $681,000 for the three months ended March 31, 2017. This was primarily due to an increase in fees for service of $45,000.

Non-interest income decreased $364,000, or 14.6%, to $2.1 million for the nine months ended March 31, 2018 compared to $2.5 million for the nine months ended March 31, 2017. This was primarily due to a decrease in legal settlement income of $362,000 relating to securities that had been previously written off. Net gains on sales of other real estate owned decreased $108,000 and fees for services increased $139,000.

Non-interest Expense. Non-interest expense increased $160,000, or 5.6% to $3.0 million for the three months ended March 31, 2018 from $2.9 million for the three months ended March 31, 2017. Salaries and benefits expense increased $147,000, or 8.5% to $1.9 million for the three months ended March 31, 2018 from $1.7 million for the three months ended March 31, 2017. This was primarily due to an increase in employee stock award expense of $71,000. Occupancy and equipment expense decreased $30,000, or 9.3% to $293,000 for the three months ended March 31, 2018 from $323,000 for the three months ended March 31, 2017. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, professional fees and marketing expense increased by $43,000, or 5.3%, to $853,000 for the three months ended March 31, 2018 from $810,000 for the three months ended March 31, 2017. This was primarily due to an increase in Directors stock award expense of $39,000.

Non-interest expense increased $425,000, or 4.9% to $9.0 million for the nine months ended March 31, 2018 from $8.6 million for the nine months ended March 31, 2017. Salaries and benefits expense increased $400,000, or 7.8% to $5.5 million for the nine months ended March 31, 2018 from $5.1 million for the nine months ended March 31, 2017. This was primarily due to an increase in employee stock award expense of $216,000. Occupancy and equipment expense decreased $45,000, or 4.8% to $888,000 for the nine months ended March 31, 2018 from $933,000 for the nine months ended March 31, 2017. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, professional fees and marketing expense increased $70,000, or 2.7% to $2.6 million for the nine months ended March 31, 2018 compared to $2.5 million for the nine months ended March 31, 2017. This was primarily due to an increase in Directors stock award expense of $117,000.

Income Tax Expense. Income tax expense decreased by $23,000, or 9.8% to $212,000 for the three months ended March 31, 2018 from $235,000 for the three months ended March 31, 2017.

Our effective tax rate was 18.0% for the three months ended March 31, 2018 compared to 27.0% for the three months ended March 31, 2017. 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 and the reduced corporate tax rate included in the Tax Cuts and Jobs Act enacted on December 22, 2017.

Income tax expense increased by $289,000, or 47.3% to $900,000 for the nine months ended March 31, 2018 from $611,000 for the nine months ended March 31, 2017, due to an $886,000 increase in income before tax expense, partially offset by an increase in non-taxable bank-owned life insurance income and certain dividend income. Our effective tax rate was 27.8% for the nine months ended March 31, 2018 compared to 26.0% for the nine months ended March 31, 2017. Tax expense for the nine months ended March 31, 2018 included a charge of $211,000 to our deferred tax expense because of the reduced corporate tax rate included in the Tax Cuts and Jobs Act enacted on December 22, 2017.

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 tables 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 March 31,
	2018							2017
	Average		Interest		Yield/			Average		Interest		Yield/
	Balance		Income/Expense		Cost			Balance		Income/Expense		Cost
	(Dollars in thousands)
Interest-earning assets:
Investment securities	$	147,778	$	926		2.54	%	$	189,119	$	1,045		2.24	%
Loans		345,639		3,360		3.94	%		288,140		2,794		3.93	%
Other earning assets		7,057		21		1.21	%		8,616		4		0.19	%
Total interest-earning assets		500,474		4,307		3.49	%		485,875		3,843		3.21	%
Non-interest-earning assets		29,590							32,014
Total assets	$	530,064						$	517,889

Interest-bearing liabilities:
NOW accounts	$	81,682		74		0.37	%	$	84,559		82		0.39	%
Savings accounts		82,971		16		0.08	%		79,388		18		0.09	%
Money market accounts		24,003		14		0.24	%		19,384		9		0.19	%
Time deposits		108,825		364		1.36	%		109,077		326		1.21	%
Total interest-bearing deposits		297,481		468		0.64	%		292,408		435		0.60	%
FHLB advances		74,658		329		1.79	%		61,499		361		2.38	%
Other borrowed money		2,973		1		0.14	%		3,382		1		0.12	%
Total other borowed money		77,631		330		1.72	%		64,881		362		2.26	%
Total interest-bearing liabilities		375,112		798		0.86	%		357,289		797		0.90	%
Non-interest-bearing demand deposits		66,993							70,787
Other non-interest-bearing liabilities		3,342							4,346
Capital accounts		84,617							85,467
Total liabilities and capital accounts	$	530,064						$	517,889

Net interest income			$	3,509						$	3,046
Interest rate spread						2.63	%						2.31	%
Net interest-earning assets	$	125,362						$	128,586
Net interest margin						2.84	%						2.54	%
Average earning assets to average interest-bearing liabilities						133.42	%						135.99	%

		For the Nine Months Ended March 31,
		2018							2017
		Average		Interest		Yield/			Average		Interest		Yield/
		Balance		(0)		Cost			Balance		Income/Expense		Cost
	(Dollars in thousands)
Interest-earning assets:
Investment securities		$	158,654	$	2,861		2.40	%	$	200,937	$	3,221		2.14	%
Loans			335,264		9,844		3.91	%		270,533		8,040		3.96	%
Other earning assets			5,943		82		1.84	%		10,460		63		0.80	%
Total interest-earning assets			499,861		12,787		3.41	%		481,930		11,324		3.13	%
Non-interest-earning assets			28,814							31,551
Total assets		$	528,675						$	513,481

Interest-bearing liabilities:
NOW accounts		$	81,189		225		0.37	%	$	84,019		249		0.39	%
Savings accounts			82,704		52		0.08	%		78,266		54		0.09	%
Money market accounts			21,997		34		0.21	%		19,071		27		0.19	%
Time deposits			108,432		1,063		1.31	%		110,225		1,001		1.21	%
Total interest-bearing deposits			294,322		1,374		0.62	%		291,581		1,331		0.61	%
FHLB advances			75,331		1,029		1.82	%		57,999		1,071		2.46	%
Other borrowed money			2,775		2		0.10	%		4,715		4		0.11	%
Total other borrowed money			78,106		1,031		1.76	%		62,714		1,075		2.28	%
Total interest-bearing liabilities			372,428		2,405		0.86	%		354,295		2,406		0.90	%
Non-interest-bearing demand deposits			69,465							70,484
Other non-interest-bearing liabilities			2,068							3,280
Capital accounts			84,714							85,422
Total liabilities and capital accounts		$	528,675						$	513,481

Net interest income				$	10,382						$	8,918
Interest rate spread							2.55	%						2.23	%
Net interest-earning assets		$	127,433						$	127,635
Net interest margin							2.77	%						2.47	%
Average earning assets to average interest-bearing liabilities							134.22	%						136.03	%

The following tables set 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 these tables, 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 March 31, 2018
	Compared to the Three Months Ended March 31, 2017
	Increase (Decrease) Due to change in
	Rate			Volume			Net
	(In thousands)
INTEREST INCOME

Investment securities	$	664		$	(783	)	$	(119	)
Loans		7			559			566
Other interest-earning assets		22			(5	)		17
TOTAL INTEREST INCOME		693			(229	)		464

INTEREST EXPENSE

NOW accounts		(5	)		(3	)		(8	)
Savings accounts		(7	)		5			(2	)
Money market accounts		3			2			5
Time deposits		43			(5	)		38
FHLB advances		(353	)		321			(32	)
Other borrowed money		1			(1	)		-
TOTAL INTEREST EXPENSE		(318	)		319			1
CHANGE IN NET INTEREST INCOME	$	1,011		$	(548	)	$	463

	For the Nine Months Ended March 31, 2018
	Compared to the Nine Months Ended March 31, 2017
	Increase (Decrease) Due to change in
	Rate			Volume			Net
	(In thousands)
INTEREST INCOME

Investment securities	$	530		$	(890	)	$	(360	)
Loans		(147	)		1,951			1,804
Other interest-earning assets		69			(50	)		19
TOTAL INTEREST INCOME		452			1,011			1,463

INTEREST EXPENSE

NOW accounts		(16	)		(8	)		(24	)
Savings accounts		(6	)		4			(2	)
Money market accounts		3			4			7
Time deposits		88			(26	)		62
FHLB advances		(416	)		374			(42	)
Other borrowed money		(1	)		(1	)		(2	)
TOTAL INTEREST EXPENSE		(348	)		347			(1	)
CHANGE IN NET INTEREST INCOME	$	800		$	664		$	1,464

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 March 31, 2018 and June 30, 2017.

Net Interest Income At-Risk
	Estimated Increase (Decrease)			Estimated Increase (Decrease)
Change in Interest Rates	in NII			in NII
(Basis Points)	March 31, 2018			June 30, 2017

+200		(0.80	)%		(0.44	)%
+100		0.70	%		0.98	%
-100		(4.30	)%		(5.16	)%

Net Portfolio Value Simulation Analysis. We compute the amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Given the current low level of market interest rates, we do not prepare a net portfolio value calculation for an interest rate decrease of greater than 100 basis points. A basis point equals one-hundredth of one percent, and 200 basis points equals two percent, an increase in interest rates from 3% to 5% would mean, for example, a 200 basis point increase in the “Change in Interest Rates” column below.

The tables below set forth, at March 31, 2018, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve based on information produced by an external consultant. This data is for Putnam Bank only and does not include any yield curve changes in the assets of PB Bancorp, Inc.

									NPV as a Percentage of Present
			Estimated Increase (Decrease) in						Value of Assets (3)
Change in			NPV									Increase
Interest Rates	Estimated											(Decrease)
(basis points) (1)	NPV (2)		Amount			Percent			NPV Ratio (4)			(basis points)

+300	$	66,245	$	(18,575	)		-21.90	%		14.10	%		(240	)
+200	$	72,835	$	(11,985	)		-14.10	%		15.10	%		(140	)
+100	$	79,828	$	(4,992	)		-5.90	%		16.00	%		(50	)
0	$	84,820	$	-			0.00	%		16.50	%		0
-100	$	87,180	$	2,360			2.80	%		16.60	%		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 analyses do 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 including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary prepayment/refinancing levels will likely deviate from those 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, and Federal Home Loan Bank of Boston borrowings. The Bank can borrow funds from the Federal Home Loan Bank of Boston based on eligible collateral of loans and securities. The Bank had Federal Home Loan Bank of Boston borrowings as of March 31, 2018 of $70.7 million, with unused borrowing capacity of $44.3 million. The Bank has an internal limit of wholesale borrowings to total assets ratio of 30.0%. As of March 31, 2018, the ratio of wholesale borrowings to total assets was 14.4%.

The Bank’s primary investing activities are the origination of loans and the purchase of investment securities. During the nine months ended March 31, 2018, the Bank’s loan originations net of principal collections were $18.8 million compared to $26.8 million for the nine months ended March 31, 2017. There were no security purchases during the nine months ended March 31, 2018 and 2017. Loan purchases were $21.5 million for the nine months ended March 31, 2018 compared to $15.2 million in loan purchases for the nine months ended March 31, 2017.

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.

Certificates of deposit totaled $109.7 million at March 31, 2018. 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. The capital conservation buffer will be phased in over three years, beginning on January 1, 2016. As of January 1, 2018, the phase-in amount was 1.875%. Also, certain new deductions from and adjustments to regulatory capital will be phased in over several years. Management believes that the Bank’s capital levels will remain characterized as “well-capitalized” throughout the phase in periods. Due to our asset size, the Company is not subject to capital requirements.

As of March 31, 2018, the most recent notification from the Federal 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 of March 31, 2018 and June 30, 2017.

	Required			Actual		Actual
	Ratio			Amount		Ratio
				(in thousands)
March 31, 2018

Tier 1 Leverage		5.00	%	$	63,474		12.32	%
Common Equity Tier 1 Capital		6.50			63,474		18.34
Tier 1 Risk-based Capital		8.00			63,474		18.34
Total Capital		10.00			66,454		19.20

June 30, 2017

Tier 1 Leverage		5.00	%	$	62,813		12.56	%
Common Equity Tier 1 Capital		6.50			62,813		19.33
Tier 1 Risk-based Capital		8.00			62,813		19.33
Total Capital		10.00			65,632		20.20

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 nine months ended March 31, 2018, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Under the supervision and with the participation of PB Bancorp, Inc.’s management, including its Chief Executive Officer and Chief Financial Officer, PB Bancorp, Inc. evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, PB Bancorp’s disclosure controls and procedures were effective.

There has been no change in PB Bancorp, Inc.’s internal control over financial reporting in connection with the quarterly evaluation that occurred during PB Bancorp, Inc.’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, PB Bancorp, Inc.’s internal control over financial reporting.

Part II. – OTHER INFORMATION

Item 1. Legal Proceedings – Not applicable

Item 1A. Risk Factors – Not applicable to smaller reporting companies

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a) Not applicable

b) Not applicable

c) The following table shows the Company’s repurchase of its common stock for the three months ended March 31, 2018.

					Total Number of
					Shares Purchased		Maximum Number of
	Total Number		Average Price		as Part of Publicly		Shares that May Yet Be
	of Shares		Paid per Share		Announced Plans		Purchased Under Plans
Period	Purchased		Share		or Programs (1)		or Programs (1)
January 1, 2018 through January 31, 2018		1,190		10.55		267,590		126,430
February 1, 2018 through February 28, 2018		126,312		10.35		393,902		118
March 1, 2018 through March 31, 2018		118		10.60		394,020		0
		127,620	$	10.35		394,020		0

On January 18, 2017, the Company adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to 394,020 shares of its common stock. The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. This repurchase program was completed in March 2018.

On April 4, 2018, the Company adopted a second stock-repurchase program. Under the repurchase program, the Company may repurchase up to 193,012 shares of its common stock, or approximately 2.5% of the current outstanding shares. Repurchases will be made no sooner than the termination of the Company’s regular quarterly trading blackout after the Company publically releases its results of operations for the fiscal quarter ended March 31, 2018, and consistent with the Company’s trading policies.

Item 3. Defaults Upon Senior Securities – Not applicable

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information - Not Applicable

Item 6. Exhibits

Exhibits

31.1		Chief Executive Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.
32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.
101		The following materials from PB Bancorp’s Quarterly Report on Form 10-Q for the three and nine months ended March 31, 2018, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		PB BANCORP, INC.
		(Registrant)

Date: May 14, 2018		/s/ Thomas A. Borner
		Thomas A. Borner
		President and Chief Executive Officer

Date: May 14, 2018		/s/ Robert J. Halloran, Jr.
		Robert J. Halloran, Jr.
		Executive Vice President, Chief Financial Officer and Treasurer

PB Bancorp, Inc. - FORM 10-Q - May 14, 2018

Attached files

PB Bancorp, Inc. Reports