Forward Looking Statements
This Annual Report on Form 10-K contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products and services.
PSB Holdings, Inc.
PSB Holdings, Inc. is the federally chartered stock holding company of Putnam Bank, and owns 100% of the common stock of Putnam Bank. PSB Holdings, Inc. also owns investment securities valued at $1.1 million as of June 30, 2013. We have not engaged in any significant business activity other than owning the common stock of Putnam Bank and investing in marketable securities. Our executive office is located at 40 Main Street, Putnam, Connecticut 06260, and our telephone number is (860) 928-6501. As of June 30, 2013, 57.0% of the outstanding stock of PSB Holdings, Inc. was owned by Putnam Bancorp, MHC.
Putnam Bancorp, MHC
Putnam Bancorp, MHC is a federally chartered mutual holding company. Putnam Bancorp, MHC has not engaged in any significant business activity other than owning the common stock of PSB Holdings, Inc. Putnam Bancorp, MHC owns 57.0% of the outstanding shares of common stock of PSB Holdings, Inc. So long as Putnam Bancorp, MHC exists, it is required to own a majority of the voting stock of PSB Holdings, Inc. As a result, stockholders other than Putnam Bancorp, MHC will not be able to exercise voting control over most matters put to a vote of stockholders and Putnam Bancorp, MHC, through its Board of Directors, will be able to exercise voting control over most matters put to a vote of stockholders.
Putnam Bancorp, MHC is headquartered at 40 Main Street in Putnam, Connecticut and its telephone number at that address is (860) 928-6501.
Putnam Bank
Putnam Bank was founded in 1862 as a state-chartered mutual savings bank. In October 2004, the Bank converted to a federally chartered stock savings bank in connection with the offering of common stock by PSB Holdings, Inc. The Bank is headquartered at 40 Main Street in Putnam, Connecticut and conducts substantially all of its business from eight full-service banking offices and one loan origination center. In addition, the Bank maintains a “Special Needs Limited Branch” and a “Limited Service (Mobile) Branch.” The telephone number at the Bank’s main office is (860) 928-6501.
Available Information
PSB Holdings, Inc. is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission. These respective reports are on file and a matter of public record with the Securities and Exchange Commission and may be obtained on the Securities and Exchange Commission’s website (
http://www.sec.gov
).
Our website address is
www.putnambank.com
. Information on our website should not be considered a part of this annual report.
General
Our principal business consists of attracting deposits from the general public in Windham County and New London County, Connecticut and investing those deposits, together with funds generated from operations, primarily in one- to four-family residential mortgage loans and, to a lesser extent, commercial real estate loans (including multi-family real estate loans), commercial loans, construction mortgage loans and consumer loans, and in investment securities. Our revenues are derived principally from interest on loans and securities, and from loan origination and servicing fees. Our primary sources of funds are deposits and principal and interest payments on loans and securities.
Competition
We face intense competition within our market area both in making loans and attracting deposits. The Town of Putnam and the surrounding area have a high concentration of financial institutions, including large commercial banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. As of June 30, 2012, based on the FDIC’s annual Summary of Deposits Report (the most current data available), our market share of deposits represented 18.6% of deposits in Windham County and 1.4% in New London County.
Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.
Market Area
We operate in a primarily rural market area that has a stable population and household base. We currently operate out of eight offices, which are located in Windham County and New London County, Connecticut. According to SNL Financial, LC., from 2010 to 2012, the population of Windham County increased by 0.4%, while London County reflected relatively no change (0.0%). At the same time, the population of the state of Connecticut increased by 0.3%, while the United States increased at a higher rate of 1.4%. During the same period, the growth in number of households in Windham and New London Counties, as well as on a statewide basis, paralleled the relative nationwide population growth trends. In 2012, per capita income for Windham County was $26,936 and the median household income was $54,853. In the same year, per capita income for New London County was $33,150 and the median household income was $63,020. These compare to per capita income levels for the state of Connecticut and the United States of $35,247 and $26,409 and median household income levels of $65,549 and $50,157, respectively.
Windham County is located in the Northeastern corner of Connecticut and borders both Massachusetts (to the north) and Rhode Island (to the east). New London County is to the south of Windham County, located in the Southeastern corner of Connecticut. Putnam is approximately 45 miles from Hartford, Connecticut, 30 miles from Providence, Rhode Island, and 65 miles from Boston, Massachusetts.
Windham County has a diversified mix of industry groups and employment sectors, including services, wholesale/retail trade and government. These three sectors comprise approximately 69% of the employment base in Windham County. The same three sectors comprise an approximately higher 75% of the employment base in New London County; however, nearly 26% of the employment base is employed by the government sector.
Windham County’s June 2013 unemployment rate of 9.4% is higher than the New London County unemployment rate of 8.2%, which were both higher than the comparable Connecticut unemployment rate of 8.1%, and the national unemployment rate of 7.6%. Notably, the unemployment rates for the United States, Connecticut, Windham County, and New London County for June 2013 have all decreased relative to their June 2012 unemployment rates of 8.2%, 8.5%, 10.2%, and 8.8%, respectively. Our primary market area for deposits includes the communities in which we maintain our main office and our branch office locations. Our primary lending area is broader than our primary deposit market area and includes all of Windham County, and parts of the adjacent Connecticut Counties of New London and Tolland, as well as the Rhode Island and Massachusetts communities adjacent to Windham County.
Lending Activities
Historically, our principal lending activity has been the origination of first mortgage loans for the purchase or refinancing of one- to four-family residential real estate. We retain most of the loans that we originate. However, we generally sell long-term fixed rate loans in the secondary market. When we sell loans, we generally retain the servicing rights for such loans. One- to four-family residential real estate mortgage loans (including home equity loans and lines of credit) represented $187.1 million, or 79.3%, of our loan portfolio at June 30, 2013. We also offer commercial real estate loans (including multi-family real estate loans), commercial loans, construction mortgage loans (primarily secured by single-family properties) and consumer loans. At June 30, 2013, commercial real estate loans totaled $43.4 million, or 18.4% of our loan portfolio, commercial loans totaled $2.0 million, or 0.8% of our loan portfolio, residential construction mortgage loans totaled $2.8 million, or 1.2% of our loan portfolio and consumer loans, consisting primarily of automobile loans and secured personal loans, totaled $707,000, or 0.3% of our loan portfolio.
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio at June 30, of each year indicated.
|
|
At June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Real Estate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
$
|
187,116
|
|
|
|
79.29
|
%
|
|
$
|
200,148
|
|
|
|
79.24
|
%
|
|
$
|
193,084
|
|
|
|
74.96
|
%
|
|
$
|
194,960
|
|
|
|
75.37
|
%
|
|
$
|
200,680
|
|
|
|
74.57
|
%
|
Commercial
|
|
|
43,423
|
|
|
|
18.40
|
|
|
|
45,032
|
|
|
|
17.83
|
|
|
|
53,248
|
|
|
|
20.67
|
|
|
|
54,398
|
|
|
|
21.03
|
|
|
|
56,500
|
|
|
|
20.99
|
|
Residential construction
|
|
|
2,775
|
|
|
|
1.17
|
|
|
|
3,044
|
|
|
|
1.20
|
|
|
|
2,824
|
|
|
|
1.10
|
|
|
|
1,338
|
|
|
|
0.52
|
|
|
|
1,887
|
|
|
|
0.70
|
|
Commercial
|
|
|
1,980
|
|
|
|
0.84
|
|
|
|
3,459
|
|
|
|
1.37
|
|
|
|
7,356
|
|
|
|
2.86
|
|
|
|
6,786
|
|
|
|
2.62
|
|
|
|
8,958
|
|
|
|
3.33
|
|
Consumer and other
|
|
|
707
|
|
|
|
0.30
|
|
|
|
898
|
|
|
|
0.36
|
|
|
|
1,070
|
|
|
|
0.41
|
|
|
|
1,177
|
|
|
|
0.46
|
|
|
|
1,097
|
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
236,001
|
|
|
|
100.00
|
%
|
|
|
252,581
|
|
|
|
100.00
|
%
|
|
|
257,582
|
|
|
|
100.00
|
%
|
|
|
258,659
|
|
|
|
100.00
|
%
|
|
|
269,122
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unadvanced construction loans
|
|
|
(1,745
|
)
|
|
|
|
|
|
|
(1,559
|
)
|
|
|
|
|
|
|
(1,476
|
)
|
|
|
|
|
|
|
(1,521
|
)
|
|
|
|
|
|
|
(2,929
|
)
|
|
|
|
|
|
|
|
234,256
|
|
|
|
|
|
|
|
251,022
|
|
|
|
|
|
|
|
256,106
|
|
|
|
|
|
|
|
257,138
|
|
|
|
|
|
|
|
266,193
|
|
|
|
|
|
Net deferred loan costs
|
|
|
608
|
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
285
|
|
|
|
|
|
|
|
324
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(2,693
|
)
|
|
|
|
|
|
|
(2,913
|
)
|
|
|
|
|
|
|
(3,072
|
)
|
|
|
|
|
|
|
(2,651
|
)
|
|
|
|
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
232,171
|
|
|
|
|
|
|
$
|
248,572
|
|
|
|
|
|
|
$
|
253,225
|
|
|
|
|
|
|
$
|
254,772
|
|
|
|
|
|
|
$
|
264,317
|
|
|
|
|
|
|
|
(1)
|
Residential real estate loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
Loan Portfolio Maturities and Yields.
The following table summarizes the final maturities of the Company’s loan portfolio at June 30, 2013. This table does not reflect
scheduled principal payments, unscheduled prepayments, or the ability of certain loans to reprice prior to maturity dates. Demand loans, and loans having no stated repayment schedule, are reported as being due in one year or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate
(1)
|
|
|
Commercial Real Estate
|
|
|
Residential
Construction
|
|
|
Commercial
|
|
|
Consumer and Other
Loans
|
|
|
Total Loans
|
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Due During the Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending After June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
707
|
|
|
|
7.04
|
%
|
|
$
|
5,527
|
|
|
|
5.49
|
%
|
|
$
|
1,283
|
|
|
|
3.81
|
%
|
|
$
|
749
|
|
|
|
5.03
|
%
|
|
$
|
146
|
|
|
|
6.32
|
%
|
|
$
|
8,412
|
|
|
|
5.34
|
%
|
More than one to five years
|
|
|
5,131
|
|
|
|
5.42
|
%
|
|
|
6,661
|
|
|
|
5.20
|
%
|
|
|
249
|
|
|
|
6.10
|
%
|
|
|
1,079
|
|
|
|
6.13
|
%
|
|
|
544
|
|
|
|
6.40
|
%
|
|
|
13,664
|
|
|
|
5.42
|
%
|
More than five years
|
|
|
181,278
|
|
|
|
4.29
|
%
|
|
|
30,559
|
|
|
|
5.71
|
%
|
|
|
174
|
|
|
|
5.13
|
%
|
|
|
152
|
|
|
|
5.06
|
%
|
|
|
17
|
|
|
|
6.00
|
%
|
|
|
212,180
|
|
|
|
4.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
187,116
|
|
|
|
4.33
|
%
|
|
$
|
42,747
|
|
|
|
5.61
|
%
|
|
$
|
1,706
|
|
|
|
4.28
|
%
|
|
$
|
1,980
|
|
|
|
5.63
|
%
|
|
$
|
707
|
|
|
|
6.37
|
%
|
|
$
|
234,256
|
|
|
|
4.58
|
%
|
(1)
|
Residential real estate loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
The following table sets forth the scheduled repayments of fixed and adjustable rate loans at June 30, 2013 that are contractually due after June 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Real Estate loans:
|
|
|
|
|
|
|
|
|
|
Residential (1)
|
|
$
|
120,419
|
|
|
$
|
65,990
|
|
|
$
|
186,409
|
|
Commercial
|
|
|
15,786
|
|
|
|
21,434
|
|
|
|
37,220
|
|
Residential construction
|
|
|
150
|
|
|
|
273
|
|
|
|
423
|
|
Commercial
|
|
|
880
|
|
|
|
351
|
|
|
|
1,231
|
|
Consumer and other
|
|
|
561
|
|
|
|
-
|
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137,796
|
|
|
$
|
88,048
|
|
|
$
|
225,844
|
|
(1)
|
Residential real estate loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
At June 30, 2013, the total amount of loans that had fixed interest rates was $144.2 million, and the total amount of loans that had floating or adjustable interest rates was $90.1 million.
Residential Real Estate Loans.
Our primary lending activity consists of the origination of one- to four-family residential real estate loans that are primarily secured by properties located in Windham and New London Counties, Connecticut. At June 30, 2013, $187.1 million, or 79.3% of our loan portfolio, consisted of one- to four-family residential real estate loans. At June 30, 2013, our residential real estate loans included $8.9 million of home equity loans and $10.7 million of home equity lines of credit. Generally, one- to four-family residential real estate loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We will not make loans with a loan-to-value ratio in excess of 100% for loans secured by single family homes. Fixed rate real estate loans generally are originated for terms of 10 to 30 years. Generally, all fixed rate residential real estate loans are underwritten according to Fannie Mae policies and procedures. Fixed rate residential real estate loans with terms of more than 15 years are generally sold in the secondary market, although bi-weekly fixed rate real estate loans with terms of more than 15 years are generally retained in our portfolio. Bi-weekly real estate loans are loans that require payments to be made every two weeks. We will usually retain the servicing rights for all loans that we sell in the secondary market. We originated $34.8 million of fixed rate one- to four-family residential loans during the year ended June 30, 2013, of which $14.7 million were sold in the secondary market.
We also offer adjustable rate mortgage loans for one- to four-family properties, with an interest rate based on the one-year Constant Maturity Treasury Bill Index, which adjusts annually from the outset of the loan or which adjusts annually after a three-, five-, seven-, or ten-year initial fixed rate period. We originated $5.9 million of adjustable rate one- to four-family residential loans during the year ended June 30, 2013, of which $117,000 was sold in the secondary market. Our adjustable rate mortgage loans generally provide for maximum rate adjustments of 100 basis points per adjustment, with a lifetime maximum adjustment up to 6% above the initial rate, regardless of the initial rate. Our adjustable rate real estate loans amortize over terms of up to 30 years.
Adjustable rate real estate loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the monthly or bi-weekly payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the value of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate real estate loans may be limited during periods of rapidly rising interest rates. At June 30, 2013, $66.1 million, or 28.2%, of our one- to four-family residential loans had adjustable rates of interest.
In an effort to provide financing for moderate income home buyers, we offer Veterans Administration (VA), Federal Housing Administration (FHA), Connecticut Housing Finance Authority (CHFA) and Rural Development loans. These programs offer residential real estate loans to qualified individuals. These loans are offered with fixed rates of interest and terms of up to 30 years. Such loans are secured by one- to four-family residential properties. All of these loans are originated using agency underwriting guidelines. VA, FHA and CHFA loans are closed in the name of Putnam Bank and are immediately sold on a servicing-released basis. All such loans are originated in amounts of up to 100% of the lower of the property’s appraised value or the sale price. Private mortgage insurance is required on all such loans.
All residential real estate loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. Regulations limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. All borrowers are required to obtain title insurance. We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance, on properties securing real estate loans. At June 30, 2013, our largest residential real estate loan had a principal balance of $698,000 and was secured by a residence located in our primary market area. At June 30, 2013, this loan was performing in accordance with its original terms.
At June 30, 2013, home equity loans and lines of credit totaled $19.6 million, or 10.5% of our residential real estate loans and 8.3% of total loans. Additionally, at June 30, 2013, the unadvanced amounts of home equity lines of credit totaled $9.8 million. The underwriting standards utilized for home equity loans and home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home equity loans are offered with fixed rates of interest and with terms up to 15 years. The loan-to-value ratio for a home equity loan is generally limited to 80%. However, we offer special programs to borrowers, who satisfy certain underwriting criteria, with loan-to-value ratios of up to 100%. Our home equity lines of credit have adjustable rates of interest which are indexed to the prime rate, as reported in
The Wall Street Journal
. Interest rates on home equity lines of credit are generally limited to a maximum rate of 14.25%.
Commercial Real Estate Loans.
We originate commercial real estate loans, including multi-family real estate loans. These loans are generally secured by five unit or more apartment buildings, construction loans and loans on properties used for business purposes such as small office buildings, industrial facilities or retail facilities primarily located in our primary market area. We also offer real estate development loans to licensed contractors and builders for the construction and development of commercial real estate projects and one- to four-family residential properties. At June 30, 2013, commercial mortgage loans totaled $43.4 million, which amounted to 18.4% of total loans. Our commercial real estate underwriting policies provide that such real estate loans may be made in amounts of up to 80% of the appraised value of the property provided such loan complies with our current loans-to-one-borrower limit, which at June 30, 2013 was $6.2 million. Our commercial real estate loans may be made with terms of up to five years with 20 year amortization schedules and are offered with interest rates that are fixed or that adjust periodically and are generally indexed to the prime rate as reported in
The Wall Street Journal
or to Federal Home Loan Bank advance rates. In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise and credit history, and the profitability of the value of the underlying property. In addition, with respect to commercial real estate rental properties, we will also consider the term of the lease and the quality of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25x. Environmental surveys are generally required for commercial real estate loans. Generally, multi-family and commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals.
A commercial borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower. We require commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to all guarantors on commercial loans. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable. The largest commercial real estate loan in our portfolio at June 30, 2013 was a $2.6 million loan secured by property located in our primary market area. At June 30, 2013, this loan was performing in accordance with its original terms.
Loans secured by commercial real estate, including multi-family properties, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential real estate loans. Because payments on loans secured by commercial real estate, including multi-family properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.
Residential Construction Loans.
We originate construction loans to individuals for the construction and acquisition of personal residences. At June 30, 2013, construction real estate loans totaled $2.8 million, or 1.2%, of total loans. At June 30, 2013, the unadvanced portion of these construction loans totaled $1.1 million.
Our construction real estate loans generally provide for the payment of interest only during the construction phase, which is usually nine months. At the end of the construction phase, the construction loan converts to a permanent mortgage loan. Construction loans can be made with a maximum loan-to-value ratio of 95%, provided that the borrower obtains private mortgage insurance on the loan if the loan balance exceeds 80% of the appraised value or sales price, whichever is less, of the secured property. At June 30, 2013, our largest outstanding residential construction real estate loan commitment was for $600,000, $250,000 of which was outstanding. This loan was performing according to its original terms at June 30, 2013. Construction loans to individuals are generally made on the same terms as our one- to four-family real estate loans.
Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. We also review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method.
Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value is inaccurate, we may be confronted with a project, when completed, with a value that is insufficient to assure full payment.
Commercial Loans.
At June 30, 2013, we had $2.0 million in commercial business loans which amounted to 0.8% of total loans. We make such commercial loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. Commercial lending products include term loans and revolving lines of credit. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial loans are made with either adjustable or fixed rates of interest. Variable rates are based on the prime rate, as published in
The Wall Street Journal,
plus a margin. Fixed rate commercial loans are set at a margin above the comparable Federal Home Loan Bank advance rate.
When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are made in amounts of up to 75% of the value of the collateral securing the loan. We generally do not make unsecured commercial loans.
Commercial loans generally have greater credit risk than residential real estate loans. Unlike residential real estate loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards. At June 30, 2013, our largest commercial loan was a $429,000 loan secured by business assets located in our primary market area. This loan was performing according to its original terms at June 30, 2013.
Consumer and Other Loans.
We offer a limited range of consumer loans, principally to Putnam Bank customers residing in our primary market area with acceptable credit ratings. Our consumer loans generally consist of loans on new and used automobiles, loans secured by deposit accounts and unsecured personal loans. Consumer loans totaled $707,000, or 0.3% of our total loan portfolio, at June 30, 2013.
Origination, Purchase, Sale and Servicing of Loans.
Lending activities are conducted primarily by our loan personnel operating at our eight branch offices and one loan origination center. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by current and expected future levels of market interest rates.
Generally, we retain in our portfolio all bi-weekly loans and other loans that we originate, with the exception of longer-term, non-bi-weekly fixed rate one- to four-family mortgage loans. The one- to four-family loans that we currently originate for sale include mortgage loans which conform to the underwriting standards specified by Fannie Mae. We also sell all mortgage loans insured by CHFA, FHA, VA and Rural Development. Generally, all one- to four-family loans that we sell are sold pursuant to master commitments negotiated with Fannie Mae. Generally, we sell our loans without recourse. We generally retain the servicing rights on the mortgage loans sold to Fannie Mae, but sell all CHFA, VA, FHA and Rural Development loans on a servicing-released basis.
At June 30, 2013, Putnam Bank was servicing loans sold in the amount of $30.7 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
During the fiscal year ended June 30, 2013, we originated $40.7 million of fixed rate and adjustable rate one- to four-family loans, of which we retained $25.9 million. We recognize at the time of sale, the cash gain or loss on the sale of the loans based on the difference between the net cash proceeds received and the carrying value of the loans sold.
Loan Approval Procedures and Authority.
The Board of Directors establishes the lending policies and loan approval limits of Putnam Bank. Loan officers generally have the authority to originate real estate loans, consumer loans and commercial loans up to amounts established for each lending officer. Loans in amounts above the individual authorized limits require the approval of Putnam Bank’s Credit Committee. The Credit Committee is authorized to approve all one- to four family real estate loans, commercial real estate loans, commercial loans and secured consumer loans in amounts up to $500,000. All loans of $500,000 or greater must receive the approval of Putnam Bank’s Board of Directors.
The Board annually approves independent appraisers used by Putnam Bank. For larger loans, the Bank may require an environmental site assessment to be performed by an independent professional for all non-residential real estate loans. It is Putnam Bank’s policy to require hazard insurance on all real estate loans.
Loan Origination Fees and Other Income.
In addition to interest earned on loans, Putnam Bank receives loan origination fees. Such fees and costs vary with the volume and type of loans and commitments made and purchased, principal repayments, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money.
Loans to One Borrower.
The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by regulation, to 15% of our stated capital and reserves. At June 30, 2013, our regulatory limit on loans to one borrower was $6.2 million. At that date, the largest aggregate amount loaned by Putnam Bank to one borrower was $2.8 million. The loans comprising this lending relationship were performing in accordance with their original terms as of June 30, 2013.
Delinquencies and Classified Assets
Collection Procedures
A computer-generated delinquency notice is mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. When a loan becomes 60 days delinquent, Putnam Bank sends a letter advising the borrower of the delinquency. The borrower is given 30 days to pay the delinquent payments or to contact Putnam Bank to make arrangements to bring the loan current over a longer period of time. If the borrower fails to bring the loan current in 30 days or to make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure proceedings are started. We may consider forbearance in cases of a temporary loss of income if a plan is presented by the borrower to cure the delinquency in a reasonable period of time after his or her income resumes.
Loans Past Due and Non-performing Assets
.
Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to an irreversible deterioration in the financial condition of the borrower or the value of the underlying collateral. When a loan is determined to be impaired, the measurement of the loan is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans in which collectability is questionable and therefore interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received. At June 30, 2013, the Company had non-performing loans of $6.3 million and a ratio of non-performing loans to total loans of 2.71%.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss provisions, the difference is charged against the allowance for loan losses. Any subsequent write-down of OREO is charged against earnings. At June 30, 2013, the Company had OREO of $1.7 million. Other real estate owned is included in non-performing assets.
A loan is classified as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of debt. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six months.
At June 30, 2013, the Company had total non-performing assets of $8.0 million, and a ratio of total non-performing assets to total assets of 1.76%. At June 30, 2013, the Company had total non-performing assets and troubled debt restructurings of $10.2 million, and a ratio of total non-performing assets and troubled debt restructurings to total assets of 2.24%.
Non-Performing Assets.
The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. A loan classified in the table below as “non-accrual” does not necessarily mean that such loan is or has been delinquent. Once a loan is more than 90 days delinquent or the borrower or collateral securing the loan experiences an event that makes collectability suspect, the loan is placed on “non-accrual” status. Our policies require six months of continuous payments in order for the loan to be removed from non-accrual status.
|
|
At June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans (1)
|
|
$
|
2,865
|
|
|
$
|
3,985
|
|
|
$
|
1,752
|
|
|
$
|
1,425
|
|
|
$
|
1,277
|
|
Commercial real estate
|
|
|
3,365
|
|
|
|
3,975
|
|
|
|
4,635
|
|
|
|
4,164
|
|
|
|
5,073
|
|
Residential construction
|
|
|
-
|
|
|
|
424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
|
99
|
|
Total
|
|
|
6,230
|
(2)
|
|
|
8,384
|
|
|
|
6,387
|
|
|
|
5,802
|
|
|
|
6,449
|
|
Accruing loans past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans (1)
|
|
|
112
|
|
|
|
-
|
|
|
|
32
|
|
|
|
491
|
|
|
|
-
|
|
Total
|
|
|
112
|
|
|
|
-
|
|
|
|
32
|
|
|
|
491
|
|
|
|
-
|
|
Total non-performing loans
|
|
|
6,342
|
|
|
|
8,384
|
|
|
|
6,419
|
|
|
|
6,293
|
|
|
|
6,449
|
|
Other real estate owned
|
|
|
1,665
|
|
|
|
1,683
|
|
|
|
1,074
|
|
|
|
1,561
|
|
|
|
1,211
|
|
Other non-performing assets
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
46
|
|
|
|
46
|
|
Total non-performing assets
|
|
|
8,007
|
|
|
|
10,067
|
|
|
|
7,539
|
|
|
|
7,900
|
|
|
|
7,706
|
|
Troubled debt restructurings in compliance with restructured terms
|
|
|
2,159
|
(3)
|
|
|
3,443
|
|
|
|
4,644
|
|
|
|
930
|
|
|
|
259
|
|
Troubled debt restructurings and
total non-performing assets
|
|
$
|
10,166
|
|
|
$
|
13,510
|
|
|
$
|
12,183
|
|
|
$
|
8,830
|
|
|
$
|
7,965
|
|
Total non-performing loans to total loans
|
|
|
2.71
|
%
|
|
|
3.34
|
%
|
|
|
2.51
|
%
|
|
|
2.45
|
%
|
|
|
2.42
|
|
Total non-performing assets to total assets
|
|
|
1.76
|
%
|
|
|
2.23
|
%
|
|
|
1.60
|
%
|
|
|
1.61
|
%
|
|
|
1.61
|
%
|
Total non-performing assets and
troubled debt restructurings to total assets
|
|
|
2.24
|
%
|
|
|
2.99
|
%
|
|
|
2.58
|
%
|
|
|
1.80
|
%
|
|
|
1.67
|
%
|
(1)
|
Residential real estate loans include one- to four-family real estate loans, home equity loans, and home equity lines of credit.
|
(2)
|
The gross interest income that would have been reported if the non-accrual loans had performed in accordance with their original terms was $424,000 for the year ended June 30, 2013. Actual income recognized in income was $97,000 for the year ended June 30, 2013.
|
(3)
|
The gross interest income that would have been reported if the troubled debt restructurings had performed in accordance with their original terms was $260,000 for the year ended June 30, 2013. Actual income recognized in income was $67,000 for the year ended June 30, 2013.
|
Total non-performing assets decreased $2.1 million to $8.0 million at June 30, 2013 from $10.1 million at June 30, 2012. Non-performing assets as of June 30, 2013 consisted of $1.7 million in other real estate owned which reflects the repossession of a six-lot residential development project at a carrying value of $247,000, a single family home with a carrying value of $213,000, a commercial building at a carrying value of $166,000, five lots in a recreational park at a value of $290,000, a residential building lot at $53,000 and 202.5 acres of land carried at $696,000. Also included in non-performing assets is
$6.3 million in non-performing loans. These loans consisted of 19 residential loans totaling $2.9 million and 20 commercial real estate loans totaling $3.4 million. Non-performing assets as of June 30, 2012 consisted of $1.7 million in other real estate owned which reflects the repossession of a six-lot residential development project at a carrying value of $247,000, a single family home with a carrying value of $236,000, a commercial building at a carrying value of $166,000, five lots in a recreational park at a value of $338,000 and 202.5 acres of land carried at $696,000. Also included in non-performing assets is
$8.4 million in non-performing loans. These loans consisted of 17 residential loans totaling $4.0 million, one residential construction loan totaling $424,000 and 25 commercial real estate loans totaling $4.0 million. Twenty eight of these loans continue to be classified as non-performing as of June 30, 2013.
The Bank’s non-performing loans are a direct correlation to the weakened real estate climate. Management is focused on working with borrowers and guarantors to resolve these trends 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. Overall, we expect to see improvement as solutions are identified and executed. The Bank obtains a current appraisal on all real estate secured loans that are 180 days or more past due if the appraisal in our file is older than one year. If the determination is made that there is the potential for collateral shortfall, an allocated reserve will be assigned to the loan for the expected deficiency. It is 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 book value, or the collection of the amount is expected to be unduly prolonged. The level of non-performing assets is expected to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with management’s degree of success in resolving problem assets. Management takes a proactive approach with respect to the identification and resolution of problem loans. In addition, in connection with a regularly scheduled Office of the Comptroller of the Currency (“OCC”) examination, the Holding Company and Bank developed and implemented a plan to reduce classified assets. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Comparisons of Operating Results for the Fiscal Years Ended June 30, 2013 and 2012.
The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
|
|
Loans Delinquent For
|
|
|
|
|
|
|
|
|
|
60-89 Days Past Due
|
|
|
90 Days and Over
|
|
|
Total
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
|
3
|
|
|
$
|
195
|
|
|
|
10
|
|
|
$
|
1,844
|
|
|
|
13
|
|
|
$
|
2,039
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
2,876
|
|
|
|
17
|
|
|
|
2,876
|
|
Total
|
|
|
3
|
|
|
$
|
195
|
|
|
|
27
|
|
|
$
|
4,720
|
|
|
|
30
|
|
|
$
|
4,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
|
2
|
|
|
$
|
162
|
|
|
|
5
|
|
|
$
|
940
|
|
|
|
7
|
|
|
$
|
1,102
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
1,573
|
|
|
|
5
|
|
|
|
1,573
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
424
|
|
|
|
1
|
|
|
|
424
|
|
Total
|
|
|
2
|
|
|
$
|
162
|
|
|
|
11
|
|
|
$
|
2,937
|
|
|
|
13
|
|
|
$
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
|
2
|
|
|
$
|
247
|
|
|
|
5
|
|
|
$
|
1,126
|
|
|
|
7
|
|
|
$
|
1,373
|
|
Commercial real estate
|
|
|
4
|
|
|
|
488
|
|
|
|
8
|
|
|
|
3,324
|
|
|
|
12
|
|
|
|
3,812
|
|
Total
|
|
|
6
|
|
|
$
|
735
|
|
|
|
13
|
|
|
$
|
4,450
|
|
|
|
19
|
|
|
$
|
5,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
|
6
|
|
|
$
|
696
|
|
|
|
4
|
|
|
$
|
491
|
|
|
|
10
|
|
|
$
|
1,187
|
|
Total
|
|
|
6
|
|
|
$
|
696
|
|
|
|
4
|
|
|
$
|
491
|
|
|
|
10
|
|
|
$
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
3
|
|
|
$
|
581
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3
|
|
|
$
|
581
|
|
Commercial
|
|
|
4
|
|
|
|
2,024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
2,024
|
|
Total
|
|
|
7
|
|
|
$
|
2,605
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
7
|
|
|
$
|
2,605
|
|
(1)
|
Residential real estate loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
Classified Assets.
The OCC regulations and the Bank’s internal policies require that management utilize an internal asset classification system to monitor and evaluate the credit risk inherent in its loan portfolio. The Bank currently classifies problem and potential problem assets as “substandard”, “doubtful”, “loss” or “special mention.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable, and there is a high probability of loss. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as loans is not warranted. In addition, assets that do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated “special mention.”
An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other potential problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss”, it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. Our determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC which can order the establishment of additional general or specific loss allowances.
On the basis of management’s review of its assets, at June 30, 2013 we had classified $8.7 million of our loans as substandard and $2.3 million as doubtful. Of these loans, $6.2 million were considered non-performing and included in the table of non-performing assets. At June 30, 2013, $5.3 million of our loans were designated as special mention, and none of our assets were classified as loss.
The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in our loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. Starting with March 31, 2012, we changed the loan categories to match those used in the call report. We utilize a two-tier approach: (1) identification and establishment of specific loss allowances on impaired loans; and (2) establishment of general valuation allowances on the remainder of our loan portfolio. Once a loan becomes delinquent or otherwise identified as impaired, we may establish a specific loan loss allowance based on a review of among other things, expected cash flows, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and delinquency trends. The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary based on changing economic conditions. Payments received on non-accrual commercial loans are applied first to principal. The allowance for loan losses as of June 30, 2013 was maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.
In addition, the OCC, as an integral part of their examination process, periodically reviews our allowance for loan losses. This agency may require that we recognize additions to the allowance based on its judgment of information available to it at the time of its examination.
The following table sets forth activity in our allowance for loan losses for the years indicated.
|
|
Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,913
|
|
|
$
|
3,072
|
|
|
$
|
2,651
|
|
|
$
|
2,200
|
|
|
$
|
1,758
|
|
Provision for loan losses
|
|
|
770
|
|
|
|
1,152
|
|
|
|
915
|
|
|
|
1,049
|
|
|
|
967
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
|
(307
|
)
|
|
|
(364
|
)
|
|
|
(208
|
)
|
|
|
(50
|
)
|
|
|
(53
|
)
|
Commercial real estate
|
|
|
(806
|
)
|
|
|
(928
|
)
|
|
|
(62
|
)
|
|
|
(410
|
)
|
|
|
(400
|
)
|
Residential construction
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
(212
|
)
|
|
|
(49
|
)
|
|
|
-
|
|
Consumer and other
|
|
|
(56
|
)
|
|
|
(60
|
)
|
|
|
(72
|
)
|
|
|
(156
|
)
|
|
|
(118
|
)
|
Total charge-offs
|
|
|
(1,178
|
)
|
|
|
(1,352
|
)
|
|
|
(554
|
)
|
|
|
(665
|
)
|
|
|
(571
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
|
77
|
|
|
|
7
|
|
|
|
6
|
|
|
|
4
|
|
|
|
1
|
|
Commercial real estate
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential construction
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
4
|
|
|
|
11
|
|
|
|
18
|
|
|
|
25
|
|
|
|
5
|
|
Consumer and other
|
|
|
18
|
|
|
|
23
|
|
|
|
36
|
|
|
|
38
|
|
|
|
40
|
|
Total recoveries
|
|
|
188
|
|
|
|
41
|
|
|
|
60
|
|
|
|
67
|
|
|
|
46
|
|
Net charge-offs
|
|
|
(990
|
)
|
|
|
(1,311
|
)
|
|
|
(494
|
)
|
|
|
(598
|
)
|
|
|
(525
|
)
|
Balance at end of year
|
|
$
|
2,693
|
|
|
$
|
2,913
|
|
|
$
|
3,072
|
|
|
$
|
2,651
|
|
|
$
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to non-performing loans
at end of year
|
|
|
42.46
|
%
|
|
|
34.74
|
%
|
|
|
47.86
|
%
|
|
|
42.13
|
%
|
|
|
34.11
|
%
|
Allowance for loan losses to total loans
outstanding at the end of the year
|
|
|
1.15
|
%
|
|
|
1.16
|
%
|
|
|
1.20
|
%
|
|
|
1.03
|
%
|
|
|
0.83
|
%
|
Net charge-offs to average loans outstanding
|
|
|
0.40
|
%
|
|
|
0.51
|
%
|
|
|
0.19
|
%
|
|
|
0.22
|
%
|
|
|
0.20
|
%
|
(1)
|
Residential real estate loans include one- to four-family mortgage loans, home equity loans, and home equity lines of credit.
|
Allocation of Allowance for Loan Losses.
The following table sets forth the allowance for loan losses allocated by loan category, the percent of the allowance for a category to the total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each loan category is not necessarily indicative of future losses in any particular category.
|
|
Amount
|
|
|
% of
Allowance to
Total
Allowance
|
|
|
% of Loans
in Category
to Total
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,223
|
|
|
|
45.41
|
%
|
|
|
80.46
|
%
|
Commercial loans (2)
|
|
|
1,332
|
|
|
|
49.46
|
|
|
|
19.24
|
|
Consumer and other
|
|
|
36
|
|
|
|
1.34
|
|
|
|
0.30
|
|
Unallocated
|
|
|
102
|
|
|
|
3.79
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,693
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,505
|
|
|
|
51.67
|
%
|
|
|
80.43
|
%
|
Commercial loans (2)
|
|
|
1,364
|
|
|
|
46.82
|
|
|
|
19.21
|
|
Consumer and other
|
|
|
37
|
|
|
|
1.27
|
|
|
|
0.36
|
|
Unallocated
|
|
|
7
|
|
|
|
0.24
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,913
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,548
|
|
|
|
50.39
|
%
|
|
|
76.05
|
%
|
Commercial loans (2)
|
|
|
1,426
|
|
|
|
46.42
|
|
|
|
23.53
|
|
Consumer and other
|
|
|
11
|
|
|
|
0.36
|
|
|
|
0.42
|
|
Unallocated
|
|
|
87
|
|
|
|
2.83
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
3,072
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,342
|
|
|
|
50.62
|
%
|
|
|
75.89
|
%
|
Commercial loans (2)
|
|
|
1,198
|
|
|
|
45.19
|
|
|
|
23.65
|
|
Consumer and other
|
|
|
43
|
|
|
|
1.62
|
|
|
|
0.46
|
|
Unallocated
|
|
|
68
|
|
|
|
2.57
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,651
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate (1)
|
|
$
|
1,085
|
|
|
|
49.32
|
%
|
|
|
75.27
|
%
|
Commercial loans (2)
|
|
|
1,016
|
|
|
|
46.18
|
|
|
|
24.32
|
|
Consumer and other
|
|
|
11
|
|
|
|
0.50
|
|
|
|
0.41
|
|
Unallocated
|
|
|
88
|
|
|
|
4.00
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
2,200
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
(1)
|
Residential real estate loans include one- to four-family mortgage loans, residential construction loans, home equity loans, and home equity lines of credit.
|
(2)
|
Commercial loans include commercial real estate loans and commercial loans.
|
Each quarter, management evaluates the total balance of the allowance for loan losses based on several factors, some of which are not loan specific but are reflective of the inherent losses in the loan portfolio. This process includes, but is not limited to, a periodic review of loan collectability in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability of the borrower to repay, underlying value of collateral, if applicable, and economic conditions in our immediate market area. First, we group loans by delinquency status. All loans 90 days or more delinquent are generally evaluated individually along with other impaired loans, based primarily on the present value of expected future cash flows or the value of the collateral securing the loan. Specific loss allowances are established as required by this analysis. All loans which are not individually evaluated are segregated by type, delinquency status or loan grade and a loss allowance is established by using loss experience data and management’s judgment concerning other matters it considers significant. The allowance is allocated to each category of loan based on the results of the above analysis. Small differences between the allocated balances and recorded allowances are reflected as unallocated to absorb losses resulting from the inherent imprecision involved in the loss analysis process.
This analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.
Investment Activities
Putnam Bank’s Executive Committee is responsible for implementing Putnam Bank’s Investment Policy. The Investment Policy is reviewed annually and any changes to the policy are recommended to, and subject to, the approval of our Board of Directors. The Executive Committee is comprised of our Chairman, President, Executive Vice-President and one rotating director. Authority to make investments under the approved Investment Policy guidelines is delegated by the Executive Committee to appropriate officers. While general investment strategies are developed and authorized by the Asset/Liability Committee, the execution of specific actions rests with the Chief Executive Officer or Executive Vice-President who may act jointly or severally as Putnam Bank’s Investment Officer. The Investment Officer is responsible for ensuring that the guidelines and requirements included in the Investment Policy are followed and that all securities are considered prudent for investment. The Investment Officer is authorized to execute investment transactions (purchases and sales) up to $5 million per transaction without the prior approval of the Executive Committee and within the scope of the established investment policy. Each transaction in excess of established limits must receive prior approval of the Executive Committee.
In addition, Putnam Bank may utilize the services of an independent investment advisor to assist in managing the investment portfolio. The investment advisor is responsible for maintaining current information regarding securities dealers with whom they are conducting business on our behalf. A list of appropriate dealers is provided annually to the Board of Directors for approval and authorization prior to execution of trades. The investment advisor, through its assigned portfolio manager, must contact our President or Treasurer to review all investment recommendations and transactions and receive approval from the President or Treasurer prior to execution of any transaction that might be transacted on our behalf. Upon receipt of approval, the investment advisor, or its assigned portfolio manager, is authorized to conduct all investment business on our behalf.
Our Investment Policy requires that all securities transactions be conducted in a safe and sound manner. Investment decisions must be based upon a thorough analysis of each security instrument to determine its quality, inherent risks, fit within our overall asset/liability management objectives, effect on our risk-based capital measurement and prospects for yield and/or appreciation.
The investment policy is consistent with our overall business and asset/liability management strategy, which focuses on sustaining adequate levels of core earnings.
During the fiscal year ended June 30, 2013, the Company recognized other-than-temporary write-downs of $462,000 on non-agency mortgage-backed securities.
U.S. Government and government-sponsored securities.
At June 30, 2013, the Company’s U.S. Government and government-sponsored securities portfolio classified as available-for-sale totaled $961,000, or 0.5% of total securities. At June 30, 2013, the Company’s U.S. Government and government-sponsored securities portfolio classified as held-to-maturity totaled $6.2 million, or 3.6% of total securities. While U.S. Government and government-sponsored securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and prepayment protection.
Corporate Bonds.
At June 30, 2013, 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 $4.9 million, or 2.8% of total securities all of which were classified as available-for-sale. The single-issuer trust preferred investments are evaluated for other-than-temporary impairment by performing a present value of cash flows each quarter. None of the issuers have deferred interest payments or announced the intention to defer interest payments. 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 basis which may be at maturity.
Although corporate bonds may offer higher yields than U.S. Treasury or agency securities of comparable duration, corporate bonds also have a higher risk of default due to possible adverse changes in the credit-worthiness of the issuer. In order to mitigate this risk, our investment policy requires that corporate debt obligations be rated investment grade or better by a nationally recognized rating agency. If the bond rating goes below investment grade, then the investment is placed on an investment “watch report” and is monitored by our Investment Officer. The investment is then reviewed quarterly by our Board of Directors where a determination is made to hold or dispose of the investment.
Mortgage-Backed Securities.
The Company purchases mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae. The Company also invests in collateralized mortgage obligations (CMOs or non-agency mortgage-backed securities), also insured or issued by Freddie Mac, Fannie Mae and Ginnie Mae, or private issuers such as Washington Mutual and Countrywide Home Loans. All private issuer CMOs were rated AAA at time of purchase.
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the interest rate on the underlying mortgage. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities (generally U.S. government agencies and government-sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors such as Putnam Bank, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize our specific liabilities and obligations.
CMOs are a type of mortgage-backed security issued by a special purpose entity that aggregates pools of mortgage-backed securities and creates different classes of CMO securities with varying maturities and amortization schedules as well as a residual interest, with each class, or “tranche”, possessing different risk characteristics. A particular tranche of CMOs may, therefore, carry prepayment risk that differs from that of both the underlying collateral and other tranches. CMO tranches are purchased by the Company in an attempt to moderate reinvestment risk associated with mortgage-backed securities resulting from unexpected prepayment activities.
At June 30, 2013, mortgage-backed securities and CMOs classified as available for sale totaled $22.6 million, or 13.0% of total securities. At June 30, 2013, mortgage-backed securities and CMOs classified as held to maturity totaled $128.8 million, or 74.3% of total securities. At June 30, 2013, 54.5% of the mortgage-backed securities were backed by adjustable rate loans and 45.5% were backed by fixed rate mortgage loans. The mortgage-backed securities portfolio had a weighted average yield of 2.85% at June 30, 2013. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.
Marketable Equity Securities.
At June 30, 2013, our equity securities portfolio totaled $10.0 million, or 5.8% of total securities, all of which were classified as available for sale. At June 30, 2013, the portfolio consisted of auction-rate trust preferred securities (“ARP”). Auction-rate trust preferred securities are a floating rate preferred stock, on which the dividend rate generally resets every 90 days based on an auction process to reflect the yield demand for the instruments by potential purchasers. At June 30, 2013, our investments in auction-rate trust preferred securities consisted of investments in three corporate issuers. These securities were originally purchased by the Company because they represented highly liquid, tax-preferred investments secured, in most cases, by preferred stock issued by high quality, investment grade companies, generally other financial institutions (“collateral preferred shares”). The ARP shares, or certificates, purchased by the Company are Class A certificates, which, among other rights, entitles the holder to priority claim on dividends paid into the trust holding the preferred shares.
In most cases, the trusts which issued the ARP certificates own various callable preferred shares of stock by a single entity. In addition to the call dates for redemption established by the collateral preferred shares, each trust has a maturity date upon which the trust itself will terminate. The value of the remaining collateral preferred shares is not guaranteed, and may be more or less than the stated par value of the collateral preferred shares, and is dependent on the market value of those collateral preferred shares on the date of the trust’s maturity.
The certificates issued by the trusts previously traded in an active, open auction market, with each individual trust establishing the frequency of its auctions, typically every 90 days (the “reset date”). The results of an auction would be the exchange of certificates, at par, between participants entering or exiting the market, and resetting of the yield to be earned by holders of the Class A certificates as well as the holders of other classes of trust certificates.
Beginning in February 2008, auctions for these securities began to fail when investors declined to bid on the securities. Five of the largest investment banks that made a market in these securities (Merrill Lynch, Citigroup, USB, AG and Morgan Stanley) declined to act as bidders of last resort, as they had in the past. The auction failures did not result in the loss of any principal value to the certificate holders, but prevented many sellers from exiting, or redeeming, their certificates at the reset date. These unsuccessful sellers were required to continue to hold the certificates until the next scheduled reset date. To compensate these unsuccessful sellers, the failed auctions triggered a penalty-rate feature which provided that owners of the Class A certificates were entitled to a higher portion of the dividends, and thus a higher yield, on the Class A certificates.
During this time, the Company attempted to divest itself of the ARPs, but was prevented from doing so due to the continued failure of the auction market. The Company continued to carry its investments at par value, despite the increased liquidity risk, because the credit strength of the issuers of the collateral preferred shares remained high, and the yield remained above-market.
The turmoil in the financial markets caused the value of the underlying collateral preferred shares to decline dramatically. Market values for the ARPs from Merrill Lynch, the Company’s safekeeping agent, also declined, and the Company recorded a temporary impairment adjustment to the carrying value of the ARPs which are classified as available-for-sale. A temporary impairment reduces the carrying value of the investment security with an offsetting reduction in the capital accounts of the Company.
The Company had difficulty identifying market prices of comparable instruments for ARPs due to the inactive market. As a result, during the quarter ended June 30, 2009, the Company modified its methodology for determining the fair value of the ARPs classified as Level 3, and used the quoted market values of the underlying collateral preferred shares, adjusted for the higher yield earned by the Company through the Class A certificates compared with the nominal rate available to a direct owner of the collateral preferred shares. The Company continued to record a temporary impairment adjustment on the ARPs, primarily due to the depressed market values of the underlying collateral preferred shares.
During 2009, the Company concluded that the market value of the underlying collateral preferred shares did not represent orderly transactions and adopted the use of a discounted cash flow model to determine if there was any other-than-temporary impairment of its investments in the ARPs. The resulting discounted cash flow for each ARP classified as Level 3 showed no other-than-temporary impairment in the fair value of the securities.
On September 7, 2008, the U.S. Department of the Treasury placed Fannie Mae and Freddie Mac under conservatorship and assumed an equity position in these entities, which takes priority over both common and preferred stocks. Putnam Bank owned $4,000,000 in Freddie Mac auction-rate preferred securities and recorded an other-than-temporary impairment loss totaling $3.95 million during the quarters ended September 30, 2008 and December 31, 2008. The book value of this investment was $46,000 as of June 30, 2011. The Company took possession of the underlying preferred shares of this investment and sold them during the fiscal year ended June 30, 2012. A gain on sale of $235,000 was recognized.
The Company has the ability and intent to hold these securities for the time necessary to collect the expected cash flows.
The chart below includes information on the various issuers of Auction Rate Preferred securities owned by the Company:
Issuer
|
Goldman Sachs
|
|
Merrill Lynch
|
|
Bank of America
|
Par amount
|
$3,000,000
|
|
$5,000,000
|
|
$2,000,000
|
Book Value
|
$3,000,000
|
|
$5,000,000
|
|
$2,000,000
|
Purchase Date
|
12-12-07
|
|
09-04-07
|
|
11-20-07
|
Maturity Date
|
08-23-26
|
|
05-28-27
|
|
08-17-47
|
Next Reset Date
|
08-21-13
|
|
08-27-13
|
|
08-16-13
|
Reset Frequency
|
Quarterly
|
|
Quarterly
|
|
Quarterly
|
Failed Auction
|
Yes
|
|
Yes
|
|
Yes
|
Receiving Default Rates
|
Yes
|
|
Yes
|
|
Yes
|
Current Rate
|
4.698%
|
|
4.659%
|
|
4.571%
|
Dividends Current:
|
Yes
|
|
Yes
|
|
Yes
|
The Bank’s entire auction rate preferred securities holdings as of June 30, 2013 had failed auctions for the past fiscal year.
Securities Portfolio Composition.
The following table sets forth the composition of our securities portfolio, excluding Federal Home Loan Bank stock, at the dates indicated,
|
|
At June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Carrying
|
|
|
Percent
|
|
|
Carrying
|
|
|
Percent
|
|
|
Carrying
|
|
|
Percent
|
|
|
|
Value
|
|
|
of total
|
|
|
Value
|
|
|
of total
|
|
|
Value
|
|
|
of total
|
|
|
|
(Dollars in thousands)
|
|
Securities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
$
|
961
|
|
|
|
0.5
|
%
|
|
$
|
459
|
|
|
|
0.3
|
%
|
|
$
|
666
|
|
|
|
0.4
|
%
|
Corporate bonds and other securities
|
|
|
4,873
|
|
|
|
2.8
|
%
|
|
|
4,654
|
|
|
|
3.1
|
%
|
|
|
4,905
|
|
|
|
2.9
|
%
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
15,065
|
|
|
|
8.7
|
%
|
|
|
24,113
|
|
|
|
15.8
|
%
|
|
|
30,316
|
|
|
|
17.5
|
%
|
Non-agency mortgage-backed securities
|
|
|
7,551
|
|
|
|
4.3
|
%
|
|
|
8,351
|
|
|
|
5.5
|
%
|
|
|
11,722
|
|
|
|
6.8
|
%
|
Equity securities
|
|
|
10,000
|
|
|
|
5.8
|
%
|
|
|
9,636
|
|
|
|
6.3
|
%
|
|
|
10,400
|
|
|
|
6.0
|
%
|
Total securities, available for sale
|
|
|
38,450
|
|
|
|
22.1
|
%
|
|
|
47,213
|
|
|
|
31.0
|
%
|
|
|
58,009
|
|
|
|
33.6
|
%
|
Securities, held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
|
6,198
|
|
|
|
3.6
|
%
|
|
|
9,192
|
|
|
|
6.0
|
%
|
|
|
16,085
|
|
|
|
9.3
|
%
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
128,791
|
|
|
|
74.3
|
%
|
|
|
96,003
|
|
|
|
63.0
|
%
|
|
|
98,656
|
|
|
|
57.1
|
%
|
Total securities, held-to-maturity
|
|
|
134,989
|
|
|
|
77.9
|
%
|
|
|
105,195
|
|
|
|
69.0
|
%
|
|
|
114,741
|
|
|
|
66.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
173,439
|
|
|
|
100.0
|
%
|
|
$
|
152,408
|
|
|
|
100.0
|
%
|
|
$
|
172,750
|
|
|
|
100.0
|
%
|
At June 30, 2013, we had invested in $7.6 million in non-agency mortgage-backed securities, and had no other investments in a single company or entity (other than the U.S. Government or an agency of the U.S. Government) that had an aggregate book value in excess of 10% or more of our equity.
Portfolio Maturities and Yields.
The composition and maturities of the investment securities portfolio at June 30, 2013 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State agency and municipal obligations as well as common and preferred stock yields have not been adjusted to a tax-equivalent basis. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At June 30, 2013, mortgage-backed securities with adjustable rates totaled $82.5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In One Year
or Less
|
|
|
After One
Year Through
Five Years
|
|
|
After Five
Years
Through
Ten Years
|
|
|
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
961
|
|
|
$
|
-
|
|
|
$
|
961
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,873
|
|
|
|
4,873
|
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
22
|
|
|
|
1,288
|
|
|
|
143
|
|
|
|
13,612
|
|
|
|
15,065
|
|
Non-agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,551
|
|
|
|
7,551
|
|
Total debt securities
|
|
|
22
|
|
|
|
1,288
|
|
|
|
1,104
|
|
|
|
26,036
|
|
|
|
28,450
|
|
Equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
(1)
|
Total securities available-for-sale
|
|
|
22
|
|
|
|
1,288
|
|
|
|
1,104
|
|
|
|
26,036
|
|
|
|
38,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government-sponsored securities
|
|
|
-
|
|
|
|
5,259
|
|
|
|
939
|
|
|
|
-
|
|
|
|
6,198
|
|
U.S. Government-sponsored and guaranteed mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,652
|
|
|
|
124,139
|
|
|
|
128,791
|
|
Total securities held to maturity
|
|
|
-
|
|
|
|
5,259
|
|
|
|
5,591
|
|
|
|
124,139
|
|
|
|
134,989
|
|
Total securities
|
|
$
|
22
|
|
|
$
|
6,547
|
|
|
$
|
6,695
|
|
|
$
|
150,175
|
|
|
$
|
173,439
|
|
Weighted average yield
|
|
|
4.00
|
%
|
|
|
1.87
|
%
|
|
|
2.95
|
%
|
|
|
2.86
|
%
|
|
|
2.83
|
%
|
(1) Equity securities consist of ARP’s with no stated maturity.
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. In addition to deposits, funds are derived from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the Federal Home Loan Bank of Boston and brokered certificates of deposit may be used to compensate for reductions in deposits and to fund loan growth.
Deposits.
A majority of our depositors are persons who work or reside in Windham County and New London County, Connecticut. We offer a selection of deposit instruments, including checking, savings, money market deposit accounts, negotiable order of withdrawal (NOW) accounts and fixed-term certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. To attract and retain deposits, we rely upon personalized customer service, long-standing relationships and competitive interest rates.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on historical experience, management believes our deposits are relatively stable. However, the ability to attract and maintain money market accounts and certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. At June 30, 2013, $130.1 million, or 38.1%, of our deposit accounts were certificates of deposit, of which $67.1 million had maturities of one year or less.
The following table sets forth the average distribution of total deposit accounts, by account type, for the years indicated.
|
|
At June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
Balance
|
|
|
Percent
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
42,518
|
|
|
|
12.58
|
%
|
|
|
-
|
%
|
|
$
|
38,948
|
|
|
|
11.66
|
%
|
|
|
-
|
%
|
|
$
|
35,914
|
|
|
|
10.85
|
%
|
|
|
-
|
%
|
NOW accounts
|
|
|
92,819
|
|
|
|
27.45
|
|
|
|
0.49
|
|
|
|
91,767
|
|
|
|
27.46
|
|
|
|
0.67
|
|
|
|
90,186
|
|
|
|
27.25
|
|
|
|
0.81
|
|
Regular savings
|
|
|
56,325
|
|
|
|
16.66
|
|
|
|
0.14
|
|
|
|
51,063
|
|
|
|
15.28
|
|
|
|
0.21
|
|
|
|
48,004
|
|
|
|
14.50
|
|
|
|
0.34
|
|
Money market accounts
|
|
|
14,313
|
|
|
|
4.23
|
|
|
|
0.38
|
|
|
|
15,117
|
|
|
|
4.52
|
|
|
|
0.48
|
|
|
|
13,517
|
|
|
|
4.09
|
|
|
|
0.68
|
|
Club accounts
|
|
|
192
|
|
|
|
0.06
|
|
|
|
0.10
|
|
|
|
196
|
|
|
|
0.06
|
|
|
|
0.15
|
|
|
|
199
|
|
|
|
0.06
|
|
|
|
0.30
|
|
|
|
|
206,167
|
|
|
|
60.98
|
|
|
|
0.29
|
|
|
|
197,091
|
|
|
|
58.98
|
|
|
|
0.40
|
|
|
|
187,820
|
|
|
|
56.75
|
|
|
|
0.52
|
|
Certificates of deposit
|
|
|
131,932
|
|
|
|
39.02
|
|
|
|
1.70
|
|
|
|
137,054
|
|
|
|
41.02
|
|
|
|
1.96
|
|
|
|
143,158
|
|
|
|
43.25
|
|
|
|
2.34
|
|
Total
|
|
$
|
338,099
|
|
|
|
100.00
|
%
|
|
|
0.84
|
%
|
|
$
|
334,145
|
|
|
|
100.00
|
%
|
|
|
1.04
|
%
|
|
$
|
330,978
|
|
|
|
100.00
|
%
|
|
|
1.31
|
%
|
As of June 30, 2013, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was $61.8 million. The following table sets forth the maturity of those certificates as of June 30, 2013, in thousands.
|
|
|
|
|
Three months or less
|
|
$
|
21,550
|
|
Over three through six months
|
|
|
5,608
|
|
Over six months through one year
|
|
|
7,467
|
|
Over one year through three years
|
|
|
18,370
|
|
Over three years
|
|
|
8,823
|
|
Total
|
|
$
|
61,818
|
|
Borrowings.
Our borrowings consist of advances from, and a line of credit with, the Federal Home Loan Bank of Boston (“FHLB”), and securities sold under agreements to repurchase. At June 30, 2013, we had an available line of credit with the Federal Home Loan Bank of Boston in the amount of $2.4 million and access to additional Federal Home Loan Bank advances of up to $49.2 million. The Bank has an available line of credit with Bankers Bank Northeast in the amount of $4.0 million. There was nothing advanced on this line as of June 30, 2013. At June 30, 2013, retail securities sold under agreements to repurchase were $4.8 million. The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the years indicated.
|
|
At and For The Year Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount of advances outstanding
|
|
|
|
|
|
|
|
|
|
at any month end during the year:
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
56,800
|
|
|
$
|
83,500
|
|
|
$
|
98,500
|
|
Securities sold under agreements to repurchase with customers
|
|
|
15,783
|
|
|
|
12,236
|
|
|
|
11,651
|
|
Average advances outstanding during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
54,068
|
|
|
|
72,692
|
|
|
|
93,799
|
|
Securities sold under agreements to repurchase with customers
|
|
|
6,841
|
|
|
|
6,303
|
|
|
|
7,671
|
|
Balance outstanding at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
53,500
|
|
|
|
53,500
|
|
|
|
83,500
|
|
Securities sold under agreements to repurchase with customers
|
|
|
4,849
|
|
|
|
3,653
|
|
|
|
4,244
|
|
Weighted average interest rate during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
3.17
|
%
|
|
|
3.79
|
%
|
|
|
3.84
|
%
|
Securities sold under agreements to repurchase with customers
|
|
|
0.16
|
|
|
|
0.21
|
|
|
|
0.28
|
|
Weighted average interest rate at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
2.89
|
%
|
|
|
3.46
|
%
|
|
|
3.88
|
%
|
Securities sold under agreements to repurchase with customers
|
|
|
0.16
|
|
|
|
0.17
|
|
|
|
0.27
|
|
Subsidiary Activities
PSB Holdings Inc.’s only subsidiary is Putnam Bank. Putnam Bank has three subsidiaries, Windham North Properties, LLC, PSB Realty, LLC and Putnam Bank Mortgage Servicing Company. Windham North Properties, LLC is used to acquire title to selected properties on which Putnam Bank forecloses. As of June 30, 2013, Windham North Properties, LLC, owned six such properties. PSB Realty, LLC owns a parcel of real estate located immediately adjacent to Putnam Bank’s main office. This real estate is utilized as a loan center for Putnam Bank and there are no outside tenants that occupy the premises. PSB Realty, LLC also owns the 40 High Street, Norwich branch building and real estate. Putnam Bank Mortgage Servicing Company is a qualified “passive investment company” that is intended to reduce Connecticut state taxes on interest earned on real estate loans.
Personnel
As of June 30, 2013, we had 81 full-time employees and 37 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General
.
PSB Holdings, Inc. and Putnam Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.
The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to PSB Holdings, Inc. or Putnam Bank.
Method of Accounting
.
For federal income tax purposes, PSB Holdings, Inc. and Putnam Bank currently report their income and expenses on the accrual method of accounting and use a tax year ending June 30 for filing their federal income tax returns.
Bad Debt Reserves
.
Prior to the Small Business Protection Act of 1996 (the “1996 Act”), Putnam Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, Putnam Bank was required to use the specific charge off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At June 30, 2013, Putnam Bank had no reserves subject to recapture in excess of its base year reserves.
Taxable Distributions and Recapture
.
Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Putnam Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules. At June 30, 2013, our total federal pre-1988 base year reserve was approximately $2.3 million. However, under current law, pre-1988 base year reserves remain subject to recapture if Putnam Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Alternative Minimum Tax
.
The Internal Revenue Code of 1986, as amended (the “Code”) imposes an alternative minimum tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. At June 30, 2013, PSB Holdings, Inc. had $1.2 million of AMT payments available to carry forward to future periods.
Net Operating Loss Carryovers
.
A company may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At June 30, 2013, PSB Holdings, Inc. had $1.4 million in net operating loss carry forwards for federal income tax purposes.
Corporate Dividends-Received Deduction
.
PSB Holdings, Inc. may exclude from its income 100% of dividends received from Putnam Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.
State Taxation
Connecticut State Taxation
.
PSB Holdings, Inc. and Putnam Bank and its subsidiaries, are subject to the Connecticut corporation business tax. Both entities are required to pay the regular corporation business tax (income tax).
The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate of 7.5% to arrive at Connecticut income tax.
In 1998, the State of Connecticut enacted legislation permitting the formation of passive investment companies by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. Putnam Bank established a passive investment company, Putnam Bank Mortgage Servicing Company, during 2007 and eliminated the state income tax expense of Putnam Bank effective July 1, 2006. If the State of Connecticut were to pass legislation in the future to eliminate the passive investment company exemption Putnam Bank would be subject to state income taxes in Connecticut.
The state tax returns have not been audited for the last five years.
SUPERVISION AND REGULATION
General
Putnam Bank is examined and supervised by the Office of the Comptroller of the Currency. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Putnam Bank also is a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the twelve regional banks in the Federal Home Loan Bank System. Putnam Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. The Office of the Comptroller of the Currency examines Putnam Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Putnam Bank’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of Putnam Bank’s mortgage documents.
Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency or Congress, could have a material adverse impact on PSB Holdings, Inc. and Putnam Bank and their operations.
Regulatory Agreement
On June 20, 2012, Putnam Bank entered into an agreement with the Office of Comptroller of the Currency (the “Agreement”). As part of the Agreement, the Office of Comptroller of the Currency (required Putnam Bank to take a number of specific corrective actions, and specified that Putnam Bank may not undertake certain actions without obtaining prior regulatory approval. The Agreement replaces a memorandum of understanding that Putnam Bank entered into with the Office of Thrift Supervision.
The actions and forbearances contained in the Agreement require Putnam Bank’s Board of Directors (the “Board”) to, among other matters:
|
●
|
Appoint a Compliance Committee of the Board to monitor compliance with the Agreement.
|
|
●
|
The Compliance Committee must prepare and submit to the full Board within 90 days from June 20, 2012, a report detailing the actions taken to comply with the requirements of the Agreement, and thereafter to provide quarterly progress reports.
|
|
●
|
The full Board must forward a copy of the progress report with any comments they may have to the Assistant Deputy Comptroller.
|
|
●
|
Develop a detailed three year business plan for Putnam Bank which must be forwarded to the Assistant Deputy Comptroller for a prior written determination of no supervisory objection.
|
|
●
|
Putnam Bank may not deviate from the business plan without receiving the prior written determination of no supervisory objection from the Assistant Deputy Comptroller.
|
|
●
|
Prepare and forward to the Assistant Deputy Comptroller a revised capital plan for Putnam Bank that is consistent with Putnam Bank’s business plan.
|
|
●
|
Following receipt of the Assistant Deputy Comptroller’s written determination of no supervisory objection, the Board must adopt and Putnam Bank implement the capital plan.
|
|
●
|
Adopt and implement a written program to review Putnam Bank’s classified investment securities and reduce the levels of classified investments.
|
|
●
|
Develop and implement policies and procedures to identify and monitor investment securities with other than temporary impairment.
|
|
●
|
Develop and implement a program to improve loan portfolio management.
|
|
●
|
Establish a written loan review system to review on at least a quarterly basis Putnam Bank’s loan portfolio to assure the timely identification and categorization of problem loans.
|
|
●
|
Prior to adoption the written loan system and any future changes must be provided to the Assistant Deputy Comptroller for a prior written determination of no supervisory objection.
|
|
●
|
Adopt, implement and adhere to written policies and procedures for maintaining an adequate allowance for loan and lease losses.
|
|
●
|
Establish a written program eliminating the basis of the Office of the Comptroller of the Currency’s criticism of certain assets and assets classified through any internal or external loan review.
|
The Agreement also requires that the written programs referenced above be submitted to the Office of the Comptroller of the Currency within certain timeframes following June 20, 2012, the date Putnam Bank entered into the Agreement. Management has reviewed its obligations under the Agreement and believes it is in compliance with the terms of the Agreement.
Dodd-Frank Act
The Dodd-Frank Act, enacted on July 21, 2010, changed the bank regulatory structure and is affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act eliminated our former primary federal regulator, the Office of Thrift Supervision, and required Putnam Bank to be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorized the Federal Reserve Board to supervise and regulate all savings and loan holding companies, including mutual holding companies, like PSB Holdings, Inc., and Putnam Bancorp, Inc., in addition to bank holding companies that it already regulated. The Dodd-Frank Act also required the Federal Reserve Board to set minimum capital levels for holding companies that are as stringent as those required for the insured depository subsidiaries, meaning that the components of Tier 1 capital will be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Putnam Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are continuing to be examined by their applicable bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The legislation broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. The legislation also required rules governing retention of a portion of credit risk by originators of certain securitized loans, stipulated regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to mortgage originations. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.
Many of the provisions of the Dodd-Frank Act have delayed effective dates and the process of the various federal agencies promulgating numerous and extensive implementing regulations is continuing. Although the substance and scope of these regulations cannot be completely determined at this time, it is expected that the legislation and implementing regulations will increase our operating and compliance costs.
Federal Banking Regulation
Business Activities.
A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and federal regulations issued thereunder. Under these laws and regulations, Putnam Bank may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets and non-residential real estate loans certain types of debt securities and certain other assets. Putnam Bank also may invest specified amount in subsidiaries that may engage in activities not otherwise permissible for Putnam Bank, including real estate investment and securities and insurance brokerage. The Dodd-Frank Act authorized depository institutions to, for the first time, pay interest on business checking accounts, effective July 21, 2011.
Capital Requirements.
Federal regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for associations receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by federal regulations based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. Putnam Bank does not typically engage in asset sales.
At June 30, 2013, Putnam Bank’s capital exceeded all applicable requirements.
In July 2013, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised and implements more stringent treatment of mortgage servicing assets and certain deferred tax assets. Under the rule, a banking organization’s capital distributions and certain discretionary bonus payments will be restricted if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be applicable.
Loans-to-One Borrower.
A federal savings association generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and unimpaired surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by certain readily marketable collateral, which does not include real estate. As of June 30, 2013, Putnam Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test.
As a federal savings association, Putnam Bank must satisfy the qualified thrift lender, or “QTL”, test. Under the QTL test, Putnam Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
“Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans. Putnam Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
A savings association that fails the qualified thrift lender test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test potentially subject to regulatory enforcement action for a violation of law. At June 30, 2013, Putnam Bank satisfied this test.
Capital Distributions.
Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings association must file an application for approval of a capital distribution if:
|
●
|
the total capital distributions for the applicable calendar year exceed the sum of the association’s net income for that year to date plus the association’s retained net income for the preceding two years still available for dividend;
|
|
●
|
the association would not be at least adequately capitalized following the distribution;
|
|
●
|
the distribution would violate any applicable statute, regulation, agreement or Office of the Comptroller of the Currency-imposed condition; or
|
|
●
|
the association is not eligible for expedited treatment of its filings.
|
Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a regulatory notice at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
Such a notice or application may be disapproved if:
|
●
|
the association would be undercapitalized following the distribution;
|
|
●
|
the proposed capital distribution raises safety and soundness concerns; or
|
|
●
|
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
|
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.
Liquidity.
A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.
Community Reinvestment Act and Fair Lending Laws.
All savings associations have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the Office of the Comptroller of the Currency is required to assess the association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by federal regulators, as well as other federal regulatory agencies and the Department of Justice. Putnam Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Privacy Standards.
Federal regulations require Putnam Bank to disclose its privacy policy, including identifying with whom it shares “non-public personal information” to customers at the time of establishing the customer relationship and annually thereafter.
The regulations also require Putnam Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, Putnam Bank is required to provide its customers with the ability to “opt-out” of having Putnam Bank share their non-public personal information with unaffiliated third parties before it can disclose such information, subject to certain exceptions. The implementation of these regulations did not have a material adverse effect on PSB Holdings, Inc. or Putnam Bank.
Putnam Bank must implement measures intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records, or information that could result in substantial harm or inconvenience to any customer. Putnam Bank has implemented these measures.
Transactions with Related Parties.
A federal savings association’s authority to engage in transactions with its “affiliates” is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). The term “affiliates” for these purposes generally means any company that controls, is controlled by, or is under common control with an institution. PSB Holdings, Inc. and Putnam Bancorp, MHC are affiliates of Putnam Bank. In general, transactions with affiliates must be on terms that are as favorable to the association as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the association’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the association. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.
Putnam Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Putnam Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by Putnam Bank’s Board of Directors. Extensions of credit to executive officers are subject to additional restrictions.
Enforcement.
The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties”, including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day.
Standards for Safety and Soundness.
Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
Prompt Corrective Action Regulations
.
Under the prompt corrective action regulations, the Office of the Comptroller of the Currency is required and authorized to take supervisory actions against undercapitalized federal savings associations. For this purpose, a savings association is placed in one of the following five categories based on the association’s capital:
|
●
|
well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
|
|
●
|
adequately capitalized (at least 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital and 8% total risk-based capital);
|
|
●
|
undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 4% leverage capital (3% for savings banks with a composite examination rating of 1);
|
|
●
|
significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and
|
|
●
|
critically undercapitalized (less than 2% tangible capital).
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Generally, the banking regulator is required to appoint a receiver or conservator for an association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45 days of the date an association receives notice that it is “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the savings association will engage in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings association. Any holding company for the savings association required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of the savings association’s assets at the time it was notified or deemed to be undercapitalized by the Office of the Comptroller of the Currency, or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the Office of the Comptroller of the Currency notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of the Comptroller of the Currency has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of the Comptroller of the Currency may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At June 30, 2013, Putnam Bank met the criteria for being considered “well-capitalized”.
The previously mentioned final rule that increases regulatory capital requirements will revise the prompt corrective action categories accordingly.
Insurance of Deposit Accounts.
The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.
Effective April 1, 2011, the Federal Deposit Insurance Corporation implemented a requirement of the Dodd-Frank Act to revise its assessment system to base it on each institution’s total assets less tangible capital of each institution instead of deposits. The Federal Deposit Insurance Corporation also revised its assessment schedule so that it ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not believe we are taking or are subject to any action, condition or violation that could lead to termination of our deposit insurance.
The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.
In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2013, the annualized FICO assessment was equal to 0.64 basis points of an institution’s total assets less tangible capital.
Prohibitions Against Tying Arrangements
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Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System.
Putnam Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Boston, Putnam Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in specified amounts. As of June 30, 2013, Putnam Bank was in compliance with this requirement.
The USA PATRIOT Act
The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Certain provisions of the act impose affirmative obligations on a broad range of financial institutions, including savings banks, like Putnam Bank. These obligations include enhanced anti-money laundering programs, customer identification programs and regulations relating to private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States).
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
We have existing policies, procedures and systems designed to comply with these regulations, and we are further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.
Holding Company Regulation
General
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Putnam Bancorp, MHC and PSB Holdings, Inc. are savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, Putnam Bancorp, MHC and PSB Holdings, Inc. are registered with the Federal Reserve Board and are subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over PSB Holdings, Inc. and Putnam Bancorp, MHC, and their subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. Pursuant to the Dodd-Frank Act, the Federal Reserve Board assumed regulatory authority over savings and loan holding companies from the Office of Thrift Supervision on July 21, 2011. As federal corporations, PSB Holdings, Inc. and Putnam Bancorp, MHC are generally not subject to state business organization laws.
Permitted Activities
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Pursuant to Section 10(o) of the Home Owners’ Loan Act and federal regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as PSB Holdings, Inc. may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (x), subject to meeting certain criteria, any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Federal Reserve Board.
The Home Owners’ Loan Act prohibits a savings and loan holding company, including PSB Holdings, Inc. and Putnam Bancorp, MHC from, directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board. It also prohibits, with certain exceptions, the acquisition or retention of, more than 5% of a nonsubsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital.
Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, which is currently permitted for bank holding companies, subject to certain grandfather rules. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act’s directive as to savings and loan holding companies. The consolidated regulatory capital requirements will apply to savings and loan holding companies As of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.
Dividends and repurchases.
The Federal Reserve Board has issued a supervisory letter regarding the payment of dividends and stock repurchases by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the supervisory letter provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing its stock in certain circumstances. These regulatory policies could affect the ability of PSB Holdings, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Source of Strength.
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Waivers of Dividends by Putnam Bancorp, MHC
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Federal regulations require Putnam Bancorp, MHC to notify the Federal Reserve Board of any proposed waiver of its receipt of dividends from PSB Holdings, Inc. The Office of Thrift Supervision, the previous regulator for Putnam Bancorp, MHC, allowed dividend waivers where the mutual holding company’s board of directors determined that the waiver was consistent with its fiduciary duties and the waiver would not be detrimental to the safety and soundness of the institution. The Federal Reserve Board has issued an interim final rule providing that, pursuant to a Dodd-Frank Act grandfathering provision, it may not object to dividend waivers under similar circumstances, but adding the requirement that a majority of the mutual holding company’s members eligible to vote have approved a waiver of dividends by the company within 12 months prior to the declaration of the dividend being waived. The Federal Reserve Board has typically not allowed dividend waivers by mutual bank holding companies and, therefore, the ability of Putnam Bancorp, MHC to waive dividends for in the future is uncertain.
Conversion of Putnam Bancorp, MHC to Stock Form
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Federal regulations permit Putnam Bancorp, MHC to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion Transaction a new stock holding company would be formed as the successor to PSB Holdings, Inc. (the “New Holding Company”), Putnam Bancorp, MHC’s corporate existence would end, and certain depositors of Putnam Bank would receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than Putnam Bancorp, MHC (“Minority Stockholders”) would be automatically converted into a number of shares of common stock of the New Holding Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in the New Holding Company as they owned in PSB Holdings, Inc. immediately prior to the Conversion Transaction. Under a provision of the Dodd-Frank Act applicable to Putnam Bancorp, MHC, Minority Stockholders would not be diluted because of any dividends waived by Putnam Bancorp, MHC (and waived dividends would not be considered in determining an appropriate exchange ratio), in the event Putnam Bancorp, MHC converts to stock form.
Federal Securities Laws
PSB Holdings, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. PSB Holdings, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
PSB Holdings, Inc. common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of PSB Holdings, Inc. may not be resold without registration or unless sold in accordance with certain resale restrictions. If PSB Holdings, Inc. meets specified current public information requirements, each affiliate of PSB Holdings, Inc. is able to sell in the public market, without registration, a limited number of shares in any three-month period.
Reports to Security Holders
PSB Holdings, Inc. files annual and quarterly reports with the SEC on Forms 10-K and 10-Q, respectively. PSB Holdings, Inc. also files current reports on the Form 8-K with the SEC. In addition, PSB Holdings, Inc. files preliminary and definitive proxy materials with the SEC.
PSB Holdings, Inc. is an electronic filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the site is http://www.sec.gov.
We could record future losses on our investment securities portfolio.
A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an additional impairment that is other-than- temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of the trust preferred securities could decline if the overall economy and the financial condition of some of the issuers continue to deteriorate and there remains limited liquidity for these securities.
We have been negatively affected by current local and national market and economic conditions. A continuation or worsening of these conditions could adversely affect our operations, financial condition and earnings.
Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could
significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued elevated unemployment levels may
result in higher than expected loan delinquencies, increases in our nonperforming and criticized classified assets and a decline in demand for our products and services. These events could then result in further increases in loan loss provisions, costs associated with monitoring delinquent loans and disposing of foreclosed property, which could negatively affect our financial condition and results of operations.
Concentration of loans in our primary market area, which has recently experienced an economic downturn, may increase risk.
Our success depends primarily on the general economic conditions in the State of Connecticut, as nearly all of our loans are to customers in the state. Accordingly, the local economic conditions in the State of Connecticut have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans. As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans. In addition, continued weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control could negatively affect our financial results.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. In addition, recently some of our larger financial institution competitors, offer loans with lower interest rates on more attractive terms than those offered by Putnam Bank, which we expect to continue in the foreseeable future. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by our competition may limit our ability to increase our interest earning assets. For additional information see “Business of Putnam Bank—Competition.”
Because we intend to increase our commercial real estate and commercial loan originations, our lending risk will increase and downturns in the real estate market or local economy could adversely affect our earnings.
Commercial real estate and commercial loans generally have more risk than residential mortgage loans. Because the repayment of commercial real estate and commercial loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the real estate market or the local economy. Commercial real estate and commercial loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business thereby increasing the risk of non-performing loans. As our commercial real estate and commercial loan portfolio increases, the corresponding risks and potential for losses from these loans may also increase.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Our allowance for loan losses was 1.15% of total loans and 42.46% of non-performing loans at June 30, 2013. Material additions to our allowance would materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations and financial condition.
Because we originate a significant number of mortgage loans secured by residential real estate, decreases in real estate values could adversely affect the value of property used as collateral for such loans. At June 30, 2013, loans secured by real estate represented 98.9% of our total loans, substantially all of which are secured by properties located in Windham County. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. As of June 30, 2013, the unemployment rate in Windham County, Connecticut was 9.4%, and the New London County unemployment rate was 8.2% compared to the national unemployment rate of 7.6% and the unemployment rate for Connecticut as a whole of 8.1%.
Future changes in interest rates may reduce our profits.
Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
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the interest income we earn on our interest-earning assets, such as loans and securities; and
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the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
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The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. In a period of declining interest rates, the interest income earned on our assets may decrease more rapidly than the interest paid on our liabilities, as borrowers speed up prepayments of mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk, Liquidity and Capital resources.”
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.
At June 30, 2013, our “rate shock” analysis prepared by our third party consultant indicates that our net portfolio value would decrease by $10.3 million if there was an instantaneous 200 basis point increase in market interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk, Liquidity and Capital resources.”
Historically low interest rates may adversely affect our net interest income and profitability.
During the past three years it has been the policy of the Board of Governors of the Federal Reserve System to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than as available prior to 2008. Consequently, the average yield on our interest earning assets has decreased to 3.61% for the year ended June 30, 2013 from 4.40% for the year ended June 30, 2011. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets. This has resulted in increases in net interest income in the short term. However, our ability to lower our interest expense is limited at these interest rate levels while the average yield on our interest-earning assets may continue to decrease. The Board of Governors of the Federal Reserve System has indicated its intention to continue to maintain low interest rates in the near future. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which may have an adverse affect on our profitability.
If our investment in the common stock of the Federal Home Loan Bank of Boston is classified as other-than-temporarily impaired or as permanently impaired, earnings and stockholders’ equity could decrease.
We own stock of the Federal Home Loan Bank of Boston, which is part of the Federal Home Loan Bank system. The Federal Home Loan Bank of Boston common stock is held to qualify for membership in the Federal Home Loan Bank of Boston and to be eligible to borrow funds under the Federal Home Loan Bank of Boston’s advance programs. The aggregate cost of our Federal Home Loan Bank of Boston common stock as of June 30, 2013, was $7.0 million based on its par value. There is no market for Federal Home Loan Bank of Boston common stock.
Although the Federal Home Loan Bank of Boston is not reporting current operating difficulties, it is possible that the capital of the Federal Home Loan Bank system, including the Federal Home Loan Bank of Boston, could be substantially diminished. This could occur with respect to an individual Federal Home Loan Bank due to the requirement that each Federal Home Loan Bank is jointly and severally liable along with the other Federal Home Loan Banks for the consolidated obligations issued through the Office of Finance, a joint office of the Federal Home Loan Banks, or due to the merger of a Federal Home Loan Bank experiencing operating difficulties into a stronger Federal Home Loan Bank. Consequently, there continues to be a risk that our investment in Federal Home Loan Bank of Boston common stock could be deemed other-than-temporarily impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the impairment charge.
Stockholders other than our mutual holding company own a minority of PSB Holdings, Inc.’s common stock and are not able to exercise voting control over most matters put to a vote of stockholders.
Public stockholders own a minority of the outstanding shares of PSB Holdings, Inc. common stock. As a result, stockholders other than Putnam Bancorp, MHC are not able to exercise voting control over most matters put to a vote of stockholders. Putnam Bancorp, MHC owns a majority of PSB Holdings, Inc.’s common stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage PSB Holdings, Inc. and Putnam Bank also manage Putnam Bancorp, MHC. Putnam Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium for their shares.
Our stock value may be negatively affected by federal regulations restricting takeovers and our mutual holding company structure.
Federal regulations restricting takeovers.
Regulatory policy prohibits the acquisition of a mutual holding company subsidiary by any person or entity other than a mutual holding company or a mutual institution. While Putnam Bancorp, MHC’s regulator recently changed, there can be no assurance that there will be a change in this policy.
The mutual holding company structure may impede takeovers.
Putnam Bancorp, MHC, as the majority stockholder of PSB Holdings, Inc., is able to control the outcome of virtually all matters presented to stockholders for their approval, including a proposal to acquire PSB Holdings, Inc. Accordingly, Putnam Bancorp, MHC may prevent the sale of control or merger of PSB Holdings, Inc. or its subsidiaries even if such a transaction were favored by a majority of the public stockholders of PSB Holdings, Inc.
The corporate governance provisions in our charter and bylaws may prevent or impede the holders of a minority of our common stock from obtaining representation on our Board of Directors.
Provisions in our charter and bylaws may prevent or impede holders of a minority of our common stock from obtaining representation on our board of directors. For example, our board of directors is divided into three staggered classes. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Second, our charter provides that there will not be cumulative voting by stockholders for the election of our directors which means that Putnam Bancorp, MHC, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may elect all of our directors to be elected at that meeting. Third, our bylaws contain procedures and timetables for a stockholder wanting to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders, the effect of which may be to give our management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations if management thinks it is in the best interest of stockholders generally.
Federal policy on remutualization transactions could prohibit acquisition of PSB Holdings, Inc., which may lower our stock price.
Current federal regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. However, the Office of Thrift Supervision, Putnam Bancorp, MHC’s previous regulator, issued a policy statement indicating that it viewed remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and the mutual interests of the mutual holding company, and also raising issues concerning the effect on the mutual interests of the acquiring entity. The policy statement indicated that, under certain circumstances, these transactions would receive special scrutiny and would be rejected unless the applicant can clearly demonstrate that the regulatory concerns are not warranted in the particular case. Should these transactions be prohibited or otherwise restricted in the future, our per-share stock price may be adversely affected.
Government responses to economic conditions may adversely affect our operations, financial condition and earnings.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
The Dodd-Frank Act and related regulations may have an adverse effect on our ability to pay dividends, which would adversely affect the value of our common stock.
The value of PSB Holdings, Inc.’s common stock is significantly affected by its ability to pay dividends to its public stockholders. PSB Holdings, Inc.’s ability to pay dividends to our stockholders is subject to the ability of Putnam Bank to make capital distributions to PSB Holdings, Inc., or the availability of cash at the holding company level in the event Putnam Bank’s earnings are not sufficient to pay dividends.
Moreover, the amount of the dividends that we are able to pay our public stockholders is affected by the ability of Putnam Bancorp, MHC, our mutual holding company, to waive the receipt of dividends declared by PSB Holdings, Inc. Regulations of the Office of Thrift Supervision, our previous federal regulator, allowed federally chartered mutual holding companies to waive dividends without taking into account the amount of waived dividends in determining an appropriate exchange ratio in the event of a conversion of a mutual holding company to stock form. However, under the Dodd-Frank Act, the powers and duties of the Office of Thrift Supervision relating to mutual holding companies have been transferred to the Federal Reserve Board, and the Office of Thrift Supervision was eliminated. The Dodd-Frank Act also provides that a mutual holding company must give the Federal Reserve Board notice before waiving the receipt of dividends, and sets forth certain standards for allowing a waiver of dividends by a mutual holding company. Under these standards, waived dividends must be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form, unless a mutual holding company has waived dividends prior to December 1, 2009, which Putnam Bancorp, MHC has done. However, the Federal Reserve Board has recently issued an interim final rule requiring that, even where a mutual holding company has waived dividends prior to December 1, 2009, a majority of the mutual holding company’s members eligible to vote must approve a waiver of dividends by the mutual holding company within 12 months prior to the declaration of the dividend being waived. Accordingly, the ability of Putnam Bancorp, MHC to waive dividends in the future is uncertain.
We are subject to extensive regulatory oversight.
We and our subsidiaries are subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There also is increased scrutiny of our compliance practices generally and particularly with the rules enforced by the Office of Foreign Assets Control. Our failure to comply with these and other regulatory requirements could lead to, among other remedies, administrative enforcement actions and legal proceedings. In addition, the Dodd-Frank Act and implementing regulations are likely to have a significant effect on the financial services industry, which are likely to increase operating costs and reduce profitability. Regulatory or legislative changes could make regulatory compliance more difficult or expensive for us, and could cause us to change or limit some of our products and services, or the way we operate our business.
Legislative or regulatory responses to perceived financial and market problems could impair our rights against borrowers.
Current and future legislative regulatory proposals would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans, and may limit the ability of lenders to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting Putnam Bank’s rights as a creditor, were to be implemented, we could experience increased credit losses on our loans and mortgage-backed securities, or increased expense in pursuing our remedies as a creditor.
Proposed and final regulations could restrict our ability to originate and sell loans.
The Consumer Financial Protection Bureau has issued a rule, effective January 10, 2014, designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage“ definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
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excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
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interest-only payments;
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negative-amortization; and
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terms of longer than 30 years.
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The final rule also establishes general underwriting criteria for qualified mortgages, including that the consumer has a total (or “back end”) debt-to-income ratio that is less than or equal to 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more costly/and or time consuming to make these loans, which could limit our growth or profitability.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies initially issued a proposed rule to implement this requirement in April 2011. A revised proposed rule was issued in August 2013. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations. Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.
Recent health care legislation could increase our expenses or require us to pass further costs on to our employees, which could adversely affect our operations, financial condition and earnings.
Legislation enacted in 2010 requires companies to provide expanded health care coverage to their employees, such as affordable coverage to part-time employees and coverage to dependent adult children of employees. Companies will also be required to enroll new employees automatically into one of their health plans. Compliance with these and other new requirements of the health care legislation will increase our employee benefits expense, and may require us to pass these costs on to our employees, which could give us a competitive disadvantage in hiring and retaining qualified employees.
The requirement to account for certain assets at estimated fair value may adversely affect our results of operations.
We report certain assets, including securities available-for-sale, at fair value. Generally, for securities that are reported at fair value, we use quoted market prices or valuation models that utilize observable market inputs to estimate fair value. Because we carry these assets on our books at their estimated fair value, we may record losses even if the asset in question presents minimal credit risk. Under current accounting requirements, elevated delinquencies, defaults, and estimated losses from the disposition of collateral in our non-agency mortgage-backed securities portfolio may require us to recognize additional other-than-temporary impairments in future periods with respect to our securities portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in the estimated fair value of the asset and our estimate of the anticipated recovery period.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.
Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
The need to account for certain assets at estimated fair value may adversely affect our results of operations.
Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that utilize observable market inputs to estimate fair value. Because we carry these assets on our books at their estimated fair value, we may incur losses even if the asset in question presents minimal credit risk.