UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2019

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

For the transition period from ______________ to _____________

Commission file number 001-37676

PB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

40 Main Street, Putnam, Connecticut 06260

(Address of principal executive offices)

(Zip Code)

(860) 928-6501

(Issuer’s telephone number)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

PBBI

The NASDAQ Stock Market, LLC

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

x YES ¨ NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x YES ¨ NO

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
Emerging growth company ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

¨ YES x NO

As of February 1, 2020, there were 7,447,204 shares of the registrant’s common stock outstanding.

PB Bancorp, Inc.

Table of Contents

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at December 31, 2019 and June 30, 2019	1

	Consolidated Statements of Net Income for the three and six months ended December 31, 2019 and 2018	2

	Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2019 and 2018	3

	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended December 31, 2019 and 2018	4

	Consolidated Statements of Cash Flows for the six months ended December 31, 2019 and 2018	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	43

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

SIGNATURES		44

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

PB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

	December 31,			June 30,
	2019			2019
	(in thousands except share data)
ASSETS
Cash and due from depository institutions	$	2,401		$	2,173
Interest-bearing demand deposits with other banks		36,249			23,499
Total cash and cash equivalents		38,650			25,672
Securities available-for-sale, at fair value		35,223			38,919
Securities held-to-maturity (fair value of $53,628 as of December 31, 2019 and $63,858 as of June 30, 2019)		53,248			63,480
Federal Home Loan Bank stock, at cost		3,044			3,464
Loans held for sale		97			-
Loans		373,833			381,080
Less: Allowance for loan losses		(3,200	)		(3,063	)
Net loans		370,633			378,017
Premises and equipment, net		3,054			3,062
Accrued interest receivable		1,521			1,559
Other real estate owned		1,009			1,271
Goodwill		6,912			6,912
Bank-owned life insurance		13,443			13,267
Net deferred tax asset		794			443
Other assets		1,833			1,964

Total assets	$	529,461		$	538,030

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing	$	72,723		$	73,764
Interest-bearing		309,757			310,095
Total deposits		382,480			383,859
Mortgagors' escrow accounts		3,095			3,371
Federal Home Loan Bank advances		52,618			62,145
Securities sold under agreements to repurchase		2,137			804
Other liabilities		2,728			2,779
Total liabilities		443,058			452,958

Stockholders' Equity

Preferred stock,50,000,000 shares authorized, $0.01 par value, no shares issued and outstanding		-			-
Common stock, 100,000,000 shares authorized, $0.01 par value, 7,447,204 shares issued and outstanding at December 31, 2019 and June 30, 2019.		74			74
Additional paid-in capital		58,713			58,598
Retained earnings		31,465			30,638
Accumulated other comprehensive loss		(103	)		(269	)
Unearned ESOP shares		(3,073	)		(3,146	)
Unearned stock awards		(673	)		(823	)
Total stockholders' equity		86,403			85,072

Total liabilities and stockholders' equity	$	529,461		$	538,030

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Net Income

(Unaudited)

	Three months ended						Six months ended
	December 31,						December 31,
	2019			2018			2019			2018
	(in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans	$	3,935		$	3,731		$	7,920		$	7,306
Interest and dividends on investments		673			816			1,385			1,681
Other		178			70			348			114
Total interest and dividend income		4,786			4,617			9,653			9,101

Interest expense:
Deposits and escrow		783			577			1,587			1,134
Borrowed funds		270			304			566			608
Total interest expense		1,053			881			2,153			1,742
Net interest and dividend income		3,733			3,736			7,500			7,359

Provision (credit) for loan losses		-			-			150			(600	)
Net interest and dividend income after provision (credit) for loan losses		3,733			3,736			7,350			7,959

Non-interest income:
Total other-than-temporary impairment losses on debt securities		(17	)		(135	)		(216	)		(135	)
Portion of (gains) losses recognized in other comprehensive income		(17	)		131			135			131
Net impairment losses recognized in earnings		(34	)		(4	)		(81	)		(4	)
Fees for services		469			488			959			958
Mortgage banking activities		20			7			30			12
Net commissions from brokerage services		36			21			85			45
Income from bank-owned life insurance		88			90			176			179
Gain on sales of other real estate owned, net		69			86			166			107
Other income		21			47			68			107
Total non-interest income		669			735			1,403			1,404

Non-interest expense:
Compensation and benefits		1,760			1,946			3,823			3,874
Occupancy and equipment		292			290			603			600
Data processing		298			293			598			590
LAN/WAN network		23			22			45			46
Advertising and marketing		36			46			77			80
Merger related expenses		491			-			491			-
Other real estate owned		70			21			100			85
Write-down of other real estate owned		-			-			-			91
Other		345			555			790			1,012
Total non-interest expense		3,315			3,173			6,527			6,378
Income before income tax expense		1,087			1,298			2,226			2,985

Income tax expense		174			208			357			504
NET INCOME	$	913		$	1,090		$	1,869		$	2,481

Earnings per common share:
Basic	$	0.13		$	0.15		$	0.26		$	0.34
Diluted	$	0.13		$	0.15		$	0.26		$	0.34

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended						Six Months Ended
	December 31,						December 31,
	2019			2018			2019			2018
	(in thousands)
Net income	$	913		$	1,090		$	1,869		$	2,481
Other comprehensive income (loss):
Net unrealized holding gains (losses) on available-for-sale securities		14			(292	)		265			(428	)
Reclassification adjustment for losses on available-for-sale securities realized in income on (1)		34			4			81			4
Non-credit portion of other-than-temporary gains (losses) on available-for-sale securities		17			(131	)		(135	)		(131	)

Other comprehensive income (loss) before tax		65			(419	)		211			(555	)
Income tax (loss) benefit related to other comprehensive income (loss)		(13	)		85			(45	)		114
Other comprehensive income (loss) net of tax		52			(334	)		166			(441	)
Total comprehensive income	$	965		$	756		$	2,035		$	2,040

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

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP Shares			Unearned Stock Awards			Total Stockholders' Equity
	(dollars in thousands, except per share data)
Balances at June 30, 2018	$	76		$	60,329		$	28,822		$	(522	)	$	(3,293	)	$	(1,123	)	$	84,289


Comprehensive income		-			-			1,391			(107	)		-			-			1,284
Cash dividends declared and paid ($0.06 per share)		-			-			(458	)		-			-			-			(458	)
ESOP shares committed to be released (4,504 shares)		-			16			-			-			37			-			53
Common stock repurchased (1,000 shares)		-			(11	)		-			-			-			-			(11	)
Share-based compensation expense		-			43			-			-			-			75			118

Balances at September 30, 2018	$	76		$	60,377		$	29,755		$	(629	)	$	(3,256	)	$	(1,048	)	$	85,275


Comprehensive income		-			-			1,090			(334	)		-			-			756
Cash dividends declared and paid ($0.13 per share)		-			-			(991	)		-			-			-			(991	)
ESOP shares committed to be released (4,505 shares)		-			14			-			-			37			-			51
Common stock repurchased (174,983 shares)		(2	)		(1,914	)		-			-			-			-			(1,916	)
Share-based compensation expense		-			36			-			-			-			75			111

Balances at December 31, 2018	$	74		$	58,513		$	29,854		$	(963	)	$	(3,219	)	$	(973	)	$	83,286

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Unearned ESOP Shares			Unearned Stock Awards			Total Stockholders' Equity
	(dollars in thousands, except per share data)
Balances at June 30, 2019	$	74	$	58,598	$	30,638		$	(269	)	$	(3,146	)	$	(823	)	$	85,072

Comprehensive income		-		-		956			114			-			-			1,070
Cash dividends declared and paid ($0.07 per share)		-		-		(521	)		-			-			-			(521	)
ESOP shares committed to be released (4,505 shares)		-		15		-			-			37			-			52
Share-based compensation expense		-		36		-			-			-			75			111

Balances at September 30, 2019	$	74	$	58,649	$	31,073		$	(155	)	$	(3,109	)	$	(748	)	$	85,784

Comprehensive income		-		-		913			52			-			-			965
Cash dividends declared and paid ($0.07 per share)		-		-		(521	)		-			-			-			(521	)
ESOP shares committed to be released (4,505 shares)		-		28		-			-			36			-			64
Share-based compensation expense		-		36		-			-			-			75			111
Balances at December 31, 2019	$	74	$	58,713	$	31,465		$	(103	)	$	(3,073	)	$	(673	)	$	86,403

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months
	ended December 31,
	2019			2018
	(in thousands)
Cash flows from operating activities
Net income	$	1,869		$	2,481
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net		184			234
Impairment losses on securities		81			4
Net increase in loans held for sale		(97	)		-
Amortization of deferred loan costs, net		138			135
Provision (credit) for loan losses		150			(600	)
Gain on sale of other real estate owned, net		(166	)		(107	)
Write-down of other real estate owned		-			91
Loss on sale of premises and equipment		-			1
Depreciation and amortization - premises and equipment		159			166
Amortization - software		3			4
Net decrease (increase) in accrued interest receivable and other assets		166			(842	)
Income from bank-owned life insurance		(176	)		(179	)
(Decrease) increase in other liabilities		(51	)		94
Share-based compensation expense		222			229
Deferred tax expense		(396	)		1,324
ESOP expense		116			104
Net cash provided by operating activities		2,202			3,139

Cash flows from investing activities
Proceeds from calls, pay downs and maturities of available-for-sale securities		3,749			4,609
Proceeds from calls, pay downs and maturities of held-to-maturity securities		10,125			10,761
Redemption of Federal Home Loan stock		420			-
Net loan principal repayments		8,780			(16,787	)
Loan purchases		(1,955	)		-
Recoveries of loans previously charged off		14			582
Proceeds from sale of other real estate owned		685			422
Capital expenditures - premises and equipment		(151	)		(28	)
Net cash provided by (used in) investing activities		21,667			(441	)

Cash flows from financing activities
Net decrease in deposit accounts		(1,379	)		(5,650	)
Net decrease in mortgagors' escrow accounts		(276	)		(61	)
Repayment of long-term Federal Home Loan Bank advances		(9,527	)		(1,027	)
Net increase in securities sold under agreements to repurchase		1,333			2,646
Cash dividends paid on common stock		(1,042	)		(1,449	)
Common stock repurchased		-			(1,927	)
Net cash used in financing activities		(10,891	)		(7,468	)

Net increase (decrease) in cash and cash equivalents		12,978			(4,770	)
Cash and cash equivalents at beginning of year		25,672			10,102
Cash and cash equivalents at end of period	$	38,650		$	5,332
Supplemental disclosures
Cash paid during the period for:
Interest	$	2,049		$	1,700
Income taxes paid		351			1
Loans transferred to other real estate owned		257			322

See accompanying notes to consolidated financial statements.

PB Bancorp, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – Organization

PB Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated in 2015 to be the successor to PSB Holdings, Inc. upon completion of the second-step mutual-to-stock conversion (the “Conversion”) of Putnam Bancorp, MHC (the “MHC”), the top tier mutual holding company of PSB Holdings, Inc. PSB Holdings, Inc. was the former mid-tier holding company for Putnam Bank (the “Bank”). Prior to completion of the Conversion, a majority of the shares of common stock of PSB Holdings, Inc. were owned by the MHC. In conjunction with the Conversion, the MHC and PSB Holdings, Inc. merged into the Company and the Company became PSB Holdings, Inc.’s successor. The Conversion was completed on January 7, 2016. The Company raised gross proceeds of $33.7 million in the related stock offering. Concurrent with the completion of the stock offering, each share of PSB Holdings, Inc. stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.1907 shares of Company common stock. The Conversion was accounted for as a capital raising transaction by entities under common control. The historical financial results of the MHC were immaterial to the results of the Company and therefore the net assets of the MHC were reflected as an increase to stockholders’ equity.

Acquisition

On October 22, 2019, the Company, Putnam Bank and Centreville Bank announced they had entered into a definitive agreement under which Centreville Bank will acquire the Company and Putnam Bank in an all cash transaction valued at approximately $115.5 million. The Company’s stockholders will receive $15.25 for each share of Company common stock that they own. The transaction is expected to close in the first or second quarter of calendar 2020 and is subject to customary closing conditions, including the approval of the Company’s stockholders and required regulatory approvals. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all. In connection with the acquisition, the Company had incurred $491,000 of merger expenses for the six months ended December 31, 2019, primarily legal and investment banker costs, which are included in the consolidated Statement of Net Income.

NOTE 2 – Basis of Presentation

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the instructions to Form 10-Q, and accordingly do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary, consisting of only normal recurring accruals and the elimination of all significant intercompany accounts, to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The interim results of operations are not necessarily indicative of the operating results to be expected for future periods, including the fiscal year ending June 30, 2020. These financial statements should be read in conjunction with the 2019 consolidated financial statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (’’SEC’’) on September 26, 2019, as amended on October 5, 2019.

NOTE 3 – Recent Accounting Pronouncements

Effective July 1, 2019 the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes the requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Based on the current level of long-term leases in place, adoption of this guideline was not material to the Company’s results of operations or financial position.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires entities to measure all expected credit losses for certain financial assets (such as loans and held-to-maturity securities) held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The amendments in this Update, and related guidance, are effective for companies that qualify as “smaller reporting companies” under SEC regulations, like the Company, fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management is currently working to implement these requirements to determine the potential impact on the Company’s consolidated financial statements.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which amends the disclosure requirements by adding, changing, or removing certain disclosures about recurring or non-recurring fair value measurements. This ASU will be effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this update will not have a significant impact on the consolidated financial statements.

Note 4 - Critical Accounting Policies

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

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

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

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, residential construction, commercial and consumer/other. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in terms and amount of loans; concentrations; changes in lending policies and procedures; experience/ability/depth of lending management and staff; loan rating migration; the effect of other external factors; changes in the value of underlying collateral; changes in the loan review system; and national and local economic trends and conditions. The Company calculates historical losses using a five-year rolling average, which is considered indicative of the risk in the Company’s current loan portfolio. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses through December 31, 2019.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate - The Company does not originate loans with a loan-to-value ratio greater than 100% and does not originate subprime loans. Loans originated with a loan-to-value ratio greater than 80% generally require private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate - Loans in this segment are primarily income-producing properties throughout New England. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, would have an effect on the credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans.

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

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

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

Specific component

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

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

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

Unallocated component

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

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

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

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

OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income, net of applicable taxes.

Income Taxes. The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

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

NOTE 5 – Earnings Per Share (EPS)

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

The following information was used in the computation of EPS on both a basic and diluted basis for the three and six months ended December 31, 2019:

	Three months ended December 31,				Six months ended December 31,
	2019		2018		2019		2018
Net income	$	913,000	$	1,090,000	$	1,869,000	$	2,481,000

Weighted average common shares applicable to basic EPS		7,064,390		7,198,456		7,062,138		7,208,317
Effect of dilutive potential common shares		86,750		-		49,407		4,306
Weighted average common shares applicable to diluted EPS		7,151,140		7,198,456		7,111,545		7,212,623
Earnings per share:
Basic	$	0.13	$	0.15	$	0.26	$	0.34
Diluted	$	0.13	$	0.15	$	0.26	$	0.34

For the three months ended December 31, 2018, there were no antidilutive options not being included in the computation of diluted earnings per share.

NOTE 6 – Investment Securities

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

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gains		(Losses)			Value
	(in thousands)
December 31, 2019:
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due after ten years	$	1,992	$	-	$	(67	)	$	1,925

Corporate bonds:
Due from five through ten years		3,666		-		(222	)		3,444

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from one through five years		4,178		13		(6	)		4,185
From five through ten years		1,022		1		-			1,023
After ten years		12,259		103		(58	)		12,304
		17,459		117		(64	)		17,512

Non-agency mortgage-backed securities:
Due after ten years		2,236		399		(293	)		2,342

Other debt securities:
Auction rate preferred:
Due from five through ten years		8,000		-		-			8,000
After ten years		2,000		-		-			2,000
		10,000		-		-			10,000

Total available-for-sale securities	$	35,353	$	516	$	(646	)	$	35,223

Held-to-maturity:
U.S. government and government-sponsored securities:
Due in one year or less	$	2,994	$	14	$	-		$	3,008
After ten years		4,150		-		(17	)		4,133
		7,144		14		(17	)		7,141

State agency and municipal obligations
Due from one through five years		438		2		-			440

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due in one year or less		37		1		-			38
From one through five years		222		5		-			227
From five through ten years		9,077		72		(17	)		9,132
After ten years		36,330		439		(119	)		36,650
		45,666		517		(136	)		46,047
Total held-to-maturity securities	$	53,248	$	533	$	(153	)	$	53,628

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gains		(Losses)			Value
	(in thousands)
June 30, 2019:
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due after ten years	$	2,310	$	-	$	(68	)	$	2,242


Corporate bonds:
Due from five through ten years		3,999		-		(323	)		3,676


U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from one through five years		5,066		13		(5	)		5,074
From five through ten years		1,147		-		(5	)		1,142
After ten years		14,235		118		(117	)		14,236
		20,448		131		(127	)		20,452

Non-agency mortgage-backed securities:
Due after ten years		2,503		410		(340	)		2,573

Other debt securities:
Auction rate preferred:
Due from five through ten years		8,000		-		(24	)		7,976
After ten years		2,000		-		-			2,000

		10,000		-		(24	)		9,976
Total available-for-sale securities	$	39,260	$	541	$	(882	)	$	38,919

Held-to-maturity:
U.S. government and government-sponsored securities:
Due in one year or less	$	4,000	$	-	$	(4	)	$	3,996
From one through five years		989		22		-			1,011
After ten years		4,379		-		(2	)		4,377
		9,368		22		(6	)		9,384

State agency and municipal obligations
Due from one through five years		440		-		(2	)		438

U.S. Government-sponsored and guaranteed mortgage-backed securities:
Due from one through five years		411		9		-			420
From five through ten years		9,636		24		(37	)		9,623
After ten years		43,625		543		(175	)		43,993
		53,672		576		(212	)		54,036

Total held-to-maturity securities	$	63,480	$	598	$	(220	)	$	63,858

There were no sales of available-for-sale securities for the three and six months ended December 31, 2019 or 2018. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method. There were other-than-temporary impairment OTTI charges on available-for-sale securities realized in income during the three months ended December 31, 2019 of $34,000 and $4,000 during the three months ended December 31, 2018. The OTTI charges for the three months ended December 31, 2019 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $17,000, net of a $17,000 gain recognized in other comprehensive loss, before taxes. The OTTI charges for the three months ended December 31, 2018 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $135,000, net of $131,000 recognized in other comprehensive loss, before taxes. There were other-than-temporary impairment charges on available-for-sale securities realized in income during the six months ended December 31, 2019 of $81,000 and $4,000 during the six months ended December 31, 2018. The OTTI charges for the six months ended December 31, 2019 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $216,000, net of $135,000 recognized in other comprehensive loss, before taxes. The OTTI charges for the six months ended December 31, 2018 included total other-than-temporary impairment losses on non-agency mortgage-backed securities of $135,000, net of $131,000 recognized in other comprehensive loss, before taxes.

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

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
December 31, 2019:
Available-for-sale:
U.S. Government and government-sponsored securities	$	-	$	-	$	1,925	$	67	$	1,925	$	67
Corporate bonds		-		-		3,444		222		3,444		222
U.S. Government-sponsored and guaranteed mortgage-backed securities		4,722		17		5,617		47		10,339		64
Total temporarily impaired available-for-sale		4,722		17		10,986		336		15,708		353

Held-to-maturity:
U.S. Government and government-sponsored securities		4,133		17		-		-		4,133		17
U.S. Government-sponsored and guaranteed mortgage-backed securities		3,936		24		13,483		112		17,419		136
Total temporarily impaired held-to-maturity		8,069		41		13,483		112		21,552		153

Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		-		-		840		293		840		293

Total temporarily-impaired and other-than-temporarily impaired securities	$	12,791	$	58	$	25,309	$	741	$	38,100	$	799

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
June 30, 2019:
Available-for-sale:
U.S. Government and government-sponsored securities	$	-	$	-	$	2,242	$	68	$	2,242	$	68
Corporate bonds		-		-		3,676		323		3,676		323

U.S. Government-sponsored and guaranteed mortgage-backed securities		1,425		7		13,576		120		15,001		127
Other securities		2,976		24		-		-		2,976		24
Total temporarily impaired available-for-sale		4,401		31		19,494		511		23,895		542

Held-to-maturity:
U.S. Government and government-sponsored securities		-		-		8,373		6		8,373		6
State and political subdivisions		-		-		438		2		438		2

U.S. Government-sponsored and guaranteed mortgage-backed securities		-		-		29,400		212		29,400		212
Total temporarily impaired held-to-maturity		-		-		38,211		220		38,211		220

Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		268		11		947		329		1,215		340

Total temporarily-impaired and other-than-temporarily impaired securities	$	4,669	$	42	$	58,652	$	1,060	$	63,321	$	1,102

(1)

Includes other-than-temporary impaired available-for-sale debt securities in which a portion of the other-than-temporary impairment loss remains in accumulated other comprehensive loss.

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

At December 31, 2019, there were 46 individual investment securities with aggregate depreciation of 2.1% from the Company’s amortized cost basis. Management has the intent and ability to hold these securities until cost recovery occurs and considers these declines to be temporary.

The unrealized losses on the Company’s investment in U.S. Government-sponsored agency bonds and U.S. government-guaranteed and government-sponsored residential mortgage-backed securities were primarily caused by interest rate fluctuations. These investments are guaranteed or sponsored by the U.S. government or an agency thereof. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2019.

The Company’s unrealized losses on investments in corporate bonds and other securities relate to investments in companies within the financial services sector. As of December 31, 2019, the Company had three investments in corporate single-issuer trust preferred securities (TRUPs) with a total book value of $3.7 million and total fair value of $3.4 million, all of which were classified as available-for-sale. The single-issuer trust preferred investments are evaluated for other-than-temporary impairment by performing a present value of cash flows calculation each quarter. None of the issuers have deferred interest payments or announced the intention to defer interest payments. The Company believes the decline in fair value is related to the spread over three-month LIBOR, on which the quarterly interest payments are based, as the spread over LIBOR being received is significantly lower than current market spreads. Management concluded the impairment of these investments was considered temporary and asserts that the Company does not have the intent to sell these investments and that it is more likely than not it will not have to sell the investments before recovery of their cost bases which may be at maturity.

At December 31, 2019, there was one state and political subdivision security that had an unrealized loss of 0.5% from the Company’s amortized cost basis. We believe the unrealized loss was primarily caused by interest rate fluctuations. This security is guaranteed by a school district located in Texas. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2019.

For the three months ended December 31, 2019, there was $34,000 in other-than-temporary impairment losses recognized in earnings and $4,000 for the three months ended December 31, 2018. For the six months ended December 31, 2019, there was $81,000 in other-than-temporary impairment losses recognized in earnings and $4,000 for the six months ended December 31, 2018. The other-than-temporary impairment losses were on non-agency mortgage-backed securities. The Company estimates the portion of possible loss attributable to credit loss using a discounted cash flow model. Significant inputs include the estimated cash flows of the underlying loans based on key assumptions, such as default rate, loss severity and prepayment rate. Assumptions can vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type. The present value of the expected cash flows is compared to the Company’s amortized cost basis to determine if there was a credit-related impairment loss. Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on these securities.

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

	Six months ended
	December 31,
	2019		2018
	(in thousands)
Balance at beginning of period	$	16,016	$	15,983
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded		81		4
Balance at end of period	$	16,097	$	15,987

NOTE 7 – Loans

The following table sets forth the composition of our loan portfolio at December 31, 2019 and June 30, 2019:

	December 31,			June 30,
	2019			2019
	(in thousands)
Real Estate:
Residential (1)	$	211,893		$	221,488
Commercial		147,464			145,694
Residential construction		2,019			1,476
Commercial		10,599			10,298
Consumer and other		814			968

Total loans		372,789			379,924

Net deferred loan costs		1,044			1,156
Allowance for loan losses		(3,200	)		(3,063	)

Loans, net	$	370,633		$	378,017

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

Credit Quality Information

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

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

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

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

Loans rated 8 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9 are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. Annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. Credit quality for residential real estate and consumer/other loans is determined by monitoring loan payment history and ongoing communications with the borrower.

The following table presents the Company’s loan classes by internally assigned grades at December 31, 2019 and June 30, 2019:

	Residential		Commercial		Residential				Consumer
	Real Estate		Real Estate		Construction		Commercial		and other		Total
	(in thousands)
December 31, 2019
Grade:
Pass	$	207,201	$	144,688	$	2,019	$	9,706	$	814	$	364,428
Special Mention		1,366		1,546		-		-		-		2,912
Substandard		3,326		1,230		-		893		-		5,449
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	211,893	$	147,464	$	2,019	$	10,599	$	814	$	372,789

June 30, 2019
Grade:
Pass	$	217,800	$	142,829	$	1,476	$	9,355	$	968	$	372,428
Special Mention		-		1,557		-		-		-		1,557
Substandard		3,688		1,308		-		943		-		5,939
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	221,488	$	145,694	$	1,476	$	10,298	$	968	$	379,924

Modifications deemed to be troubled debt restructurings were not material for the three and six months ended December 31, 2019 and 2018.

There were no troubled debt restructurings that subsequently defaulted (defined as 30 or more days past due subsequent to restructuring) within one year of modification during the three and six months ended December 31, 2019 and 2018.

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

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

	At December 31,			At June 30,
	2019			2019
	(Dollars in thousands)
Non-accrual loans:
Real Estate:
Residential	$	3,326		$	3,530
Commercial		513			260
Total non-accrual loans		3,839			3,790

Accruing loans past due 90 days or more:
Real Estate:
Residential		-			159
Commercial		-			279
Total accruing loans past due 90 days or more		-			438
Total non-performing loans		3,839			4,228

Other real estate owned		1,009			1,271
Total non-performing assets	$	4,848		$	5,499

Total non-performing loans to total loans		1.03	%		1.11	%
Total non-performing assets to total assets		0.92	%		1.02	%

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

The following table sets forth information regarding past due loans at December 31, 2019 and June 30, 2019:

					90 days
	30–59 Days		60–89 Days		or Greater		Total
At December 31, 2019	Past Due		Past Due		Past Due		Past Due
	(in thousands)
Real Estate:
Residential	$	1,659	$	588	$	695	$	2,942
Commercial		658		-		278		936
Consumer and other		4		-		-		4
Total	$	2,321	$	588	$	973	$	3,882

At June 30, 2019

Real Estate:
Residential	$	39	$	397	$	668	$	1,104
Commercial		-		-	$	279		279
Consumer and other		3		-		-		3
Total	$	42	$	397	$	947	$	1,386

The following is a summary of information pertaining to impaired loans at December 31, 2019 and June 30, 2019, none of which had a valuation allowance:

	At December 31, 2019				At June 30, 2019
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal
	Investment		Balance		Investment		Balance
	(in thousands)
Real Estate:
Residential	$	1,794	$	1,940	$	2,150	$	2,296
Commercial		514		514		260		260
Total impaired loans	$	2,308	$	2,454	$	2,410	$	2,556

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

	Three months ended						Three months ended
	December 31, 2019						December 31, 2018
	Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Real Estate:
Residential	$	1,812	$	7	$	4	$	2,177	$	22	$	19
Commercial		381		-		-		411		-		-
Total impaired loans	$	2,193	$	7	$	4	$	2,588	$	22	$	19

	Six months ended						Six months ended
	December 31, 2019						December 31, 2018
	Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		on Cash Basis		Investment		Recognized		on Cash Basis
	(in thousands)
Real Estate:
Residential	$	1,925	$	27	$	22	$	2,362	$	39	$	33
Commercial		340		1		1		684		7		-
Total impaired loans	$	2,265	$	28	$	23	$	3,046	$	46	$	33

NOTE 9 – Allowance for Loan Losses

An analysis of the allow ance for loan losses for the three and six months ended December 31, 2019 and 2018 is as follows:

	Residential			Commercial			Residential						Consumer
	Real Estate			Real Estate			Construction			Commercial			and Other			Unallocated			Total
	(in thousands)
Three months ended December 31, 2019

Beginning balance	$	1,551		$	1,443		$	14		$	91		$	22		$	91		$	3,212
Charge-offs		-			-			-			-			(18	)		-			(18	)
Recoveries		2			-			-			1			3			-			6
Provision		69			(102	)		-			(6	)		17			22			-
Ending Balance	$	1,622		$	1,341		$	14		$	86		$	24		$	113		$	3,200

Three months ended December 31, 2018

Beginning balance	$	1,488		$	1,094		$	7		$	77		$	131		$	109		$	2,906
Charge-offs		(42	)		-			-			-			(12	)		-			(54	)
Recoveries		3			-			-			4			5			-			12
(Credit) provision		16			102			(2	)		29			(92	)		(53	)		-
Ending Balance	$	1,465		$	1,196		$	5		$	110		$	32		$	56		$	2,864

Six months ended December 31, 2019

Beginning balance	$	1,456		$	1,418		$	10		$	79		$	28		$	72		$	3,063
Charge-offs		-			-			-			-			(27	)		-			(27	)
Recoveries		5			-			-			3			6			-			14
(Credit) provision		161			(77	)		4			4			17			41			150
Ending Balance	$	1,622		$	1,341		$	14		$	86		$	24		$	113		$	3,200

Six months ended December 31, 2018

Beginning balance	$	1,385		$	1,194		$	14		$	80		$	135		$	135		$	2,943
Charge-offs		(42	)		-			-			-			(19	)		-			(61	)
Recoveries		8			560			-			6			8			-			582
(Credit) provision		114			(558	)		(9	)		24			(92	)		(79	)		(600	)
Ending Balance	$	1,465		$	1,196		$	5		$	110		$	32		$	56		$	2,864

Further information pertaining to the allowance for loan losses at December 31, 2019 and June 30, 2019 is as follows:

	Residential		Commercial		Residential				Consumer
	Real Estate		Real Estate		Construction		Commercial		and Other		Unallocated		Total
		(in thousands)
At December 31, 2019
Amount of allowance for loan losses for impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Amount of allowance for loan losses for non-impaired loans	$	1,622	$	1,341	$	14	$	86	$	24	$	113	$	3,200

Impaired loans	$	1,794	$	514	$	-	$	-	$	-	$	-	$	2,308

Non-impaired loans	$	210,099	$	146,950	$	2,019	$	10,599	$	814	$	-	$	370,481

At June 30, 2019

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

Amount of allowance for loan losses for non-impaired loans	$	1,456	$	1,418	$	10	$	79	$	28	$	72	$	3,063

Impaired loans	$	2,150	$	260	$	-	$	-	$	-	$	-	$	2,410

Non-impaired loans	$	219,338	$	145,434	$	1,476	$	10,298	$	968	$	-	$	377,514

NOTE 10 – Stock-Based Incentive Plan

In February 2017, stockholders of the Company approved the PB Bancorp, Inc. 2017 Stock-Based Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to 453,267 stock options and 181,306 shares of restricted stock to its employees, officers and directors for an aggregate amount of up to 634,573 shares. Both incentive stock options and non-statutory stock options may be granted under the Incentive Plan.

There were no stock options or awards granted during the six months ended December 31, 2019 and 2018.

Both stock option and restricted stock awards granted to date vest at 20% per year beginning on the first anniversary of the date of the grant, and become fully vested in the event of a change in control of the Company

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

The Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded to unearned stock awards. Compensation expense related to unearned restricted shares is amortized to compensation and benefits expense over the vesting period of the restricted stock awards, adjusted by actual forfeitures, based on the trading price of the stock on the date of vesting. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for both the three months ended December 31, 2019 and 2018 of $111,000. The Company recorded share-based compensation expense in connection with the stock option and restricted stock awards for the six months ended December 31, 2019 of $222,000 and for the six months ended December 31, 2018 of $229,000.

NOTE 11 – Accumulated Other Comprehensive Loss

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

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

	December 31,			June 30,
	2019			2019
	(in thousands)
Net unrealized loss on securities available-for-sale	$	(130	)	$	(341	)
Tax effect		27			72
Accumulated other comprehensive loss	$	(103	)	$	(269	)

NOTE 12 – FAIR VALUE MEASUREMENTS

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

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

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

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

The level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets carried at fair value for December 31, 2019 and June 30, 2019.

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

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

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

The Company did not have any transfers of assets between levels of the fair value hierarchy during the six months ended December 31, 2019.

The following summarizes assets measured at fair value on a recurring basis at December 31, 2019 and June 30, 2019:

	Total Fair
	Value		Level 1		Level 2		Level 3
	(in thousands)
At December 31, 2019

Securities available-for-sale:
U.S. government and government-sponsored securities	$	1,925	$	-	$	1,925	$	-
Corporate bonds		3,444		-		3,444		-
U.S. Government-sponsored and guaranteed mortgage-backed securities		17,512		-		17,512		-
Non-agency mortgage-backed securities		2,342		-		2,342		-
Other securities		10,000		-		-		10,000
Total	$	35,223	$	-	$	25,223	$	10,000

At June 30, 2019

Securities available-for-sale:
U.S. government and government-sponsored securities	$	2,242	$	-	$	2,242	$	-
Corporate bonds		3,676		-		3,676		-
U.S. Government-sponsored and guaranteed mortgage-backed securities		20,452		-		20,452		-
Non-agency mortgage-backed securities		2,573		-		2,573		-
Other securities		9,976		-		-		9,976
Total	$	38,919	$	-	$	28,943	$	9,976

There were no changes in level 3 assets measured at fair value for the three and six months ended December 31, 2019 and 2018.

The Company had no assets measured at fair value on a non-recurring basis at December 31, 2019. The following summarizes assets measured at fair value on a non-recurring basis and the adjustments to the carrying value at and for the three and six months ended December 31, 2018:

									Total Losses		Total Losses
									for the three		for the six
	Total Fair								months ended		months ended
At June 30, 2019	Value		Level 1		Level 2		Level 3		December 31, 2018		December 31, 2018
	(in thousands)
Impaired loans	$	219	$	-	$	-	$	219	$	38	$	38
Other real estate owned		984		-		-		984		-		63
	$	1,203	$	-	$	-	$	1,203	$	38	$	101

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

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

There were no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2019 or June 30, 2019.

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

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

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

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

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

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

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

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

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

Off-Balance Sheet Instruments. The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. In the case of the commitments discussed in Note 14, the fair value equals the carrying amounts which are not significant.

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

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, as of December 31, 2019 and June 30, 2019:

	December 31, 2019
	Carrying		Fair Value Hierarchy						Total Fair
	Amount		Level 1		Level 2		Level 3		Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	38,650	$	38,650	$	-	$	-	$	38,650
Securities available-for-sale		35,223		-		25,223		10,000		35,223
Securities held-to-maturity		53,248		-		53,628		-		53,628
Federal Home Loan Bank stock		3,044		-		-		3,044		3,044
Loans held for sale		97		-		-		96		96
Loans, net		370,633		-		-		359,883		359,883
Accrued interest receivable		1,521		-		-		1,521		1,521

Financial liabilities:
Deposits		382,480		-		-		383,602		383,602
Mortgagors' escrow accounts		3,095		-		-		3,095		3,095
Federal Home Loan Bank advances		52,618		-		53,591		-		53,591
Securities sold under agreements to repurchase		2,137		-		2,137		-		2,137
Accrued interest payable		355		-		-		355		355

	June 30, 2019
	Carrying		Fair Value Hierarchy						Total Fair
	Amount		Level 1		Level 2		Level 3		Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	25,672	$	25,672	$	-	$	-	$	25,672
Securities available-for-sale		38,919		-		28,943		9,976		38,919
Securities held-to-maturity		63,480		-		63,858		-		63,858
Federal Home Loan Bank stock		3,464		-		-		3,464		3,464
Loans, net		378,017		-		-		366,442		366,442
Accrued interest receivable		1,559		-		-		1,559		1,559

Financial liabilities:
Deposits		383,859		-		-		384,698		384,698
Mortgagors' escrow accounts		3,371		-		-		3,371		3,371
Federal Home Loan Bank advances		62,145		-		62,773		-		62,773
Securities sold under agreements to repurchase		804		-		804		-		804
Accrued interest payable		251		-		-		251		251

NOTE 13 – Subsequent Events

On January 2, 2020, the Board of Directors of PB Bancorp, Inc. declared a quarterly cash dividend of $0.07 per share for stockholders of record as of January 16, 2020, which is payable on January 30, 2020.

NOTE 14 – Commitments to Extend Credit

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

The contractual amounts of outstanding commitments were as follows:

	December 31,		June 30,
	2019		2019
	(in thousands)
Commitments to extend credit:
Commitments to grant loans	$	2,888	$	1,118
Unadvanced construction loans		3,577		6,872
Unadvanced lines of credit		21,340		21,819
Standby letters of credit		395		395
Outstanding commitments	$	28,200	$	30,204

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

The following analysis discusses changes in the financial condition at December 31, 2019 and June 30, 2019 and results of operations for the three and six months ended December 31, 2019 and 2018, and should be read in conjunction with the Company’s Consolidated Financial Statements (unaudited) and the notes thereto, appearing in Part I, Item 1 of this quarterly report. These financial statements should be read in conjunction with the 2019 Consolidated Financial Statements and notes thereto included in PB Bancorp, Inc.’s Annual Report on Form 10-K filed with the SEC on September 26, 2019, as amended on October 25, 2019.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. PB Bancorp intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of PB Bancorp, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. PB Bancorp’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of PB Bancorp and its subsidiary include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, real estate values, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan and investment portfolios, demand for loan products, cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems; deposit flows, competition, demand for financial services in PB Bancorp’s market area, the effect of any federal government shutdown, and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning PB Bancorp and its business, including additional factors that could materially affect PB Bancorp financial results, is included in PB Bancorp’s filings with the Securities and Exchange Commission, including the risk factors included in PB Bancorp’s Annual Report on Form 10-K filed with the SEC on September 26, 2019, as amended on October 25, 2019.

Except as required by applicable law and regulation, the Company does not undertake – and specifically disclaims any obligation – to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

Our profitability is highly dependent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds.

Our net income decreased $177,000, or 16.2%, to $913,000, or $0.13 per basic and diluted share for the three months ended December 31, 2019, compared to net income of $1.1 million, or $0.15 per basic and diluted share for the three months ended December 31, 2018. This was due primarily to merger related expenses of $491,000 for the three months ended December 31, 2019. Net interest income remained unchanged at $3.7 million for the three months ended December 31, 2019 and December 31, 2018 while non-interest income decreased $66,000, or 9.0% to $669,000, for the three months ended December 31, 2019 from $735,000 for the three months ended December 31, 2018. Non-interest expense increased $142,000, or 4.5% to $3.3 million for the three months ended December 31, 2019 from $3.2 million for the three months ended December 31, 2018. Income tax expense decreased $34,000, or 16.3% to $174,000 for the three months ended December 31, 2019 from $208,000 for the three months ended December 31, 2018. The effective tax rate was 16.0% for the three months ended December 31, 2019 and 16.1% for the three months ended December 31, 2018.

Our net income decreased $612,000, or 24.7%, to $1.9 million, or $0.26 per basic and diluted share for the six months ended December 31, 2019, compared to net income of $2.5 million, or $0.34 per basic and diluted share for the six months ended December 31, 2018. This was due primarily to an increase of $750,000 in the provision for loan losses. The Company recorded a credit for loan losses of $600,000 for the six months ended December 31, 2018 compared to a $150,000 provision for loan losses for the six months ended December 31, 2019. Net interest income increased $141,000, or 1.9% to $7.5 million for the six months ended December 31, 2019 from $7.4 million for the six months ended December 31, 2018, while non-interest income remained unchanged at $1.4 million for the six months ended December 31, 2019 and December 31, 2018. Non-interest expense increased $149,000, or 2.3% to $6.5 million for the six months ended December 31, 2019 from $6.4 million for the six months ended December 31, 2018. This included $491,000 in merger related expenses. Income tax expense decreased $147,000, or 29.2% to $357,000 for the six months ended December 31, 2019 from $504,000 for the six months ended December 31, 2018. The effective tax rate was 16.0% for the six months ended December 31, 2019 compared to 16.9% for the six months ended December 31, 2018.

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

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

Comparison of Financial Condition at December 31, 2019 and June 30, 2019

Assets

Total assets were $529.5 million at December 31, 2019, a decrease of $8.6 million, or 1.6%, from $538.0 million at June 30, 2019. Cash and cash equivalents increased $13.0 million, or 50.6%, to $38.7 million at December 31, 2019 compared to $25.7 million at June 30, 2019. The increase was due to accumulating additional funds from maturing securities, loan pay-offs and an increase in deposits for upcoming loan closings. Investments in held-to-maturity securities decreased $10.2 million, or 16.1%, to $53.2 million at December 31, 2019 compared to $63.5 million at June 30, 2019 and investments in available-for-sale securities decreased $3.7 million, or 9.5%, to $35.2 million at December 31, 2019 compared to $38.9 million at June 30, 2019. The Company used excess cash, as well as cash flows from investments to assist in repaying higher cost borrowings. Net loans outstanding decreased $7.4 million, or 2.0%, to $370.6 million at December 31, 2019 from $378.0 million at June 30, 2019. This was primarily due to a decrease in residential loans of $9.6 million, or 4.3%, to $211.9 million at December 31, 2019 compared to $221.5 million at June 30, 2019. Commercial real estate loans increased $1.8 million, or 1.2%, to $147.5 million at December 31, 2019 compared to $145.7 million at June 30, 2019.

Allowance for Loan Losses

The table below indicates the relationship between the allowance for loan losses, total loans outstanding and non-performing loans at December 31, 2019 and June 30, 2019. For additional information, see “Comparison of Operating Results for the three and six months ended December 31, 2019 and 2018 – Provision for Loan Losses.”

	December 31,			June 30,
	2019			2019
	(Dollars in thousands)
Allowance for loan losses	$	3,200		$	3,063
Total loans		372,789			379,924
Non-performing loans		3,839			4,228
Allowance/total loans		0.86	%		0.81	%
Allowance/non-performing loans		83.4	%		72.4	%

Liabilities

Total liabilities decreased $9.9 million, or 2.2%, to $443.1 million at December 31, 2019 from $453.0 million at June 30, 2019. Total deposits decreased $1.4 million, or 0.4%, to $382.5 million at December 31, 2019 from $383.9 million at June 30, 2019. We experienced a decrease in non-interest-bearing deposits of $1.0 million, or 1.4%, to $72.7 million at December 31, 2019 compared to $73.8 million at June 30, 2019. Interest-bearing deposits decreased $338,000, or 0.1% to $309.8 million at December 31, 2019 compared to $310.1 million at June 30, 2019. Total Federal Home Loan Bank borrowings decreased $9.5 million, or 15.3%, to $52.6 million at December 31, 2019 from $62.1 million at June 30, 2019, as we required less borrowings to fund our operations. Securities sold under agreement to repurchase increased $1.3 million, or 165.8% to $2.1 million at December 31, 2019 compared to $804,000 at June 30, 2019.

Stockholders’ Equity

Total stockholders’ equity increased $1.3 million, or 1.6%, to $86.4 million at December 31, 2019 from $85.1 million at June 30, 2019 due primarily to net income of $1.9 million for the six months ended December 31, 2019, offset by dividends paid totaling $1.0 million.

Comparison of Operating Results for the Three and Six Months Ended December 31, 2019 and 2018

Interest and Dividend Income. Interest and dividend income increased $169,000, or 3.7% to $4.8 million for the three months ended December 31, 2019 compared to $4.6 million for the three months ended December 31, 2018. The average balance of interest-earning assets increased $18.1 million, or 3.7%, to $508.9 million for the three months ended December 31, 2019 from $490.7 million for the three months ended December 31, 2018. The average yield on interest-earning assets remained the same for the three months ended December 31, 2019 and 2018, at 3.73%.

Interest income on loans increased $204,000, or 5.5% to $3.9 million for the three months ended December 31, 2019 compared to $3.7 million for the three months ended December 31, 2018. This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased $14.7 million, or 4.1%, to $375.3 million for the three months ended December 31, 2019 from $360.6 million for the three months ended December 31, 2018. The yield on average loans increased six basis points to 4.16% for the three months ended December 31, 2019 from 4.10% for the three months ended December 31, 2018.

Interest and dividend income on investments decreased $143,000, or 17.5% to $673,000 for the three months ended December 31, 2019 compared to $816,000 for the three months ended December 31, 2018. This was due to a decrease in the average balance of investments of $27.3 million, or 22.3%, to $94.8 million for the three months ended December 31, 2019 from $122.1 million for the three months ended December 31, 2018. This was partially offset by an increase in yield of 17 basis points to 2.82% for the three months ended December 31, 2019 from 2.65% for the three months ended December 31, 2018.

Interest income on other earning assets increased $108,000, or 154.3% to $178,000 for the three months ended December 31, 2019 compared to $70,000 for the three months ended December 31, 2018. This was due to an increase in the average balance of other earning assets of $30.8 million, or 383.3%, to $38.8 million for the three months ended December 31, 2019 from $8.0 million for the three months ended December 31, 2018. The yield on other earning assets decreased 164 basis points to 1.82% for the three months ended December 31, 2019 from 3.46% for the three months ended December 31, 2018.

Interest and dividend income increased $552,000, or 6.1% to $9.7 million for the six months ended December 31, 2019 compared to $9.1 million for the six months ended December 31, 2018. The average balance of interest-earning assets increased $19.9 million, or 4.0% to $512.2 million for the six months ended December 31, 2019 from $492.3 million for the six months ended December 31, 2018. The average yield on interest-earning assets increased to 3.74% for the six months ended December 31, 2019 from 3.67% for the six months ended December 31, 2018 as a result of increases in market interest rates.

Interest income on loans increased $614,000, or 8.4% to $7.9 million for the six months ended December 31, 2019 compared to $7.3 million for the six months ended December 31, 2018. This was due to an increase in average loans outstanding and an increase in yield. The average balance of loans increased $19.1 million, or 5.4% to $376.2 million for the six months ended December 31, 2019 from $357.0 million for the six months ended December 31, 2018. The yield on average loans increased 12 basis points to 4.18% for the six months ended December 31, 2019 from 4.06% for the six months ended December 31, 2018 as a result of increases in market interest rates.

Interest and dividend income on investments decreased $296,000, or 17.6% to $1.4 million for the six months ended December 31, 2019 compared to $1.7 million for the six months ended December 31, 2018. This was due to a decrease in the average balance of investments of $27.3 million, or 21.6% to $98.7 million for the six months ended December 31, 2019 from $126.0 million for the six months ended December 31, 2018. This was partially offset by an increase in yield of 13 basis points to 2.78% for the six months ended December 31, 2019 from 2.65% for the six months ended December 31, 2018 as a result of increases in market interest rates.

Interest income on other earning assets increased $234,000, or 205.3% to $348,000 for the six months ended December 31, 2019 compared to $114,000 for the six months ended December 31, 2018. This was due to an increase in the average balance of other earning assets of $28.1 million, or 304.2%, to $37.3 million for the six months ended December 31, 2019 from $9.2 million for the six months ended December 31, 2018. This was partially offset by a decrease in yield of 60 basis points to 1.85% for the six months ended December 31, 2019 from 2.45% for the six months ended December 31, 2018.

Interest Expense. Interest expense increased $172,000, or 19.5% to $1.0 million for the three months ended December 31, 2019 compared to $881,000 for the three months ended December 31, 2018. Total average interest-bearing liabilities increased $13.1 million, or 3.6% to $374.3 million for the three months ended December 31, 2019 compared to $361.2 million for the three months ended December 31, 2018. The cost of average interest-bearing liabilities increased 15 basis points to 1.12% for the three months ended December 31, 2019 compared to 0.97% for the three months ended December 31, 2018.

Interest expense on deposits increased by $206,000, or 35.7%, to $783,000 for the three months ended December 31, 2019 from $577,000 for the three months ended December 31, 2018. The average balance of deposits increased $20.2 million, or 6.8%, from $297.1 million for the three months ended December 31, 2018 to $317.3 million for the three months ended December 31, 2019. The cost of interest-bearing deposits increased 21 basis points to 0.98% for the three months ended December 31, 2019 from 0.77% for the three months ended December 31, 2018. Interest expense on time deposits increased $188,000, or 40.4%, to $653,000 for the three months ended December 31, 2019 from $465,000 for the three months ended December 31, 2018. The average balance of time deposits increased $17.8 million, or 15.6%, from $114.2 million for the three months ended December 31, 2018 to $132.0 million for the three months ended December 31, 2019. The cost of time deposits increased to 1.96% for the three months ended December 31, 2019 from 1.62% for the three months ended December 31, 2018.

Interest expense on borrowings decreased by $34,000, or 11.2%, to $270,000 for the three months ended December 31, 2019 from $304,000 for the three months ended December 31, 2018. The rate paid on borrowings remained unchanged at 1.88% for the three months ended December 31, 2019 and the three months ended December 31, 2018. Average borrowings decreased $7.1 million, or 11.1%, to $57.0 million for the three months ended December 31, 2019 from $64.1 million for the three months ended December 31, 2018. Average Federal Home Loan Bank advances decreased $6.7 million, or 10.7%, to $55.6 million for the three months ended December 31, 2019 from $62.3 million for the three months ended December 31, 2018. We have been able to fund loan growth, in part, with an increase in deposits. The average rate on Federal Home Loan Bank advances decreased one basis point to 1.92% for the three months ended December 31, 2019 from 1.93% for the three months ended December 31, 2018. Average other borrowed money decreased $421,000, or 22.7%, to $1.4 million for the three months ended December 31, 2019 from $1.8 million for the three months ended December 31, 2018.

Interest expense increased $411,000, or 23.6% to $2.1 million for the six months ended December 31, 2019 compared to $1.7 million for the six months ended December 31, 2018. Total average interest-bearing liabilities increased $14.6 million, or 4.0% to $378.1 million for the six months ended December 31, 2019 compared to $363.5 million for the six months ended December 31, 2018. The cost of average interest-bearing liabilities increased 18 basis points to 1.13% for the six months ended December 31, 2019 compared to 0.95% for the six months ended December 31, 2018.

Interest expense on deposits increased by $453,000, or 39.9%, to $1.6 million for the six months ended December 31, 2019 from $1.1 million for the six months ended December 31, 2018. The average balance of deposits increased $19.2 million, or 6.4%, to $318.0 million for the six months ended December 31, 2019 from $298.7 million for the six months ended December 31, 2018. The cost of interest-bearing deposits increased 24 basis points to 0.99% for the six months ended December 31, 2019 from 0.75% for the six months ended December 31, 2018. Interest expense on time deposits increased $414,000, or 45.4%, to $1.3 million for the six months ended December 31, 2019 from $912,000 for the six months ended December 31, 2018. The average balance of time deposits increased $19.4 million, or 17.0%, to $133.6 million for the six months ended December 31, 2019 from $114.2 million for the six months ended December 31, 2018. The cost of time deposits increased to 1.97% for the six months ended December 31, 2019 from 1.58% for the six months ended December 31, 2018.

Interest expense on borrowings decreased by $42,000, or 6.9%, to $566,000 for the six months ended December 31, 2019 from $608,000 for the six months ended December 31, 2018. The rate paid on borrowings increased one basis point to 1.87% for the six months ended December 31, 2019 from 1.86% for the six months ended December 31, 2018. Average borrowings decreased $4.6 million, or 7.1%, to $60.1 million for the six months ended December 31, 2019 from $64.7 million for the six months ended December 31, 2018. Average Federal Home Loan Bank advances decreased $4.3 million, or 6.8%, to $58.1 million for the six months ended December 31, 2019 from $62.4 million for the six months ended December 31, 2018. We have been able to fund loan growth, in part, with an increase in deposits. The average rate on Federal Home Loan Bank advances remained unchanged at 1.93% for the six months ended December 31, 2019 and for the six months ended December 31, 2018. Average other borrowed money decreased $344,000, or 14.5%, to $2.0 million for the six months ended December 31, 2019 from $2.4 million for the six months ended December 31, 2018.

Net Interest Income. Net interest income remained unchanged at $3.7 million for the three months ended December 31, 2019 and December 31, 2018. Our interest rate spread decreased to 2.61% for the three months ended December 31, 2019 from 2.76% for the three months ended December 31, 2018 and our net interest-earning assets increased $5.0 million, or 3.9%. Our net interest margin decreased to 2.91% for the three months ended December 31, 2019 from 3.02% for the three months ended December 31, 2018.

Net interest income increased $141,000, or 1.9%, to $7.5 million for the six months ended December 31, 2019 from $7.4 million for the six months ended December 31, 2018. Our interest rate spread decreased to 2.61% for the six months ended December 31, 2019 from 2.72% for the six months ended December 31, 2018 and our net interest-earning assets increased $5.3 million, or 4.1%. Our net interest margin decreased to 2.90% for the six months ended December 31, 2019 from 2.97% for the six months ended December 31, 2018.

Provision for Loan Losses. There was no provision for loan loss for the three months ended December 31, 2019 and December 31, 2018.

Provision for loan losses increased $750,000 to $150,000 for the six months ended December 31, 2019 from a credit provision of $600,000 for the six months ended December 31, 2018. This was due primarily to $521,000 in net recoveries for the six months ended December 31, 2018.

Non-interest Income. Non-interest income decreased $66,000, or 9.0%, to $669,000 for the three months ended December 31, 2019 compared to $735,000 for the three months ended December 31, 2018. This was primarily due to an increase of $30,000 in other-than-temporary impairment losses on debt securities and decreases in fees for service of $19,000 and gain on sales of oreo of $17,000.

Non-interest income remained unchanged at $1.4 million for the six months ended December 31, 2019 and December 31, 2018. This included an increase of $77,000 in other-than-temporary impairment losses on debt securities and increases in gain on sale of other real estate owned of $59,000 and net commissions from brokerage services of $40,000.

Non-interest Expense. Non-interest expense increased $142,000, or 4.5% to $3.3 million for the three months ended December 31, 2019 compared to $3.2 million for the three months ended December 31, 2018. Salaries and benefits expense decreased $186,000, or 9.6% to $1.8 million for the three months ended December 31, 2019 from $1.9 million for the three months ended December 31, 2018. This was primarily due to decreases in bonus expense of $98,000 and profit sharing expense of $145,000. This was partially offset by an increase in salary expense of $33,000. Occupancy and equipment expense increased $2,000, or 0.7% to $292,000 for the three months ended December 31, 2019 from $290,000 for the three months ended December 31, 2018. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, merger related expenses, professional fees and marketing expense increased by $326,000, or 34.8%, to $1.3 million for the three months ended December 31, 2019 from $937,000 for the three months ended December 31, 2018. This was primarily due to $491,000 in merger related expenses during the three months ended December 31, 2019. This was partially offset by decreases in FDIC insurance expense of $35,000 and investor related expenses of $31,000.

Non-interest expense increased $149,000, or 2.3% to $6.5 million for the six months ended December 31, 2019 compared to $6.4 million for the six months ended December 31, 2018. Salaries and benefits expense decreased $51,000, or 1.3% to $3.8 million for the six months ended December 31, 2019 from $3.9 million for the six months ended December 31, 2018. Occupancy and equipment expense increased $3,000, or 0.5% to $603,000 for the six months ended December 31, 2019 from $600,000 for the six months ended December 31, 2018. All other non-interest expense, consisting primarily of data processing expense, Federal Deposit Insurance Corporation deposit insurance, merger related expenses, professional fees and marketing expense increased by $197,000, or 10.3%, to $2.1 million for the six months ended December 31, 2019 from $1.9 million for the six months ended December 31, 2018. This was primarily due to $491,000 in merger related expenses during the six months ended December 31, 2019. This was offset by decreases in write-downs on other real estate owned of $91,000 and FDIC insurance expense of $74,000.

Tax Expense. Income tax expense decreased by $34,000, or 16.3% to $174,000 for the three months ended December 31, 2019 from $208,000 for the three months ended December 31, 2018. Our effective tax rate was 16.0% for the three months ended December 31, 2019 and 16.1% for the three months ended December 31, 2018. Tax expense is based on a year-to-date basis at a forecasted effective rate. The effective tax rates differed from the statutory tax rate due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income.

Income tax expense decreased by $147,000, or 29.2% to $357,000 for the six months ended December 31, 2019 from $504,000 for the six months ended December 31, 2018. Our effective tax rate was 16.0% for the six months ended December 31, 2019 compared to 16.9% for the six months ended December 31, 2018. Tax expense is based on a year-to-date basis at a forecasted effective rate. The effective tax rates differed from the statutory tax rate due to the dividends-received deduction applicable to certain securities in our investment portfolio, tax-exempt municipal income and non-taxable bank-owned life insurance income.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields and costs are annualized.

	For the Three Months Ended December 31,
			2019							2018
	Average		Interest		Yield/			Average		Interest		Yield/
	Balance		Income/Expense		Cost			Balance		Income/Expense		Cost
	(Dollars in thousands)
Interest-earning assets:
Investment securities	$	94,827	$	673		2.82	%	$	122,109	$	816		2.65	%
Loans		375,267		3,935		4.16	%		360,607		3,731		4.10	%
Other earning assets		38,775		178		1.82	%		8,023		70		3.46	%
Total interest-earning assets		508,869		4,786		3.73	%		490,739		4,617		3.73	%
Non-interest-earning assets		28,392							30,650
Total assets	$	537,261						$	521,389

Interest-bearing liabilities:
NOW accounts	$	71,413		67		0.37	%	$	75,142		72		0.38	%
Savings accounts		86,642		18		0.08	%		85,916		17		0.08	%
Money market accounts		27,187		45		0.66	%		21,798		23		0.42	%
Time deposits		132,033		653		1.96	%		114,207		465		1.62	%
Total interest-bearing deposits		317,275		783		0.98	%		297,063		577		0.77	%
FHLB advances		55,585		269		1.92	%		62,278		303		1.93	%
Other borrowed money		1,433		1		0.28	%		1,854		1		0.21	%
Total other borowed money		57,018		270		1.88	%		64,132		304		1.88	%
Total interest-bearing liabilities		374,293		1,053		1.12	%		361,195		881		0.97	%
Non-interest-bearing demand deposits		72,049							70,789
Other non-interest-bearing liabilities		4,859							4,303
Capital accounts		86,060							85,102
Total liabilities and capital accounts	$	537,261						$	521,389

Net interest income			$	3,733						$	3,736
Interest rate spread						2.61	%						2.76	%
Net interest-earning assets	$	134,576						$	129,544
Net interest margin						2.91	%						3.02	%
Average earning assets to average interest-bearing liabilities						135.95	%						135.87	%

	For the Six Months Ended December 31,
			2019							2018
	Average		Interest		Yield/			Average		Interest		Yield/
	Balance		Income/Expense		Cost			Balance		Income/Expense		Cost
	(Dollars in thousands)
Interest-earning assets:
Investment securities	$	98,740	$	1,385		2.78	%	$	126,013	$	1,681		2.65	%
Loans		376,163		7,920		4.18	%		357,041		7,306		4.06	%
Other earning assets		37,287		348		1.85	%		9,224		114		2.45	%
Total interest-earning assets		512,190		9,653		3.74	%		492,278		9,101		3.67	%
Non-interest-earning assets		28,024							28,544
Total assets	$	540,214						$	520,822

Interest-bearing liabilities:
NOW accounts	$	71,012		134		0.37	%	$	77,132		146		0.38	%
Savings accounts		86,082		36		0.08	%		85,210		35		0.08	%
Money market accounts		27,214		91		0.66	%		22,179		41		0.37	%
Time deposits		133,648		1,326		1.97	%		114,211		912		1.58	%
Total interest-bearing deposits		317,956		1,587		0.99	%		298,732		1,134		0.75	%
FHLB advances		58,089		565		1.93	%		62,359		607		1.93	%
Other borrowed money		2,030		1		0.10	%		2,374		1		0.08	%
Total other borrowed money		60,119		566		1.87	%		64,733		608		1.86	%
Total interest-bearing liabilities		378,075		2,153		1.13	%		363,465		1,742		0.95	%
Non-interest-bearing demand deposits		71,697							70,287
Other non-interest-bearing liabilities		4,603							2,154
Capital accounts		85,839							84,916
Total liabilities and capital accounts	$	540,214						$	520,822

Net interest income			$	7,500						$	7,359
Interest rate spread						2.61	%						2.72	%
Net interest-earning assets	$	134,115						$	128,813
Net interest margin						2.90	%						2.97	%
Average earning assets to average interest-bearing liabilities						135.47	%						135.44	%

The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of the table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

	For the Three Months Ended December 31, 2019
	Compared to the Three Months Ended December 31, 2018
	Increase (Decrease) Due to change in
	Rate			Volume			Net
	(In thousands)
INTEREST INCOME
Investment securities	$	283		$	(426	)	$	(143	)
Loans		51			153			204
Other interest-earning assets		(222	)		330			108
TOTAL INTEREST INCOME		112			57			169

INTEREST EXPENSE

NOW accounts		(1	)		(4	)		(5	)
Savings accounts		1			-			1
Money market accounts		15			7			22
Time deposits		109			79			188
FHLB advances		(2	)		(32	)		(34	)
Other borrowed money		1			(1	)		-
TOTAL INTEREST EXPENSE		123			49			172
CHANGE IN NET INTEREST INCOME	$	(11	)	$	8		$	(3	)

	For the Six Months Ended December 31, 2019
	Compared to the Six Months Ended December 31, 2018
	Increase (Decrease) Due to change in
	Rate			Volume			Net
	(In thousands)
INTEREST INCOME
Investment securities	$	221		$	(517	)	$	(296	)
Loans		215			399			614
Other interest-earning assets		(85	)		319			234
TOTAL INTEREST INCOME		351			201			552

INTEREST EXPENSE

NOW accounts		-			(12	)		(12	)
Savings accounts		1			-			1
Money market accounts		39			11			50
Time deposits		243			171			414
FHLB advances		-			(42	)		(42	)
Other borrowed money		-			-			-
TOTAL INTEREST EXPENSE		283			128			411
CHANGE IN NET INTEREST INCOME	$	68		$	73		$	141

Market Risk, Liquidity and Capital Resources

Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk (“IRR”). Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and other borrowings. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income (“NII”) to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and generally meets at least on a quarterly basis to review our asset/liability policies and IRR position.

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset/liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the Federal Home Loan Bank of Boston, to “match fund” certain investments and/or loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction loans and commercial and industrial loans; (iv) offering a variety of consumer loans, which typically have shorter-terms; and (v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long- term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained parallel shift in the yield curve (+100 and +200 basis points) at December 31, 2019 and June 30, 2019.

Net Interest Income At-Risk
	Estimated Increase (Decrease)	Estimated Increase (Decrease)
Change in Interest Rates	in NII

PB Bancorp, Inc. 10-Q