UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2017

OR

For the transition period from _____ to _____

Commission File Number: 001-38065

 

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code: (914) 248-7272

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for completing with any 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  ☐    No  ☒

18,165,110 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 9, 2017.

 

 

 

 

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Table of Contents

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

(amounts in thousands, except share data)

 

 

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

(amounts in thousands, except share and per share data)

 

 

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(amounts in thousands)

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

(amounts in thousands, except share data)

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

 

 

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited) - (Continued)

(amounts in thousands)

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

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PCSB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

Nature of Operations: PCSB Financial Corporation (the “Holding Company” and together with its direct and indirect subsidiaries, the “Company”) is a Maryland corporation organized by PCSB Bank (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in the Bank's conversion to stock ownership on April 20, 2017. At September 30, 2017, the significant assets of the Holding Company were the capital stock of the Bank, investments retained by the Holding Company, and a loan to the PCSB Bank Employee Stock Ownership Plan (“ESOP”). The liabilities of the Holding Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

PCSB Bank is a community-oriented financial institution that provides financial services to individuals and businesses within its market area of Putnam, Southern Dutchess, Rockland and Westchester Counties in New York.  The Bank is a state-chartered stock savings bank and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s primary regulators are the FDIC and the New York State Department of Financial Services.

Basis of Presentation:  The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, and include the accounts of the Holding Company, the Bank and the Bank's three subsidiaries – PCSB Funding Corp., PCSB Commercial Bank and PCSB Realty Ltd.  PCSB Funding Corp. is a real estate investment trust that holds certain mortgage assets.  PCSB Commercial Bank is a state-chartered commercial bank authorized to accept the deposits of local governments in New York State. PCSB Realty Ltd. is a corporation that holds certain properties foreclosed upon by the Bank. All intercompany transactions and balances have been eliminated in consolidation. Financial information for the periods before the Company’s initial public offering (“IPO”) on April 20, 2017 is that of the Bank only.    

The unaudited consolidated financial statements contained herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments reflected in the consolidated financial statements contained herein. The annualized results of operations for the period presented are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2017, included in the Company's annual report on Form 10-K.

Use of Estimates:  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.  

Note 2. Recent Accounting Pronouncements

The pronouncements discussed below are not intended to be an all-inclusive list, but rather only those pronouncements that could potentially have a material impact on our financial position, results of operations or disclosures.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers.” The amendments in ASU 2014-09 provide a comprehensive framework for addressing revenue recognition issues that can be applied to all contracts with customers. While the guidance in ASU 2014-09 supersedes most existing industry-specific revenue recognition accounting guidance, much of PCSB Bank’s revenue comes from financial instruments such as debt securities and loans that are outside the scope of the guidance. The amendments in ASU 2014-09 also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. For public entities, ASU 2014-09, as amended, is effective for interim and annual reporting periods beginning after December 15, 2017. ASU 2014-09 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

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In January 2016, the FASB issued ASU 2016-01 “Financial Instruments – Overall.” The amendments in ASU 2016-01 are intended to improve the recognition, measurement, presentation and disclosure of financial assets and liabilities to provide users of financial statements with information that is more useful for decision-making purposes. Among other changes, ASU 2016-01 would require equity securities to be measured at fair value with changes in fair value recognized through net income, but would allow equity securities that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments would simplify the impairment assessment of such equity securities and would require enhanced disclosure about these investments. ASU 2016-01 would also require separate presentation of financial assets and liabilities by measurement category and type of instrument, such as securities or loans, on the balance sheet or in the notes, and would eliminate certain other disclosures relating to the methods and assumptions used to estimate fair value. For public entities, the amendments in ASU 2016-01 are effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact that ASU 2016-02 will have on the Company’s consolidated financial position, results of operations and disclosures.

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including loans, debt securities, and other financial assets. The ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by recording an allowance for current expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact that ASU 2016-13 will have on the Company’s consolidated financial position, results of operations and disclosures.

In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350).” ASU 2017-04 Simplifies the test for goodwill impairment, which eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. Management expects ASU 2017-04 will not have a significant impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08 "Receivables - Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The ASU requires premiums on callable debt securities to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2017-08 will not have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

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Note 3. Shareholders' Equity

The Company completed its initial public offering (“IPO”) on April 20, 2017, in connection with the Bank’s mutual-to-stock conversion, resulting in gross proceeds of $178.3 million, through the sale of 17,826,408 shares, including 1,453,209 shares sold to the PCSB Bank Employee Stock Ownership Plan (ESOP), at the offering price of $10.00 per share. In addition, the Company also contributed 338,702 shares of its common stock and $1.6 million in cash to the PCSB Community Foundation. Expenses related to the offering were approximately $3.7 million, which resulted in net proceeds of approximately $174.6 million prior to the contribution to PCSB Community Foundation. The Company lent approximately $14.5 million to the ESOP and retained approximately $87.3 million of the net proceeds of the offering prior to the contribution to PCSB Community Foundation. The remainder of the net proceeds was contributed to the Bank.

Prior to the IPO, the Company had no outstanding shares.

Note 4. Investment Securities

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity securities at September 30, 2017 and June 30, 2017 were as follows:

 

 

 

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During the three months ended September 30, 2017, the Company sold securities with a carrying amount of $6.6 million, resulting in $173,000 of net realized gains. Included was the disposal of $681,000 of securities classified as held to maturity, resulting in net realized gains of $34,000. These securities were comprised of seasoned mortgage-backed securities where the Company collected a substantial portion (at least 85%) of the principal outstanding at acquisition due to prepayments or scheduled payments payable in equal installments, comprising both principal and interest, over the terms. There were no sales of or realized gains or losses on investment securities for the three months ended September 30, 2016.

The following table presents the fair value and carrying amount of debt securities at September 30, 2017, by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

 

Securities pledged had carrying amounts of $82.4 million and $95.5 million at September 30, 2017 and June 30, 2017, respectively, and were pledged principally to secure FHLB advances and public deposits.

The following table provides information regarding investment securities with unrealized/unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at September 30, 2017 and June 30, 2017:

 

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As of September 30, 2017, the Company’s security portfolio consisted of $475.8 million in securities, of which 173 securities with a fair value of $328.7 million were in an unrealized loss position.

As of June 30, 2017, the Company’s security portfolio consisted of $495.4 million in securities, of which 156 securities with a fair value of $271.9 million were in an unrealized loss position.

The majority of unrealized losses are related to the Company’s mortgage-backed securities and U.S. Government and agency obligations as of September 30, 2017 and June 30, 2017.

There were no securities for which the Company believes it is not probable that it will collect all amounts due according to the contractual terms of the security as of September 30, 2017 and June 30, 2017. Management believes the unrealized losses are primarily a result of changes in interest rates. The Company has determined that it does not intend to sell, or it is not more likely than not that it will be required to sell, its securities that are in an unrealized loss position prior to the recovery of its amortized cost basis. Therefore, the Company did not consider any securities to be other-than-temporarily impaired as of September 30, 2017 and June 30, 2017.

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Note 5. Loans Receivable

Loans receivable are summarized as follows (in thousands):

 

 

In 2015, the Company completed a merger with CMS Bancorp and its wholly owned subsidiary, CMS Bank. References to acquired loans in this note pertain only to those loans acquired as part of the merger.

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The following tables present the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2017 and 2016 (in thousands):

 

 

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The following tables present the balance in the allowance for loan losses and the recorded investment in loans, excluding net deferred fees and accrued interest, by portfolio segment, and based on impairment method as of September 30, 2017 and June 30, 2017 (in thousands):

 

 

 

 

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The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by class of loans as of September 30, 2017 and June 30, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The table below presents the average recorded investment and interest income recognized on loans individually evaluated for impairment, by class of loans, for the three months ended September 30, 2017 and 2016 (in thousands):

 

 

 

The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days and still on accrual status, by class of loans as of September 30, 2017 and June 30, 2017 (in thousands):

 

 

Nonperforming loans include both smaller-balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The table above excludes nonaccrual acquired loans that are accounted for as purchased credit impaired loans totaling $2.7 million as of both September 30, 2017 and June 30, 2017. Such loans are excluded because the loans are in pools that are considered performing. The discounts arising from recording these loans at fair value upon acquisition were due in part to credit quality and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows.

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The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2017 and June 30, 2017 (in thousands):

 

 

 

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Troubled Debt Restructurings

The terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

As of both September 30, 2017 and June 30, 2017, the Company had 20 loans classified as troubled debt restructurings totaling $9.6 million and $9.9 million, respectively. The Company has allocated $148,000 and $145,000, respectively, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2017 and June 30, 2017, and has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

The Company did not modify any loans as troubled debt restructuring during the three months ended September 30, 2017 or 2016.

The Company had one troubled debt restructuring with a carrying amount of $2.4 million at September 30, 2017 for which there was a payment default in the three months ended September 30, 2017 that was modified in the twelve months prior to default. This default was cured subsequent to September 30, 2017 and resulted in no impact to the allowance for loan loss. There were no such defaults during the three months ended September 30, 2016.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans.  This analysis is performed on a monthly basis.  The Company utilized the same grading process for acquired loans as it does for originated loans. The Company uses the following definitions for risk ratings:

Special Mention – Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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Loans not meeting the criteria above that are analyzed individually as part of the above-described process and loans in groups of homogenous loans are considered to be pass rated loans.  These loans are monitored based on delinquency and performance.  Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

 

 

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Purchased Credit Impaired Loans

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of September 30, 2017 and June 30, 2017 is as follows (in thousands):

 

 

For those purchased credit impaired loans disclosed in the preceding table, the Company did not increase or reverse the allowance for loan losses during any period presented.

Accretable yield, or income expected to be collected, for acquired loans is as follows (in thousands):

 

 

Note 6. Other Comprehensive Income (Loss)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax (in thousands):

 

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Note 7. Post-Retirement Benefits

Employee Pension Plan:  The Company maintains a non-contributory defined benefit pension plan that covers employees meeting specific requirements as to age and length of service. The Company’s contributions to this qualified plan are determined on the basis of (i) the maximum amount that can be deducted for federal income tax purposes, and (ii) the amount determined by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974 (“ERISA”).  Contributions are intended to provide for benefits attributed to service to date. On February 15, 2017, the Board of Directors approved the freezing of the defined benefit pension plan effective May 1, 2017.

Supplemental Retirement Plans:  The Company also maintains unfunded and non-qualified supplemental retirement plans ("SERP") to provide pension benefits in addition to those provided under the qualified pension plan.

Net periodic benefit cost and other amounts recognized in other comprehensive income for the three months ended September 30, 2017 and 2016 (in thousands):

 

 

The Company made no contributions to the defined benefit plan during the three months ended September 30, 2017 and expects to make no contributions to the plan for the year ending June 30, 2018.

Employee Stock Ownership Plan

On January, 1, 2017, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified retirement plan for the benefit of Company employees. The Company granted a loan to the ESOP for the purchase of 1,453,209 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company to purchase the common stock is payable annually over 15 years at a rate per annum equal to the Prime Rate, reset annually on January 1st (4.00% at September 30, 2017). Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. The balance of the ESOP loan at September 30, 2017 was $14.5 million. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released annually is 96,881 through 2032.

Shares held by the ESOP include the following:

 

 

The fair value of unallocated shares was $26.2 million at September 30, 2017.

Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2017 and 2016 was $607,000 and $0, respectively.

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Note 8. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  

Investment Securities:  The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs), or a broker's opinion of value (Level 3 inputs).  

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. Appraisals are generally obtained annually and may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management performs a review of all appraisals, including any such adjustments.

Foreclosed Real Estate:  Assets acquired through or instead of loan foreclosure are initially recorded at fair value, less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value, less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Credit Department, as well as a third-party specialist, where deemed appropriate, reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Once appraisals are considered appropriate, management discounts the appraised value for estimated selling costs, such as legal, broker, and property maintenance and insurance costs.  The most recent analysis performed indicated discount rates ranging between 10% and 20% should be applied to properties with appraisals performed.

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Assets and liabilities measured at fair value are summarized below (in thousands):

 

 

 

There were no transfers between levels within the fair value hierarchy during the three months ended September 30, 2017.

 

Impaired loans in the table above had a carrying amount of $3.7 million, and a remaining valuation allowance of $1.0 million at September 30, 2017, as compared to $6.3 million and $1.1 million, respectively, as of June 30, 2017. Impaired loans measured at fair value incurred $17,000 of net charge-offs, and resulted in an additional provision for loan losses of $48,000 during the three months ended September 30, 2017. Impaired loans measured at fair value as of September 30, 2016 incurred $38,000 of net charge-offs and resulted in an additional provision for loan losses of $40,000 during the three months ended September 30, 2016.

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The following tables present quantitative information about Level 3 fair value measurements for selected financial instruments measured at fair value on a non-recurring basis at September 30, 2017 and June 30, 2017 (dollars in thousands):

 

 

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The following is a summary of the carrying amounts and estimated fair values of the Company’s financial assets and liabilities (in thousands) (none of which are held for trading purposes):

 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents:  The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Loans Receivable, Net:  For valuation purposes, the loan portfolio was segregated into its significant categories such as one-to-four family residential mortgage loans, other mortgage loans, consumer loans and commercial loans.  These categories were further analyzed, where appropriate, into components based on significant financial characteristics such as type of interest rate (adjustable or fixed).  For adjustable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans is considered Level 3.

FHLB Stock:  It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Accrued Interest Receivable/Payable: The carrying amount of accrued interest approximates fair value.

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Deposits:  The fair values disclosed for demand deposits (e.g., non-interest bearing demand, NOW, money market, savings deposits and escrow accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) and are considered Level 1. Fair values for time certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

FHLB Advances: Fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to the Company's current advances maturities schedule, resulting in a Level 2 classification.

Note 9. Regulatory Capital

The following is a summary of the Company’s and Bank’s actual capital amounts and ratios as of September 30, 2017 and June 30, 2017, compared to the required ratios for minimum capital adequacy and for classification as well capitalized (dollars in thousands):

 

 

 

In addition to the ratios above, the Basel III Capital Rules established that community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

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Management believes that as of September 30, 2017 and June 30, 2017, the Bank and Company met all capital adequacy requirements to which they were subject, including the capital conservation buffer of 1.250% as of both September 30, 2017 and June 30, 2017.  Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification.

Note 10. Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no potentially dilutive common stock equivalents as of September 30, 2017. Earnings per share data is not applicable for the period ended September 30, 2016 because the Company had not yet been formed and had no shares outstanding at a Company or Bank level.

 

 

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

General

Management’s discussion and analysis of financial condition and results of operations at September 30, 2017 and June 30, 2017, and for the three months ended September 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

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Additional factors that may affect our results are discussed in the Prospectus under the heading “Risk Factors.”

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change.  Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions.  Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Loan Losses.  The allowance for loan losses is established as probable incurred 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 uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

Income Taxes.  We recognize 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 our assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

Goodwill.  Goodwill resulting from business combination transactions is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquired, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  We recognized goodwill in connection with our acquisition of CMS Bancorp, Inc.

 

Comparison of Financial Condition at September 30, 2017 and June 30, 2017

 

Total Assets. Total assets decreased $14.8 million, or 1.0%, to $1.41 billion at September 30, 2017 from $1.43 billion at June 30, 2017. The decrease is primarily the result of decreases of $25.8 million in cash and cash equivalents, $14.4 million in HTM securities, and $5.3 million in AFS securities, partially offset by an increase of $30.4 million in net loans.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $25.8 million, or 42.6%, to $34.7 million at September 30, 2017 from $60.5 million at June 30, 2017. The decrease was primarily attributable to loan growth and net outflows in deposits.

 

Securities Held-to-Maturity. Total securities held to maturity decreased $14.4 million, or 3.7%, to $369.2 million at September 30, 2017 from $383.6 million at June 30, 2017.  This decrease was primarily caused by $11.6 million of net maturities of U.S. government and agency obligations, $4.2 million of net repayments and $600,000 of sales of mortgage-backed securities, and $2.0 million of maturities of US government bonds, partially offset by $4.0 million of net purchases of municipal securities.

 

Securities Available for Sale. Total securities available for sale decreased $5.3 million, or 4.7%, to $106.6 million at September 30, 2017 from $111.9 million at June 30, 2017. This decline was primarily due to $7.0 million of net

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maturities of U.S. government and agency obligations, and $6.0 million in sales of mortgage backed securities, partially offset by $8.1 million of net purchases of mortgage backed securities.

 

Net Loans Receivable. Net loans receivable increased $30.4 million, or 3.7%, to $840.0 million at September 30, 2017 from $809.6 million at June 30, 2017.  The $30.4 million increase is primarily due to increases of $32.3 million in commercial mortgage loans and $1.7 million in other loans secured, partially offset by decreases of $2.2 million in residential mortgage loans and $1.9 million in commercial loans. The Company purchased $26.1 million of commercial mortgage loans during the three months ended September 30, 2017.

 

Deposits. Total deposits decreased $6.8 million, or 0.6%, to $1.08 billion at September 30, 2017 from $1.09 billion at June 30, 2017. This decrease primarily reflects a $13.8 million decrease in savings accounts and $2.9 million decrease in demand accounts, partially offset by a $9.9 million increase in certificates of deposit.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $6.8 million, or 16.1%, to $35.8 million at September 30, 2017 from $42.6 million at June 30, 2017. The decrease was due to $6.8 million of maturities of short-term advances and $30,000 of amortization on long-term advances.

 

Total Shareholder’s Equity. Total shareholders’ equity increased $2.3 million, or 0.8%, to $282.1 million at September 30, 2017 from $279.8 million at June 30, 2017. This increase was primarily due to net income of $1.8 million and a $607,000 reduction in unearned ESOP shares for plan shares earned during the period. At September 30, 2017, the Company’s book value per share was $15.53, compared to $15.41 at June 30, 2017. At September 30, 2017, the Bank was considered “well capitalized” under applicable regulatory guidelines.

 

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016

 

General. Net income increased $300,000, or 20.6%, to $1.8 million for the three months ended September 30, 2017 compared to $1.5 million for the three months ended September 30, 2016. The increase was primarily due to a $1.1 million increase in net interest income and a $162,000 increase in non-interest income, partially offset by a $696,000 increase in non-interest expenses, $158,000 increase in income tax expense and $109,000 increase in the provision for loan losses.

 

Net Interest Income. Net interest income increased $1.1 million, or 12.5%, to $9.9 million for the three months ended September 30, 2017 compared to $8.8 million for the three months ended September 30, 2016, primarily reflecting a $163.5 million increase in net interest-earning assets.  The net interest margin was unchanged at 2.89% for the three months ended September 30, 2017 and 2016.

 

Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 11.8%, to $11.3 million for the three months ended September 30, 2017 compared to $10.1 million for the three months ended September 30, 2016. The increase primarily reflects a $154.1 million increase in total interest-earning assets, partially offset by a 2-basis point decrease in the yield on total interest-earning assets.

 

Interest income on loans receivable increased $293,000, or 3.4%, primarily due to a $37.1 million increase in the average balance of loans receivable to $813.2 million for the three months ended September 30, 2017 from $776.1 million for the same period last year. The increase was partially offset by a 6-basis point decrease in the average yield on loans to 4.33% for the three months ended September 30, 2017 from 4.39% for the same period last year.

 

Interest income on securities increased $765,000, or 51.7%, primarily due to a $113.1 million increase in the average balance of securities and a 26-basis point increase in the average yield on securities to 1.85% for the current-year period from 1.59% for the same period last year. The increase in the yield on securities was due primarily to an increase in market interest rates as well as an increase in the percentage of the portfolio being invested in generally higher-yielding mortgage-backed securities.

 

Interest income on other interest-earning assets increased $130,000, or 125.0%, primarily due to a $3.8 million increase in the average balance and a 71-basis point increase in the average yield on other interest-earning assets to 1.34% for the three months ended September 30, 2017 from 0.63% for the same period last year. The increase in the yield on other interest-earning assets was due primarily to an increase in market interest rates.

 

Interest Expense. Interest expense increased $87,000, or 6.5%, to $1.4 million for the three months ended September 30, 2017 compared to $1.3 million for the three months ended September 30, 2016. The increase

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primarily reflects a 4-basis point increase in the average cost of interest-bearing liabilities to 0.56% for the three months ended September 30, 2017 from 0.52% for the same period last year, partially offset by a $9.4 million decrease in the average balance on interest-bearing liabilities.

 

Interest expense on interest-bearing deposits and mortgage escrow funds decreased $17,000 primarily due to a $35.3 million decrease in the average balance to $961.2 million for the three months ended September 30, 2017 from $996.5 million for the three months ended September 30, 2016, partially offset by a 1-basis point increase in the average cost of deposits to 0.52% for the three months ended September 30, 2017 from 0.51% for the same period last year. The decrease in the average balance of interest-bearing deposits primarily reflects lower average certificate of deposit balances. The increase in the average rate paid on interest-bearing deposits was caused primarily by a 7-basis point increase in the average rate paid on certificates of deposit.

 

Interest expense on Federal Home Loan Bank advances increased $104,000, or 208.0%, primarily due to a $25.9 million increase in the average balance to $41.4 million for the three months ended September 30, 2016 from $15.5 million for the same period last year and a 20-basis point increase in the average cost to 1.48% for the three months ended September 30, 2017 from 1.28% for the same period last year. The increase in the average cost is primarily due to a longer average maturity in the current year compare to the same period last year.

 

Provision for Loan Losses. The provision for loan losses increased by $109,000 to $135,000 for the three months ended September 30, 2017, compared to $26,000 for the three months ended September 30, 2016 primarily as a result of the increase in the loan portfolio in the current period. Charge-offs, net of recoveries, were $17,000 and $3,000 for the three months ended September 30, 2017 and 2016, respectively. Loans classified as substandard and doubtful decreased to $24.6 million at September 30, 2017 from $25.1 million at June 30, 2017.

 

Non-Interest Income. Non-interest income increased $162,000, or 29.3% to $714,000 for the three months ended September 30, 2017 compared to $552,000 for the three months ended September 30, 2016. The increase was caused primarily by a $173,000 net gain on sale of securities.

 

Non-Interest Expense. Non-interest expense increased $696,000, or 9.7%, to $7.9 million for the three months ended September 30, 2017 compared to $7.2 million for the three months ended September 30, 2016. The increase was caused primarily by increases of $563,000 in salaries and benefits, $154,000 in other operating expenses, and $104,000 in professional fees, partially offset by a $137,000 decrease in FDIC assessment. The increase in salaries and benefits was due primarily to a $290,000 net increase in retirement expenses and a $226,000 increase due to increased staffing.  The increase in other operating expenses was caused primarily by increases in Director and Officer insurance and data processing fees. The increase in professional fees was due primarily to expenses related to being a public company.

 

Income Tax Expense. Income tax expense increased $158,000, or 24.4%, to $805,000 for the three months ended September 30, 2017 from $647,000 for the three months ended September 30, 2016. The increase was caused primarily by the $458,000, or 21.8%, increase in pre-tax income. The effective income tax rate was 31.4% and 30.8% for the three months ended September 30, 2017 and 2016, respectively.

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Net Interest Income

Average Balance Sheet and Interest Rates. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Amortization of loan fees is included in interest income on loans.

 

 

Rate/Volume Analysis. The following tables set forth the effects of changing rates and volumes on our net interest income. 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. Changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

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Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans and investment securities, have longer maturities than our liabilities, consisting primarily of deposits and FHLB advances. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, we have established a management-level Asset/Liability Management Committee, which takes initial responsibility for developing an asset/liability management process and related procedures, establishing and monitoring reporting systems and developing asset/liability strategies. On at least a quarterly basis, the Asset/Liability Management Committee reviews asset/liability management with the Investment Asset/Liability Committee that has been established by the Board of Directors. This committee also reviews any changes in strategies as well as the performance of any specific asset/liability management actions that have been implemented previously. On a quarterly basis, an outside consulting firm provides us with detailed information and analysis as to asset/liability management, including our interest rate risk profile. Ultimate responsibility for effective asset/liability management rests with our Board of Directors.  

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the offering have increased our capital and provided management with greater flexibility to manage our interest rate risk, including the following strategies: originating loans with adjustable interest rates; promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary. By following these strategies, we believe that we are better positioned to react to changes in market interest rates.  

Net Portfolio Value Simulation.  We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of capital ratio. We estimate what our NPV would be at a specific date.  We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve.  We currently calculate NPV under the assumptions that interest rates increase 100 and 200 basis points from current market rates and that interest rates decrease 100 basis points from current market rates.  

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The following table presents the estimated changes in our NPV that would result from changes in market interest rates at September 30, 2017 and June 30, 2017. All estimated changes presented in the table are within the policy limits approved by our Board of Directors.

 

 

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results.

Liquidity and Capital Resources

Liquidity.  Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2017, cash and cash equivalents totaled $34.7 million, a decrease from $60.5 million as of June 30, 2017. Securities classified as available for sale, which provide an additional source of liquidity, totaled $106.6 million at September 30, 2017, a decrease from $111.9 million as of June 30, 2017.

At September 30, 2017, we had the ability to borrow up to $335.9 million from the Federal Home Loan Bank of New York, $35.8 million of which was outstanding at that date. At September 30, 2017, we also had an available line of credit with the Federal Reserve Bank of New York’s discount window program of $84.6 million, none of which was outstanding at that date.

At June 30, 2017, we had the ability to borrow up to $350.7 million from the Federal Home Loan Bank of New York, $42.6 million of which was outstanding at that date. At June 30, 2017, we also had an available line of credit with the Federal Reserve Bank of New York’s discount window program of $85.9 million, none of which was outstanding at that date.

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We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. If loan demand was to increase faster than expected, or any unforeseen demand or commitment was to occur, we could access our borrowing capacity with the Federal Home Loan Bank of New York or the Federal Reserve Bank of New York.

At September 30, 2017, we had $82.3 million of loan commitments outstanding and $35.0 million of approved, but unadvanced, funds to borrowers. We also had $750,000 in outstanding letters of credit at September 30, 2017.

At June 30, 2017, we had $77.6 million of loan commitments outstanding and $45.4 million of approved, but unadvanced, lines of credit. We also had $705,000 in outstanding letters of credit at June 30, 2017.  

Certificates of deposit due within one year of September 30, 2017 totaled $112.9 million, an increase of $5.8 million from $107.1 million as of June 30, 2017. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at September 30, 2017. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its stockholders and for other corporate purposes. The Company’s primary source of liquidity is dividend payments it may receive from the Bank. The Bank’s ability to pay dividends to the Company is governed by applicable laws and regulations. At September 30, 2017, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $71.4 million.

Capital Resources.  The Company and Bank are subject to various regulatory capital requirements administered by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation. At September 30, 2017, the Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 to the accompanying unaudited financial statements

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is included in Part I, Item 2 of this report under "Management of Market Risk".

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2017. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2017, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2017, we were not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017, filed with the Securities and Exchange Commission. As of September 30, 2017, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended June 30, 2017.

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

None

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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