PCSB Financial Corp - Quarter Report: 2016 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2016

OR

For the transition period from                      to                     

Commission File Number: 333-215052

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

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

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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  ☒

No shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of March 27, 2017.

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EXPLANATORY NOTE

PCSB Financial Corporation (the “Company,” “we” or “our”) was incorporated on December 1, 2016 to serve as the bank holding company for PCSB Bank upon the conversion of PCSB Bank from a New York-chartered mutual savings bank to a New York-chartered capital stock savings bank. As of December 31, 2016, the conversion had not been completed. As of December 31, 2016, the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, the unaudited consolidated financial statements and the other financial information contained in this quarterly report on Form 10-Q relate solely to PCSB Bank and subsidiaries.

The unaudited consolidated financial statements and other financial information contained in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements of PCSB Bank and subsidiaries at and for the year ended June 30, 2016 contained in the Company’s definitive prospectus dated February 10, 2017 (the “Prospectus”) as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on February 17, 2017.

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PART I—FINANCIAL INFORMATION

PCSB Bank

Consolidated Balance Sheets (unaudited)

(amounts in thousands)

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Bank

Consolidated Statements of Operations (unaudited)

(amounts in thousands)

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Bank

Consolidated Statements of Comprehensive Income (unaudited)

(amounts in thousands)

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Bank

Consolidated Statements of Changes in Equity (unaudited)

(amounts in thousands)

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Bank

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Bank

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

(amounts in thousands)

See accompanying notes to the consolidated financial statements (unaudited)

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PCSB Bank

Notes to Unaudited Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

PCSB Bank (“the 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 mutual 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.

Merger with CMS Bancorp: On April 28, 2015, CMS Bancorp and CMS Bank merged with and into PCSB Bank.

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 Bank and its 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 significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited consolidated financial statements for the three and six months ended December 31, 2016 and 2015 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. The annualized results of operations for the three and six months ended December 31, 2016 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.

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 an 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. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. ASU 2014-09 is not expected to have a material impact on the Bank’s consolidated financial position, results of operations or disclosures.

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

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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 Bank’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 Bank’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 Bank’s consolidated financial position, results of operations and disclosures.

Note 3. Investment Securities

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2016 and June 30, 2016 were as follows:

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There were no sales of or realized gains or losses on investment securities for the three or six months ended December 31, 2016 or 2015.

The following table presents the fair value and carrying amount of debt securities at December 31, 2016, by contractual maturity (in thousands). 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 $63.8 million and $93.1 million at December 31, 2016 and June 30, 2016, respectively, and were pledged principally to secure FHLB advances and public deposits.

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The following tables provide 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/unrecognized loss position at December 31, 2016 and June 30, 2016:

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As of December 31, 2016, the Bank’s security portfolio consisted of $368.0 million in securities, of which 165 securities with a fair value of $264.7 million were in an unrealized/unrecognized loss position. The majority of unrealized/unrecognized losses are related to the Bank’s U.S. Government and agency obligations and mortgage-backed securities.

As of June 30, 2016, the Bank’s security portfolio consisted of $383.0 million in securities, of which 52 securities with a fair value of $80.6 million were in an unrealized/unrecognized loss position. The majority of unrealized/unrecognized losses are related to the Bank’s U.S. Government and agency obligations and mortgage-backed securities.

There were no securities for which the Bank believes it is not probable that it will collect all amounts due according to the contractual terms of the security as of December 31, 2016. Management believes the unrealized/unrecognized losses are primarily a result of changing interest rates. The Bank 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/unrecognized loss position prior to the recovery of its amortized cost basis. Therefore, the Bank did not consider any securities to be other-than-temporarily impaired as of December 31, 2016.

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Note 4. Loans

Loans receivable are summarized as follows (in thousands):

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended December 31, 2016 and 2015 (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 due to immateriality, by portfolio segment, and based on impairment method as of December 31, 2016 and June 30, 2016 (in thousands):