PCSB Financial Corp - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2018

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

For the transition period from _____ to _____

Commission File Number: 001-38065

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

Maryland	81-4710738
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2651 Strang Blvd, Suite 100 Yorktown Heights, NY	10598
(Address of principal executive offices)	(Zip Code)

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.

Large accelerated filer	☐		Accelerated filer	☐

Non-accelerated filer	☒	(Do not check if a small reporting company)	Small reporting company	☐

			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 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 May 11, 2018.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
Signatures		46

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

(amounts in thousands, except share data)

	March 31,			June 30,
	2018			2017
ASSETS
Cash and due from banks	$	35,307		$	59,115
Federal funds sold		1,198			1,371
Total cash and cash equivalents		36,505			60,486
Investment securities:
Held to maturity investment securities, at amortized cost (fair value of $357,761 and $383,588, respectively)		366,362			383,551
Available for sale securities, at fair value		107,321			111,889
Total investment securities		473,683			495,440
Loans receivable, net of allowance for loan losses of $4,624 and $5,150, respectively		886,718			809,648
Accrued interest receivable		4,458			3,693
Federal Home Loan Bank stock		4,112			3,132
Premises and equipment, net		12,522			12,959
Deferred tax asset, net		2,832			4,770
Foreclosed real estate		142			977
Bank-owned life insurance		23,609			23,179
Goodwill		6,106			6,106
Other intangible assets		463			559
Other assets		5,819			5,509
Total assets	$	1,456,969		$	1,426,458
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits	$	960,666		$	952,109
Non-interest bearing deposits		127,319			136,352
Total deposits		1,087,985			1,088,461
Mortgage escrow funds		7,596			8,084
Advances from Federal Home Loan Bank		68,872			42,598
Other liabilities		7,856			7,469
Total liabilities		1,172,309			1,146,612
Commitments and contingencies		-			-
Preferred stock ($0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2018 and June 30, 2017)		-			-
Common stock ($0.01 par value, 200,000,000 shares authorized, 18,165,110 shares issued and outstanding as of March 31, 2018 and June 30, 2017)		182			182
Additional paid in capital		178,795			177,993
Retained earnings		126,200			121,148
Unallocated common stock of Employee Stock Ownership Plan ("ESOP")		(13,324	)		(14,262	)
Accumulated other comprehensive loss, net of income taxes		(7,193	)		(5,215	)
Total shareholders' equity		284,660			279,846
Total liabilities and shareholders' equity	$	1,456,969		$	1,426,458

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2018		2017		2018		2017
Interest and dividend income
Loans receivable	$	9,103	$	8,493	$	27,092	$	25,256
Investment securities		2,368		1,633		6,882		4,643
Federal funds and other		177		150		628		336
Total interest and dividend income		11,648		10,276		34,602		30,235
Interest expense
Deposits		1,380		1,263		3,954		3,839
FHLB advances		125		55		443		136
Total interest expense		1,505		1,318		4,397		3,975
Net interest income		10,143		8,958		30,205		26,260
Provision for loan losses		54		235		389		823
Net interest income after provision for loan losses		10,089		8,723		29,816		25,437
Noninterest income
Fees and service charges		241		353		810		955
Gain on sale of securities, net		-		-		173		-
Bank-owned life insurance		136		146		430		474
Settlement on acquired loan		-		-		-		1,615
Other		135		127		505		393
Total noninterest income		512		626		1,918		3,437
Noninterest expense
Salaries and employee benefits		4,755		3,495		14,391		12,189
Occupancy and equipment		1,326		1,362		3,904		4,497
Professional fees		465		273		1,257		858
Advertising		112		135		456		364
Postage, printing, stationary and supplies		161		140		435		404
FDIC assessment		93		160		235		481
Amortization of intangible assets		32		36		97		109
Other operating expenses		889		979		3,077		2,670
Total noninterest expense		7,833		6,580		23,852		21,572
Net income before income tax expense		2,768		2,769		7,882		7,302
Income tax expense		591		878		3,947		2,283
Net income	$	2,177	$	1,891	$	3,935	$	5,019
Earnings per common share:
Basic	$	0.13	n/a		$	0.23	n/a
Diluted	$	0.13	n/a		$	0.23	n/a

Weighted average common shares outstanding - basic and diluted		16,820,726	n/a			16,789,131	n/a

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(amounts in thousands)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2018			2017			2018			2017

Net Income	$	2,177		$	1,891		$	3,935		$	5,019

Other comprehensive (loss) income:

Unrealized gains (losses) on available for sale securities:
Net change in unrealized gains/losses before reclassification adjustment		(705	)		319			(1,635	)		(790	)
Reclassification adjustment for gains realized in net income		-			-			(139	)		-
Net change in unrealized gains/losses		(705	)		319			(1,774	)		(790	)
Tax effect		149			(109	)		512			268
Net of tax		(556	)		210			(1,262	)		(522	)

Defined benefit pension plan:
Net gain (loss) arising during the period		-			4,357			-			4,357
Reclassification adjustment for amortization of prior service cost and net gain (loss) included in net periodic pension cost		182			(727	)		544			(149	)
Tax effect		(39	)		(1,233	)		(162	)		(1,430	)
Net of tax		143			2,397			382			2,778

Supplemental retirement plans:
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost		10			24			26			70
Tax effect		(3	)		(9	)		(7	)		(24	)
Net of tax		7			15			19			46

Total other comprehensive (loss) income		(406	)		2,622			(861	)		2,302

Comprehensive income	$	1,771		$	4,513		$	3,074		$	7,321

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

(amounts in thousands, except share data)

													Accumulated
					Additional					Unallocated			Other
	Number of		Common		Paid-In			Retained		Common Stock			Comprehensive			Total
	Shares		Stock		Capital			Earnings		of ESOP			Loss			Equity
Balance at July 1, 2017		18,165,110	$	182	$	177,993		$	121,148	$	(14,262	)	$	(5,215	)	$	279,846
Net Income		-		-		-			3,935		-			-			3,935
Other comprehensive loss		-		-		-			-		-			(861	)		(861	)
Reclassification of certain tax effects on other comprehensive income⁽¹⁾		-		-		-			1,117		-			(1,117	)		-
Issuance of common stock⁽²⁾		-		-		(17	)		-		-			-			(17	)
ESOP shares committed to be released (93,794 shares)		-		-		819			-		938			-			1,757
Balance at March 31, 2018		18,165,110	$	182	$	178,795		$	126,200	$	(13,324	)	$	(7,193	)	$	284,660

Balance at July 1, 2016		-	$	-	$	-		$	117,919	$	-		$	(7,970	)	$	109,949
Net Income		-		-		-			5,019		-			-			5,019
Other comprehensive income		-		-		-			-		-			2,302			2,302
Balance at March 31, 2017		-	$	-	$	-		$	122,938	$	-		$	(5,668	)	$	117,270


(1) The adoption of ASU 2018-02 requires the reclassification from accumulated other comprehensive income to retained earnings of certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. Refer to Footnote 2 - Recent Accounting Pronouncements for additional information.
(2) Represents costs incurred in association with the Company's initial public offering completed in the prior period.

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

	Nine Months Ended March 31,
	2018			2017

OPERATING ACTIVITIES
Net income	$	3,935		$	5,019
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan loss		389			823
Depreciation and amortization		1,110			1,065
Amortization of net premiums on securities and net deferred loan origination costs		1,293			681
Net increase in accrued interest receivable		(765	)		(103	)
Net loss on sale of foreclosed real estate		7			5
Net gains on sales of securities		(173	)		-
Write-downs on other real estate owned		13			-
ESOP Compensation		1,757			-
Earnings from cash surrender value of BOLI		(430	)		(474	)
Net accretion of purchase account adjustments		(464	)		(651	)
Other adjustments, principally net changes in other assets and liabilities		2,928			(3,841	)
Net cash provided by operating activities		9,600			2,524
INVESTING ACTIVITIES
Purchases of investment securities:
Held to maturity		(43,055	)		(78,589	)
Available for sale		(23,537	)		(18,222	)
Sales of investment securities available for sale		6,100			-
Maturities and calls of investment securities:
Held to maturity		59,772			56,808
Available for sale		20,107			30,295
Principal repayments net of disbursement for loan originations		10,724			15,507
Purchase of loans		(88,605	)		(12,069	)
Net redemption of FHLB stock		(980	)		(196	)
Purchase of bank premises and equipment		(577	)		(2,382	)
Proceeds from sale of foreclosed real estate		1,160			939
Net cash used in investing activities		(58,891	)		(7,909	)
FINANCING ACTIVITIES
Net (decrease) increase in deposits		(459	)		1,890
Net increase in short-term FHLB advances		26,364			20,454
Repayment of long-term FHLB advances		(90	)		(16,089	)
Net decrease in mortgage escrow funds		(488	)		(291	)
Issuance of common stock		(17	)		136,252
Net cash provided by financing activities		25,310			142,216
Net (decrease) increase in cash and cash equivalents		(23,981	)		136,831
Cash and cash equivalents:
Cash and cash equivalents at beginning of period		60,486			41,578
Cash and cash equivalents at end of period	$	36,505		$	178,409

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

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

(amounts in thousands)

Supplemental information:
Cash paid for:
Interest	$	4,354	$	3,974
Income taxes		2,066		223
Loans transferred to foreclosed real estate and other assets		345		1,762

See accompanying notes to the consolidated financial statements (unaudited)

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 March 31, 2018, the significant assets of the Holding Company were the capital stock of the Bank, cash deposited in the Bank, 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 UpCounty Realty Corp. (formerly 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. UpCounty Realty Corp. 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.”, and was later amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and 2016-20. These updates provide a comprehensive framework for addressing revenue recognition issues that can be applied to all contracts with customers. The amendments also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2018, including interim periods within that fiscal year. ASU 2014-09 is not expected to have a material impact on the Company’s consolidated financial position or results of operations. The impact on disclosures is currently being evaluated by management.

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 Company’s material revenue streams that will be in the scope of ASU 2014-09 are fees on deposit accounts (including interchange fees) and foreclosed real estate gains and losses. All other revenue streams are immaterial or are in the scope of other GAAP requirements which take precedence and therefore are not in the scope of ASU 2014-09. Based on the Company’s analysis, ASU 2014-09 will not materially change the recognition of revenue on service fees on deposit accounts as the contracts are day to day and recognized as the service is provided. Gains and losses on the sale of foreclosed real estate are generally accounted for under ASC 610. However, ASU 2014-09 also added a new Subtopic 610-20 which addresses the recognition of gains and losses on the transfer of nonfinancial and in-substance nonfinancial assets. Gain and loss recognition is not expected to change except for foreclosed real estate and other nonfinancial asset sales that are financed by the Company. In the case of financed sales, the Company will need to evaluate each contract to determine whether each contract criteria are met, including whether it is probable that it will collect substantially all consideration to which it is entitled. The Company will also need to evaluate whether the financing terms offered to the buyer of the nonfinancial asset are market terms when determining the transaction price.

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 reclassified out of available for sale and 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. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2018, including interim periods within that fiscal year. Early adoption is not permitted. ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial position or results of operations. The impact on disclosures is currently being evaluated by management.

In March 2017, the FASB issued ASU 2017-07 “Compensation – Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost.” The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost, with the other components required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, the amendment also allows only the service cost component to be eligible for capitalization when applicable. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2018, including interim periods within that fiscal year. ASU 2017-07 will not have a material impact on the Company’s consolidated financial position or results of operations.

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. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company currently leases eleven branches and two administrative offices. ASU 2016-02 will result in the establishment of a right to use asset and corresponding lease obligation, the materiality of which has yet to be determined by management, however the ASU is not expected to have a material impact on the Company’s consolidated results of operations or 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. The amendments in this update will be effective for the Company for the fiscal year beginning on July

1, 2020, including interim periods within that fiscal year. 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 amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2019, including interim periods within that fiscal year. Early adoption is permitted for interim or annual goodwill impairment testing performed on testing dates 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. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2020, including interim periods within that fiscal year. 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.

On February 14, 2018, the FASB issued ASU 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of certain tax effects from accumulated other comprehensive income." The ASU intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. The ASU requires the reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the TAX Cuts and Job Act 2017 (or portion thereof) is recorded. The amount of the reclassification is the difference between the historical corporate income tax rate (34 percent) and the newly enacted 21 percent corporate income tax rate. The Company has elected to early adopt the ASU as of March 31, 2018, resulting in a $1.1 million reclassification between accumulated other comprehensive income and retained earnings. There is no impact to current earnings and no prior period information has been retroactively adjusted as a result of implementing the ASU. No additional reclassifications will be required in the future periods as a result of this guidance. The ASU is applied specifically to the impacts of the Tax Cuts and Jobs Act of 2017 and is not effective for other or future state or federal tax law changes.

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 $3.7 million, which resulted in net proceeds of $174.6 million prior to the contribution to PCSB Community Foundation. The Company lent $14.5 million to the ESOP and contributed $87.3 million to the Bank, with the remainder of the net proceeds of the offering prior to the contribution to PCSB Community Foundation being retained at the holding company.

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 March 31, 2018 and June 30, 2017 were as follows:

	March 31, 2018
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
			(in thousands)
Available for sale:
U.S. Government and agency obligations	$	62,437	$	-	$	(871	)	$	61,566
Corporate and other debt securities		8,420		-		(157	)		8,263
Mortgage-backed securities – residential		38,149		123		(812	)		37,460
Equity securities		32		-		-			32
Total available for sale	$	109,038	$	123	$	(1,840	)	$	107,321
Held to maturity:
U.S. Government and agency obligations	$	132,050	$	-	$	(2,153	)	$	129,897
Corporate and other debt securities		4,000		-		(81	)		3,919
Mortgage-backed securities – residential		141,258		86		(4,070	)		137,274
Mortgage-backed securities – collateralized mortgage obligations		55,814		-		(1,582	)		54,232
Mortgage-backed securities – commercial		33,240		22		(823	)		32,439
Total held to maturity	$	366,362	$	108	$	(8,709	)	$	357,761

	June 30, 2017
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
			(in thousands)
Available for sale:
U.S. Government and agency obligations	$	63,630	$	31	$	(216	)	$	63,445
Corporate and other debt securities		8,460		58		(36	)		8,482
Mortgage-backed securities – residential		39,710		363		(143	)		39,930
Equity securities		32		-		-			32
Total available for sale	$	111,832	$	452	$	(395	)	$	111,889
Held to maturity:
U.S. Government and agency obligations	$	155,559	$	23	$	(574	)	$	155,008
Corporate and other debt securities		999		-		-			999
Mortgage-backed securities – residential		143,452		828		(497	)		143,783
Mortgage-backed securities – collateralized mortgage obligations		59,476		146		(235	)		59,387
Mortgage-backed securities – commercial		24,065		412		(66	)		24,411
Total held to maturity	$	383,551	$	1,409	$	(1,372	)	$	383,588

During the nine months ended March 31, 2018, 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 was no sales of or realized gains or losses on investment securities for the three or nine months ended March 31, 2017.

The following table presents the fair value and carrying amount of debt securities at March 31, 2018, 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.

	Held to maturity				Available for sale
	Carrying		Fair		Amortized		Fair
	Amount		Value		Cost		Value
	(in thousands)
March 31, 2018:
1 year or less	$	31,504	$	31,382	$	13,404	$	13,349
1 to 5 years		100,546		98,515		55,453		54,504
5 to 10 years		-		-		2,000		1,976
Mortgage-backed securities and other		234,312		227,864		38,149		37,460
Total	$	366,362	$	357,761	$	109,006	$	107,289

Securities pledged had carrying amounts of $129.6 million and $95.5 million at March 31, 2018 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 March 31, 2018 and June 30, 2017:

	March 31, 2018
	Less than 12 months					12 months or greater					Total
			Unrealized/					Unrealized/					Unrealized/
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
	Value		Loss			Value		Loss			Value		Loss
	(in thousands)
Available for sale:
U.S. Government and agency obligations	$	38,880	$	(492	)	$	21,686	$	(379	)	$	60,566	$	(871	)
Corporate and other debt securities		8,262		(157	)		-		-			8,262		(157	)
Mortgage-backed securities – residential		22,324		(493	)		10,101		(319	)		32,425		(812	)
Total available for sale	$	69,466	$	(1,142	)	$	31,787	$	(698	)	$	101,253	$	(1,840	)
Held to maturity:
U.S. Government and agency obligations	$	66,915	$	(1,117	)	$	62,982	$	(1,036	)		129,897	$	(2,153	)
Corporate and other debt securities		3,919		(81	)		-		-			3,919		(81	)
Mortgage-backed securities – residential		110,055		(2,901	)		25,580		(1,169	)		135,635		(4,070	)
Mortgage-backed securities – collateralized mortgage obligations		43,000		(1,099	)		11,232		(483	)		54,232		(1,582	)
Mortgage-backed securities – commercial		20,038		(464	)		8,698		(359	)		28,736		(823	)
Total held to maturity	$	243,927	$	(5,662	)	$	108,492	$	(3,047	)	$	352,419	$	(8,709	)

	June 30, 2017
	Less than 12 months					12 months or greater					Total
			Unrealized/					Unrealized/					Unrealized/
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
	Value		Loss			Value		Loss			Value		Loss
	(in thousands)
Available for sale
U.S. Government and agency obligations	$	41,900	$	(200	)	$	3,993	$	(16	)	$	45,893	$	(216	)
Corporate and other debt securities		1,964		(36	)		-		-			1,964		(36	)
Mortgage-backed securities – residential		18,861		(111	)		3,200		(32	)		22,061		(143	)
Total available for sale	$	62,725	$	(347	)	$	7,193	$	(48	)	$	69,918	$	(395	)
Held to maturity
U.S. Government and agency obligations	$	113,511	$	(531	)	$	5,981	$	(43	)	$	119,492	$	(574	)
Corporate and other debt securities		999		-			-		-			999		-
Mortgage-backed securities – residential		39,754		(467	)		1,626		(30	)		41,380		(497	)
Mortgage-backed securities – collateralized mortgage obligations		26,622		(141	)		4,444		(94	)		31,066		(235	)
Mortgage-backed securities – commercial		9,092		(66	)		-		-			9,092		(66	)
Total held to maturity	$	189,978	$	(1,205	)	$	12,051	$	(167	)	$	202,029	$	(1,372	)

As of March 31, 2018, the Company’s security portfolio consisted of $473.7 million in securities, of which 256 securities with a fair value of $453.7 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.

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 March 31, 2018 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 March 31, 2018 and June 30, 2017.

Note 5. Loans Receivable

Loans receivable are summarized as follows (in thousands):

	March 31,			June 30,
	2018			2017
Mortgage loans:
Residential	$	253,847		$	217,778
Commercial		484,810			437,651
Construction		16,098			22,404
Net deferred loan origination costs		1,203			397
Total mortgages		755,958			678,230
Commercial and consumer loans:
Commercial loans		35,897			33,297
Other loans secured		47,770			46,802
Home equity lines of credit		38,220			41,927
Consumer and installment loans		12,773			13,765
Net deferred loan origination costs		724			777
Total commercial and consumer loans		135,384			136,568
Total loans receivable		891,342			814,798
Allowance for loan losses		(4,624	)		(5,150	)
Loans receivable, net	$	886,718		$	809,648

In April 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.

During the nine months ended March 31, 2018, the Company purchased whole loans and loan participations totaling $88.6 million, including $46.4 million of commercial mortgage loans and $42.2 million of residential mortgage loans.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ended March 31, 2018 and 2017 (in thousands):

	Three Months Ended March 31, 2018
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	402	$	(20	)	$	(47	)	$	-	$	335
Commercial		2,686		131			-			-		2,817
Construction		400		90			-			-		490
Commercial loans		322		2			-			-		324
Other loans secured		389		(180	)		(13	)		210		406
Home equity lines of credit		74		35			(60	)		19		68
Consumer and installment loans		133		(4	)		(10	)		-		119
Acquired:
Residential		65		-			-			-		65
Total	$	4,471	$	54		$	(130	)	$	229	$	4,624

	Three Months Ended March 31, 2017
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	238	$	158		$	(15	)	$	-	$	381
Commercial		3,031		(621	)		-			-		2,410
Construction		336		552			-			-		888
Commercial loans		501		48			-			-		549
Other loans secured		339		31			-			-		370
Home equity lines of credit		70		3			-			-		73
Consumer and installment loans		113		61			(19	)		4		159
Acquired:
Commercial loans		-		3			(3	)		-		-
Total	$	4,628	$	235		$	(37	)	$	4	$	4,830

	Nine Months Ended March 31, 2018
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	360	$	39		$	(64	)	$	-	$	335
Commercial		2,589		228			-			-		2,817
Construction		1,150		337			(997	)		-		490
Commercial loans		440		(116	)		-			-		324
Other loans secured		365		(156	)		(13	)		210		406
Home equity lines of credit		76		33			(60	)		19		68
Consumer and installment loans		144		(15	)		(10	)		-		119
Acquired:
Residential		26		39			-			-		65
Total	$	5,150	$	389		$	(1,144	)	$	229	$	4,624

	Nine Months Ended March 31, 2017
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	237	$	89		$	(15	)	$	70	$	381
Commercial		2,149		242			-			19		2,410
Construction		269		619			-			-		888
Commercial loans		604		(628	)		-			573		549
Other loans secured		397		199			(324	)		98		370
Home equity lines of credit		73		-			-			-		73
Consumer and installment loans		313		259			(417	)		4		159
Acquired:												-
Residential		-		38			(38	)		-		-
Commercial loans		-		2			(2	)
Consumer and installment loans		-		3			(3	)		-		-
Total	$	4,042	$	823		$	(799	)	$	764	$	4,830

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

	March 31, 2018
	Loans								Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total
Residential	$	2,879	$	249,655	$	1,313	$	253,847	$	127	$	208	$	65	$	400
Commercial		2,440		480,887		1,483		484,810		-		2,817		-		2,817
Construction		2,260		13,838		-		16,098		276		214		-		490
Commercial loans		349		35,548		-		35,897		8		316		-		324
Other loans secured		3,973		43,797		-		47,770		1		405		-		406
Home equity lines of credit		416		37,633		171		38,220		5		63		-		68
Consumer and installment loans		-		12,773		-		12,773		-		119		-		119
Total	$	12,317	$	874,131	$	2,967	$	889,415	$	417	$	4,142	$	65	$	4,624

	June 30, 2017
	Loans								Allowance for Loan Losses
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired With Deteriorated Credit Quality		Total
Residential	$	4,471	$	211,983	$	1,324	$	217,778	$	131	$	229	$	26	$	386
Commercial		2,411		433,416		1,824		437,651		-		2,589		-		2,589
Construction		3,661		18,743		-		22,404		997		153		-		1,150
Commercial loans		356		32,941		-		33,297		7		433		-		440
Other loans secured		5,813		40,989		-		46,802		2		363		-		365
Home equity lines of credit		610		41,140		177		41,927		5		71		-		76
Consumer and installment loans		-		13,723		42		13,765		-		144		-		144
Total	$	17,322	$	792,935	$	3,367	$	813,624	$	1,142	$	3,982	$	26	$	5,150

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


	March 31, 2018
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance recorded:
Residential	$	2,698	$	2,428	$	-
Commercial		2,946		2,440		-
Other loans secured		7,163		2,916		-
Home equity lines of credit		471		405		-
With a related allowance recorded:
Residential		390		451		127
Construction		3,257		2,260		276
Commercial loans		349		349		8
Other loans secured		1,057		1,057		1
Home equity lines of credit		11		11		5
Total	$	18,342	$	12,317	$	417

	June 30, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance recorded:
Residential	$	4,216	$	4,014	$	-
Commercial		2,935		2,411		-
Construction		404		404		-
Commercial loans		276		277		-
Other loans secured		9,157		4,702		-
Home equity lines of credit		599		599		-
With a related allowance recorded:
Residential		395		457		131
Construction		3,257		3,257		997
Commercial loans		79		79		7
Other loans secured		1,111		1,111		2
Home equity lines of credit		11		11		5
Total	$	22,440	$	17,322	$	1,142

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 and nine months ended March 31, 2018 and 2017 (in thousands):

	Three months ended				Three months ended
	March 31, 2018				March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential	$	2,776	$	13	$	3,048	$	-
Commercial		2,440		37		2,287		32
Commercial loans		-		-		89		1
Other loans secured		3,027		68		4,804		53
Home equity lines of credit		452		-		599		-
With a related allowance recorded:
Residential		452		4		517		4
Construction		2,260		-		3,388		-
Commercial loans		350		1		-		-
Other loans secured		1,067		13		1,129		14
Home equity lines of credit		11		-		11		-
Total	$	12,835	$	136	$	15,872	$	104

	Nine Months Ended				Nine Months Ended
	March 31, 2018				March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential	$	3,360	$	179	$	3,078	$	-
Commercial		2,447		91		2,303		95
Construction		121		17		-		-
Commercial loans		-		-		91		3
Other loans secured		3,704		228		4,846		172
Home equity lines of credit		549		20		599		(2	)
With a related allowance recorded:
Residential		454		11		513		14
Construction		2,858		-		3,073		71
Commercial loans		353		5		-		-
Other loans secured		1,086		40		1,141		43
Home equity lines of credit		11		-		11		-
Total	$	14,943	$	591	$	15,655	$	396

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

					Loans Past Due Over 90 Days
	Nonaccrual				and Still Accruing
	March 31,		June 30,		March 31,		June 30,
	2018		2017		2018		2017
Originated:
Residential	$	1,129	$	2,581	$	-	$	-
Commercial		262		-		-		-
Construction		2,260		3,661		-		-
Commercial loans		275		-		-		-
Other loans secured		1,307		2,959		-		-
Home equity lines of credit		100		302		-		-
Acquired:
Residential		1,299		1,776		-		-
Commercial		508		497		-		-
Home equity lines of credit		304		296		-		-
Total	$	7,444	$	12,072	$	-	$	-

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 $1.8 million and $2.7 million as of March 31, 2018 and June 30, 2017, respectively. 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.

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2018 and June 30, 2017 (in thousands):

	March 31, 2018
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current		Total
Originated:
Residential	$	-	$	-	$	736	$	736	$	195,610	$	196,346
Commercial		775		-		262		1,037		407,747		408,784
Construction		-		-		2,260		2,260		13,838		16,098
Commercial loans		-		-		275		275		35,033		35,308
Other loans secured		-		-		500		500		47,140		47,640
Home equity lines of credit		-		-		100		100		32,646		32,746
Consumer and installment loans		-		-		-		-		12,624		12,624
Total originated		775		-		4,133		4,908		744,638		749,546
Acquired:
Residential		233		-		1,797		2,030		55,471		57,501
Commercial		-		-		1,087		1,087		74,939		76,026
Commercial loans		-		-		-		-		589		589
Other loans secured		-		-		-		-		130		130
Home equity lines of credit		23		-		296		319		5,155		5,474
Consumer and installment loans		-		-		-		-		149		149
Total acquired		256		-		3,180		3,436		136,433		139,869
Total	$	1,031	$	-	$	7,313	$	8,344	$	881,071	$	889,415

	June 30, 2017
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current		Total
Originated:
Residential	$	94	$	275	$	1,973	$	2,342	$	153,390	$	155,732
Commercial		-		-		-		-		355,247		355,247
Construction		-		-		3,661		3,661		18,743		22,404
Commercial loans		-		-		-		-		31,613		31,613
Other loans secured		-		-		544		544		43,612		44,156
Home equity lines of credit		-		199		103		302		35,246		35,548
Consumer and installment loans		-		-		-		-		13,435		13,435
Total originated		94		474		6,281		6,849		651,286		658,135
Acquired:
Residential		237		463		1,472		2,172		59,874		62,046
Commercial		-		-		1,054		1,054		81,350		82,404
Commercial loans		-		-		-		-		1,684		1,684
Other loans secured		-		-		-		-		2,646		2,646
Home equity lines of credit		-		-		296		296		6,083		6,379
Consumer and installment loans		-		-		-		-		330		330
Total acquired		237		463		2,822		3,522		151,967		155,489
Total	$	331	$	937	$	9,103	$	10,371	$	803,253	$	813,624

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 March 31, 2018 and June 30, 2017, the Company had 16 and 20 loans classified as troubled debt restructurings totaling $7.0 million and $9.9 million, respectively. The Company has allocated $141,000 and $145,000, respectively, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2018 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 or nine months ended March 31, 2018. The Company modified one loan as a troubled debt restructuring in the three and nine months ended March 31, 2017.

The Company had two troubled debt restructurings with a total carrying amount of $1.1 million at March 31, 2018 for which there was a payment default in the nine months ended March 31, 2018 that were modified in the twelve months prior to default, resulting in a $2,000 increase to the allowance for loan loss. One default, with a carrying amount of $807,000, has been cured as of March 31, 2018. There were no such defaults during the three months ended March 31, 2018. There were two troubled debt restructurings with a total carrying amount of $929,000 for which there was a payment default in the three and nine months ended March 31, 2017. These defaults resulted in no increase to the allowance for loan losses.

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.

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):

	March 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
Originated:
Residential	$	194,594	$	548	$	1,204	$	-	$	196,346
Commercial		405,696		-		3,088		-		408,784
Construction		13,838		-		2,260		-		16,098
Commercial loans		32,647		-		2,661		-		35,308
Other loans secured		42,606		-		5,034		-		47,640
Home equity lines of credit		32,599		102		45		-		32,746
Consumer and installment loans		12,624		-		-		-		12,624
Total originated		734,604		650		14,292		-		749,546
Acquired:
Residential		54,367		253		2,881		-		57,501
Commercial		72,565		1,470		1,991		-		76,026
Commercial loans		589		-		-		-		589
Other loans secured		116		14		-		-		130
Home equity lines of credit		5,074		-		400		-		5,474
Consumer and installment loans		149		-		-		-		149
Total acquired		132,860		1,737		5,272		-		139,869
Total	$	867,464	$	2,387	$	19,564	$	-	$	889,415

	June 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
Originated:
Residential	$	153,165	$	-	$	2,567	$	-	$	155,732
Commercial		352,203		134		2,910		-		355,247
Construction		18,743		-		3,661		-		22,404
Commercial loans		28,944		-		2,669		-		31,613
Other loans secured		37,267		-		6,889		-		44,156
Home equity lines of credit		35,246		58		244		-		35,548
Consumer and installment loans		13,405		-		30		-		13,435
Total originated		638,973		192		18,970		-		658,135
Acquired:
Residential		58,665		-		3,381		-		62,046
Commercial		80,082		-		2,322		-		82,404
Commercial loans		1,684		-		-		-		1,684
Other loans secured		2,646		-		-		-		2,646
Home equity lines of credit		5,906		-		473		-		6,379
Consumer and installment loans		330		-		-		-		330
Total acquired		149,313		-		6,176		-		155,489
Total	$	788,286	$	192	$	25,146	$	-	$	813,624

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 March 31, 2018 and June 30, 2017 is as follows (in thousands):

	March 31,		June 30,
	2018		2017
Residential	$	1,248	$	1,298
Commercial		1,483		1,824
Home equity lines of credit		171		177
Consumer and installment loans		-		42
Carrying amount, net of allowance of $65 and $26, respectively	$	2,902	$	3,341

The allowance for loan losses on purchased credit impaired loans was unchanged during the three months ended March 31, 2018 and increased $39,000 during the nine months ended March 31, 2018.

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2018			2017			2018			2017
Beginning balance	$	238		$	486		$	403		$	578
New loans acquired		-			-			-			-
Accretion income		(7	)		(47	)		(59	)		(139	)
Reclassification from non-accretable difference		-			-			-			-
Disposals		-			-			(113	)		-
Ending balance	$	231		$	439		$	231		$	439

Note 6. Other Comprehensive Income (Loss)

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

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at January 1, 2018	$	(669	)	$	(4,763	)	$	(238	)	$	(5,670	)
Other comprehensive loss before reclassifications		(705	)		-			-			(705	)
Amounts reclassified from accumulated other comprehensive income		-			182			10			192
Tax effect		149			(39	)		(3	)		107
Net other comprehensive (loss) income		(556	)		143			7			(406	)
Reclassification of certain tax effects on other comprehensive income⁽¹⁾		(132	)		(938	)		(47	)		(1,117	)
Balance at March 31, 2018	$	(1,357	)	$	(5,558	)	$	(278	)	$	(7,193	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at January 1, 2017	$	(209	)	$	(7,302	)	$	(779	)	$	(8,290	)
Other comprehensive income before reclassifications		319			4,357			-			4,676
Amounts reclassified from accumulated other comprehensive income		-			(727	)		24			(703	)
Tax effect		(109	)		(1,233	)		(9	)		(1,351	)
Net other comprehensive income		210			2,397			15			2,622
Balance at March 31, 2017	$	1		$	(4,905	)	$	(764	)	$	(5,668	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2017	$	37		$	(5,002	)	$	(250	)	$	(5,215	)
Other comprehensive loss before reclassifications		(1,635	)		-			-			(1,635	)
Amounts reclassified from accumulated other comprehensive income		(139	)		544			26			431
Tax effect		512			(162	)		(7	)		343
Net other comprehensive (loss) income		(1,262	)		382			19			(861	)
Reclassification of certain tax effects on other comprehensive income⁽¹⁾		(132	)		(938	)		(47	)		(1,117	)
Balance at March 31, 2018	$	(1,357	)	$	(5,558	)	$	(278	)	$	(7,193	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2016	$	523		$	(7,683	)	$	(810	)	$	(7,970	)
Other comprehensive (loss) income before reclassifications		(790	)		4,357			-			3,567
Amounts reclassified from accumulated other comprehensive income		-			(149	)		70			(79	)
Tax effect		268			(1,430	)		(24	)		(1,186	)
Net other comprehensive (loss) income		(522	)		2,778			46			2,302
Balance at March 31, 2017	$	1		$	(4,905	)	$	(764	)	$	(5,668	)

(1) Represents the impact of adopting ASU 2018-02 requiring the reclassification of certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) is recorded. The amount of the reclassification is the difference between the historical corporate income tax rate (34 percent) and the newly enacted 21 percent corporate income tax rate. The reclassification is as of March 31, 2018; no prior period information has been retroactively adjusted as a result of implementing the ASU.

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 and nine months ended March 31, 2018 and 2017 (in thousands):

	Three Months Ended					Three Months Ended
	March 31, 2018					March 31, 2017
	Defined Benefit Plan			Supplemental Retirement Plans		Defined Benefit Plan			Supplemental Retirement Plans
Service cost	$	-		$	149	$	150		$	100
Interest cost		242			26		250			32
Expected return on plan assets		(505	)		-		(462	)		-
Amortization of prior net loss		-			-		300			23
Amortization of prior service cost		182			10		(48	)		-
Gain on curtailment		-			-		(919	)		-
Net periodic (benefit) cost	$	(81	)	$	185	$	(729	)	$	155

	Nine Months Ended					Nine Months Ended
	March 31, 2018					March 31, 2017
	Defined Benefit Plan			Supplemental Retirement Plan		Defined Benefit Plan			Supplemental Retirement Plan
Service cost	$	-		$	369	$	519		$	261
Interest cost		726			76		757			91
Expected return on plan assets		(1,511	)		-		(1,424	)		-
Amortization of prior net loss		-			-		1,021			70
Amortization of prior service cost		544			26		(192	)		-
Gain on curtailment		-			-		(919	)		-
Net periodic cost	$	(241	)	$	471	$	(238	)	$	422

The Company made no contributions to the defined benefit plan during the three and nine months ended March 31, 2018 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 (4.5% at March 31, 2018). 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 March 31, 2018 was $13.6 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:

	March 31, 2018		June 30, 2017
Allocated		96,881		-
Committed to be allocated		23,888		26,975
Unallocated		1,332,440		1,426,234
Total shares		1,453,209		1,453,209

The fair value of unallocated shares was $28.0 million at March 31, 2018.

Total compensation expense recognized in connection with the ESOP for the three and nine months ended March 31, 2018 was $478,000 and $1.8 million, respectively. There was no ESOP compensation expense for the three or nine months ended March 31, 2017.

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.

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

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2018
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations	$	-	$	61,566	$	-	$	61,566
Corporate and other debt securities		-		8,263		-		8,263
Mortgage-backed securities – residential		-		37,460		-		37,460
Equity securities		-		32		-		32
Total assets at fair value	$	-	$	107,321	$	-	$	107,321

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	399	$	399
Construction		-		-		1,984		1,984
Commercial loans		-		-		286		286
Other loans secured		-		-		500		500
Home equity lines of credit		-		-		6		6
Foreclosed real estate		-		-		144		144
Total assets at fair value	$	-	$	-	$	3,319	$	3,319

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
June 30, 2017
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations	$	-	$	63,445	$	-	$	63,445
Corporate and other debt securities		-		8,482		-		8,482
Mortgage-backed securities – residential		-		39,930		-		39,930
Equity securities		-		32		-		32
Total assets at fair value	$	-	$	111,889	$	-	$	111,889

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	1,126	$	1,126
Construction		-		-		2,260		2,260
Commercial loans		-		-		72		72
Other loans secured		-		-		1,609		1,609
Home equity lines of credit		-		-		5		5
Foreclosed real estate		-		-		977		977
Total assets at fair value	$	-	$	-	$	6,049	$	6,049

There were no transfers between levels within the fair value hierarchy during the three or nine months ended March 31, 2018.

Impaired loans in the table above had a carrying amount of $3.4 million, and a remaining valuation allowance of $278,000 at March 31, 2018, as compared to $6.3 million and $1.1 million, respectively, as of June 30, 2017. Impaired loans measured at fair value incurred $1.1 million of net charge-offs and resulted in an additional provision for loan losses of $201,000 during the nine months ended March 31, 2018. Impaired loans measured at fair value as of March 31, 2017 incurred $38,000 of net charge-offs and resulted in an additional provision for loan losses of $824,000 during the nine months ended March 31, 2017.

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 March 31, 2018 and June 30, 2017 (dollars in thousands):

Valuation

Unobservable

Range or

Fair Value

Technique(s)

Input(s)

Rate Used

March 31, 2018:

Impaired loans - residential mortgages

399

Sales comparison

Adjustments for

differences in sales

comparables

-3.3% to 21.1%

Impaired loans - construction

1,984

Sales contract

Discount to sales contract

10.0%

Impaired loans - commercial loans

286

Discounted cash flow

Discount rate

5.3%

Impaired loans - other loans secured

500

Sales contract

Discount to sales contract

10.0%

Impaired loans - home equity lines of credit

Sales comparison

Adjustments for

differences in sales

comparables

4.2% to 21.1%

Foreclosed real estate

144

Sales comparison

Adjustments for

differences in

sales comparables

-40.0% to 8.8%

June 30, 2017:

Impaired loans - residential mortgages

1,126

Sales comparison

Adjustments for

differences in sales

comparables

-5.1% to 7.8%

Discounted cash flow

Discount rate

5.4% to 6.3%

Impaired loans - construction

2,260

Cost approach

Discount for distressed property

50.0%

Impaired loans - commercial

Discounted cash flow

Adjustments for

differences in sales

comparables

7.0% to 7.5%

Impaired loans - other loans secured

1,609

Discounted cash flow

Discount rate

6.0%

Sales comparison

Adjustments for

differences in sales

comparables

0.0%

Impaired loans - home equity lines of credit

Discounted cash flow

Discount rate

6.3%

Foreclosed real estate

977

Sales comparison

Adjustments for

differences in

sales comparables

-23.4% to 7.2%

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):

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
March 31, 2018:
Financial assets:
Cash and cash equivalents	$	36,505	$	36,505	$	-	$	-	$	36,505
Investment securities held to maturity		366,362		-		357,648		113		357,761
Investment securities available for sale		107,321		-		107,321		-		107,321
Loans receivable, net		886,718		-		-		873,570		873,570
Accrued interest receivable		4,458		-		1,580		2,878		4,458
Federal Home Loan Bank stock		4,112	N/A		N/A		N/A		N/A
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		765,560		765,560		-		-		765,560
Time deposits		322,425		-		324,732		-		324,732
Mortgage escrow funds		7,596		7,596		-		-		7,596
FHLB advances		68,872		-		68,681		-		68,681
June 30, 2017:
Financial assets:
Cash and cash equivalents	$	60,486	$	60,486	$	-	$	-	$	60,486
Investment securities held to maturity		383,551		-		383,318		270		383,588
Investment securities available for sale		111,889		-		111,889		-		111,889
Loans receivable, net		809,648		-		-		817,814		817,814
Accrued interest receivable		3,693		-		1,243		2,450		3,693
Federal Home Loan Bank stock		3,132	N/A		N/A		N/A		N/A
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		793,681		793,681		-		-		793,681
Time deposits		294,780		-		297,508		-		297,508
Mortgage escrow funds		8,084		8,084		-		-		8,084
FHLB advances		42,598		-		45,504		-		45,504

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.

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 deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on time deposits 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 March 31, 2018 and June 30, 2017, compared to the required ratios for minimum capital adequacy and for classification as well capitalized (dollars in thousands):

											To Be Well Capitalized
											Under Prompt
						For Capital Adequacy					Corrective Action
	Bank Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2018:
PCSB Bank
Leverage (Tier 1)	$	202,158		14.0	%	$	56,557		4.0	%	$	70,696		5.0	%
Risk-based:
Common Tier 1		202,158		21.2			42,015		4.5			60,688		6.5
Tier 1		202,158		21.2			56,020		6.0			74,693		8.0
Total		197,534		21.7			74,693		8.0			93,366		10.0
PCSB Financial Corporation
Leverage (Tier 1)	$	285,305		20.2	%	$	56,612		4.0	%	N/A		N/A
Risk-based:
Common Tier 1		285,305		30.5			42,056		4.5		N/A		N/A
Tier 1		285,305		30.5			56,075		6.0		N/A		N/A
Total		289,929		31.0			74,766		8.0		N/A		N/A

June 30, 2017:
PCSB Bank
Leverage (Tier 1)	$	190,990		13.7	%	$	55,949		4.0	%	$	69,936		5.0	%
Risk-based:
Common Tier 1		190,990		21.7			39,631		4.5			57,245		6.5
Tier 1		190,990		21.7			52,841		6.0			70,455		8.0
Total		196,140		22.3			70,455		8.0			88,069		10.0
PCSB Financial Corporation
Leverage (Tier 1)	$	278,528		20.0	%	$	55,839		4.0	%	N/A		N/A
Risk-based:
Common Tier 1		278,528		31.6			39,631		4.5		N/A		N/A
Tier 1		278,528		31.6			52,841		6.0		N/A		N/A
Total		283,678		32.2			70,455		8.0		N/A		N/A

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).

Management believes that as of March 31, 2018 and June 30, 2017, the Bank and Company met all capital adequacy requirements to which they were subject, including the capital conservation buffer of 1.875% and 1.250% as of March 31, 2018 and June 30, 2017, respectively. 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 during the nine months ended March 31, 2018. Earnings per share data is not applicable for the periods ended March 31, 2017 because the Company had not yet been formed and had no shares outstanding at a Company or Bank level.

	Three Months Ended March 31, 2018		Nine Months Ended March 31, 2018
	(amounts in thousands, except share and per share data)

Net income applicable to common stock	$	2,177	$	3,935

Average number of common shares outstanding		18,165,110		18,165,110
Less: Average unallocated ESOP shares		1,344,384		1,375,979
Average number of common shares outstanding used to calculate basic earnings per common share		16,820,726		16,789,131

Earnings per Common share:
Basic	$	0.13	$	0.23
Diluted	$	0.13	$	0.23

Note 11. Income Taxes

On December 22, 2017, as part of the Tax Cuts and Jobs Act, the federal government enacted comprehensive tax reform containing provisions with a number of impacts on corporate income taxes, the most significant of which provides a decrease in the corporate income tax rate from 34% to 21% for tax years beginning on or after January 1, 2018. The Company is required to re-measure as of the date the law is enacted, its net deferred tax assets to reflect the income tax rate expected to be effective when deferred tax positions will be realized. As a result, the Company recorded a re-measurement charge (benefit) through income tax expense of $(182,000) and $1.6 million for the three and nine months ended March 31, 2018, respectively. The Company has finalized its accounting for the impacts of the tax reform and the amounts recorded are no longer considered provisional.

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

General

Management’s discussion and analysis of financial condition at March 31, 2018 and June 30, 2017, and results of operations for the three and nine months ended March 31, 2018 and 2017 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 and with the audited financial statements included in the annual report on Form 10-K for the fiscal year ended June 30, 2017.

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:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans, prospects, growth and operating strategies;

•

statements regarding the quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

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:

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

•

changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;

•

our ability to access cost-effective funding;

•

fluctuations in real estate values and both residential and commercial real estate market conditions;

•

demand for loans and deposits in our market area;

•

our ability to continue to implement our business strategies;

•

competition among depository and other financial institutions;

•

inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

•

adverse changes in the securities or credit markets;

•

changes in laws or government regulations or policies affecting financial institutions, including changes in tax laws, regulatory fees, and capital requirements, including as a result of Basel III;

•

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

•

our ability to enter new markets successfully and capitalize on growth opportunities;

•

our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

•

changes in consumer spending, borrowing and savings habits;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

•

our ability to retain key employees;

•

our compensation expense associated with equity allocated or awarded to our employees; and

•

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

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 March 31, 2018 and June 30, 2017

Total Assets. Total assets increased $30.5 million, or 2.1%, to $1.46 billion at March 31, 2018 from $1.43 billion at June 30, 2017. The increase is primarily the result of an increase of $77.1 million in net loans, partially offset by decreases of $24.0 million in cash and cash equivalents, $21.8 million in total investment securities, $1.9 million in deferred tax assets and $835,000 in foreclosed real estate.

Cash and Cash Equivalents. Cash and cash equivalents decreased $24.0 million, or 39.6%, to $36.5 million at March 31, 2018 from $60.5 million at June 30, 2017. The decrease was primarily attributable to a $77.1 million increase in net loans, partially offset by a $26.3 million increase in advances from Federal Home Loan Bank, a $21.8 million decrease in total investment securities and an $821,000 decrease in all other assets.

Securities Held-to-Maturity. Total securities held to maturity decreased $17.2 million, or 4.5%, to $366.4 million at March 31, 2018 from $383.6 million at June 30, 2017. This decrease was primarily caused by $23.5 million of net maturities of U.S. government and agency obligations, partially offset by net purchases of $3.3 million of mortgage-backed securities and $3.0 million of corporate and other debt securities.

Securities Available for Sale. Total securities available for sale decreased $4.6 million, or 4.1%, to $107.3 million at March 31, 2018 from $111.9 million at June 30, 2017. This decline was due primarily to $1.2 million of net

maturities of U.S. government and agency obligations, $1.6 million in sales and amortization of mortgage backed securities net of purchases, and a $1.8 million increase in net unrealized losses driven primarily by an increase in market interest rates.

Net Loans Receivable. Net loans receivable increased $77.1 million, or 9.5%, to $886.7 million at March 31, 2018 from $809.6 million at June 30, 2017. The increase is due primarily to increases of $47.2 million in commercial mortgage loans, $36.1 million in residential mortgage loans, and $2.6 million in commercial loans, partially offset by decreases of $6.3 million in construction loans and $3.7 million in home equity credit lines. The Company purchased $46.4 million of commercial mortgage loans and $42.2 million of residential mortgage loans during the nine months ended March 31, 2018.

Deposits. Total deposits decreased $476,000 to $1.09 billion at March 31, 2018. This decrease primarily reflects decreases of $29.7 million in savings, and $9.7 million in demand deposits and NOW accounts, partially offset by increases of $27.6 million in time deposits and $11.3 million in money market accounts.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances increased $26.3 million, or 61.7%, to $68.9 million at March 31, 2018 from $42.6 million at June 30, 2017, due primarily to $45.0 million of additional short-term advances, offset by $18.7 million in maturities.

Total Shareholder’s Equity. Total shareholders’ equity increased $4.9 million, or 1.7%, to $284.7 million at March 31, 2018 from $279.8 million at June 30, 2017. This increase was due primarily to net income of $3.9 million and a $1.8 million reduction in unearned ESOP shares for plan shares earned during the period, partially offset by other comprehensive losses of $861,000 due largely to increased unrealized losses in the available for sale securities portfolio driven by increased market interest rates. At March 31, 2018, the Company’s book value per share was $15.67, compared to $15.41 at June 30, 2017. At March 31, 2018, the Bank was considered “well capitalized” under applicable regulatory guidelines.

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

General. Net income increased $286,000, or 15.1%, to $2.2 million for the three months ended March 31, 2018 compared to $1.9 million for the three months ended March 31, 2017. The increase was due primarily to a $1.1 million increase in net interest income, a $287,000 decrease in income tax expense and a $181,000 decrease in the provision for loan losses, partially offset by a $1.3 million increase in non-interest expense and a $114,000 decrease in non-interest income.

Net Interest Income. Net interest income increased $1.1 million, or 13.2%, to $10.1 million for the three months ended March 31, 2018 compared to a $9.0 million for the three months ended March 31, 2017. The increase primarily reflects a $172.6 million increase in average net interest-earning assets and a 3-basis point increase in the net interest margin to 2.99% for the three months ended March 31, 2018 compared to 2.96% for the three months ended March 31, 2017. The increase in average net interest-earning assets primarily reflects the investment of the net proceeds received in the Company’s initial public offering completed in April 2017.

Interest and Dividend Income. Interest and dividend income increased $1.3 million, or 13.4%, to $11.6 million for the three months ended March 31, 2018 compared to a $10.3 million for the three months ended March 31, 2017. The increase primarily reflects a $146.0 million increase in total average interest-earning assets and a 5-basis point increase in the yield on total interest-earning assets.

Interest income on loans receivable increased $610,000, or 7.2%, due primarily to a $70.6 million increase in the average balance of loans receivable to $843.6 million for the three months ended March 31, 2018 from $773.0 million for the same period last year, partially offset by an 8-basis point decrease in the average yield on loans to 4.32% for the three months ended March 31, 2018 from 4.40% for the same period last year.

Interest income on securities increased $735,000, or 45.0%, due primarily to a $92.6 million increase in the average balance of securities and a 29-basis point increase in the average yield on securities to 2.01% for the nine months ended March 31, 2018 from 1.72% 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 Expense. Interest expense increased $187,000, or 14.2%, to $1.5 million for the three months ended March 31, 2018 compared to $1.3 million for the three months ended March 31, 2017. The increase primarily reflects a 10-basis point increase in the average cost to 0.62% for the three months ended March 31, 2018 from 0.52% for the same period last year, partially offset by $26.6 million decrease in the average balance on interest bearing liabilities.

Interest expense on interest-bearing deposits increased $117,000, or 9.3%, due primarily to a 6-basis point increase in the average cost of deposits to 0.58% for the three months ended March 31, 2018 from 0.52% for the same period last year, partially offset by a $38.1 million decrease in the average balance to $967.0 million for the three months ended March 31, 2018 from $1.01 billion for the three months ended March 31, 2017. The increase in the average rate paid on interest-bearing deposits was caused primarily by a 22-basis point increase in the average rate paid on money market accounts, and a 13-basis point increase in the average rate paid on time deposits as the Bank offered increased rates on these deposits due to the increase in market rates.

Interest expense on Federal Home Loan Bank advances increased $70,000, or 127.3%, due primarily to a $11.5 million increase in the average balance to $27.4 million for the three months ended March 31, 2018 from $15.9 million for the same period last year, and by a 46-basis point increase in the average cost to 1.84% for the three months ended March 31, 2018 from 1.38% for the same period last year. The increase in the average cost is due primarily to an increase in market interest rates.

Provision for Loan Losses. The provision for loan losses decreased by $181,000 to $54,000 for the three months ended March 31, 2018, compared to $235,000 for the three months ended March 31, 2017 due primarily to increases in specific reserves on impaired loans in the prior year period. Recoveries, net of charge-offs, were $99,000 for the three months ended March 31, 2018 compared to charge-offs, net of recoveries, of $33,000 for the three months ended March 31, 2017.

Non-Interest Income. Non-interest income decreased $114,000, or 18.2% to $512,000 for the three months ended March 31, 2018 compared to a $626,000 for the three months ended March 31, 2017. The decrease was caused primarily due to higher loan-related fees earned in the prior year period.

Non-Interest Expense. Non-interest expense increased $1.2 million, or 19.0%, to $7.8 million for the three months ended March 31, 2018 compared to $6.6 million for the three months ended March 31, 2017. The increase was caused primarily by increases of $1.3 million in salaries and benefits and $192,000 in professional fees, partially offset by decreases of $67,000 in FDIC assessment and $132,000 in all other operating expenses. The increase in salaries and benefits was due primarily to a $919,000 curtailment gain recognized in the prior year period related to the defined benefit pension plan, a $478,000 increase in ESOP compensation expense, and a $192,000 increase due to increased staffing, partially offset by a $286,000 decrease in other retirement expenses. The increase in professional fees was due primarily to expenses related to being a public company.

Income Tax Expense. Income tax expense decreased $287,000, or 32.7%, to $591,000 for the three months ended March 31, 2018 from $878,000 for the three months ended March 31, 2017. The decrease was caused primarily by lower marginal tax rates, as well as a $182,000 tax benefit recorded in the current quarter from the adjustment of the re-measurement charge associated with the recent tax reform and the related reduction of the corporate income tax rate from 34% to 21%. The effective income tax rate was 21.4% (27.9% excluding the effects of the current quarter re-measurement charge) for the three months ended March 31, 2018 compared to 31.7% for the three months ended March 31, 2017.

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

General. Net income decreased $1.1 million, or 21.6%, to $3.9 million for the nine months ended March 31, 2018 compared to $5.0 million for the nine months ended March 31, 2017. The decrease was due primarily to a $2.3 million increase in non-interest expenses, a $1.7 million increase in income tax expense, and a $1.5 million decrease in non-interest income, partially offset by a $3.9 million increase in net interest income and a $434,000 decrease in the provision for loan losses.

Net Interest Income. Net interest income increased $3.9 million, or 15.0%, to $30.2 million for the nine months ended March 31, 2018 compared to a $26.3 million for the nine months ended March 31, 2017. The increase primarily reflects a $168.9 million increase in average net interest-earning assets and a 5-basis point increase in the

net interest margin to 2.96% for the nine months ended March 31, 2018 compared to 2.91% for the nine months ended March 31, 2017. The increase in average net interest-earning assets primarily reflects the investment of the net proceeds received in the Company’s initial public offering completed in April 2017.

Interest and Dividend Income. Interest and dividend income increased $4.4 million, or 14.4%, to $34.6 million for the nine months ended March 31, 2018 compared to $30.2 million for the nine months ended March 31, 2017. The increase primarily reflects a $158.1 million increase in total average interest-earning assets and a 4-basis point increase in the yield on total interest-earning assets.

Interest income on loans receivable increased $1.8 million, or 7.3%, due primarily to a $57.5 million increase in the average balance of loans receivable to $828.1 million for the nine months ended March 31, 2018 from $770.6 million for the same period last year, partially offset by a 1-basis point decrease in the average yield on loans to 4.36% for the nine months ended March 31, 2018 from 4.37% for the same period last year.

Interest income on securities increased $2.2 million, or 48.2%, due primarily to a $104.8 million increase in the average balance of securities and a 26-basis point increase in the average yield on securities to 1.92% for the nine months ended March 31, 2018 from 1.66% 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 $292,000, or 86.9%, due primarily to a 76-basis point increase in the average yield on other interest-earning assets to 1.51% for the nine months ended March 31, 2018 from 0.75% for the same period last year, partially offset by a $4.3 million decrease in the average balance of other interest-earning assets. 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 $422,000, or 10.6%, to $4.4 million for the nine months ended March 31, 2018 compared to $4.0 million for the nine months ended March 31, 2017. The increase primarily reflects a 7-basis point increase in the average cost of interest-bearing liabilities to 0.59% for the nine months ended March 31, 2018 from 0.52% for the same period last year, partially offset by a $10.8 million decrease in the average balance on interest-bearing liabilities.

Interest expense on interest-bearing deposits increased $115,000 or 3.0%, due primarily to a 3-basis point increase in the average cost of deposits to 0.55% for the nine months ended March 31, 2018 from 0.52% for the same period last year, partially offset by a $32.9 million decrease in the average balance to $962.0 million for the nine months ended March 31, 2018 from a $994.9 million for the nine months ended March 31, 2017. The decrease in the average balance of interest-bearing deposits primarily reflects lower average savings, time deposit and now accounts balances. The increase in the average rate paid on interest-bearing deposits was caused primarily by an 11-basis point increase in the average rate paid on money market accounts and a 9-basis point increase in the average interest paid on time deposits as the Bank offered increased rates on the deposits due to the increase in market rates.

Interest expense on Federal Home Loan Bank advances increased $307,000, or 225.7%, due primarily to a $22.1 million increase in the average balance to $34.7 million for the nine months ended March 31, 2018 from $12.6 million for the same period last year, and a 27-basis point increase in the average cost to 1.70% for the nine months ended March 31, 2018 from 1.43% for the same period last year. The increase in the average cost is due primarily to an increase in market interest rates.

Provision for Loan Losses. The provision for loan losses decreased by $434,000 to $389,000 for the nine months ended March 31, 2018, compared to $823,000 for the nine months ended March 31, 2017 due primarily to specific reserves established on impaired loans in the prior year period. Charge-offs, net of recoveries, were $915,000 and $35,000 for the nine months ended March 31, 2018 and 2017, respectively.

Non-Interest Income. Non-interest income decreased $1.5 million, or 44.2% to $1.9 million for the nine months ended March 31, 2018 compared to $3.4 million for the nine months ended March 31, 2017. The decrease was caused primarily by a one-time settlement on an acquired loan of $1.6 million in the prior year partially offset by a $173,000 gain on the sale of securities recognized in the current year.

Non-Interest Expense. Non-interest expense increased $2.3 million, or 10.6%, to $23.9 million for the nine months ended March 31, 2018 compared to $21.6 million for the nine months ended March 31, 2017. The increase was

primarily caused by increases of $2.2 million in salaries and benefits, $399,000 in professional fees and $272,000 in all other operating expenses, partially offset by a $593,000 decrease in occupancy and equipment expense. The increase in salaries and benefits was due primarily to a $1.8 million increase in ESOP expense and a $598,000 increase due to increased staffing, partially offset by a $78,000 decrease in other retirement expenses. The increase in professional fees was due primarily to expenses related to being a public company. The increase in other operating expenses was caused primarily by increases in Director and Officer insurance and data processing fees. The decrease in occupancy and equipment expense was caused primarily by a $521,000 lease obligation write-off recorded in the prior year.

Income Tax Expense. Income tax expense increased $1.6 million, or 72.9%, to $3.9 million for the nine months ended March 31, 2018 from $2.3 million for the nine months ended March 31, 2017. The increase was primarily caused by a $1.6 million tax re-measurement charge associated with the recent tax reform as well as higher pre-tax income, partially offset by lower marginal tax rates in the current year related to the reduction of the corporate income tax rate from 34% to 21%. The effective income tax rate was 50.1% (30.2% excluding the effects of the current year re-measurement charge) for the nine months ended March 31, 2018 as compared to 31.3% for the nine months ended March 31, 2017.

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.

	Three Months Ended March 31,
	2018								2017
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
	(dollars in thousands)
Assets:
Loans receivable	$	843,557		$	9,103		4.32	%	$	773,022		$	8,493		4.40	%
Securities		471,932			2,368		2.01			379,364			1,633		1.72
Other interest-earning assets		42,860			177		1.68			59,915			150		1.02
Total interest-earning assets		1,358,349			11,648		3.44			1,212,301			10,276		3.39
Non-interest-earning assets		56,874								61,354
Total assets	$	1,415,223							$	1,273,655

Liabilities and equity:
NOW accounts	$	113,178			49		0.18		$	139,306			54		0.17
Money market accounts		42,448			50		0.48			31,689			21		0.26
Savings accounts and escrow		496,574			297		0.24			523,045			315		0.24
Time deposits		314,815			984		1.27			311,092			873		1.14
Total interest-bearing deposits		967,015			1,380		0.58			1,005,132			1,263		0.52
Federal Home Loan Bank advances		27,444			125		1.84			15,920			55		1.38
Total interest-bearing liabilities		994,459			1,505		0.62			1,021,052			1,318		0.52
Non-interest-bearing deposits		129,905								125,774
Other non-interest-bearing liabilities		6,719								12,617
Total liabilities		1,131,083								1,159,443
Total equity		284,140								114,212
Total liabilities and equity	$	1,415,223							$	1,273,655

Net interest income				$	10,143							$	8,958
Interest rate spread ⁽¹⁾							2.82								2.87
Net interest margin ⁽²⁾							2.99								2.96
Average interest-earning assets to interest-bearing liabilities		136.59	%							118.73	%

⁽¹⁾	Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

⁽²⁾	Net interest margin represents annualized net interest income divided by average interest-earning assets.

	Nine Months Ended March 31,
	2018								2017
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
	(dollars in thousands)
Assets:
Loans receivable	$	828,138		$	27,092		4.36	%	$	770,567		$	25,256		4.37	%
Securities		477,199			6,882		1.92			372,358			4,643		1.66
Other interest-earning assets		55,502			628		1.51			59,838			336		0.75
Total interest-earning assets		1,360,839			34,602		3.39			1,202,763			30,235		3.35
Non-interest-earning assets		57,927								58,405
Total assets	$	1,418,766							$	1,261,168

Liabilities and equity:
NOW accounts	$	113,365			146		0.17		$	118,304			142		0.16
Money market accounts		33,854			93		0.37			31,658			63		0.26
Savings accounts and escrow		508,259			930		0.24			526,735			970		0.25
Time deposits		306,527			2,785		1.21			318,214			2,664		1.12
Total interest-bearing deposits		962,005			3,954		0.55			994,911			3,839		0.52
Federal Home Loan Bank advances		34,712			443		1.70			12,583			136		1.43
Total interest-bearing liabilities		996,717			4,397		0.59			1,007,494			3,975		0.52
Non-interest-bearing deposits		131,629								126,559
Other non-interest-bearing liabilities		7,590								14,468
Total liabilities		1,135,936								1,148,521
Total equity		282,830								112,647
Total liabilities and equity	$	1,418,766							$	1,261,168

Net interest income				$	30,205							$	26,260
Interest rate spread ⁽¹⁾							2.80								2.83
Net interest margin ⁽²⁾							2.96								2.91
Average interest-earning assets to interest-bearing liabilities		136.53	%							119.38	%

⁽¹⁾	Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.

⁽²⁾	Net interest margin represents annualized net interest income divided by average interest-earning assets.

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.

	Three Months Ended March 31,
	2018 versus 2017
	Rate			Volume			Net
	(in thousands)
Interest income:
Loans receivable	$	(222	)	$	832		$	610
Securities		200			535			735
Other interest-earning assets		78			(51	)		27
Total interest-earning assets		56			1,316			1,372

Interest expense:
NOW accounts		2			(7	)		(5	)
Money market accounts		21			8			29
Savings and escrow accounts		(2	)		(16	)		(18	)
Time deposits		100			11			111
Federal Home Loan Bank advances		22			48			70
Total interest-bearing liabilities		143			44			187

Net increase in net interest income	$	(87	)	$	1,272		$	1,185

	Nine Months Ended March 31,
	2018 versus 2017
	Rate			Volume			Net
	(in thousands)
Interest income:
Loans receivable	$	(167	)	$	2,003		$	1,836
Securities		486			1,753			2,239
Other interest-earning assets		311			(19	)		292
Total interest-earning assets		630			3,737			4,367

Interest expense:
NOW accounts		7			(3	)		4
Money market accounts		26			4			30
Savings and escrow accounts		(10	)		(30	)		(40	)
Time deposits		221			(100	)		121
Federal Home Loan Bank advances		29			278			307
Total interest-bearing liabilities		273			149			422

Net increase in net interest income	$	357		$	3,588		$	3,945

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.

The following table presents the estimated changes in our NPV that would result from changes in market interest rates at March 31, 2018 and June 30, 2017. All estimated changes presented in the table are within the policy limits approved by our Board of Directors.

	NPV									NPV as Percent of Portfolio Value of Assets
	(dollars in thousands)
Basis Point Change in Interest Rates	Dollar Amount		Dollar Change			Percent Change				EVE Ratio			Change (in bps)
March 31, 2018:
200	$	290,115	$	(43,596	)		(13.1	)	%		21.47	%		(178	)
100		313,830		(19,881	)		(6.0	)			22.53			(72	)
-		333,711	-			-					23.25			-
(100)		345,010		11,299			3.4				23.41			16

June 30, 2017:
200	$	290,781	$	(35,848	)		(11.0	)	%		21.62	%		(130	)
100		311,728		(14,901	)		(4.6	)			22.49			(42	)
-		326,629	-			-					22.92		-
(100)		331,139		4,510			1.4				22.69			(22	)

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 March 31, 2018, cash and cash equivalents totaled $36.5 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 $107.3 million at March 31, 2018, a decrease from $111.9 million as of June 30, 2017.

We had the ability to borrow up to $328.7 million and $350.7 million from the Federal Home Loan Bank of New York, at March 31, 2018 and June 30, 2017, $68.9 million and $42.6 million of which was outstanding as of March 31, 2018 and June 30, 2017, respectively. We also had an available line of credit with the Federal Reserve Bank of New York’s discount window program of $88.0 million and $85.9 million as of March 31, 2018 and June 30, 2017, respectively, none of which was outstanding at either date.

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.

We had $96.0 million and $77.6 million of loan commitments outstanding as of March 31, 2018 and June 30, 2017, respectively, and $48.5 million and $45.4 million as of March 31, 2018 and June 30, 2017, respectively, of approved, but unadvanced, funds to borrowers. We also had $1.6 million and $705,000 in outstanding letters of credit at March 31, 2018 and June 30, 2017, respectively.

Time deposits due within one year of March 31, 2018 totaled $134.4 million, an increase of $27.3 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 time deposits 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 time deposits at March 31, 2018. We believe, however, based on past experience that a significant portion of our time deposits 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 March 31, 2018, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $72.8 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 March 31, 2018, 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 March 31, 2018. 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 March 31, 2018, 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. will not have a material impact on the Company’s consolidated financial position, results of operations or disclosures

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 March 31, 2018, 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 March 31, 2018, except for the additional risk factor described below, 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.

We may be adversely affected by recent changes in U.S. tax laws and regulations.

Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Included in this legislation is a reduction of the corporate income tax rate from 34% to 21%. In addition, other changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes. These recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, such as New York. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

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

Exhibit Number		Description

3.1		Articles of Incorporation of PCSB Financial Corporation ⁽¹⁾

3.2		Bylaws of PCSB Financial Corporation ⁽²⁾

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002⁽³⁾

101		The following materials for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements ⁽³⁾

(1)	Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215052).

(2)	Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-215052).

(3)	Furnished, not filed.

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.

		PCSB FINANCIAL CORPORATION

Date: May 11, 2018		/s/ Joseph D. Roberto
		Joseph D. Roberto
		Chairman, President and Chief Executive Officer

Date: May 11, 2018		/s/ Scott D. Nogles
		Scott D. Nogles
		Executive Vice President and Chief Financial Officer