PCSB Financial Corp - Quarter Report: 2019 December (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 December 31, 2019

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

For the transition period from _____ to _____

Commission File Number: 001-38065

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)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

PCSB

The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 every Interactive Data File required to be submitted 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 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	☐	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 ☒

17,043,648 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of February 5, 2020.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	50
Signatures		51

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

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

	December 31,			June 30,
	2019			2019
ASSETS
Cash and due from banks	$	61,603		$	58,756
Federal funds sold		1,232			1,273
Total cash and cash equivalents		62,835			60,029
Investment securities:
Held to maturity debt securities, at amortized cost (fair value of $274,850, and $346,243, respectively)		273,381			345,545
Available for sale debt securities, at fair value		54,454			72,228
Total investment securities		327,835			417,773
Loans receivable, net of allowance for loan losses of $6,216 and $5,664, respectively		1,183,740			1,093,121
Accrued interest receivable		4,932			4,797
FHLB stock		5,127			6,255
Premises and equipment, net		23,438			11,802
Deferred tax asset, net		1,956			2,478
Foreclosed real estate		279			1,158
Bank-owned life insurance		24,562			24,291
Goodwill		6,106			6,106
Other intangible assets		274			323
Other assets		8,083			9,446
Total assets	$	1,649,167		$	1,637,579
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits	$	1,111,396		$	1,084,442
Non-interest bearing deposits		140,218			141,379
Total deposits		1,251,614			1,225,821
Mortgage escrow funds		10,049			9,355
Advances from FHLB		86,153			111,216
Other liabilities		21,512			9,880
Total liabilities		1,369,328			1,356,272
Commitments and contingencies		-			-
Shareholders' equity:
Preferred stock ($0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding as of December 31, 2019 and June 30, 2019)		-			-
Common stock ($0.01 par value, 200,000,000 shares authorized, 18,712,295 shares issued as of December 31, 2019 and June 30, 2019, respectively, and 17,372,308 and 17,804,039 shares outstanding as of December 31, 2019 and June 30, 2019, respectively)		187			187
Additional paid in capital		184,276			182,129
Retained earnings		138,373			134,500
Unearned compensation - ESOP		(11,626	)		(12,114	)
Accumulated other comprehensive loss, net of income taxes		(4,474	)		(5,090	)
Treasury stock, at cost (1,339,987 and 908,256 shares as of December 31, 2019 and June 30, 2019, respectively)		(26,897	)		(18,305	)
Total shareholders' equity		279,839			281,307
Total liabilities and shareholders' equity	$	1,649,167		$	1,637,579

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 December 31,				Six Months Ended December 31,
	2019		2018		2019		2018
Interest and dividend income
Loans receivable	$	13,149	$	10,321	$	26,185	$	20,219
Investment securities		2,279		2,428		4,971		4,794
Federal funds and other		301		491		599		836
Total interest and dividend income		15,729		13,240		31,755		25,849
Interest expense
Deposits and escrow interest		3,358		2,375		6,659		4,431
FHLB advances		674		121		1,401		210
Total interest expense		4,032		2,496		8,060		4,641
Net interest income		11,697		10,744		23,695		21,208
Provision for loan losses		412		6		747		64
Net interest income after provision for loan losses		11,285		10,738		22,948		21,144
Noninterest income
Fees and service charges		402		457		804		875
Bank-owned life insurance		134		139		271		279
Swap income		-		75		170		146
Gains on sales of securities, net		-		55		-		55
Other		11		194		67		206
Total noninterest income		547		920		1,312		1,561
Noninterest expense
Salaries and employee benefits		5,889		5,306		11,653		10,328
Occupancy and equipment		1,333		1,284		2,648		2,525
Communication and data processing		507		482		1,038		954
Professional fees		379		417		783		786
Postage, printing, stationary and supplies		159		178		299		316
FDIC assessment		-		124		-		217
Advertising		100		131		200		218
Amortization of intangible assets		25		28		49		56
Other operating expenses		402		630		911		1,188
Total noninterest expense		8,794		8,580		17,581		16,588
Net income before income tax expense		3,038		3,078		6,679		6,117
Income tax expense		685		754		1,497		1,464
Net income	$	2,353	$	2,324	$	5,182	$	4,653
Earnings per common share:
Basic	$	0.15	$	0.14	$	0.33	$	0.28
Diluted	$	0.14	$	0.14	$	0.32	$	0.28
Weighted average common shares outstanding:
Basic		15,837,762		16,852,718		15,908,761		16,860,942
Diluted		15,909,855		16,868,464		15,996,251		16,868,815

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 December 31,						Six Months Ended December 31,
	2019			2018			2019			2018
Net income	$	2,353		$	2,324		$	5,182		$	4,653

Other comprehensive income (loss):
Unrealized gains (losses) on available for sale debt securities:
Net change in unrealized gains/losses before reclassification adjustment		39			506			220			353
Reclassification adjustment for gains realized in net income		-			(55	)		-			(55	)
Net change in unrealized gains/losses		39			451			220			298
Tax effect		(7	)		(94	)		(45	)		(62	)
Net of tax		32			357			175			236

Defined benefit pension plan:
Net gain (loss) arising during the period		-			-			-			-
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost		403			145			536			290
Tax effect		(83	)		(31	)		(112	)		(61	)
Net of tax		320			114			424			229

Supplemental retirement plans:
Net gain (loss) arising during the period		-			-			-			-
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost		12			9			23			18
Tax effect		(4	)		(2	)		(6	)		(4	)
Net of tax		8			7			17			14

Total other comprehensive income		360			478			616			479

Comprehensive income	$	2,713		$	2,802		$	5,798		$	5,132

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 and per share data)

																	Accumulated
						Additional					Unallocated			Treasury			Other
	Number of			Common		Paid-In		Retained			Common Stock			Stock,			Comprehensive			Total
	Shares			Stock		Capital		Earnings			of ESOP			at cost			Loss			Equity
Balance at July 1, 2019		17,804,039		$	187	$	182,129	$	134,500		$	(12,114	)	$	(18,305	)	$	(5,090	)	$	281,307
Net income		-			-		-		2,829			-			-			-			2,829
Other comprehensive income		-			-		-		-			-			-			256			256
Common stock dividends declared ($0.04 per share)		-			-		-		(659	)		-			-			-			(659	)
Repurchase of common stock		(179,800	)		-		-		-			-			(3,524	)		-			(3,524	)
Stock-based compensation		-			-		829		-			-			-			-			829
ESOP shares committed to be released (24,419 shares)		-			-		240		-			244			-			-			484
Balance at September 30, 2019		17,624,239			187		183,198		136,670			(11,870	)		(21,829	)		(4,834	)		281,522
Net income		-			-		-		2,353			-			-			-			2,353
Other comprehensive income		-			-		-		-			-			-			360			360
Common stock dividends declared ($0.04 per share)		-			-		-		(650	)		-			-			-			(650	)
Repurchase of common stock		(236,050	)		-		-		-			-			(4,748	)		-			(4,748	)
Shares withheld related to income tax withholding		(15,881	)												(320	)					(320	)
Stock-based compensation		-			-		829		-			-			-			-			829
ESOP shares committed to be released (24,419 shares)		-			-		249		-			244			-			-			493
Balance at December 31, 2019		17,372,308		$	187	$	184,276	$	138,373		$	(11,626	)	$	(26,897	)	$	(4,474	)	$	279,839

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 and per share data)

																		Accumulated
						Additional						Unallocated						Other
	Number of			Common		Paid-In			Retained			Common Stock			Treasury Stock,			Comprehensive			Total
	Shares			Stock		Capital			Earnings			of ESOP			at cost			Loss			Equity
Balance at July 1, 2018		18,165,110		$	182	$	179,045		$	128,365		$	(13,083	)	$	-		$	(6,950	)	$	287,559
Net income		-			-		-			2,329			-			-			-			2,329
Other comprehensive income		-			-		-			-			-			-			1			1
Common stock dividends declared ($0.03 per share)		-			-		-			(505	)		-			-			-			(505	)
ESOP shares committed to be released (24,419 shares)		-			-		249			-			244			-			-			493
Balance at September 30, 2018		18,165,110			182		179,294			130,189			(12,839	)		-			(6,949	)		289,877
Net income		-			-		-			2,324			-			-			-			2,324
Other comprehensive income		-			-		-			-			-			-			478			478
Common stock dividends declared ($0.03 per share)		-			-		-			(520	)		-			-			-			(520	)
Repurchase of common stock		(222,070	)		-		-			-			-			(4,336	)		-			(4,336	)
Restricted stock awards granted		547,185			5		(5	)		-			-			-			-			-
Stock-based compensation		-			-		482			-			-			-			-			482
ESOP shares committed to be released (24,419 shares)		-			-		232			-			245			-			-			477
Balance at December 31, 2018		18,490,225		$	187	$	180,003		$	131,993		$	(12,594	)	$	(4,336	)	$	(6,471	)	$	288,782

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

	Six Months Ended December 31,
	2019			2018
OPERATING ACTIVITIES
Net income	$	5,182		$	4,653
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan loss		747			64
Depreciation and amortization		629			591
Amortization of net premiums on securities and net deferred loan origination costs		836			744
Net increase in accrued interest receivable		(135	)		(99	)
Net gains on sales of foreclosed real estate		(38	)		(24	)
Net gains on sales of securities		-			(55	)
Gains on sales of bank premises		-			(156	)
Write-downs on foreclosed real estate		-			45
Stock-based compensation		1,658			482
ESOP compensation		977			970
Earnings from cash surrender value of BOLI		(271	)		(279	)
Net accretion of purchase accounting adjustments		(293	)		(188	)
Other adjustments, principally net changes in other assets and liabilities		50			793
Net cash provided by operating activities		9,342			7,541
INVESTING ACTIVITIES
Purchases of investment securities:
Held to maturity		(1,103	)		(42,226	)
Sales of investment securities available for sale		-			2,069
Maturities, calls and amortization of investment securities:
Held to maturity		74,876			35,346
Available for sale		17,857			10,943
Loan principal disbursements, net		(47,312	)		(2,429	)
Purchase of loans		(44,321	)		-
Net redemption (purchase) of FHLB stock		1,128			(335	)
Purchase of bank premises and equipment, net of sales		(380	)		(209	)
Proceeds from sales of foreclosed real estate		1,196			48
Net cash provided by investing activities		1,941			3,207
FINANCING ACTIVITIES
Net increase in deposits		25,793			67,867
Net decrease in short-term FHLB advances		(40,000	)		-
Proceeds from long-term FHLB advances		20,000			12,500
Repayment of long-term FHLB advances		(5,063	)		(5,062	)
Net increase in mortgage escrow funds		694			282
Common stock dividends paid		(1,309	)		(1,025	)
Repurchase of shares from employees for income tax withholding purposes		(320	)		-
Repurchase of common stock		(8,272	)		(4,336	)
Net cash (used in) provided by financing activities		(8,477	)		70,226
Net increase in cash and cash equivalents		2,806			80,974
Cash and cash equivalents at beginning of period		60,029			62,145
Cash and cash equivalents at end of period	$	62,835		$	143,119

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited) (continued)

(amounts in thousands)

	Six Months Ended December 31,
	2019		2018
Supplemental information:
Cash paid for:
Interest	$	8,011	$	4,620
Income taxes (net of refunds)		1,921		1,640
Loans transferred to foreclosed real estate and other assets		279		181
Establishment of right to use lease asset (ASU 2016-13)		12,687		-

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Notes to 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 December 31, 2019, 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 and regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New York State Department of Financial Services (the “NYSDFS”).

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 commercial 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 NYSDFS.

Basis of Presentation: The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and include the accounts of the Holding Company, the Bank and the Bank's two subsidiaries – PCSB Funding Corp. and UpCounty Realty Corp. (formerly PCSB Realty Ltd.). PCSB Funding Corp. is a real estate investment trust that holds certain mortgage assets. 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.

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 results of operations for the current period presented are not necessarily indicative of the results of operations that may be expected for the entire current fiscal year. Certain information and note disclosures normally included in 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2019, included in the Company's Annual Report on Form 10-K.

Certain prior period amounts have been reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or equity.

Use of Estimates: To prepare financial statements in conformity with GAAP 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.

Accounting Standards Adopted in the Period

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 longer than 12 months 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 also requires entities to disclose key information about leasing arrangements. The Company currently leases eleven branches and two administrative offices. The Company adopted this standard and the related amendments (collectively "ASC 842") on July 1, 2019 and utilized the modified

retrospective approach provided by ASU 2018-11, "Leases (Topic 842): Targeted Improvements," that allowed for a cumulative effect adjustment in the period of adoption. Under this method of adoption, the comparative information in the consolidated financial statements has not been revised and continues to be reported under the previously applicable lease accounting guidance (ASC 840). We also utilized the package of practical expedients permitted under the transition guidance which included the carry-forward of historical lease classification. The Company recorded a right to use asset totaling $11.9 million and lease liability totaling $12.0 million on the balance sheet for Company’s outstanding lease obligations on July 1, 2019. The right to use asset is disclosed within premises and equipment and the lease liability is disclosed within other liabilities on the balance sheet.

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 adoption of ASU 2017-04 on July 1, 2019 did not have a material impact on the Company’s 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 adoption of ASU 2017-08 on July 1, 2019 did not have a material impact on the Company’s consolidated financial statements.

Future Application of Accounting Pronouncements Previously Issued

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. In October 2019, the FASB unanimously voted to delay the implementation of the standard for three years for certain companies, including small reporting companies (as defined by the SEC), non-SEC public companies and private companies. The Company currently qualifies as a small reporting company and is subject to the delayed implementation. Therefore, the amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2023, including interim periods within that fiscal year. The Company is actively working through the provisions of the Update. Management has established a steering committee which is identifying the methodologies and the additional data requirements necessary to implement the Update and has engaged a third-party software service provider to assist in the Company's implementation. Management is currently evaluating the impact that ASU 2016-13 will have on the Company’s consolidated financial position, results of operations and disclosures.

Note 3. Investment Securities

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity debt securities at December 31, 2019 and June 30, 2019 were as follows:

	December 31, 2019
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
			(in thousands)
Available for sale:
U.S. Government and agency obligations	$	22,010	$	8	$	(19	)	$	21,999
Corporate and other debt securities		8,322		70		-			8,392
Mortgage-backed securities – residential		24,165		27		(129	)		24,063
Total available for sale	$	54,497	$	105	$	(148	)	$	54,454
Held to maturity:
U.S. Government and agency obligations	$	48,552	$	181	$	(43	)	$	48,690
Corporate and other debt securities		34,025		347		(413	)		33,959
Mortgage-backed securities – residential		123,069		1,180		(303	)		123,946
Mortgage-backed securities – collateralized mortgage obligations		47,402		361		(126	)		47,637
Mortgage-backed securities – commercial		20,333		304		(19	)		20,618
Total held to maturity	$	273,381	$	2,373	$	(904	)	$	274,850

	June 30, 2019
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
			(in thousands)
Available for sale:
U.S. Government and agency obligations	$	37,027	$	5	$	(121	)	$	36,911
Corporate and other debt securities		8,349		20		(9	)		8,360
Mortgage-backed securities – residential		27,115		23		(181	)		26,957
Total available for sale	$	72,491	$	48	$	(311	)	$	72,228
Held to maturity:
U.S. Government and agency obligations	$	96,545	$	192	$	(246	)	$	96,491
Corporate and other debt securities		34,033		133		(413	)		33,753
Mortgage-backed securities – residential		133,602		818		(372	)		134,048
Mortgage-backed securities – collateralized mortgage obligations		52,940		311		(147	)		53,104
Mortgage-backed securities – commercial		28,425		451		(29	)		28,847
Total held to maturity	$	345,545	$	1,905	$	(1,207	)	$	346,243

No securities were sold during the three or six months ended December 31, 2019. During the three and six months ended December 31, 2018, the Company sold $2.1 million of securities resulting in $55,000 of realized gains.

The following table presents the fair value and carrying amount of debt securities at December 31, 2019, 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
1 year or less	$	31,550	$	31,540	$	21,011	$	21,003
1 to 5 years		22,002		22,131		9,321		9,388
5 to 10 years		25,030		24,919		-		-
Mortgage-backed securities and other		194,799		196,260		24,165		24,063
Total	$	273,381	$	274,850	$	54,497	$	54,454

Securities pledged had carrying amounts of $157.1 million and $166.4 million at December 31, 2019 and June 30, 2019, 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 December 31, 2019 and June 30, 2019:

	December 31, 2019
	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	$	1,008	$	(1	)	$	8,990	$	(18	)	$	9,998	$	(19	)
Corporate and other debt securities		-		-			-		-			-		-
Mortgage-backed securities – residential		4,564		(21	)		12,657		(108	)		17,221		(129	)
Total available for sale	$	5,572	$	(22	)	$	21,647	$	(126	)	$	27,219	$	(148	)
Held to maturity:
U.S. Government and agency obligations	$	1,997	$	(3	)	$	32,513	$	(40	)	$	34,510	$	(43	)
Corporate and other debt securities		24,587		(413	)		-		-			24,587		(413	)
Mortgage-backed securities – residential		24,048		(125	)		14,801		(178	)		38,849		(303	)
Mortgage-backed securities – collateralized mortgage obligations		13,991		(48	)		7,893		(78	)		21,884		(126	)
Mortgage-backed securities – commercial		-		-			3,440		(19	)		3,440		(19	)
Total held to maturity	$	64,623	$	(589	)	$	58,647	$	(315	)	$	123,270	$	(904	)

	June 30, 2019
	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	$	-	$	-		$	32,919	$	(121	)	$	32,919	$	(121	)
Corporate and other debt securities		-		-			3,269		(9	)		3,269		(9	)
Mortgage-backed securities – residential		-		-			24,000		(181	)		24,000		(181	)
Total available for sale	$	-	$	-		$	60,188	$	(311	)	$	60,188	$	(311	)
Held to maturity
U.S. Government and agency obligations	$	-	$	-		$	59,306	$	(246	)	$	59,306	$	(246	)
Corporate and other debt securities		17,087		(413	)		-		-			17,087		(413	)
Mortgage-backed securities – residential		1,666		(26	)		54,648		(346	)		56,314		(372	)
Mortgage-backed securities – collateralized mortgage obligations		-		-			29,372		(147	)		29,372		(147	)
Mortgage-backed securities – commercial		-		-			6,972		(29	)		6,972		(29	)
Total held to maturity	$	18,753	$	(439	)	$	150,298	$	(768	)	$	169,051	$	(1,207	)

As of December 31, 2019, the Company’s securities portfolio consisted of $327.8 million in securities, of which 92 securities with a fair value of $150.5 million were in an unrealized loss position. The majority of unrealized losses are related to the Company’s U.S. Government and agency obligations and mortgage-backed securities.

As of June 30, 2019, the Company’s securities portfolio consisted of $417.8 million in securities, of which 135 securities with a fair value of $229.2 million were in an unrealized loss position. The majority of unrealized losses are related to the Company’s U.S. Government and agency obligations and mortgage-backed securities.

There were no securities as of December 31, 2019 or June 30, 2019 for which the Company believes it is not probable that it will collect all amounts due according to the contractual terms of the security. 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 December 31, 2019 or June 30, 2019.

Note 4. Loans Receivable

Loans receivable are summarized as follows (in thousands):

	December 31,			June 30,
	2019			2019
Mortgage loans:
Residential	$	262,441		$	265,167
Commercial		741,171			651,396
Construction		22,787			13,231
Net deferred loan origination costs		1,054			1,031
Total mortgage loans		1,027,453			930,825
Commercial and consumer loans:
Commercial loans		129,809			133,614
Home equity lines of credit		31,460			33,204
Consumer and overdrafts		436			365
Net deferred loan origination costs		798			777
Total commercial and consumer loans		162,503			167,960
Total loans receivable		1,189,956			1,098,785
Allowance for loan losses		(6,216	)		(5,664	)
Loans receivable, net	$	1,183,740		$	1,093,121

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

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended December 31, 2019 and 2018 (in thousands):

	Three Months Ended December 31, 2019
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	343	$	7		$	-		$	2	$	352
Commercial		4,314		254			-			-		4,568
Construction		222		51			-			-		273
Commercial loans		1,041		62			(150	)		-		953
Home equity lines of credit		61		(4	)		-			3		60
Consumer and overdrafts		12		11			(15	)		2		10
Acquired:
Residential		-		31			(31	)		-		-
Total	$	5,993	$	412		$	(196	)	$	7	$	6,216

	Three Months Ended December 31, 2018
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	359	$	17		$	-		$	3	$	379
Commercial		3,130		245			(114	)		-		3,261
Construction		493		(331	)		-			96		258
Commercial loans		825		55			-			-		880
Home equity lines of credit		69		13			-			-		82
Consumer and overdrafts		10		7			(9	)		2		10
Acquired:
Residential		73		-			-			-		73
Total	$	4,959	$	6		$	(123	)	$	101	$	4,943

	Six Months Ended December 31, 2019
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	363	$	(16	)	$	-		$	5	$	352
Commercial		3,853		715			-			-		4,568
Construction		159		114			-			-		273
Commercial loans		1,130		(27	)		(150	)		-		953
Home equity lines of credit		65		(13	)		-			8		60
Consumer and installment loans		11		26			(33	)		6		10
Acquired:
Residential		83		(52	)		(31	)		-		-
Total	$	5,664	$	747		$	(214	)	$	19	$	6,216


	Six Months Ended December 31, 2018
	Beginning Allowance		Provision (credit)			Charge-offs			Recoveries		Ending Allowance
Originated:
Residential	$	386	$	(12	)	$	-		$	5	$	379
Commercial		3,073		302			(114	)		-		3,261
Construction		505		(343	)		-			96		258
Commercial loans		780		100			-			-		880
Home equity lines of credit		80		2			-			-		82
Consumer and installment loans		7		15			(16	)		4		10
Acquired:
Residential		73		-			-			-		73
Total	$	4,904	$	64		$	(130	)	$	105	$	4,943

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 December 31, 2019 and June 30, 2019 (in thousands):

	December 31, 2019
	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	$	2,365	$	259,325	$	751	$	262,441	$	119	$	233	$	-	$	352
Commercial		831		739,458		882		741,171		-		4,568		-		4,568
Construction		-		22,787		-		22,787		-		273		-		273
Commercial loans		1,930		127,879		-		129,809		1		952		-		953
Home equity lines of credit		405		30,908		147		31,460		7		53		-		60
Consumer and overdrafts		-		436		-		436		-		10		-		10
Total	$	5,531	$	1,180,793	$	1,780	$	1,188,104	$	127	$	6,089	$	-	$	6,216

	June 30, 2019
	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	$	1,774	$	262,124	$	1,269	$	265,167	$	130	$	233	$	83	$	446
Commercial		1,418		649,088		890		651,396		-		3,853		-		3,853
Construction		-		13,231		-		13,231		-		159		-		159
Commercial loans		2,016		131,598		-		133,614		39		1,091		-		1,130
Home equity lines of credit		689		32,359		156		33,204		4		61		-		65
Consumer and overdrafts		-		365		-		365		-		11		-		11
Total	$	5,897	$	1,088,765	$	2,315	$	1,096,977	$	173	$	5,408	$	83	$	5,664

The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by portfolio segment as of December 31, 2019 and June 30, 2019 (in thousands):


	December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance recorded:
Residential	$	2,046	$	1,931	$	-
Commercial		955		831		-
Commercial loans		2,058		1,887		-
Home equity lines of credit		379		326		-
With an allowance recorded:
Residential		375		434		119
Commercial loans		43		43		1
Home equity lines of credit		85		79		7
Total	$	5,941	$	5,531	$	127

	June 30, 2019
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance recorded:
Residential	$	1,061	$	1,028	$	-
Commercial		1,471		1,418		-
Commercial loans		2,007		1,836		-
Home equity lines of credit		750		678		-
With an allowance recorded:
Residential		723		746		130
Commercial loans		180		180		39
Home equity lines of credit		11		11		4
Total	$	6,203	$	5,897	$	173

The tables below present the average recorded investment and interest income recognized on loans individually evaluated for impairment, by portfolio segment, for the three and six months ended December 31, 2019 and 2018 (in thousands):

	Three months ended				Three months ended
	December 31, 2019				December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential	$	1,992	$	21	$	1,927	$	4
Commercial		1,083		128		1,417		13
Commercial loans		1,882		53		2,110		47
Home equity lines of credit		538		13		597		1
With an allowance recorded:
Residential		436		4		445		3
Construction		-		-		1,130		-
Commercial loans		119		-		63		1
Home equity lines of credit		80		6		89		-
Total	$	6,130	$	225	$	7,778	$	69

	Six Months Ended				Six Months Ended
	December 31, 2019				December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential	$	2,009	$	27	$	1,968	$	11
Commercial		1,193		140		1,532		26
Construction		1,887		103		-		-
Commercial loans		569		13		2,226		96
Home equity lines of credit		-		-		612		9
With an allowance recorded:
Residential		436		7		446		7
Construction		-		-		1,614		-
Commercial loans		152		1		63		1
Home equity lines of credit		81		6		89		-
Total	$	6,327	$	297	$	8,550	$	150

The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days and still on accrual status, by portfolio segment, as of December 31, 2019 and June 30, 2019 (in thousands):

					Loans Past Due Over 90 Days
	Nonaccrual				and Still Accruing
	December 31,		June 30,		December 31,		June 30,
	2019		2019		2019		2019
Originated:
Residential	$	1,076	$	536	$	-	$	-
Commercial loans		-		150		-		-
Home equity lines of credit		30		383		-		-
Consumer and overdrafts		-		-		-		1
Acquired:
Residential		216		795		-		-
Commercial		-		568		-		-
Home equity lines of credit		296		294		-		-
Total	$	1,618	$	2,726	$	-	$	1

Nonperforming loans include both smaller-balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The table above excludes acquired loans that are accounted for as purchased credit impaired loans totaling $409,000 and $501,000 as of December 31, 2019 and June 30, 2019, 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 portfolio segment as of December 31, 2019 and June 30, 2019 (in thousands):

	December 31, 2019
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current		Total
Originated:
Residential	$	261	$	95	$	403	$	759	$	219,707	$	220,466
Commercial		-		-		-		-		695,236		695,236
Construction		-		-		-		-		22,787		22,787
Commercial loans		14		-		-		14		129,611		129,625
Home equity lines of credit		68		56		30		154		28,018		28,172
Consumer and overdrafts		-		-		-		-		421		421
Total originated		343		151		433		927		1,095,780		1,096,707
Acquired:
Residential		499		-		431		930		41,045		41,975
Commercial		-		-		-		-		45,935		45,935
Commercial loans		-		-		-		-		184		184
Home equity lines of credit		61		-		317		378		2,910		3,288
Consumer and overdrafts		-		-		-		-		15		15
Total acquired		560		-		748		1,308		90,089		91,397
Total	$	903	$	151	$	1,181	$	2,235	$	1,185,869	$	1,188,104

	June 30, 2019
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current		Total
Originated:
Residential	$	-	$	-	$	86	$	86	$	217,970	$	218,056
Commercial		-		-		-		-		600,675		600,675
Construction		-		-		-		-		13,231		13,231
Commercial loans		-		150		-		150		133,286		133,436
Home equity lines of credit		344		-		312		656		28,767		29,423
Consumer and overdrafts		-		-		1		1		348		349
Total originated		344		150		399		893		994,277		995,170
Acquired:
Residential		220		116		709		1,045		46,066		47,111
Commercial		-		-		568		568		50,153		50,721
Commercial loans		-		-		-		-		178		178
Home equity lines of credit		-		67		296		363		3,418		3,781
Consumer and overdrafts		-		-		-		-		16		16
Total acquired		220		183		1,573		1,976		99,831		101,807
Total	$	564	$	333	$	1,972	$	2,869	$	1,094,108	$	1,096,977

Troubled Debt Restructurings

The terms of certain loans have been 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. All troubled debt restructurings are considered impaired loans.

As of December 31, 2019 and June 30, 2019, the Company had 15 and 14 loans, respectively, classified as troubled debt restructurings totaling $4.1 million as of both dates, including $3.8 million and $3.2 million, respectively, of loans still accruing interest. The Company has allocated $124,000 and $135,000, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2019 and June 30, 2019, respectively. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

The Company has modified one commercial loan in a troubled debt restructuring during the three and six months ended December 31, 2019. This loan had a carrying amount as of December 31, 2019 of $95,000. The Company modified two loans with a total carrying amount of $428,000, one residential mortgage and one home equity line of credit, in troubled debt restructurings during the six months ended December 31, 2018. The Company did not modify any loans during the three months ended December 31, 2018.

The Company had one troubled debt restructuring, a residential mortgage with a carrying amount of $370,000 as of December 31, 2019, default in the six months ended December 31, 2019 that was modified in the twelve months prior to default, with no such defaults occurring in the three months ended December 31, 2019. This default did not result in a charge-off nor an increase to the allowance for loan losses. The Company had no troubled debt restructurings for which there was a payment default in the three or six months ended December 31, 2018, that were modified in the twelve months prior to default.

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 utilizes 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 portfolio segment is as follows (in thousands):

	December 31, 2019
	Pass		Special Mention		Substandard		Total
Originated:
Residential	$	218,772	$	482	$	1,212	$	220,466
Commercial		694,902		334		-		695,236
Construction		22,787		-		-		22,787
Commercial loans		124,155		3,932		1,538		129,625
Home equity lines of credit		28,020		84		68		28,172
Consumer and overdrafts		421		-		-		421
Total originated		1,089,057		4,832		2,818		1,096,707
Acquired:
Residential		40,921		203		851		41,975
Commercial		42,407		2,646		882		45,935
Commercial loans		184		-		-		184
Home equity lines of credit		2,845		61		382		3,288
Consumer and overdrafts		15		-		-		15
Total acquired		86,372		2,910		2,115		91,397
Total	$	1,175,429	$	7,742	$	4,933	$	1,188,104

	June 30, 2019
	Pass		Special Mention		Substandard		Total
Originated:
Residential	$	216,438	$	1,071	$	547	$	218,056
Commercial		600,216		339		120		600,675
Construction		13,231		-		-		13,231
Commercial loans		123,361		6,423		3,652		133,436
Home equity lines of credit		28,996		67		360		29,423
Consumer and overdrafts		349		-		-		349
Total originated		982,591		7,900		4,679		995,170
Acquired:
Residential		44,959		211		1,941		47,111
Commercial		45,726		3,537		1,458		50,721
Commercial loans		178		-		-		178
Home equity lines of credit		3,331		68		382		3,781
Consumer and overdrafts		16		-		-		16
Total acquired		94,210		3,816		3,781		101,807
Total	$	1,076,801	$	11,716	$	8,460	$	1,096,977

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 December 31, 2019 and June 30, 2019 is as follows (in thousands):

	December 31,		June 30,
	2019		2019
Residential	$	751	$	1,186
Commercial		882		890
Home equity lines of credit		147		156
Carrying amount, net of allowance of $0 and $83, respectively	$	1,780	$	2,232

The allowance for loan losses on purchased credit impaired loans decreased $0 and $83,000 during the three and six months ended December 31, 2019, respectively.

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

	Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018
Beginning balance	$	182		$	232		$	192		$	245
New loans acquired		-			-			-			-
Accretion income		(8	)		(13	)		(18	)		(26	)
Reclassification from non-accretable difference		-			-			-			-
Disposals		-			-			-			-
Ending balance	$	174		$	219		$	174		$	219

Note 5. Other Comprehensive Loss

The following is a summary of the accumulated other comprehensive 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 October 1, 2019	$	(66	)	$	(4,527	)	$	(241	)	$	(4,834	)
Other comprehensive income before reclassifications		39			-			-			39
Amounts reclassified from accumulated other comprehensive income		-			403			12			415
Less tax effect		(7	)		(83	)		(4	)		(94	)
Net other comprehensive income		32			320			8			360
Balance at December 31, 2019	$	(34	)	$	(4,207	)	$	(233	)	$	(4,474	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at October 1, 2018	$	(1,657	)	$	(5,035	)	$	(257	)	$	(6,949	)
Other comprehensive income before reclassifications		506			-			-			506
Amounts reclassified from accumulated other comprehensive income		(55	)		145			9			99
Less tax effect		(94	)		(31	)		(2	)		(127	)
Net other comprehensive income		357			114			7			478
Balance at December 31, 2018	$	(1,300	)	$	(4,921	)	$	(250	)	$	(6,471	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2019	$	(209	)	$	(4,631	)	$	(250	)	$	(5,090	)
Other comprehensive income before reclassifications		220			-			-			220
Amounts reclassified from accumulated other comprehensive income		-			536			23			559
Tax effect		(45	)		(112	)		(6	)		(163	)
Net other comprehensive income		175			424			17			616
Balance at December 31, 2019	$	(34	)	$	(4,207	)	$	(233	)	$	(4,474	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2018	$	(1,536	)	$	(5,150	)	$	(264	)	$	(6,950	)
Other comprehensive income before reclassifications		353			-			-			353
Amounts reclassified from accumulated other comprehensive income		(55	)		290			18			253
Tax effect		(62	)		(61	)		(4	)		(127	)
Net other comprehensive income		236			229			14			479
Balance at December 31, 2018	$	(1,300	)	$	(4,921	)	$	(250	)	$	(6,471	)

Note 6. 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 but also those expected to be earned in the future. On February 15, 2017, the Board of Directors approved the freezing of the defined benefit pension plan effective May 1, 2017.

Supplemental Executive Retirement Plans

The Company also maintains unfunded and non-qualified supplemental executive 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 six months ended December 31, 2019 and 2018 (in thousands):

	Three Months Ended					Three Months Ended
	December 31, 2019					December 31, 2018
	Defined Benefit Plan			Supplemental Retirement Plans		Defined Benefit Plan			Supplemental Retirement Plans
Service cost	$	-		$	79	$	-		$	147
Interest cost		180			30		250			26
Expected return on plan assets		(478	)		-		(513	)		-
Amortization of prior net loss		131			12		145			9
Settlement charges		272			-		-			-
Net periodic cost (benefit)	$	105		$	121	$	(118	)	$	182

	Six Months Ended					Six Months Ended
	December 31, 2019					December 31, 2018
	Defined Benefit Plan			Supplemental Retirement Plan		Defined Benefit Plan			Supplemental Retirement Plan
Service cost	$	-		$	158	$	-		$	295
Interest cost		360			61		500			52
Expected return on plan assets		(957	)		-		(1,026	)		-
Amortization of prior net loss		264			23		290			18
Settlement charges		272			-		-			-
Net periodic (benefit) cost	$	(61	)	$	242	$	(236	)	$	365

The Company made no contributions to the defined benefit plan during the three or six months ended December 31, 2019.

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 ESOP is a tax-qualified retirement plan for the benefit of Company employees. On April 20, 2017, 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 (5.50% for 2020). 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 December 31, 2019 was $11.6 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. Dividends on allocated shares increase participant accounts and are used to purchase additional shares of stock. Participants receive the shares at the end of employment.

Shares held by the ESOP include the following (dollars in thousands):

	December 31, 2019		June 30, 2019
Allocated to participants		282,833		234,059
Unearned		1,162,572		1,211,410
Total ESOP shares		1,445,405		1,445,469

Fair value of unearned shares	$	23,542	$	24,531

Total compensation expense recognized in connection with the ESOP for the three and six months ended December 31, 2019 was $493,000 and $977,000, respectively, and for the three and six months ended December 31, 2018 was $477,000 and $970,000, respectively.

Note 7. 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 collateral-dependent 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. The fair value of uncollateralized or non-collateral-dependent loans are generally based on discounted cash flows which utilize management’s assumption of discount rates and expected future cash flows, resulting in a Level 3 classification.

Foreclosed Real Estate: Assets acquired through or instead of loan foreclosure are initially recorded at fair value, less estimated costs to sell, when acquired, establishing a new cost basis. These assets are subsequently accounted for at the 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.

Foreclosed 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.

Derivatives: The Company’s derivative assets and liabilities consist of transactions undertaken as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

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

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
December 31, 2019
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations	$	-	$	21,999	$	-	$	21,999
Corporate and other debt securities		-		8,392		-		8,392
Mortgage-backed securities – residential		-		24,063		-		24,063
Derivatives – interest rate contracts		-		1,886		-		1,886
Total assets at fair value	$	-	$	56,340	$	-	$	56,340

Derivatives – interest rate contracts	$	-	$	1,886	$	-	$	1,886
Total liabilities at fair value	$	-	$	1,886	$	-	$	1,886

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	390	$	390
Commercial loans		-		-		41		41
Home equity lines of credit		-		-		72		72
Foreclosed real estate		-		-		279		279
Total assets at fair value	$	-	$	-	$	782	$	782

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
June 30, 2019
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations	$	-	$	36,911	$	-	$	36,911
Corporate and other debt securities		-		8,360		-		8,360
Mortgage-backed securities – residential		-		26,957		-		26,957
Derivatives – interest rate contracts		-		1,339		-		1,339
Total assets at fair value	$	-	$	73,567	$	-	$	73,567

Derivatives – interest rate contracts	$	-	$	1,339	$	-	$	1,339
Total liabilities at fair value	$	-	$	1,339	$	-	$	1,339

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	616	$	616
Commercial loans		-		-		141		141
Home equity lines of credit		-		-		7		7
Foreclosed real estate		-		-		653		653
Total assets at fair value	$	-	$	-	$	1,417	$	1,417

There were no transfers between levels within the fair value hierarchy during the three and six months ended December 31, 2019 and 2018.

Impaired loans in the preceding table had a carrying amount of $631,000, and a remaining valuation allowance of $127,000, at December 31, 2019, as compared to $937,000 and $173,000, respectively, as of June 30, 2019. Impaired loans measured at fair value incurred no net charge-offs and resulted in a credit for loan losses of $2,000 during the six months ended December 31, 2019. Impaired loans measured at fair value as of December 31, 2018 incurred no net charge-offs and resulted in an additional credit for loan losses of $7,000 during the six months ended December 31, 2018.

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 December 31, 2019 and June 30, 2019 (dollars in thousands):

Valuation

Unobservable

Range or

Fair Value

Technique(s)

Input(s)

Rate Used

December 31, 2019

Impaired loans - residential mortgages

390

Sales comparison

Adjustments for

differences in sales

comparables

-22.0% to -11.8%

Discounted cash flow

Discount rate

5.4% to 6.3%

Impaired loans - commercial loans

Discounted cash flow

Discount rate

7.0% to 7.5%

Impaired loans - home equity lines of credit

Sales comparison

Adjustments for

differences in sales

comparables

-22.0% to -11.8%

Discounted cash flow

Discount rate

6.3%

Foreclosed real estate

279

Sales comparison

Adjustments for

differences in sales

comparables

-34.4% to -24.0%

June 30, 2019

Impaired loans - residential mortgages

616

Discounted cash flow

Discount rate

5.4% to 6.3%

Impaired loans - commercial loans

141

Discounted cash flow

Discount rate

6.0% to 7.0%

Impaired loans - home equity lines of credit

Discounted cash flow

Discount rate

6.2%

Foreclosed real estate

653

Sales comparison

Adjustments for

differences in sales

comparables

-8.0% to 45.0%

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

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2019
Financial assets:
Cash and cash equivalents	$	62,835	$	62,835	$	-	$	-	$	62,835
Investment securities held to maturity		273,381		-		269,950		4,900		274,850
Investment securities available for sale		54,454		-		54,454		-		54,454
Loans receivable, net		1,183,740		-		-		1,188,343		1,188,343
Accrued interest receivable		4,932		-		973		3,959		4,932
FHLB stock		5,127	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		1,886		-		1,886		-		1,886
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		782,850		782,850		-		-		782,850
Time deposits		468,764		-		475,505		-		475,505
Mortgage escrow funds		10,049		10,049		-		-		10,049
Accrued interest payable		259		1		258		-		259
FHLB advances		86,153		-		89,095		-		89,095
Derivative liabilities - interest rate contracts		1,886		-		1,886		-		1,886

June 30, 2019
Financial assets:
Cash and cash equivalents	$	60,029	$	60,029	$	-	$	-	$	60,029
Investment securities held to maturity		345,545		-		346,243		-		346,243
Investment securities available for sale		72,228		-		72,228		-		72,228
Loans receivable, net		1,093,121		-		-		1,092,878		1,092,878
Accrued interest receivable		4,797		-		1,330		3,467		4,797
FHLB stock		6,255	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		1,339		-		1,339		-		1,339
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		770,426		770,426		-		-		770,426
Time deposits		455,395		-		460,554		-		460,554
Mortgage escrow funds		9,355		9,355		-		-		9,355
Accrued interest payable		209		16		193				209
FHLB advances		111,216		-		111,818		-		111,818
Derivative liabilities - interest rate contracts		1,339		-		1,339		-		1,339

The methods of determining the fair value of assets and liabilities presented in the table above are consistent with our methodologies disclosed in the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K.

Note 8. Regulatory Matters

The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2019 and June 30, 2019, compared to the required ratios for minimum capital adequacy and for classification as well capitalized (dollars in thousands). As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act passed by Congress in 2018, the Company is no longer subject to consolidated capital requirements, as the Company’s total consolidated assets do not exceed $3 billion.

											To Be Well Capitalized
						For Capital					Under Prompt
						Adequacy					Corrective Action
	Bank Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2019
PCSB Bank
Leverage (Tier 1)	$	215,585		13.0	%	$	66,311		4.0	%	$	82,889		5.0	%
Risk-based:
Common Tier 1		215,585		17.2			56,271		4.5			81,281		6.5
Tier 1		215,585		17.2			75,028		6.0			100,038		8.0
Total		221,801		17.7			100,038		8.0			125,047		10.0

June 30, 2019
PCSB Bank
Leverage (Tier 1)	$	209,885		13.8	%	$	60,774		4.0	%	$	75,968		5.0	%
Risk-based:
Common Tier 1		209,885		18.0			52,579		4.5			75,948		6.5
Tier 1		209,885		18.0			70,105		6.0			93,474		8.0
Total		215,549		18.4			93,474		8.0			116,842		10.0

In addition to the ratios above, the Basel III Capital Rules have 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.

Management believes that as of December 31, 2019 and June 30, 2019, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer of 2.5%, as of December 31, 2019 and June 30, 2019, 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 9. Earnings Per Share

Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted EPS is calculated in a similar matter, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. Dilutive financial instruments include stock options and unvested restricted stock.

The following table provides factors used in the earnings per share computation for the three and six months ended December 31, 2019 and 2018.

	Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018
	(amounts in thousands, except share and per share data)
Net income applicable to common stock	$	2,353		$	2,324		$	5,182		$	4,653

Average number of common shares outstanding		17,012,405			18,124,242			17,095,614			18,144,676
Less: Average unallocated ESOP shares		(1,174,643	)		(1,271,524	)		(1,186,853	)		(1,283,734	)
Average number of common shares outstanding used to calculate basic earnings per common share		15,837,762			16,852,718			15,908,761			16,860,942

Effect of equity-based awards		72,093			15,746			87,490			7,873
Average number of common shares outstanding used to calculate diluted earnings per common share		15,909,855			16,868,464			15,996,251			16,868,815

Earnings per common share:
Basic	$	0.15		$	0.14		$	0.33		$	0.28
Diluted	$	0.14		$	0.14		$	0.32		$	0.28

Stock options for 1,339,293 shares of common stock were not considered in computing diluted earnings per common share for both the three and six months ended December 31, 2019 and 2018 because they were antidilutive.

Note 10. Derivatives and Hedging

Derivatives not designated as hedges may be used to manage the Company’s exposure to interest rate movements or to provide service to customers. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. These interest rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.

The following table presents summary information about the interest rate swaps as of December 31, 2019 and June 30, 2019.

	December 31,			June 30,
	2019			2019
	(dollars in thousands)
Notional amounts	$	95,929		$	68,535
Weighted average pay rates		3.52	%		3.89	%
Weighted average receive rates		3.52	%		3.89	%
Weighted average maturity	9.43 years			9.84 years
Fair value of combined interest rate swaps	$	-		$	-

Note 11. Revenue From Contracts With Customers

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company applies the following five steps to properly recognize revenue:

Identify the contract with a customer

Identify the performance obligations in the contract

Determine the transaction price

Allocate the transaction price to performance obligations in the contract

Recognize revenue when (or as) the Company satisfies a performance obligation

	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2018		2019		2018
	(in thousands)
Noninterest income:
Service charges on deposits	$	246	$	310	$	501	$	597
Interchange fees		112		114		229		219
Other ⁽¹⁾		44		33		74		59
Fees and service charges		402		457		804		875

Bank-owned life insurance⁽¹⁾		134		139		271		279
Gains on sales of securities, net ⁽¹⁾		-		55		-		55
Swap income ⁽¹⁾		-		75		170		146

Net gain on sale of bank premises ⁽¹⁾		-		156		-		156
Net gain on sale of foreclosed real estate		-		24		38		24
Other ⁽¹⁾		11		14		29		26
Other noninterest income		11		194		67		206
Total noninterest income	$	547	$	920	$	1,312	$	1,561

⁽¹⁾Not within the scope of ASC 606.

Fees and Service Charges on Deposit Accounts. The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfied the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income. The Company earns interchange fees from debit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Gain on Sales of Foreclosed Real Estate. The Company records a gain or loss from the sale of foreclosed real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of foreclosed real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed real estate asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

Note 12. Stock-Based Compensation

On October 24, 2018, the Company’s shareholders approved the PCSB Financial Corporation 2018 Equity Incentive Plan (the “Plan”), which permits the grant of stock options and restricted stock and/or restricted stock units. The total number of shares that may be granted under the Plan is 2,543,115, of which 1,816,511 shares may be granted as stock options and 726,604 shares may be granted as restricted stock and restricted stock units. Total compensation cost that has been charged against income for the Plan was $829,000 and $1.7 million for the three and six months ended December 31, 2019 and $482,000 for both the three and six months ended December 31, 2018.

Restricted Stock Awards (“RSAs”)

RSAs provide for the issuance of shares to both employees and non-employee directors. These awards generally vest over a 5-year period, with 20% vesting each year on the anniversary of the award. All awards were made at the fair value of common stock on the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at grant date. The fair value of the stock was determined to be the closing price of the stock on the NASDAQ exchange. Total shares available for grant under the Plan are 726,604, of which 547,185 shares were granted as of December 31, 2019.

The following table presents a summary of RSA activity during the period ended December 31, 2019.

	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested granted shares outstanding at July 1, 2019		547,185		$	19.02
Shares granted		-			-
Shares vested		(109,448	)		19.02
Shares forfeited		-			-
Unvested granted shares at December 31, 2019		437,737		$	19.02

As of December 31, 2019, there was $8.0 million of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.9 years.

Stock Option Awards

Stock options awarded to employees under the Plan are considered incentive stock options (ISOs), up to applicable limits. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. Those issued to non-employee directors, as well as those exceeding ISO limitations, are considered non-qualified stock options (NQSOs). Options generally vest over a 5-year period, with 20% vesting each year on the anniversary of the award, however, may not vest more rapidly than over a three-year period, and have a contractual term of 10 years. The Company has a policy of using shares held as a treasury stock to satisfy share option exercises. Currently, the Company has a sufficient number of treasury shares to satisfy the current level of exercisable share options.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatilities of a peer group of publicly traded financial institutions. The expected term of options granted is based on the simplified “mid-point” approach which utilizes the weighted average vesting period and contractual term. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

As of December 31, 2019, there was $4.8 million of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.9 years.

Total shares available for grant under the Plan are 1,816,511, of which 1,339,293 shares were granted as of December 31, 2019. The following table presents a summary of activity related to stock options granted under the Plan, and changes during the period then ended:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Years		Aggregate Intrinsic Value
	(dollars in thousands, except share and per share data)
Options outstanding at July 1, 2019		1,339,293	$	19.04
Options granted		-		-
Options expired		-		-
Options exercised		-		-
Options outstanding at December 31, 2019		1,339,293	$	19.04		8.9	$	1,625

Exercisable at December 31, 2019		267,859	$	19.04		8.9	$	325

Note 13. Leases

As of December 31, 2019, the Company leases real estate for eleven branch offices and two administrative offices, including its corporate headquarters, under various operating lease agreements. The Company’s leases have maturities which range from 2020 to 2041, some of which include lessee options to extend the lease term. The weighted average remaining life of the lease terms for these leases was 10.0 years as of December 31, 2019.

The operating lease asset and lease liability are determined at the commencement date of the lease based on the present value of the lease payments. As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term, at the lease commencement date. The Company utilized a weighted average discount rate of 2.38% in determining the lease liability as of December 31, 2019.

The Company made a policy election to exclude the recognition requirements of ASU 2016-02 to short-term leases, those leases with original terms of 12 months or less. Short-term lease payments are recognized in the income statement on a straight-line basis over the lease term. The Company had no short-term lease cost for the three or six months ended December 31, 2019, respectively. Certain leases may include one or more options to renew. The exercise of lease renewal options is typically at the Company’s discretion and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated. The Company does not sublease any of its leased properties. There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three or six months ended December 31, 2019.

For the three and six months ended December 31, 2019, total operating lease costs were $501,000 and $998,000, respectively, and is included in occupancy and equipment expense. The right-of-use asset, included in premises and equipment, net, was $11.8 million and the corresponding lease liability, included in other liabilities was $12.1 million as of December 31, 2019, respectively.

Future minimum lease payments for the fiscal years ending June 30^th and a reconciliation of undiscounted lease cash flows and the lease liability recognized in the consolidated balance sheet as of December 31, 2019 is shown below:

(dollars in thousands)
2020	$	1,065
2021		1,960
2022		1,937
2023		1,850
2024		1,479
Thereafter		5,661
Total future minimum lease payments (undiscounted)		13,952
Discounting effect on cash flows		(1,830	)
Lease liability (discounted)	$	12,122

Note 14. Subsequent Events

Subsequent to December 31, 2019, and through February 5, 2020, the Company repurchased 328,660 shares of common stock, at an average cost of $20.01 per share.

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

General

Management’s discussion and analysis of financial condition at December 31, 2019 and June 30, 2019, and results of operations for the three and six months ended December 31, 2019 and 2018 is intended to assist in understanding the consolidated financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q and with the audited consolidated financial statements included in the annual report on Form 10-K for the fiscal year ended June 30, 2019.

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 regulatory fees and capital requirements;

•

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 annual report on Form 10-K for the fiscal year ended June 30, 2019, 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. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

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. For additional information regarding critical accounting policies, refer to the section captioned “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the June 30, 2019 Form 10-K. There have been no significant changes in our application of critical accounting policies for the three months ended December 31, 2019.

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

Total Assets. Total assets increased $11.6 million, or 0.7%, to $1.65 billion at December 31, 2019 from $1.64 billion at June 30, 2019. The increase is primarily the result of increases of $90.6 million in net loans receivable, $11.6 million in premises and equipment and $2.8 million in cash and cash equivalents, partially offset by decreases of $72.1 million in held to maturity securities and $17.7 million in securities available for sale.

Cash and Cash Equivalents. Cash and cash equivalents increased $2.8 million, or 4.7%, to $62.8 million at December 31, 2019 from $60.0 million at June 30, 2019. The increase is due primarily to an $89.9 million decrease in total investment securities and a $25.8 million increase in deposits, partially offset by a $90.6 million increase in loans receivable and a $25.0 million decrease in FHLB advances.

Securities Held to Maturity. Total securities held to maturity decreased $72.1 million, or 20.9%, to $273.4 million at December 31, 2019 from $345.5 million at June 30, 2019. This decrease was caused primarily by $48.0 million of calls and maturities, net of purchases, of U.S. government and agency obligations and $24.1 million of amortization of mortgage-backed securities.

Securities Available for Sale. Total securities available for sale decreased $17.7 million, or 24.6%, to $54.5 million at December 31, 2019 from $72.2 million at June 30, 2019. This decline was due primarily to $15.0 million in maturities of U.S. government and agency obligations, and $2.9 million of amortization of mortgage-backed securities, partially offset by a $220,000 increase in net unrealized gains.

Net Loans Receivable. Net loans receivable increased $90.6 million, or 8.3%, to $1.18 billion at December 31, 2019 from $1.09 billion at June 30, 2019. The increase in loans receivable was the result of $111.6 million of originations and $44.1 million of loan purchases, partially offset by $65.1 million of net amortization and repayments. Commercial mortgage loans and construction loans increased $89.8 million and $9.6 million, respectively, while all other loans had a net decrease of $8.2 million.

Premises and Equipment. Premises and equipment, net, increased $11.6 million, to $23.4 million at December 31, 2019 from $11.8 million at June 30, 2019. This increase is primarily the result of an $11.8 million net

increase in lease assets (a net increase in lease liabilities of $12.1 million is included as part of other liabilities) associated with the adoption of ASU 2016-02.

Deposits. Total deposits increased $25.8 million, or 2.1%, to $1.25 billion at December 31, 2019 as compared to $1.23 billion at June 30, 2019. This increase primarily reflects increases of $14.1 million in money market accounts, $13.4 million in time deposits and $3.3 million in NOW accounts, partially offset by decreases of $3.8 million in savings accounts and $1.2 million in demand deposits.

Federal Home Loan Bank Advances. FHLB advances decreased $25.0 million, or 22.5%, to $86.2 million at December 31, 2019 as compared to $111.2 million at June 30, 2019. This decrease is due primarily to $40.0 million of net repayments of short-term advances and $5.0 million of repayments of long-term amortizing advances, partially offset by $20.0 million of additional long-term advances.

Total Shareholder’s Equity. Total shareholders’ equity decreased $1.5 million, or 0.5%, to $279.8 million at December 31, 2019 from $281.3 million at June 30, 2019. This decrease was due primarily to the repurchase of $8.6 million (431,731 shares) of common stock and $1.3 million of cash dividends declared and paid, partially offset by net income of $5.2 million, as well as $2.6 million increase of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period. As of December 31, 2019, there were 474,171 shares available to be repurchased under the current stock repurchase plan.

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

General. Net income increased $29,000, or 1.2%, to $2.4 million for the three months ended December 31, 2019 compared to $2.3 million for the three months ended December 31, 2018. The increase was due primarily to a $953,000 increase in net interest income and a $69,000 decrease in income tax expense, partially offset by a $406,000 increase in the provision for loan losses, a $373,000 decrease in noninterest income and a $214,000 increase in noninterest expense.

Net Interest Income. Net interest income increased $953,000, or 8.9%, to $11.7 million for the three months ended December 31, 2019 compared to $10.7 million for the three months ended December 31, 2018. The increase primarily reflects a $160.9 million increase in average interest-earning assets, partially offset by a 6 basis point decrease in net interest margin to 2.93% for the three months ended December 31, 2019 compared to 2.99% for the three months ended December 31, 2018. The increase in average interest-earning assets reflects a $268.9 million increase in average loans receivable, partially offset by a $81.2 million decrease in average investment securities and $26.8 million decrease in average other interest-earning assets. Despite continued asset growth and a higher yielding asset mix, which resulted in a 26 basis point increase in the yield on interest earning assets, the interest rate margin has been impacted by rising funding costs due to higher short-term interest rates along with competitive pricing, which caused a 38 basis point increase in the average cost of interest-bearing liabilities.

Interest and Dividend Income. Interest and dividend income increased $2.5 million, or 18.8%, to $15.7 million for the three months ended December 31, 2019 compared to $13.2 million for the three months ended December 31, 2018. The increase primarily reflects a $160.9 million increase in total average interest-earning assets and a 26 basis point increase in the yield on total interest-earning assets.

Interest income on loans receivable increased $2.8 million, or 27.4%, due primarily to a $268.9 million increase in the average balance of loans receivable to $1.18 billion for the three months ended December 31, 2019 from $909.4 million for the same period last year, partially offset by a 7 basis point decrease in the average yield on loans to 4.46% for the three months ended December 31, 2019 from 4.53% for the same period last year. The decrease in yield is due primarily to downward pressures on market interest rates, affecting both existing adjustable rate loans as well as new originations.

Interest income on investment securities decreased $149,000, or 6.1%, due primarily to a $81.1 million decrease in the average balance of investment securities to $358.8 million for the three months ended December 31, 2019 from $439.9 million for the same period last year, partially offset by a 33 basis point increase in the average yield on investment securities to 2.54% for the three months ended December 31, 2019 from 2.21% for the same period last year. The increase in yield is a result of prepayment income earned in the current quarter. The decrease in the average balance of investment securities is the result of the Company utilizing investment securities portfolio runoff to fund loan growth.

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, decreased $190,000 or 38.7%, due primarily to a $26.8 million decrease in the average balance of other interest-earning assets to $59.7 million for the three months ended December 31, 2019 compared to $86.5 million for the three months ended December 31, 2018 and a 25 basis point decrease in the average yield on other interest-earning assets. The decrease in the yield on other interest-earning assets was due primarily to a decrease in short-term market interest rates.

Interest Expense. Interest expense increased $1.5 million, or 61.5%, to $4.0 million for the three months ended December 31, 2019 compared to $2.5 million for the three months ended December 31, 2018. The increase primarily reflects a $165.1 million increase in the average balance of interest-bearing liabilities to $1.22 billion for the three months ended December 31, 2019 from $1.06 billion for the same period last year and a 38 basis point increase in the rate paid on average interest-bearing liabilities to 1.31% for the three months ended December 31, 2019 from 0.93% for the same period last year.

Interest expense on interest-bearing deposits increased $983,000, or 41.4%, due primarily to a 29 basis point increase in the average cost of interest-bearing deposits to 1.20% for the three months ended December 31, 2019 from 0.91% for the same period last year, and a $69.5 million increase in the average balance to $1.11 billion for the three months ended December 31, 2019 from a $1.04 billion for the three months ended December 31, 2018. The increase in the average rate paid on interest-bearing deposits was primarily caused by rising funding costs due to higher short-term interest rates along with competitive pricing. The Company has experienced a shift in deposit mix as customers in lower costing saving products moved funds to generally higher costing time deposits. The average interest rate paid on time deposits increased 43 basis points, as the Bank offered increased rates on these deposits due to the increase in market interest rates.

Interest expense on FHLB advances increased $553,000, due primarily to a $95.6 million increase in the average balance to $117.7 million for the three months ended December 31, 2019 from $22.1 million for the same period last year, and a 12 basis point increase in the average cost to 2.27% for the three months ended December 31, 2019 from 2.15% 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 increased by $406,000 to $412,000 for the three months ended December 31, 2019, compared to $6,000 for the three months ended December 31, 2018, due primarily to loan portfolio growth. Charge-offs, net of recoveries, were $189,000 and $22,000 for the three months ended December 31, 2019 and 2018, respectively. Current quarter charge-offs related primarily to one commercial loan relationship. Loans classified as substandard or doubtful decreased $5.3 million, or 51.5%, to $4.9 million at December 31, 2019 from $10.2 million at December 31, 2018. Non-performing loans as a percent of total loans receivable was 0.14% as of December 31, 2019, a decrease from 0.39% as of December 31, 2018.

Noninterest Income. Noninterest income decreased $373,000, or 40.5%, to $547,000 for the three months ended December 31, 2019 compared to $920,000 for the three months ended December 31, 2018. The decrease was caused primarily by decreases of $155,000 in gain on sale of bank premises, $75,000 in swap income, $55,000 in net gains on sales of securities, $55,000 in fees and service charges and $24,000 in net gains on sale of foreclosed real estate.

Noninterest Expense. Noninterest expense increased $214,000, or 2.5%, to $8.8 million for the three months ended December 31, 2019 compared to $8.6 million for the three months ended December 31, 2018. The increase was caused primarily by a $583,000 increase in salaries and employee benefits, partially offset by decreases of $124,000 in FDIC assessment and $245,000 in all other noninterest expenses. The increase in salaries and employee benefits was due primarily to increases of $347,000 in stock-based compensation expense and $251,000 in other compensation, partially offset by lower benefit costs. The decrease in FDIC assessment was due primarily to the Bank applying small bank assessment credits of $108,000 which fully offset the Bank’s FDIC assessment for the current quarter. The remaining credits available are approximately $131,000.

Income Tax Expense. Income tax expense decreased $69,000, or 9.2%, to $685,000 for the three months ended December 31, 2019 from $754,000 for the three months ended December 31, 2018. The decrease was caused primarily by a lower effective tax rate and lower pre-tax income in the current year. The effective income tax rate was 22.5% for the three months ended December 31, 2019 as compared to 24.5% for the three months ended December 31, 2018.

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

General. Net income increased $529,000, or 11.4%, to $5.2 million for the six months ended December 31, 2019 compared to $4.7 million for the six months ended December 31, 2018. The increase was due primarily to a $2.5 million increase in net interest income, partially offset by a $993,000 increase in noninterest expense, a $683,000 increase in the provision for loan losses, a $249,000 decrease in noninterest income, and a $33,000 increase in income tax expense.

Net Interest Income. Net interest income increased $2.5 million, or 11.7%, to $23.7 million for the six months ended December 31, 2019 compared to $21.2 million for the six months ended December 31, 2018. The increase primarily reflects a $162.0 million increase in average interest-earning assets and a 1 basis point increase in net interest margin to 2.98% for the six months ended December 31, 2019 compared to 2.97% for the six months ended December 31, 2018. The increase in average interest-earning assets reflects a $253.9 million increase in average loans receivable, partially offset by a $67.8 million decrease in average investment securities and a $24.1 million decrease in average other interest earning assets. Despite continued asset growth and a higher yielding asset mix, which resulted in a 38 basis point increase in the yield on interest earning assets, the interest rate spread has been impacted by rising funding costs due to higher short-term interest rates along with competitive pricing, which caused a 45 basis point increase in the average cost of interest-bearing liabilities, resulting in net interest margin expansion.

Interest and Dividend Income. Interest and dividend income increased $5.9 million, or 22.8%, to $31.8 million for the six months ended December 31, 2019 compared to $25.9 million for the six months ended December 31, 2018. The increase primarily reflects a $162.0 million increase in total average interest-earning assets and a 38 basis point increase in the yield on total interest-earning assets.

Interest income on loans receivable increased $6.0 million, or 29.5%, due primarily to a $253.9 million increase in the average balance of loans receivable to $1.16 billion for the six months ended December 31, 2019 from $906.2 million for the same period last year and a 5 basis point increase in the average yield on loans to 4.51% for the six months ended December 31, 2019 from 4.46% for the same period last year. The increase in yield is due primarily to growth in commercial loans and increases in prepayment income earned.

Interest income on investment securities increased $177,000, or 3.7%, due primarily to a 47 basis point increase in the average yield on investment securities to 2.62% for the six months ended December 31, 2019 from 2.15% for the same period last year, partially offset by a $67.8 million decrease in the average balance of investment securities. The increase in yield is a result of prepayment income earned in the current year as well as increases in market rates. The decrease in the average balance of investment securities is the result of the Company utilizing securities portfolio runoff to fund loan growth.

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, decreased $237,000 or 28.3%, due primarily to a $24.1 million decrease in the average balance of other interest-earning assets to $52.8 million for the six months ended December 31, 2019 compared to $76.9 million for the six months ended December 31, 2018, partially offset by a 9 basis point increase in the average yield on other interest-earning assets. The increase in the yield on other interest-earning assets was due primarily to an increase in the yield on federal funds.

Interest Expense. Interest expense increased $3.5 million, or 73.7%, to $8.1 million for the six months ended December 31, 2019 compared to $4.6 million for the six months ended December 31, 2018. The increase primarily reflects a $161.9 million increase in the average balance of interest-bearing liabilities to $1.22 billion for the six months ended December 31, 2019 from $1.06 billion for the same period last year, and a 45 basis point increase in the average cost of interest-bearing liabilities to 1.32% for the six months ended December 31, 2019 from 0.87% for the same period last year.

Interest expense on interest-bearing deposits increased $2.2 million, or 50.3%, due primarily to a 35 basis point increase in the average cost of interest-bearing deposits to 1.20% for the six months ended December 31, 2019 from 0.85% for the same period last year, and a $62.6 million increase in the average balance to $1.10 billion for the six months ended December 31, 2019 from a $1.04 billion for the six months ended December 31, 2018. The increase in the average rate paid on interest-bearing deposits was primarily caused by rising funding costs due to higher short-term interest rates along with competitive pricing. The Company has experienced a shift in deposit mix as customers

in generally lower costing saving products moved funds to generally higher costing time deposits and money market accounts. The average interest rate paid on time deposits and money market accounts increased 52 and 16 basis points, respectively, as the Bank offered increased rates on these deposits due to the increase in market interest rates.

Interest expense on FHLB advances increased $1.2 million, due primarily to a $99.3 million increase in the average balance to $119.8 million for the six months ended December 31, 2019 from $20.5 million for the same period last year, and a 29 basis point increase in the average cost to 2.32% for the six months ended December 31, 2019 from 2.03% for the same period last year.

Provision for Loan Losses. The provision for loan losses increased by $683,000 to $747,000 for the six months ended December 31, 2019, compared to $64,000 for the six months ended December 31, 2018, due primarily to loan portfolio growth. Charge-offs, net of recoveries, were $195,000 and $25,000 for the six months ended December 31, 2019 and 2018, respectively.

Noninterest Income. Noninterest income decreased $249,000, or 16.0%, to $1.3 million for the six months ended December 31, 2019 compared to $1.6 million for the six months ended December 31, 2018. The decrease was caused primarily by decreases of $155,000 in gain on sale of bank premises, $71,000 in fees and service charges, $55,000 in net gains on sale of securities, partially offset by increase of $24,000 in swap income and $23,000 in net gains on sale of foreclosed real estate.

Noninterest Expense. Noninterest expense increased $993,000, or 6.0%, to $17.6 million for the six months ended December 31, 2019 compared to $16.6 million for the six months ended December 31, 2018. The increase was caused primarily by a $1.3 million increase in salaries and employee benefits, partially offset by a $217,000 decrease in FDIC assessment. The increase in salaries and employee benefits was due primarily to a $1.2 million increase in stock-based compensation expense and $293,000 in other compensation, partially offset by lower benefit costs. The decrease in FDIC assessment was due primarily to the Bank applying small bank assessment credits of $206,000 which fully offset the Bank’s FDIC assessment in the current year.

Income Tax Expense. Income tax expense increased $33,000, or 2.3%, for the six months ended December 31, 2019 in comparison to the six months ended December 31, 2018. The increase was caused primarily by higher pre-tax income, partially offset by a lower effective tax rate in the current year. The effective income tax rate was 22.4% for the six months ended December 31, 2019 as compared to 23.9% for the six months ended December 31, 2018.

Net Interest Income

Average Balance Sheet and Interest Rates.

The following table presents 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. Loan fees are included in interest income on loans and are not material.

	Three Months Ended December 31,
	2019								2018
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
	(dollars in thousands)
Assets:
Loans receivable	$	1,178,253		$	13,149		4.46	%	$	909,368		$	10,321		4.53	%
Investment securities		358,760			2,279		2.54			439,919			2,428		2.21
Other interest-earning assets		59,678			301		2.00			86,527			491		2.25
Total interest-earning assets		1,596,691			15,729		3.94			1,435,814			13,240		3.68
Non-interest-earning assets		68,793								55,135
Total assets	$	1,665,484							$	1,490,949

Liabilities and equity:
NOW accounts	$	122,455			67		0.22		$	116,381			52		0.18
Money market accounts		161,075			472		1.16			100,075			280		1.11
Savings accounts and escrow		355,295			234		0.26			416,687			252		0.24
Time deposits		467,486			2,585		2.19			403,652			1,791		1.76
Total interest-bearing deposits		1,106,311			3,358		1.20			1,036,795			2,375		0.91
FHLB advances		117,712			674		2.27			22,106			121		2.15
Total interest-bearing liabilities		1,224,023			4,032		1.31			1,058,901			2,496		0.93
Non-interest-bearing deposits		138,346								134,694
Other non-interest-bearing liabilities		21,827								6,506
Total liabilities		1,384,196								1,200,101
Total equity		281,288								290,848
Total liabilities and equity	$	1,665,484							$	1,490,949

Net interest income				$	11,697							$	10,744
Interest rate spread ⁽¹⁾							2.63								2.75
Net interest margin ⁽²⁾							2.93								2.99
Average interest-earning assets to interest-bearing liabilities		130.45	%							135.59	%

⁽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.

	Six Months Ended December 31,
	2019								2018
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
	(dollars in thousands)
Assets:
Loans receivable	$	1,160,139		$	26,185		4.51	%	$	906,194		$	20,219		4.46	%
Investment securities		378,975			4,971		2.62			446,795			4,794		2.15
Other interest-earning assets		52,796			599		2.25			76,875			836		2.16
Total interest-earning assets		1,591,910			31,755		3.99			1,429,864			25,849		3.61
Non-interest-earning assets		69,530								55,193
Total assets	$	1,661,440							$	1,485,057

Liabilities and equity:
NOW accounts	$	121,154			124		0.20		$	117,893			105		0.18
Money market accounts		155,477			935		1.19			80,877			419		1.03
Savings accounts and escrow		358,932			466		0.26			439,615			540		0.25
Time deposits		463,417			5,134		2.20			397,994			3,367		1.68
Total interest-bearing deposits		1,098,980			6,659		1.20			1,036,379			4,431		0.85
FHLB advances		119,784			1,401		2.32			20,463			210		2.03
Total interest-bearing liabilities		1,218,764			8,060		1.32			1,056,842			4,641		0.87
Non-interest-bearing deposits		139,486								131,228
Other non-interest-bearing liabilities		21,519								6,894
Total liabilities		1,379,769								1,194,964
Total equity		281,671								290,093
Total liabilities and equity	$	1,661,440							$	1,485,057

Net interest income				$	23,695							$	21,208
Interest rate spread ⁽¹⁾							2.67								2.74
Net interest margin ⁽²⁾							2.98								2.97
Average interest-earning assets to interest-bearing liabilities		130.62	%							135.30	%

⁽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 table sets 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 December 31,
	2019 versus 2018
	Rate			Volume			Net
	(in thousands)
Interest income:
Loans receivable	$	(217	)	$	3,045		$	2,828
Investment securities		100			(249	)		(149	)
Other interest-earning assets		(50	)		(140	)		(190	)
Total interest-earning assets		(167	)		2,656			2,489

Interest expense:
NOW accounts		13			2			15
Money market accounts		13			179			192
Savings and escrow accounts		30			(48	)		(18	)
Time deposits		483			311			794
FHLB advances		7			546			553
Total interest-bearing liabilities		546			990			1,536

Net (decrease) increase in net interest income	$	(713	)	$	1,666		$	953

	Six Months Ended December 31,
	2019 versus 2018
	Rate			Volume			Net
	(in thousands)
Interest income:
Loans receivable	$	189		$	5,777		$	5,966
Investment securities		517			(340	)		177
Other interest-earning assets		32			(269	)		(237	)
Total interest-earning assets		738			5,168			5,906

Interest expense:
NOW accounts		17			2			19
Money market accounts		76			440			516
Savings and escrow accounts		52			(126	)		(74	)
Time deposits		1,154			613			1,767
FHLB advances		34			1,157			1,191
Total interest-bearing liabilities		1,333			2,086			3,419

Net (decrease) increase in net interest income	$	(595	)	$	3,082		$	2,487

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, have longer maturities than our liabilities, consisting primarily of deposits. 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 of 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. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates; utilizing interest rate swaps, 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 equity 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 and 200 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 December 31, 2019 and June 30, 2019. 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				NPV Ratio			Change (in bps)
December 31, 2019:
200	$	282,795	$	(38,998	)		(12.1	)	%		18.08	%		(141	)
100		308,291		(13,502	)		(4.2	)			19.16			(33	)
-		321,793	-				-				19.49			-
(100)		328,422		6,629			2.1				19.46			(3	)
(200)		334,696		12,903			4.0				19.48			(1	)

June 30, 2019:
200	$	286,711	$	(39,593	)		(12.1	)	%		18.52	%		(143	)
100		309,974		(16,330	)		(5.0	)			19.45			(50	)
-		326,304		-			-				19.95			-
(100)		330,749		4,445			1.4				19.79			(16	)
(200)		329,929		3,625			1.1				19.39			(56	)

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require 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 are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2019, cash and cash equivalents totaled $62.8 million, an increase from $60.0 million as of June 30, 2019. Securities classified as available for sale, which provide an additional source of liquidity, totaled $54.5 million at December 31, 2019, a decrease from $72.2 million as of June 30, 2019.

We had the ability to borrow up to $226.9 million and $291.2 million from the FHLB of New York, at December 31, 2019 and June 30, 2019, respectively, of which $86.2 million and $111.2 million was outstanding as of December 31, 2019 and June 30, 2019, respectively. We also had an available line of credit with the Federal Reserve Bank of New York’s discount window program of $117.0 million and $118.0 million as of December 31, 2019 and June 30, 2019, 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 FHLB of New York or the Federal Reserve Bank of New York.

We had $153.1 million and $136.8 million of loan commitments outstanding as of December 31, 2019 and June 30, 2019, respectively, and $38.8 million and $52.6 million as of December 31, 2019 and June 30, 2019, respectively, of approved, but unadvanced, funds to borrowers. We also had $1.8 million and $1.7 million in outstanding letters of credit at December 31, 2019 and June 30, 2019, respectively.

Time deposits due within one year of December 31, 2019 totaled $270.0 million, an increase of $48.2 million from $221.8 million as of June 30, 2019. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB 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 December 31, 2019. 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 Holding Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders, to repurchase shares of its common stock and for other corporate purposes. The Holding Company’s primary source of liquidity is dividend payments it may receive from the Bank. The Bank’s ability to pay dividends to the Holding Company is governed by applicable law and regulations. At December 31, 2019, the Holding Company (on an unconsolidated, stand-alone basis) had liquid assets of $49.7 million.

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the NYSDFS and the FDIC. At December 31, 2019, the Bank exceeded all applicable regulatory capital requirements, and the Bank was considered “well capitalized” under applicable regulatory guidelines. See Note 8 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 December 31, 2019. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended December 31, 2019, 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is 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 December 31, 2019, the Company was not involved in any legal proceedings the outcome of which it believes would be material to its consolidated 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, 2019, filed with the Securities and Exchange Commission. As of December 31, 2019, 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, 2019.

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

(a)

Not applicable

(b)

Not applicable

(c)

On June 20, 2019, a second repurchase program was authorized by the Board of Directors to repurchase up to 890,021 shares, or 5.0% of the Company’s common stock. As of December 31, 2019, 415,850 shares have been repurchased at an average price of $19.90 per share.

The following table presents information regarding stock repurchases by the Company during the quarter ended December 31, 2019.

	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs
October 1, 2019 through October 31, 2019		86,800	$	19.96		86,800		623,421
November 1, 2019 through November 30, 2019		30,550		20.23		30,550		592,871
December 1, 2019 through December 31, 2019		118,700		20.20		118,700		474,171
Total		236,050	$	20.12		236,050

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

101		The following materials for the quarter ended December 31, 2019, 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

(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).

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: February 7, 2020		/s/ Joseph D. Roberto
		Joseph D. Roberto
		Chairman, President and Chief Executive Officer

Date: February 7, 2020		/s/ Jeffrey M. Helf
		Jeffrey M. Helf
		Senior Vice President and Chief Financial Officer