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PCSB Financial Corp - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

For the transition period from _____ to _____

Commission File Number: 001-38065

 

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

81-4710738

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

2651 Strang Blvd, Suite 100

Yorktown Heights, NY

10598

(Address of principal executive offices)

(Zip Code)

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

N/A

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

 

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

Indicate by check mark whether the registrant has submitted electronically 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  

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

 

17,804,039 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 10, 2019.

 

 


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

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

47

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

48

Signatures

49

 

 

 

2


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

(amounts in thousands, except share data)

 

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

85,875

 

 

$

60,684

 

Federal funds sold

 

 

1,230

 

 

 

1,461

 

Total cash and cash equivalents

 

 

87,105

 

 

 

62,145

 

Held to maturity debt securities, at amortized cost (fair value of

   $351,184 and $343,188, respectively)

 

 

354,000

 

 

 

353,183

 

Available for sale debt securities, at fair value

 

 

86,014

 

 

 

105,472

 

Total investment securities

 

 

440,014

 

 

 

458,655

 

Loans receivable, net of allowance for loan losses of $4,945 and

   $4,904, respectively

 

 

935,680

 

 

 

902,336

 

Accrued interest receivable

 

 

5,037

 

 

 

4,358

 

Federal Home Loan Bank stock

 

 

2,384

 

 

 

2,050

 

Premises and equipment, net

 

 

11,497

 

 

 

11,598

 

Deferred tax asset, net

 

 

2,372

 

 

 

2,622

 

Foreclosed real estate

 

 

653

 

 

 

460

 

Bank-owned life insurance

 

 

24,157

 

 

 

23,747

 

Goodwill

 

 

6,106

 

 

 

6,106

 

Other intangible assets

 

 

348

 

 

 

433

 

Other assets

 

 

8,405

 

 

 

5,677

 

Total assets

 

$

1,523,758

 

 

$

1,480,187

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

1,064,294

 

 

$

1,025,574

 

Non-interest bearing deposits

 

 

137,899

 

 

 

131,883

 

Total deposits

 

 

1,202,193

 

 

 

1,157,457

 

Mortgage escrow funds

 

 

7,675

 

 

 

8,803

 

Advances from Federal Home Loan Bank

 

 

26,248

 

 

 

18,841

 

Other liabilities

 

 

9,326

 

 

 

7,527

 

Total liabilities

 

 

1,245,442

 

 

 

1,192,628

 

Commitments and contingencies

 

 

-

 

 

 

-

 

Preferred stock ($0.01 par value, 10,000,000 shares authorized, no shares

   issued or outstanding as of March 31, 2019 and June 30, 2018)

 

 

-

 

 

 

-

 

Common stock ($0.01 par value, 200,000,000 shares authorized,

   18,712,295 and 18,165,110 shares issued, and 17,804,039 and

   18,165,110 shares outstanding as of March 31, 2019 and

   June 30, 2018, respectively)

 

 

187

 

 

 

182

 

Additional paid in capital

 

 

181,066

 

 

 

179,045

 

Retained earnings

 

 

133,483

 

 

 

128,365

 

Unearned compensation - ESOP

 

 

(12,364

)

 

 

(13,083

)

Accumulated other comprehensive loss, net of income taxes

 

 

(5,751

)

 

 

(6,950

)

Treasury stock, at cost (908,256 shares as of March 31, 2019 and no

   shares as of June 30, 2018)

 

 

(18,305

)

 

 

-

 

Total shareholders' equity

 

 

278,316

 

 

 

287,559

 

Total liabilities and shareholders' equity

 

$

1,523,758

 

 

$

1,480,187

 

 

See accompanying notes to the consolidated financial statements (unaudited)

3


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

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

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

10,413

 

 

$

9,103

 

 

$

30,632

 

 

$

27,092

 

Investment securities

 

 

2,619

 

 

 

2,368

 

 

 

7,413

 

 

 

6,882

 

Federal funds and other

 

 

614

 

 

 

177

 

 

 

1,450

 

 

 

628

 

Total interest and dividend income

 

 

13,646

 

 

 

11,648

 

 

 

39,495

 

 

 

34,602

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,741

 

 

 

1,380

 

 

 

7,172

 

 

 

3,954

 

FHLB advances

 

 

168

 

 

 

125

 

 

 

378

 

 

 

443

 

Total interest expense

 

 

2,909

 

 

 

1,505

 

 

 

7,550

 

 

 

4,397

 

Net interest income

 

 

10,737

 

 

 

10,143

 

 

 

31,945

 

 

 

30,205

 

Provision for loan losses

 

 

7

 

 

 

54

 

 

 

71

 

 

 

389

 

Net interest income after provision for loan losses

 

 

10,730

 

 

 

10,089

 

 

 

31,874

 

 

 

29,816

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees and service charges

 

 

436

 

 

 

352

 

 

 

1,311

 

 

 

1,145

 

Bank-owned life insurance

 

 

131

 

 

 

136

 

 

 

410

 

 

 

430

 

Gain on sale of securities, net

 

 

-

 

 

 

-

 

 

 

55

 

 

 

173

 

Other

 

 

12

 

 

 

24

 

 

 

364

 

 

 

170

 

Total noninterest income

 

 

579

 

 

 

512

 

 

 

2,140

 

 

 

1,918

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,757

 

 

 

4,800

 

 

 

16,341

 

 

 

14,530

 

Occupancy and equipment

 

 

1,340

 

 

 

1,326

 

 

 

3,865

 

 

 

3,904

 

Communicating and data processing

 

 

476

 

 

 

477

 

 

 

1,430

 

 

 

1,447

 

Professional fees

 

 

396

 

 

 

465

 

 

 

1,182

 

 

 

1,257

 

Postage, printing, stationary and supplies

 

 

138

 

 

 

161

 

 

 

454

 

 

 

435

 

FDIC assessment

 

 

105

 

 

 

93

 

 

 

322

 

 

 

235

 

Advertising

 

 

131

 

 

 

112

 

 

 

349

 

 

 

456

 

Amortization of intangible assets

 

 

29

 

 

 

32

 

 

 

85

 

 

 

97

 

Other operating expenses

 

 

326

 

 

 

367

 

 

 

1,258

 

 

 

1,491

 

Total noninterest expense

 

 

8,698

 

 

 

7,833

 

 

 

25,286

 

 

 

23,852

 

Net income before income tax expense

 

 

2,611

 

 

 

2,768

 

 

 

8,728

 

 

 

7,882

 

Income tax expense

 

 

625

 

 

 

591

 

 

 

2,089

 

 

 

3,947

 

Net income

 

$

1,986

 

 

$

2,177

 

 

$

6,639

 

 

$

3,935

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.13

 

 

$

0.40

 

 

$

0.23

 

Diluted

 

$

0.12

 

 

$

0.13

 

 

$

0.40

 

 

$

0.23

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,204,393

 

 

 

16,820,726

 

 

 

16,645,287

 

 

 

16,789,131

 

Diluted

 

 

16,261,755

 

 

 

16,820,726

 

 

 

16,659,746

 

 

 

16,789,131

 

 

See accompanying notes to the consolidated financial statements (unaudited)

4


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(amounts in thousands)

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

1,986

 

 

$

2,177

 

 

$

6,639

 

 

$

3,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on available for sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains/losses before reclassification adjustment

 

 

757

 

 

 

(705

)

 

 

1,110

 

 

 

(1,635

)

Reclassification adjustment for gains realized in net income

 

 

-

 

 

 

-

 

 

 

(55

)

 

 

(139

)

Net change in unrealized gains/losses

 

 

757

 

 

 

(705

)

 

 

1,055

 

 

 

(1,774

)

Tax effect

 

 

(160

)

 

 

149

 

 

 

(222

)

 

 

512

 

Net of tax

 

 

597

 

 

 

(556

)

 

 

833

 

 

 

(1,262

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

145

 

 

 

182

 

 

 

435

 

 

 

544

 

Tax effect

 

 

(30

)

 

 

(39

)

 

 

(91

)

 

 

(162

)

Net of tax

 

 

115

 

 

 

143

 

 

 

344

 

 

 

382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental retirement plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost

 

 

9

 

 

 

10

 

 

 

27

 

 

 

26

 

Tax effect

 

 

(1

)

 

 

(3

)

 

 

(5

)

 

 

(7

)

Net of tax

 

 

8

 

 

 

7

 

 

 

22

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

720

 

 

 

(406

)

 

 

1,199

 

 

 

(861

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,706

 

 

$

1,771

 

 

$

7,838

 

 

$

3,074

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

5


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

(amounts in thousands, except share data)

 

 

Number of Shares

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Retained Earnings

 

 

Unallocated Common Stock of ESOP

 

 

Treasury

Stock, at cost

 

 

Accumulated Other Comprehensive Loss

 

 

Total

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

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

1,986

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,986

 

Other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

720

 

 

 

720

 

Common stock dividends declared ($0.03 per share)

 

-

 

 

 

-

 

 

 

-

 

 

 

(496

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(496

)

Repurchase of common stock

 

(686,186

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,969

)

 

 

-

 

 

 

(13,969

)

Stock-based compensation

 

-

 

 

 

-

 

 

 

829

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

829

 

ESOP shares committed to be released (23,092 shares)

 

-

 

 

 

-

 

 

 

234

 

 

 

-

 

 

 

230

 

 

 

-

 

 

 

-

 

 

 

464

 

Balance at March 31, 2019

 

17,804,039

 

 

$

187

 

 

$

181,066

 

 

$

133,483

 

 

$

(12,364

)

 

$

(18,305

)

 

$

(5,751

)

 

$

278,316

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

6


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

(amounts in thousands, except share data)

 

 

Number of Shares

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Retained Earnings

 

 

Unallocated Common Stock of ESOP

 

 

Treasury

Stock, at cost

 

 

Accumulated Other Comprehensive Loss

 

 

Total

Equity

 

Balance at July 1, 2017

 

18,165,110

 

 

$

182

 

 

$

177,993

 

 

$

121,148

 

 

$

(14,262

)

 

$

-

 

 

$

(5,215

)

 

$

279,846

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

1,756

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,756

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(107

)

 

 

(107

)

Issuance of common stock (1)

 

-

 

 

 

-

 

 

 

(17

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17

)

ESOP shares committed to be released (34,953 shares)

 

-

 

 

 

-

 

 

 

258

 

 

 

-

 

 

 

349

 

 

 

-

 

 

 

-

 

 

 

607

 

Balance at September 30, 2017

 

18,165,110

 

 

 

182

 

 

 

178,234

 

 

 

122,904

 

 

 

(13,913

)

 

 

-

 

 

 

(5,322

)

 

 

282,085

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(348

)

 

 

(348

)

ESOP shares committed to be released (34,953 shares)

 

-

 

 

 

-

 

 

 

322

 

 

 

-

 

 

 

350

 

 

 

-

 

 

 

-

 

 

 

672

 

Balance at December 31, 2017

 

18,165,110

 

 

 

182

 

 

 

178,556

 

 

 

122,906

 

 

 

(13,563

)

 

 

-

 

 

 

(5,670

)

 

 

282,411

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

2,177

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,177

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(406

)

 

 

(406

)

Reclassification of certain tax effects on other comprehensive income (2)

 

-

 

 

 

-

 

 

 

-

 

 

 

1,117

 

 

 

-

 

 

 

-

 

 

 

(1,117

)

 

 

-

 

ESOP shares committed to be released (23,888 shares)

 

-

 

 

 

-

 

 

239

 

 

 

-

 

 

239

 

 

 

-

 

 

 

-

 

 

 

478

 

Balance at March 31, 2018

$

18,165,110

 

 

$

182

 

 

$

178,795

 

 

$

126,200

 

 

$

(13,324

)

 

$

-

 

 

$

(7,193

)

 

$

284,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents costs incurred in association with the Company's initial public offering.

 

(2) The adoption of ASU 2018-02 requires the reclassification from accumulated income to retained earnings of stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017.

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

 

7


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

 

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

6,639

 

 

$

3,935

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Provision for loan loss

 

 

71

 

 

 

389

 

Depreciation and amortization

 

 

877

 

 

 

1,110

 

Amortization of net premiums on securities and net deferred loan

   origination costs

 

 

1,055

 

 

 

1,293

 

Net increase in accrued interest receivable

 

 

(679

)

 

 

(765

)

Net (gain) loss on sale of foreclosed real estate

 

 

(24

)

 

 

7

 

Net gains on sales of securities

 

 

(55

)

 

 

(173

)

Net (gain) loss on sales of real estate

 

 

(156

)

 

 

13

 

Write-down on other real estate owned

 

 

21

 

 

 

-

 

Stock-based compensation

 

 

1,311

 

 

 

-

 

ESOP Compensation

 

 

1,434

 

 

 

1,757

 

Earnings from cash surrender value of BOLI

 

 

(410

)

 

 

(430

)

Net accretion of purchase account adjustments

 

 

(276

)

 

 

(464

)

Other adjustments, principally net changes in other assets and liabilities

 

 

(535

)

 

 

2,928

 

Net cash provided by operating activities

 

 

9,273

 

 

 

9,600

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of investment securities:

 

 

 

 

 

 

 

 

Held to maturity

 

 

(49,220

)

 

 

(43,055

)

Available for sale

 

 

-

 

 

 

(23,537

)

Sales of investment securities available for sale

 

 

2,069

 

 

 

6,100

 

Maturities and calls of investment securities:

 

 

 

 

 

 

 

 

Held to maturity

 

 

47,968

 

 

 

59,772

 

Available for sale

 

 

18,314

 

 

 

20,107

 

Principal (disbursements) repayments, net

 

 

(20,789

)

 

 

10,724

 

Purchase of loans

 

 

(13,398

)

 

 

(88,605

)

Net purchases of FHLB stock

 

 

(334

)

 

 

(980

)

Purchases of bank premises and equipment, net of sales

 

 

(535

)

 

 

(577

)

Proceeds from sale of foreclosed real estate

 

 

487

 

 

 

1,160

 

Net cash used in investing activities

 

 

(15,438

)

 

 

(58,891

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

44,672

 

 

 

(459

)

Net increase in short-term FHLB advances

 

 

-

 

 

 

26,364

 

Proceeds from long-term FHLB advances

 

 

12,500

 

 

 

-

 

Repayment of long-term FHLB advances

 

 

(5,093

)

 

 

(90

)

Net decrease in mortgage escrow funds

 

 

(1,128

)

 

 

(488

)

Common stock dividends paid

 

 

(1,521

)

 

 

-

 

Issuance of common stock

 

 

-

 

 

 

(17

)

Repurchase of common stock

 

 

(18,305

)

 

 

-

 

Net cash provided by financing activities

 

 

31,125

 

 

 

25,310

 

Net increase (decrease) in cash and cash equivalents

 

 

24,960

 

 

 

(23,981

)

Cash and cash equivalents at beginning of period

 

 

62,145

 

 

 

60,486

 

Cash and cash equivalents at end of period

 

$

87,105

 

 

$

36,505

 

 

See accompanying notes to the consolidated financial statements (unaudited)

8


PCSB Financial Corporation and Subsidiaries

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

(amounts in thousands)

 

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

7,491

 

 

$

4,354

 

Income taxes

 

 

1,718

 

 

 

2,066

 

Loans transferred to foreclosed real estate

 

 

677

 

 

 

345

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

9


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 March 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 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. On March 31, 2019, in conjunction with the Bank’s charter conversion from a stock savings bank to a commercial bank, the Bank’s wholly-owned subsidiary, PCSB Commercial Bank, merged with and into PCSB 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 the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2018, 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers,” and was later amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and 2016-20. These updates provide a comprehensive framework for addressing revenue recognition issues that can be applied to all contracts with customers. The amendments also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized.

10


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

The Company has evaluated the impact of ASU 2014-09 and the amendments upon adoption as of July 1, 2018. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard and for in scope revenue streams management determined that, based on the modified retrospective method, a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard is not needed. Additional disclosures required under ASU 2014-09 are contained in Note 11.

In January 2016, the FASB issued ASU 2016-01, an amendment to “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01 are intended to improve the recognition, measurement, presentation and disclosure of financial assets and liabilities to provide users of financial statements with information that is more useful for decision-making purposes. Among other changes, ASU 2016-01 would: (1) require equity securities to be reclassified out of available for sale and measured at fair value with changes in fair value recognized through net income but would allow equity securities that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment, (2) simplify the impairment assessment of such equity securities and would require enhanced disclosure about these investments, (3) require separate presentation of financial assets and liabilities by measurement category and type of instrument, such as securities or loans, on the balance sheet or in the notes, and would eliminate certain other disclosures relating to the methods and assumptions used to estimate fair value for financial assets measured at amortized cost on the balance sheet, and (4) require the use of an exit price notion when measuring the fair value of financial instruments. The adoption of ASU 2016-01, and subsequent amendments, on July 1, 2018 did not have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07 “Compensation – Retirement Benefits”. The ASU requires companies that offer employee defined pension plans, other postretirement benefit plans, or other types of benefit plans accounted for under Topic 715 to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of ASU 2017-07 resulted in credits to non-service cost of $73,000 and $239,000, and $45,000 and $139,000 to be included in other operating expense for the three and nine months ended March 31, 2019 and 2018, respectively.

Future Application of Accounting Pronouncements Previously Issued

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2019, including interim periods within that fiscal year. The Company currently leases eleven branches and two administrative offices. ASU 2016-02 will result in the establishment of a right to use asset and corresponding lease obligation. The impact to the Company’s consolidated financial position has yet to be determined by management, however the ASU is not expected to have a material impact on the Company’s consolidated results of operations or disclosures.

11


In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including loans, debt securities, and other financial assets. The ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by recording an allowance for current expected credit losses. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2020, including interim periods within that fiscal year. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. 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 is evaluating the need for 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.

In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350).” ASU 2017-04 simplifies the test for goodwill impairment, which eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2019, including interim periods within that fiscal year. Management expects ASU 2017-04 will not have a significant 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 amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2020, including interim periods within that fiscal year. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2017-08 will not have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

Note 3. Investment Securities

In association with the adoption of ASU 2016-01, available-for-sale and held-to-maturity debt securities are referred to as 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 March 31, 2019 and June 30, 2018 were as follows:

 

 

 

March 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized/Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

49,977

 

 

$

36

 

 

$

(401

)

 

$

49,612

 

Corporate and other debt securities

 

 

8,364

 

 

 

-

 

 

 

(48

)

 

 

8,316

 

Mortgage-backed securities – residential

 

 

28,560

 

 

 

9

 

 

 

(483

)

 

 

28,086

 

Total available for sale

 

$

86,901

 

 

$

45

 

 

$

(932

)

 

$

86,014

 

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

106,544

 

 

$

84

 

 

$

(882

)

 

$

105,746

 

Corporate and other debt securities

 

 

34,035

 

 

 

229

 

 

 

(122

)

 

 

34,142

 

Mortgage-backed securities – residential

 

 

135,352

 

 

 

225

 

 

 

(1,647

)

 

 

133,930

 

Mortgage-backed securities – collateralized

   mortgage obligations

 

 

49,538

 

 

 

54

 

 

 

(698

)

 

 

48,894

 

Mortgage-backed securities – commercial

 

 

28,531

 

 

 

139

 

 

 

(198

)

 

 

28,472

 

Total held to maturity

 

$

354,000

 

 

$

731

 

 

$

(3,547

)

 

$

351,184

 

12


 

 

 

June 30, 2018

 

 

 

Amortized

 

 

Gross Unrealized/Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

64,389

 

 

$

-

 

 

$

(959

)

 

$

63,430

 

Corporate and other debt securities

 

 

8,406

 

 

 

-

 

 

 

(171

)

 

 

8,235

 

Mortgage-backed securities – residential

 

 

34,619

 

 

 

81

 

 

 

(893

)

 

 

33,807

 

Total available for sale

 

$

107,414

 

 

$

81

 

 

$

(2,023

)

 

$

105,472

 

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

122,048

 

 

$

-

 

 

$

(2,274

)

 

$

119,774

 

Corporate and other debt securities

 

 

4,000

 

 

 

-

 

 

 

(126

)

 

 

3,874

 

Mortgage-backed securities – residential

 

 

140,478

 

 

 

32

 

 

 

(4,846

)

 

 

135,664

 

Mortgage-backed securities – collateralized

   mortgage obligations

 

 

53,547

 

 

 

-

 

 

 

(1,815

)

 

 

51,732

 

Mortgage-backed securities – commercial

 

 

33,110

 

 

 

11

 

 

 

(977

)

 

 

32,144

 

Total held to maturity

 

$

353,183

 

 

$

43

 

 

$

(10,038

)

 

$

343,188

 

 

No securities were sold during the three months ended March 31, 2019 and March 31, 2018, respectively. During the nine months ended March 31, 2019, $2.1 million of securities were sold resulting in $55,000 of net realized gains. During the nine months ended March 31, 2018, $6.6 million of securities were sold resulting in $173,000 of net realized gains. Included in the net realized gain for the nine months ended March 31, 2018, was a disposal of $681,000 of securities classified as held to maturity, resulting in net realized gains of $34,000. These securities were comprised of seasoned mortgage-backed securities where the Company collected a substantial portion (at least 85%) of the principal outstanding at acquisition due to prepayments or scheduled payments payable in equal installments, comprising both principal and interest, over the terms.

The following table presents the fair value and carrying amount of debt securities at March 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

 

 

 

(in thousands)

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 year or less

 

$

27,550

 

 

$

27,389

 

 

$

18,007

 

 

$

17,907

 

1 to 5 years

 

 

83,994

 

 

 

83,419

 

 

 

40,334

 

 

 

40,021

 

5 to 10 years

 

 

25,035

 

 

 

25,155

 

 

 

-

 

 

 

-

 

Mortgage-backed securities and other

 

 

217,421

 

 

 

215,221

 

 

 

28,560

 

 

 

28,086

 

Total

 

$

354,000

 

 

$

351,184

 

 

$

86,901

 

 

$

86,014

 

 

Securities pledged had carrying amounts of $112.2 million and $140.5 million at March 31, 2019 and June 30, 2018, respectively, and were pledged principally to secure FHLB advances and public deposits.

13


The following table provides information regarding investment securities with unrealized/unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at March 31, 2019 and June 30, 2018:

 

 

 

March 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

 

$

-

 

 

$

-

 

 

$

44,657

 

 

$

(401

)

 

$

44,657

 

 

$

(401

)

Corporate and other debt securities

 

 

-

 

 

 

-

 

 

 

8,316

 

 

 

(48

)

 

 

8,316

 

 

 

(48

)

Mortgage-backed securities – residential

 

 

-

 

 

 

-

 

 

 

25,806

 

 

 

(483

)

 

 

25,806

 

 

 

(483

)

Total available for sale

 

$

-

 

 

$

-

 

 

$

78,779

 

 

$

(932

)

 

$

78,779

 

 

$

(932

)

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

-

 

 

$

-

 

 

$

95,669

 

 

$

(882

)

 

 

95,669

 

 

$

(882

)

Corporate and other debt securities

 

 

2,453

 

 

 

(47

)

 

 

3,925

 

 

 

(75

)

 

 

6,378

 

 

 

(122

)

Mortgage-backed securities – residential

 

 

-

 

 

 

-

 

 

 

111,881

 

 

 

(1,647

)

 

 

111,881

 

 

 

(1,647

)

Mortgage-backed securities – collateralized

   mortgage obligations

 

 

-

 

 

 

-

 

 

 

40,744

 

 

 

(698

)

 

 

40,744

 

 

 

(698

)

Mortgage-backed securities – commercial

 

 

-

 

 

 

-

 

 

 

18,099

 

 

 

(198

)

 

 

18,099

 

 

 

(198

)

Total held to maturity

 

$

2,453

 

 

$

(47

)

 

$

270,318

 

 

$

(3,500

)

 

$

272,771

 

 

$

(3,547

)

 

 

 

June 30, 2018

 

 

 

Less than 12 months

 

 

12 months or greater

 

 

Total

 

 

 

 

 

 

Unrealized/

 

 

 

 

 

Unrealized/

 

 

 

 

 

Unrealized/

 

 

 

Fair

 

 

Unrecognized

 

 

Fair

 

 

Unrecognized

 

 

Fair

 

 

Unrecognized

 

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

 

(in thousands)

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

41,762

 

 

$

(569

)

 

$

21,668

 

 

$

(390

)

 

$

63,430

 

 

$

(959

)

Corporate and other debt securities

 

 

6,258

 

 

 

(148

)

 

 

1,977

 

 

 

(23

)

 

 

8,235

 

 

 

(171

)

Mortgage-backed securities – residential

 

 

13,397

 

 

 

(379

)

 

 

14,718

 

 

 

(514

)

 

 

28,115

 

 

 

(893

)

Total available for sale

 

$

61,417

 

 

$

(1,096

)

 

$

38,363

 

 

$

(927

)

 

$

99,780

 

 

$

(2,023

)

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

46,163

 

 

$

(871

)

 

$

71,611

 

 

$

(1,403

)

 

$

117,774

 

 

$

(2,274

)

Corporate and other debt securities

 

 

3,874

 

 

 

(126

)

 

 

-

 

 

 

-

 

 

 

3,874

 

 

 

(126

)

Mortgage-backed securities – residential

 

 

102,496

 

 

 

(3,338

)

 

 

32,490

 

 

 

(1,508

)

 

 

134,986

 

 

 

(4,846

)

Mortgage-backed securities – collateralized

   mortgage obligations

 

 

31,124

 

 

 

(884

)

 

 

20,608

 

 

 

(931

)

 

 

51,732

 

 

 

(1,815

)

Mortgage-backed securities – commercial

 

 

21,762

 

 

 

(582

)

 

 

8,629

 

 

 

(395

)

 

 

30,391

 

 

 

(977

)

Total held to maturity

 

$

205,419

 

 

$

(5,801

)

 

$

133,338

 

 

$

(4,237

)

 

$

338,757

 

 

$

(10,038

)

 

As of March 31, 2019, the Company’s securities portfolio consisted of $440.0 million in securities, of which 205 securities with a fair value of $351.6 million were in an unrealized loss position.

As of June 30, 2018, the Company’s securities portfolio consisted of $458.7 million in securities, of which 254 securities with a fair value of $438.5 million were in an unrealized loss position.

There were no securities as of March 31, 2019 or June 30, 2018 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 March 31, 2019 or June 30, 2018.

14


Note 4. Loans Receivable

Loans receivable are summarized as follows (in thousands):

 

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2018

 

Mortgage loans:

 

 

 

 

 

 

 

 

Residential

 

$

261,970

 

 

$

250,578

 

Commercial

 

 

499,284

 

 

 

495,265

 

Construction

 

 

16,302

 

 

 

17,352

 

Net deferred loan origination costs

 

 

843

 

 

 

1,041

 

Total mortgage loans

 

 

778,399

 

 

 

764,236

 

Commercial and consumer loans:

 

 

 

 

 

 

 

 

Commercial loans

 

 

126,514

 

 

 

104,135

 

Home equity lines of credit

 

 

34,525

 

 

 

37,395

 

Consumer and overdrafts

 

 

459

 

 

 

745

 

Net deferred loan origination costs

 

 

728

 

 

 

729

 

Total commercial and consumer loans

 

 

162,226

 

 

 

143,004

 

Total loans receivable

 

 

940,625

 

 

 

907,240

 

Allowance for loan losses

 

 

(4,945

)

 

 

(4,904

)

Loans receivable, net

 

$

935,680

 

 

$

902,336

 

 

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 nine months ended March 31, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended March 31, 2019

 

 

 

Beginning

Allowance

 

 

Provision

(credit)

 

 

Charge-offs

 

 

Recoveries

 

 

Ending

Allowance

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

379

 

 

$

8

 

 

$

-

 

 

$

2

 

 

$

389

 

Commercial

 

 

3,261

 

 

 

(26

)

 

 

-

 

 

 

-

 

 

 

3,235

 

Construction

 

 

258

 

 

 

(58

)

 

 

-

 

 

 

-

 

 

 

200

 

Commercial loans

 

 

880

 

 

 

69

 

 

 

-

 

 

 

2

 

 

 

951

 

Home equity lines of credit

 

 

82

 

 

 

(8

)

 

 

-

 

 

 

-

 

 

 

74

 

Consumer and overdrafts

 

 

10

 

 

 

6

 

 

 

(11

)

 

 

2

 

 

 

7

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

73

 

 

 

16

 

 

 

-

 

 

 

-

 

 

 

89

 

Total

 

$

4,943

 

 

$

7

 

 

$

(11

)

 

$

6

 

 

$

4,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

Beginning

Allowance

 

 

Provision

(credit)

 

 

Charge-offs

 

 

Recoveries

 

 

Ending

Allowance

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

402

 

 

$

(20

)

 

$

(47

)

 

$

-

 

 

$

335

 

Commercial

 

 

2,686

 

 

 

131

 

 

 

-

 

 

 

-

 

 

 

2,817

 

Construction

 

 

400

 

 

 

90

 

 

 

-

 

 

 

-

 

 

 

490

 

Commercial loans

 

 

844

 

 

 

(186

)

 

 

(23

)

 

 

210

 

 

 

845

 

Home equity lines of credit

 

 

74

 

 

 

35

 

 

 

(60

)

 

 

19

 

 

 

68

 

Consumer and overdrafts

 

 

-

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

4

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

65

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65

 

Total

 

$

4,471

 

 

$

54

 

 

$

(130

)

 

$

229

 

 

$

4,624

 

15


 

 

 

Nine Months Ended March 31, 2019

 

 

 

Beginning

Allowance

 

 

Provision

(credit)

 

 

Charge-offs

 

 

Recoveries

 

 

Ending

Allowance

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

386

 

 

$

(4

)

 

$

-

 

 

$

7

 

 

$

389

 

Commercial

 

 

3,073

 

 

 

276

 

 

 

(114

)

 

 

-

 

 

 

3,235

 

Construction

 

 

505

 

 

 

(401

)

 

 

-

 

 

 

96

 

 

 

200

 

Commercial loans

 

 

780

 

 

 

169

 

 

 

-

 

 

 

2

 

 

 

951

 

Home equity lines of credit

 

 

80

 

 

 

(6

)

 

 

-

 

 

 

-

 

 

 

74

 

Consumer and installment loans

 

 

7

 

 

 

21

 

 

 

(27

)

 

 

6

 

 

 

7

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

73

 

 

 

16

 

 

 

-

 

 

 

-

 

 

 

89

 

Total

 

$

4,904

 

 

$

71

 

 

$

(141

)

 

$

111

 

 

$

4,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended March 31, 2018

 

 

 

Beginning

Allowance

 

 

Provision

(credit)

 

 

Charge-offs

 

 

Recoveries

 

 

Ending

Allowance

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

360

 

 

$

39

 

 

$

(64

)

 

$

-

 

 

$

335

 

Commercial

 

 

2,589

 

 

 

228

 

 

 

-

 

 

 

-

 

 

 

2,817

 

Construction

 

 

1,150

 

 

 

337

 

 

 

(997

)

 

 

-

 

 

 

490

 

Commercial loans

 

 

949

 

 

 

(291

)

 

 

(23

)

 

 

210

 

 

 

845

 

Home equity lines of credit

 

 

76

 

 

 

33

 

 

 

(60

)

 

 

19

 

 

 

68

 

Consumer and installment loans

 

 

-

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

4

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

26

 

 

 

39

 

 

 

-

 

 

 

-

 

 

 

65

 

Total

 

$

5,150

 

 

$

389

 

 

$

(1,144

)

 

$

229

 

 

$

4,624

 

 

 

16


The following tables present the balance in the allowance for loan losses and the recorded investment in loans, excluding net deferred fees and accrued interest, by portfolio segment, and based on impairment method as of March 31, 2019 and June 30, 2018 (in thousands):

 

 

 

March 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

 

$

1,785

 

 

$

258,905

 

 

$

1,280

 

 

$

261,970

 

 

$

132

 

 

$

257

 

 

$

89

 

 

$

478

 

Commercial

 

 

1,403

 

 

 

496,410

 

 

 

1,471

 

 

 

499,284

 

 

 

-

 

 

 

3,235

 

 

 

-

 

 

 

3,235

 

Construction

 

 

-

 

 

 

16,302

 

 

 

-

 

 

 

16,302

 

 

 

-

 

 

 

200

 

 

 

-

 

 

 

200

 

Commercial loans

 

 

1,883

 

 

 

124,631

 

 

 

-

 

 

 

126,514

 

 

 

2

 

 

 

949

 

 

 

-

 

 

 

951

 

Home equity lines of credit

 

 

699

 

 

 

33,667

 

 

 

159

 

 

 

34,525

 

 

 

7

 

 

 

67

 

 

 

-

 

 

 

74

 

Consumer and overdrafts

 

 

-

 

 

 

459

 

 

 

-

 

 

 

459

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Total

 

$

5,770

 

 

$

930,374

 

 

$

2,910

 

 

$

939,054

 

 

$

141

 

 

$

4,715

 

 

$

89

 

 

$

4,945

 

 

 

 

June 30, 2018

 

 

 

Loans

 

 

Allowance for Loan Losses

 

 

 

Individually

Evaluated for

Impairment

 

 

Collectively

Evaluated for

Impairment

 

 

Acquired With

Deteriorated

Credit Quality

 

 

Total

 

 

Individually

Evaluated for

Impairment

 

 

Collectively

Evaluated for

Impairment

 

 

Acquired With

Deteriorated

Credit Quality

 

 

Total

 

Residential

 

$

2,360

 

 

$

246,913

 

 

$

1,305

 

 

$

250,578

 

 

$

154

 

 

$

232

 

 

$

73

 

 

$

459

 

Commercial

 

 

1,683

 

 

 

492,105

 

 

 

1,477

 

 

 

495,265

 

 

 

-

 

 

 

3,073

 

 

 

-

 

 

 

3,073

 

Construction

 

 

2,260

 

 

 

15,092

 

 

 

-

 

 

 

17,352

 

 

 

276

 

 

 

229

 

 

 

-

 

 

 

505

 

Commercial loans

 

 

2,451

 

 

 

101,684

 

 

 

-

 

 

 

104,135

 

 

 

9

 

 

 

771

 

 

 

-

 

 

 

780

 

Home equity lines of credit

 

 

360

 

 

 

36,867

 

 

 

168

 

 

 

37,395

 

 

 

12

 

 

 

68

 

 

 

-

 

 

 

80

 

Consumer and overdrafts

 

 

-

 

 

 

745

 

 

 

-

 

 

 

745

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Total

 

$

9,114

 

 

$

893,406

 

 

$

2,950

 

 

$

905,470

 

 

$

451

 

 

$

4,380

 

 

$

73

 

 

$

4,904

 

 

 

17


 

The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by class of loans as of March 31, 2019 and June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

Unpaid

Principal

Balance

 

 

Recorded Investment

 

 

Allowance for Loan Losses

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

1,064

 

 

$

1,037

 

 

$

-

 

Commercial

 

 

1,481

 

 

 

1,403

 

 

 

-

 

Commercial loans

 

 

5,146

 

 

 

1,853

 

 

 

-

 

Home equity lines of credit

 

 

679

 

 

 

613

 

 

 

-

 

With a related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

726

 

 

 

748

 

 

 

132

 

Commercial loans

 

 

30

 

 

 

30

 

 

 

2

 

Home equity lines of credit

 

 

89

 

 

 

86

 

 

 

7

 

Total

 

$

9,215

 

 

$

5,770

 

 

$

141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

Unpaid

Principal

Balance

 

 

Recorded Investment

 

 

Allowance for Loan Losses

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

1,659

 

 

$

1,576

 

 

$

-

 

Commercial

 

 

1,765

 

 

 

1,683

 

 

 

-

 

Commercial loans

 

 

2,254

 

 

 

2,098

 

 

 

-

 

Home equity lines of credit

 

 

341

 

 

 

341

 

 

 

-

 

With a related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

742

 

 

 

784

 

 

 

154

 

Construction

 

 

3,257

 

 

 

2,260

 

 

 

276

 

Commercial loans

 

 

353

 

 

 

353

 

 

 

9

 

Home equity lines of credit

 

 

84

 

 

 

19

 

 

 

12

 

Total

 

$

10,455

 

 

$

9,114

 

 

$

451

 

 

 


18


 

The tables below present the average recorded investment and interest income recognized on loans individually evaluated for impairment, by class of loans, for the three and nine months ended March 31, 2019 and 2018 (in thousands):

 

 

Three months ended

 

 

Three months ended

 

 

March 31, 2019

 

 

March 31, 2018

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

$

1,317

 

 

$

9

 

 

$

2,776

 

 

$

13

 

Commercial

 

1,408

 

 

 

11

 

 

 

2,440

 

 

 

37

 

Commercial loans

 

1,862

 

 

 

42

 

 

 

3,027

 

 

 

68

 

Home equity lines of credit

 

616

 

 

 

-

 

 

 

452

 

 

 

-

 

With a related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

750

 

 

 

4

 

 

 

452

 

 

 

4

 

Construction

 

-

 

 

 

-

 

 

 

2,260

 

 

 

-

 

Commercial loans

 

39

 

 

 

-

 

 

 

1,417

 

 

 

14

 

Home equity lines of credit

 

87

 

 

 

-

 

 

 

11

 

 

 

-

 

Total

$

6,079

 

 

$

66

 

 

$

12,835

 

 

$

136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

March 31, 2019

 

 

March 31, 2018

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

$

1,516

 

 

$

20

 

 

$

3,360

 

 

$

179

 

Commercial

 

1,494

 

 

 

37

 

 

 

2,447

 

 

 

91

 

Construction

 

2,131

 

 

 

138

 

 

 

121

 

 

 

17

 

Commercial loans

 

628

 

 

 

9

 

 

 

3,704

 

 

 

228

 

Home equity lines of credit

 

-

 

 

 

-

 

 

 

549

 

 

 

20

 

With a related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

752

 

 

 

11

 

 

 

454

 

 

 

11

 

Construction

 

1,130

 

 

 

-

 

 

 

2,858

 

 

 

-

 

Commercial loans

 

40

 

 

 

1

 

 

 

1,439

 

 

 

45

 

Home equity lines of credit

 

88

 

 

 

-

 

 

 

11

 

 

 

-

 

Total

$

7,779

 

 

$

216

 

 

$

14,943

 

 

$

591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


 

The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days and still on accrual status, by class of loans as of March 31, 2019 and June 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Loans Past Due Over 90 Days

 

 

 

Nonaccrual

 

 

and Still Accruing

 

 

 

March 31,

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

541

 

 

$

604

 

 

$

-

 

 

$

-

 

Commercial

 

 

-

 

 

 

262

 

 

 

-

 

 

 

-

 

Construction

 

 

-

 

 

 

2,260

 

 

 

-

 

 

 

-

 

Commercial loans

 

 

273

 

 

 

788

 

 

 

-

 

 

 

-

 

Home equity lines of credit

 

 

391

 

 

 

45

 

 

 

-

 

 

 

-

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

802

 

 

 

1,308

 

 

 

-

 

 

 

-

 

Commercial

 

 

543

 

 

 

532

 

 

 

-

 

 

 

-

 

Home equity lines of credit

 

 

296

 

 

 

303

 

 

 

-

 

 

 

-

 

Total

 

$

2,846

 

 

$

6,102

 

 

$

-

 

 

$

-

 

 

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 past due over 90 days that are accounted for as purchased credit impaired loans totaling $1.1 million as of both March 31, 2019 and June 30, 2018. Such loans are excluded because the loans are in pools that are considered performing. The discounts arising from recording these loans at fair value upon acquisition were due in part to credit quality and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows.

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2019 and June 30, 2018 (in thousands):

 

 

 

March 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

 

$

-

 

 

$

-

 

 

$

461

 

 

$

461

 

 

$

212,028

 

 

$

212,489

 

Commercial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

440,114

 

 

 

440,114

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,302

 

 

 

16,302

 

Commercial loans

 

 

158

 

 

 

-

 

 

 

-

 

 

 

158

 

 

 

126,169

 

 

 

126,327

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

316

 

 

 

316

 

 

 

29,581

 

 

 

29,897

 

Consumer and overdrafts

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

443

 

 

 

444

 

Total originated

 

 

158

 

 

 

1

 

 

 

777

 

 

 

936

 

 

 

824,637

 

 

 

825,573

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

-

 

 

 

-

 

 

 

1,010

 

 

 

1,010

 

 

 

48,471

 

 

 

49,481

 

Commercial

 

 

-

 

 

 

-

 

 

 

1,122

 

 

 

1,122

 

 

 

58,048

 

 

 

59,170

 

Commercial loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

187

 

 

 

187

 

Home equity lines of credit

 

 

-

 

 

 

69

 

 

 

296

 

 

 

365

 

 

 

4,263

 

 

 

4,628

 

Consumer and overdrafts

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15

 

 

 

15

 

Total acquired

 

 

-

 

 

 

69

 

 

 

2,428

 

 

 

2,497

 

 

 

110,984

 

 

 

113,481

 

Total

 

$

158

 

 

$

70

 

 

$

3,205

 

 

$

3,433

 

 

$

935,621

 

 

$

939,054

 

20


 

 

 

 

June 30, 2018

 

 

 

30-59

 

 

60-89

 

 

90 Days or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

Days Past

 

 

More Past

 

 

Total Past

 

 

 

 

 

 

 

 

 

 

 

Due

 

 

Due

 

 

Due

 

 

Due

 

 

Current

 

 

Total

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

-

 

 

$

394

 

 

$

210

 

 

$

604

 

 

$

194,986

 

 

$

195,590

 

Commercial

 

 

-

 

 

 

-

 

 

 

262

 

 

 

262

 

 

 

420,320

 

 

 

420,582

 

Construction

 

 

-

 

 

 

-

 

 

 

2,260

 

 

 

2,260

 

 

 

15,092

 

 

 

17,352

 

Commercial loans

 

 

-

 

 

 

-

 

 

 

500

 

 

 

500

 

 

 

102,767

 

 

 

103,267

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

45

 

 

 

45

 

 

 

32,311

 

 

 

32,356

 

Consumer and overdrafts

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

733

 

 

 

733

 

Total originated

 

 

-

 

 

 

394

 

 

 

3,277

 

 

 

3,671

 

 

 

766,209

 

 

 

769,880

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

-

 

 

 

232

 

 

 

1,806

 

 

 

2,038

 

 

 

52,950

 

 

 

54,988

 

Commercial

 

 

-

 

 

 

-

 

 

 

1,112

 

 

 

1,112

 

 

 

73,571

 

 

 

74,683

 

Commercial loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

868

 

 

 

868

 

Home equity lines of credit

 

 

30

 

 

 

-

 

 

 

296

 

 

 

326

 

 

 

4,713

 

 

 

5,039

 

Consumer and overdrafts

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

12

 

Total acquired

 

 

30

 

 

 

232

 

 

 

3,214

 

 

 

3,476

 

 

 

132,114

 

 

 

135,590

 

Total

 

$

30

 

 

$

626

 

 

$

6,491

 

 

$

7,147

 

 

$

898,323

 

 

$

905,470

 

 

Troubled Debt Restructurings

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

As of both March 31, 2019 and June 30, 2018, the Company had 12 loans classified as troubled debt restructurings totaling $3.5 million and $3.8 million, respectively. The Company has allocated $129,000 and $139,000, respectively, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2019 and June 30, 2018. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

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 nine months ended March 31, 2019. The Company did not modify any loans as troubled debt restructuring during the three months ended March 31, 2019 or during the three or nine months ended March 31, 2018.

The Company had no troubled debt restructurings for which there was a payment default in the three or nine months ended March 31, 2019 that were modified in the twelve months prior to default. There were no such defaults during the three months ended March 31, 2018. There were two troubled debt restructuring with a total carrying amount of $1.1 million at March 31, 2018 for which there was a payment default in the nine months ended March 31, 2018 and resulted in a $2,000 increase to the allowance for loan losses. One default with a carrying amount of $807,000, was cured as of March 31, 2018.

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.

21


 

Credit Quality Indicators

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

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

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

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

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

 

 

 

March 31, 2019

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

210,771

 

 

$

1,143

 

 

$

575

 

 

$

-

 

 

$

212,489

 

Commercial

 

 

439,642

 

 

 

342

 

 

 

130

 

 

 

-

 

 

 

440,114

 

Construction

 

 

16,302

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,302

 

Commercial loans

 

 

116,129

 

 

 

6,607

 

 

 

3,591

 

 

 

-

 

 

 

126,327

 

Home equity lines of credit

 

 

29,438

 

 

 

92

 

 

 

367

 

 

 

-

 

 

 

29,897

 

Consumer and overdrafts

 

 

444

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

444

 

Total originated

 

 

812,726

 

 

 

8,184

 

 

 

4,663

 

 

 

-

 

 

 

825,573

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

47,312

 

 

 

214

 

 

 

1,955

 

 

 

-

 

 

 

49,481

 

Commercial

 

 

56,330

 

 

 

825

 

 

 

2,015

 

 

 

-

 

 

 

59,170

 

Commercial loans

 

 

184

 

 

 

3

 

 

 

-

 

 

 

-

 

 

 

187

 

Home equity lines of credit

 

 

3,768

 

 

 

474

 

 

 

386

 

 

 

-

 

 

 

4,628

 

Consumer and overdrafts

 

 

15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15

 

Total acquired

 

 

107,609

 

 

 

1,516

 

 

 

4,356

 

 

 

-

 

 

 

113,481

 

Total

 

$

920,335

 

 

$

9,700

 

 

$

9,019

 

 

$

-

 

 

$

939,054

 

22


 

 

 

 

June 30, 2018

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

194,341

 

 

$

571

 

 

$

678

 

 

$

-

 

 

$

195,590

 

Commercial

 

 

418,370

 

 

 

-

 

 

 

2,212

 

 

 

-

 

 

 

420,582

 

Construction

 

 

15,092

 

 

 

-

 

 

 

2,260

 

 

 

-

 

 

 

17,352

 

Commercial loans

 

 

98,205

 

 

 

167

 

 

 

4,895

 

 

 

-

 

 

 

103,267

 

Home equity lines of credit

 

 

32,167

 

 

 

144

 

 

 

45

 

 

 

-

 

 

 

32,356

 

Consumer and overdrafts

 

 

733

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

733

 

Total originated

 

 

758,908

 

 

 

882

 

 

 

10,090

 

 

 

-

 

 

 

769,880

 

Acquired:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

51,858

 

 

 

249

 

 

 

2,881

 

 

 

-

 

 

 

54,988

 

Commercial

 

 

71,832

 

 

 

842

 

 

 

2,009

 

 

 

-

 

 

 

74,683

 

Commercial loans

 

 

857

 

 

 

11

 

 

 

-

 

 

 

-

 

 

 

868

 

Home equity lines of credit

 

 

4,641

 

 

 

-

 

 

 

398

 

 

 

-

 

 

 

5,039

 

Consumer and overdrafts

 

 

12

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12

 

Total acquired

 

 

129,200

 

 

 

1,102

 

 

 

5,288

 

 

 

-

 

 

 

135,590

 

Total

 

$

888,108

 

 

$

1,984

 

 

$

15,378

 

 

$

-

 

 

$

905,470

 

 

Purchased Credit Impaired Loans

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of March 31, 2019 and June 30, 2018 is as follows (in thousands):

 

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2018

 

Residential

 

$

1,191

 

 

$

1,232

 

Commercial

 

 

1,471

 

 

 

1,477

 

Home equity lines of credit

 

 

159

 

 

 

168

 

Carrying amount, net of allowance of $89 and $73, respectively

 

$

2,821

 

 

$

2,877

 

 

The allowance for loan losses on purchased credit impaired loans increased $16,000 during the three and nine months ended March 31, 2019.

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

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Beginning balance

 

$

219

 

 

$

238

 

 

$

245

 

 

$

403

 

New loans acquired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Accretion income

 

 

(14

)

 

 

(7

)

 

 

(40

)

 

 

(59

)

Reclassification from non-accretable difference

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Disposals

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(113

)

Ending balance

 

$

205

 

 

$

231

 

 

$

205

 

 

$

231

 

 

23


 

Note 5. Other Comprehensive Income (Loss)

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

 

 

 

Net unrealized

gain (loss) on

available for

sale securities

 

 

Unrealized loss

on pension

benefits

 

 

Unrealized loss

on SERP

benefits

 

 

Total

 

Balance at January 1, 2019

 

$

(1,300

)

 

$

(4,921

)

 

$

(250

)

 

$

(6,471

)

Other comprehensive income before reclassifications

 

 

757

 

 

 

-

 

 

 

-

 

 

 

757

 

Amounts reclassified from accumulated other comprehensive income

 

 

-

 

 

 

145

 

 

 

9

 

 

 

154

 

Less tax effect

 

 

(160

)

 

 

(30

)

 

 

(1

)

 

 

(191

)

Net other comprehensive income

 

 

597

 

 

 

115

 

 

 

8

 

 

 

720

 

Balance at March 31, 2019

 

$

(703

)

 

$

(4,806

)

 

$

(242

)

 

$

(5,751

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized

gain (loss) on

available for

sale securities

 

 

Unrealized loss

on pension

benefits

 

 

Unrealized loss

on SERP

benefits

 

 

Total

 

Balance at January 1, 2018

 

$

(669

)

 

$

(4,763

)

 

$

(238

)

 

$

(5,670

)

Other comprehensive loss before reclassifications

 

 

(705

)

 

 

-

 

 

 

-

 

 

 

(705

)

Amounts reclassified from accumulated other comprehensive income

 

 

-

 

 

 

182

 

 

 

10

 

 

 

192

 

Less tax effect

 

 

149

 

 

 

(39

)

 

 

(3

)

 

 

107

 

Net other comprehensive (loss) income

 

 

(556

)

 

 

143

 

 

 

7

 

 

 

(406

)

Reclassification of certain tax effects on other comprehensive income (1)

 

 

(132

)

 

 

(938

)

 

 

(47

)

 

 

(1,117

)

Balance at March 31, 2018

 

$

(1,357

)

 

$

(5,558

)

 

$

(278

)

 

$

(7,193

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized

gain (loss) on

available for sale securities

 

 

Unrealized loss

on pension

benefits

 

 

Unrealized loss

on SERP

benefits

 

 

Total

 

Balance at July 1, 2018

 

$

(1,536

)

 

$

(5,150

)

 

$

(264

)

 

$

(6,950

)

Other comprehensive income before reclassifications

 

 

1,110

 

 

 

-

 

 

 

-

 

 

 

1,110

 

Amounts reclassified from accumulated other comprehensive income

 

 

(55

)

 

 

435

 

 

 

27

 

 

 

407

 

Tax effect

 

 

(222

)

 

 

(91

)

 

 

(5

)

 

 

(318

)

Net other comprehensive income

 

 

833

 

 

 

344

 

 

 

22

 

 

 

1,199

 

Balance at March 31, 2019

 

$

(703

)

 

$

(4,806

)

 

$

(242

)

 

$

(5,751

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized

gain (loss) on

available for sale securities

 

 

Unrealized loss

on pension

benefits

 

 

Unrealized loss

on SERP

benefits

 

 

Total

 

Balance at July 1, 2017

 

$

37

 

 

$

(5,002

)

 

$

(250

)

 

$

(5,215

)

Other comprehensive loss before reclassifications

 

 

(1,635

)

 

 

-

 

 

 

-

 

 

 

(1,635

)

Amounts reclassified from accumulated other comprehensive income

 

 

(139

)

 

 

544

 

 

 

26

 

 

 

431

 

Tax effect

 

 

512

 

 

 

(162

)

 

 

(7

)

 

 

343

 

Net other comprehensive (loss) income

 

 

(1,262

)

 

 

382

 

 

 

19

 

 

 

(861

)

Reclassification of certain tax effects on other comprehensive income (1)

 

 

(132

)

 

 

(938

)

 

 

(47

)

 

 

(1,117

)

Balance at March 31, 2018

 

$

(1,357

)

 

$

(5,558

)

 

$

(278

)

 

$

(7,193

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24


 

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

 

 

Note 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. 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 nine months ended March 31, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

Defined

Benefit

Plan

 

 

Supplemental

Retirement

Plans

 

 

Defined

Benefit

Plan

 

 

Supplemental

Retirement

Plans

 

Service cost

 

$

-

 

 

$

78

 

 

$

-

 

 

$

149

 

Interest cost

 

 

250

 

 

 

36

 

 

 

242

 

 

 

26

 

Expected return on plan assets

 

 

(513

)

 

 

-

 

 

 

(505

)

 

 

-

 

Amortization of prior net loss

 

 

145

 

 

 

9

 

 

 

-

 

 

 

-

 

Amortization of prior service cost

 

 

-

 

 

 

-

 

 

 

182

 

 

 

10

 

Net periodic (benefit) cost

 

$

(118

)

 

$

123

 

 

$

(81

)

 

$

185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

Defined

Benefit

Plan

 

 

Supplemental

Retirement

Plan

 

 

Defined

Benefit

Plan

 

 

Supplemental

Retirement

Plan

 

Service cost

 

$

-

 

 

$

373

 

 

$

-

 

 

$

369

 

Interest cost

 

 

750

 

 

 

88

 

 

 

726

 

 

 

76

 

Expected return on plan assets

 

 

(1,539

)

 

 

-

 

 

 

(1,511

)

 

 

-

 

Amortization of prior net loss

 

 

435

 

 

 

27

 

 

 

544

 

 

 

26

 

Amortization of prior service cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net periodic (benefit) cost

 

$

(354

)

 

$

488

 

 

$

(241

)

 

$

471

 

 

The Company made no contributions to the defined benefit plan during the three and nine months ended March 31, 2019.

25


 

Employee Stock Ownership Plan

On January 1, 2017, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified retirement plan for the benefit of Company employees. On April 20, 2017 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 (5.5% at March 31, 2019). Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. The balance of the ESOP loan at March 31, 2019 was $12.6 million. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released annually is 96,881 through 2032.

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

 

 

 

March 31, 2019

 

 

June 30, 2018

 

Allocated to participants

 

 

216,854

 

 

 

144,923

 

Unearned

 

 

1,236,355

 

 

 

1,308,286

 

Total ESOP shares

 

 

1,453,209

 

 

 

1,453,209

 

 

 

 

 

 

 

 

 

 

Fair value of unearned shares

 

$

24,647

 

 

$

25,996

 

 

 

 

 

 

 

 

 

 

Total compensation expense recognized in connection with the ESOP for the three and nine months ended March 31, 2019 was $464,000 and $1.4 million, respectively, and for the three and nine months ended March 31, 2018 was $478,000 and $1.8 million, 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 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.

26


 

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 lower of cost or fair value, less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

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

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

Derivatives: The Company’s derivative assets and liabilities consist of transactions 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

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

-

 

 

$

49,612

 

 

$

-

 

 

$

49,612

 

Corporate and other debt securities

 

 

-

 

 

 

8,316

 

 

 

-

 

 

 

8,316

 

Mortgage-backed securities – residential

 

 

-

 

 

 

28,086

 

 

 

-

 

 

 

28,086

 

Derivatives – interest rate contracts

 

 

-

 

 

 

526

 

 

 

-

 

 

 

526

 

Total assets at fair value

 

$

-

 

 

$

86,540

 

 

$

-

 

 

$

86,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives – interest rate contracts

 

$

-

 

 

$

526

 

 

$

-

 

 

$

526

 

Total liabilities at fair value

 

$

-

 

 

$

526

 

 

$

-

 

 

$

526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgages

 

$

-

 

 

$

-

 

 

$

698

 

 

$

698

 

Commercial loans

 

 

-

 

 

 

-

 

 

 

28

 

 

 

28

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

80

 

 

 

80

 

Foreclosed real estate

 

 

-

 

 

 

-

 

 

 

653

 

 

 

653

 

Total assets at fair value

 

$

-

 

 

$

-

 

 

$

1,459

 

 

$

1,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


 

 

 

 

Fair Value Measurements

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

-

 

 

$

63,430

 

 

$

-

 

 

$

63,430

 

Corporate and other debt securities

 

 

-

 

 

 

8,235

 

 

 

-

 

 

 

8,235

 

Mortgage-backed securities – residential

 

 

-

 

 

 

33,807

 

 

 

-

 

 

 

33,807

 

Total assets at fair value

 

$

-

 

 

$

105,472

 

 

$

-

 

 

$

105,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgages

 

$

-

 

 

$

-

 

 

$

688

 

 

$

688

 

Construction

 

 

-

 

 

 

-

 

 

 

1,984

 

 

 

1,984

 

Commercial loans

 

 

-

 

 

 

-

 

 

 

845

 

 

 

845

 

Home equity lines of credit

 

 

-

 

 

 

-

 

 

 

7

 

 

 

7

 

Foreclosed real estate

 

 

-

 

 

 

-

 

 

 

460

 

 

 

460

 

Total assets at fair value

 

$

-

 

 

$

-

 

 

$

3,984

 

 

$

3,984

 

 

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

 

Impaired loans in the preceding table had a carrying amount of $945,000, and a remaining valuation allowance of $141,000 at March 31, 2019, as compared to $3.9 million and $451,000, respectively, as of June 30, 2018. Impaired loans measured at fair value incurred no net charge-offs and resulted in a provision for loan losses of $9,000 during the nine months ended March 31, 2019. Impaired loans measured at fair value as of March 31, 2018 incurred $1.1 million of net charge-offs and resulted in an additional provision for loan losses of $201,000 during the nine months ended March 31, 2018.

28


 

The following tables present quantitative information about Level 3 fair value measurements for selected financial instruments measured at fair value on a non-recurring basis at March 31, 2019 and June 30, 2018 (dollars in thousands):

 

 

 

 

 

 

 

Valuation

 

Unobservable

 

Range or

 

 

 

Fair Value

 

 

Technique(s)

 

Input(s)

 

Rate Used

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential mortgages

 

$

698

 

 

Discounted cash flow

 

Discount rate

 

5.4% to 6.3%

 

 

 

 

 

 

 

Sales comparison

 

Adjustments for

differences in

sales comparables

 

-24.3% to -10.2%

 

Impaired loans - commercial loans

 

 

28

 

 

Discounted cash flow

 

Discount rate

 

7.0%

 

Impaired loans - home equity lines of credit

 

 

80

 

 

Discounted cash flow

 

Discount rate

 

6.3%

 

 

 

 

 

 

 

Sales comparison

 

Adjustments for

differences in

sales comparables

 

-24.3% to -10.2%

 

Foreclosed real estate

 

 

653

 

 

Sales comparison

 

Adjustments for

differences in

sales comparables

 

-8.0% to 45.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential mortgages

 

$

688

 

 

Sales comparison

 

Adjustments for

differences in sales

comparables

 

-5.1% to 20.9%

 

 

 

 

 

 

 

Discounted cash flow

 

Discount rate

 

5.4% to 6.3%

 

Impaired loans - construction

 

 

1,984

 

 

Sales contract

 

Discount to sales contract

 

9.8%

 

Impaired loans - commercial loans

 

 

845

 

 

Discounted cash flow

 

Discount rate

 

5.3% to 7.5%

 

 

 

 

 

 

 

Sales contract

 

Discount to sales contract

 

9.8%

 

Impaired loans - home equity lines of credit

 

 

7

 

 

Sales comparison

 

Adjustments for

differences in sales

comparables

 

-5.1% to 20.9%

 

 

 

 

 

 

 

Discounted cash flow

 

Discount rate

 

6.3%

 

Foreclosed real estate

 

 

460

 

 

Sales comparison

 

Adjustments for

differences in

sales comparables

 

-8.1% to -0.4%

 

 

29


 

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

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,105

 

 

$

87,105

 

 

$

-

 

 

$

-

 

 

$

87,105

 

Investment securities held to maturity

 

 

354,000

 

 

 

-

 

 

 

351,184

 

 

 

-

 

 

 

351,184

 

Investment securities available for sale

 

 

86,014

 

 

 

-

 

 

 

86,014

 

 

 

-

 

 

 

86,014

 

Loans receivable, net

 

 

935,680

 

 

 

-

 

 

 

-

 

 

 

923,683

 

 

 

923,683

 

Accrued interest receivable

 

 

5,037

 

 

 

-

 

 

 

1,694

 

 

 

3,343

 

 

 

5,037

 

Federal Home Loan Bank stock

 

 

2,384

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Derivative assets - interest rate contracts

 

 

526

 

 

 

-

 

 

 

526

 

 

 

-

 

 

 

526

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand, NOW, money market deposits and savings accounts

 

 

774,999

 

 

 

774,999

 

 

 

-

 

 

 

-

 

 

 

774,999

 

Time deposits

 

 

427,194

 

 

 

-

 

 

 

431,302

 

 

 

-

 

 

 

431,302

 

Mortgage escrow funds

 

 

7,675

 

 

 

7,675

 

 

 

-

 

 

 

-

 

 

 

7,675

 

FHLB advances

 

 

26,248

 

 

 

-

 

 

 

26,537

 

 

 

-

 

 

 

26,537

 

Derivative liabilities - interest rate contracts

 

 

526

 

 

 

-

 

 

 

526

 

 

 

-

 

 

 

526

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,145

 

 

$

62,145

 

 

$

-

 

 

$

-

 

 

$

62,145

 

Investment securities held to maturity

 

 

353,183

 

 

 

-

 

 

 

343,188

 

 

 

-

 

 

 

343,188

 

Investment securities available for sale

 

 

105,472

 

 

 

-

 

 

 

105,472

 

 

 

-

 

 

 

105,472

 

Loans receivable, net

 

 

902,336

 

 

 

-

 

 

 

-

 

 

 

882,319

 

 

 

882,319

 

Accrued interest receivable

 

 

4,358

 

 

 

-

 

 

 

1,402

 

 

 

2,956

 

 

 

4,358

 

Federal Home Loan Bank stock

 

 

2,050

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand, NOW, money market deposits and savings accounts

 

 

765,084

 

 

 

765,084

 

 

 

-

 

 

 

-

 

 

 

765,084

 

Time deposits

 

 

392,373

 

 

 

-

 

 

 

394,205

 

 

 

-

 

 

 

394,205

 

Mortgage escrow funds

 

 

8,803

 

 

 

8,803

 

 

 

-

 

 

 

-

 

 

 

8,803

 

FHLB advances

 

 

18,841

 

 

 

-

 

 

 

20,574

 

 

 

-

 

 

 

20,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In connection with the adoption of ASU 2016-01 on July 1, 2018, we refined our methodology to estimate the fair value of our loan portfolio using an exit price notion resulting in prior periods no longer being comparable. The exit price notion requires determination of the price at which willing market participants would transact at the measurement date under current market conditions depending on facts and circumstances, such as origination rates, credit risk, transaction costs, liquidity, national and regional market trends and other adjustments, utilizing publicly available rates and indices. The application of an exit price notion requires the use of significant judgment. The prior period estimate of loans receivable, net was determined using an entrance price methodology based only on the discounted value of contracted cash flows based on prevailing interest rates.

 

30


 

Note 8. Regulatory Capital

The following is a summary of the Bank’s actual capital amounts and ratios as of March 31, 2019 and June 30, 2018, 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, and thus the consolidated capital ratios are no longer required to be disclosed in the financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

For Capital Adequacy

 

 

Corrective Action

 

 

 

Bank Actual

 

 

Purposes

 

 

Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PCSB Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage (Tier 1)

 

$

207,968

 

 

 

13.7

%

 

$

60,687

 

 

 

4.0

%

 

$

75,859

 

 

 

5.0

%

Risk-based:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Tier 1

 

 

207,968

 

 

 

20.5

 

 

 

45,712

 

 

 

4.5

 

 

 

66,028

 

 

 

6.5

 

Tier 1

 

 

207,968

 

 

 

20.5

 

 

 

60,949

 

 

 

6.0

 

 

 

81,265

 

 

 

8.0

 

Total

 

 

212,913

 

 

 

21.0

 

 

 

81,265

 

 

 

8.0

 

 

 

101,581

 

 

 

10.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PCSB Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage (Tier 1)

 

$

200,488

 

 

 

13.6

%

 

$

58,924

 

 

 

4.0

%

 

$

73,655

 

 

 

5.0

%

Risk-based:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Tier 1

 

 

200,488

 

 

 

21.1

 

 

 

42,745

 

 

 

4.5

 

 

 

61,743

 

 

 

6.5

 

Tier 1

 

 

200,488

 

 

 

21.1

 

 

 

56,994

 

 

 

6.0

 

 

 

75,991

 

 

 

8.0

 

Total

 

 

205,392

 

 

 

21.6

 

 

 

75,991

 

 

 

8.0

 

 

 

94,989

 

 

 

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. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period through January 1, 2019. As of January 1, 2019, the conservation buffer was fully phased in.

Management believes that as of March 31, 2019 and June 30, 2018, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer of 2.5% and 1.875% as of March 31, 2019 and June 30, 2018, 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.  

31


 

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 manner, 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 nine months ended March 31, 2019 and 2018.

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

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

 

Net income applicable to common stock

 

$

1,986

 

 

$

2,177

 

 

$

6,639

 

 

$

3,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares

   outstanding

 

 

17,451,763

 

 

 

18,165,110

 

 

 

17,917,077

 

 

 

18,165,110

 

Less: Average unallocated ESOP shares

 

 

1,247,370

 

 

 

1,344,384

 

 

 

1,271,790

 

 

 

1,375,979

 

Average number of common share

   soutstanding used to calculate basic

   earnings per common share

 

 

16,204,393

 

 

 

16,820,726

 

 

 

16,645,287

 

 

 

16,789,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of equity-based awards

 

 

57,362

 

 

 

-

 

 

 

14,459

 

 

 

-

 

Average number of common shares

   outstanding used to calculate diluted

   earnings per common share

 

 

16,261,755

 

 

 

16,820,726

 

 

 

16,659,746

 

 

 

16,789,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.13

 

 

$

0.40

 

 

$

0.23

 

Diluted

 

$

0.12

 

 

$

0.13

 

 

$

0.40

 

 

$

0.23

 

 

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 nine months ended March 31, 2019 because they were antidilutive. There were no potentially dilutive common stock equivalents during the three or nine months ended March 31, 2018.

 

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 Company had no interest rate swaps as of June 30, 2018. The following table presents summary information about the interest rate swaps as of March 31, 2019:

 

 

 

March 31,

 

(dollars in thousands)

 

2019

 

Notional amounts

 

$

16,525

 

Weighted average pay rates

 

 

4.39

%

Weighted average receive rates

 

 

4.39

%

Weighted average maturity

 

9.58 years

 

Fair value of combined interest rate swaps

 

$

-

 

32


 

 

Note 11. Revenue From Contracts With Customers

 

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on July 1, 2018. Under ASC 2014-09, an entity is required to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, as well as qualitative and quantitative disclosure related to contracts with certain customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.

 

In accordance with ASU 2014-09, 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:

 

 

1.

Identify the contract with a customer

 

2.

Identify the performance obligations in the contract

 

3.

Determine the transaction price

 

4.

Allocate the transaction price to performance obligations in the contract

 

5.

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

 

The Company’s revenue streams that are within the scope of the accounting standard are: (1) fees and service charges on deposit accounts (including interchange fees), which, are included on the Consolidated Statements of Operations as “Fees and service charges” and (2) gains on the sale of foreclosed real estate. For the three and nine months ended March 31, 2019 fees and services charges totaled $436,000 and $1.3 million, of which and $390,000 and $1.2 million, respectively, were revenue streams within the scope of the accounting standard. For the three and nine months ended March 31, 2018 fees and services charges totaled $352,000 and $1.1 million, of which $335,000 and $935,000, respectively, were in-scope revenue streams.

 

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. For the three and nine months ended March 31, 2019 fees and service charges on deposit accounts were $295,000 and $892,000, and for the three and nine months ended March 31, 2018 fees and service charges on deposit accounts were $242,000 and $649,000, respectively.

 

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. For the three and nine months ended March 31, 2019 interchange income was $95,000 and $314,000, and for the three and nine months ended March 31, 2018 interchange income was $93,000 and $286,000, respectively.

 

Gain/Losses 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. For the three and nine months ended March 31, 2019, gains on sale of foreclosed real estate were $0 and $24,000, compared to $13,000 and $27,000, for the three and nine months ended March 31, 2018, respectively.

33


 

 

 

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. Concurrent with the approval of the Plan, on October 24, 2018, 431,039 stock options and 183,884 restricted stock awards (“RSAs”) were granted to non-employee directors. Additionally, on November 14, 2018 the Board of Directors approved employee grants of 908,254 stock options and 363,301 RSAs. All grants of stock options and RSAs have a 5-year vesting period. Total compensation cost that has been charged against income for the Plan was $829,000 and $1.3 million for the three and nine months ended March 31, 2019.

 

Restricted Stock Awards

 

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, however may not vest more rapidly than over a three-year period. 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 issued as of March 31, 2019.

 

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

 

 

Number of

Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Unvested allocated shares outstanding at July 1, 2018

 

-

 

 

$

-

 

Shares granted

 

547,185

 

 

 

19.02

 

Shares vested

 

-

 

 

 

-

 

Shares forfeited

 

-

 

 

 

-

 

Unvested allocated shares at March 31, 2019

 

547,185

 

 

$

-

 

 

As of March 31, 2019, there was $9.6 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 4.6 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.

 

34


 

The fair value of options granted during the current year was determined using the following weighted-average assumptions as of grant date.

 

 

 

 

 

 

 

Risk-free interest rate

 

 

 

3.03

%

Expected term

 

 

 

6.50

 

Expected stock price volatility

 

 

 

18.26

%

Dividend yield

 

 

 

0.63

%

Weighted average fair value of options granted

 

 

$

4.61

 

 

As of March 31, 2019, there was $5.7 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 4.6 years.

 

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, 2018

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

Options granted

 

1,339,293

 

 

 

19.04

 

 

 

 

 

 

 

 

 

Options expired

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Options exercised

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2019

 

1,339,293

 

 

$

19.04

 

 

 

9.6

 

 

$

715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully vested and expected to vest

 

1,339,293

 

 

$

19.04

 

 

 

9.6

 

 

$

715

 

Exercisable at March 31, 2019

 

-

 

 

$

-

 

 

 

 

 

 

$

-

 

 

 

35


 

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

General

Management’s discussion and analysis of financial condition at March 31, 2019 and June 30, 2018, and results of operations for the three and nine months ended March 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, 2018.

Cautionary Note Regarding Forward-Looking Statements

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

 

statements of our goals, intentions and expectations;

 

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

 

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

 

estimates of our risks and future costs and benefits.

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

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

 

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

 

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

 

our ability to access cost-effective funding;

 

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

 

demand for loans and deposits in our market area;

 

our ability to continue to implement our business strategies;

 

competition among depository and other financial institutions;

 

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

 

adverse changes in the securities or credit markets;

 

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

 

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

 

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

 

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

 

changes in consumer spending, borrowing and savings habits;

36


 

 

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, 2018, 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. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Loan Losses. The allowance for loan losses is established as probable incurred losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

 

Comparison of Financial Condition at March 31, 2019 and June 30, 2018

 

Total Assets. Total assets increased $43.6 million, or 2.9%, to $1.52 billion at March 31, 2019 from $1.48 billion at June 30, 2018. The increase is primarily the result of increases of $33.3 million in net loans receivable, $25.0 million in cash and cash equivalents and $3.9 million in other assets, partially offset by a decrease of $18.6 million in total investment securities.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $25.0 million, or 40.2%, to $87.1 million at March 31, 2019 from $62.1 million at June 30, 2018. The increase was primarily attributable to a $44.7 million increase in deposits, a $19.5 million decrease in available for sale securities and a $7.4 million increase in FHLB advances, partially offset by a $33.3 million increase in net loans receivable and $817,000 increase in held to maturity securities.

 

Securities Held to Maturity. Total securities held to maturity increased $817,000, or 0.2%, to $354.0 million at March 31, 2019 from $353.2 million at June 30, 2018. This increase was primarily caused by $49.2 million of purchases, partially offset by $48.0 million in calls, maturities and amortization of mortgage-backed securities.

 

Securities Available for Sale. Total securities available for sale decreased $19.5 million, or 18.4%, to $86.0 million at March 31, 2019 from $105.5 million at June 30, 2018. This decline was primarily due to $14.4 million of calls and maturities of U.S. government and agency obligations, $3.9 million of amortization of mortgage backed securities, and $2.1 million of sales, partially offset by a $1.1 million decrease in net unrealized losses.

 

Net Loans Receivable. Net loans receivable increased $33.3 million, or 3.7%, to $935.6 million at March 31, 2019 from $902.3 million at June 30, 2018. The increase was the result of $127.7 million in originations and loan purchases, partially offset by $94.4 million of net amortization, prepayments, and other activity on the remaining portfolio.

 

37


 

Deposits. Total deposits increased $44.7 million, or 3.9% to $1.20 billion at March 31, 2019 from $1.16 billion at June 30, 2018. This increase primarily reflects increases of $87.3 million in money market accounts, $34.8 million in time deposits, $6.0 million in demand deposits and $2.5 million in NOW accounts, partially offset by a decrease of $85.9 million in savings accounts, and a $2.5 million net decrease in brokered time deposits.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank advances increased $7.4 million, or 39.3%, to $26.2 million at March 31, 2019 from $18.8 million at June 30, 2018. The increase is primarily due to $12.5 million of additional long-term advances, partially offset by $5.1 million in maturities and paydowns.

 

Total Shareholders’ Equity. Total shareholders’ equity decreased $9.2 million, or 3.2%, to $278.3 million at March 31, 2019 from $287.5 million at June 30, 2018. This decrease was primarily due to the repurchase of $18.3 million in common stock and $1.5 million of cash dividends paid, partially offset by net income of $6.6 million, $2.0 million of stock-based compensation expense, $1.2 million of comprehensive income, primarily due to the decrease in net unrealized losses on investment securities and a $719,000 reduction in unearned ESOP shares for plan shares earned during the period. As of March 31, 2019, the Company completed its previously reported program to repurchase up to 908,256 shares of its outstanding common stock. The Company repurchased 908,256 shares at an average price of $20.15 per share. At March 31, 2019, the Company’s book value per share and tangible book value per share were $15.63 and $15.27, respectively, compared to $15.83 and $15.47, respectively, at June 30, 2018. At March 31, 2019, the Bank was considered “well capitalized” under applicable regulatory guidelines.

 

 

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

 

General. Net income was $2.0 million for the three months ended March 31, 2019 compared to $2.2 million for the three months ended March 31, 2018. The decrease was primarily due to an $865,000 increase in noninterest expense, and a $34,000 increase in income tax expense, partially offset by a $594,000 increase in net interest income, a $67,000 increase in noninterest income and a $47,000 decrease in the provision for loan losses.

 

Net Interest Income. Net interest income increased $594,000, or 5.9%, to $10.7 million for the three months ended March 31, 2019, compared to the same period in 2018. The increase in net interest income compared to the prior period is primarily the result of a $99.6 million, or 7.3%, increase in average interest-earning assets, partially offset by a 5 basis point decrease in the net interest margin. The increase in average interest-earning assets is primarily due to a $70.1 million increase in average loans receivable. The net interest margin was 2.94% for the three months ended March 31, 2019, a decrease of five basis points compared to 2.99% in the prior year quarter. Despite continued asset growth and a higher yielding asset mix, the margin has been impacted by rising funding costs due to higher short-term interest rates along with competitive pricing. The cost of interest-bearing deposits was 1.04% for the three months ended March 31, 2019 compared to 0.58% for the three months ended March 31, 2018, an increase of 46 basis points. The Company has experienced a shift in deposit mix as customers in lower costing saving products moved funds to higher rate money market accounts and time deposits.

 

Interest and Dividend Income. Interest and dividend income increased $2.0 million, or 17.2%, to $13.6 million for the three months ended March 31, 2019 compared to $11.6 million for the three months ended March 31, 2018. The increase primarily reflects a $99.6 million increase in total average interest-earning assets and a 31 basis point increase in the yield on total interest-earning assets. The increase in yield is due to the shift from generally lower yielding investment securities to generally higher yielding loans, as well as the increase in yields for all asset types primarily due to changes in market interest rates.

 

Interest income on loans receivable increased $1.3 million, or 14.4%, primarily due to a $70.1 million increase in the average balance of loans receivable to $913.6 million for the three months ended March 31, 2019 from $843.5 million for the same period last year, and a 24 basis point increase in the average yield on loans to 4.56% for the three months ended March 31, 2019 from 4.32% for the same period last year.

 

Interest income on securities increased $251,000, or 10.6%, primarily due to a 34 basis point increase in the average yield on securities to 2.35% for the three months ended March 31, 2019 from 2.01% for the same period last year, partially offset by a $26.3 million decrease in the average balance of securities. The increase in the yield on securities was primarily due to an increase in market interest rates.

 

38


 

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, increased $437,000, or 246.9%, due primarily to a $55.8 million increase in the average balance of other interest-earning assets to $98.7 million for the three months ended March 31, 2019 from $42.9 million for the same period last year, and an 84 basis point increase in the average yield on other interest-earning assets to 2.52% for the three months ended March 31, 2019 from 1.68% for the same period last year. The increase in the yield on other interest-earning assets was primarily due to an increase in market interest rates.

 

Interest Expense. Interest expense increased $1.4 million, or 93.3%, to $2.9 million for the three months ended March 31, 2019 compared to $1.5 million for the three months ended March 31, 2018. The increase primarily reflects a 46 basis point increase in the average cost of interest-bearing liabilities to 1.08% for the three months ended March 31, 2019 from 0.62% for the same period last year, and a $96.2 million increase in the average balance on interest-bearing liabilities.

 

Interest expense on interest-bearing deposits increased $1.4 million, or 98.6%, primarily due to a 46 basis point increase in the average cost of interest- bearing deposits to 1.04% for the three months ended March 31, 2019 from 0.58% for the same period last year, and a $97.4 million increase in the average balance to $1.06 billion for the three months ended March 31, 2019 from $967.0 million for the three months ended March 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 the deposit mix as customers in lower costing saving products moved funds to higher rate money market accounts and time deposits. The average interest rate paid on money market accounts and time deposits both increased 70 basis points, as the Bank offered higher rates on these deposits due to the increase in market interest rates.

 

Interest expense on Federal Home Loan Bank advances increased $43,000, or 34.4%, primarily due to a 77 basis point increase in the average cost to 2.61% for the three months ended March 31, 2019 from 1.84% for the same period last year, partially offset by a $1.2 million decrease in the average balance to $26.2 million for the three months ended March 31, 2019 from $27.4 million for the same period last year. The increase in the average cost is primarily due to higher rates on new borrowings and the maturity of lower cost borrowings.

 

Provision for Loan Losses. The provision for loan losses decreased by $47,000 to $7,000 for the three months ended March 31, 2019, compared to $54,000 for the three months ended March 31, 2018. Charge-offs, net of recoveries, were $5,000 for the three months ended March 31, 2018 compared to recoveries, net of charge-offs, of $99,000 for the three months ended March 31, 2018. Loans classified as substandard decreased $10.6 million, or 53.9%, to $9.0 million as of March 31, 2019, from $19.6 million at March 31, 2018. Non-performing loans as a percent of total loans receivable was 0.30% as of March 31, 2019, a decrease from 0.80% as of March 31, 2018.

 

Noninterest Income. Noninterest income increased $67,000, or 13.1%, to $579,000 for the three months ended March 31, 2019 compared to a $512,000 for the three months ended March 31, 2018. The increase was caused primarily by an $84,000 increase in fees and service charges (deposit fees and loan processing fees), partially offset by a $17,000 decrease in all other noninterest income.

 

Noninterest Expense. Noninterest expense increased $865,000, or 11.0%, to $8.7 million for the three months ended March 31, 2019 compared to $7.8 million for the three months ended March 31, 2018. The increase was primarily caused by a $957,000 increase in salaries and employee benefits, partially offset by a $92,000 decrease in all other noninterest expenses. The increase in salaries and employee benefits was primarily due to $829,000 of stock-based compensation expense recorded in the current quarter, as well as a $110,000 increase in salaries as a result of additional staffing.

 

Income Tax Expense. Income tax expense increased $34,000, or 5.8%, to $625,000 for the three months ended March 31, 2019 from $591,000 for the three months ended March 31, 2018. The increase was caused primarily by a $182,000 one-time deferred tax remeasurement credit recorded in the prior year period in conjunction with the passing of the Tax Cuts and Job Act. The effective income tax rate was 23.9% for the three months ended March 31, 2019. The effective tax rate, adjusted for remeasurement credit, was 27.9% for the three months ended March 31, 2018. Beginning on July 1, 2018, the Company began to realize the full benefits of the reduction in the corporate income tax rate from 34% to 21%, which became effective in January 2018.

 

39


 

Comparison of Operating Results for the Nine Months Ended March 31, 2019 and 2018

 

General. Net income increased $2.7 million, or 68.7%, to $6.6 million for the nine months ended March 31, 2019 compared to $3.9 million for the nine months ended March 31, 2018. The increase was primarily due to a $1.9 million decrease in income tax expense, a $1.7 million increase in net interest income, a $318,000 decrease in the provision for loan losses, and a $222,000 increase in noninterest income, partially offset by a $1.4 million increase in noninterest expense.                                  

 

Net Interest Income. Net interest income increased $1.7 million, or 5.8%, to $31.9 million for the nine months ended March 31, 2019, compared to the same period in 2018. The increase in net interest income compared to the prior year is primarily the result of a $78.2 million, or 5.7%, increase in average interest-earning assets. The increase in average interest-earning assets is primarily due to an $80.6 million increase in average loans receivable. The net interest margin was 2.96% for the nine months ended March 31, 2019 unchanged from the nine months ended March 31, 2018. Despite continued asset growth and a higher yielding asset mix, the margin has been negatively impacted by rising funding costs due to higher short-term interest rates along with competitive pricing. The cost of interest-bearing deposits was 0.91% for the nine months ended March 31, 2019 compared to 0.55% for the nine months ended March 31, 2018, an increase of 36 basis points. The Company has experienced a shift in deposit mix as customers in lower costing saving products moved funds to higher rate money market accounts and time deposits.

 

Interest and Dividend Income. Interest and dividend income increased $4.9 million, or 14.1%, to $39.5 million for the nine months ended March 31, 2019 compared to a $34.6 million for the nine months ended March 31, 2018. The increase primarily reflects a $78.2 million increase in total average interest-earning assets and a 27 basis point increase in the yield on total interest-earning assets. The increase in yield is due to the increase in market interest rates, as well as the shift of assets from generally lower yielding investment securities to generally higher yielding loans.

 

Interest income on loans receivable increased $3.5 million, or 13.1%, primarily due to an $80.6 million increase in the average balance of loans receivable to $908.7 million for the nine months ended March 31, 2019 from $828.1 million for the same period last year, and an 13 basis point increase in the average yield on loans to 4.49% for the nine months ended March 31, 2019 from 4.36% for the same period last year.

 

Interest income on securities increased $531,000, or 7.7%, primarily due to a 29 basis point increase in the average yield on securities to 2.21% for the nine months ended March 31, 2019 from 1.92% for the same period last year, partially offset by a $30.8 million decrease in the average balance of securities. The increase in the yield on securities was primarily due to an increase in market interest rates.

 

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, increased $822,000, or 130.9%, due primarily to a $28.4 million increase in the average balance of the other interest-earning assets to $83.9 million for the nine months ended March 31, 2019 from $55.5 million for the same period last year, and a 79 basis point increase in the average yield on other interest-earning assets to 2.30% for the nine months ended March 31, 2019 from 1.51% for the same period last year. The increase in the yield on other interest-earning assets was due primarily to an increase in market interest rates.

 

Interest Expense. Interest expense increased $3.2 million, or 71.7%, to $7.6 million for the nine months ended March 31, 2019 compared to $4.4 million for the nine months ended March 31, 2018. The increase primarily reflects a 35 basis point increase in the average cost of interest-bearing liabilities to 0.94% for the nine months ended March 31, 2019 from 0.59% for the same period last year, and a $70.7 million increase in the average balance on interest-bearing liabilities.

 

Interest expense on interest-bearing deposits increased $3.2 million, or 81.4%, primarily due to a 36 basis point increase in the average cost of deposits to 0.91% for the nine months ended March 31, 2019 from 0.55% for the same period last year, and an $83.1 million increase in the average balance to $1.05 billion for the nine months ended March 31, 2019 from $962.0 million for the nine months ended March 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 higher rate money market accounts and time deposits. The average interest rate paid on money market accounts and time deposits increased 73 and 57 basis points respectively, as the Bank offered increased rates on these deposits due to the increase in market interest rates.

40


 

 

Interest expense on Federal Home Loan Bank advances decreased $65,000, or 14.7%, primarily due to a 55 basis point increase in the average cost to 2.25% for the nine months ended March 31, 2019 from 1.70% for the same period last year, partially offset by a $12.3 million decrease in the average balance to $22.4 million for the nine months ended March 31, 2019 from $34.7 million for the same period last year. The increase in the average cost is primarily due to higher rates on new borrowings and the maturity of lower cost borrowings.

 

Provision for Loan Losses. The provision for loan losses decreased by $318,000 to $71,000 for the nine months ended March 31, 2019, compared to $389,000 for the nine months ended March 31, 2018. Charge-offs, net of recoveries, were $30,000 for the nine months ended March 31, 2019 compared to $915,000 for the nine months ended March 31, 2018. In the prior year period, the Company recorded a $997,000 charge-off of a specific reserve previously recorded on a construction loan.

 

Noninterest Income. Noninterest income increased $222,000, or 11.6%, to $2.1 million for the nine months ended March 31, 2019 compared to a $1.9 million for the nine months ended March 31, 2018. The increase was caused primarily by a $155,000 gain on the sale of bank premises and $147,000 of swap income in the current year period, partially offset by a $118,000 decrease in gains on the sale of securities.

 

Noninterest Expense. Noninterest expense increased $1.4 million, or 6.0%, to $25.3 million for the nine months ended March 31, 2019 compared to $23.9 million for the nine months ended March 31, 2018. The increase was caused primarily by a $1.8 million increase in salaries and employee benefits, partially offset by decreases of $400,000 in all other noninterest expenses. The increase in salaries and employee benefits was primarily due to $1.3 million of stock-based compensation expense recorded in the current year, as well as a $668,000 increase in salaries as a result of additional staffing, partially offset by lower retirement and medical benefits costs.

 

Income Tax Expense. Income tax expense decreased $1.8 million, or 47.1%, to $2.1 million for the nine months ended March 31, 2019 from $3.9 million for the nine months ended March 31, 2018. The decrease was caused primarily by a $1.6 million one-time deferred tax remeasurement charge recorded in the prior year. The effective income tax rate was 23.9% for the nine months ended March 31, 2019. The effective tax rate, adjusted for remeasurement credit, was 30.2% for the nine months ended March 31, 2018.

 

41


 

Net Interest Income

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

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest/

Dividends

 

 

Average

Rate

 

 

Average

Balance

 

 

Interest/

Dividends

 

 

Average

Rate

 

 

 

(dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

913,634

 

 

$

10,413

 

 

 

4.56

%

 

$

843,557

 

 

$

9,103

 

 

 

4.32

%

Investment securities

 

 

445,604

 

 

 

2,619

 

 

 

2.35

 

 

 

471,932

 

 

 

2,368

 

 

 

2.01

 

Other interest-earning assets

 

 

98,717

 

 

 

614

 

 

 

2.52

 

 

 

42,860

 

 

 

177

 

 

 

1.68

 

Total interest-earning assets

 

 

1,457,955

 

 

 

13,646

 

 

 

3.75

 

 

 

1,358,349

 

 

 

11,648

 

 

 

3.44

 

Non-interest-earning assets

 

 

58,541

 

 

 

 

 

 

 

 

 

 

 

56,874

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,516,496

 

 

 

 

 

 

 

 

 

 

$

1,415,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

116,781

 

 

 

52

 

 

 

0.18

 

 

$

113,178

 

 

 

49

 

 

 

0.18

 

Money market accounts

 

 

126,438

 

 

 

368

 

 

 

1.18

 

 

 

42,448

 

 

 

50

 

 

 

0.48

 

Savings accounts and escrow

 

 

392,537

 

 

 

239

 

 

 

0.24

 

 

 

496,574

 

 

 

297

 

 

 

0.24

 

Time deposits

 

 

428,643

 

 

 

2,082

 

 

 

1.97

 

 

 

314,815

 

 

 

984

 

 

 

1.27

 

Total interest-bearing deposits

 

 

1,064,399

 

 

 

2,741

 

 

 

1.04

 

 

 

967,015

 

 

 

1,380

 

 

 

0.58

 

Federal Home Loan Bank advances

 

 

26,259

 

 

 

168

 

 

 

2.61

 

 

 

27,444

 

 

 

125

 

 

 

1.84

 

Total interest-bearing liabilities

 

 

1,090,658

 

 

 

2,909

 

 

 

1.08

 

 

 

994,459

 

 

 

1,505

 

 

 

0.62

 

Non-interest-bearing deposits

 

 

133,671

 

 

 

 

 

 

 

 

 

 

 

129,905

 

 

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

11,242

 

 

 

 

 

 

 

 

 

 

 

6,719

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,235,571

 

 

 

 

 

 

 

 

 

 

 

1,131,083

 

 

 

 

 

 

 

 

 

Total equity

 

 

280,925

 

 

 

 

 

 

 

 

 

 

 

284,140

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,516,496

 

 

 

 

 

 

 

 

 

 

$

1,415,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

10,737

 

 

 

 

 

 

 

 

 

 

$

10,143

 

 

 

 

 

Interest rate spread (1)

 

 

 

 

 

 

 

 

 

 

2.67

 

 

 

 

 

 

 

 

 

 

 

2.82

 

Net interest margin (2)

 

 

 

 

 

 

 

 

 

 

2.94

 

 

 

 

 

 

 

 

 

 

 

2.99

 

Average interest-earning assets to interest-bearing liabilities

 

 

133.68

%

 

 

 

 

 

 

 

 

 

 

136.59

%

 

 

 

 

 

 

 

 

 

(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.

42


 

 

 

 

 

Nine Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest/

Dividends

 

 

Average

Rate

 

 

Average

Balance

 

 

Interest/

Dividends

 

 

Average

Rate

 

 

 

(dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

908,674

 

 

$

30,632

 

 

 

4.49

%

 

$

828,138

 

 

$

27,092

 

 

 

4.36

%

Investment securities

 

 

446,398

 

 

 

7,413

 

 

 

2.21

 

 

 

477,199

 

 

 

6,882

 

 

 

1.92

 

Other interest-earning assets

 

 

83,938

 

 

 

1,450

 

 

 

2.30

 

 

 

55,502

 

 

 

628

 

 

 

1.51

 

Total interest-earning assets

 

 

1,439,010

 

 

 

39,495

 

 

 

3.66

 

 

 

1,360,839

 

 

 

34,602

 

 

 

3.39

 

Non-interest-earning assets

 

 

55,334

 

 

 

 

 

 

 

 

 

 

 

57,927

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,494,344

 

 

 

 

 

 

 

 

 

 

$

1,418,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

117,522

 

 

 

157

 

 

 

0.18

 

 

$

113,365

 

 

 

146

 

 

 

0.17

 

Money market accounts

 

 

95,407

 

 

 

788

 

 

 

1.10

 

 

 

33,854

 

 

 

93

 

 

 

0.37

 

Savings accounts and escrow

 

 

423,922

 

 

 

780

 

 

 

0.25

 

 

 

508,259

 

 

 

930

 

 

 

0.24

 

Time deposits

 

 

408,210

 

 

 

5,447

 

 

 

1.78

 

 

 

306,527

 

 

 

2,785

 

 

 

1.21

 

Total interest-bearing deposits

 

 

1,045,061

 

 

 

7,172

 

 

 

0.91

 

 

 

962,005

 

 

 

3,954

 

 

 

0.55

 

Federal Home Loan Bank advances

 

 

22,395

 

 

 

378

 

 

 

2.25

 

 

 

34,712

 

 

 

443

 

 

 

1.70

 

Total interest-bearing liabilities

 

 

1,067,456

 

 

 

7,550

 

 

 

0.94

 

 

 

996,717

 

 

 

4,397

 

 

 

0.59

 

Non-interest-bearing deposits

 

 

131,507

 

 

 

 

 

 

 

 

 

 

 

131,629

 

 

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

8,344

 

 

 

 

 

 

 

 

 

 

 

7,590

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,207,307

 

 

 

 

 

 

 

 

 

 

 

1,135,936

 

 

 

 

 

 

 

 

 

Total equity

 

 

287,037

 

 

 

 

 

 

 

 

 

 

 

282,830

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,494,344

 

 

 

 

 

 

 

 

 

 

$

1,418,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

31,945

 

 

 

 

 

 

 

 

 

 

$

30,205

 

 

 

 

 

Interest rate spread (1)

 

 

 

 

 

 

 

 

 

 

2.72

 

 

 

 

 

 

 

 

 

 

 

2.80

 

Net interest margin (2)

 

 

 

 

 

 

 

 

 

 

2.96

 

 

 

 

 

 

 

 

 

 

 

2.96

 

Average interest-earning assets to interest-bearing liabilities

 

 

134.81

%

 

 

 

 

 

 

 

 

 

 

136.53

%

 

 

 

 

 

 

 

 

 

(1)

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

(2)

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

 

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

43


 

 

 

 

Three Months Ended March 31,

 

 

 

2019 versus 2018

 

 

 

Rate

 

 

Volume

 

 

Net

 

 

 

(in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

535

 

 

$

775

 

 

$

1,310

 

Investment securities

 

 

224

 

 

 

27

 

 

 

251

 

Other interest-earning assets

 

 

121

 

 

 

316

 

 

 

437

 

Total interest-earning assets

 

 

880

 

 

 

1,118

 

 

 

1,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

 

2

 

 

 

1

 

 

 

3

 

Money market accounts

 

 

135

 

 

 

183

 

 

 

318

 

Savings and escrow accounts

 

 

20

 

 

 

(78

)

 

 

(58

)

Time deposits

 

 

664

 

 

 

434

 

 

 

1,098

 

Federal Home Loan Bank advances

 

 

50

 

 

 

(7

)

 

 

43

 

Total interest-bearing liabilities

 

 

871

 

 

 

533

 

 

 

1,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in net interest income

 

$

9

 

 

$

585

 

 

$

594

 

 

 

 

Nine Months Ended March 31,

 

 

 

2019 versus 2018

 

 

 

Rate

 

 

Volume

 

 

Net

 

 

 

(in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$

838

 

 

$

2,702

 

 

$

3,540

 

Investment securities

 

 

785

 

 

 

(254

)

 

 

531

 

Other interest-earning assets

 

 

409

 

 

 

413

 

 

 

822

 

Total interest-earning assets

 

 

2,032

 

 

 

2,861

 

 

 

4,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

 

5

 

 

 

6

 

 

 

11

 

Money market accounts

 

 

363

 

 

 

332

 

 

 

695

 

Savings and escrow accounts

 

 

42

 

 

 

(192

)

 

 

(150

)

Time deposits

 

 

1,559

 

 

 

1,103

 

 

 

2,662

 

Federal Home Loan Bank advances

 

 

119

 

 

 

(184

)

 

 

(65

)

Total interest-bearing liabilities

 

 

2,088

 

 

 

1,065

 

 

 

3,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in net interest income

 

$

(56

)

 

$

1,796

 

 

$

1,740

 

 

Management of Market Risk

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

44


 

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the offering have increased our capital and provided management with greater flexibility to manage our interest rate risk, including the following strategies; originating loans with adjustable interest rates; utilizing interest rate swap contracts; 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. Based on the recent increases in the fed funds rate, as of March 31, 2019 we have removed the 150 basis point decrease scenario in favor of a 200 basis point decrease to evaluate NPV.  

The following table presents the estimated changes in our NPV that would result from changes in market interest rates at March 31, 2019 and June 30, 2018. 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)

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200

 

$

292,697

 

 

$

(35,101

)

 

 

(10.7

)

%

 

20.41

%

 

 

(125

)

100

 

 

312,234

 

 

 

(15,564

)

 

 

(4.7

)

 

 

21.18

 

 

 

(48

)

-

 

 

327,798

 

 

-

 

 

-

 

 

 

21.66

 

 

-

 

(100)

 

 

332,546

 

 

 

4,748

 

 

 

1.4

 

 

 

21.48

 

 

 

(18

)

(200)

 

 

331,790

 

 

 

3,992

 

 

 

1.2

 

 

 

21.05

 

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200

 

$

282,017

 

 

$

(50,676

)

 

 

(15.2

)

%

 

20.75

%

 

 

(219

)

100

 

 

313,606

 

 

 

(19,087

)

 

 

(5.7

)

 

 

22.25

 

 

 

(69

)

-

 

 

332,693

 

 

-

 

 

-

 

 

 

22.94

 

 

-

 

(100)

 

 

342,520

 

 

 

9,827

 

 

 

3.0

 

 

 

23.02

 

 

 

8

 

(150)

 

 

348,648

 

 

 

15,955

 

 

 

4.8

 

 

 

23.14

 

 

 

20

 

 

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

45


 

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2019, cash and cash equivalents totaled $87.1 million, an increase from $62.1 million as of June 30, 2018. Debt securities classified as available for sale, which provide an additional source of liquidity, totaled $86.0 million at March 31, 2019, a decrease from $105.5 million as of June 30, 2018.

We had the ability to borrow up to $295.5 million and $314.9 million from the Federal Home Loan Bank of New York, at March 31, 2019 and June 30, 2018, respectively, of which $26.2 million and $18.8 million was outstanding as of March 31, 2019 and June 30, 2018, respectively. We also had an available line of credit with the Federal Reserve Bank of New York’s discount window program of $116.0 million and $122.1 million as of March 31, 2019 and June 30, 2018, respectively, none of which was outstanding at either date.

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

We had $126.8 million and $99.7 million of loan commitments outstanding as of March 31, 2019 and June 30, 2018, respectively, and $72.2 million and $59.5 million as of March 31, 2019 and June 30, 2018, respectively, of approved, but unadvanced, funds to borrowers. We also had $1.7 million and $1.4 million in outstanding letters of credit at March 31, 2019 and June 30, 2018, respectively.  

Time deposits due within one year of March 31, 2019 totaled $163.4 million, a decrease of $19.9 million from $183.3 million as of June 30, 2018. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and Federal Home Loan Bank of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits at March 31, 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 stockholders 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 laws and regulations. At March 31, 2019, the Holding Company (on an unconsolidated, stand-alone basis) had liquid assets of $55.4 million.

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation. At March 31, 2019, the Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 8 to the accompanying unaudited financial statements.

46


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2019. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended March 31, 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 will not have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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 March 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, 2018, filed with the Securities and Exchange Commission. As of March 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, 2018.

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

 

(a)

Not applicable

 

 

(b)

Not applicable

 

 

(c)

On October 24, 2018, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may repurchase up to 908,256 shares, or 5.0% of the Company’s then outstanding common stock. On February 6, 2019, PCSB Financial Corporation (the “Company”) completed the program. The Company repurchased 908,256 shares at an average price of $20.15 per share.

 

47


 

The following table presents information regarding stock repurchases by the Company during the quarter ended March 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

 

January 1, 2019 through January 31, 2019

 

 

335,000

 

 

$

19.99

 

 

 

335,000

 

 

 

351,186

 

February 1, 2019 through February 28, 2019

 

 

351,186

 

 

 

20.71

 

 

 

351,186

 

 

 

-

 

March 1, 2019 through March 31, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

 

686,186

 

 

$

20.36

 

 

 

686,186

 

 

 

 

 

 

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 March 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).

 

48


 

SIGNATURES

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

 

 

 

PCSB FINANCIAL CORPORATION

 

 

 

Date:  May 10, 2019

 

/s/ Joseph D. Roberto

 

 

Joseph D. Roberto

 

 

Chairman, President and Chief Executive Officer

 

 

 

Date:  May 10, 2019

 

/s/ Scott D. Nogles

 

 

Scott D. Nogles

 

 

Executive Vice President and Chief Financial Officer

 

 

49