PCSB Financial Corp - Quarter Report: 2021 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, 2021

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

For the transition period from _____ to _____

Commission File Number: 001-38065

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

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

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

N/A

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

PCSB

The NASDAQ Stock Market, LLC

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Small reporting company	☒

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for completing with any or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

15,966,216 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 7, 2021.

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	35
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		50

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

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

	March 31,			June 30,
	2021			2020
ASSETS
Cash and due from banks	$	167,983		$	135,045
Federal funds sold		1,331			1,257
Total cash and cash equivalents		169,314			136,302
Investment securities:
Held to maturity debt securities, at amortized cost (fair value of $313,974 and $281,497, respectively)		309,692			275,772
Available for sale debt securities, at fair value		37,610			37,426
Total investment securities		347,302			313,198
Loans receivable, net of allowance for loan losses of $7,865 and $8,639, respectively		1,261,155			1,260,947
Accrued interest receivable		6,731			6,880
FHLB stock		5,854			6,308
Premises and equipment, net		19,364			20,853
Deferred tax asset, net		3,163			3,129
Bank-owned life insurance		25,400			25,019
Goodwill		6,106			6,106
Other intangible assets		168			229
Other assets		10,117			12,958
Total assets	$	1,854,674		$	1,791,929
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits	$	1,250,945		$	1,181,357
Non-interest bearing deposits		203,345			191,898
Total deposits		1,454,290			1,373,255
Mortgage escrow funds		9,252			10,123
Advances from FHLB		95,991			106,089
Other liabilities		23,844			28,749
Total liabilities		1,583,377			1,518,216
Commitments and contingencies		-			-
Shareholders' equity:
Preferred stock ($0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2021 and June 30, 2020)		-			-
Common stock ($0.01 par value, 200,000,000 shares authorized, 18,703,577 and 18,712,295 shares issued as of March 31, 2021 and June 30, 2020, respectively, and 15,966,216 and 16,898,137 shares outstanding as of March 31, 2021 and June 30, 2020, respectively)		187			187
Additional paid in capital		188,926			186,200
Retained earnings		148,466			141,288
Unearned compensation - ESOP		(10,418	)		(11,145	)
Accumulated other comprehensive loss, net of income taxes		(6,180	)		(6,403	)
Treasury stock, at cost (2,737,361 and 1,814,158 shares as of March 31, 2021 and June 30, 2020, respectively)		(49,684	)		(36,414	)
Total shareholders' equity		271,297			273,713
Total liabilities and shareholders' equity	$	1,854,674		$	1,791,929

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

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

	Three Months Ended March 31,					Nine Months Ended March 31,
	2021			2020		2021			2020
Interest and dividend income
Loans receivable	$	12,116		$	13,114	$	36,845		$	39,299
Investment securities		1,700			2,003		5,489			6,974
Federal funds and other		109			217		344			816
Total interest and dividend income		13,925			15,334		42,678			47,089
Interest expense
Deposits and escrow interest		1,782			3,268		6,372			9,927
FHLB advances		506			541		1,545			1,942
Total interest expense		2,288			3,809		7,917			11,869
Net interest income		11,637			11,525		34,761			35,220
Provision (benefit) for loan losses		(894	)		2,008		(678	)		2,755
Net interest income after provision for loan losses		12,531			9,517		35,439			32,465
Noninterest income
Fees and service charges		353			366		1,038			1,170
Bank-owned life insurance		120			128		381			399
Swap income		-			-		367			170
Gains on sales of securities		113			38		113			38
Other		6			48		30			115
Total noninterest income		592			580		1,929			1,892
Noninterest expense
Salaries and employee benefits		5,595			5,782		16,722			17,435
Occupancy and equipment		1,359			1,311		4,051			3,959
Communication and data processing		517			521		1,539			1,559
Professional fees		382			393		1,285			1,176
Postage, printing, stationery and supplies		146			140		452			439
FDIC assessment		115			-		350			-
Advertising		100			100		300			300
Amortization of intangible assets		21			24		61			73
Other operating expenses		337			249		1,127			1,160
Total noninterest expense		8,572			8,520		25,887			26,101
Net income before income tax expense		4,551			1,577		11,481			8,256
Income tax expense		959			360		2,467			1,857
Net income	$	3,592		$	1,217	$	9,014		$	6,399
Earnings per common share:
Basic	$	0.25		$	0.08	$	0.60		$	0.41
Diluted	$	0.25		$	0.08	$	0.60		$	0.40
Weighted average common shares outstanding:
Basic		14,631,122			15,437,173		14,944,097			15,752,709
Diluted		14,632,342			15,447,217		14,944,664			15,814,322

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(amounts in thousands)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2021			2020			2021			2020
Net income	$	3,592		$	1,217		$	9,014		$	6,399

Other comprehensive income:
Unrealized (losses) gains on available for sale debt securities:
Net change in unrealized gains/losses before reclassification adjustment		(565	)		186			(584	)		406
Reclassification adjustment for gains realized in net income		(52	)		(20	)		(52	)		(20	)
Net change in unrealized gains/losses		(617	)		166			(636	)		386
Tax effect		129			(35	)		133			(80	)
Net of tax		(488	)		131			(503	)		306

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		305			132			877			668
Tax effect		(64	)		(27	)		(184	)		(139	)
Net of tax		241			105			693			529

Supplemental retirement plans:
Net gain (loss) arising during the period		-			-			-			-
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost		14			11			42			34
Tax effect		(2	)		(3	)		(9	)		(9	)
Net of tax		12			8			33			25

Total other comprehensive (loss) income		(235	)		244			223			860

Comprehensive income	$	3,357		$	1,461		$	9,237		$	7,259

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

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

																		Accumulated
	Number of					Additional						Unallocated			Treasury			Other			Total
	Common			Common		Paid-In			Retained			Common Stock			Stock,			Comprehensive			Shareholders'
	Shares			Stock		Capital			Earnings			of ESOP			at cost			Loss			Equity
Balance at July 1, 2020		16,898,137		$	187	$	186,200		$	141,288		$	(11,145	)	$	(36,414	)	$	(6,403	)	$	273,713
Net income		-			-		-			2,728			-			-			-			2,728
Other comprehensive income		-			-		-			-			-			-			187			187
Common stock dividends declared ($0.04 per share)		-			-		-			(630	)		-			-			-			(630	)
Repurchase of common stock		(266,900	)		-		-			-			-			(3,449	)		-			(3,449	)
Restricted stock awards granted		3,000			-		(60	)		-			-			60			-			-
Stock-based compensation		-			-		829			-			-			-			-			829
ESOP shares committed to be released (24,419 shares)		-			-		57			-			244			-			-			301
Balance at September 30, 2020		16,634,237			187		187,026			143,386			(10,901	)		(39,803	)		(6,216	)		273,679
Net income		-			-		-			2,694			-			-			-			2,694
Other comprehensive income		-			-		-			-			-			-			271			271
Common stock dividends declared ($0.04 per share)		-			-		-			(608	)		-			-			-			(608	)
Repurchase of common stock		(517,270	)		-		-			-			-			(7,591	)		-			(7,591	)
Shares withheld related to income tax withholding		(19,100	)		-		-			-			-			(303	)		-			(303	)
Stock-based compensation		-			-		822			-			-			-			-			822
ESOP shares committed to be released (24,419 shares)		-			-		116			-			244			-			-			360
Balance at December 31, 2020		16,097,867			187		187,964			145,472			(10,657	)		(47,697	)		(5,945	)		269,324
Net income		-			-		-			3,592			-			-			-			3,592
Other comprehensive loss		-			-		-			-			-			-			(235	)		(235	)
Common stock dividends declared ($0.04 per share)		-			-		-			(598	)		-			-			-			(598	)
Repurchase of common stock		(122,933	)		-		-			-			-			(1,987	)		-			(1,987	)
Forfeiture of restricted stock		(8,718	)		-		-			-			-			-			-			-
Stock-based compensation		-			-		809			-			-			-			-			809
ESOP shares committed to be released (23,888 shares)		-			-		153			-			239			-			-			392
Balance at March 31, 2021		15,966,216		$	187	$	188,926		$	148,466		$	(10,418	)	$	(49,684	)	$	(6,180	)	$	271,297

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

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

																	Accumulated
	Number of					Additional					Unallocated			Treasury			Other			Total
	Common			Common		Paid-In		Retained			Common Stock			Stock,			Comprehensive			Shareholders'
	Shares			Stock		Capital		Earnings			of ESOP			at cost			Loss			Equity
Balance at July 1, 2019		17,804,039		$	187	$	182,129	$	134,500		$	(12,114	)	$	(18,305	)	$	(5,090	)	$	281,307
Net income		-			-		-		2,829			-			-			-			2,829
Other comprehensive income		-			-		-		-			-			-			256			256
Common stock dividends declared ($0.04 per share)		-			-		-		(659	)		-			-			-			(659	)
Repurchase of common stock		(179,800	)		-		-		-			-			(3,524	)		-			(3,524	)
Stock-based compensation		-			-		830		-			-			-			-			830
ESOP shares committed to be released (24,419 shares)		-			-		239		-			244			-			-			483
Balance at September 30, 2019		17,624,239			187		183,198		136,670			(11,870	)		(21,829	)		(4,834	)		281,522
Net income		-			-		-		2,353			-			-			-			2,353
Other comprehensive income		-			-		-		-			-			-			360			360
Common stock dividends declared ($0.04 per share)		-			-		-		(650	)		-			-			-			(650	)
Repurchase of common stock		(236,050	)		-		-		-			-			(4,748	)		-			(4,748	)
Shares withheld related to income tax withholding		(15,881	)		-		-		-			-			(320	)		-			(320	)
Stock-based compensation		-			-		829		-			-			-			-			829
ESOP shares committed to be released (24,419 shares)		-			-		249		-			244			-			-			493
Balance at December 31, 2019		17,372,308			187		184,276		138,373			(11,626	)		(26,897	)		(4,474	)		279,839
Net income		-			-		-		1,217			-			-			-			1,217
Other comprehensive income		-			-		-		-			-			-			244			244
Common stock dividends declared ($0.04 per share)		-			-		-		(633	)		-			-			-			(633	)
Repurchase of common stock		(474,171	)		-		-		-			-			(9,517	)		-			(9,517	)
Stock-based compensation		-			-		829		-			-			-			-			829
ESOP shares committed to be released (24,154 shares)		-			-		196		-			242			-			-			438
Balance at March 31, 2020		16,898,137		$	187	$	185,301	$	138,957		$	(11,384	)	$	(36,414	)	$	(4,230	)	$	272,417

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

	Nine Months Ended March 31,
	2021			2020
OPERATING ACTIVITIES
Net income	$	9,014		$	6,399
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for loan loss		(678	)		2,755
Depreciation and amortization		2,226			2,223
Amortization of net premiums on securities and net deferred loan origination costs		681			1,242
Net decrease (increase) in accrued interest receivable		149			(587	)
Net gains on sales of foreclosed real estate		-			(87	)
Net gains on sales of securities		(113	)		(38	)
Stock-based compensation		2,460			2,487
ESOP compensation		1,053			1,415
Earnings from cash surrender value of BOLI		(381	)		(399	)
Net accretion of purchase accounting adjustments		(193	)		(437	)
Other adjustments, principally net changes in other assets and liabilities		(1,682	)		(474	)
Net cash provided by operating activities		12,536			14,499
INVESTING ACTIVITIES
Purchases of investment securities:
Held to maturity		(102,412	)		(13,189	)
Available for sale		(20,377	)		-
Sales of investment securities available for sale		3,339			4,245
Maturities, calls and amortization of investment securities:
Held to maturity		67,814			99,572
Available for sale		16,120			22,148
Loan principal repayments (disbursements), net		871			(86,045	)
Purchase of loans		-			(44,579	)
Net redemption of FHLB stock		454			229
Purchase of bank premises and equipment, net of sales		(233	)		(563	)
Purchase of BOLI		-			(200	)
Proceeds from sales of foreclosed real estate		-			1,578
Net cash used in investing activities		(34,424	)		(16,804	)
FINANCING ACTIVITIES
Net increase in deposits		81,035			53,765
Net decrease in short-term FHLB advances		(10,000	)		(50,000	)
Proceeds from long-term FHLB advances		-			50,000
Repayment of long-term FHLB advances		(98	)		(5,095	)
Net decrease in mortgage escrow funds		(871	)		(1,431	)
Common stock dividends paid		(1,836	)		(1,942	)
Repurchase of shares from employees for income tax withholding purpose		(303	)		(320	)
Repurchase of common stock		(13,027	)		(17,789	)
Net cash provided by financing activities		54,900			27,188
Net increase in cash and cash equivalents		33,012			24,883
Cash and cash equivalents at beginning of period		136,302			60,029
Cash and cash equivalents at end of period	$	169,314		$	84,912

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited) – (continued)

(amounts in thousands)

	Nine Months Ended March 31,
	2021		2020
Supplemental information:
Cash paid for:
Interest	$	7,935	$	11,822
Income taxes		2,764		2,069
Loans transferred to foreclosed real estate		-		333
Establishment of right to use lease asset		443		12,687

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

Nature of Operations: PCSB Financial Corporation (the “Holding Company” and together with its direct and indirect subsidiaries, the “Company”) is a Maryland corporation organized by PCSB Bank (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in the Bank's conversion to stock ownership on April 20, 2017. At March 31, 2021, the significant assets of the Holding Company were the capital stock of the Bank, cash deposited in the Bank, and a loan to the PCSB Bank Employee Stock Ownership Plan (“ESOP”). The liabilities of the Holding Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended, and regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New York State Department of Financial Services (the “NYSDFS”).

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

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

The unaudited consolidated financial statements contained herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments reflected in the consolidated financial statements contained herein. The results of operations for the current period presented are not necessarily indicative of the results of operations that may be expected for the entire current fiscal year. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2020, 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.

Risks and Uncertainties:

The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. The New York City Metropolitan area and environs have had one of the highest incidences of COVID-19 in the nation, and the neighboring Tri-State area of New Jersey and Connecticut also has been particularly affected by COVID-19. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 continue to evolve and are not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

The ultimate financial impact of the pandemic is unknown at this time. However, if these actions are sustained, it may continue to adversely impact several industries within our geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations to the Company. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of

operations. Material adverse impacts may include all or a combination of valuation impairments of the Company’s intangible assets, investments, loans, or deferred tax assets.

As it relates to the allowance for loan losses, the Company continues to assess the economic impacts the COVID-19 pandemic has had on our local economy and loan portfolio. The Company has taken actions to identify, assess and address its COVID-19 related credit exposure. Many factors are unknown, including the length of the various restrictions imposed on certain industries by New York State and other neighboring states, the impacts of the government’s fiscal and monetary relief measures, including payment deferral programs, as well as the long-term impacts COVID-19 may have on our consumer and commercial borrowers. It is reasonably possible that the Company’s allowance for loan losses as of March 31, 2021 will change in the near term and could result in a material change to the Company’s provision for loan losses, earnings and capital.

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 the Company has determined could potentially have a material impact on our financial position, results of operations or disclosures.

There were no accounting standards adopted in the current period.

Future Application of Accounting Pronouncements Previously Issued

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including loans, debt securities, and other financial assets. The ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by recording an allowance for current expected credit losses. In October 2019, the FASB unanimously voted to delay the implementation of the standard for three years for certain companies, including small reporting companies (as defined by the SEC), non-SEC public companies and private companies. The Company currently qualifies as a small reporting company and is subject to the delayed implementation. Therefore, the amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2023, including interim periods within that fiscal year. The Company is actively working through the provisions of the Update. Management has established a steering committee which is identifying the methodologies and the additional data requirements necessary to implement the Update and has engaged a third-party software service provider to assist in the Company's implementation. Management is currently evaluating the impact that ASU 2016-13 will have on the Company’s consolidated financial position, results of operations and disclosures.

Note 3. Investment Securities

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity debt securities at March 31, 2021 and June 30, 2020 were as follows:

	March 31, 2021
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
			(in thousands)
Available for sale:
U.S. Government and agency obligations	$	1,000	$	4	$	-		$	1,004
Corporate		8,020		85		-			8,105
State and municipal		7,041		33		(210	)		6,864
Mortgage-backed securities – residential		21,643		279		(285	)		21,637
Total available for sale	$	37,704	$	401	$	(495	)	$	37,610
Held to maturity:
U.S. Government and agency obligations	$	43,493	$	261	$	(91	)	$	43,663
Corporate		43,612		1,171		(127	)		44,656
State and municipal		41,356		207		(843	)		40,720
Mortgage-backed securities – residential		83,862		3,058		(113	)		86,807
Mortgage-backed securities – collateralized mortgage obligations		45,260		935		(138	)		46,057
Mortgage-backed securities – commercial		52,109		587		(625	)		52,071
Total held to maturity	$	309,692	$	6,219	$	(1,937	)	$	313,974

	June 30, 2020
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
			(in thousands)
Available for sale:
U.S. Government and agency obligations	$	11,002	$	47	$	-		$	11,049
Corporate		5,038		82		-			5,120
Mortgage-backed securities – residential		20,844		428		(15	)		21,257
Total available for sale	$	36,884	$	557	$	(15	)	$	37,426
Held to maturity:
U.S. Government and agency obligations	$	42,001	$	454	$	(5	)	$	42,450
Corporate		43,634		142		(1,459	)		42,317
State and municipal		9,156		190		(51	)		9,295
Mortgage-backed securities – residential		117,160		4,291		(17	)		121,434
Mortgage-backed securities – collateralized mortgage obligations		45,047		1,487		(31	)		46,503
Mortgage-backed securities – commercial		18,774		724		-			19,498
Total held to maturity	$	275,772	$	7,288	$	(1,563	)	$	281,497

During the three and nine months ended March 31, 2021, the Company sold $5.0 million of securities which resulted in $113,000 of realized gains, which included the disposal of $1.6 million of securities classified as held to maturity, resulting in $61,000 of realized gains. These held to maturity 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, comparing both principal and interest over terms. During the three and nine months ended March 31, 2020, the Company sold $4.7 million of securities which resulted in $38,000 of realized gains, which included the disposal of $426,000 of securities classified as held to maturity, resulting in $17,000 of realized gains.

The following table presents the fair value and carrying amount of debt securities at March 31, 2021, by contractual maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to

call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Held to maturity				Available for sale
	Carrying		Fair		Amortized		Fair
	Amount		Value		Cost		Value
1 year or less	$	6,035	$	6,084	$	4,020	$	4,076
1 to 5 years		48,159		48,381		2,000		2,017
5 to 10 years		33,702		34,645		3,000		3,017
over 10 years		36,638		35,856		7,041		6,863
Mortgage-backed securities and other		185,158		189,008		21,643		21,637
Total	$	309,692	$	313,974	$	37,704	$	37,610

Securities pledged had carrying amounts of $183.2 million and $182.2 million at March 31, 2021 and June 30, 2020, respectively, and were pledged principally to secure FHLB advances and public deposits.

The following table provides information regarding investment securities with unrealized/unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at March 31, 2021 and June 30, 2020:

	March 31, 2021
	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:
State and municipal	$	4,790	$	(210	)	$	-	$	-		$	4,790	$	(210	)
Mortgage-backed securities – residential		9,852		(274	)		1,365		(11	)		11,217		(285	)
Total available for sale	$	14,642	$	(484	)	$	1,365	$	(11	)	$	16,007	$	(495	)
Held to maturity:
U.S. Government and agency obligations	$	11,403	$	(91	)	$	-	$	-		$	11,403	$	(91	)
Corporate		2,481		(18	)		14,969		(109	)		17,450		(127	)
State and municipal		28,818		(843	)		-		-			28,818		(843	)
Mortgage-backed securities – residential		7,805		(113	)		-		-			7,805		(113	)
Mortgage-backed securities – collateralized mortgage obligations		16,541		(138	)		-		-			16,541		(138	)
Mortgage-backed securities – commercial		24,315		(625	)		-		-			24,315		(625	)
Total held to maturity	$	91,363	$	(1,828	)	$	14,969	$	(109	)	$	106,332	$	(1,937	)

	June 30, 2020
	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
Mortgage-backed securities – residential	$	1,450	$	(15	)	$	-	$	-		$	1,450	$	(15	)
Total available for sale	$	1,450	$	(15	)	$	-	$	-		$	1,450	$	(15	)
Held to maturity
U.S. Government and agency obligations	$	11,995	$	(5	)	$	-	$	-		$	11,995	$	(5	)
Corporate		25,615		(1,004	)		12,045		(455	)		37,660		(1,459	)
State and municipal		5,136		(51	)		-		-			5,136		(51	)
Mortgage-backed securities – residential		5,130		(17	)		-		-			5,130		(17	)
Mortgage-backed securities – collateralized mortgage obligations		2,627		(31	)		-		-			2,627		(31	)
Total held to maturity	$	50,503	$	(1,108	)	$	12,045	$	(455	)	$	62,548	$	(1,563	)

As of March 31, 2021, the Company’s securities portfolio consisted of $347.3 million in securities, of which 57 securities with a fair value of $122.3 million were in an unrealized loss position. The majority of unrealized losses are related to the Company’s state, municipal and corporate securities which are internally pass rated and are subject to quarterly credit monitoring. With the exception of these securities, all other investments are guaranteed by the U.S. government or its agencies.

At March 31, 2021 and June 30, 2020, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

There were no securities as of March 31, 2021 or June 30, 2020 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 and credit spreads. 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, 2021 or June 30, 2020.

Note 4. Loans Receivable

Loans receivable are summarized as follows (in thousands):

	March 31,			June 30,
	2021			2020
Mortgage loans:
Residential	$	229,008		$	255,382
Commercial		831,162			807,106
Construction		10,047			11,053
Net deferred loan origination costs		365			739
Total mortgage loans		1,070,582			1,074,280
Commercial and consumer loans:
Commercial loans		171,314			164,257
Home equity lines of credit		27,211			29,838
Consumer and overdrafts		269			481
Net deferred loan origination costs		(356	)		730
Total commercial and consumer loans		198,438			195,306
Total loans receivable		1,269,020			1,269,586
Allowance for loan losses		(7,865	)		(8,639	)
Loans receivable, net	$	1,261,155		$	1,260,947

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ended March 31, 2021 and 2020 (in thousands):

	Three Months Ended March 31, 2021
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	334	$	(4	)	$	-		$	2	$	332
Commercial mortgages		6,872		(354	)		-			-		6,518
Construction		205		(103	)		-			-		102
Commercial loans		1,201		(437	)		(21	)		105		848
Home equity lines of credit		61		(1	)		-			2		62
Consumer and overdrafts		4		5			(6	)		-		3
Total	$	8,677	$	(894	)	$	(27	)	$	109	$	7,865

	Three Months Ended March 31, 2020
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	352	$	102		$	-		$	3	$	457
Commercial mortgages		4,568		1,099			-			125		5,792
Construction		273		173			-			-		446
Commercial loans		953		600			-			-		1,553
Home equity lines of credit		60		23			-			2		85
Consumer and overdrafts		10		11			(9	)		1		13
Total	$	6,216	$	2,008		$	(9	)	$	131	$	8,346

	Nine Months Ended March 31, 2021
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	373	$	(49	)	$	-		$	8	$	332
Commercial mortgages		6,913		(395	)		-			-		6,518
Construction		165		(63	)		-			-		102
Commercial loans		1,124		(187	)		(245	)		156		848
Home equity lines of credit		60		(4	)		-			6		62
Consumer and installment loans		4		20			(23	)		2		3
Total	$	8,639	$	(678	)	$	(268	)	$	172	$	7,865

	Nine Months Ended March 31, 2020
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	446	$	34		$	(31	)	$	8	$	457
Commercial mortgages		3,853		1,814			-			125		5,792
Construction		159		287			-			-		446
Commercial loans		1,130		573			(150	)		-		1,553
Home equity lines of credit		65		10			-			10		85
Consumer and installment loans		11		37			(42	)		7		13
Total	$	5,664	$	2,755		$	(223	)	$	150	$	8,346

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, 2021 and June 30, 2020 (in thousands):

	March 31, 2021
	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 mortgages	$	2,238	$	226,049	$	721	$	229,008	$	114	$	218	$	-	$	332
Commercial mortgages		-		830,264		898		831,162		-		6,518		-		6,518
Construction		-		10,047		-		10,047		-		102		-		102
Commercial loans		1,739		169,575		-		171,314		-		848		-		848
Home equity lines of credit		410		26,674		127		27,211		9		53		-		62
Consumer and overdrafts		-		269		-		269		-		3		-		3
Total	$	4,387	$	1,262,878	$	1,746	$	1,269,011	$	123	$	7,742	$	-	$	7,865

	June 30, 2020
	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 mortgages	$	2,448	$	252,195	$	739	$	255,382	$	118	$	255	$	-	$	373
Commercial mortgages		-		806,224		882		807,106		-		6,913		-		6,913
Construction		-		11,053		-		11,053		-		165		-		165
Commercial loans		1,921		162,336		-		164,257		1		1,123		-		1,124
Home equity lines of credit		350		29,349		139		29,838		4		56		-		60
Consumer and overdrafts		-		481		-		481		-		4		-		4
Total	$	4,719	$	1,261,638	$	1,760	$	1,268,117	$	123	$	8,516	$	-	$	8,639

The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by portfolio segment as of March 31, 2021 and June 30, 2020 (in thousands):

	March 31, 2021						June 30, 2020
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance recorded:
Residential mortgages	$	1,926	$	1,812	$	-	$	2,123	$	2,013	$	-
Commercial loans		1,909		1,739		-		2,067		1,897		-
Home equity lines of credit		358		379		-		326		339		-
With an allowance recorded:
Residential mortgages		365		426		114		372		435		118
Commercial loans		-		-		-		24		24		1
Home equity lines of credit		31		31		9		11		11		4
Total	$	4,589	$	4,387	$	123	$	4,923	$	4,719	$	123

The tables below present the average recorded investment and interest income recognized on loans individually evaluated for impairment, by portfolio segment, for the three and nine months ended March 31, 2021 and 2020 (in thousands):

	Three months ended				Three months ended
	March 31, 2021				March 31, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgages	$	1,822	$	7	$	2,060	$	13
Commercial mortgages		-		-		485		9
Commercial loans		1,749		47		1,932		51
Home equity lines of credit		379		-		403		7
With an allowance recorded:
Residential mortgages		427		4		435		4
Commercial loans		-		-		38		-
Home equity lines of credit		30		-		11		(6	)
Total	$	4,407	$	58	$	5,364	$	78

	Nine Months Ended				Nine Months Ended
	March 31, 2021				March 31, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgages	$	1,905	$	27	$	2,050	$	40
Commercial mortgages		-		-		946		149
Commercial loans		1,786		144		2,015		154
Home equity lines of credit		384		1		574		20
With an allowance recorded:
Residential mortgages		429		11		437		11
Commercial loans		-		-		42		1
Home equity lines of credit		24		-		11		-
Total	$	4,528	$	183	$	6,075	$	375

The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days and still on accrual status, by portfolio segment, as of March 31, 2021 and June 30, 2020 (in thousands):

					Loans Past Due Over 90 Days
	Nonaccrual				and Still Accruing
	March 31,		June 30,		March 31,		June 30,
	2021		2020		2021		2020
Residential mortgages	$	1,267	$	1,457	$	-	$	-
Commercial mortgages		-		-		408		-
Home equity lines of credit		379		338		-		-
Total	$	1,646	$	1,795	$	408	$	-

Nonperforming loans include both smaller-balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The table above excludes acquired loans that are accounted for as purchased credit impaired loans totaling $372,000 and $392,000 as of March 31, 2021 and June 30, 2020, respectively. Such loans are excluded because the loans are in pools that are considered performing. The discounts arising from recording these loans at fair value upon acquisition were due in part to credit quality and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows.

The following tables present the aging of the recorded investment in past due loans by portfolio segment as of March 31, 2021 and June 30, 2020 (in thousands):

	March 31, 2021
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current ⁽¹⁾		Total
Residential mortgages	$	-	$	-	$	939	$	939	$	228,069	$	229,008
Commercial mortgages		-		-		408		408		830,754		831,162
Construction		-		-		-		-		10,047		10,047
Commercial loans		54		226		-		280		171,034		171,314
Home equity lines of credit		-		-		379		379		26,832		27,211
Consumer and overdrafts		-		-		-		-		269		269
Total	$	54	$	226	$	1,726	$	2,006	$	1,267,005	$	1,269,011

	June 30, 2020
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current ⁽¹⁾		Total
Residential mortgages	$	495	$	10	$	806	$	1,311	$	254,071	$	255,382
Commercial mortgages		-		-		-		-		807,106		807,106
Construction		-		-		-		-		11,053		11,053
Commercial loans		76		-		-		76		164,181		164,257
Home equity lines of credit		44		-		338		382		29,456		29,838
Consumer and overdrafts		-		-		-		-		481		481
Total	$	615	$	10	$	1,144	$	1,769	$	1,266,348	$	1,268,117

⁽¹⁾	As of March 31, 2021 and June 30, 2020, loans on a COVID-19-related payment deferral of $34.4 million and $200.6 million, respectively, are considered current.

Troubled Debt Restructurings

The terms of certain loans have been modified as troubled debt restructurings (“TDR”). The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. All TDRs are considered impaired loans.

As of March 31, 2021 and June 30, 2020, the Company had 13 and 14 loans, classified as TDRs totaling $3.1 million and $3.3 million, including $2.7 million and $2.9 million, respectively, of loans still accruing interest. The Company has allocated $123,000 of specific reserves to customers whose loan terms have been modified in TDRs as of both March 31, 2021 and June 30, 2020. As of March 31, 2021, the Company has committed to lend an additional $5,000 to customers with outstanding loans that are classified as TDRs.

The Company did not modify any loans during the three or nine months ended March 31, 2021 that were classified as TDRs. The Company modified one and two commercial loans in troubled debt restructurings during the three and nine months ended March 31, 2020, respectively. These loans had a carrying amount as of March 31, 2020 of $156,000.

There were no defaults of troubled debt restructurings occurring in the three or nine months ended March 31, 2021 that were modified in the twelve months prior to default. The Company had one TDR, a residential mortgage loan with a carrying amount of $370,000 as of March 31, 2020, default in the nine months ended March 31, 2020 that was modified in the twelve months prior to default, with no such defaults occurring in the three months ended March 31, 2020. This default did not result in a charge-off nor an increase to the allowance for loan losses.

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. On December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends Section 4013 of the CARES Act to the earlier of January 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19. Additionally, on April 7, 2020, the banking agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (“Interagency Statement”), to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain COVID-19-related modifications.

During the nine months ended March 31, 2021, the Company granted or extended loan payment deferrals for 31 residential mortgage loans and home equity lines of credit totaling $9.7 million, as well as 35 commercial mortgage, construction and commercial loans totaling $41.6 million. In accordance with either the CARES Act (as amended) or Interagency Statement, these modifications are not considered troubled debt restructurings. The Company had 35 and 293 loans totaling $34.4 million and $200.6 million on loan payment deferral as of March 31, 2021 and June 30, 2020, respectively.

Credit Quality Indicators

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

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

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

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

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

	March 31, 2021
	Pass		Special Mention		Substandard		Total
Residential mortgages	$	224,725	$	2,358	$	1,925	$	229,008
Commercial mortgages		814,173		1,627		15,362		831,162
Construction		10,047		-		-		10,047
Commercial loans		167,309		94		3,911		171,314
Home equity lines of credit		25,870		902		439		27,211
Consumer and overdrafts		269		-		-		269
Total	$	1,242,393	$	4,981	$	21,637	$	1,269,011

	June 30, 2020
	Pass		Special Mention		Substandard		Total
Residential mortgages	$	252,604	$	687	$	2,091	$	255,382
Commercial mortgages		803,048		3,176		882		807,106
Construction		11,053		-		-		11,053
Commercial loans		160,137		201		3,919		164,257
Home equity lines of credit		28,894		498		446		29,838
Consumer and overdrafts		481		-		-		481
Total	$	1,256,217	$	4,562	$	7,338	$	1,268,117

As of March 31, 2021, of the $34.4 million in loans in a COVID-19 related payment deferral, $16.4 million were pass-rated, with $2.6 million and $15.3 million rated special mention and substandard, respectively. As of June 30, 2020, of the $200.6 million in loans on deferral, $195.4 million and $5.2 million were rated pass and substandard, respectively.

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, 2021 and June 30, 2020 is as follows (in thousands):

	March 31,		June 30,
	2021		2020
Residential mortgages	$	721	$	739
Commercial mortgages		898		882
Home equity lines of credit		127		139
Carrying amount, net of allowance of $0	$	1,746	$	1,760

There was no provision for loan losses on purchased credit impaired loans during the three or nine months ended March 31, 2021 and 2020.

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,
	2021			2020			2021			2020
Beginning balance	$	147		$	174		$	156		$	192
New loans acquired		-			-			-			-
Accretion income		(9	)		(9	)		(18	)		(27	)
Reclassification from non-accretable difference		-			-			-			-
Disposals		-			-			-			-
Ending balance	$	138		$	165		$	138		$	165

Note 5. Accumulated 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, 2021	$	413		$	(6,153	)	$	(205	)	$	(5,945	)
Other comprehensive loss before reclassifications		(565	)		-			-			(565	)
Amounts reclassified from accumulated other comprehensive income		(52	)		305			14			267
Less tax effect		129			(64	)		(2	)		63
Net other comprehensive (loss) income		(488	)		241			12			(235	)
Balance at March 31, 2021	$	(75	)	$	(5,912	)	$	(193	)	$	(6,180	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at January 1, 2020	$	(34	)	$	(4,207	)	$	(233	)	$	(4,474	)
Other comprehensive income before reclassifications		186			-			-			186
Amounts reclassified from accumulated other comprehensive income		(20	)		132			11			123
Less tax effect		(35	)		(27	)		(3	)		(65	)
Net other comprehensive income		131			105			8			244
Balance at March 31, 2020	$	97		$	(4,102	)	$	(225	)	$	(4,230	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2020	$	428		$	(6,605	)	$	(226	)	$	(6,403	)
Other comprehensive loss before reclassifications		(584	)		-			-			(584	)
Amounts reclassified from accumulated other comprehensive income		(52	)		877			42			867
Tax effect		133			(184	)		(9	)		(60	)
Net other comprehensive (loss) income		(503	)		693			33			223
Balance at March 31, 2021	$	(75	)	$	(5,912	)	$	(193	)	$	(6,180	)

	Net unrealized gain (loss) on available for sale securities			Unrealized loss on pension benefits			Unrealized loss on SERP benefits			Total
Balance at July 1, 2019	$	(209	)	$	(4,631	)	$	(250	)	$	(5,090	)
Other comprehensive income before reclassifications		406			-			-			406
Amounts reclassified from accumulated other comprehensive income		(20	)		668			34			682
Tax effect		(80	)		(139	)		(9	)		(228	)
Net other comprehensive income		306			529			25			860
Balance at March 31, 2020	$	97		$	(4,102	)	$	(225	)	$	(4,230	)

Note 6. Post-Retirement Benefits

Employee Pension Plan

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

Supplemental Executive Retirement Plans

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

Net periodic benefit cost and other amounts recognized in other comprehensive income for the three and nine months ended March 31, 2021 and 2020 (in thousands):

	Three Months Ended					Three Months Ended
	March 31, 2021					March 31, 2020
	Defined Benefit Plan			Supplemental Retirement Plans		Defined Benefit Plan			Supplemental Retirement Plans
Service cost	$	-		$	130	$	-		$	90
Interest cost		136			18		180			28
Expected return on plan assets		(455	)		-		(479	)		-
Amortization of prior net loss		241			14		132			11
Settlement charges		65			-		-			-
Net periodic (benefit) cost	$	(13	)	$	162	$	(167	)	$	129

	Nine Months Ended					Nine Months Ended
	March 31, 2021					March 31, 2020
	Defined Benefit Plan			Supplemental Retirement Plan		Defined Benefit Plan			Supplemental Retirement Plan
Service cost	$	-		$	311	$	-		$	248
Interest cost		409			65		540			89
Expected return on plan assets		(1,366	)		-		(1,436	)		-
Amortization of prior net loss		720			42		396			34
Settlement charges		158			-		272			-
Net periodic (benefit) cost	$	(79	)	$	418	$	(228	)	$	371

The Company made no contributions to the defined benefit plan during the three or nine months ended March 31, 2021.

Employee Stock Ownership Plan

On January 1, 2017, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Company employees. On April 20, 2017, the Company granted a loan to the ESOP for the purchase of 1,453,209 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company to purchase the common stock is payable annually over 15 years at a rate per annum equal to the Prime Rate, reset annually on January 1st (3.25% for 2021). 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, 2021 was $10.7 million. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released annually is 96,881 through 2032. Dividends on allocated shares increase participant accounts and are used to purchase additional shares of stock. Participants receive the shares at the end of employment.

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

	March 31, 2021		June 30, 2020
Allocated to participants		402,362		327,206
Unearned		1,041,802		1,114,529
Total ESOP shares		1,444,164		1,441,735

Fair value of unearned shares	$	17,304	$	14,132

Total compensation expense recognized in connection with the ESOP for the three and nine months ended March 31, 2021 was $392,000 and $1.1 million, respectively, and for the three and nine months ended March 31, 2020 was $438,000 and $1.4 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 collateral-dependent impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. Appraisals are generally obtained annually and may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management performs a review of all appraisals, including any such adjustments. The fair value of uncollateralized or non-collateral-dependent loans are generally based on discounted cash flows which utilize management’s assumption of discount rates and expected future cash flows, resulting in a Level 3 classification.

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

Foreclosed properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

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

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

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2021
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations	$	-	$	1,004	$	-	$	1,004
Corporate		-		8,105		-		8,105
State and municipal		-		6,864		-		6,864
Mortgage-backed securities – residential		-		21,637		-		21,637
Derivatives – interest rate contracts		-		4,425		-		4,425
Total assets at fair value	$	-	$	42,035	$	-	$	42,035

Derivatives – interest rate contracts	$	-	$	4,425	$	-	$	4,425
Total liabilities at fair value	$	-	$	4,425	$	-	$	4,425

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	312	$	312
Home equity lines of credit		-		-		21		21
Total assets at fair value	$	-	$	-	$	333	$	333

	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
June 30, 2020
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations	$	-	$	11,049	$	-	$	11,049
Corporate		-		5,120		-		5,120
Mortgage-backed securities – residential		-		21,257		-		21,257
Derivatives – interest rate contracts		-		8,305		-		8,305
Total assets at fair value	$	-	$	45,731	$	-	$	45,731

Derivatives – interest rate contracts	$	-	$	8,305	$	-	$	8,305
Total liabilities at fair value	$	-	$	8,305	$	-	$	8,305

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	317	$	317
Commercial loans		-		-		100		100
Home equity lines of credit		-		-		7		7
Total assets at fair value	$	-	$	-	$	424	$	424

There were no transfers between levels within the fair value hierarchy during the three or nine months ended March 31, 2021 and 2020.

Impaired loans in the preceding table had a carrying amount of $456,000 and a remaining valuation allowance of $123,000, at March 31, 2021, as compared to $547,000 and $123,000, respectively, as of June 30, 2020. Impaired loans measured at fair value incurred no net charge-offs and resulted in a benefit for loan losses of $1,000 during the nine months ended March 31, 2021. Impaired loans measured at fair value as of March 31, 2020 incurred no net charge-offs and resulted in an additional credit for loan losses of $6,000 during the nine months ended March 31, 2020.

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, 2021 and June 30, 2020 (dollars in thousands):

Valuation

Unobservable

Range or

Fair Value

Technique(s)

Input(s)

Rate Used

March 31, 2021

Impaired loans - residential mortgages

312

Discounted cash flow

Discount rate

5.4% to 6.3%

Impaired loans - home equity lines of credit

Discounted cash flow

Discount rate

5.4% to 6.3%

June 30, 2020

Impaired loans - residential mortgages

316

Discounted cash flow

Discount rate

5.4% to 6.3%

Impaired loans - home equity lines of credit

Discounted cash flow

Discount rate

6.3%

Impaired loans - commercial loans

100

Discounted cash flow

Discount rate

6.8% to 7.5%

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, 2021
Financial assets:
Cash and cash equivalents	$	169,314	$	169,314	$	-	$	-	$	169,314
Investment securities held to maturity		309,692		-		286,539		27,435		313,974
Investment securities available for sale		37,610		-		37,610		-		37,610
Loans receivable, net		1,261,155		-		-		1,240,645		1,240,645
Accrued interest receivable		6,731		-		1,300		5,431		6,731
FHLB stock		5,854	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		4,425		-		4,425		-		4,425
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,046,464		1,046,464		-		-		1,046,464
Time deposits		407,826		-		414,737		-		414,737
Mortgage escrow funds		9,252		9,252		-		-		9,252
Accrued interest payable		228		1		227		-		228
FHLB advances		95,991		-		99,550		-		99,550
Derivative liabilities - interest rate contracts		4,425		-		4,425		-		4,425

	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2020
Financial assets:
Cash and cash equivalents	$	136,302	$	136,302	$	-	$	-	$	136,302
Investment securities held to maturity		275,772		-		276,847		4,650		281,497
Investment securities available for sale		37,426		-		37,426		-		37,426
Loans receivable, net		1,260,947		-		-		1,240,440		1,240,440
Accrued interest receivable		6,880		-		997		5,883		6,880
FHLB stock		6,308	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		8,305		-		8,305		-		8,305
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		926,989		926,989		-		-		926,989
Time deposits		446,246		-		456,109		-		456,109
Mortgage escrow funds		10,123		10,123		-		-		10,123
Accrued interest payable		246		1		245				246
FHLB advances		106,089		-		110,937		-		110,937
Derivative liabilities - interest rate contracts		8,305		-		8,305		-		8,305

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

Note 8. Regulatory Matters

The following is a summary of the Bank’s actual capital amounts and ratios as of March 31, 2021 and June 30, 2020, compared to the required ratios for minimum capital adequacy and for classification as well capitalized (dollars in thousands).

											To Be Well Capitalized
						For Capital					Under Prompt
						Adequacy					Corrective Action
	Bank Actual					Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2021
Leverage (Tier 1)	$	230,237		12.8	%	$	72,197		4.0	%	$	90,247		5.0	%
Risk-based:
Common Tier 1		230,237		17.7			58,462		4.5			84,445		6.5
Tier 1		230,237		17.7			77,950		6.0			103,933		8.0
Total		238,102		18.3			103,933		8.0			129,916		10.0

June 30, 2020
Leverage (Tier 1)	$	220,310		12.5	%	$	70,432		4.0	%	$	88,040		5.0	%
Risk-based:
Common Tier 1		220,310		17.0			58,389		4.5			84,339		6.5
Tier 1		220,310		17.0			77,852		6.0			103,802		8.0
Total		228,949		17.0			103,802		8.0			129,753		10.0

In addition to the ratios above, the Basel III Capital Rules have established that community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers.

Management believes that as of March 31, 2021 and June 30, 2020, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer of 2.5%, as of March 31, 2021 and June 30, 2020,

respectively. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification.

Note 9. Earnings Per Share (“EPS”)

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

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2021			2020			2021			2020
	(amounts in thousands, except share and per share data)
Net income applicable to common stock	$	3,592		$	1,217		$	9,014		$	6,399

Average number of common shares outstanding		15,684,763			16,587,563			16,022,046			16,927,496
Less: Average unallocated ESOP shares		(1,053,641	)		(1,150,390	)		(1,077,949	)		(1,174,787	)
Average number of common shares outstanding used to calculate basic earnings per common share		14,631,122			15,437,173			14,944,097			15,752,709

Effect of equity-based awards		1,220			10,044			567			61,613
Average number of common shares outstanding used to calculate diluted earnings per common share		14,632,342			15,447,217			14,944,664			15,814,322

Earnings per common share:
Basic	$	0.25		$	0.08		$	0.60		$	0.41
Diluted	$	0.25		$	0.08		$	0.60		$	0.40

Stock options for 1,323,334 and 1,338,000 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended March 31, 2021, respectively, because they were antidilutive. Stock options for 1,339,293 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended March 31, 2020 because they were antidilutive.

Note 10. Derivatives and Hedging

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

The following table presents summary information about the interest rate swaps as of March 31, 2021 and June 30, 2020.

	March 31,			June 30,
	2021			2020
	(dollars in thousands)
Notional amounts	$	183,571		$	159,242
Weighted average pay rates		2.55	%		2.54	%
Weighted average receive rates		2.55	%		2.54	%
Weighted average maturity	8.71 years			9.31 years
Fair value of combined interest rate swaps	$	-		$	-

Note 11. Revenue From Contracts With Customers

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

Identify the contract with a customer.

Identify the performance obligations in the contract.

Determine the transaction price.

Allocate the transaction price to performance obligations in the contract.

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

The following table presents summary information about sources of revenue from contracts with customers for the periods indicated.

	Three Months Ended March 31,					Nine Months Ended March 31,
	2021		2020			2021		2020
	(in thousands)
Noninterest income:
Service charges on deposits	$	173	$	236		$	531	$	737
Interchange fees		128		95			392		324
Other ⁽¹⁾		52		35			115		109
Fees and service charges		353		366			1,038		1,170

Bank-owned life insurance⁽¹⁾		120		128			381		399
Swap income ⁽¹⁾		-		-			367		170
Gain on sale of securities, net ⁽¹⁾		113		38			113		38

Net gain on sale of foreclosed real estate		-		49			-		87
Other ⁽¹⁾		6		(1	)		30		28
Other noninterest income		6		48			30		115
Total noninterest income	$	592	$	580		$	1,929	$	1,892

⁽¹⁾Not within the scope of ASC 606.

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

Interchange Income. The Company earns interchange fees from debit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying

transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

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

Note 12. Stock-Based Compensation

On October 24, 2018, the Company’s shareholders approved the PCSB Financial Corporation 2018 Equity Incentive Plan (the “Plan”), which permits the grant of stock options and restricted stock and/or restricted stock units. The total number of shares that may be granted under the Plan is 2,543,115, of which 1,816,511 shares may be granted as stock options and 726,604 shares may be granted as restricted stock and restricted stock units. Total compensation cost that has been charged against income for the Plan was $809,000 and $2.5 million for the three and nine months ended March 31, 2021, and $829,000 and $2.5 million for the three and nine months ended March 31, 2020, respectively.

Restricted Stock Awards (“RSAs”)

RSAs provide for the issuance of shares to both employees and non-employee directors. These awards generally vest over a 5-year period, with 20% vesting each year on the anniversary of the award. All awards were made at the fair value of common stock on the grant date. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at grant date. The fair value of the stock was determined to be the closing price of the stock on the NASDAQ exchange. Total shares available for grant under the Plan are 726,604, of which 541,467 shares were granted as of March 31, 2021.

The following table presents a summary of RSA activity during the period ended March 31, 2021.

	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested granted shares outstanding at July 1, 2020		437,737		$	19.02
Shares granted		3,000			12.34
Shares vested		(109,439	)		19.02
Shares forfeited		(8,718	)		19.40
Unvested granted shares at March 31, 2021		322,580		$	18.95

As of March 31, 2021, there was $5.5 million of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.7 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.

The fair value of options granted during the three and nine months ended March 31, 2021, was determined using the following weighted-average assumptions as of grant date.

Risk-free interest rate		0.39	%
Expected term (in years)		6.25
Expected stock price volatility		35.75	%
Dividend yield		1.30	%
Weighted average fair value of options granted	$	3.72

Total options available for grant under the Plan are 1,816,511, of which 1,308,963 options were granted as of March 31, 2021. 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, 2020		1,339,293		$	19.04			$	-
Options granted		6,000			12.34
Options expired		(14,532	)		19.40
Options forfeited		(21,798	)		19.40
Options exercised		-			-
Options outstanding at March 31, 2021		1,308,963		$	19.00		7.6	$	26

Exercisable at March 31, 2021		521,185		$	19.03		7.6	$	-

As of March 31, 2021, there was $3.2 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 2.7 years.

Note 13. Leases

As of March 31, 2021, the Company leases real estate for eleven branch offices and one administrative office, including its corporate headquarters, under various operating lease agreements. The Company’s leases have maturities which range from 2022 to 2041, some of which include lessee options to extend the lease term. The weighted average remaining life of the lease terms for these leases was 9.62 years as of March 31, 2021.

The operating lease asset and lease liability are determined at the commencement date of the lease based on the present value of the lease payments. As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term, at the lease commencement date. The Company utilized a weighted average discount rate of 2.37% in determining the lease liability as of March 31, 2021.

The Company made a policy election to exclude the recognition requirements of ASC 842 to short-term leases, those leases with original terms of 12 months or less. Short-term lease payments are recognized in the income statement on a straight-line basis over the lease term. The Company had no short-term lease cost for the three or nine months ended March 31, 2021 or 2020. Certain leases may include one or more options to renew. The exercise of lease renewal options is typically at the Company’s discretion and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally

accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated. The Company does not sublease any of its leased properties. There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three or nine months ended March 31, 2021 or 2020.

Total operating lease cost was $501,000 and $1.5 million for both the three and nine months ended March 31, 2021 and 2020, respectively, and is included in occupancy and equipment expense. The right-of-use asset, included in premises and equipment, net, was $10.1 million and the corresponding lease liability, included in other liabilities was $10.4 million as of March 31, 2021.

Future minimum lease payments for the fiscal years ending June 30 and a reconciliation of undiscounted lease cash flows and the lease liability recognized in the consolidated balance sheet as of March 31, 2021 is shown below:

(dollars in thousands)
2021	$	507
2022		2,027
2023		1,940
2024		1,569
2025		1,276
Thereafter		4,550
Total future minimum lease payments (undiscounted)		11,869
Discounting effect on cash flows		(1,502	)
Lease liability (discounted)	$	10,367

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, 2021 and June 30, 2020, and results of operations for the three and nine months ended March 31, 2021 and 2020 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, 2020.

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:

•

extent and severity of the recent COVID-19 pandemic, including its impact on our business and operations, including the impact on lost fee revenue and operating expenses, as well as its effects on our customers and issuers of securities, including their ability to make timely payments on obligations, service providers, and on economies and markets more generally;

•

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

•

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

•

our ability to access cost-effective funding;

•

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

•

demand for loans and deposits in our market area;

•

our ability to continue to implement our business strategies;

•

competition among depository and other financial institutions;

•

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

•

adverse changes in the securities or credit markets;

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

•

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

•

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

•

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

•

changes in consumer spending, borrowing and savings habits;

•

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

•

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, 2020, under the heading “Risk Factors.”

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

Critical Accounting Policies

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. For additional information regarding critical accounting policies, refer to the section captioned “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the June 30, 2020 Form 10-K. There have been no significant changes in our application of critical accounting policies for the three or nine months ended March 31, 2021.

Loan Payment Deferrals

The COVID-19 pandemic has created extensive disruptions to the local economy and our customers. Through March 31, 2021, the Company has granted loan payment deferrals on 330 consumer and commercial loans whose borrowers have demonstrated financial hardship caused by COVID-19 with loan balances totaling $220.2 million. As of March 31, 2021, 35 loans totaling $34.4 million were still on deferral. Of those loans still on deferral as of March 31, 2021, $8.7 million are scheduled to resume payments prior to June 30, 2021, with the remainder scheduled to resume payments prior to January 31, 2022, however as we continue to assess our borrowers’ financial condition and individual circumstances in the coming weeks and months, additional payment deferrals may be granted.

The table below provides additional detail for those loans on deferral as of March 31, 2021 (dollar amounts in thousands):

Industry Sector:	Number of loans		Recorded Investment ⁽²⁾		% secured by real estate collateral			Loan-to-Value %⁽³⁾			Weighted average term of remaining deferral (in months)
Consumer ⁽¹⁾		18	$	5,925		100.0	%		60.9	%		1.6
Commercial:
Retail		3		11,591		100.0			59.8			9.1
Hotels and accommodation services		2		7,648		100.0			55.6			3.0
Food service		2		3,018		100.0			48.7			7.7
All other commercial		10		6,175		96.7			49.6			2.4
Total commercial		17		28,432		99.3			55.3			5.9
Total		35	$	34,357		99.4	%		56.3	%		5.2

⁽¹⁾

Includes first and second lien residential mortgages of $5.3 million and $658, respectively.

⁽²⁾

Includes loans classified as special mention and substandard of $2.6 million and $15.3 million, respectively.

⁽³⁾

Generally based on collateral values upon origination.

The table below provides additional detail regarding the type of deferral granted for those loans on deferral as of March 31, 2021 (dollar amounts in thousands):

	Consumer		Commercial		Total
Principal only	$	-	$	16,047	$	16,047
Interest only		707		4,504		5,211
Principal and interest		5,218		6,925		12,143
Principal, interest and escrow		-		956		956
Total	$	5,925	$	28,432	$	34,357

Comparison of Financial Condition at March 31, 2021 and June 30, 2020

Total Assets. Total assets increased $62.7 million, or 3.5%, to $1.85 billion at March 31, 2021 from $1.79 billion at June 30, 2020. The increase is primarily the result of increases of $34.1 million in total investment securities and $33.0 million in cash and cash equivalents, partially offset by a decrease of $4.4 million in all other assets.

Cash and Cash Equivalents. Cash and cash equivalents increased $33.0 million, or 24.2%, to $169.3 million at March 31, 2021 from $136.3 million at June 30, 2020. The increase is primarily due to a $80.2 million increase in deposits and escrow funds, partially offset by a $34.1 million increase in total investment securities and a $10.1 million decrease in FHLB advances. The Company has maintained elevated cash balances for much of the last twelve months as a result of muted loan growth and significant deposit growth driven by government stimulus and reduced consumer and commercial spending.

Securities Held to Maturity. Total securities held to maturity increased $33.9 million, or 12.3%, to $309.7 million at March 31, 2021 from $275.8 million at June 30, 2020. This increase was caused primarily by increases of $32.2 million in municipal securities and $1.5 million in U.S. government and agency obligations.

Securities Available for Sale. Total securities available for sale increased $184,000, or 0.5%, to $37.6 million at March 31, 2021 from $37.4 million at June 30, 2020. This increase was primarily due to increases of $7.0 million in municipal securities, $3.0 million in corporate securities, $799,000 in mortgage-backed securities and $636,000 in net unrealized gains, partially offset by a $10.0 million decrease in U.S. government and agency obligations.

Net Loans Receivable. Net loans receivable increased $208,000, to $1.26 billion at March 31, 2021. The increase was primarily the result of increases in commercial mortgages of $24.1 million and commercial loans of $7.1 million, and a decrease in the allowance for loan losses of $774,000, partially offset by decreases in residential mortgages and home equity lines of credit of $26.4 million and $2.6 million, respectively. The increase in

commercial loans includes an increase in PPP loans of $777,000, driven by the originations of $17.1 million in PPP loans, largely offset by paydowns and forgiveness of $16.3 million.

Deposits. Total deposits increased $81.0 million, or 5.9%, to $1.45 billion at March 31, 2021 as compared to $1.37 billion at June 30, 2020. This increase primarily reflects increases of $62.0 million in money market accounts, $28.8 million in savings accounts, $17.3 million in NOW accounts and $11.4 million in demand accounts, partially offset by a $38.4 million decrease in time deposits.

Federal Home Loan Bank Advances. FHLB advances decreased $10.1 million, or 9.5%, to $96.0 million at March 31, 2021 as compared to $106.1 million at June 30, 2020. This decrease is primarily due to $10.0 million repayments of short-term borrowings.

Total Shareholder’s Equity. Total shareholders’ equity decreased $2.4 million, or 0.9%, to $271.3 million at March 31, 2021 as compared to June 30, 2020. This decrease was primarily due to the repurchase of $13.3 million (926,203 shares) of common stock and $1.8 million of cash dividends declared and paid, partially offset by net income of $9.0 million and $3.5 million of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period. As of March 31, 2021, there were 739,660 shares available to be repurchased under the current stock repurchase plan.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020

General. Net income increased $2.4 million, or 195.2%, to $3.6 million for the three months ended March 31, 2021 compared to $1.2 million for the three months ended March 31, 2020. The increase was primarily due to a $2.9 million decrease in provision for loan losses and a $112,000 increase in net interest income, partially offset by a $599,000 increase in tax expense and a $52,000 increase in non-interest expenses.

Net Interest Income. Net interest income increased $112,000, or 1.0%, to $11.6 million for the three months ended March 31, 2021 compared to $11.5 million for the three months ended March 31, 2020. The increase primarily reflects a $143.8 million, or 9.0% increase in average interest-earning assets, partially offset by 21 basis point decrease in the tax equivalent net interest margin to 2.69% compared to 2.90% for the same period last year. The increase in average interest-earning assets reflects a $106.0 million increase in average other interest-earning assets and a $42.5 million increase in average loans receivable, partially offset by a $4.7 million decrease in average investment securities. Despite continued asset growth and a decrease in funding costs, margin compression has resulted from significant decreases in market interest rates over the past year and a less profitable asset mix due to an increase in cash and cash equivalents.

Interest and Dividend Income. Interest and dividend income decreased $1.4 million, or 9.2%, to $13.9 million for the three months ended March 31, 2021 compared to $15.3 million for the three months ended March 31, 2020. The decrease primarily reflects a 64 basis point decrease in the yield on total interest-earning assets, partially offset by a $143.8 million increase in total average interest-earning assets.

Interest income on loans receivable decreased $998,000, or 7.6%, primarily due to a 47 basis point decrease in the average yield on the tax equivalent loans to 3.88% for the three months ended March 31, 2021 from 4.35% for the same period last year, partially offset by a $42.5 million increase in the average balance of loans receivable to $1.25 billion for the three months ended March 31, 2021 from $1.21 billion for the same period last year. Decreases in market interest rates driven most significantly by the Fed Funds rate cuts throughout the last year, as well as the origination of lower yielding PPP loans, has resulted in a decreased yield on tax equivalent loans.

Interest income on investment securities decreased $303,000, or 15.1%, primarily due to a 30 basis point decrease in the average yield on the tax equivalent investment securities to 2.18% for the three months ended March 31, 2021 from 2.48% for the same period last year and a $4.7 million decrease in the average balance of investment securities to $319.2 million for the three months ended March 31, 2021 from $323.9 million for the same period last year. The decrease in yield is a result of lower market rates. The decrease in the average balance of investment securities is the result of the Company utilizing securities portfolio runoff to fund loan growth.

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, decreased $108,000, or 49.8%, primarily due to a 129 basis point decrease in the average yield on other interest-earning assets to 0.27% for the three months ended March 31, 2021, from 1.56% for

the same period last year, partially offset by a $106.0 million increase in the average balance of other interest-earning assets to $162.2 million for the three months ended March 31, 2021 compared to $56.2 million for the three months ended March 31, 2020. The decrease in the yield on other interest-earning assets was primarily due to a decrease in market interest rates, specifically the Fed Funds rate.

Interest Expense. Interest expense decreased $1.5 million, or 39.9%, to $2.3 million for the three months ended March 31, 2021 compared to $3.8 million for the three months ended March 31, 2020. The decrease primarily reflects a 56 basis point decrease in the average cost of interest-bearing liabilities to 0.70% for the three months ended March 31, 2021 from 1.26% for the same period last year, partially offset by a $95.3 million increase in the average balance of interest-bearing liabilities to $1.32 billion for the three months ended March 31, 2021 from $1.23 billion for the same period last year.

Interest expense on interest-bearing deposits decreased $1.5 million, or 45.5%, primarily due to a 59 basis point decrease in the average cost of interest-bearing deposits to 0.59% for the three months ended March 31, 2021 from 1.18% for the same period last year, partially offset by a $89.0 million increase in the average balance to $1.22 billion for the three months ended March 31, 2021 from $1.13 billion for the three months ended March 31, 2020. The decrease in the average rate paid on interest-bearing deposits was primarily caused by a decrease in market interest rates affecting most significantly the average rates paid on time deposits and money market accounts, which decreased 81 and 65 basis points, respectively, when compared to the prior year quarter.

Interest expense on FHLB advances decreased $35,000, or 6.5%, primarily due to a 27 basis point decrease in the average cost to 1.96% for the three months ended March 31, 2021 from 2.23% for the same period last year, partially offset by a $6.2 million increase in the average balance to $104.6 million for the three months ended March 31, 2021 from a $98.4 million for the three months ended March 31, 2020. The decrease in the cost of FHLB funds is primarily due to a decrease in market interest rates.

Over the remainder of the current fiscal year, the Company has $50.0 million of wholesale funding maturing, comprised of FHLB advances and brokered time deposits, with a weighted average cost of 2.31%. Additionally, over the same period the Company has $78.3 million of non-brokered time deposits maturing with a current weighted average cost of 0.98%. If our time deposit offer rates remain at their current levels, the Company expects the cost of these deposits to be reduced significantly or to be paid off with low-earning excess liquidity.

Provision for Loan Losses. The benefit for loan losses was $894,000 for the three months ended March 31, 2021, compared to a provision for loan losses of $2.0 million for the three months ended March 31, 2020. Included in the prior year quarter was a provision for loan losses of $1.7 million associated with reserves established in response to the COVID-19 pandemic. Included in the current quarter was a benefit for loan losses of $944,000 associated with release of those reserves. Loans on a COVID-19 related payment deferral totaled $34.4 million, or 2.71% of gross loans as of March 31, 2021. Loans classified as substandard or doubtful totaled $21.6 million, an increase of $16.6 million from June 30, 2020. Non-performing loans as a percent of total loans receivable (excluding PPP loans) was 0.17% as of March 31, 2021, an increase from 0.15% as of June 30, 2020. Recoveries, net of charge-offs, were $82,000 and $122,000 for the three months ended March 31, 2021 and 2020, respectively.

Noninterest Income. Noninterest income increased $12,000, or 2.1%, to $592,000 for the three months ended March 31, 2021 compared to $580,000 for the three months ended March 31, 2020. The increase was caused primarily by a $75,000 increase in gains on sale of securities, partially offset by decreases of $40,000 in gains on sale of foreclosed real estate and $23,000 in all other noninterest income.

Noninterest Expense. Noninterest expense increased $52,000, or 0.6%, to $8.6 million for the three months ended March 31, 2021 compared to $8.5 million for the three months ended March 31, 2020. The increase compared to the prior year quarter was caused primarily by increases of $115,000 in FDIC insurance premiums, $48,000 in occupancy expenses and $76,000 in all other expenses, partially offset by a decrease of $187,000 in salaries and employee benefits. The Bank applied small bank assessment credits of $108,000 which fully offset its FDIC assessment for the prior year quarter. All available credits were applied as of June 30, 2020.

Income Tax Expense. Income tax expense increased $599,000, or 166.4%, for the three months ended March 31, 2021 in comparison to the three months ended March 31, 2020. The increase was caused by higher pre-tax income partially offset by as a lower effective tax rate. The effective income tax rate was 21.1% for the three months ended March 31, 2021 as compared to 22.8% for the three months ended March 31, 2020. The Company expects an effective tax rate of approximately 21.5% for the fiscal year ending June 30, 2021.

Comparison of Operating Results for the Nine Months Ended March 31, 2021 and 2020

General. Net income increased $2.6 million, or 40.9%, to $9.0 million for the nine months ended March 31, 2021 compared to $6.4 million for the nine months ended March 31, 2020. The increase was primarily due to a $3.4 million decrease in provision for loan losses and a $214,000 decrease in non-interest expense, partially offset by a $610,000 increase in tax expense and a $459,000 decrease in net-interest income.

Net Interest Income. Net interest income decreased $459,000, or 1.3%, to $34.8 million for the nine months ended March 31, 2021 compared to $35.2 million for the nine months ended March 31, 2020. The decrease primarily reflects a 25 basis point decrease in the tax equivalent net interest margin to 2.70% compared to 2.95% for the same period last year, partially offset by an increase in average interest-earning assets of $133.6 million, or 8.4%. The increase in average interest-earning assets reflects a $109.0 million increase in average other interest earning assets and a $69.1 million increase in average loans receivable, partially offset by a $44.5 million decrease in average investment securities. Despite continued asset growth and a decrease in funding costs, margin compression has resulted from significant decreases in market interest rates over the past year and a less profitable asset mix due to an increase in cash and cash equivalents.

Interest and Dividend Income. Interest and dividend income decreased $4.4 million, or 9.4%, to $42.7 million for the nine months ended March 31, 2021 compared to $47.1 million for the nine months ended March 31, 2020. The decrease primarily reflects a 64 basis point decrease in the yield on total interest-earning assets, partially offset by a $133.6 million increase in total average interest-earning assets.

Interest income on loans receivable decreased $2.5 million, or 6.2%, primarily due to a 50 basis point decrease in the average yield on the tax equivalent loans to 3.95% for the nine months ended March 31, 2021 from 4.45% for the same period last year, partially offset by a $69.1 million increase in the average balance of loans receivable to $1.25 billion for the nine months ended March 31, 2021 from $1.18 billion for the same period last year. Decreases in market interest rates driven most significantly by the Fed Funds rate cuts throughout the last year, as well as the origination of lower yielding PPP loans, has resulted in a decreased yield on loans.

Interest income on investment securities decreased $1.5 million, or 21.3%, primarily due to a 23 basis point decrease in the average yield on the tax equivalent investment securities to 2.36% for the nine months ended March 31, 2021 from 2.59% for the same period last year and a $44.5 million decrease in the average balance of investment securities to $316.1 million for the nine months ended March 31, 2021 from $360.6 million for the same period last year. The decrease in yield is a result of lower market rates. The decrease in the average balance of investment securities is the result of the Company utilizing securities portfolio runoff to fund loan growth.

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, decreased $472,000, or 57.8%, primarily due to a 173 basis point decrease in the average yield on other interest-earning assets to 0.28% for the nine months ended March 31, 2021, from 2.01% for the same period last year, partially offset by a $109.0 million increase in the average balance of other interest-earning assets to $162.9 million for the nine months ended March 31, 2021 compared to $53.9 million for the nine months ended March 31, 2020. The decrease in the yield on other interest-earning assets was primarily due to a decrease in market interest rates, specifically Fed Funds.

Interest Expense. Interest expense decreased $4.0 million, or 33.3%, to $7.9 million for the nine months ended March 31, 2021 compared to $11.9 million for the nine months ended March 31, 2020. The decrease primarily reflects a 50 basis point decrease in the average cost of interest-bearing liabilities to 0.80% for the nine months ended March 31, 2021 from 1.30% for the same period last year, partially offset by a $91.9 million increase in the average balance of interest-bearing liabilities to $1.31 billion for the nine months ended March 31, 2021 from $1.22 billion for the same period last year.

Interest expense on interest-bearing deposits decreased $3.6 million, or 35.8%, primarily due to a 49 basis point decrease in the average cost of interest-bearing deposits to 0.70% for the nine months ended March 31, 2021 from 1.19% for the same period last year, partially offset by a $99.0 million increase in the average balance to $1.21 billion for the nine months ended March 31, 2021 from a $1.11 billion for the nine months ended March 31, 2020. The decrease in the average rate paid on interest-bearing deposits was primarily caused by a decrease in market

interest rates affecting most significantly the average rates paid on money market accounts and time deposits, which decreased 77 and 65 basis points, respectively, when compared to the prior year quarter.

Interest expense on FHLB advances decreased $397,000, or 20.4%, primarily due to a 35 basis point decrease in the average cost to 1.95% for the nine months ended March 31, 2021 from 2.30% for the same period last year, and due to a $7.0 million decrease in the average balance to $105.6 million for the nine months ended March 31, 2021 from a $112.6 million for the nine months ended March 31, 2020. The decrease in the cost of FHLB funds is primarily due to a decrease in market interest rates.

Provision for Loan Losses. The benefit for loan losses was $678,000 for the nine months ended March 31, 2021, compared to a provision for loan losses of $2.8 million for the nine months ended March 31, 2020. Included in the prior year period was a provision for loan losses of $1.7 million associated with reserves established in response to the COVID-19 pandemic. Included in the current year period was a benefit for loan losses of $944,000 associated with release of those reserves. Charge-offs, net of recoveries, were $96,000 and $73,000 for the nine months ended March 31, 2021 and 2020, respectively.

Noninterest Income. Noninterest income increased $37,000, or 2.0%, to $1.9 million for the nine months ended March 31, 2021 compared to the nine months ended March 31, 2020. The increase was caused primarily by increases of $197,000 in swap income and $75,000 in gains on sale of securities, partially offset by decreases of $132,000 in fees and service charges, $87,000 in gains on the sale of foreclosed real estate and $16,000 in all other non-interest income. The reduction in fees and service charge income compared to the prior year period was due to the effects of reduced customer transaction activity since the start of the COVID-19 pandemic.

Noninterest Expense. Noninterest expense decreased $214,000, or 0.8%, to $25.9 million for the nine months ended March 31, 2021 compared to $26.1 million for the nine months ended March 31, 2020. The decrease compared to the prior year quarter was caused primarily by a decrease of $713,000 in salaries and employee benefits, partially offset by increases of $350,000 in FDIC insurance premiums, $109,000 in professional fees and $40,000 in all other noninterest expenses. The decrease in salaries and benefits includes decreases of $373,000 in salaries and short-term incentives and $362,000 in ESOP expense, driven by a lower average stock price. The Bank applied small bank assessment credits of $314,000 which fully offset its FDIC assessment for the prior year period. All available credits were applied as of June 30, 2020.

Income Tax Expense. Income tax expense increased $610,000, or 32.8%, for the nine months ended March 31, 2021 in comparison to the nine months ended March 31, 2020. The increase was caused by higher pre-tax income, partially offset by a lower effective tax rate. The effective income tax rate was 21.5% for the nine months ended March 31, 2021 as compared to 22.5% for the nine months ended March 31, 2020.

Average Balance Sheet and Interest Rates.

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material.

	Three Months Ended March 31,
	2021								2020
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
	(dollars in thousands)
Assets:
Loans receivable ⁽¹⁾		1,252,492			12,116		3.88	%		1,209,920			13,114		4.35	%
Investment securities⁽¹⁾		319,239			1,700		2.18			323,942			2,003		2.48
Other interest-earning assets		162,193			109		0.27			56,242			217		1.56
Total interest-earning assets		1,733,924			13,925		3.23			1,590,104			15,334		3.87
Non-interest-earning assets		68,748								67,889
Total assets		1,802,672								1,657,993

Liabilities and equity:
NOW accounts		161,049			59		0.15			125,103			66		0.21
Money market accounts		274,516			208		0.31			179,230			423		0.96
Savings accounts and escrow		368,791			132		0.15			342,254			209		0.25
Time deposits		411,500			1,383		1.36			480,233			2,570		2.17
Total interest-bearing deposits		1,215,856			1,782		0.59			1,126,820			3,268		1.18
FHLB advances		104,604			506		1.96			98,364			541		2.23
Total interest-bearing liabilities		1,320,460			2,288		0.70			1,225,184			3,809		1.26
Non-interest-bearing deposits		187,778								137,930
Other non-interest-bearing liabilities		24,272								19,706
Total liabilities		1,532,510								1,382,820
Total shareholders' equity		270,162								275,173
Total liabilities and shareholders' equity		1,802,672								1,657,993

Net interest income					11,637								11,525
Interest rate spread - tax equivalent ⁽²⁾							2.53								2.61
Net interest margin - tax equivalent ⁽³⁾							2.69								2.90
Average interest-earning assets to interest-bearing liabilities		131.31	%							129.78	%

⁽¹⁾	Tax equivalent yield is shown on a tax equivalent basis for proper comparison using statutory federal income tax rate of 21% for all periods presented. See tax equivalent adjustment table below.

⁽²⁾	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.

⁽³⁾	Net interest margin represents annualized net interest income divided by average interest-earning assets. See tax equivalent adjustment table below.

	Nine Months Ended March 31,
	2021								2020
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
	(dollars in thousands)
Assets:
Loans receivable ⁽¹⁾	$	1,245,881		$	36,845		3.95	%	$	1,176,733		$	39,299		4.45	%
Investment securities ⁽¹⁾		316,114			5,489		2.36			360,631			6,974		2.59
Other interest-earning assets		162,946			344		0.28			53,944			816		2.01
Total interest-earning assets		1,724,941			42,678		3.31			1,591,308			47,089		3.95
Non-interest-earning assets		70,364								68,983
Total assets	$	1,795,305							$	1,660,291

Liabilities and equity:
NOW accounts	$	153,378			227		0.20		$	122,470			191		0.21
Money market accounts		260,258			657		0.34			163,395			1,358		1.11
Savings accounts and escrow		363,768			502		0.18			353,373			674		0.25
Time deposits		429,811			4,986		1.54			469,022			7,704		2.19
Total interest-bearing deposits		1,207,215			6,372		0.70			1,108,260			9,927		1.19
FHLB advances		105,569			1,545		1.95			112,644			1,942		2.30
Total interest-bearing liabilities		1,312,784			7,917		0.80			1,220,904			11,869		1.30
Non-interest-bearing deposits		183,467								138,968
Other non-interest-bearing liabilities		26,570								20,914
Total liabilities		1,522,821								1,380,786
Total shareholders' equity		272,484								279,505
Total liabilities and shareholders' equity	$	1,795,305							$	1,660,291

Net interest income				$	34,761							$	35,220
Interest rate spread - tax equivalent ⁽²⁾							2.51								2.65
Net interest margin - tax equivalent⁽³⁾							2.70								2.95
Average interest-earning assets to interest-bearing liabilities		131.40	%							130.34	%

⁽¹⁾	Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using statutory federal income tax rate of 21% for all periods presented. See tax equivalent adjustment table below.

⁽²⁾	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.

⁽³⁾	Net interest margin represents annualized net interest income divided by average interest-earning assets. See tax equivalent adjustment table below.

The following table presents information regarding tax equivalent adjustment used in the calculation of certain financial metrics.

	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
	(amounts in thousands)
Total interest income	$	13,925	$	15,334	$	42,678	$	47,089
Total interest expense		2,288		3,809		7,917		11,869
Net interest income		11,637		11,525		34,761		35,220
Tax equivalent adjustment		51		14		130		38
Net interest income - tax equivalent		11,688		11,539		34,891		35,258

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

	Three Months Ended March 31,
	2021 versus 2020
	Rate			Volume			Net
	(in thousands)
Interest income:
Loans receivable	$	(1,306	)	$	308		$	(998	)
Investment securities		(385	)		82			(303	)
Other interest-earning assets		(282	)		174			(108	)
Total interest-earning assets		(1,973	)		564			(1,409	)

Interest expense:
NOW accounts		(23	)		16			(7	)
Money market accounts		(373	)		158			(215	)
Savings and escrow accounts		(89	)		12			(77	)
Time deposits		(859	)		(328	)		(1,187	)
FHLB advances		(67	)		32			(35	)
Total interest-bearing liabilities		(1,411	)		(110	)		(1,521	)

Net (decrease) increase in net interest income	$	(562	)	$	674		$	112

	Nine Months Ended March 31,
	2021 versus 2020
	Rate			Volume			Net
	(in thousands)
Interest income:
Loans receivable	$	(4,293	)	$	1,839		$	(2,454	)
Investment securities		(1,171	)		(314	)		(1,485	)
Other interest-earning assets		(1,124	)		652			(472	)
Total interest-earning assets		(6,588	)		2,177			(4,411	)

Interest expense:
NOW accounts		(9	)		45			36
Money market accounts		(1,249	)		548			(701	)
Savings and escrow accounts		(172	)		-			(172	)
Time deposits		(2,117	)		(601	)		(2,718	)
FHLB advances		(280	)		(117	)		(397	)
Total interest-bearing liabilities		(3,827	)		(125	)		(3,952	)

Net (decrease) increase in net interest income	$	(2,761	)	$	2,302		$	(459	)

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, we have established a management-level Asset/Liability Management Committee, which takes initial responsibility for developing an asset/liability management process and related procedures, establishing and monitoring reporting systems and developing asset/liability strategies. On at least a quarterly basis, the Asset/Liability Management Committee reviews asset/liability management with the

Investment Asset/Liability Committee of the Board of Directors. This Committee also reviews any changes in strategies as well as the performance of any specific asset/liability management actions that have been implemented previously. On a quarterly basis, an outside consulting firm provides us with detailed information and analysis as to asset/liability management, including our interest rate risk profile. Ultimate responsibility for effective asset/liability management rests with our Board of Directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates; utilizing interest rate swaps, promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary. By following these strategies, we believe that we are better positioned to react to changes in market interest rates.

Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of equity ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100 and 200 basis points from current market rates and that interest rates decrease 50 and 100 basis points from current market rates.

The following table presents the estimated changes in our NPV that would result from changes in market interest rates at March 31, 2021 and June 30, 2020. 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, 2021:
200	$	275,588	$	(25,558	)		(8.5	)	%		15.51	%		(67	)
100		290,573		(10,573	)		(3.5	)			15.97			(21	)
-		301,146	-				-				16.18			-
(50)		314,819		13,673			4.5				16.70			52
(100)		332,865		31,719			10.5				17.45			127

June 30, 2020:
200	$	285,720	$	(20,631	)		(6.7	)	%		16.42	%		(40	)
100		304,004		(2,347	)		0.8				17.03			21
-		306,351		-			-				16.82			-
(50)		312,596		6,245			2.0				16.99			17
(100)		323,494		17,143			5.6				17.44			62

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

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2021, cash and cash equivalents totaled $169.3 million, an increase from $136.3 million as of June 30, 2020. Securities classified as available for sale that are not pledged to support borrowings, which provide an additional source of liquidity, totaled $16.3 million at March 31, 2021, an increase from $13.9 million as of June 30, 2020.

We had the ability to borrow up to $217.2 million from the FHLB of New York, at March 31, 2021 of which $96.0 million was outstanding as of March 31, 2021. Additionally, as of March 31, 2021, we had an available line of credit with the FRB of New York’s discount window program of $98.1 million, and $25.0 million of fed funds lines of credit, neither of which had outstanding balances as of March 31, 2021.

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 sources detailed above.

We had $51.6 million of loan commitments outstanding as of March 31, 2021 and $143.5 million of approved, but unadvanced, funds to borrowers. We also had $1.6 million in outstanding letters of credit at March 31, 2021.

Time deposits due within one year of March 31, 2021 totaled $250.2 million. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB of New York advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits at March 31, 2021. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Holding Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders, to repurchase shares of its common stock and for other corporate purposes. The Holding Company’s primary source of liquidity is dividend payments it may receive from the Bank. The Bank’s ability to pay dividends to the Holding Company is governed by applicable law and regulations. At March 31, 2021, the Holding Company (on an unconsolidated, stand-alone basis) had liquid assets of $30.2 million.

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the NYSDFS and the FDIC. At March 31, 2021, the Bank exceeded all applicable regulatory capital requirements, and the Bank was considered “well capitalized” under applicable regulatory guidelines. See Note 8 to the accompanying unaudited consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2021. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2021, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At March 31, 2021, 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, 2020, filed with the Securities and Exchange Commission. As of March 31, 2021, except for the additional risk factor described below, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended June 30, 2020.

Any future action by the U.S. Congress to amend federal tax laws and regulations could impact our future profitability and change our net deferred tax asset causing a corresponding charge against earnings.

The net deferred tax asset reported on our balance sheet represents the net amount of income taxes expected to be received upon the reversal of temporary differences between the bases of assets and liabilities as measured by enacted tax laws, and their bases as reported in the financial statements. As of March 31, 2021, our net deferred tax asset was computed using the federal statutory rate of 21%. Additionally, the Company’s effective tax rate was 21.5% for the nine months ended March 31, 2021.

The President of the United States and members of Congress have announced plans to pursue tax regulation changes including raising the federal corporate income tax rate from its current level of 21%. If these plans ultimately result in the enactment of new laws raising the corporate income tax rate, our net deferred tax asset would need to be re-measured. This could result in an increase to the deferred tax asset in the period of the law change and a corresponding credit to earnings but could be offset by an increase to the income tax provision in the year of enactment and future years.

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

(a)

Not applicable

(b)

Not applicable

(c)

On August 20, 2020, a repurchase program was authorized by the Board of Directors to repurchase up to 844,907 shares, or 5.0% of the Company’s common stock. The Company completed this repurchase program in January 2021 at an average cost of $14.24 per share.

On February 3, 2021, PCSB Financial Corporation (the “Company”) announced the authorization of a repurchase program to repurchase up to 801,856 shares, or 5%, of its then outstanding common stock.

The following table presents information regarding stock repurchases by the Company during the quarter ended March 31, 2021.

	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, 2021 through January 31, 2021		60,737	$	16.26		60,737		-
February 1, 2021 through February 28, 2021		62,196		16.08		62,196		739,660
March 1, 2021 through March 31, 2021		-		-		-		739,660
Total		122,933	$	16.17		122,933

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, 2021, formatted in Inline 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

104		Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101.

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

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

SIGNATURES

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

		PCSB FINANCIAL CORPORATION

Date: May 7, 2021		/s/ Joseph D. Roberto
		Joseph D. Roberto
		Chairman, President and Chief Executive Officer

Date: May 7, 2021		/s/ Jeffrey M. Helf
		Jeffrey M. Helf
		Senior Vice President and Chief Financial Officer