PCSB Financial Corp - Quarter Report: 2022 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, 2022

☐ 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 ☒

15,334,857 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 6, 2022.

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	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
Signatures		45

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

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


	March 31,			June 30,
	2022			2021
ASSETS
Cash and due from banks	$	156,982		$	152,070
Federal funds sold		1,910			7,235
Total cash and cash equivalents		158,892			159,305
Held to maturity debt securities, at amortized cost (fair value of $379,500 and $342,137 as of March 31, 2022 and June 30, 2021, respectively)		410,896			337,584
Available for sale debt securities, at fair value		37,185			57,387
Total investment securities		448,081			394,971
Loans receivable, net of allowance for loan losses of $8,711 and $7,881 as of March 31, 2022 and June 30, 2021, respectively		1,285,886			1,229,451
Accrued interest receivable		6,583			6,398
FHLB stock		3,715			4,507
Premises and equipment, net		18,904			21,099
Deferred tax asset, net		3,089			2,552
Bank-owned life insurance		36,136			35,568
Goodwill		6,106			6,106
Other intangible assets		102			151
Other assets		17,047			14,827
Total assets	$	1,984,541		$	1,874,935
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits	$	1,380,811		$	1,272,610
Non-interest bearing deposits		243,908			219,072
Total deposits		1,624,719			1,491,682
Mortgage escrow funds		8,744			10,536
Advances from FHLB		48,357			65,957
Other liabilities		26,329			32,200
Total liabilities		1,708,149			1,600,375
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, 2022 and June 30, 2021)		-			-
Common stock ($0.01 par value, 200,000,000 shares authorized, 18,703,577 shares issued as of both March 31, 2022 and June 30, 2021, and 15,334,857 and 15,770,645 shares outstanding as of March 31, 2022 and June 30, 2021, respectively)		187			187
Additional paid in capital		192,860			189,926
Retained earnings		159,765			150,987
Unearned compensation - ESOP		(9,449	)		(10,176	)
Accumulated other comprehensive loss, net of income taxes		(5,628	)		(3,099	)
Treasury stock, at cost (3,368,720 and 2,932,932 shares as of March 31, 2022 and June 30, 2021, respectively)		(61,343	)		(53,265	)
Total shareholders' equity		276,392			274,560
Total liabilities and shareholders' equity	$	1,984,541		$	1,874,935

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

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


	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2022		2021			2022		2021
Interest and dividend income
Loans receivable	$	11,943	$	12,116		$	36,701	$	36,845
Investment securities		2,152		1,700			6,294		5,489
Federal funds and other		105		109			302		344
Total interest and dividend income		14,200		13,925			43,297		42,678
Interest expense
Deposits and escrow interest		1,217		1,782			3,863		6,372
FHLB advances		266		506			924		1,545
Total interest expense		1,483		2,288			4,787		7,917
Net interest income		12,717		11,637			38,510		34,761
Provision (benefit) for loan losses		286		(894	)		563		(678	)
Net interest income after provision (benefit) for loan losses		12,431		12,531			37,947		35,439
Noninterest income
Fees and service charges		390		353			1,198		1,038
Bank-owned life insurance		185		120			568		381
Gain on sale of premises		-		-			548		-
Swap income		333		-			333		367
Gains on sales of loans receivable		9		-			56		-
Gains on sales of securities		-		113			-		113
Other		6		6			28		30
Total noninterest income		923		592			2,731		1,929
Noninterest expense
Salaries and employee benefits		5,737		5,595			17,353		16,722
Occupancy and equipment		1,414		1,359			4,115		4,051
Communication and data processing		573		517			1,626		1,539
Professional fees		543		382			1,356		1,285
Postage, printing, stationery and supplies		153		146			478		452
FDIC assessment		125		115			371		350
Advertising		100		100			300		300
Amortization of intangible assets		17		21			49		61
Other operating expenses		294		337			737		1,127
Total noninterest expense		8,956		8,572			26,385		25,887
Net income before income tax expense		4,398		4,551			14,293		11,481
Income tax expense		924		959			2,917		2,467
Net income	$	3,474	$	3,592		$	11,376	$	9,014
Earnings per common share:
Basic	$	0.25	$	0.25		$	0.80	$	0.60
Diluted		0.24		0.25			0.80		0.60
Weighted average common shares outstanding:
Basic		14,165,775		14,631,122			14,247,188		14,944,097
Diluted		14,197,716		14,632,342			14,301,150		14,944,664

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(Dollars in thousands)


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2022			2021			2022			2021
Net income	$	3,474		$	3,592		$	11,376		$	9,014

Other comprehensive income:
Unrealized (losses) gains on available for sale debt securities:
Net change in unrealized gains/losses before reclassification adjustment		(2,933	)		(565	)		(3,363	)		(584	)
Reclassification adjustment for gains realized in net income		-			(52	)		-			(52	)
Net change in unrealized gains/losses		(2,933	)		(617	)		(3,363	)		(636	)
Tax effect		615			129			706			133
Net of tax		(2,318	)		(488	)		(2,657	)		(503	)

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		38			305			113			877
Net change in unrealized gains/losses		38			305			113			877
Tax effect		(8	)		(64	)		(24	)		(184	)
Net of tax		30			241			89			693

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		17			14			49			42
Net change in unrealized gains/losses		17			14			49			42
Tax effect		(4	)		(2	)		(10	)		(9	)
Net of tax		13			12			39			33

Total other comprehensive (loss) income		(2,275	)		(235	)		(2,529	)		223

Comprehensive income	$	1,199		$	3,357		$	8,847		$	9,237

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

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


															Accumulated
	Number of					Additional						Unallocated			Other			Treasury			Total
	Common			Common		Paid-In			Retained			Common Stock			Comprehensive			Stock,			Shareholders'
	Shares			Stock		Capital			Earnings			of ESOP			Loss			at cost			Equity
Balance at July 1, 2021		15,770,645		$	187	$	189,926		$	150,987		$	(10,176	)	$	(3,099	)	$	(53,265	)	$	274,560
Net income		-			-		-			3,614			-			-			-			3,614
Other comprehensive loss		-			-		-			-			-			(105	)		-			(105	)
Common stock dividends declared ($0.06 per share)		-			-		-			(876	)		-			-			-			(876	)
Repurchase of common stock		(204,261	)		-		-			-			-			-			(3,720	)		(3,720	)
Restricted stock awards granted		8,000			-		(145	)		-			-			-			145			-
Shares withheld related to income tax withholding		(74	)		-		-			-			-			-			(1	)		(1	)
Stock-based compensation		-			-		810			-			-			-			-			810
ESOP shares committed to be released (24,419 shares)		-			-		202			-			244			-			-			446
Balance at September 30, 2021		15,574,310			187		190,793			153,725			(9,932	)		(3,204	)		(56,841	)		274,728
Net income		-			-		-			4,288			-			-			-			4,288
Other comprehensive loss		-			-		-			-			-			(149	)		-			(149	)
Common stock dividends declared ($0.06 per share)		-			-		-			(867	)		-			-			-			(867	)
Repurchase of common stock		(217,411	)		-		-			-			-			-			(4,084	)		(4,084	)
Shares withheld related to income tax withholding		(18,920	)		-		-			-			-			-			(359	)		(359	)
Stock-based compensation		-			-		820			-			-			-			-			820
ESOP shares committed to be released (24,419 shares)		-			-		213			-			244			-			-			457
Balance at December 31, 2021		15,337,979			187		191,826			157,146			(9,688	)		(3,353	)		(61,284	)		274,834
Net income		-			-		-			3,474			-			-			-			3,474
Other comprehensive loss		-			-		-			-			-			(2,275	)		-			(2,275	)
Common stock dividends declared ($0.06 per share)		-			-		-			(855	)		-			-			-			(855	)
Repurchase of common stock		(3,122	)		-		-			-			-			-			(59	)		(59	)
Stock-based compensation		-			-		820			-			-			-			-			820
ESOP shares committed to be released (23,888 shares)		-			-		214			-			239			-			-			453
Balance at March 31, 2022		15,334,857		$	187	$	192,860		$	159,765		$	(9,449	)	$	(5,628	)	$	(61,343	)	$	276,392

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity (unaudited)

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


															Accumulated
	Number of					Additional						Unallocated			Other			Treasury			Total
	Common			Common		Paid-In			Retained			Common Stock			Comprehensive			Stock,			Shareholders'
	Shares			Stock		Capital			Earnings			of ESOP			Loss			at cost			Equity
Balance at July 1, 2020		16,898,137		$	187	$	186,200		$	141,288		$	(11,145	)	$	(6,403	)	$	(36,414	)	$	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	)		(6,216	)		(39,803	)		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	)		(5,945	)		(47,697	)		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	)	$	(6,180	)	$	(49,684	)	$	271,297

See accompanying notes to the consolidated financial statements (unaudited)

PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)


	Nine Months Ended March 31,
	2022			2021
OPERATING ACTIVITIES
Net income	$	11,376		$	9,014
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for loan losses		563			(678	)
Depreciation and amortization		2,221			2,226
Amortization of net premiums on securities and net deferred loan origination costs		110			681
Net (increase) decrease in accrued interest receivable		(185	)		149
Gains on sales of securities		-			(113	)
Gains on sales of loans receivable		(56	)		-
Gain on sale of premises		(548	)		-
Stock-based compensation		2,450			2,460
ESOP compensation		1,356			1,053
Earnings from cash surrender value of BOLI		(568	)		(381	)
Originations of loans receivable held for sale		(3,708	)		-
Proceeds from loans receivable held for sale		3,764			-
Net accretion of purchase accounting adjustments		(103	)		(193	)
Other adjustments, principally net changes in other assets and liabilities		(845	)		(1,682	)
Net cash provided by operating activities		15,827			12,536
INVESTING ACTIVITIES
Purchases of investment securities:
Held to maturity		(130,786	)		(102,412	)
Available for sale		-			(20,377	)
Sale of investment securities available for sale		-			3,339
Maturities, calls and amortization of investment securities:
Held to maturity		49,974			67,814
Available for sale		16,713			16,120
Loan (originations) repayments, net		(56,328	)		871
Net redemption of FHLB stock		792			454
Sale (purchase) of bank premises and equipment		571			(233	)
Net cash used in investing activities		(119,064	)		(34,424	)
FINANCING ACTIVITIES
Net increase in deposits		133,037			81,035
Net decrease in short-term FHLB advances		-			(10,000	)
Repayment of long-term FHLB advances		(17,600	)		(98	)
Net decrease in mortgage escrow funds		(1,792	)		(871	)
Common stock dividends paid		(2,598	)		(1,836	)
Repurchase of shares from employees for income tax withholding purpose		(360	)		(303	)
Repurchase of common stock		(7,863	)		(13,027	)
Net cash provided by financing activities		102,824			54,900
Net (decrease) increase in cash and cash equivalents		(413	)		33,012
Cash and cash equivalents at beginning of period		159,305			136,302
Cash and cash equivalents at end of period	$	158,892		$	169,314

Supplemental information:
Cash paid for:
Interest	$	4,816		$	7,935
Income taxes		1,602			2,764
Establishment of right to use lease asset		-			443

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, 2022, 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, 2021, 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.

Loans Receivable Held For Sale: Loans receivable held for sale are those loans which management has the intent to sell in the foreseeable future, and are carried at the lower of aggregate cost or market value. Net unrealized losses, if any, are recognized by a valuation allowance through a charge to noninterest income. Realized gains and losses on the sale of loans are recognized on the trade date and are determined by the difference between the sale proceeds and the carrying value of the loans.

Loans may be sold with servicing rights released or retained. At the time of the sale, management records a servicing asset for the value of any retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.

Assets Held For Sale: Assets held for sale are those assets which management has the intent to sell in the foreseeable future, and are carried at the lower of aggregate cost or fair value, less estimated costs to sell, in the period in which the held for sale

criteria are met and every subsequent period until the asset is sold. The carrying amount of the asset is adjusted for subsequent increases or decreases in its fair value, less estimated cost to sell, except that any subsequent increase cannot exceed the cumulative loss previously recognized. Such assets are not depreciated or amortized while they are classified as held for sale. Realized gains and losses on the sale of the asset is recognized when the asset is sold and is determined by the difference between the sale proceeds and the carrying value of the asset. Assets classified as held for sale totaled $1.5 million as of both March 31, 2022 and June 30, 2021 and are included in other assets on the consolidated balance sheet. During the nine months ended March 31, 2022, the Company sold $398,000 in assets held for sale resulting in gains on sale of $548,000.

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. Governments, businesses, and the public have taken unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including vaccination mandates, 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 on the economy 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.

Many of the emergency actions taken to mitigate the effects of the pandemic have since been reduced or eliminated, resulting in an improved local and national economic environment, however the ultimate financial impact of the pandemic on our borrowers, and therefore on our credit quality and financial performance, is still unknown at this time. The pandemic may continue to adversely impact consumers and 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, but are not limited to, the valuation impairments of the Company’s intangible assets, investments, loans receivable, or deferred tax assets. Additionally, it is reasonably possible that the Company’s allowance for loan loss estimate as of March 31, 2022 could 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 its consolidated financial position and results of operations or on its disclosures.

There were no accounting standards adopted in the current period.

Future Application of Accounting Pronouncements Previously Issued

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 which 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. On March 31, 2022 the FASB issued ASU 2022-02 "Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." The ASU eliminates the current accounting guidance on troubled debt restructurings ("TDRs") for creditors, enhances disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty and amends the guidance on vintage disclosures with respect to current period gross charge-offs. For entities that have not yet adopted ASU 2016-13, the amendments in ASU

2022-02 are effective upon the adoption of ASU 2016-13. Management is currently evaluating the impact that ASU 2016-13 and ASU 2022-02 will have on the Company’s consolidated financial position, results of operations and disclosures.

The FASB issued ASU 2020-04 “Reference Rate Reform” and ASU 2021-01 “Reference Rate Reform Scope” which collectively address accounting considerations related to the expected discontinuation of LIBOR as a reference rate for financial contracts. These Updates provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform (codified in ASC 848). They include optional expedients related to contract modifications that allow an entity to account for modifications (if certain criteria are met) as if the modifications were only minor (assets within the scope of ASC 310, Receivables), were not substantial (assets within the scope of ASC 470, Debt) and/or did not result in remeasurements or reclassifications (assets within the scope of ASC 842, Leases, and other Topics) of the existing contract. They also include optional expedients and exceptions for contract modifications and hedge accounting that apply to derivative instruments impacted by the market-wide discounting transition. The Updates also allow for a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. The guidance in these ASUs are effective as of March 12, 2020 through December 31, 2022. The Company has not yet elected to apply the practical expedients contained in these Updates and does not expect significant impact to the consolidated financial statements upon adoption.

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, 2022 and June 30, 2021 were as follows (in thousands):


	March 31, 2022
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
Available for sale debt securities
U.S. Government and agency obligations	$	10,939	$	-	$	(710	)	$	10,229
Corporate		5,000		8		(30	)		4,978
State and municipal		7,040		-		(1,507	)		5,533
Mortgage-backed securities – residential		14,960		23		(941	)		14,042
Mortgage-backed securities – commercial		2,435		-		(32	)		2,403
Total available for sale debt securities	$	40,374	$	31	$	(3,220	)	$	37,185
Held to maturity debt securities
U.S. Government and agency obligations	$	49,995	$	44	$	(1,989	)	$	48,050
Corporate		52,083		562		(2,075	)		50,570
State and municipal		87,407		-		(15,294	)		72,113
Mortgage-backed securities – residential		106,302		97		(5,158	)		101,241
Mortgage-backed securities – collateralized mortgage obligations		26,076		2		(1,373	)		24,705
Mortgage-backed securities – commercial		89,033		62		(6,274	)		82,821
Total held to maturity debt securities	$	410,896	$	767	$	(32,163	)	$	379,500


	June 30, 2021
	Amortized		Gross Unrealized/Unrecognized					Fair
	Cost		Gains		Losses			Value
Available for sale debt securities
U.S. Government and agency obligations	$	21,931	$	6	$	(121	)	$	21,816
Corporate		8,013		176		-			8,189
State and municipal		7,041		104		(30	)		7,115
Mortgage-backed securities – residential		17,738		148		(232	)		17,654
Mortgage-backed securities – commercial		2,490		123		-			2,613
Total available for sale debt securities	$	57,213	$	557	$	(383	)	$	57,387
Held to maturity debt securities
U.S. Government and agency obligations	$	33,994	$	202	$	(84	)	$	34,112
Corporate		43,605		1,312		(38	)		44,879
State and municipal		57,625		440		(248	)		57,817
Mortgage-backed securities – residential		96,181		2,713		(107	)		98,787
Mortgage-backed securities – collateralized mortgage obligations		33,300		376		(328	)		33,348
Mortgage-backed securities – commercial		72,879		937		(622	)		73,194
Total held to maturity debt securities	$	337,584	$	5,980	$	(1,427	)	$	342,137

No securities were sold during the three or nine months ended March 31, 2022. 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.

The following table presents the fair value and carrying amount of debt securities at March 31, 2022, 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	$	5,115	$	5,157	$	-	$	-
1 to 5 years		55,970		53,720		5,000		4,849
5 to 10 years		43,463		42,030		10,939		10,357
over 10 years		81,068		66,179		7,040		5,534
Mortgage-backed securities and other		225,280		212,414		17,395		16,445
Total	$	410,896	$	379,500	$	40,374	$	37,185

Securities pledged had carrying amounts of $206.3 million and $180.1 million at March 31, 2022 and June 30, 2021, 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, 2022 and June 30, 2021 (in thousands):


	March 31, 2022
	Less than 12 months					12 months or greater					Total
			Unrealized/					Unrealized/					Unrealized/
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
	Value		Loss			Value		Loss			Value		Loss
Available for sale
U.S. Government and agency obligations	$	10,229	$	(710	)	$	-	$	-		$	10,229	$	(710	)
Corporate		2,970		(30	)		-		-			2,970		(30	)
State and municipal		3,312		(710	)		2,221		(797	)		5,533		(1,507	)
Mortgage-backed securities – residential		1,234		(12	)		9,234		(929	)		10,468		(941	)
Mortgage-backed securities – commercial		2,403		(32	)		-		-			2,403		(32	)
Total available for sale	$	20,148	$	(1,494	)	$	11,455	$	(1,726	)	$	31,603	$	(3,220	)
Held to maturity
U.S. Government and agency obligations	$	37,198	$	(1,801	)	$	2,807	$	(188	)	$	40,005	$	(1,989	)
Corporate		40,483		(2,075	)		-		-			40,483		(2,075	)
State and municipal		68,772		(14,064	)		3,341		(1,230	)		72,113		(15,294	)
Mortgage-backed securities – residential		90,221		(4,751	)		4,410		(407	)		94,631		(5,158	)
Mortgage-backed securities – collateralized mortgage obligations		13,899		(540	)		7,483		(833	)		21,382		(1,373	)
Mortgage-backed securities – commercial		58,089		(4,013	)		18,146		(2,261	)		76,235		(6,274	)
Total held to maturity	$	308,662	$	(27,244	)	$	36,187	$	(4,919	)	$	344,849	$	(32,163	)


	June 30, 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
Available for sale
U.S. Government and agency obligations	$	14,811	$	(121	)	$	-	$	-		$	14,811	$	(121	)
State and municipal		2,990		(30	)		-		-			2,990		(30	)
Mortgage-backed securities – residential		9,615		(222	)		1,339		(10	)		10,954		(232	)
Total available for sale	$	27,416	$	(373	)	$	1,339	$	(10	)	$	28,755	$	(383	)
Held to maturity
U.S. Government and agency obligations	$	19,409	$	(84	)	$	-	$	-		$	19,409	$	(84	)
Corporate		2,488		(13	)		4,975		(25	)		7,463		(38	)
State and municipal		19,980		(248	)		-		-			19,980		(248	)
Mortgage-backed securities – residential		30,335		(107	)		-		-			30,335		(107	)
Mortgage-backed securities – collateralized mortgage obligations		15,133		(328	)		-		-			15,133		(328	)
Mortgage-backed securities – commercial		47,580		(622	)		-		-			47,580		(622	)
Total held to maturity	$	134,925	$	(1,402	)	$	4,975	$	(25	)	$	139,900	$	(1,427	)

As of March 31, 2022, the Company’s securities portfolio consisted of $448.1 million in securities, of which 275 securities with a fair value of $376.5 million were in an unrealized/unrecognized loss position. Non-U.S. government and agency obligations are internally pass rated and are subject to quarterly credit monitoring.

There were no securities for which the Company believes it is not probable that it will collect all amounts due according to the contractual terms of the security as of March 31, 2022 or June 30, 2021. Management believes the unrealized losses are primarily a result of changes in market interest rates. The Company has determined that it does not intend to sell, or it is not more likely than not that it will be required to sell, its securities that are in an unrealized loss position prior to the recovery of its amortized cost basis. Therefore, the Company did not consider any securities to be other-than-temporarily impaired as of March 31, 2022 or June 30, 2021.

Note 4. Loans Receivable

Loans receivable are summarized as follows (in thousands):


	March 31,			June 30,
	2022			2021
Mortgage loans:
Residential	$	215,431		$	224,305
Commercial		897,424			826,624
Construction		16,894			10,151
Net deferred loan origination (fees) costs		(23	)		196
Total mortgage loans		1,129,726			1,061,276
Commercial and consumer loans:
Commercial loans		141,427			150,658
Home equity lines of credit		22,557			25,439
Consumer and overdrafts		348			345
Net deferred loan origination costs (fees)		539			(386	)
Total commercial and consumer loans		164,871			176,056
Total loans receivable		1,294,597			1,237,332
Allowance for loan losses		(8,711	)		(7,881	)
Loans receivable, net	$	1,285,886		$	1,229,451

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31, 2022
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	319	$	1		$	-		$	4	$	324
Commercial mortgages		6,853		206			-			-		7,059
Construction		129		37			-			-		166
Commercial loans		1,067		40			(8	)		10		1,109
Home equity lines of credit		51		(4	)		-			2		49
Consumer and overdrafts		10		6			(16	)		4		4
Total	$	8,429	$	286		$	(24	)	$	20	$	8,711

	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


	Nine Months Ended March 31, 2022
	Beginning Allowance		Provision (benefit)			Charge-offs			Recoveries		Ending Allowance
Residential mortgages	$	337	$	(21	)	$	-		$	8	$	324
Commercial mortgages		6,435		624			-			-		7,059
Construction		102		64			-			-		166
Commercial loans		948		(121	)		(108	)		390		1,109
Home equity lines of credit		54		(11	)		-			6		49
Consumer and installment loans		5		28			(34	)		5		4
Total	$	7,881	$	563		$	(142	)	$	409	$	8,711

	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

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, 2022 and June 30, 2021 (in thousands):


	March 31, 2022
	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	$	1,740	$	213,274	$	417	$	215,431	$	110	$	214	$	-	$	324
Commercial mortgages		4,790		891,768		866		897,424		-		7,059		-		7,059
Construction		1,113		15,781		-		16,894		-		166		-		166
Commercial loans		652		140,775		-		141,427		-		1,109		-		1,109
Home equity lines of credit		375		22,071		111		22,557		8		41		-		49
Consumer and overdrafts		-		348		-		348		-		4		-		4
Total	$	8,670	$	1,284,017	$	1,394	$	1,294,081	$	118	$	8,593	$	-	$	8,711


	June 30, 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	$	2,356	$	221,229	$	720	$	224,305	$	113	$	224	$	-	$	337
Commercial mortgages		3,582		822,154		888		826,624		-		6,435		-		6,435
Construction		-		10,151		-		10,151		-		102		-		102
Commercial loans		1,707		148,951		-		150,658		-		948		-		948
Home equity lines of credit		414		24,902		123		25,439		8		46		-		54
Consumer and overdrafts		-		345		-		345		-		5		-		5
Total	$	8,059	$	1,227,732	$	1,731	$	1,237,522	$	121	$	7,760	$	-	$	7,881

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, 2022 and June 30, 2021 (in thousands):



	March 31, 2022						June 30, 2021
	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	$	1,365	$	1,323	$	-	$	2,044	$	1,931	$	-
Commercial mortgages		4,796		4,790		-		3,582		3,582		-
Construction		1,113		1,113		-		-		-		-
Commercial loans		664		652		-		1,878		1,707		-
Home equity lines of credit		314		339		-		358		381		-
With an allowance recorded:
Residential mortgages		356		417		110		363		425		113
Home equity lines of credit		36		36		8		33		33		8
Total	$	8,644	$	8,670	$	118	$	8,258	$	8,059	$	121

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, 2022 and 2021 (in thousands):


	Three months ended				Three months ended
	March 31, 2022				March 31, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgages	$	1,472	$	16	$	1,822	$	7
Commercial mortgages		4,790		12		-		-
Construction		1,113		-		-		-
Commercial loans		653		3		1,749		47
Home equity lines of credit		339		-		379		-
With an allowance recorded:
Residential mortgages		418		3		427		4
Home equity lines of credit		36		1		30		-
Total	$	8,821	$	35	$	4,407	$	58

	Nine Months Ended				Nine Months Ended
	March 31, 2022				March 31, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgages	$	1,750	$	46	$	1,905	$	27
Commercial mortgages		4,065		12		-		-
Construction		445		-		-		-
Commercial loans		704		197		1,786		144
Home equity lines of credit		343		2		384		1
With an allowance recorded:
Residential mortgages		421		10		429		11
Home equity lines of credit		35		1		24		-
Total	$	7,763	$	268	$	4,528	$	183

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, 2022 and June 30, 2021 (in thousands):


					Loans Past Due Over 90 Days
	Nonaccrual				and Still Accruing
	March 31,		June 30,		March 31,		June 30,
	2022		2021		2022		2021
Residential mortgages	$	793	$	1,391	$	-	$	-
Commercial mortgages		4,790		3,582		423		411
Construction		1,113		-		-		-
Commercial loans		400		-		-		-
Home equity lines of credit		339		381		-		-
Total	$	7,435	$	5,354	$	423	$	411

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 $351,000 and $368,000 as of March 31, 2022 and June 30, 2021, 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, 2022 and June 30, 2021 (in thousands):


	March 31, 2022
	30-59		60-89		90 Days or
	Days Past		Days Past		More Past		Total Past
	Due		Due		Due		Due		Current (1)		Total
Residential mortgages	$	-	$	-	$	869	$	869	$	214,562	$	215,431
Commercial mortgages		-		-		1,631		1,631		895,793		897,424
Construction		-		-		1,113		1,113		15,781		16,894
Commercial loans		12		11		400		423		141,004		141,427
Home equity lines of credit		97		-		357		454		22,103		22,557
Consumer and overdrafts		-		-		-		-		348		348
Total	$	109	$	11	$	4,370	$	4,490	$	1,289,591	$	1,294,081


	June 30, 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	$	198	$	126	$	948	$	1,272	$	223,033	$	224,305
Commercial mortgages		453		-		411		864		825,760		826,624
Construction		-		-		-		-		10,151		10,151
Commercial loans		69		76		-		145		150,513		150,658
Home equity lines of credit		-		19		381		400		25,039		25,439
Consumer and overdrafts		-		-		-		-		345		345
Total	$	720	$	221	$	1,740	$	2,681	$	1,234,841	$	1,237,522

(1)

As of March 31, 2022 and June 30, 2021, loans on a COVID-19-related payment deferral are considered current.

Troubled Debt Restructurings

The terms of certain loans have been modified as troubled debt restructurings (“TDRs”). 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, 2022 and June 30, 2021, the Company had 8 and 12 loans, classified as TDRs totaling $1.6 million and $3.1 million, including $1.2 million and $2.7 million, respectively, of loans still accruing interest. The Company has allocated

$118,000 and $121,000, respectively, of specific reserves to customers whose loan terms have been modified in TDRs as of March 31, 2022 and June 30, 2021. As of March 31, 2022, the Company has no commitments to lend additional funds 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, 2022 or 2021 that were classified as TDRs.

There were no defaults of TDRs occurring in the three or nine months ended March 31, 2022 or March 31, 2021 that were modified in the twelve months prior to default.

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

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. This legislation expired on January 1, 2022. 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 three months ended March 31, 2022, no loan payment deferrals were granted or extended by the Company. During the nine months ended March 31, 2022, the Company granted or extended loan payment deferrals for one residential mortgage, two commercial mortgages and two commercial loans totaling $91,000, $5.6 million and $205,000, respectively. In accordance with either the CARES Act (as amended) or Interagency Statement, these modifications are not considered TDRs. The Company had one loan totaling $3.6 million and 19 loans totaling $27.3 million on loan payment deferral as of March 31, 2022 and June 30, 2021, 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, 2022
	Pass		Special Mention		Substandard		Total
Residential mortgages	$	213,685	$	156	$	1,590	$	215,431
Commercial mortgages		878,607		2,947		15,870		897,424
Construction		15,781		-		1,113		16,894
Commercial loans		137,265		21		4,141		141,427
Home equity lines of credit		22,047		82		428		22,557
Consumer and overdrafts		348		-		-		348
Total	$	1,267,733	$	3,206	$	23,142	$	1,294,081


	June 30, 2021
	Pass		Special Mention		Substandard		Total
Residential mortgages	$	219,901	$	2,480	$	1,924	$	224,305
Commercial mortgages		809,660		1,615		15,349		826,624
Construction		9,038		1,113		-		10,151
Commercial loans		146,275		491		3,892		150,658
Home equity lines of credit		24,400		602		437		25,439
Consumer and overdrafts		345		-		-		345
Total	$	1,209,619	$	6,301	$	21,602	$	1,237,522

As of March 31, 2022, the $3.6 million in loans in a COVID-19 related payment deferral were rated as substandard. As of June 30, 2021, of the $27.3 million in loans on deferral, $9.9 million were pass-rated, $3.2 million were rated special mention and $14.2 million were rated substandard.

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, 2022 and June 30, 2021 is as follows (in thousands):


	March 31,		June 30,
	2022		2021
Residential mortgages	$	417	$	720
Commercial mortgages		866		888
Home equity lines of credit		111		123
Carrying amount, net of allowance of $0	$	1,394	$	1,731

There was no provision for loan losses on purchased credit impaired loans during the three and nine months ended March 31, 2022 or 2021.

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


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2022			2021			2022			2021
Beginning balance	$	101		$	147		$	130		$	156
New loans acquired		-			-			-			-
Accretion income		(5	)		(9	)		(34	)		(18	)
Reclassification from non-accretable difference		-			-			-			-
Disposals		-			-			-			-
Ending balance	$	96		$	138		$	96		$	138

Note 5. Accumulated Other Comprehensive (Loss) Income

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, 2022	$	(202	)	$	(2,996	)	$	(155	)	$	(3,353	)
Other comprehensive loss before reclassifications		(2,933	)		-			-			(2,933	)
Amounts reclassified from accumulated other comprehensive income		-			38			17			55
Less tax effect		615			(8	)		(4	)		603
Net other comprehensive (loss) income		(2,318	)		30			13			(2,275	)
Balance at March 31, 2022	$	(2,520	)	$	(2,966	)	$	(142	)	$	(5,628	)


	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 July 1, 2021	$	137		$	(3,055	)	$	(181	)	$	(3,099	)
Other comprehensive loss before reclassifications		(3,363	)		-			-			(3,363	)
Amounts reclassified from accumulated other comprehensive income		-			113			49			162
Tax effect		706			(24	)		(10	)		672
Net other comprehensive (loss) income		(2,657	)		89			39			(2,529	)
Balance at March 31, 2022	$	(2,520	)	$	(2,966	)	$	(142	)	$	(5,628	)


	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 income 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	)

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, 2022 and 2021 (in thousands):


	Three Months Ended					Three Months Ended
	March 31, 2022					March 31, 2021
	Defined Benefit Plan			Supplemental Retirement Plans		Defined Benefit Plan			Supplemental Retirement Plans
Service cost	$	-		$	82	$	-		$	130
Interest cost		149			25		136			18
Expected return on plan assets		(509	)		-		(454	)		-
Amortization of prior net loss		38			17		240			14
Settlement charges		-			-		65			-
Net periodic (benefit) cost	$	(322	)	$	124	$	(13	)	$	162

	Nine Months Ended					Nine Months Ended
	March 31, 2022					March 31, 2021
	Defined Benefit Plan			Supplemental Retirement Plan		Defined Benefit Plan			Supplemental Retirement Plan
Service cost	$	-		$	343	$	-		$	311
Interest cost		446			60		409			65
Expected return on plan assets		(1,528	)		-		(1,365	)		-
Amortization of prior net loss		113			49		719			42
Settlement charges		-			-		158			-
Net periodic (benefit) cost	$	(969	)	$	452	$	(79	)	$	418

The Company made no contributions to the defined benefit plan during the three and nine months ended March 31, 2022.

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 Holding Company granted a loan to the ESOP in the amount of $14.5 million 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 Holding 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 2022). 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, 2022 was $9.7 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, 2022		June 30, 2021
Allocated to participants		494,510		417,902
Unearned		944,921		1,017,648
Total ESOP shares		1,439,431		1,435,550

Fair value of unearned shares	$	18,057	$	18,491

Total compensation expense recognized in connection with the ESOP for the three and nine months ended March 31, 2022 was $453,000 and $1.4 million, respectively, and for the three and nine months ended March 31, 2021 was $392,000 and $1.1 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, 2022
Measured on a recurring basis:
Available for sale debt securities:
U.S. Government and agency obligations	$	-	$	10,229	$	-	$	10,229
Corporate		-		-		4,978		4,978
State and municipal		-		5,533		-		5,533
Mortgage-backed securities – residential		-		14,042		-		14,042
Mortgage-backed securities – commercial		-		2,403		-		2,403
Derivatives – interest rate contracts		-		4,843		-		4,843
Total assets at fair value	$	-	$	37,050	$	4,978	$	42,028

Derivatives – interest rate contracts	$	-	$	4,843	$	-	$	4,843
Total liabilities at fair value	$	-	$	4,843	$	-	$	4,843

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	307	$	307
Home equity lines of credit		-		-		28		28
Total assets at fair value	$	-	$	-	$	335	$	335


	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
June 30, 2021
Measured on a recurring basis:
Available for sale debt securities:
U.S. Government and agency obligations	$	-	$	21,816	$	-	$	21,816
Corporate		-		5,058		3,131		8,189
State and municipal		-		7,115		-		7,115
Mortgage-backed securities – residential		-		17,654		-		17,654
Mortgage-backed securities – commercial		-		2,613		-		2,613
Derivatives – interest rate contracts		-		4,232		-		4,232
Total assets at fair value	$	-	$	58,488	$	3,131	$	61,619

Derivatives – interest rate contracts	$	-	$	4,232	$	-	$	4,232
Total liabilities at fair value	$	-	$	4,232	$	-	$	4,232

Measured on a non-recurring basis:
Impaired loans:
Residential mortgages	$	-	$	-	$	312	$	312
Home equity lines of credit		-		-		25		25
Total assets at fair value	$	-	$	-	$	337	$	337

Investment securities with a fair value of $2.0 million were transferred from Level 2 to Level 3 during the three and nine months ended March 31, 2022 because of a lack of observable market data for this investment due to a decrease in the market activity for this security. There were no transfers between levels within the fair value hierarchy during the three and nine months ended March 31, 2021.

Impaired loans in the preceding table had a carrying amount of $454,000 and a remaining valuation allowance of $118,000, at March 31, 2022, as compared to $458,000 and $121,000, respectively, as of June 30, 2021. Impaired loans measured at fair value incurred no net charge-offs and resulted in a benefit for loan losses of $3,000 during the nine months ended March 31, 2022. Impaired loans measured at fair value as of March 31, 2021 incurred no net charge-offs and resulted in a provision for loan losses of $1,000 during the nine months ended March 31, 2021.

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, 2022 and June 30, 2021 (Dollars in thousands):


			Valuation	Unobservable	Range or
	Fair Value		Technique(s)	Input(s)	Rate Used
March 31, 2022
Impaired loans - residential mortgages	$	307	Discounted cash flow	Discount rate	5.4% to 6.3%
Impaired loans - home equity lines of credit		28	Discounted cash flow	Discount rate	5.4% to 6.3%

June 30, 2021
Impaired loans - residential mortgages	$	312	Discounted cash flow	Discount rate	5.4% to 6.3%
Impaired loans - home equity lines of credit		25	Discounted cash flow	Discount rate	5.4% to 6.3%

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, 2022
Financial assets:
Cash and cash equivalents	$	158,892	$	158,892	$	-		$	-	$	158,892
Held to maturity debt securities		410,896		-		324,079	-		55,421		379,500
Available for sale debt securities		37,185		-		32,207			4,978		37,185
Loans receivable, net		1,285,886		-		-			1,254,851		1,254,851
Accrued interest receivable		6,583		-		1,926			4,657		6,583
FHLB stock		3,715	N/A		N/A			N/A		N/A
Derivative assets - interest rate contracts		4,843		-		4,843			-		4,843
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,279,627		1,279,627		-			-		1,279,627
Time deposits		345,092		-		348,306			-		348,306
Mortgage escrow funds		8,744		8,744		-			-		8,744
Advances from FHLB		48,357		-		48,950			-		48,950
Accrued interest payable		117		1		116			-		117
Derivative liabilities - interest rate contracts		4,843		-		4,843			-		4,843


	Carrying		Fair Value Measurements
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2021
Financial assets:
Cash and cash equivalents	$	159,305	$	159,305	$	-	$	-	$	159,305
Held to maturity debt securities		337,584		-		305,671		36,466		342,137
Available for sale debt securities		57,387		-		54,256		3,131		57,387
Loans receivable, net		1,229,451		-		-		1,234,116		1,234,116
Accrued interest receivable		6,398		-		1,341		5,057		6,398
FHLB stock		4,507	N/A		N/A		N/A		N/A
Derivative assets - interest rate contracts		4,232		-		4,232		-		4,232
Financial liabilities:
Demand, NOW, money market deposits and savings accounts		1,116,667		1,116,667		-		-		1,116,667
Time deposits		375,015		-		380,948		-		380,948
Mortgage escrow funds		10,536		10,536		-		-		10,536
Advances from FHLB		65,957		-		67,334		-		67,334
Accrued interest payable		146		1		145		-		146
Derivative liabilities - interest rate contracts		4,232		-		4,232		-		4,232

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 for the year ended June 30, 2021.

Note 8. Regulatory Matters

The following is a summary of the Bank’s actual capital amounts and ratios as of March 31, 2022 and June 30, 2021, 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, 2022
Leverage (Tier 1)	$	246,410		12.9	%	$	76,672		4.0	%	$	95,840		5.0	%
Risk-based:
Common Tier 1		246,410		17.2			64,384		4.5			92,999		6.5
Tier 1		246,410		17.2			85,845		6.0			114,460		8.0
Total		255,121		17.8			114,460		8.0			143,075		10.0
June 30, 2021
Leverage (Tier 1)	$	233,944		12.5	%	$	74,988		4.0	%	$	93,735		5.0	%
Risk-based:
Common Tier 1		233,944		17.9			58,713		4.5			84,807		6.5
Tier 1		233,944		17.9			78,283		6.0			104,378		8.0
Total		241,825		18.5			104,378		8.0			130,472		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, 2022 and June 30, 2021, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer of 2.5%. 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						Nine Months Ended
	March 31,						March 31,
	2022			2021			2022			2021
	(Dollars in thousands, except share and per share data)
Net income applicable to common stock	$	3,474		$	3,592		$	11,376		$	9,014

Average number of common shares outstanding		15,122,502			15,684,763			15,228,422			16,022,046
Less: Average unallocated ESOP shares		(956,727	)		(1,053,641	)		(981,234	)		(1,077,949	)
Average number of common shares outstanding used to calculate basic earnings per common share		14,165,775			14,631,122			14,247,188			14,944,097

Effect of equity-based awards		31,941			1,220			53,962			567
Average number of common shares outstanding used to calculate diluted earnings per common share		14,197,716			14,632,342			14,301,150			14,944,664

Earnings per common share:
Basic	$	0.25		$	0.25		$	0.80		$	0.60
Diluted	$	0.24		$	0.25		$	0.80		$	0.60

Stock options for 1,314,963 and 1,311,328 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended March 31, 2022, respectively, because they were antidilutive. 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.

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, 2022 and June 30, 2021 (Dollars in thousands).


	March 31,			June 30,
	2022			2021
Notional amounts	$	222,425		$	182,700
Weighted average pay rates		2.78	%		2.55	%
Weighted average receive rates		2.78	%		2.55	%
Weighted average maturity	8.14 years			8.46 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 (in thousands).


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Noninterest income:
Service charges on deposits	$	222	$	173	$	604	$	531
Interchange fees		139		128		459		392
Other fees and service charges (1)		29		52		135		115
Fees and service charges		390		353		1,198		1,038

Bank-owned life insurance (1)		185		120		568		381
Gain on sale of premises (1)		-		-		548		-
Swap income (1)		333		-		333		367
Gains on sales of loans receivable (1)		9		-		56		-
Gains on sales of securities (1)		-		113		-		113
Other noninterest income (1)		6		6		28		30
Total noninterest income	$	923	$	592	$	2,731	$	1,929

(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 $820,000 and $2.5 million for the three and nine months ended March 31, 2022 and $809,000 and $2.5 million for the three and nine months ended March 31, 2021, respectively.

Restricted Stock Awards (“RSAs”)

RSAs awarded under the Plan 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 726,000, of which 549,467 shares were granted as of March 31, 2022.

The following table presents a summary of RSA activity during the period ended March 31, 2022.


	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested granted shares outstanding at July 1, 2021		322,580		$	18.95
Shares granted		8,000			17.66
Shares vested		(107,130	)		18.97
Shares forfeited		-			-
Unvested granted shares at March 31, 2022		223,450		$	18.89

As of March 31, 2022, there was $3.4 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 2.0 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.

Total options available for grant under the Plan are 1,816,511, of which 1,320,963 options were granted as of March 31, 2022. 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, 2021		1,308,963	$	19.00		7.4	$	35
Options granted		12,000		17.66
Options expired		-		-
Options forfeited		-		-
Options exercised		-		-
Options outstanding at March 31, 2022		1,320,963	$	18.98		6.7	$	420

Exercisable at March 31, 2022		782,978	$	19.02		6.6	$	225

As of March 31, 2022, there was $2.0 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 2.0 years.

The fair value of options granted during the nine months ended March 31, 2022, was determined using the following weighted-average assumptions as of grant date.


Risk-free interest rate		1.00	%
Expected term (in years)		6.25
Expected stock price volatility		35.91	%
Dividend yield		1.36	%
Weighted average fair value of options granted	$	5.50

Note 13. Leases

As of March 31, 2022, 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 9.6 years as of March 31, 2022.

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 2.42% in determining the lease liability as of March 31, 2022.

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, 2022 or 2021. 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, 2022 or 2021.

Total operating lease cost was $504,000 and $1.5 million for the three and nine months ended March 31, 2022 and $501,000 and $1.5 million for the three and nine months ended March 31, 2021, respectively. The right-of-use asset, included in premises and equipment, net, was $8.3 million and the corresponding lease liability, included in other liabilities was $8.6 million as of March 31, 2022.

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, 2022 is shown below:


(Dollars in thousands)
2022	$	511
2023		1,940
2024		1,569
2025		1,276
2026		748
Thereafter		3,802
Total future minimum lease payments (undiscounted)		9,846
Discounting effect on cash flows		(1,273	)
Lease liability (discounted)	$	8,573

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, 2022 and June 30, 2021, and results of operations for the three and nine months ended March 31, 2022 and 2021 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, 2021.

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, duration and severity of the COVID-19 pandemic and government action in response to the pandemic, including their impact on our business and operations, including the impact on lost fee revenue and operating expenses, as well as their 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, 2021, under the heading “Risk Factors” and in this quarterly report on Form 10-Q under Part II, Item 1A.

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 and Critical Accounting Estimates

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, estimates 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, 2021 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, 2022.

Overview

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, 2022, 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”).

The Company's primary market area encompasses all of Putnam and Westchester Counties and parts of Dutchess and Rockland Counties in New York, which are the counties in which our offices are located, and the surrounding areas. It is considered a primary area for growth, particularly for commercial lending and deposit opportunities. Westchester County includes a high concentration of office, medical, retail, industrial, mixed use and multi-family real estate buildings and businesses. Our primary focus in this marketplace is small to middle market businesses in these segments. Rising real estate values and lack of available commercial space in Brooklyn and Manhattan have caused businesses to migrate to central and lower Westchester County, which has increased the demand for flex-industrial and multi-family property loans in our market area. Dutchess, Putnam and Rockland Counties offer similar commercial opportunities to Westchester County, but on a significantly smaller scale, and provide greater opportunities in residential mortgage lending and consumer lending and in retail deposit gathering. The close proximity of Bronx County, New York City, Fairfield County, Connecticut, and Bergen County, New Jersey, to our market area also creates a secondary area of opportunity for office, industrial and multi-family property loans.

Selected Financial Ratios

The summary information presented below as of and for the three and nine months ended March 31, 2022 and 2021 is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Part I (Dollars in thousands, except share and per share data).


	Three Months Ended						Nine Months Ended
	March 31, 2022			March 31, 2021			March 31, 2022			March 31, 2021
Performance Ratios (1):
Return on average assets		0.73	%		0.80	%		0.81	%		0.67	%
Return on average equity		5.02	%		5.32	%		5.51	%		4.41	%
Interest rate spread		2.69	%		2.53	%		2.76	%		2.51	%
Net interest margin		2.80	%		2.69	%		2.86	%		2.70	%
Efficiency ratio		65.66	%		70.10	%		63.98	%		70.56	%

Noninterest income to average assets		0.19	%		0.13	%		0.19	%		0.14	%
Noninterest expense to average assets		1.87	%		1.90	%		1.87	%		1.92	%

Average interest-earning assets to average interest-bearing liabilities		131.20	%		131.31	%		131.24	%		131.40	%
Average equity to average assets		14.50	%		14.99	%		14.62	%		15.18	%
Dividend payout ratio (2)		24.61	%		16.65	%		22.84	%		20.37	%


	As of and for the three months ended
	March 31, 2022			March 31, 2021
Loans to deposits		79.15	%		86.72	%

Share Data:
Shares outstanding		15,334,857			15,966,216
Book value per common share	$	18.02		$	16.99
Tangible book value per common share (3)	$	17.62		$	16.60

Asset Quality Ratios:
Non-performing loans receivable	$	7,858		$	2,054
Non-performing assets	$	7,858		$	2,054
Allowance for loan losses as a percent of total loans receivable (4)		0.68	%		0.65	%
Allowance for loan losses as a percent of non-performing loans receivable		110.86	%		382.91	%
Non-performing loans as a percent of total loans receivable, net (4)		0.61	%		0.17	%
Non-performing assets as a percent of total assets		0.40	%		0.11	%
Net charge-offs (recoveries)	$	4		$	(82	)
Net charge-offs (recoveries) to average outstanding loans during the period (1)		0.00	%		(0.03	%)

Capital Ratios (5):
Tier 1 capital (to adjusted total assets)		12.86	%		12.76	%
Common equity Tier 1 capital (to risk-weighted assets)		17.22	%		17.72	%
Tier 1 capital (to risk-weighted assets)		17.22	%		17.72	%
Total capital (to risk-weighted assets)		17.83	%		18.33	%

(1) Performance ratios are annualized.
(2) Dividends declared per share divided by net income per share.
(3) Tangible book value per share is a non-GAAP measure and equals total shareholders’ equity, less goodwill and other intangible assets, divided by shares outstanding. We believe this disclosure may be meaningful to those investors who seek to evaluate our equity without giving effect to goodwill and other intangible assets. Reconciliations of GAAP to non-GAAP measures appear below this table.
(4) Total loans receivable excludes PPP loans.
(5) Represents Bank ratios.

Non-GAAP Financial Measures

The following table is a reconciliations of book value per share (GAAP measure) to tangible book value per share (non-GAAP measure) (Dollars in thousands, except share and per share data).


	As of
	March 31, 2022			March 31, 2021
Computation of Tangible Book Value per Common Share
Total shareholders' equity (GAAP)	$	276,392		$	271,297
Adjustments:
Goodwill		(6,106	)		(6,106	)
Other intangible assets		(102	)		(168	)
Tangible common shareholders' equity (Non-GAAP)	$	270,184		$	265,023

Common shares outstanding		15,334,857			15,966,216

Book value per share (GAAP)	$	18.02		$	16.99
Adjustments:
Effects of intangible assets		(0.40	)		(0.39	)

Tangible book value per common share (Non-GAAP)	$	17.62		$	16.60

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents decreased $413,000, or 0.3%, to $158.9 million at March 31, 2022 from $159.3 million at June 30, 2021. The decrease is primarily due to a $56.4 million increase in net loans receivable, $53.1 million increase in total investment securities, a $17.6 million decrease in FHLB advances and a $5.9 million decrease in other liabilities, partially offset by a $133.0 million increase in deposits.

Investment Securities Portfolio

The following table is a summary of the Company's investment securities portfolio, at carrying value, as of March 31, 2022 and June 30, 2021 (Dollars in thousands):


					Increase / (Decrease)
	March 31, 2022		June 30, 2021		$			%
Available for sale debt securities
U.S. Government and agency obligations	$	10,229	$	21,816	$	(11,587	)		-53.1	%
Corporate		4,978		8,189		(3,211	)		-39.2	%
State and municipal		5,533		7,115		(1,582	)		-22.2	%
Mortgage-backed securities – residential		14,042		17,654		(3,612	)		-20.5	%
Mortgage-backed securities – commercial		2,403		2,613		(210	)		-8.0	%
Total available for sale debt securities	$	37,185	$	57,387	$	(20,202	)		-35.2	%
Held to maturity debt securities
U.S. Government and agency obligations	$	49,995	$	33,994	$	16,001			47.1	%
Corporate		52,083		43,605		8,478			19.4	%
State and municipal		87,407		57,625		29,782			51.7	%
Mortgage-backed securities – residential		106,302		96,181		10,121			10.5	%
Mortgage-backed securities – collateralized mortgage obligations		26,076		33,300		(7,224	)		-21.7	%
Mortgage-backed securities – commercial		89,033		72,879		16,154			22.2	%
Total held to maturity debt securities	$	410,896	$	337,584	$	73,312			21.7	%

The increase in investment securities was the result of the Company deploying excess liquidity.

Loans Receivable Portfolio

The following table is a summary of the Company's loan portfolio, as of March 31, 2022 and June 30, 2021 (Dollars in thousands):


							Increase / (Decrease)
	March 31, 2022			June 30, 2021			$			%
Mortgage loans
Residential	$	215,431		$	224,305		$	(8,874	)		-4.0	%
Commercial		897,424			826,624			70,800			8.6	%
Construction		16,894			10,151			6,743			66.4	%
Net deferred loan origination (fees) costs		(23	)		196			(219	)		-111.7	%
Total mortgage loans		1,129,726			1,061,276			68,450			6.4	%
Commercial and consumer loans:
Commercial loans		141,427			150,658			(9,231	)		-6.1	%
Home equity lines of credit		22,557			25,439			(2,882	)		-11.3	%
Consumer and overdrafts		348			345			3			0.9	%
Net deferred loan origination costs (fees)		539			(386	)		925			-239.6	%
Total commercial and consumer loans		164,871			176,056			(11,185	)		-6.4	%
Total loans receivable		1,294,597			1,237,332			57,265			4.6	%
Allowance for loan losses		(8,711	)		(7,881	)		(830	)		10.5	%
Loans receivable, net	$	1,285,886		$	1,229,451		$	56,435			4.6	%

The increase in loans receivable was primarily the result of increases in commercial mortgage loans and construction loans, partially offset by decreases in commercial loans, residential mortgage loans and home equity lines of credit. The decrease in commercial loans includes a decrease in PPP loans of $32.3 million, driven by loan forgiveness and paydowns, largely offset by a net increase of $23.0 million in all other commercial loans.

Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered adequate by management to provide for probable incurred loan losses inherent in the loan portfolio at the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions, loss experience and an overall evaluation of the quality of the underlying collateral.

The allowance for loan losses increased $830,000, or 10.5%, to $8.7 million at March 31, 2022 from $7.9 million at June 30, 2021. The increase is primarily due to loan portfolio growth. Non-performing loans as a percent of total loans receivable (excluding PPP loans) were 0.61% as of March 31, 2022, an increase from 0.48% as of June 30, 2021.

The COVID-19 pandemic has created extensive disruptions to the local economy and our customers. From March 2020 to December 2021, the Company has granted loan payment deferrals on 331 commercial and consumer loans totaling $220.3 million for borrowers experiencing financial hardship due to the pandemic. Loans on a COVID-19 related payment deferral totaled $3.6 million (1 loan), or 0.28% of gross loans, as of March 31, 2022, compared to $27.3 million (19 loans) , or 2.21% of gross loans, as of June 30, 2021.

Deposits

Deposits have traditionally been our primary source of funds for our lending and investment activities. The substantial majority of our deposits are from depositors who reside in our primary market area. Deposits are attracted through the offering of a broad selection of deposit instruments for both individuals and businesses.

The following table is a summary of the Company's deposits, as of March 31, 2022 and June 30, 2021 (Dollars in thousands):


					Increase / (Decrease)
	March 31, 2022		June 30, 2021		$			%
Demand	$	243,908	$	219,072	$	24,836			11.3	%
NOW Accounts		221,386		177,223		44,163			24.9	%
Money market accounts		396,358		332,843		63,515			19.1	%
Savings		417,975		387,529		30,446			7.9	%
Time deposits		345,092		375,015		(29,923	)		-8.0	%
Total deposits	$	1,624,719	$	1,491,682	$	133,037			8.9	%

Federal Home Loan Bank Advances. FHLB advances decreased $17.6 million to $48.4 million at March 31, 2022 as compared to $66.0 million at June 30, 2021. This decrease is due to maturities and principal paydowns of $17.6 million.

Total Shareholder’s Equity. Total shareholders’ equity increased $1.8 million, or 0.7%, to $276.4 million at March 31, 2022 from $274.6 million at June 30, 2021. This increase was primarily due to net income of $11.4 million and $3.8 million of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period, partially offset by the repurchase of $8.2 million (435,788 shares) of common stock, $2.5 million of other comprehensive losses related primarily to unrealized losses on available for sale investment securities driven by higher market interest rates and $2.6 million of cash dividends declared and paid. We would expect that further increases in market interest rates would lead to additional unrealized losses on available for sale investment securities. On February 3, 2021, a repurchase plan was authorized to repurchase up to 801,856 shares, or 5% of the Company’s then outstanding common stock. As of March 31, 2022, the Company repurchased 682,561 shares of common stock at an average cost of $18.23 per share under this plan. At March 31, 2022, the Bank was considered “well capitalized” under applicable regulatory guidelines.

Results of Operations for the Three and Nine Months Ended March 31, 2022 and March 31, 2021

Net Income. Net income decreased $118,000, or 3.3%, to $3.5 million for the three months ended March 31, 2022 compared to $3.6 million for the three months ended March 31, 2021. The decrease was primarily due to increases of $1.2 million in provision for loan losses and $384,000 in noninterest expense, largely offset by increases of $1.1 million in net interest income and $331,000 in noninterest income, and a $35,000 decrease in income tax expense. Net income increased $2.4 million, or 26.2%, to $11.4 million for the nine months ended March 31, 2022 compared to $9.0 million for the nine months ended March 31, 2021. The increase was primarily due to increases of $3.7 million in net interest income and $802,000 in noninterest income, partially offset by increases of $1.2 million in provision for loan losses, $498,000 in noninterest expense and $450,000 in income tax expense.

Net Interest Income.

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average tax equivalent 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 (Dollars in thousands).


	Three Months Ended March 31,
	2022								2021
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
Assets:
Loans receivable (1)	$	1,255,117		$	11,943		3.81	%	$	1,252,492		$	12,116		3.88	%
Investment securities (1)		436,702			2,152		2.06			319,239			1,700		2.18
Other interest-earning assets		141,677			105		0.30			162,193			109		0.27
Total interest-earning assets		1,833,496			14,200		3.12			1,733,924			13,925		3.23
Non-interest-earning assets		77,202								68,748
Total assets	$	1,910,698							$	1,802,672

Liabilities and equity:
NOW accounts	$	215,021			94		0.18		$	161,049			59		0.15
Money market accounts		360,131			144		0.16			274,516			208		0.31
Savings accounts and escrow		415,850			113		0.11			368,791			132		0.15
Time deposits		349,266			866		1.00			411,500			1,383		1.36
Total interest-bearing deposits		1,340,268			1,217		0.37			1,215,856			1,782		0.59
FHLB advances		57,185			266		1.89			104,604			506		1.96
Total interest-bearing liabilities		1,397,453			1,483		0.43			1,320,460			2,288		0.70
Non-interest-bearing deposits		220,809								187,778
Other non-interest-bearing liabilities		15,370								24,272
Total liabilities		1,633,632								1,532,510
Total shareholders' equity		277,066								270,162
Total liabilities and shareholders' equity	$	1,910,698							$	1,802,672

Net interest income				$	12,717							$	11,637
Interest rate spread - tax equivalent (2)							2.69								2.53
Net interest margin - tax equivalent (3)							2.80								2.69
Average interest-earning assets to interest-bearing liabilities		131.20	%							131.31	%

(1)

Tax exempt yield is shown on a tax equivalent basis for proper comparison using statutory federal income tax rate of 21% for all periods presented. See reconciliation of GAAP to non-GAAP measures in the 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 reconciliation of GAAP to non-GAAP measures in the table below.


	Nine Months Ended March 31,
	2022								2021
	Average Balance			Interest/ Dividends		Average Rate			Average Balance			Interest/ Dividends		Average Rate
Assets:
Loans receivable (1)	$	1,240,253		$	36,701		3.95	%	$	1,245,881		$	36,845		3.95	%
Investment securities (1)		423,062			6,294		2.07			316,114			5,489		2.36
Other interest-earning assets		142,974			302		0.28			162,946			344		0.28
Total interest-earning assets		1,806,289			43,297		3.22			1,724,941			42,678		3.31
Non-interest-earning assets		77,027								70,364
Total assets	$	1,883,316							$	1,795,305

Liabilities and equity:
NOW accounts	$	196,803			254		0.17		$	153,378			227		0.20
Money market accounts		355,471			499		0.19			260,258			657		0.34
Savings accounts and escrow		403,740			334		0.11			363,768			502		0.18
Time deposits		358,050			2,776		1.03			429,811			4,986		1.54
Total interest-bearing deposits		1,314,064			3,863		0.39			1,207,215			6,372		0.70
FHLB advances		62,309			924		1.98			105,569			1,545		1.95
Total interest-bearing liabilities		1,376,373			4,787		0.46			1,312,784			7,917		0.80
Non-interest-bearing deposits		214,391								183,467
Other non-interest-bearing liabilities		17,186								26,570
Total liabilities		1,607,950								1,522,821
Total shareholders' equity		275,366								272,484
Total liabilities and shareholders' equity	$	1,883,316							$	1,795,305

Net interest income				$	38,510							$	34,761
Interest rate spread - tax equivalent (2)							2.76								2.51
Net interest margin - tax equivalent (3)							2.86								2.70
Average interest-earning assets to interest-bearing liabilities		131.24	%							131.40	%

(1)

(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 reconciliation of GAAP to non-GAAP measures in the table below.

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


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Total interest income	$	14,200	$	13,925	$	43,297	$	42,678
Total interest expense		1,483		2,288		4,787		7,917
Net interest income (GAAP)		12,717		11,637		38,510		34,761
Tax equivalent adjustment		101		51		289		130
Net interest income - tax equivalent (non-GAAP)	$	12,818	$	11,688	$	38,799	$	34,891

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 (in thousands).


	Three Months Ended March 31,									Nine Months Ended March 31,
	2022 versus 2021									2022 versus 2021
	Rate			Volume			Net			Rate			Volume			Net
Interest income:
Loans receivable	$	(304	)	$	131		$	(173	)	$	(272	)	$	128		$	(144	)
Investment securities		(118	)		570			452			(865	)		1,670			805
Other interest-earning assets		12			(16	)		(4	)		6			(48	)		(42	)
Total interest-earning assets		(410	)		685			275			(1,131	)		1,750			619

Interest expense:
NOW accounts		13			22			35			(32	)		59			27
Money market accounts		(117	)		53			(64	)		(350	)		192			(158	)
Savings and escrow accounts		(32	)		13			(19	)		(212	)		44			(168	)
Time deposits		(328	)		(189	)		(517	)		(1,469	)		(741	)		(2,210	)
FHLB advances		(18	)		(222	)		(240	)		21			(642	)		(621	)
Total interest-bearing liabilities		(482	)		(323	)		(805	)		(2,042	)		(1,088	)		(3,130	)

Net increase in net interest income	$	72		$	1,008		$	1,080		$	911		$	2,838		$	3,749

Provision for Loan Losses. The provision for loan losses increased for the three and nine months ended March 31, 2022, compared to the same periods last year. The increase is primarily due to higher loan portfolio growth in the current year as well as a $944,000 benefit for loan losses in the prior year quarter associated with the release of qualitative reserves established in the prior fiscal year associated with the COVID-19 pandemic. Charge-offs net of recoveries were $4,000 and recoveries, net of charge-offs were $267,000 for the three and nine months ended March 31, 2022, respectively, compared to recoveries net of charge-offs were $82,000 and charge-offs, net of recoveries were $96,000, respectively, for the same periods last year.

Noninterest Income

The following table displays noninterest income for the three and nine months ended March 31, 2022 and 2021 (Dollars in thousands).


	Three Months Ended										Nine Months Ended
	March 31,				Net Change						March 31,				Net Change
	2022		2021		$			%			2022		2021		$			%
Fees and service charges	$	390	$	353	$	37			10.5	%	$	1,198	$	1,038	$	160			15.4	%
Bank-owned life insurance		185		120		65			54.2	%		568		381		187			49.1	%
Gain on sale of premises		-		-		-			0.0	%		548		-		548			100.0	%
Gain on sale of securities		-		113		(113	)		-100.0	%		-		113		(113	)		-100.0	%
Net gains on sales of loans receivable		9		-		9			100.0	%		56		-		56			100.0	%
Swap income		333		-		333			100.0	%		333		367		(34	)		-9.3	%
Other		6		6		-			0.0	%		28		30		(2	)		-6.7	%
Total noninterest income	$	923	$	592	$	331			55.9	%	$	2,731	$	1,929	$	802			41.6	%

During the nine months ended March 31, 2022, the Company sold a parcel of unused land, resulting in the gain on sale of premises. The increase in fees and service charges compared to the same period last year was primarily the result of increases in debit card and interchange income, as well as increases in overdraft, ATM and wire fees which declined substantially during the beginning of the COVID-19 pandemic and have since recovered to near pre-pandemic levels.

Noninterest Expense

The following table displays noninterest expense for the three and nine months ended March 31, 2022 and 2021 (Dollars in thousands).


	Three Months Ended										Nine Months Ended
	March 31,				Net Change						March 31,				Net Change
	2022		2021		$			%			2022		2021		$			%
Salaries and employee benefits	$	5,737	$	5,595	$	142			2.5	%	$	17,353	$	16,722	$	631			3.8	%
Occupancy and equipment		1,414		1,359		55			4.0	%		4,115		4,051		64			1.6	%
Communication and data processing		573		517		56			10.8	%		1,626		1,539		87			5.7	%
Professional fees		543		382		161			42.1	%		1,356		1,285		71			5.5	%
Postage, printing, stationery and supplies		153		146		7			4.8	%		478		452		26			5.8	%
FDIC assessment		125		115		10			8.7	%		371		350		21			6.0	%
Advertising		100		100		-			0.0	%		300		300		-			0.0	%
Amortization of intangible assets		17		21		(4	)		-19.0	%		49		61		(12	)		-19.7	%
Other operating expenses		294		337		(43	)		-12.8	%		737		1,127		(390	)		-34.6	%
Total noninterest expense	$	8,956	$	8,572	$	384			4.5	%	$	26,385	$	25,887	$	498			1.9	%

The increase in professional fees in the current quarter ended March 31, 2022 compared to the same period last year is primarily due to higher legal and consulting fees. The decrease in other operating expenses for the nine months ended March 31, 2022 compared to the same period last year is primarily due to lower pension costs in the current year.

Income Tax Expense. The effective income tax rate was 21.0% and 20.4% for the three and nine months ended March 31, 2022 as compared to 21.1% and 21.5% for the same periods last year, with the decrease largely driven by an increase in tax-exempt interest income on municipal investments and bank-owned life insurance income.

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, 2022 and June 30, 2021 (Dollars in thousands). 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
Basis Point Change in Interest Rates	Dollar Amount		Dollar Change			Percent Change				NPV Ratio			Change (in bps)
March 31, 2022:
200	$	271,985	$	(59,081	)		(17.8	)	%		15.06	%		(222	)
100		305,840		(25,226	)		(7.6	)			16.43			(85	)
-		331,066	-				-				17.28			-
(50)		355,547		24,481			7.4				18.20			92
(100)		373,059		41,993			12.7				18.87			159

June 30, 2021:
200	$	270,679	$	(37,814	)		(12.3	)	%		15.21	%		(122	)
100		291,715		(16,778	)		(5.4	)			15.95			(48	)
-		308,493		-			-				16.43			-
(50)		324,999		16,506			5.4				17.06			63
(100)		346,539		38,046			12.3				17.94			151

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, 2022, cash and cash equivalents totaled $158.9 million, a decrease from $159.3 million as of June 30, 2021. Unpledged securities classified as available for sale, which provide an additional source of liquidity, totaled $19.5 million at March 31, 2022, a decrease from $28.9 million as of June 30, 2021.

We had the ability to borrow up to $319.4 million from the FHLB of New York, at March 31, 2022 of which $48.4 million was outstanding as of March 31, 2022. Additionally, as of March 31, 2022, we had an available line of credit with the FRB of New York’s discount window program of $96.1 million, and $25.0 million of fed funds lines of credit, neither of which had outstanding balances as of March 31, 2022.

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 $83.2 million of loan commitments outstanding as of March 31, 2022 and $155.2 million of approved, but unadvanced, funds to borrowers. We also had $2.9 million in outstanding letters of credit at March 31, 2022.

Time deposits due within one year of March 31, 2022 totaled $219.5 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, 2022. 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, 2022, the Holding Company (on an unconsolidated, stand-alone basis) had liquid assets of $19.7 million.

Capital Resources. The Bank is subject to various regulatory capital requirements administered by the NYSDFS and the FDIC. At March 31, 2022, 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, 2022. 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, 2022, 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

At March 31, 2022, 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, 2021, filed with the Securities and Exchange Commission. As of March 31, 2022, 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, 2021.

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

(a)

Not applicable

(b)

Not applicable

(c)

On February 3, 2021, a repurchase program was authorized by the Board of Directors to repurchase up to 801,856 shares, or 5.0% of the Company’s then outstanding common stock.

The following table presents information regarding stock repurchases by the Company during the quarter ended March 31, 2022.


	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, 2022 through January 31, 2022		3,122	$	19.02		3,122		119,295
February 1, 2022 through February 28, 2022		-		-		-		119,295
March 1, 2022 through March 31, 2022		-		-		-		119,295
Total		3,122	$	19.02		3,122

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		Amended and Restated 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, 2022, 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 Current Report on Form 8-K, filed on June 24, 2021.

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 6, 2022		/s/ Joseph D. Roberto
		Joseph D. Roberto
		Chairman, President and Chief Executive Officer

Date: May 6, 2022		/s/ Jeffrey M. Helf
		Jeffrey M. Helf
		Senior Vice President and Chief Financial Officer