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Section 1: 10-Q (10-Q 09302018)

pcsb-10q_20180930.htm

 

 

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 September 30, 2018

OR

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

For the transition period from _____ to _____

Commission File Number: 001-38065

 

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

81-4710738

(State or other jurisdiction of

incorporation or organization)

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

2651 Strang Blvd, Suite 100

Yorktown Heights, NY

10598

(Address of principal executive offices)

(Zip Code)

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

N/A

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

 

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

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

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

 

Large accelerated filer

 

 

  

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Small reporting company

 

 

 

 

 

 

 

 

 

  

  

Emerging growth company

 

 

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

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

18,348,994 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 9, 2018.

 


 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

2

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Operations

3

 

Consolidated Statements of Comprehensive Income

4

 

Consolidated Statements of Changes in Shareholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

38

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

39

Signatures

40

 

 

 

1


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets (unaudited)

(amounts in thousands, except share data)

 

 

 

September 30,

 

 

June 30,

 

 

 

2018

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

66,039

 

 

$

60,684

 

Federal funds sold

 

 

2,284

 

 

 

1,461

 

Total cash and cash equivalents

 

 

68,323

 

 

 

62,145

 

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

   $328,962 and $343,188, respectively)

 

 

340,208

 

 

 

353,183

 

Available for sale debt securities, at fair value

 

 

101,540

 

 

 

105,472

 

Total investment securities

 

 

441,748

 

 

 

458,655

 

Loans receivable, net of allowance for loan losses of $4,959 and

   $4,904, respectively

 

 

905,093

 

 

 

902,336

 

Accrued interest receivable

 

 

4,747

 

 

 

4,358

 

Federal Home Loan Bank stock

 

 

2,049

 

 

 

2,050

 

Premises and equipment, net

 

 

11,546

 

 

 

11,598

 

Deferred tax asset, net

 

 

2,495

 

 

 

2,622

 

Foreclosed real estate

 

 

754

 

 

 

460

 

Bank-owned life insurance

 

 

23,887

 

 

 

23,747

 

Goodwill

 

 

6,106

 

 

 

6,106

 

Other intangible assets

 

 

405

 

 

 

433

 

Other assets

 

 

7,342

 

 

 

5,677

 

Total assets

 

$

1,474,495

 

 

$

1,480,187

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

1,022,096

 

 

$

1,025,574

 

Non-interest bearing deposits

 

 

131,025

 

 

 

131,883

 

Total deposits

 

 

1,153,121

 

 

 

1,157,457

 

Mortgage escrow funds

 

 

4,981

 

 

 

8,803

 

Advances from Federal Home Loan Bank

 

 

18,810

 

 

 

18,841

 

Other liabilities

 

 

7,706

 

 

 

7,527

 

Total liabilities

 

 

1,184,618

 

 

 

1,192,628

 

Commitments and contingencies (Notes 1 and 2)

 

 

-

 

 

 

-

 

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

   issued or outstanding as of September 30, 2018 and June 30, 2018)

 

 

-

 

 

 

-

 

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

   18,165,110 shares issued and outstanding as of September 30, 2018 and

   June 30, 2018)

 

 

182

 

 

 

182

 

Additional paid in capital

 

 

179,294

 

 

 

179,045

 

Retained earnings

 

 

130,189

 

 

 

128,365

 

Unearned compensation - ESOP

 

 

(12,839

)

 

 

(13,083

)

Accumulated other comprehensive loss, net of income taxes

 

 

(6,949

)

 

 

(6,950

)

Total shareholders' equity

 

 

289,877

 

 

 

287,559

 

Total liabilities and shareholders' equity

 

$

1,474,495

 

 

$

1,480,187

 

 

See accompanying notes to the consolidated financial statements (unaudited)

2


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations (unaudited)

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

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

Interest and dividend income

 

 

 

 

 

 

 

 

Loans receivable

 

$

9,898

 

 

$

8,818

 

Investment securities

 

 

2,366

 

 

 

2,245

 

Federal funds and other

 

 

345

 

 

 

234

 

Total interest and dividend income

 

 

12,609

 

 

 

11,297

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

2,056

 

 

 

1,267

 

FHLB advances

 

 

89

 

 

 

154

 

Total interest expense

 

 

2,145

 

 

 

1,421

 

Net interest income

 

 

10,464

 

 

 

9,876

 

Provision for loan losses

 

 

58

 

 

 

135

 

Net interest income after provision for loan losses

 

 

10,406

 

 

 

9,741

 

Noninterest income

 

 

 

 

 

 

 

 

Fees and service charges

 

 

418

 

 

 

381

 

Bank-owned life insurance

 

 

140

 

 

 

149

 

Gain on sale of securities, net

 

 

-

 

 

 

173

 

Other

 

 

83

 

 

 

11

 

Total noninterest income

 

 

641

 

 

 

714

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,140

 

 

 

4,860

 

Occupancy and equipment

 

 

1,241

 

 

 

1,282

 

Communicating and data processing

 

 

472

 

 

 

491

 

Professional fees

 

 

369

 

 

 

413

 

Postage, printing, stationary and supplies

 

 

138

 

 

 

132

 

FDIC assessment

 

 

93

 

 

 

78

 

Advertising

 

 

87

 

 

 

165

 

Amortization of intangible assets

 

 

28

 

 

 

32

 

Other operating expenses

 

 

440

 

 

 

441

 

Total noninterest expense

 

 

8,008

 

 

 

7,894

 

Net income before income tax expense

 

 

3,039

 

 

 

2,561

 

Income tax expense

 

 

710

 

 

 

805

 

Net income

 

$

2,329

 

 

$

1,756

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

 

$

0.10

 

Diluted

 

$

0.14

 

 

$

0.10

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

16,869,100

 

 

 

16,756,447

 

 

See accompanying notes to the consolidated financial statements (unaudited)

3


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(amounts in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

Net income

 

$

2,329

 

 

$

1,756

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on available for sale securities:

 

 

 

 

 

 

 

 

Net change in unrealized gains/losses before reclassification adjustment

 

 

(153

)

 

 

(213

)

Reclassification adjustment for gains realized in net income

 

 

-

 

 

 

(139

)

Net change in unrealized gains/losses

 

 

(153

)

 

 

(352

)

Tax effect

 

 

32

 

 

 

120

 

Net of tax

 

 

(121

)

 

 

(232

)

 

 

 

 

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

Net gain (loss) arising during the period

 

 

-

 

 

 

-

 

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

 

 

145

 

 

 

181

 

Tax effect

 

 

(30

)

 

 

(62

)

Net of tax

 

 

115

 

 

 

119

 

 

 

 

 

 

 

 

 

 

Supplemental retirement plans:

 

 

 

 

 

 

 

 

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

 

 

9

 

 

 

8

 

Tax effect

 

 

(2

)

 

 

(2

)

Net of tax

 

 

7

 

 

 

6

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

1

 

 

 

(107

)

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,330

 

 

$

1,649

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

4


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

(amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Unallocated

 

 

Other

 

 

 

 

 

 

Number of

 

 

Common

 

 

Paid-In

 

 

Retained

 

 

Common Stock

 

 

Comprehensive

 

 

Total

 

 

Shares

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

of ESOP

 

 

Loss

 

 

Equity

 

Balance at July 1, 2018

 

18,165,110

 

 

$

182

 

 

$

179,045

 

 

$

128,365

 

 

$

(13,083

)

 

$

(6,950

)

 

$

287,559

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

2,329

 

 

 

-

 

 

 

-

 

 

 

2,329

 

Other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

Common stock dividends declared ($0.03 per share)

 

-

 

 

 

-

 

 

 

-

 

 

 

(505

)

 

 

-

 

 

 

-

 

 

 

(505

)

ESOP shares committed to be released (24,419 shares)

 

-

 

 

 

-

 

 

 

249

 

 

 

-

 

 

 

244

 

 

 

-

 

 

 

493

 

Balance at September 30, 2018

 

18,165,110

 

 

$

182

 

 

$

179,294

 

 

$

130,189

 

 

$

(12,839

)

 

$

(6,949

)

 

$

289,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2017

 

18,165,110

 

 

$

182

 

 

$

177,993

 

 

$

121,148

 

 

$

(14,262

)

 

$

(5,215

)

 

$

279,846

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

1,756

 

 

 

-

 

 

 

-

 

 

 

1,756

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(107

)

 

 

(107

)

Issuance of common stock (1)

 

-

 

 

 

-

 

 

 

(17

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17

)

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

 

-

 

 

 

-

 

 

258

 

 

 

-

 

 

349

 

 

 

-

 

 

 

607

 

Balance at September 30, 2017

 

18,165,110

 

 

$

182

 

 

$

178,234

 

 

$

122,904

 

 

$

(13,913

)

 

$

(5,322

)

 

$

282,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

5


PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

2,329

 

 

$

1,756

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Provision for loan loss

 

 

58

 

 

 

135

 

Depreciation and amortization

 

 

299

 

 

 

387

 

Amortization of net premiums on securities and net deferred loan

   origination costs

 

 

482

 

 

 

383

 

Net increase in accrued interest receivable

 

 

(389

)

 

 

(485

)

Net gains on sales of securities

 

 

-

 

 

 

(173

)

ESOP Compensation

 

 

493

 

 

 

607

 

Earnings from cash surrender value of BOLI

 

 

(140

)

 

 

(149

)

Net accretion of purchase account adjustments

 

 

(96

)

 

 

(126

)

Other adjustments, principally net changes in other assets and liabilities

 

 

(1,205

)

 

 

(282

)

Net cash provided by operating activities

 

 

1,831

 

 

 

2,053

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of investment securities:

 

 

 

 

 

 

 

 

Held to maturity

 

 

(1,169

)

 

 

(7,023

)

Available for sale

 

 

-

 

 

 

(12,663

)

Sales of investment securities available for sale

 

 

-

 

 

 

6,100

 

Maturities and calls of investment securities:

 

 

 

 

 

 

 

 

Held to maturity

 

 

13,984

 

 

 

21,222

 

Available for sale

 

 

3,710

 

 

 

11,528

 

Disbursement for loan originations net of principal repayments

 

 

(3,266

)

 

 

(4,358

)

Purchase of loans

 

 

-

 

 

 

(26,082

)

Net redemption of FHLB stock

 

 

1

 

 

 

510

 

Purchase of bank premises and equipment

 

 

(219

)

 

 

(299

)

Net cash provided by (used in) investing activities

 

 

13,041

 

 

 

(11,065

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net decrease in deposits

 

 

(4,336

)

 

 

(6,747

)

Net decrease in short-term FHLB advances

 

 

-

 

 

 

(6,818

)

Repayment of long-term FHLB advances

 

 

(31

)

 

 

(30

)

Net decrease in mortgage escrow funds

 

 

(3,822

)

 

 

(3,129

)

Common stock dividends paid

 

 

(505

)

 

 

-

 

Issuance of common stock

 

 

-

 

 

 

(17

)

Net cash used in financing activities

 

 

(8,694

)

 

 

(16,741

)

Net increase (decrease) in cash and cash equivalents

 

 

6,178

 

 

 

(25,753

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

62,145

 

 

 

60,486

 

Cash and cash equivalents at end of period

 

$

68,323

 

 

$

34,733

 

 

See accompanying notes to the consolidated financial statements (unaudited)

6


PCSB Financial Corporation and Subsidiaries

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

(amounts in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

2,122

 

 

$

1,379

 

Income taxes

 

 

830

 

 

 

975

 

Loans transferred to foreclosed real estate and other assets

 

 

294

 

 

 

-

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

 

7


PCSB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

Nature of Operations: PCSB Financial Corporation (the “Holding Company” and together with its direct and indirect subsidiaries, the “Company”) is a Maryland corporation organized by PCSB Bank (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in the Bank's conversion to stock ownership on April 20, 2017. At September 30, 2018, the significant assets of the Holding Company were the capital stock of the Bank, cash deposited in the Bank, and a loan to the PCSB Bank Employee Stock Ownership Plan (“ESOP”). The liabilities of the Holding Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) 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 stock savings bank and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s primary regulators are the FDIC and the 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, and include the accounts of the Holding Company, the Bank and the Bank's three subsidiaries – PCSB Funding Corp., PCSB Commercial Bank and UpCounty Realty Corp. (formerly PCSB Realty Ltd.). PCSB Funding Corp. is a real estate investment trust that holds certain mortgage assets.  PCSB Commercial Bank is a state-chartered commercial bank authorized to accept the deposits of local governments in New York State. UpCounty Realty Corp. is a corporation that holds certain properties foreclosed upon by the Bank. All intercompany transactions and balances have been eliminated in consolidation. Financial information for the periods before the Company’s initial public offering (“IPO”) on April 20, 2017 are those of the Bank and its subsidiaries.    

The unaudited consolidated financial statements contained herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments reflected in the consolidated financial statements contained herein. The annualized results of operations for the period presented are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2018, included in the Company's annual report on Form 10-K.

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

Use of Estimates:  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.  

Note 2. Recent Accounting Pronouncements

The pronouncements discussed below are not intended to be an all-inclusive list, but rather only those pronouncements that could potentially have a material impact on our financial position, results of operations or disclosures.

 

Accounting Standards Adopted in the Period

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers,” and was later amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and 2016-20. These updates provide a comprehensive framework for addressing revenue

8


recognition issues that can be applied to all contracts with customers. The amendments also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized.

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

The Company has evaluated the impact of ASU 2014-09 and the amendments upon adoption as of July 1, 2018. In evaluating this standard, management has determined that the majority of revenue earned by the Company is from revenue streams not included in the scope of this standard and for in scope revenue streams management determined that, based on the modified retrospective method, a cumulative-effect adjustment to opening retained earnings as a result of adopting this standard is not needed. Additional disclosures required under ASU 2014-09 are contained in Note 12.

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

In March 2017, the FASB issued ASU 2017-07 “Compensation – Retirement Benefits”. The ASU requires companies that offer employee defined pension plans, other postretirement benefit plans, or other types of benefit plans accounted for under Topic 715 to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of ASU 2017-07 resulted in non-service cost credits of $83,000 and $47,000 to be included in other operating expense for the three months ended September 30, 2018 and 2017, respectively.

Future Application of Accounting Pronouncements Previously Issued

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key information about leasing arrangements. The

9


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

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including loans, debt securities, and other financial assets. The ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by recording an allowance for current expected credit losses. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2020, including interim periods within that fiscal year. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. The Company is actively working through the provisions of the Update. Management has established a steering committee which is identifying the methodologies and the additional data requirements necessary to implement the Update and is evaluating the need for a third-party software service provider to assist in the Company's implementation. Management is currently evaluating the impact that ASU 2016-13 will have on the Company’s consolidated financial position, results of operations and disclosures.

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

In March 2017, the FASB issued ASU 2017-08 "Receivables - Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The ASU requires premiums on callable debt securities to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2020, including interim periods within that fiscal year. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2017-08 will not have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

Note 3. Shareholders' Equity

The Company completed its initial public offering (“IPO”) on April 20, 2017, in connection with the Bank’s mutual-to-stock conversion, resulting in gross proceeds of $178.3 million, through the sale of 17,826,408 shares, including 1,453,209 shares sold to the PCSB Bank Employee Stock Ownership Plan (ESOP), at the offering price of $10.00 per share. In addition, the Company also contributed 338,702 shares of its common stock and $1.6 million in cash to the PCSB Community Foundation. Expenses related to the offering were $3.7 million, which resulted in net proceeds of $174.6 million prior to the contribution to PCSB Community Foundation. The Company lent $14.5 million to the ESOP and contributed $87.3 million to the Bank, with the remainder of the net proceeds of the offering prior to the contribution to PCSB Community Foundation being retained at the holding company.

Prior to the IPO, the Company had no outstanding shares.

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Note 4. Investment Securities

In association with the adoption of ASU 2016-01, available-for-sale and held-to-maturity debt securities are referred to as investment securities.

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity securities at September 30, 2018 and June 30, 2018 were as follows:

 

 

 

September 30, 2018

 

 

 

Amortized

 

 

Gross Unrealized/Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

62,381

 

 

$

-

 

 

$

(1,024

)

 

$

61,357

 

Corporate and other debt securities

 

 

8,392

 

 

 

-

 

 

 

(183

)

 

 

8,209

 

Mortgage-backed securities – residential

 

 

32,862

 

 

 

88

 

 

 

(976

)

 

 

31,974

 

Total available for sale

 

$

103,635

 

 

$

88

 

 

$

(2,183

)

 

$

101,540

 

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

117,048

 

 

$

-

 

 

$

(2,434

)

 

$

114,614

 

Corporate and other debt securities

 

 

4,000

 

 

 

-

 

 

 

(149

)

 

 

3,851

 

Mortgage-backed securities – residential

 

 

136,905

 

 

 

27

 

 

 

(5,577

)

 

 

131,355

 

Mortgage-backed securities – collateralized mortgage obligations

 

 

51,052

 

 

 

-

 

 

 

(2,071

)

 

 

48,981

 

Mortgage-backed securities – commercial

 

 

31,203

 

 

 

-

 

 

 

(1,042

)

 

 

30,161

 

Total held to maturity

 

$

340,208

 

 

$

27

 

 

$

(11,273

)

 

$

328,962

 

 

 

 

June 30, 2018

 

 

 

Amortized

 

 

Gross Unrealized/Unrecognized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

64,389

 

 

$

-

 

 

$

(959

)

 

$

63,430

 

Corporate and other debt securities

 

 

8,406

 

 

 

-

 

 

 

(171

)

 

 

8,235

 

Mortgage-backed securities – residential

 

 

34,619

 

 

 

81

 

 

 

(893

)

 

 

33,807

 

Total available for sale

 

$

107,414

 

 

$

81

 

 

$

(2,023

)

 

$

105,472

 

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

$

122,048

 

 

$

-

 

 

$

(2,274

)

 

$

119,774

 

Corporate and other debt securities

 

 

4,000

 

 

 

-

 

 

 

(126

)

 

 

3,874

 

Mortgage-backed securities – residential

 

 

140,478

 

 

 

32

 

 

 

(4,846

)

 

 

135,664

 

Mortgage-backed securities – collateralized mortgage obligations

 

 

53,547

 

 

 

-

 

 

 

(1,815

)

 

 

51,732

 

Mortgage-backed securities – commercial

 

 

33,110

 

 

 

11

 

 

 

(977

)

 

 

32,144

 

Total held to maturity

 

$

353,183

 

 

$

43

 

 

$

(10,038

)

 

$

343,188

 

 

11


No securities were sold during the three months ended September 30, 2018. During the three months ended September 30, 2017, $6.6 million of securities were sold resulting in $173,000 of net realized gains. Included was the disposal of $681,000 of securities classified as held to maturity, resulting in net realized gains of $34,000. These securities were comprised of seasoned mortgage-backed securities where the Company collected a substantial portion (at least 85%) of the principal outstanding at acquisition due to prepayments or scheduled payments payable in equal installments, comprising both principal and interest, over the terms.

The following table presents the fair value and carrying amount of debt securities at September 30, 2018, by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

 

 

Held to maturity

 

 

Available for sale

 

 

 

Carrying

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Amount

 

 

Value

 

 

Cost

 

 

Value

 

 

 

(in thousands)

 

September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 year or less

 

$

26,503

 

 

$

26,327

 

 

$

16,399

 

 

$

16,298

 

1 to 5 years

 

 

90,545

 

 

 

88,287

 

 

 

52,374

 

 

 

51,290

 

5 to 10 years

 

 

-