UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended June 30, 2018
OR
☐☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 001-38065
PCSB FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State of Other Jurisdiction of
Incorporation or Organization)
2651 Strang Blvd., Suite 100, Yorktown Heights, New York
(Address of Principal Executive Offices)
81-4710738
(I.R.S. Employer
Identification No.)
10598
(Zip Code)
(914) 248-7272
(Registrant’s Telephone Number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
(Title of each class)
The NASDAQ Stock Market, LLC
(Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐
NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐
NO ☒
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 twelve 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒
NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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 ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☒
Accelerated filer ☒
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐
NO ☒
As of December 29, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting common equity held by non-affiliates
of the Registrant was $306.8 million. The registrant does not have any non-voting common equity.
As of September 13, 2018, there were issued and outstanding 18,165,110 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders (Part III).
Item Number
1
1A
1B
2
3
4
5
6
7
7A
8
9
9A
9B
10
11
12
13
14
15
16
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Table of Contents
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
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Page Number
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22
30
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36
56
57
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108
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,”
“anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:
Forward Looking Statements
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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:
•
•
•
•
•
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•
•
•
•
•
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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 markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital
requirements;
our ability to manage market risk, credit risk and operational risk in the current economic conditions;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and
our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the
Securities and Exchange Commission or the Public Company Accounting Oversight Board;
our ability to retain key employees;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
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Because of these and other uncertainties, our actual future results may be materially different from the results indica ted by these forward-looking
statements. See “Risk Factors” contained in Item 1A. We do not undertake to update any forward-looking statements, except as may be required by applicable law
or regulation.
Item 1. Business
PCSB Financial Corporation
PCSB Financial Corporation (“PCSB Financial” or the “Company”), a Maryland corporation, is the bank holding company for PCSB Bank (the “Bank”).
On April 20, 2017, the Company completed its initial public offering in connection with the Bank’s conversion from a mutual savings bank to a stock savings bank,
selling 17,826,408 shares of common stock at a price of $10.00 per share. In addition, the Company contributed 338,702 shares of common stock and $1.6 million
in cash to the PCSB Community Foundation, a charitable foundation formed in connection with the conversion. As of June 30, 2018, we had consolidated assets of
$1.48 billion, consolidated deposits of $1.16 billion and consolidated equity of $287.6 million. Other than holding the common stock of PCSB Bank, PCSB
Financial has not engaged in any significant business to date. In the future, we may pursue other business activities, including mergers and acquisitions, investment
alternatives and diversification of operations; however, there are no current agreements for these activities.
The Company’s executive offices/headquarters are located at 2651 Strang Blvd., Suite 100, Yorktown Heights, NY 10598, and the telephone number at
that address is (914) 248-7272.
PCSB Bank
PCSB Bank is a New York-chartered stock savings bank that serves the banking needs of customers in the Lower Hudson Valley of New York State. We
operate from our executive offices/headquarters and 15 banking offices located in Dutchess (3 offices), Putnam (3 offices), Rockland (1 office) and Westchester (8
offices) Counties, New York. Our primary business activity is attracting deposits from the general public and using those funds primarily to originate and purchase
commercial real estate, business loans, and one-to four-family loans and purchase investment securities. We are subject to comprehensive regulation and
examination by the New York State Department of Financial Services (the “NYSDFS”) and by the Federal Deposit Insurance Corporation (the “FDIC”).
Our website address is www.pcsb.com
. Information on our website is not and should not be considered a part of this annual report.
Market Area
Our 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. We view Westchester County, which borders the Bronx (New York City’s northernmost
borough) and is more populous than the other counties, as 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 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.
Competition
We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from the many financial institutions
operating in our market area, many of which are significantly larger than we are and, therefore, have greater resources. We compete with these larger institutions
particularly in
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our Westchester County market area. We also face competition for funds from other financial service compan ies such as brokerage firms, money market funds,
mutual funds and other corporate and government securities issuers.
Competition for loans comes primarily from the many financial institutions operating in our market area. Our experience in recent years has been that
many financial institutions in our market area, especially community banks seeking to expand their commercial loan portfolios and institutions located in highly
competitive Westchester County, have been willing to price commercial loans aggressively in order to gain market share.
Lending Activities
Commercial Real Estate Loans. At June 30, 2018, commercial real estate loans were $495.3 million, or 54.7%, of total loans receivable. Our commercial
real estate loans are generally secured by properties used for business purposes such as office buildings, industrial facilities and retail facilities, and multi-family
properties. At June 30, 2018, multi-family residential real estate loans, which are described below, totaled $103.1 million. Excluding multi-family loans, $76.1
million of our commercial real estate portfolio was owner occupied real estate and $316.1 million was secured by income producing, or non-owner occupied real
estate.
At June 30, 2018, substantially all of our commercial real estate loans were secured by properties located in the lower Hudson Valley; however, we will
originate commercial real estate loans on properties located outside this area based on an established relationship with a strong borrower. We intend to continue to
grow our commercial real estate loan portfolio while maintaining prudent underwriting standards. In addition to originating these loans, we also purchase and
participate in commercial real estate loans with other financial institutions. At June 30, 2018, we had $94.0 million in commercial real estate loan participations and
whole loan purchases, which constituted 19.0% of our commercial loan portfolio, as compared with $70.6 million in commercial loan participations and whole loan
purchases, which constituted 16.1% of our commercial loan portfolio at June 30, 2017. Such loans are independently underwritten according to our policies and
require satisfactory documentation review by our legal counsel before we will purchase or participate in such loans.
We originate a variety of adjustable-rate commercial real estate loans with terms and amortization periods generally up to 25 years, which may include
balloon payment loans. Interest rates and payments on our adjustable-rate loans adjust every five, seven or ten years and generally are indexed to the prime rate or
the corresponding Treasury rate, plus a margin. We generally include pre-payment penalties on commercial real estate loans we originate.
In underwriting commercial real estate loans, we consider a number of factors, which include the projected net cash flow to the loan’s debt service
requirement (generally requiring a minimum of 120%), the age and condition of the collateral, the financial resources and income level of the borrower and the
borrower’s experience in owning or managing similar properties. Commercial real estate loans are generally originated in amounts up to 75% of the appraised
value or the purchase price of the property securing the loan, whichever is lower. Generally, guarantees are obtained from commercial real estate customers. In
addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.
We encourage our commercial business borrowers to maintain their primary deposit accounts with us, which would enhance our interest rate spread and overall
profitability.
If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be a lengthy process with
substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions
to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial
charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.
At June 30, 2018, our largest commercial real estate loan had an outstanding balance of $9.0 million and is secured by a non-owner occupied industrial
property. At June 30, 2018, this loan was performing according to its original terms.
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Multi-Family Residential Real Estate Loans. At June 30, 2018, multi-famil y real estate loans were $103.1 million, or 11.4%, of total loans receivable.
Our multi-family real estate loans are generally secured by properties consisting of five to 100 rental units in our market area. In addition to originating these loans,
we also purchase and participate in multi-family residential real estate loans with other financial institutions. At June 30, 2018, we had $63.4 million in multi-
family residential real estate loan participations, which constituted 61.5% of our multi-family resid ential real estate loan portfolio, as compared with $51.1 million
in multi-family residential real estate loan participations, which constituted 55.9% of our multi-family residential real estate loan portfolio at June 30, 2017. Such
loans are independently underwritten according to our policies and require satisfactory documentation review by our legal counsel before we will purchase or
participate in such loans.
We originate a variety of adjustable-rate multi-family residential real estate loans with terms and amortization periods generally up to 30 years, which may
include balloon loans. Interest rates and payments on our adjustable-rate loans adjust every five, seven or ten years and generally are indexed to the prime rate or
the corresponding Treasury rate, plus a margin. We generally include pre-payment penalties on multi-family residential real estate loans we originate.
In underwriting multi-family residential real estate loans, we consider a number of factors, which include the projected net cash flow to the loan’s debt
service requirement (generally requiring a minimum of 120%), the age and condition of the collateral, the financial resources and income level of the borrower and
the borrower’s experience in owning or managing similar properties. Multi-family residential real estate loans are generally originated in amounts up to 75% of the
appraised value or the purchase price of the property securing the loan, whichever is lower. Generally, guarantees are obtained from multi-family residential real
estate customers. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial
statement updates. We encourage our commercial business borrowers to maintain their primary deposit accounts with us, which would enhance our interest rate
spread and overall profitability.
At June 30, 2018, our largest multi-family residential real estate loan had an outstanding balance of $7.2 million and is secured by a 208-unit apartment
complex. At June 30, 2018, this loan was performing according to its original terms.
Commercial Loans. We originate commercial term loans and variable lines of credit to a variety of small and medium sized businesses in our market
area. These loans are generally secured by business assets, and we may support this collateral with junior liens on real property. At June 30, 2018, commercial
business loans were $104.1 million, or 11.5% of total loans receivable. Customers for these loans include professional businesses, multi-generational family-owned
businesses, and not for profit businesses. We encourage our commercial business borrowers to maintain their primary deposit accounts with us, which would
enhance our interest rate spread and overall profitability.
The commercial loans we offer include term loans and revolving lines of credit. Commercial loans and lines of credit are made with either variable or fixed
rates of interest. Variable rates are based on the prime rate, plus a margin. Commercial loans typically have shorter terms to maturity, higher interest rates than
commercial real estate loans, and may involve more credit risk because of the type and nature of the collateral.
When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities
and global cash flows of the borrower and guarantors, the projected cash flows of the business and the value of the collateral, accounts receivable, inventory and
equipment. Depending on the collateral used to secure the loans, commercial loans are generally made in amounts of up to 75% of the value of the collateral
securing the loan. All of these loans are secured by assets of the respective borrowers.
At June 30, 2018, $2.9 million of commercial loans are to developers to purchase land. These loans are underwritten for projects with appropriate
construction or development approvals already in place, have variable rates of interest and terms up to 3 years. Additionally, these loans are made in amounts up to
50% of the land value.
At June 30, 2018, our largest commercial loan had an outstanding balance of $14.3 million and is secured by 165 individual loans to medical professionals.
At June 30, 2018, this loan was performing according to its original terms.
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Construction Loans. We originate loans to finance the construction of one- to four-family residential properties, and commercial and multi-family
properties. At June 30, 2018, construction and land development loans were $17.4 milli on, or 1.9% of total loans receivable, consisting of $3.8 million of one- to
four-family residential construction loans and $13.6 million of commercial and multi-family real estate construction loans. The majority of these loans are secured
by properties l ocated in our primary market area. PCSB Bank will occasionally, through a local nonprofit, fund the construction of low-income multi-family
properties.
Most of our construction loans are interest-only loans that provide for the payment of interest during the construction phase, which is usually up to 24
months. Interest is generally a variable rate based on the prime rate, plus a margin. At the end of the construction phase, the loan may convert to a permanent
mortgage loan or the loan may be payable in full. Loans generally can be made with a maximum loan-to-value ratio of 75% of the appraised market value upon
completion of the project. Before making a commitment to fund a construction loan, we generally require an appraisal of the property by an independent licensed
appraiser. We also generally require an inspection of the property before disbursement of funds during the term of the construction loan. Loan proceeds are
disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant.
At June 30, 2018, our largest construction and land development loan had an outstanding balance of $7.0 million and is secured by a 75-unit apartment
complex. At June 30, 2018, this loan was performing according to its original terms.
Residential Mortgage Loans. Our one- to four-family residential loan portfolio consists of mortgage loans that enable borrowers to purchase or refinance
existing homes, most of which serve as the primary residence of the owner. At June 30, 2018, one- to four-family residential real estate loans were $250.6 million,
or 27.7% of total loans receivable, consisting of $223.8 million of fixed-rate loans and $26.4 million of adjustable-rate loans. In addition to originating these loans,
we also purchase residential mortgage loans from other financial institutions. At June 30, 2018, purchased loans totaled $56.3 million, or 22.5% of the residential
mortgage loan portfolio, as compared to $21.5 million, or 9.9% of the residential mortgage loan portfolio as of June 30, 2017.
We offer fixed-rate and adjustable-rate residential mortgage loans with maturities up to 30 years. Some of the properties include two- to four-unit
properties, all of which are classified as residential mortgage loans. Our one- to four-family residential mortgage loans that we originate or purchase are generally
underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally
originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance
Agency. We also originate loans above the conforming limits, which are referred to as “jumbo loans.” We generally underwrite jumbo loans, whether originated or
purchased, in a manner similar to conforming loans. Jumbo loans are common in our market area. We generally retain one- to four-family residential mortgage
loans in our portfolio.
We originate our adjustable-rate one- to four-family residential mortgage loans with initial interest rate adjustment periods of one, three, five, seven or ten
years, based on changes in a designated market index. These loans are limited to a 200 basis point initial increase in their interest rate, a 200 basis point increase in
their interest rate annually after the initial adjustment, and a maximum upward adjustment of 400 to 600 basis points over the life of the loan. We determine
whether a borrower qualifies for an adjustable-rate mortgage loan in conformance with the underwriting guidelines set forth by Fannie Mae and Freddie Mac in the
secondary mortgage market. In particular, we determine whether a borrower qualifies for an adjustable-rate mortgage loan with an initial fixed-rate period of five
years or less based on the ability to repay both principal and interest using an interest rate which is 2.0% above the initial interest rate, including a reasonable
estimate of real estate taxes and insurance, and taking into account the maximum debt-to-income ratio stipulated in the underwriting guidelines in the secondary
mortgage market. The qualification for an adjustable-rate mortgage loan with an initial fixed-rate period exceeding five years is based on the borrower’s ability to
repay at the initial fixed interest rate.
We will originate one- to four-family residential mortgage loans with loan-to-value ratios up to 80% without private mortgage insurance. We will originate
loans with loan-to-value ratios of up to 95% with private mortgage insurance and where the borrower’s debt does not exceed 45% of the borrower’s monthly cash
flow. To encourage lending to low- and moderate-income home buyers, we have several in-house developed programs which can
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include low down payments, lender-paid PMI, a low er than market interest rate, or a grant to be used towards closing costs.
We generally do not offer “interest only” mortgage loans on one- to four-family residential properties. We do not offer loans that provide for negative
amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal
balance during the life of the loan. Additionally, outside of the loan programs mentioned previously, we do not offer “subprime loans” (loans that are made with
low down-payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies,
or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than
full documentation).
Home Equity Lines of Credit. At June 30, 2018, the outstanding balance owed on home equity lines of credit was $37.4 million, or 4.1 % of total loans
receivable. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate, plus a margin.
The procedures for underwriting home equity lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet
existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral to the proposed loan amount.
The home equity lines of credit that we originate are revolving lines of credit which generally have a term of 25 years, with draws available for the first ten
years. Our 25-year lines of credit are interest only during the first ten years, and amortize on a fifteen-year basis thereafter. We generally originate home equity
lines of credit with loan-to-value ratios of up to 75% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios
may occasionally exceed 75% on a case-by-case basis. Maximum loan-to-value ratios are determined based on an applicant’s credit score, property value, loan
amount and debt-to-income ratio. Rates are adjusted monthly based on changes in a designated market index.
Other Loans. We offer consumer and deposit overdraft loans. At June 30, 2018, other loans were $745,000, or 0.1% of total loans receivable, and included
$255,000 of personal loans and $490,000 of overdrafts. The procedures for underwriting these loans include an assessment of the applicant’s and guarantor’s, if
applicable, payment history on other debts and ability to meet existing obligations and payments on the proposed loan.
Loan Underwriting Risks
Commercial and Multi-Family Real Estate Loans. Loans secured by commercial and multi-family real estate generally have larger balances and involve a
greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the property. Payments on loans secured by income properties often depend on successful operation
and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to adverse conditions in
the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial
statements on commercial and multi-family real estate loans. In reaching a decision on whether to make a commercial or multi-family real estate loan, we consider
and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and
profitability and the value of the underlying property. We generally require that the properties securing these real estate loans have debt service coverage ratios (the
ratio of net operating income before debt service to debt service) of at least 1.20x. An environmental report is obtained for all commercial and multi-family real
estate loans.
Construction Loans. Our construction loans are based upon estimates of costs and values and the absorption associated with the completed project.
Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and
manage their operations. All construction loans require an unlimited guarantee of completion (construction, including certificate of occupancy) for the project.
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Construction lending involves additional risks when compared with permanent residential lending because funds are advanced upon the security of the
project, which is of uncertain value before its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the
completed project and the effects of state and local governmental regulation of real property, it is relati vely difficult to evaluate accurately the total funds required
to complete a project and the related loan-to-value ratio. This type of lending also typically involves higher loan principal amounts and is often concentrated with a
small number of builders. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve
set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with re payment substantially dependent on the success
of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or
guarantor to repay principal and interes t. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment
of the loan upon completion of construction of the project and may incur a loss. Typically, for-rent commercially occupied propertie s require minimum pre-
leasing; and for condominiums or cooperative for sale development loans, the project is underwritten as a multi-family rental property. Our ability to continue to
originate a significant amount of construction loans is dependent on th e strength of the housing and commercial real estate markets in our market areas.
Commercial Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her
employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher
risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business as the collateral securing these
loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the
underlying collateral provided by the borrower. Most often, this collateral consists of real estate, accounts receivable, inventory or equipment. Credit support
provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a
personal guarantee, if any. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to
fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in
delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although
adjustable-rate loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is somewhat limited by the annual and
lifetime interest rate adjustment limits on residential loans.
Consumer Loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or
secured by assets that depreciate rapidly, such as motor vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer
loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws,
may limit the amount that can be recovered on such loans.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors
and management. The board of directors has granted loan approval authority to certain senior officers up to prescribed limits not exceeding $4.0 million depending
on the officer’s experience. Loans approved under these officer authorities require dual signatures of the loan officer assigned to the loan and the officer with the
appropriate approval authority. Loans in excess of $4.0 million and up to $11.0 million require approval of the Loan Committee of the board of directors, as do any
extensions of credit to classified
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borrowers in excess of $2.0 million or loans up to $4.0 million that involve an excepti on to policy. Loans greater than $11.0 million and loans greater than $4.0
million that involve exceptions to policy must be authorized by the board of directors. Exceptions are reported to the board of directors monthly.
Investment Activities
We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of various
government-sponsored enterprises, residential and commercial mortgage-backed securities, municipal government securities, deposits at the Federal Home Loan
Bank of New York (“FHLBNY”), certificates of deposit of federally insured institutions, and investment grade corporate bonds. We also are required to maintain
an investment in FHLBNY stock, which investment is based on the level of our FHLBNY borrowings. At June 30, 2018, our investment portfolio had a fair value
of $448.7 million and consisted primarily of U.S. Government securities, U.S. Government agency securities, including residential and commercial mortgage-
backed securities, collateralized mortgage obligations and investment grade corporate bonds.
Although we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities at June 30, 2018.
Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide a use of funds
when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including
approval of our investment policy. Our management is responsible for implementation of the investment policy and monitoring our investment performance. The
Asset/Liability Committee reviews the status of our investment portfolio quarterly. See Note 4 to Notes to Consolidated Financial Statements.
Sources of Funds
General. Deposits have traditionally been our primary source of funds for our lending and investment activities. To a lesser degree, we also use
borrowings, primarily FHLBNY advances, to supplement cash flow needs, as needed. In addition, funds are derived from scheduled loan payments, investment
maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposit Accounts. 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. At June 30, 2018, our deposits totaled $1.16 billion and included $60.0
million of brokered time deposits, as well as $39.1 million of municipal deposits held by PCSB Bank’s commercial bank subsidiary, PCSB Commercial Bank.
Deposit account terms vary according to the minimum balance required, the time period that funds must remain on deposit, and the interest rate, among
other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability, and customer
preferences and concerns. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive
rates and services and to periodically offer special rates in order to attract deposits of a specific type or term.
Borrowings. We primarily utilize advances from the FHLBNY to supplement our supply of investable funds. The FHLBNY functions as a central reserve
bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the FHLBNY and are authorized to apply for
advances on the security of such stock and securities which are obligations of, or guaranteed by, the United States. Advances are made under several different
programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed
percentage of an institution’s net worth or on the FHLBNY’s assessment of the institution’s creditworthiness. At June 30, 2018, we had $296.1 million of available
borrowing capacity with the FHLBNY and had $18.8 million in advances outstanding. All of our
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borrowings from the FHLBNY are secured by investment securities. At June 30, 2018, we also had an available line of credit with the Federal Reserve B ank of
New York’s discount window program of $122.1 million, none of which was outstanding at that date. This line of credit is secured by certain qualifying 1-4 family
residential mortgage loans.
Personnel
At June 30, 2018, we had 155 full-time and 28 part-time employees, none of whom is represented by a collective bargaining unit.
Subsidiaries
PCSB Bank is the wholly-owned subsidiary of PCSB Financial. PCSB Bank has three wholly-owned subsidiaries: PCSB Commercial Bank, PCSB
Funding Corp. and UpCounty Realty Inc. PCSB Commercial Bank, a New York-chartered special purpose commercial bank, is authorized to accept deposits from
New York municipalities. PCSB Funding Corp., a Delaware corporation, is a real estate investment trust that holds certain mortgage assets. UpCounty Realty Inc.,
a New York corporation, holds title to real estate properties foreclosed upon by PCSB Bank.
Regulation and Supervision
General
PCSB Bank is a New York-chartered savings bank and the wholly-owned subsidiary of PCSB Financial, a Maryland corporation, which is a registered
bank holding company. PCSB Bank’s deposits are insured up to applicable limits by the FDIC. PCSB Bank is subject to extensive regulation by the NYSDFS, as
its chartering agency, and by the FDIC, as its deposit insurer. PCSB Bank is required to file reports with, and is periodically examined by, the FDIC and the
NYSDFS concerning its activities and financial condition and must obtain regulatory approvals before entering into certain transactions, including, but not limited
to, mergers with or acquisitions of other financial institutions. PCSB Bank is a member of the FHLBNY.
As a registered bank holding company, PCSB Financial is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”) and NYSDFS. PCSB Financial is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement
authority of the Federal Reserve Board and the NYSDFS. PCSB Financial is also subject to the rules and regulations of the Securities and Exchange Commission
under the federal securities laws.
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily
for the protection of depositors and the deposit insurance funds, rather than for the protection of stockholders and creditors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning
the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes.
The Dodd-Frank Act made extensive changes in the regulation of depository institutions and their holding companies. The Dodd-Frank Act created a new
Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau is responsible for the
implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to prudential regulators, and now
has the authority to impose new requirements. However, institutions of less than $10 billion in assets, such as PCSB Bank, continue to be examined for compliance
with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their federal prudential regulator, although the
Consumer Financial Protection Bureau has back-up authority to examine and enforce consumer protection laws against all institutions, including institutions with
less than $10 billion in assets.
In addition to creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directed changes in the way that institutions
are assessed for deposit insurance, mandated the imposition of tougher
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c onsolidated capital requirements on holding companies, required the issuance of regulations requiring originators of securitized loans to retain a percentage of the
risk for the transferred loans, imposed regulatory rate-setting for certain debit card inte rchange fees, repealed restrictions on the payment of interest on commercial
demand deposits and contained a number of reforms related to mortgage originations. The Dodd-Frank Act has increased our compliance costs and we expect that
these costs will persi st.
The Dodd-Frank Act contained the so-called “Volcker Rule,” which generally prohibits banking organizations from engaging in proprietary trading and
from investing in, sponsoring or having certain relationships with hedge or private equity funds (“covered funds”). The federal agencies have issued a final rule
implementing the Volcker Rule which, among other things, requires banking organizations to restructure and limit certain of their investments in and relationships
with covered funds. PCSB Bank does not engage in activities subject to the Volcker Rule.
Any change in applicable laws or regulations, whether by the NYSDFS, the FDIC, the Federal Reserve Board, New York State or the U.S. Congress, could
have a material adverse impact on the operations and financial performance of PCSB Financial and PCSB Bank. In addition, PCSB Financial and PCSB Bank will
be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve Board. In view of changing
conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of PCSB Financial and PCSB Bank.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to PCSB Bank and PCSB Financial. The description
is limited to certain material aspects of the statutes and regulations that are addressed, and is not intended to be a complete description of such statutes and
regulations and their effects on PCSB Bank and PCSB Financial.
New York Banking Laws and Supervision
PCSB Bank, as a New York savings bank, is regulated and supervised by the NYSDFS, which is required to regularly examine each state-chartered bank.
The approval of the NYSDFS is required to establish or close branches, to merge with another bank, to issue stock and to undertake many other activities. Any New
York savings bank that does not operate according to the regulations, policies and directives of the NYSDFS may be sanctioned. The NYSDFS may suspend or
remove directors or officers of a savings bank who have violated the law, conducted a bank’s business in a manner that is unsafe, unsound or contrary to the
depositors’ interests, or been negligent in the performance of their duties. In addition, the NYSDFS has the authority to appoint a receiver or conservator if it is
determined that the savings bank is conducting its business in an unsafe or unauthorized manner, and under certain other circumstances.
The powers that New York-chartered savings banks can exercise under these laws include, but are not limited to, the following:
Lending Activities. A New York-chartered savings bank may make a wide variety of mortgage loans including fixed-rate loans, adjustable-rate loans,
variable-rate loans, participation loans, graduated payment loans, construction and development loans, condominium and co-operative loans, second mortgage
loans and other types of loans that may be made according to applicable regulations. Commercial loans may be made to corporations and other commercial
enterprises with or without security. Consumer and personal loans may also be made with or without security.
Investment Activities. In general, PCSB Bank may invest in certain types of debt securities (including certain corporate debt securities, and obligations of
federal, state, and local governments and agencies), certain types of corporate equity securities, and certain other assets. However, these investment authorities are
constrained by federal law. See “—Federal Bank Regulation—Investment Activities” for such federal restrictions.
Loans to One Borrower Limitations. Under the New York Banking Law, PCSB Bank’s total loans or extensions of credit to a single borrower or group of
related borrowers cannot exceed, with specified exceptions, 15% of its capital stock, surplus fund and undivided profits. The Bank’s lending limit as of June 30,
2018 was $30.8
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million. PCSB Bank ma y lend additional amounts up to 10% if the loans or extensions of credit are fully secured by readily-marketable collateral. At June 30,
2018, PCSB Bank complied with these loans-to-one-borrower limitations. At June 30, 2018, PCSB Bank’s largest aggregate amount of loans to one borrower was
$23.7 million.
Dividends. Under New York banking law, PCSB Bank is permitted to declare and pay dividends out of its net profits, unless there is an impairment of
capital. Additionally, the approval of the NYSDFS is required if the total of all dividends declared in a calendar year would exceed the total of its net profits for
that year combined with its retained net profits of the preceding two years, subject to certain adjustments provided for in the applicable law.
Loans to Directors and Executive Officers. Under applicable NYSDFS regulations (which are substantially similar to applicable federal banking
regulations), PCSB Bank generally may not make a loan or other extension of credit to any of its executive officers or directors unless the loan or other extension of
credit (i) is made on terms, including interest rate and collateral, that are not more favorable to the executive officer or director than those customarily offered by
PCSB Bank to persons who are not executive officers or directors and who are not employed by PCSB Bank, and (ii) does not involve more than the normal risk of
repayment or present other unfavorable features. Depending on the size of the loan or other extension of credit, prior approval of PCSB Bank’s board of directors
(with the interested party, if a director, abstaining from participating directly or indirectly in the voting) may be required.
Assessments. As a New York state-chartered savings bank, PCSB Bank is required to pay to the NYSDFS a general assessment fee in connection with the
NYSDFS’ regulation and supervision (including examination) of PCSB Bank. Each state institution is billed five times per each fiscal year, with four estimated
quarterly assessments set as approximately 25% of the annual amount based on the NYSDFS’ estimated annual budget at the time of the billing, and a final
assessment, or “true-up,” based on the NYSDFS’ actual expenses for the fiscal year. The FDIC does not charge a state bank for supervision, although as discussed
below, it charges all insured depository institutions deposit insurance assessments in connection with its administration of the Deposit Insurance Fund.
Regulatory Enforcement Authority. Any New York bank that does not operate according to the regulations, policies and directives of the NYSDFS may
be subject to sanctions for non-compliance, including seizure of the property and business of the savings bank and suspension or revocation of its charter. The
NYSDFS may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the savings bank’s business in a manner
which is unsafe, unsound or contrary to the depositors’ interests or been negligent in the performance of their duties. In addition, upon finding that a bank has
engaged in an unfair or deceptive act or practice, the NYSDFS may issue an order to cease and desist and impose a fine on the savings bank concerned. New York
consumer protection and civil rights statutes applicable to PCSB Bank permit private individual and class action law suits and provide for the rescission of
consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
Recent New York Legislative and Regulatory Developments. The New York State Legislature and the NYSDFS have adopted and proposed new laws and
regulations and issued new guidance in a number of areas affecting PCSB Bank’s operations. These include:
•
•
In June 2016, the New York Legislature enacted legislation to address "zombie properties", meaning residential property abandoned by a
homeowner after the initiation, but prior to the completion of, a foreclosure proceeding. Under this law, a mortgagee bank has a duty to maintain
and secure a residential real property where there is a reasonable basis to believe it is vacant and abandoned, and faces civil penalties up to $500
per violation, per property, per day for failing to do so. As enacted, the legislation does not apply to PCSB Bank because we originate, own,
service and maintain our own mortgages and we originate less than 0.3 percent of one- to four-family real property mortgages in New York.
However, there can be no assurance that any future amendments to this law will not include us.
In June 2016, the NYSDFS adopted a regulation that requires New York chartered banks to maintain programs to monitor and filter transactions
for potential Bank Secrecy Act and anti-money laundering violations and prevent transactions with sanctioned entities. The regulation requires
regulated institutions annually to submit a board resolution or senior officer compliance finding confirming steps taken to ascertain compliance
with the regulation. Under the new regulation, which became effective
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•
•
January 1, 2017, banks are required to review their transaction-monitoring and filtering programs and ensure that they are reasonably designed to
comply with risk-based safeguards. The institutions also must adopt (at the institutio n’s option) an annual board resolution or senior officer
compliance finding to certify compliance with the regulation beginning April 15, 2018. The resolution or finding must state that documents,
reports, certifications and opinions of officers and other relevant parties have been reviewed by the board of directors or senior official to certify
compliance with the regulation.
In March 2017, the NYSDFS adopted a regulation which requires New York chartered banks to establish and maintain a cybersecurity program
designed to protect consumers and ensure the safety and soundness of the savings bank. The regulation, which is similar to guidance issued by the
federal bank regulators, requires regulated financial institutions to establish a cybersecurity program; adopt a written cybersecurity policy;
designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing its new program and policy; and have
policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third-parties,
along with a variety of other requirements to protect the confidentiality, integrity and availability of information systems. Certain sections of the
regulation have transitional periods requiring compliance 180 days to 2 years from the effective day, with written certification of compliance to
NYSDFS commencing on February 15, 2018. We believe that our cybersecurity policies and procedures comply with the new regulation.
In October 2016, the NYSDFS issued guidance regarding incentive compensation. The guidance prohibits the payment by New York chartered
banks of incentive compensation tied to employee performance indicators, such as the number of accounts opened, or the number of products sold
per customer, without effective risk management, oversight and control. Banks considering the adoption of such incentive compensation plans
must balance between risks and rewards, emplace effective controls and risk management and have strong corporate governance, including active
and effective oversight by the board of directors. We will ensure that any incentive compensation plan we adopt will conform to this guidance. See
“Management – Executive Compensation-Proposed Short-Term Incentive Plan”.
New York has other statutes and regulations that are similar to the federal provisions discussed below.
Federal Bank Regulation
Capital Requirements. Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-
member banks”), such as PCSB Bank, are required to comply with minimum leverage capital requirements. The minimum leverage capital requirement is a ratio of
Tier 1 capital to total assets that is not less than 4.0%. Tier 1 capital consists of “CET1” and “Additional Tier 1 capital” instruments meeting specified
requirements. CET1 is defined as common stock, plus related surplus, and retained earnings plus limited amounts of minority interest in the form of common stock,
less the majority of the regulatory deductions.
The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The
ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to risk-weighted categories
ranging from 0% to 1,250%, with higher levels of capital being required for the categories perceived as representing greater risk.
State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1
capital. Total capital consists of Tier 1 capital and Tier 2 capital. Tier 1 capital consists of common stock, plus related surplus and retained earnings. Under the
new capital rules, for most banking organizations, the most common form of Additional Tier 1 capital is noncumulative perpetual preferred stock and the most
common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the new capital rules’ specific
requirements. Banks that engage in specified levels of trading activities are subject to adjustments in their risk-based capital calculation to ensure the maintenance
of sufficient capital to support market risk.
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In July 2013, the FDIC and the oth er federal bank regulatory agencies issued a final rule that has revised their leverage and risk-based capital requirements
and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision
and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-
weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets), sets the leverage ratio at a
uniform 4% of total assets and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain
commercial rea l estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses
on certain “available-for-sale” securities holdings to be included for purposes of calculating regulato ry capital requirements unless a one-time opt-out is
exercised. PCSB Bank has elected to exercise its one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities
holdings for purposes of calculatin g its regulatory capital requirements. The rule limits a banking organization’s capital distributions and certain discretionary
bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” which, when fully phased in, will consist of 2.5% of
common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule
became effective on January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital
conservation buffer will be effective.
The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as
to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, adopted a
regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a
bank’s capital adequacy. The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an
institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.
Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal
controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and
compensation, fees and benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable
plan to achieve compliance with the standard.
Investment Activities. All state-chartered FDIC-insured banks, including savings banks, are generally limited in their investment activities to principal and
equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. For example, state
chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or
the Nasdaq Global Market and in the shares of an investment company registered under the Investment Company Act of 1940. The maximum permissible
investment is 100% of Tier 1 Capital, as specified by the FDIC’s regulations, or the maximum amount permitted by New York law, whichever is less.
In addition, the FDIC is authorized to permit such a state bank to engage in state-authorized activities or investments not permissible for national banks
(other than non-subsidiary equity investments) if it meets all applicable capital requirements and it is determined that such activities or investments do not pose a
significant risk to the Deposit Insurance Fund. The FDIC has adopted procedures for institutions seeking approval to engage in such activities or investments. In
addition, a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a
“financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject
to Federal Reserve Board approval, certain concentration limits and
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other specified conditions. Inter state mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other
things, the Dodd-Frank Act permits banks to establish de novo branches on an interstate basis provided that branching is aut horized by the law of the host state for
the banks chartered by that state.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action”
with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total
risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio
of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or
greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based
capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than
4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of
less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized”
if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. At June 30, 2018, PCSB Bank was classified as a
“well capitalized” institution.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on
growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits.
Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the
appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as
well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An
undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized”
banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and
restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically
undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270
days after it obtains such status.
Transaction with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed by
federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context,
the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank (although subsidiaries of the
bank itself, except financial subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve
Board’s Regulation W limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to
10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock
and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such transactions be on terms substantially
the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans
to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions. Section 23B transactions also include the provision of services
and the sale of assets by a bank to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be
collateralized according to the requirements set forth in Section 23A of the Federal Reserve Act.
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Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and princip al
shareholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% shareholder of a financial
institution, and certain affiliated interests of these, together with all other outstanding lo ans to such person and affiliated interests, may not exceed specified limits.
Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same
as offered i n comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of
credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and sur plus. Section 22(g) of the Federal Reserve Act places
additional restrictions on loans to executive officers.
Enforcement. The FDIC has extensive enforcement authority over insured state savings banks, including PCSB Bank. The enforcement authority includes,
among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The FDIC is required, with
certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the
calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” It may also appoint itself as conservator or receiver
for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital; or (5) the incurrence of losses
that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.
Federal Insurance of Deposit Accounts. PCSB Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in
PCSB Bank are insured up to a maximum of $250,000 for each separately insured depositor.
The FDIC imposes an assessment for deposit insurance on all depository institutions. Under its risk-based assessment system, insured institutions are
assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the
category to which it is assigned and certain adjustments specified by regulation, with less risky institutions paying lower rates. Assessment rates (inclusive of
possible adjustments) currently range from 2 1 / 2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the
scale uniformly, except that no adjustment can deviate by more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s
current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured
deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the
increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. It has recently exercised that discretion by
establishing a long range fund ratio of 2%.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of PCSB Bank. Future insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. We do not know of
any practice, condition or violation that might lead to termination of PCSB Bank’s deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments
for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance
Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019.
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Privacy Regulations. FDIC regulations generally require that PCSB Bank disclose its privacy policy, including identifying with whom it shares a
customer’s “non-public personal informatio n,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, PCSB Bank
is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third pa rties and not to disclose
account numbers or access codes to non-affiliated third parties for marketing purposes. PCSB Bank currently has a privacy protection policy in place and believes
that such policy is in compliance with the regulations.
Community Reinvestment Act. Under the Community Reinvestment Act, or CRA, as implemented by FDIC, a state non-member bank has a continuing
and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to
develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in
connection with its examination of a state non-member bank, to assess the institution’s record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA
requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. PCSB Bank’s latest FDIC
CRA rating was “Satisfactory.”
New York has its own statutory counterpart to the CRA, which is applicable to PCSB Bank. New York law requires the NYSDFS to consider a bank’s
record of performance under New York law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or
to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. PCSB Bank’s most recent rating under New York law
was “Satisfactory.”
Consumer Protection and Fair Lending Regulations. New York savings banks are subject to a variety of federal and New York statutes and regulations
that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-
compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action
for actual and punitive damages and injunctive relief. Certain of these statutes, including Section 5 of the Federal Trade Commission Act, which prohibits unfair
and deceptive acts and practices against consumers, authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages
and attorneys’ fees for certain types of violations. New York’s Attorney General has vigorously enforced fair lending and other consumer protection laws. The
Dodd Frank Act added a new statute that prohibits unfair, deceptive or abusive acts practices against consumers, which can be enforced by the Consumer Financial
Protection Bureau, the FDIC and state Attorneys General. The Superintendent of Financial Services of the State of New York has stated that NYDFS will
vigorously enforce consumer protection laws to the extent that federal bank regulators reduce such enforcement.
USA Patriot Act. PCSB Bank is subject to the USA PATRIOT Act, which gave federal agencies additional powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way
of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act provided measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.
Other Regulations
Interest and other charges collected or contracted for by PCSB Bank are subject to state usury laws and federal laws concerning interest rates. Loan
operations are also subject to state and federal laws applicable to credit transactions, such as the:
•
Truth in Lending Act, which requires lenders to disclose the terms and conditions of consumer credit;
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•
•
•
•
•
Real Estate Settlement Procedures Act, which requires lenders to disclose the nature and costs of the real estate settlement process and prohibits
specific practices, such as kickbacks, and places limitations upon the use of escrow accounts;
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act and the New York Executive Law, prohibiting discrimination on the basis of race, creed or other prohibited factors
in extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; and
Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.
The deposit operations of PCSB Bank also are subject to, among others, the:
•
•
•
•
•
•
Truth in Savings Act, which requires financial institutions to disclose the terms and conditions of their deposit accounts;
Expedited Funds Availability Act, which requires banks to make funds deposited in transaction accounts available to their customers within
specified time frames;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies
made from that image, the same legal standing as the original paper check;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
New York banking laws and regulations, which governs deposit powers.
Federal Reserve System
Federal Reserve Board regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular
checking accounts). For 2018, the regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of
transaction accounts aggregating $122.3 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts
greater than $122.3 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.0
million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. PCSB Bank is in
compliance with these requirements.
Federal Home Loan Bank System
PCSB Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital
stock in the Federal Home Loan Bank. PCSB Bank complied with this requirement at June 30, 2018. Based on redemption provisions of the FHLBNY, the stock
has no quoted market value and is carried at cost. PCSB Bank reviews for impairment based on the ultimate recoverability of the cost basis of the FHLBNY stock.
At June 30, 2018, no impairment has been recognized.
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At its discretion, the FHLBNY may declare dividends on the stock. The Federal Home Loan Banks are required to provide funds for certain purposes
including the resolution of insolvent thrifts in the late 1980s and to contributing funds for affordable housin g programs. These requirements could reduce the
amount of dividends that the FHLB pay to their members and result in the FHLB imposing a higher rate of interest on advances to their members. While the
FHLBNY currently pays a dividend on its capital stock, there can be no assurance that such dividends will continue in the future. Further, there can be no assurance
that the impact of recent or future legislation on the FHLB also will not cause a decrease in the value of the FHLBNY stock held by PCSB Bank.
Holding Company Regulation
PCSB Financial, as a bank holding company, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956,
as amended, as administered by the Federal Reserve Board . In addition, the Federal Reserve Board has enforcement authority over PCSB Financial and its non-
savings bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings bank.
A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the
voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal
Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the
Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing
services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and
indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well
managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities
can include insurance underwriting and investment banking. PCSB Financial has not elected to become a financial holding company.
PCSB Financial is subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis), which have
historically been similar to, though less stringent than, those of the FDIC for PCSB Bank. The Dodd-Frank Act, however, required the Federal Reserve Board to
promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components
of capital, than those applicable to depository institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities would no longer
be includable as Tier 1 capital, as is currently the case with bank holding companies, subject to certain grandfathering rules. The previously discussed final rule
regarding regulatory capital requirements implements the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital
requirements identical to those applicable to the subsidiary banks apply to bank holding companies (with greater than $1.0 billion of assets) at January 1, 2015. As
is the case with depository institutions themselves, the capital conservation buffer will be phased-in between 2016 and 2019.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding
equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or
directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-
capitalized bank holding companies that meet certain other conditions.
The Federal Reserve Board has issued a policy statement regarding capital distributions, including dividends, by bank holding companies. In general, the
policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company
appears consistent with
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the organization’s capital needs, asset quality and overall financial condition. The policies also require that a bank holding company serve as a source of fin ancial
strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or
adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.
The Dodd-Frank Act codified the source of strength doctrine. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may
be restricte d if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of PCSB Financial to pay dividends or otherwise
engage in capital distributions.
Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with
the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.
The status of PCSB Financial as a registered bank holding company under the Bank Holding Company Act of 1956 will not exempt it from certain federal
and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
New York Holding Company Regulation. PCSB Financial is subject to regulation under New York banking law. Among other requirements, PCSB
Financial must receive the approval of the NYSDFS before acquiring 10% or more of the voting stock of another banking institution, or to otherwise acquire a
banking institution by merger or purchase.
Federal Securities Laws
PCSB Financial’s common stock is registered with the Securities and Exchange Commission. PCSB Financial is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Emerging Growth Company Status
PCSB Financial qualifies as an emerging growth company under the The Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, a
company with total annual gross revenues of less than $1.0 billion (adjusted for inflation) during its most recently completed fiscal year qualifies as an “emerging
growth company.”
An “emerging growth company” may choose not to hold shareholder votes to approve annual executive compensation (more frequently referred to as “say-
on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging
growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can
provide scaled disclosure regarding executive compensation. Finally, an emerging growth company may elect to comply with new or amended accounting
pronouncements in the same manner as a private company but must make such election when the company is first required to file a registration statement. Such an
election is irrevocable during the period a company is an emerging growth company. PCSB Financial has elected to comply with new or amended accounting
pronouncements in the same manner as a public company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross
revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity
securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the
previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer”
under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by
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improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. PCSB Financial has policies, procedures and systems designed to
comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compli ance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as PCSB Financial unless the Federal Reserve
Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating
a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the
power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company.
Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain
circumstances, including where, as is the case with PCSB Financial, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the
prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and
regulation by the Federal Reserve Board. In addition, under the New York Banking Law, for a period of three years following completion of a conversion to stock
form, no person may directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of equity security of a converting mutual
savings bank without prior written approval of NYSDFS.
Taxation
Federal Taxation
General. PCSB Financial and PCSB Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive
description of the tax rules applicable to PCSB Financial and PCSB Bank.
Tax Reform. On December 22, 2017, the Tax Act was enacted, which among other changes included a reduction of the U.S. federal corporate income tax
rate from 35% to 21% effective January 1, 2018. As a result, the Company was required to remeasure, through income tax expense, the Company’s deferred tax
assets and liabilities using the enacted rate at which the deferred items are expected to be recovered or settled. The remeasurement of our net deferred tax asset
resulted in additional income tax expense of $1.6 million for the year ended June 30, 2018.
Method of Accounting. For federal income tax purposes, PCSB Bank currently reports its income and expenses on the accrual method of accounting and
uses a tax year ending December 31 for filing its federal income tax returns.
Minimum Tax. As a result of the aforementioned tax reform, the alternative minimum tax rate is reduced from 20% to 0% for all tax years beginning after
December 31, 2017. Alternative minimum tax credit carryforwards from prior tax years can be applied to reduce future taxable income and are refundable, subject
to certain limitations. At June 30, 2018, PCSB Bank had no alternative minimum tax credit carryforwards.
Net Operating Loss Carryovers. Generally, a financial institution may carry forward net operating losses indefinitely and are subject to a limitation of 80%
of taxable income. See Note 14 to Consolidated Financial Statements for additional information.
Charitable Contributions Carryovers. Generally, charitable contributions are limited to 10% of taxable income, however financial institutions may
carryforward unused contributions for up to 5 years. At June 30, 2018 the Company has charitable contributions carryforwards totaling $3.8 million, for which we
expect to fully realize the benefit. See Note 14 to Consolidated Financial Statements for additional information.
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Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding
five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any
other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five-year carryover period is not
deductible. At June 30, 2018, PCSB Bank had no capital loss carryovers.
Corporate Dividends. We may generally exclude from our income 100% of dividends received from PCSB Bank as a member of the same affiliated group
of corporations. To date, no dividends have been paid by PCSB Bank.
Audit of Tax Returns. PCSB Bank’s federal income tax returns and New York State income tax returns have not been audited in the last three years.
State Taxation
In March 2014, tax legislation was enacted that changed the manner in which financial institutions and their affiliates are taxed in New York State. Taxable
income is apportioned to New York State based on the location of the taxpayer’s customers, with special rules for income from certain financial transactions. The
location of the taxpayer’s offices and branches are not relevant to the determination of income apportioned to New York State. The statutory tax rate is currently
6.5%. An alternative tax of 0.15% on apportioned capital is imposed to the extent that it exceeds the tax on apportioned income. The New York State alternative tax
is capped at $5 million for a tax year and is gradually phased out over a six-year period. Thrift institutions that maintain a qualified residential loan portfolio are
entitled to a specially computed modification that reduces the income taxable to New York State.
The Company is also taxable in Connecticut and New Jersey, primarily as a result of income earned on loans where the borrower or the real estate
collateral underlying the loan is located in these states.
Item 1A. Risk Factors
In the ordinary course of operating our business, we are exposed to a variety of risks inherent to the financial services industry. The following discusses
what we believe to be the significant risk factors that could affect our business and operations. If any of the following conditions or events actually occur, our
business, financial condition or results of operations could be negatively affected, the market price of your investment in the Company’s common stock could
decline, and you could lose all or a part of your investment in the Company’s common stock.
Our emphasis on commercial real estate and commercial business lending involves risks that could adversely affect our financial condition and results of
operations.
We originate and purchase commercial real estate and commercial business loans. At June 30, 2018, our commercial real estate and commercial business
loans totaled $616.8 million, or 68.0% of our loan portfolio. While these types of loans are potentially more profitable than residential mortgage loans, they are
generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. These loans also generally have relatively large
balances to single borrowers or related groups of borrowers. Accordingly, any charge-offs may be larger on a per loan basis than those incurred with our residential
or consumer loan portfolios. See “—Loan Underwriting Risks.”
The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.
The FDIC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions
with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending
should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other
factors, (i) total reported loans for construction, land acquisition and development, and other land (“ADC loans”) represent 100% or more of total risk-based
capital, or (ii) total reported loans secured by multi-family and non-owner occupied, non-farm, non-residential properties, loans for construction, land acquisition
and development and other land, and loans otherwise sensitive to the general commercial real estate market, including
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loans to commercial real estate related entities, represent 300% or more of total risk-based capital. At June 30, 2018, the Bank’s ADC loans and total commercial
real estate loans represented 13.13% a nd 228.58% of total risk-based capital.
The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate
concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and
strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Our bank regulators could
require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may
result in a curtailment of our multi-family and commercial real estate lending and/or the requirement that we maintain higher levels of regulatory capital, either of
which would adversely affect our loan originations and profitability. We believe the Company has adequate risk management and monitoring policies and
procedures in place to address the requirements of the guidance.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We maintain an allowance for loan losses, which is established through a provision for loan losses that represents management’s best estimate of probable
incurred losses within the existing portfolio of loans. We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the adequacy of the
allowance for loan losses, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our allowance for loan
losses may not be sufficient to cover losses inherent in our loan portfolio and adjustment may be necessary to allow for different economic conditions or adverse
developments in our loan portfolio. Consequently, a problem with one or more loans could require us to significantly increase the level of our provision for loan
losses. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs. Material additions to the allowance would materially decrease our net income.
A worsening of economic conditions could reduce demand for our products and services and/or result in increases in our level of non-performing loans,
which could have an adverse effect on our results of operations.
Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our
primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, construction and consumer loans,
the ability of the borrowers to repay these loans and the value of the collateral securing these loans.
Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business,
financial condition, liquidity and results of operations:
•
•
•
•
demand for our products and services may decline;
loan delinquencies, problem assets and foreclosures may increase;
collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of
assets and collateral associated with existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other
international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further
negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a
significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively
affect our financial performance.
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Changes in interest rates could reduce our profits.
Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference between our interest
income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds.
Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and
liabilities in response to these movements. Factors such as inflation, recession and instability in financial markets, among other factors beyond our control, may
affect interest rates.
If rates on our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our interest rate
spread, which would have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make
loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can
result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are
subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our
income. If interest rates rise, we expect that our net portfolio value of equity would decrease. Net portfolio value of equity 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 adjusted for the value of off-balance sheet
contracts. At June 30, 2018, and assuming a 200 basis point increase in market interest rates, we estimate that our net portfolio value of equity would decrease by
$50.7 million, or 15.2%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk—Net
Portfolio Value Simulation.”
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results
of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a
material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate
real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate
risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating
results. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Management of Market Risk.”
Changes in the valuation of our securities portfolio could reduce our profits and reduce our capital levels.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.
Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management
evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s
financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies
have occurred, industry analysts’ reports and, to a lesser extent, spread differentials between the effective rates on instruments in the portfolio compared to risk-free
rates. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of
investment analysts within a one-year time frame. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities,
a potential loss to earnings may occur. Except for a nominal investment in a community development fund, PCSB Bank has no equity securities in its portfolio.
Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and
therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the
available-for-sale securities, net of taxes. Declines in market value could result in other-than-temporary impairments of these assets, which would lead to
accounting charges that could have a material adverse effect on our net income and capital levels. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Securities Portfolio.”
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Changes in laws and regulations and the cost of regulatory c ompliance with new laws and regulations may adversely affect our operations and/or
increase our costs of operations.
We are subject to extensive regulation, supervision and examination by our banking regulators. Such regulation and supervision governs the activities in
which an institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of
PCSB Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including
the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations,
along with the currently existing tax, accounting, securities, deposit insurance, monetary laws, rules, standards, policies, and interpretations control the methods by
which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in
such regulation and oversight, whether in the form of federal and state taxation, regulatory policy, regulations, legislation or supervisory action, may have a
material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their
interpretation by us and our independent accounting firms. These changes could materially impact, potentially retroactively, how we report our financial condition
and results of operations as could our interpretation of those changes.
Strong competition within our market area could reduce our profits and slow growth.
We face intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us charging lower
interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult, and
costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we
have and may offer services that we do not provide. Our competitors often aggressively price loan and deposit products when they enter into new lines of business
or new market areas. If we are not able to effectively compete in our market area, our profitability may be negatively affected. The greater resources and broader
offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.
We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital,
or constrain us from paying dividends or repurchasing shares.
In July 2013, the federal banking agencies approved a new rule that has substantially amended regulatory risk-based capital rules. The final rule
implements the regulatory capital reforms from the Basel Committee on Banking Supervision (“Basel III”) and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2015, and refines the definition of
what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of
4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1
leverage ratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of
calculating regulatory capital requirements unless a one-time opt-out is exercised. We have elected to exercise our one-time option to opt-out of the requirement
under the final rule to include certain “available-for-sale” securities holdings for purposes of calculating our regulatory capital requirements. The final rule also
establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio
of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement has been
phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will
be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.
These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
We have analyzed the effects of these new capital requirements, and we believe that we would meet all of these new requirements, including the full 2.5%
capital conservation buffer, as if these new requirements had been in effect as of June 30, 2018.
25
The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additi onal capital,
and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with
the implementation of Basel III could result in our having to lengthen the ter m of our funding, restructure our business models, and/or increase our holdings of
liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital
and/or ad ditional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions,
including paying out dividends or buying back shares. See “Supervision and Regulation—Federal Bank Regulati on—Capital Requirements.”
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money
laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s
Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of
customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting
acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and
regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may
not be effective in preventing violations of these laws and regulations.
Legal and regulatory proceedings and related matters could adversely affect us.
We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in litigation
and regulatory proceedings. Most of these proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently
difficult to assess the outcome of these matters and we may not prevail in any proceeding or litigation. Additionally, regulatory proceedings and litigation can be
costly and could divert management resources from the Company’s business. Regardless of the merits of a particular claim, and whether or not we ultimately
prevail, litigation and regulatory proceedings could have a materially adverse effect on our business, brand or image, or our financial condition and results of our
operations.
Various factors may make takeover attempts more difficult to achieve.
Certain provisions of our articles of incorporation and bylaws and state and federal banking laws, including regulatory approval requirements, could make
it more difficult for a third party to acquire control of PCSB Financial without our board of directors’ prior approval.
Under Federal Reserve Board regulations, for a period of three years following completion of the conversion and offering, no person may directly or
indirectly acquire or offer to acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under
federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of a bank holding company.
Acquisition of 10% or more of any class of voting stock of a bank holding company creates a rebuttable presumption that the acquirer “controls” the bank holding
company. Also, a bank holding company must obtain the prior approval of the Federal Reserve Board and the NYSDFS before, among other things, acquiring
direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including PCSB Bank.
There also are provisions in our articles of organization that may be used to delay or block a takeover attempt, including a provision that prohibits any
person from voting more than 10% of the shares of common stock outstanding. Furthermore, shares of restricted stock and stock options that we have granted or
may grant to employees and directors, stock ownership by our management and directors, employment agreements that we have entered into with our executive
officers and other factors may make it more difficult for companies or persons to
26
acquire control of the Company without the consent of our board of directors. Taken as a whole, these statutory provisions and provisions in our articles of
incorporation could result in our being less attractive to a po tential acquirer and thus could adversely affect the market price of our common stock.
Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding
sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of advances from the
Federal Home Loan Bank and wholesale deposits. As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or
changes in industry conditions could lead to difficulty or an inability in accessing these additional funding sources. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If
we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.
In this case, our operating margins and profitability would be adversely affected.
Our success depends on retaining certain key personnel.
Our performance largely depends on the talents and efforts of highly skilled individuals who comprise our senior management team. We rely on key
personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation. The loss of key staff may
adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could
result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our
ability to attract new employees and to retain and motivate our existing employees.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we and our third-party service providers use could be vulnerable to unforeseen problems. Our operations
are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar
catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any breach,
damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations due to the
time and money needed to correct the issue. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and
transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers
to refrain from doing business with us. The Company has emplaced controls to defeat threats to its operating systems. Despite these safeguards, the Company
cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures, such as cyber-attacks. In addition,
advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we
and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect
on our financial condition and results of operations. We have general liability and cyber-related insurance, however there are limitations on coverage as well as
dollar amount. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require
reimbursement of customer losses.
Our business may be adversely affected by fraud and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and
other financial crimes. While we have policies and procedures designed to prevent such losses, losses may still occur which could cause both financial and
reputational harm.
27
Managing reputational risk is important to attracting and maintaining customers, investo rs and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee
misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We
have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative
publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased
governmental regulation, all of which could adversely affect our operating results.
Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or
operating results.
In preparing our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and
assumptions at a specified date. These estimates and assumptions are based on management’s best estimates and experience at that date and are subject to
substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring
significant estimates and assumptions by management include our valuation of investment securities, our determination of our income tax provision, our
determination of goodwill impairment, and our evaluation of the adequacy of our allowance for loan losses.
Our operations may be adversely affected if our external vendors do not perform as expected.
The Company relies on certain external vendors to provide products and services necessary to maintain its day-to-day operations. These include, but are
not limited to, data processing and storage, recording and monitoring transactions, internet connections and network access. The Company’s operations are exposed
to the risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to
perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial
condition, support for existing products and services or strategic focus or for any other reason, could disrupt the Company’s operations. If we are unable to find
alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the
Company’s business and, in turn, the Company’s financial condition and results of operations.
Counterparties expose the Company to risks.
The Company intends to use derivative financial instruments, primarily interest rate swaps, which will expose it to financial and contractual risks with
counterparty banks. Additionally, the Company maintains correspondent bank relationships, manages certain loan participations, and engages in securities
transactions and other activities with financial counterparties which are customary in the banking business. Financial risks are inherent in these counterparty
relationships.
Our inability to achieve profitability on new branches may negatively affect our earnings.
We may pursue further expansion through de novo branching or the purchase of branches from other financial institutions. The profitability of these
branches will depend on whether the income that we generate from the new branches will offset the increased expenses resulting from operating these branches.
We expect that it may take a period of time before these branches can become profitable, especially in areas in which we do not have an established presence.
During this period, the expense of operating these branches may negatively affect our net income.
The risks presented by acquisitions could adversely affect the Company's financial condition and result of operations.
The Company’s business strategy includes growth through acquisitions, which present risks, including: regulatory approval delays, operations and
personnel integration challenges, potential ongoing business disruption,
28
difficulty maintaining uniform standar ds, controls, procedures and policies, issues with information systems integration and the impairment of relationships with
employees and customers as a result of changes in ownership and management. Further, the asset quality or other financial characteri stics of a company may
deteriorate after the acquisition agreement is signed or after the acquisition closes.
Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to
risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques,
these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent
economic conditions, increased cybersecurity threats, and heightened legislative and regulatory scrutiny of the financial services industry, among other
developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to anticipate and manage these risks.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of
these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that
hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for
remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic
substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially
reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement
policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental
review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
Loan participations could expose the Company to losses.
We purchase and participate in residential, business and commercial real estate loans with other financial institutions. The agreements documenting these
transactions typically provide for retention by the selling institution of the servicing of the participated loans and require that institution to service the loan with the
same degree of care that it uses for loans in its portfolio. However, if the servicing institution fails to administer loans in accordance with its contractual obligations,
for example, by neglecting to enforce lender’s rights and remedies against a defaulting borrower, or by waiving or modifying loan terms without our consent, we
could incur significant losses, including loss of the outstanding principal balance.
We may be adversely affected by recent changes in U.S. tax laws and regulations.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an
impact on the banking industry, borrowers and the market for single-family residential real estate. Included in this legislation is a reduction of the corporate income
tax rate from 34% to 21%. In addition, other changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans,
(ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the
deductibility of property taxes and state and local income taxes. These recent changes in the tax laws may have an adverse effect on the market for, and valuation
of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments. In addition, these
recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, such as New York. If
home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our
29
loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan
losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
Our ability to pay dividends is subject to regulatory limitations and other limitations.
PCSB Financial is a separate legal entity from our subsidiary, the Bank, and we do not have significant operations of our own. The availability of
dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the
Bank’s regulators could assert that payment of dividends or other payments may result in an unsafe or unsound practice. In addition, under the Dodd-Frank Act, we
are subjected to consolidated capital requirements and must serve as a source of strength to the Bank. If the Bank is unable to pay dividends to us or we are required
to retain capital or contribute capital to the Bank, we may not be able to pay dividends on our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
At June 30, 2018, we conducted business through our administrative/headquarters office in Yorktown Heights and our 15 banking offices located in
Brewster (main banking office), Eastchester, Fishkill, Greenburgh, Jefferson Valley, Kent, Mahopac, Mount Kisco, Mount Vernon, New City, Pawling (2 branch
offices), East White Plains, Somers, and Yorktown Heights, all of which are located in New York. We own 4 and lease 12 of our properties. At June 30, 2018, the
net book value of our land, buildings, furniture, fixtures and equipment was $11.6 million. The Company’s and Bank’s executive offices/headquarters are located in
a leased facility at 2651 Strang Blvd., Suite 100, Yorktown Heights, New York.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we
hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending
legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
30
PART II
Item 5. Market f or Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s shares of common stock are traded on the NASDAQ Capital Market under the symbol “PCSB”. The approximate number of stockholders
of record of the Company’s common stock as of June 30, 2018 is 1,438.
The following tables set forth for the periods indicated the intra-day high and low sales prices per share of common stock as reported by The Nasdaq Stock
Market. The Company completed its initial public offering on April 20, 2017, and its stock commenced trading on April 21, 2017. Prior to the initial public
offering, the Company had no shares issued or outstanding. On June 30, 2018, the closing market price of the Company’s common stock was $19.87.
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter (from April 21, 2017)
Third Quarter
Second Quarter
First Quarter
Dividends
$
$
High
Year Ended June 30, 2018
Low
Dividend
$
21.66
21.95
20.12
18.94
$
19.61
18.92
18.25
16.69
0.03
—
—
—
High
Year Ended June 30, 2017
Low
Dividend
$
17.91
N/A
N/A
N/A
$
16.24
N/A
N/A
N/A
—
—
—
—
The Company’s board of directors has the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements.
In determining whether to pay a cash dividend and the amount of such cash dividend, the board of directors is expected to take into account a number of factors,
including capital requirements, our consolidated financial condition and results of operations, other uses of funds for the long-term value of stockholders, tax
considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid,
will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by applicable law, may be paid
in addition to, or in lieu of, regular cash dividends. PCSB Financial files a consolidated tax return with PCSB Bank. Accordingly, any cash distributions made by us
to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to
applicable regulations, during the three-year period following our stock offering, we will not take any action to declare an extraordinary dividend to stockholders
that would be treated by recipients as a tax-free return of capital for federal income tax purposes.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the policy provides
that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the
organization’s capital needs, asset quality and overall financial condition. In addition, the Federal Reserve Board has established requirements with respect to the
maintenance of appropriate levels of capital by registered bank holding companies. These regulatory policies and requirements could affect our ability to pay
dividends. See “Regulation and Supervision-Holding Company Regulation.” and “–Federal Bank Regulation–Capital Requirements.”
Initially, dividends we can declare and pay will depend upon the net proceeds retained from the stock offering and the earnings received from the
investment of those proceeds. In the future, dividends will depend in large part
31
upon receipt of dividends from PCSB Bank, because we expect to have limited sources of income other than dividends from PCSB Bank, net income earned on the
net proceeds of the offering and interest payments re ceived in connection with the loan to the employee stock ownership plan
Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority
over the holders of our shares of common stock with respect to the payment of dividends. We have no preferred stock outstanding and currently have no plans to
issue preferred stock in the future.
New York banking law and FDIC regulations impose limitations on capital distributions by savings institutions. See “Supervision and Regulation-New
York Banking Laws and Supervision-Dividends.”
Any payment of dividends by PCSB Bank to us that would be deemed to be drawn out of PCSB Bank’s bad debt reserves, if any, would require a payment
of taxes at the then-current tax rate by PCSB Bank on the amount of earnings deemed to be removed from the reserves for such distribution. PCSB Bank does not
intend to make any distribution to us that would create such a federal tax liability.
On August 2, 2018, the Board of Directors declared a regular quarterly cash dividend of $0.03 per share. The dividend was paid on August 31, 2018 to
stockholders of record on August 17, 2018.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
None.
Issuer Purchases of Equity Securities
None.
32
Item 6. Selected Financial Data
The summary information presented below at or for each of the periods presented is derived in part from and should be read in conjunction with the
consolidated financial statements of the Company presented in Item 8.
Selected Financial Condition Data:
Total Assets
Cash and cash equivalents
Securities held-to-maturity
Securities available-for-sale
Loans receivable, net
Goodwill and other intangibles
Total Liabilities
Deposits
Federal Home Loan Bank advances
Total shareholders' equity (total equity before June 30, 2017)
Selected Operating Data:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Non-interest income (1)
Non-interest expense (2)(3)
Income before income tax expense
Income tax expense (4)
Net income
2018
2017
At June 30,
2016
(Dollars in thousands)
2015
2014
$
1,480,187
62,145
353,183
105,504
902,336
6,539
1,192,628
1,157,457
18,841
287,559
$
1,426,458
60,486
383,551
111,889
809,648
6,665
1,146,612
1,088,461
42,598
279,846
$
1,262,071
41,578
270,679
112,351
782,336
6,808
1,152,122
1,112,695
20,081
109,949
$
1,200,750
77,761
269,913
84,943
727,134
6,703
1,090,479
1,060,505
14,000
110,271
976,630
105,250
267,146
72,109
507,161
-
864,991
856,518
-
111,639
2018
2017
2016
2015
2014
For the Year Ended June 30,
(Dollars in thousands)
47,960
6,323
41,637
414
41,223
2,519
32,116
11,626
5,022
6,604
$
$
40,958
5,293
35,665
823
34,842
4,084
34,431
4,495
1,266
3,229
$
$
39,044
4,812
34,232
1,859
32,373
1,951
30,265
4,059
1,133
2,926
$
$
28,827
3,884
24,943
1,326
23,617
1,567
23,974
1,210
702
508
$
$
25,864
3,634
22,230
903
21,327
1,650
20,651
2,326
699
1,627
$
$
$
(1)
(2)
(3)
(4)
Non-interest income for the year ended June 30, 2018 includes $236,000 of gains on sale of securities and the year ended June 30, 2017 includes a $1.6
million settlement on an acquired loan, respectively.
Non-interest expense for the years ended June 30, 2016 and 2015 include merger expenses of $790,000 and $1.1 million, respectively.
Non-interest expense for the year ended June 30, 2017 includes a $5.0 million contribution expense related to the Company’s contribution and
establishment of the PCSB Community Foundation, as well as a $919,000 curtailment gain on the Bank’s defined benefit pension plan.
In connection with the passage of the Tax Cuts and Jobs Act, the Company recorded a $1.6 million charge to income tax expense for the year ended June
30, 2018, primarily reflecting a write-down of our deferred tax asset resulting from a decrease in the corporate income tax rate from 34% to 21%.
33
2018
2017
2016
2015
2014
At or For the Year Ended June 30,
Selected Financial Ratios:
Return on average assets (1)
Return on average equity (2)
Noninterest income to average assets
Noninterest expense to average assets
Interest rate spread
Net interest margin (3)
Efficiency ratio (4)(7)
Dividend payout ratio (8)
Average interest-earning assets to average interest-bearing
liabilities
Loans to deposits
Equity to assets (5)
Tangible equity to tangible assets (6)
0.46%
2.33
0.18
2.24
2.86
3.03
72.73
7.63
135.94
77.96
19.80
19.43
Book value per common share
Tangible book value per common share (7)
$
$
15.83
15.47
$
$
0.25%
2.14
0.31
2.64
2.79
2.88
86.62
n/a
122.32
74.38
11.59
11.13
15.41
15.04
0.24%
2.59
0.16
2.48
2.84
2.92
83.64
n/a
120.01
70.31
9.27
8.77
n/a
n/a
0.05%
0.45
0.15
2.34
2.41
2.50
90.43
n/a
122.55
68.56
11.03
10.93
n/a
n/a
Capital Ratios:
Tier 1 capital (to adjusted total assets)
Tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Common equity Tier 1 capital (to risk-weighted assets)
Asset Quality Ratios:
Allowance for loan losses as a percent of total gross loans
Allowance for loan losses as a percent of non-performing loans
Net charge-offs (recoveries) to average outstanding loans during
the period
Non-performing loans as a percent of total loans
Non-performing assets as a percent of total assets
Other Data:
Number of offices
Number of full-time equivalent employees
19.54%
30.29
30.29
30.81
19.95%
31.63
31.63
32.21
0.54
81.71
0.08
0.66
0.44
15
170
0.63
42.66
(0.04)
1.48
0.92
15
171
8.92%
8.88%
13.47
13.96
13.47
0.51
32.17
0.23
1.60
1.07
15
169
15.47
16.03
15.47
0.54
18.69
0.27
2.87
1.78
15
174
0.17%
1.47
0.17
2.14
2.27
2.30
86.46
n/a
125.00
59.21
11.47
11.47
n/a
n/a
11.73%
22.49
23.29
22.49
0.80
22.70
0.17
3.51
1.85
10
138
(1)
(2)
(3)
(4)
(5)
(6)
Represents net income divided by average total assets.
Represents net income divided by average equity.
Represents net interest income as a percent of average interest-earning assets.
Represents non-interest expense divided by the sum of net interest income and non-interest income.
Represents average equity divided by average total assets.
Average tangible equity to average tangible assets is a non-GAAP financial measure and represents average tangible equity calculated as a percentage of
average tangible assets for the period presented. We believe that a disclosure of tangible equity to tangible assets may be helpful for those investors who
seek to evaluate our equity without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of average tangible
equity to average tangible assets for the periods presented:
34
2018
2017
2016
2015
2014
For the Year Ended June 30,
(Dollars in thousands)
Average equity
Less: Average goodwill and other intangibles
Average tangible equity
Average assets
Less: Goodwill and other intangibles
Average tangible assets
Tangible equity to tangible assets
$
$
$
$
$
$
$
283,672
6,606
277,066
1,432,778
6,606
1,426,172
$
$
$
151,026
6,741
144,285
1,302,584
6,741
1,295,843
$
$
$
112,955
6,663
106,292
1,218,073
6,663
1,211,410
$
$
$
112,760
1,158
111,602
1,022,363
1,158
1,021,205
$
19.43%
$
11.13%
$
8.77%
$
10.93%
110,671
-
110,671
964,700
-
964,700
11.47%
(7)
(8)
Represent non-GAAP financial measures, which we believe may be helpful for investors in evaluating our equity and profitability.
Dividends declared per share divided by net income per share.
35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
This section is intended to help investors understand the consolidated financial performance of PCSB Financial through a discussion of the factors
affecting our financial condition at June 30, 2018 and 2017 and our results of operations for the years ended June 30, 2018 and 2017. This section should be read in
conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this annual report.
Overview
Income. Our primary source of income is net interest and dividend income. Net interest and dividend income is the difference between interest and
dividend income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and
borrowings. Other sources of income include earnings from customer service fees (mostly from service charges on deposit accounts), bank-owned life insurance
and gains on the sale of securities.
Provision for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of probable incurred losses in
the loan portfolio, based upon management’s evaluation of the portfolio’s collectability. The allowance is established through the provision for loan losses, which is
charged against income. Charge-offs are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Allocation of the allowance may be
made for specific loans or pools of loans, but the entire allowance is available for the entire loan portfolio.
Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits, occupancy and equipment, data
processing, federal deposit insurance and other general and administrative expenses. Our noninterest expenses have increased as a result of operating as a public
company. These additional expenses consist primarily of legal and accounting fees, expenses of stockholder communications and meetings and stock exchange
listing fees.
Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement
plans and other employee benefits. We anticipate that we will also recognize additional annual employee compensation expenses stemming from the adoption of
new equity benefit plans, subject to shareholder approval. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at
this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock or stock options at specific
points in the future.
Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental
expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a
straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter. Data processing expenses are the fees we pay to
third parties for the use of their software and for processing customer information, deposits and loans.
Federal deposit insurance premiums are payments we make to the FDIC for insurance of our deposit accounts.
Other expenses include expenses for professional services, advertising, office supplies, postage, telephone, insurance and other miscellaneous operating
expenses.
Critical Accounting Policies
A summary of our accounting policies is described in Note 2 to Notes to Consolidated Financial Statements. Critical accounting estimates are necessary in
the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those
involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets
36
or on income under different assumptions or conditions. Management believe s that the most critical accounting policies, which involve the most complex or
subjective decisions or assessments, are as follows:
Allowance for Loan Losses . The allowance for loan losses is established as probable losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the allowance when management believes the collectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. See Note 5 to Notes to Consolidated Financial Statements for a complete discussion of the allowance for loan
losses.
Income Taxes . We recognize income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when the amounts
related to such temporary differences are realized or settled. See Note 14 to Notes to Consolidated Financial Statements for a complete discussion of income taxes.
Loan Portfolio
General . Loans are our primary interest-earning asset. At June 30, 2018, net loans represented 61.0% of our total assets. The following tables set forth
certain information about our loan portfolio.
Loan Portfolio Analysis. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
2018
2017
Amount
Percent
Amount
Percent
At June 30,
2016
Amount
(Dollars in thousands)
Percent
2015
2014
Amount
Percent
Amount
Percent
$
Mortgage loans:
Residential
Commercial
Construction
Total
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total loans receivable
Plus: net deferred loans origination costs and
fees
Less: allowance for loan losses
Loans receivable, net
$
250,578
495,265
17,352
763,195
104,135
37,395
745
905,470
1,770
(4,904 )
902,336
27.67 % $
54.70
1.92
84.29
11.50
4.13
0.08
100.00 %
$
217,778
437,651
22,404
677,833
93,631
41,927
233
813,624
1,174
(5,150 )
809,648
226,073
385,827
25,050
636,950
106,738
41,180
338
785,206
1,172
(4,042 )
782,336
28.79 % $
49.14
3.19
81.12
13.60
5.24
0.04
100.00 %
$
240,448
324,574
11,886
576,908
112,092
40,605
465
730,070
985
(3,921 )
727,134
32.93 % $
44.46
1.63
79.02
15.36
5.56
0.06
100.00 %
$
161,740
188,741
19,517
369,998
105,044
33,952
612
509,606
1,612
(4,057 )
507,161
31.74 %
37.03
3.83
72.60
20.62
6.66
0.12
100.00 %
26.77 % $
53.80
2.75
83.32
11.50
5.15
0.03
100.00 %
$
37
Loan Maturity. The following tables set forth certain information at June 30, 2018 regarding the dollar amount of loan maturities for the periods indicated.
The tables do not include scheduled amortization or any estimate of prepayments that significantly shorten the ave rage loan life and may cause actual repayment
experience to differ from that shown below.
Amounts due in:
One year or less
More than one year through two years
More than two years through three years
More than three years through five years
More than five years through ten years
More than ten years through fifteen years
More than fifteen years
Total
Residential
Mortgage
Loans
Commercial
Mortgage
Loans
Construction
Loans
At June 30, 2018
Commercial Loans
(Dollars in thousands)
Home equity
Lines of
Credit
Consumer
and
Overdrafts
Total Loans
$
$
412 $
115
646
1,686
17,779
26,740
203,200
250,578 $
12,899 $
6,458
10,593
27,866
197,200
77,383
162,866
495,265 $
15,184 $
2,168
-
-
-
-
-
17,352 $
36,631 $
9,402
5,681
15,462
27,207
6,150
3,602
104,135 $
- $
-
11
-
541
3,447
33,396
37,395 $
674 $
21
10
40
-
-
-
745 $
65,800
18,164
16,941
45,054
242,727
113,720
403,064
905,470
The following table sets forth the dollar amount of all loans at June 30, 2018 that are due after June 30, 2019 and have either fixed interest rates or floating
or adjustable interest rates.
Fixed Rates
%
Floating or
Adjustable Rates
%
Total
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total
$
$
223,770
131,873
17
59,933
395
71
416,059
89.45%
27.34%
0.78%
88.78%
1.06%
100.00%
49.55%
$
(Dollars in thousands)
26,396
350,493
2,151
7,571
37,000
-
423,611
$
10.55%
72.66%
99.22%
11.22%
98.94%
0.00%
50.45%
$
$
250,166
482,366
2,168
67,504
37,395
71
839,670
Loan Originations, Purchases and Sales. Loan originations come from a variety of sources. The primary sources of loan originations are current
customers, business development by our relationship managers, walk-in traffic, referrals from customers, and other professionals. We generally originate loans for
our portfolio rather than for sale in the secondary market.
We occasionally purchase whole loans and loan participation interests from other financial institutions, which consist of interests in commercial mortgage
loans, multi-family mortgage loans and residential mortgages, primarily in our market area. At June 30, 2018, we had $164.1 million in purchased whole loan and
participation interests.
38
Asset Quality
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and
providing prompt attention to potential problem loans. Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk
indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and
assess risk for the purpose of identifying loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, the
borrowers on individual commercial real estate, construction and land development and commercial business loans are assigned a risk rating, including a collateral
rating, based on pre-determined criteria and levels of risk. The borrower and collateral risk ratings are monitored annually for most loans and may change during
the life of the loan as appropriate.
Internal and independent third-party loan reviews vary by loan type, as well as the nature and complexity of the loan. Depending on the size and
complexity of the loan, some loans may warrant detailed individual review, while other loans may have less risk based upon size or be of a homogeneous nature
reducing the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and loans secured by residential real estate, may be
reviewed on the basis of risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of the loan and associated risks are
documented by completing a loan risk assessment and action plan. Some loans may be re-evaluated in terms of their fair market value or net realizable value in
order to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general loan loss reserves.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to
current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection
proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing
the loan generally is sold at foreclosure. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days.
39
Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Total
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Total
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Total
At June 30, 2018
30-89 Days
90 Days or More
Number of Loans
Principal
Balance
Number of
Loans
Principal
Balance
(Dollars in thousands)
2 $
-
-
-
2
4 $
626
-
-
-
30
656
8 $
3
1
1
3
16 $
2,016
1,374
2,260
500
341
6,491
At June 30, 2017
30-89 Days
90 Days or More
Number of Loans
Principal
Balance
Number of
Loans
Principal
Balance
(Dollars in thousands)
5 $
-
-
-
1
6 $
1,101
-
-
-
200
1,301
10 $
2
2
2
4
20 $
3,634
993
3,661
544
477
9,309
At June 30, 2016
30-89 Days
90 Days or More
Number of Loans
Principal
Balance
Number of
Loans
Principal
Balance
(Dollars in thousands)
4 $
-
-
2
1
7 $
1,735
-
-
765
296
2,796
12 $
2
2
17
3
36 $
3,305
820
144
2,304
310
6,883
40
Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, and real estate and other loan
collateral acquired through foreclosure and repossession. Non-accrual loans exclude acquired loans that are accounted for as purchased credit impaired loans
because the loans are in pools that are considered performing. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in
the process of collection. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is pl aced
on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is
acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value
after acquisition of the property result in charges against income.
The following table sets forth information regarding our non-performing assets at the dates indicated.
Non-accrual loans:
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial business loans
Home equity lines of credit
Other loans
Total
Accruing loans past due 90 days or more:
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial business loans
Home equity lines of credit
Other loans
Total
Total non-performing loans
Real estate owned
Total non-performing assets
2018
2017
At June 30,
2016
(Dollars in thousands)
2015
2014
$
$
1,911
794
2,260
788
349
-
6,102
-
-
-
-
-
-
-
6,102
460
6,562
$
$
4,357
497
3,661
2,959
598
-
12,072
-
-
-
-
-
-
-
12,072
977
13,049
$
$
5,881
300
144
5,048
602
584
12,559
-
-
-
-
-
4
4
12,563
905
13,468
$
$
4,389
6,308
2,020
7,011
424
310
20,462
-
-
-
514
-
4
518
20,980
368
21,348
$
$
3,659
2,562
5,951
5,361
132
-
17,665
-
-
-
204
-
-
204
17,869
211
18,080
Total non-performing loans to total loans
Total non-performing assets to total assets
0.67%
0.44%
1.48%
0.91%
1.60%
1.07%
2.87%
1.78%
3.51%
1.85%
Interest income that would have been recorded for the year ended June 30, 2018 had non-accruing loans been current according to their original terms,
amounted to $366,000.
Potential Problem Loans. Certain loans are identified during our loan review process that are currently performing according to their contractual terms and
we expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect a ll the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions such as cash flows, collateral values or
creditworthiness of the borrower.
Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers
causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. These loans are not classified as impaired. At June
30, 2018, other potential problem loans totaled $7.0 million.
41
Classified Assets. The following table sets forth information regarding our classified assets, as defined under applicable regulatory standards, at th e dates
indicated.
Special mention
Substandard
Doubtful
Loss
Total
2018
At June 30,
2017
2016
(Dollars in thousands)
$
$
1,984 $
15,378
-
-
17,362 $
192 $
25,146
-
-
25,338 $
5,368
35,265
349
-
40,982
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 following table sets forth activity in our allowance for loan losses for the years indicated.
Allowance for loan losses at beginning of period
Provision for loan losses
Charge-offs:
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total charge-offs
Recoveries:
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total recoveries
Net charge-offs (recoveries)
Allowance for loan losses at end of period
2018
2017
2016
2015
2014
Year Ended June 30,
$
$
$
5,150
414
136
-
997
54
60
23
1,270
1
370
-
220
19
-
610
660
4,904
$
$
$
4,042
823
275
-
108
743
-
3
1,129
70
19
-
1,321
-
4
1,414
(285)
5,150
(Dollars in thousands)
3,921
$
1,859
$
4,057
1,326
$ 3,985
903
400
10
-
1,677
24
22
2,133
-
178
192
25
-
-
395
1,738
4,042
$
$
175
361
327
1,285
43
-
2,191
5
8
-
710
6
-
729
1,462
3,921
105
-
-
763
-
8
876
$
16
10
-
19
-
-
45
831
$ 4,057
$
$
Allowance for loan losses to non-performing loans at end of period
Allowance for loan losses to total loans outstanding at end of
period
Net charge-offs (recoveries) to average loans outstanding during
period
80.37%
42.66%
32.17%
18.69%
22.70%
(1 )
0.54%
(1 )
0.63%
(1 )
0.51%
(1 )
0.54%
0.80%
0.08%
(0.04)%
0.23%
0.27%
0.17%
(1)
Loans acquired in the CMS Bancorp, Inc./CMS Bank acquisition were recorded at their estimated fair value at the acquisition date and did not include a
carry-over of the related pre-acquisition allowance for loan losses.
42
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb
losses in other categories.
2018
Percent of
Allowance to
Total Allowance
Percent of
Loans in
Category to
Total Loans
Amount
2017
Percent of
Allowance to
Total Allowance
Percent of
Loans in
Category to
Total Loans
Amount
At June 30,
$
$
459
3,073
505
780
80
7
4,904
9.36%
62.66
10.30
15.91
1.63
0.14
100.00%
(Dollars in thousands)
27.67%
54.70
1.92
11.50
4.13
0.08
100.00%
$
$
386
2,589
1,150
949
76
-
5,150
7.50%
50.26
22.33
18.43
1.48
-
100.00%
26.77%
53.80
2.75
11.50
5.15
0.03
100.00%
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total
2016
Percent of
Allowance to
Total
Amount
Allowance
Percent of
Loans in
Category to
Total Loans
At June 30,
2015
Percent of
Allowance to
Total
Amount
Allowance
Percent of
Loans in
Category to
Total Loans
2014
Percent of
Allowance to
Total
Amount
Allowance
Percent of
Loans in
Category to
Total Loans
(Dollars in thousands)
Residential mortgage loans
Commercial mortgage loans
Construction loans
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total
$
$
237
2,149
269
1,313
73
1
4,042
5.86%
53.17
6.66
32.48
1.81
0.02
100.00%
28.79% $
49.14
3.19
13.60
5.24
0.04
100.00% $
193
1,766
100
1,793
69
-
3,921
4.92%
45.04
2.55
45.73
1.76
-
100.00%
32.93% $
44.46
1.63
15.36
5.56
0.06
100.00% $
219
1,622
828
1,200
186
2
4,057
5.40%
39.98
20.41
29.58
4.58
0.05
100.00%
31.74%
37.03
3.83
20.62
6.66
0.12
100.00%
See Note 5 to Notes to Consolidated Financial Statements for a complete discussion of the allowance for loan losses. Although we believe that we use the
best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of
operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe
we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, there can be no
assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will
not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may
adversely affect our financial condition and results of operations.
43
Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at the dates indicated.
Securities held to maturity:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Mortgage-backed securities – collateralized mortgage
obligations
Mortgage-backed securities – commercial
Total
Securities available for sale:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Equity securities
Total
2018
At June 30,
2017
2016
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(Dollars in thousands)
$ 122,048
4,000
140,478
$ 119,774
3,874
135,664
$ 155,559
999
143,452
$ 155,008
999
143,783
$ 145,896
-
72,842
$ 146,202
-
74,139
53,547
33,110
$ 353,183
51,732
32,144
$ 343,188
59,476
24,065
$ 383,551
59,387
24,411
$ 383,588
30,268
21,673
$ 270,679
30,580
22,396
$ 273,317
$
64,389
8,406
34,619
32
$ 107,446
$
63,430
8,235
33,807
32
$ 105,504
$
63,630
8,460
39,710
32
$ 111,832
$
63,445
8,482
39,930
32
$ 111,889
$
65,953
8,514
37,043
49
$ 111,559
$
66,132
8,646
37,524
49
$ 112,351
At June 30, 2018, we had no investments in a single issuer, other than securities issued by the U.S. government and government agencies, which had an
aggregate book value in excess of 10% of our shareholders’ equity.
44
Securities Portfolio Maturities and Yields . The following table sets forth the stated maturities and weighted average yields of investment securities at June
30, 2018. The tables do not include any estimate of principal payments or prepayments that significantly shorten the average life of mortgage- backed securities.
Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not
reflected in the following table. Weighted average yield calculations on in vestment securities available for sale do not give effect to changes in fair value that are
reflected as a component of equity. At June 30, 2018, we did not have any investments in any private-label collateralized mortgage obligations.
One Year or Less
Amortized
Cost
Weighted
Average
Yield
More than One Year to
Five Years
More than Five Years
to Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
More than Ten Years
Weighted
Average
Amortized
Cost
Yield
Total
Amortized
Cost
Fair
Value
Weighted
Average
Yield
Securities held to maturity:
(Dollars in thousands)
U.S. Government and
agency obligations
Corporate and other debt
securities
Mortgage-backed securities
– residential
Mortgage-backed securities
– collateralized mortgage
obligations
Mortgage-backed securities
– commercial
Total
$
Securities available for sale:
$
25,504
1.19% $
96,544
1.80% $
- % $
-
- % $ 122,048 $ 119,774
1.68%
-
-
-
-
-
-
-
4,000
6,882
2.34
38,686
2.10
94,910
2.85
2.56
4,000
3,874
2.85
140,478 135,664
2.42
-
-
1,866
1.66
-
-
7,553
2.20
44,128
2.36
53,547 51,732
2.32
-
27,370
-
17,697
1.22% $ 121,123
2.25
1.90% $
11,024
57,263
2.64
4,389
2.22% $ 147,427
33,110 32,144
2.87
2.52% $ 353,183 $ 343,188
2.46
2.16%
U.S. Government and
agency obligations
Corporate and other debt
securities
Mortgage-backed securities
– residential
Equity securities
Total
$
12,402
1.34% $
51,987
1.78% $
-
- % $
-
-
6,406
2.34
2,000
3.37
-
-
- % $
64,389 $ 63,430
1.70%
-
8,406
8,235
2.58
-
-
12,402
$
-
-
1.34% $
-
-
58,393
-
-
1.84% $
3,150
-
5,150
2.20
-
2.66% $
31,469
32
31,501
45
1.94
-
34,619 33,807
32
1.94% $ 107,446 $ 105,504
32
1.97
-
1.85%
Other-than-temporary Impairment . Each reporting period, we eva luate all securities with a decline in fair value below the amortized cost of the
investment to determine whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be
recognized if (1) we in tend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis;
or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entir e amortized cost basis. Marketable equity securities are
evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in
earnings as realized losses. For impaire d debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is
recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in our noninterest income. For all other impaired debt securities,
credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. We did
not recognize any OTTI during the years ended June 30, 2018, 2017 and 2016.
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 sets forth the distribution of total deposits by account type at the dates indicated.
Non-interest bearing demand accounts
NOW Accounts
Money market accounts
Savings accounts
Time deposits
Less than $100,000
Greater than or equal to $100,000
Total
2018
At June 30,
2017
2016
Amount
Percent
Amount
Percent
Amount
Percent
$
131,883
117,875
49,885
465,441
169,517
222,856
$ 1,157,457
11.39% $
10.18
4.31
40.22
(Dollars in thousands)
136,361
115,527
29,097
512,697
12.53% $
10.61
2.67
47.11
122,740
111,455
31,194
516,249
161,961
14.65
132,818
19.25
100.00% $ 1,088,461
181,827
14.88
149,230
12.20
100.00% $ 1,112,695
11.03%
10.02
2.80
46.40
16.34
13.41
100.00%
At June 30, 2018 and 2017, we had municipal deposits of $39.1 million and $38.4 million, respectively. Municipal deposits are held by our commercial bank
subsidiary, PCSB Commercial Bank. Additionally, as of June 30, 2018, deposits included $60.0 million of brokered time deposits with remaining maturities of
between two and 47 months. We had no brokered deposits as of June 30, 2017 or 2016.
The following table indicates the amount of jumbo time deposits by time remaining until maturity at June 30, 2018. Jumbo time deposits require minimum
deposits of $100,000.
Maturity Period
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Dollar Amount
(In thousands)
15,462
25,111
58,419
123,864
222,856
$
$
46
The following tables set forth time deposit accounts classified by rate and maturity at June 30, 2018.
Less Than One
Year
Amount Due
More Than One
Year to Two
Years
More Than Two
Years to Three
Years
More Than Three
Years
Total
Percent of Total
Time Deposit
Accounts
$
$
44,517 $
116,608
22,151
183,276 $
11,246 $
28,133
9,971
49,350 $
(Dollars in thousands)
1,842 $
44,945
9,959
56,746 $
356 $
84,658
17,987
103,001 $
57,961
274,344
60,068
392,373
14.77%
69.92
15.31
100.00%
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
Total
Borrowings
We primarily utilize advances from the Federal Home Loan Bank of New York to supplement our supply of investable funds. At June 30, 2018 and 2017,
we had $296.0 million and $308.1 million, respectively, of available borrowing capacity with the Federal Home Loan Bank of New York and had $18.8 million and
$42.6 million, respectively, in advances outstanding. At June 30, 2018 and 2017, we also had an available line of credit with the Federal Reserve Bank of New
York’s discount window program of $122.1 million and $85.9 million, respectively, none of which was outstanding at that date. The following table sets forth
information concerning our borrowings at the dates and for the periods indicated.
Maximum balance outstanding at any month-end during period:
Federal Home Loan Bank advances
Average balance outstanding during period:
Federal Home Loan bank advances
Weighted average interest rate during period:
Federal Home Loan bank advances
Balance outstanding at end of period:
Federal Home Loan bank advances
Weighted average interest rate at end of period:
Federal Home Loan bank advances
Average Balance Sheets and Related Yields and Rates
Year Ended June 30,
2018
2017
2016
(Dollars in thousands)
$
83,861
$
42,598
$
34,000
42,719
15,911
23,974
1.80%
1.32%
0.83%
$
18,841
$
42,598
$
20,081
1.91%
1.55%
1.16%
The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends
from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields
and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for
the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included
in interest income on loans and are not material.
47
$ 846,353
474,201
54,528
1,375,082
57,696
$ 1,432,778
$ 113,952
36,917
502,310
315,652
968,831
42,719
1,011,550
130,196
7,360
1,149,106
283,672
$ 1,432,778
Assets:
Loans receivable
Securities
Other interest-earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Liabilities and equity:
NOW accounts
Money market accounts
Savings accounts and escrow
Time deposits
Total interest-bearing deposits
Federal Home Loan Bank advances
Total interest-bearing liabilities
Non-interest-bearing deposits
Other non-interest-bearing liabilities
Total liabilities
Total equity
Total liabilities and equity
Net interest income
Interest rate spread
Net interest margin
Average interest-earning assets to
interest-bearing liabilities
Average
Balance
2018
Interest/
Dividends
Average
Rate
Year ended June 30,
2017
Interest/
Dividends
Average
Balance
(dollars in thousands)
Average
Rate
Average
Balance
2016
Interest/
Dividends
Average
Rate
$ 37,798
9,266
896
47,960
4.47% $ 773,590
389,910
1.95
74,149
1.64
1,237,649
3.49
64,935
$ 1,302,584
$ 33,664
6,661
633
40,958
4.35% $ 743,995
365,593
1.71
62,034
0.85
1,171,622
3.31
46,451
$ 1,218,073
$ 32,832
5,897
315
39,044
4.41%
1.61
0.51
3.33
197
163
1,223
3,971
5,554
769
6,323
0.17
0.44
0.24
1.26
0.57
1.80
0.63
$ 125,818
31,260
525,486
313,334
995,898
15,911
1,011,809
126,666
13,083
1,151,558
151,026
$ 1,302,584
195
83
1,289
3,516
5,083
210
5,293
0.16
0.26
0.25
1.12
0.52
1.32
0.52
$
92,165
32,770
512,321
315,028
952,284
23,974
976,258
118,871
9,989
1,105,118
112,955
$ 1,218,073
146
89
1,487
2,891
4,613
199
4,812
$ 41,637
$ 35,665
$ 34,232
2.86
3.03
2.79
2.88
135.94%
122.32%
120.01%
48
0.16
0.27
0.29
0.92
0.49
0.83
0.49
2.84
2.92
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.
Interest income:
Loans receivable
Securities
Other interest-earning assets
Total interest-earning assets
Interest expense:
NOW accounts
Money market accounts
Savings and escrow accounts
Time deposits
Federal Home Loan Bank advances
Total interest-bearing liabilities
Year ended June 30, 2018 Compared to 2017
Year ended June 30, 2017 Compared to 2016
Increase (Decrease) Due to
Increase (Decrease) Due to
Rate
Volume
Net
Rate
Volume
Net
$
804
695
460
1,959
5
64
(8)
428
98
587
3,330
1,910
(197)
5,043
(3)
16
(58)
27
461
443
(Dollars in thousands)
$
4,134
2,605
263
7,002
2
80
(66)
455
559
1,030
(644)
75
235
(334)
2
(2)
(244)
641
92
489
1,476
689
83
2,248
47
(4)
46
(16)
(81)
(8)
832
764
318
1,914
49
(6)
(198)
625
11
481
Increase (decrease) in net interest income
$
1,372 $
4,600 $
5,972
$
(823) $
2,256 $
1,433
Comparison of Financial Condition at June 30, 2018 and June 30, 2017
Total Assets. Total assets increased $53.7 million, or 3.8%, to $1.48 billion at June 30, 2018 from $1.43 billion at June 30, 2017. The increase is primarily
the result of increases of $92.7 million in net loans, partially offset by decreases of $30.4 million in held to maturity securities, $6.4 million in securities available
for sale, and $2.1 million in deferred tax asset.
Cash and Cash Equivalents. Cash and cash equivalents increased $1.6 million, or 2.7%, to $62.1 million at June 30, 2018 from $60.5 million at June 30,
2017. The increase is due primarily to a $69.0 million increase in deposits and a $36.8 million decrease in investment securities, partially offset by a $92.7 million
increase in loans and a $23.8 million decrease in advances from the Federal Home Loan Bank.
Securities Held-to-Maturity. Total securities held to maturity decreased $30.4 million, or 7.9%, to $353.2 million at June 30, 2018 from $383.6 million at
June 30, 2017. This decrease was caused primarily by $33.5 million of net maturities of US government and agency obligations, partially offset by net purchases of
$3.0 million of corporate and debt securities and $142,000 of mortgage-backed securities.
Securities Available for Sale. Total securities available for sale decreased $6.4 million, or 5.7%, to $105.5 million at June 30, 2018 from $111.9 million at
June 30, 2017. This decline was due primarily to $5.1 million in sales and amortization of mortgage backed securities net of purchases, a $2.0 million increase in
net unrealized losses driven primarily by an increase in market interest rates and a $54,000 decrease in corporate and other debt securities, partially offset by
$759,000 of net purchases of U.S. government and agency obligations.
Net Loans Receivable. Net loans receivable increased $92.7 million, or 11.4%, to $902.3 million at June 30, 2018 from $809.6 million at June 30, 2017.
The increase is due primarily to increases of $57.6 million in commercial mortgage loans, $32.8 million in residential mortgage loans, and $10.5 million in
commercial loans,
49
partially offset by decreases of $5.1 million in construction loans and $4.5 million in home equity credit lines. T he Company purchased $50.9 million of
commercial mortgage loans and $42.3 million of residential mortgage loans during the year ended June 30, 2018 .
Deposits. Total deposits increased $69.0 million, or 6.3%, to $1.16 billion at June 30, 2018 from $1.09 billion at June 30, 2017. This increase primarily
reflects increases of $97.6 million in time deposits, and $20.8 million in money market accounts, partially offset by decreases of $47.3 million in savings and $2.1
million in demand deposits and NOW accounts.
Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $23.8 million, or 55.8%, to $18.8 million at June 30, 2018 from $42.6
million at June 30, 2017, due primarily to net maturities of short-term advances.
Total Shareholder’s Equity. Total shareholders’ equity increased $7.8 million to $287.6 million at June 30, 2018 from $279.8 million at June 30,
2017. This increase was due primarily to net income of $6.6 million and a $2.2 million reduction in unearned ESOP shares for plan shares earned during the
period, partially offset by other comprehensive losses of $618,000 due largely to increased unrealized losses in the available for sale investment securities portfolio
driven by increased market interest rates, as well as $504,000 of cash dividends paid. At June 30, 2018, the Company’s book value per share and tangible book
value per share were $15.83 and $15.47, respectively, compared to $15.41 and $15.04, respectively, at June 30, 2017. At June 30, 2018, the Bank was considered
“well capitalized” under applicable regulatory guidelines.
Comparison of Operating Results for the Years Ended June 30, 2018 and June 30, 2017
General. Net income increased $3.4 million, or 104.5%, to $6.6 million for the year ended June 30, 2018 compared to $3.2 million for the year ended
June 30, 2017. The increase was due primarily to a $5.9 million increase in net interest income, a $2.3 million decrease in noninterest expense, and a $409,000
decrease in the provision for loan losses, partially offset by a $3.8 million increase in income taxes and a $1.6 million decrease in noninterest income.
Net Interest Income. Net interest income increased $5.9 million, or 16.7%, to $41.6 million for the year ended June 30, 2018 compared to a $35.7
million for the year ended June 30, 2017. The increase primarily reflects a $137.7 million increase in average net interest-earning assets and a 15 basis point
increase in the net interest margin to 3.03% for the year ended June 30, 2018 compared to 2.88% for the year ended June 30, 2017. The increase in average net
interest-earning assets primarily reflects the investment of the net proceeds received in the Company’s initial public offering completed in April 2017.
Interest and Dividend Income. Interest and dividend income increased $7.0 million, or 17.1%, to $48.0 million for the year ended June 30, 2018
compared to $41.0 million for the year ended June 30, 2017. The increase primarily reflects a $137.4 million increase in total average interest-earning assets and an
18 basis point increase in the yield on total interest-earning assets.
Interest income on loans receivable increased $4.1 million, or 12.3%, due primarily to a $72.8 million increase in the average balance of loans receivable to $846.4
million for the year ended June 30, 2018 from $773.6 million for the same period last year, and a 12 basis point increase in the average yield on loans to 4.47% for
the year ended June 30, 2018 from 4.35% for the same period last year.
Interest income on securities increased $2.6 million, or 39.1%, due primarily to an $84.3 million increase in the average balance of securities and a 24 basis point
increase in the average yield on securities to 1.95% for the year ended June 30, 2018 from 1.71% for the same period last year. The increase in the yield on
securities was due primarily to an increase in market interest rates as well as an increase in the percentage of the portfolio being invested in generally higher-
yielding mortgage-backed securities.
Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, increased $263,000, or
41.5%, due primarily to a 79 basis point increase in the
50
average yield on other interest-earning assets to 1.64% for the year ended June 30, 2018 from 0.85% for the same period last year, partially offset by a $19.6
million decrease in the average balance of other interest-earning assets. The increase in the yield on other interest-earning assets was due primarily to an increase in
market interest rates.
Interest Expense. Interest expense increased $1.0 million, or 19.5%, to $6.3 million for the year ended June 30, 2018 compared to $5.3 million for the
year ended June 30, 2017. The increase primarily reflects a 11 basis point increase in the average cost of interest-bearing liabilities to 0.63% for the year ended
June 30, 2018 from 0.52% for the same period last year, partially offset by a $259,000 decrease in the average balance on interest-bearing liabilities.
Interest expense on interest-bearing deposits increased $471,000 or 9.3%, due primarily to a 5 basis point increase in the average cost of deposits to 0.57% for the
year ended June 30, 2018 from 0.52% for the same period last year, partially offset by a $27.1 million decrease in the average balance to $968.8 million for the year
ended June 30, 2018 from a $995.9 million for the year ended June 30, 2017. The decrease in the average balance of interest-bearing deposits primarily reflects
lower average savings and NOW accounts balances. The increase in the average rate paid on interest-bearing deposits was caused primarily by an 18 basis point
increase in the average rate paid on money market accounts and a 14 basis point increase in the average interest rate on time deposits as the Bank offered increased
rates on the deposits due to increased rates offered by competitor banks.
Interest expense on Federal Home Loan Bank advances increased $559,000, or 266.2%, due primarily to a $26.8 million increase in the average balance to $42.7
million for the year ended June 30, 2018 from $15.9 million for the same period last year, and a 48 basis point increase in the average cost to 1.80% for the year
ended June 30, 2018 from 1.32% for the same period last year. The increase in the average cost is due primarily to an increase in market interest rates.
Provision for Loan Losses. The provision for loan losses decreased by $409,000 to $414,000 for the year ended June 30, 2018, compared to $823,000
for the year ended June 30, 2017 due primarily to the Bank establishing specific reserves on impaired loans in the prior year period . Charge-offs, net of recoveries
were $660,000 and recoveries, net of charge-offs were $285,000 for the year ended June 30, 2018 and 2017, respectively.
Non-Interest Income. Non-interest income decreased $1.6 million, or 38.3% to $2.5 million for the year ended June 30, 2018 compared to $4.1 million
for the year ended June 30, 2017. The decrease was caused primarily by a one-time settlement on an acquired loan of $1.6 million in the prior year.
Non-Interest Expense. Non-interest expense decreased $2.3 million, or 6.7%, to $32.1 million for the year ended June 30, 2018 compared to $34.4
million for the year ended June 30, 2017. The decrease was caused primarily by a $5.0 million contribution expense recognized in the prior year related to the
Company’s establishment of the PCSB Community Foundation, a $671,000 decrease in occupancy and equipment expense, and a $230,000 decrease in FDIC
insurance, partially offset by increases of $2.3 million in salaries and benefits, $401,000 in professional fees and $851,000 in all other operating expenses, including
a $570,000 loss on a receivable. The increase in salaries and benefits was due primarily to a $1.8 million increase in ESOP expense, $919,000 benefit recognized
on the curtailment of the defined benefit pension plan recognized in the prior year, and a $671,000 increase due to increased staffing, partially offset by a $186,000
decrease in other retirement expenses. The increase in professional fees was due primarily to expenses related to being a public company. The increase in other
operating expenses was caused primarily by increases in Director and Officer insurance and data processing fees. The decrease in occupancy and equipment
expense was caused primarily by a $521,000 lease obligation write-off recorded in the prior year.
Income Tax Expense. Income tax expense increased $3.7 million, or 296.7%, to $5.0 million for the year ended June 30, 2018 from $1.3 million for
the year ended June 30, 2017. The increase was caused primarily by a $1.6 million tax re-measurement charge associated with the recent tax reform and higher pre-
tax income, partially offset by lower marginal tax rates in the current year related to the reduction of the corporate income tax rate from 34% to 21%. The effective
income tax rate was 43.2% (29.7% excluding the effects of the current year re-measurement charge) for the year ended June 30, 2018 as compared to 28.2% for the
year ended June 30, 2017.
51
Comparison of Operating Results for the Years Ended June 30, 2017 and June 30, 2016
General. Net income increased $303,000, or 10.4%, to $3.2 million for the year ended June 30, 2017 compared to $2.9 million for the year ended June 30,
2016. The increase was due primarily to a $1.4 million increase in net interest income, a $2.1 million increase in noninterest income, a $1.0 million decrease in the
provision for loan losses, partially offset by a $4.2 million increase in noninterest expense and a $133,000 increase in income taxes.
Net Interest Income. Net interest income increased $1.4 million, or 4.2%, to $35.7 million for the year ended June 30, 2017 from $34.2 million for the year
ended June 30, 2016. The increase primarily reflects a $1.9 million increase in interest and dividend income, partially offset by a $481,000 increase in interest
expense.
Interest and Dividend Income. Interest and dividend income increased $1.9 million, or 4.9%, to $41.0 million for the year ended June 30, 2017 from $39.0
million for the year ended June 30, 2016. The increase primarily reflects a $66.0 million increase in the average balance on interest-earning assets, partially offset
by a 2-basis point decrease in the average yield to 3.31% for the year ended June 30, 2017 from 3.33% for the same period last year.
Interest income on loans increased $832,000, or 2.5%, due primarily to a $29.6 million increase in the average balance to $773.6 million for the year ended
June 30, 2017 from $744.0 million for the year ended June 30, 2016, partially offset by a 6-basis point decrease in the average yield to 4.35% for the year ended
June 30, 2017 from 4.41% for the same period last year.
Interest income on securities increased $764,000, or 13.0%, due primarily to a $24.3 million increase in the average balance of securities to $389.9 million
for the year ended June 30, 2017 from $365.6 million for the year ended June 30, 2016 and a 10-basis point increase in the average yield on securities to 1.71% for
the current year period due primarily to an increase in market interest rates.
Interest income on other interest-earning assets increased $318,000, or 101.0%, due primarily to a $12.1 million increase in the average balance for the
year ended June 30, 2017 and a 34-basis point increase in the average yield to 0.85% from 0.51% for the year ended June 30, 2016. The increase in the yield on
other interest-earning assets was due primarily to an increase in market interest rates.
Interest Expense. Interest expense increased $481,000, or 10.0%, to $5.3 million for the year ended June 30, 2017 from $4.8 million for the year ended
June 30, 2016. The increase primarily reflects a $35.6 million increase in the average balance on interest-bearing liabilities and a 3-basis point increase in the
average cost to 0.52% for the year ended June 30, 2017 from 0.49% for the same period last year.
Interest expense on interest-bearing deposits and mortgage escrow funds increased $470,000 due primarily to a $43.6 million increase in the average
balance to $995.9 million for the year ended June 30, 2017 from $952.3 million for the year ended June 30, 2016 and a 3-basis point increase in the average cost to
0.52% from 0.49% for the year ended June 30, 2016. The increase in the average rate paid on deposits was caused by growth in the medium-term and long-term
certificates of deposit, which caused a 20-basis point increase in the rate paid on certificates of deposit .
Interest expense on Federal Home Loan Bank advances increased $11,000 due primarily to a 49-basis point increase in the average cost to 1.32% for the
year ended June 30, 2017 from 0.83% for the same period last year, partially offset by an $8.1 million decrease in the average balance to $15.9 million for the year
ended June 30, 2017 from $24.0 million for the year ended June 30, 2016.
Provision for Loan Losses. We recorded a provision for loan losses of $823,000 and $1.9 million for the years ended June 30, 2017 and 2016,
respectively. The decrease was caused primarily by the Company recognizing $285,000 in net recoveries for the year ended June 30, 2017 compared to $1.7 million
in net charge-offs for the year ended June 30, 2016.
Non-Interest Income. Non-interest income increased $2.1 million, or 109.3%, to $4.1 million for the years ended June 30, 2017 compared to $2.0 million
for the year ended June 30, 2016. The increase was caused primarily by the receipt of $1.6 million in settlement on a loan charged-off by CMS Bank before the
2015 merger.
52
Non-Interest Expense. Non-interest expense increased $4.2 million, or 13.8%, to $34.4 million for the year ended June 30, 2017 compared to $30.3
million for the year ended June 30, 2016. The increase was caused primarily by a $5.0 million contribution to PCSB Community Foundation, a $742,000 incre ase
in occupancy and equipment expense, and a $141,000 increase in advertising, partially offset by a $790,000 decrease in merger and acquisition related expenses
and a $927,000 decrease in other operating expenses. The increase in occupancy expense was du e primarily to a non-recurring impairment charge on an operating
lease totaling $521,000. The $927,000 decrease in other operating expenses was caused primarily by decreases of $330,000 in FDIC assessment, $336,000 in
professional fees, $134,000 in postag e and supplies expense and $60,000 in salaries and employee benefits expense. The decrease in salaries and employee
benefits expense was due to a $919,000 benefit recognized on the curtailment of the defined benefit pension plan, partially offset by incre ases in other salaries and
employee benefits.
Income Tax Expense. Income tax expense increased $133,000, or 11.7%, to $1.3 million for the year ended June 30, 2017 from $1.1 million for the year
ended June 30, 2016. The increase was caused primarily by a $436,000, or 10.7%, increase in pre-tax income. The effective tax rate was 28.2% and 27.9% for the
year ended June 30, 2017 and 2016, respectively.
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; promoting core deposit products; and
adjusting the interest rates and maturities of funding sources, as necessary. By following these strategies, we believe that we are better positioned to react to
changes in market interest rates.
Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV
represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The NPV ratio
represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic
value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of equity ratio. We estimate what our NPV would be at a specific
date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts
in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100 and 200 basis points from current market rates and that
interest rates decrease 100 and 150 basis points from current market rates. Based on recent increases in the fed funds rate, as of June 30, 2018 we now also
evaluate NPV considering a 150 basis point decrease in market rates. As this scenario was not evaluated prior to June 30, 2018, prior period information is not
available.
53
The following table pre sents the estimated changes in our NPV that would result from changes in market interest rates at June 30, 2018 and June 30, 2017.
All estimated changes presented in the table are within the policy limits approved by our Board of Directors.
Basis Point Change in Interest Rates
June 30, 2018:
200
100
-
(100)
(150)
June 30, 2017:
200
100
-
(100)
(150)
Dollar
Amount
NPV
(dollars in thousands)
Dollar
Change
NPV as Percent of Portfolio
Value of Assets
Percent
Change
Ratio
Change
(in bps)
$
$
282,017 $
313,606
332,693
342,520
348,648
290,781 $
311,728
326,629
331,139
n/a
(50,676)
(19,087)
-
9,827
15,955
(35,848)
(14,901)
-
4,510
n/a
(15.2) %
(5.7)
-
3.0
4.8
(11.0) %
(4.6)
-
1.4
n/a
20.75%
22.25
22.94
23.02
23.14
21.62%
22.49
22.92
22.69
n/a
(219)
(69)
-
8
20
(130)
(43)
-
(23)
n/a
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 June 30, 2018, cash and cash equivalents totaled $62.1 million, an increase from $60.5 million as of June 30, 2017. Securities classified
as available-for-sale, which provide an additional source of liquidity, totaled $105.5 million at June 30, 2018, a decrease from $111.9 million as of June 30, 2017.
We had the ability to borrow up to $314.9 million and $350.7 million from the Federal Home Loan Bank of New York, at June 30, 2018 and June 30,
2017, respectively, of which $18.8 million and $42.6 million was outstanding as of June 30, 2018 and June 30, 2017, respectively. We also had an available line of
credit with the Federal Reserve Bank of New York’s discount window program of $122.1 million and $85.9 million as of June 30, 2018 and June 30, 2017,
respectively, none of which was outstanding at either date.
54
We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. If loan demand was to increase faster
than expected, or any unforeseen demand or commitment was to occur, we could access our borrowing capacity with the Federal Home Loan Bank of New York or
the Federal Reserve Bank of New York.
We had $99.7 million and $77.6 million of loan commitments outstanding as of June 30, 2018 and June 30, 2017, respectively, and $59.5 million and
$45.4 million as of June 30, 2018 and June 30, 2017, respectively, of approved, but unadvanced, funds to borrowers. We also had $1.4 million and $705,000 in
outstanding letters of credit at June 30, 2018 and June 30, 2017, respectively.
Time deposit due within one year of June 30, 2018 totaled $183.3 million, an increase of $76.2 million from $107.1 million as of June 30, 2017. If these
deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and Federal Home Loan Bank of New York
advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits
at June 30, 2018. 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.
Liquidity is needed for financing and investing activities. The following table sets forth our primary investing and financing activities for the periods
presented.
Investing activities:
Loan purchases
Disbursement for loan originations, net of principal repayments
Proceeds from maturities and calls of securities held-to-maturity
Proceeds from maturities and calls of securities available-for-sale
Proceeds from sales of securities available-for-sale
Purchases of securities held-to-maturity
Purchases of securities available-for-sale
Financing activities:
Net increase (decrease) in deposits
(Decrease) increase in Federal Home Loan Bank advances
Issuance of common stock
2018
$
Year ended June 30,
2017
(in thousands)
2016
$
(93,166)
(818)
80,997
24,202
-
(51,218)
(27,498)
69,019
(23,757)
(17)
$
(30,926)
(1,131)
72,152
32,750
-
(195,566)
(23,314)
(24,109)
22,517
160,072
(43,981)
(14,314)
107,656
33,058
-
(112,896)
(56,420)
52,778
6,081
-
The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its stockholders and for other
corporate purposes. The Company’s primary source of liquidity is dividend payments it may receive from the Bank. The Bank’s ability to pay dividends to the
Company is governed by applicable law and regulations. At June 30, 2018, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $72.1
million.
Capital Resources. PCSB Financial and PCSB Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board,
NYSDFS and the FDIC. At June 30, 2018, PCSB Financial and PCSB Bank each exceeded all applicable regulatory capital requirements, and the Bank was
considered “well capitalized” under applicable regulatory guidelines. See Note 16 of Notes to the Consolidated Financial Statements.
55
Contrac tual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. The following tables present our
contractual obligations at June 30, 2018.
Contractual Obligations
Federal Home Loan Bank advances
Operating lease obligations
Time deposits
Total
Payments Due by Period
Total
Less Than One
Year
One to Three
Years
(In thousands)
Three to Five
Years
More Than Five
Years
$
$
18,841 $
17,505
392,373
428,719 $
10,125 $
2,145
183,276
195,546 $
5,259 $
3,763
106,096
115,118 $
273 $
3,314
102,797
106,384 $
3,184
8,283
204
11,671
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of our customers. These financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which
involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by
the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. See Note 10 of
Notes to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” under the caption “Management of Market Risk”.
56
Item 8. Financial Statements and Supplementary Data
57
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
PCSB Financial Corporation and Subsidiaries
Yorktown Heights, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PCSB Financial Corporation and Subsidiaries (the “Company”) as of June 30, 2018 and 2017,
and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in
the period ended June 30, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Corporation's auditor since 2007.
New York, New York
September 13, 2018
Crowe LLP
58
PCSB Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
ASSETS
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
Investment securities:
Held to maturity investment securities, at amortized cost (fair value of $343,188 and $383,588, respectively)
Available for sale securities, at fair value
Total investment securities
Loans receivable, net of allowance for loan losses of $4,904 and $5,150, respectively
Accrued interest receivable
Federal Home Loan Bank stock
Premises and equipment, net
Deferred tax asset, net
Foreclosed real estate
Bank-owned life insurance
Goodwill
Other intangible assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits
Non-interest bearing deposits
Total deposits
Mortgage escrow funds
Advances from Federal Home Loan Bank
Other liabilities
Total liabilities
Commitments and contingencies (Notes 1, 4 and 10)
Shareholders' equity:
Preferred stock ($0.01 par value, 10,000,000 shares authorized, no shares
issued or outstanding as of June 30, 2018 and June 30, 2017)
Common stock ($0.01 par value, 200,000,000 shares authorized,
18,165,110 shares issued and outstanding as of June 30, 2018 and
June 30, 2017)
Additional paid in capital
Retained earnings
Unearned compensation - ESOP
Accumulated other comprehensive loss, net of income taxes
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to the consolidated financial statements
59
June 30,
2018
2017
$
60,684
1,461
62,145
353,183
105,504
458,687
902,336
4,358
2,050
11,598
2,622
460
23,747
6,106
433
5,645
1,480,187
1,025,574
131,883
1,157,457
8,803
18,841
7,527
1,192,628
-
$
$
59,115
1,371
60,486
383,551
111,889
495,440
809,648
3,693
3,132
12,959
4,770
977
23,179
6,106
559
5,509
1,426,458
952,109
136,352
1,088,461
8,084
42,598
7,469
1,146,612
-
-
-
182
179,045
128,365
(13,083)
(6,950)
287,559
1,480,187
$
182
177,993
121,148
(14,262)
(5,215)
279,846
1,426,458
$
$
$
$
PCSB Financial Corporation and Subsidiaries
Consolidated Statements of Operations
2018
Year Ended June 30,
2017
2016
Interest and dividend income
Loans
Investment securities
Federal funds and other
Total interest and dividend income
Interest expense
Deposits and escrow interest
FHLB advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Fees and service charges
Bank-owned life insurance
Gains on sale of securities
Settlement on acquired loan
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Communications and data processing
Professional fees
Postage, printing, stationary and supplies
Loss on other receivable
Advertising
FDIC assessment
Amortization of intangible assets
Charitable foundation contribution
Merger and acquisition related expenses
Other operating expenses
Total noninterest expense
Net income before income tax expense
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
$
$
$
$
$
$
37,798
9,266
896
47,960
5,554
769
6,323
41,637
414
41,223
1,070
568
236
-
645
2,519
19,235
5,193
1,974
1,709
578
570
456
328
126
-
-
1,947
32,116
11,626
5,022
6,604
0.39
0.39
Weighted average common shares outstanding - basic and diluted
16,802,894
See accompanying notes to the consolidated financial statements
60
$
$
33,664
6,661
633
40,958
5,083
210
5,293
35,665
823
34,842
1,178
622
-
1,615
669
4,084
16,901
5,864
1,768
1,308
547
-
529
558
143
5,000
-
1,813
34,431
4,495
1,266
3,229
N/A
N/A
N/A
32,832
5,897
315
39,044
4,613
199
4,812
34,232
1,859
32,373
1,053
458
-
-
440
1,951
16,961
5,122
1,790
1,644
681
-
388
888
158
-
790
1,843
30,265
4,059
1,133
2,926
N/A
N/A
N/A
PCSB Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Net Income
Other comprehensive (loss) income:
Unrealized gains (losses) on available for sale securities:
Net change in unrealized gains/losses before reclassification adjustment
Reclassification adjustment for gains realized in net income
Net change in unrealized gains/losses
Tax effect
Net of tax
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
Net change in unrealized gains/losses
Tax effect
Net of tax
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
Net change in unrealized gains/losses
Tax effect
Net of tax
Year Ended June 30,
2018
2017
2016
$
6,604
$
3,229
$
2,926
(1,835)
(164)
(1,999)
558
(1,441)
(735)
(735)
249
(486)
335
3,973
725
1,060
(270)
790
10
34
44
(11)
33
89
4,062
(1,381)
2,681
(755)
93
(662)
1,222
560
255
255
(55)
200
(5,022)
398
(4,624)
1,252
(3,372)
89
84
173
(249)
(76)
Total other comprehensive (loss) income
(618)
2,755
(3,248)
Comprehensive income (loss)
$
5,986
$
5,984
$
(322)
See accompanying notes to the consolidated financial statements
61
PCSB Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(amounts in thousands, except number of shares)
Balance at June 30, 2015
Net Income
Other comprehensive income
Balance at June 30, 2016
Net Income
Other comprehensive income
Issuance of common stock
Issuance of common stock to PCSB Community
Foundation
Stock purchased by the ESOP
ESOP shares committed to be released (26,975
shares)
Balance at June 30, 2017
Net Income
Other comprehensive income
Reclassification of certain tax effects on other
comprehensive income (1)
Common stock dividends declared ($0.03 per share)
Issuance of common stock (2)
ESOP shares committed to be released (117,948
shares)
Balance at June 30, 2018
Retained
Earnings
Unallocated
Common Stock
of ESOP
Other
Comprehensive
Loss
Total
Equity
Accumulated
Number of
Shares
Common
Stock
$
$
-
-
-
-
-
-
17,826,408
338,702
-
-
-
-
-
-
-
179
3
-
Additional
Paid-In
Capital
$
-
-
-
-
-
-
174,425
$
$
$
$
$
114,993
2,926
-
117,919
3,229
-
-
3,384
-
-
-
-
18,165,110
-
-
$
-
182
-
-
184
$ 177,993
-
-
$
-
121,148
6,604
-
-
-
-
-
-
-
-
-
(17)
1,117
(504)
-
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4,722) $ 110,271
2,926
(3,248)
(3,248)
(7,970) $ 109,949
3,229
2,755
174,604
-
2,755
-
-
-
3,387
(14,532)
-
454
(5,215) $ 279,846
6,604
(618)
-
(618)
(1,117)
-
-
-
(504)
(17)
(14,532)
270
(14,262) $
$
-
18,165,110
$
-
182
1,069
$ 179,045
$
-
128,365
$
1,179
(13,083) $
-
2,248
(6,950) $ 287,559
(1) The adoption of ASU 2018-02 requires the reclassification from accumulated other comprehensive income to retained earnings of certain stranded income tax
effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. Refer to Footnote 2 - Recent Accounting Pronouncements
for additional information.
(2) 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
62
PCSB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(amounts in thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan loss
Depreciation and amortization
Amortization of net premiums on securities and net deferred loan
origination costs
Deferred income tax expense (credit), net of valuation reserves
Net increase in accrued interest receivable
Net loss (gain) on sale of foreclosed real estate
Net gains on sale of securities
Write-downs on foreclosed real estate
Contribution to PCSB Community Foundation
ESOP Compensation
Earnings from cash surrender value of BOLI
Net accretion of purchase account adjustments
Other adjustments, principally net changes in other assets and liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchases of investment securities:
Held to maturity
Available for sale
Sales of investment securities available for sale
Maturities and calls of investment securities:
Held to maturity
Available for sale
Principal repayments net of disbursement for loan originations
Purchase of loans
Net redemption (purchase) of FHLB stock
Purchase of bank premises and equipment
Purchase of BOLI
Proceeds from sale of foreclosed real estate
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase (decrease) in deposits
Net increase (decrease) in short-term FHLB advances
Proceeds from long-term FHLB advances
Repayment of long-term FHLB advances
Net increase in mortgage escrow funds
Common stock dividends paid
Issuance of common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2018
2017
2016
Year Ended June 30,
$
6,604
$
3,229
$
2,926
414
1,432
1,679
2,425
(665)
7
(236)
-
-
2,248
(568)
(563)
1,834
14,611
(51,218)
(27,498)
7,511
80,997
24,202
(818)
(93,166)
1,082
(753)
-
1,249
(58,412)
69,019
(23,636)
-
(121)
719
(504)
(17)
45,460
1,659
823
1,427
1,002
(26)
(332)
(99)
-
-
3,387
454
(622)
(820)
(588)
7,835
(195,566)
(23,314)
-
72,152
32,750
(1,131)
(30,926)
(1,085)
(3,469)
-
2,121
(148,468)
(24,109)
23,636
15,000
(16,119)
1,061
-
160,072
159,541
18,908
$
60,486
62,145
$
41,578
60,486
$
1,859
1,265
943
1,299
(127)
(9)
-
30
-
-
(458)
(1,352)
(431)
5,945
(112,896)
(56,420)
-
107,656
33,058
(14,314)
(43,981)
(328)
(3,902)
(11,275)
1,030
(101,372)
52,778
(5,019)
20,100
(9,000)
385
-
-
59,244
(36,183)
77,761
41,578
See accompanying notes to the consolidated financial statements
63
PCSB Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows - (Continued)
(amounts in thousands)
Supplemental information:
Cash paid for:
Interest
Income taxes (net of refunds)
Loans transferred to foreclosed real estate and other assets
$
$
6,204
2,766
739
$
5,293
1,100
2,075
4,814
(351)
1,575
See accompanying notes to the consolidated financial statements
64
PCSB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 June 30, 2018, the significant assets of the Holding Company were the capital stock of the Bank, investments retained by the
Holding Company, 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”).
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 New York State
Department of Financial Services.
Merger with CMS Bancorp : On April 28, 2015, CMS Bancorp and CMS Bank merged with and into the Bank.
Basis of Presentation : The 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.
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.
Cash Flows : Cash and cash equivalents include cash, deposits with other financial institutions, and federal funds sold. Net cash flows are reported for customer
loan and deposit transactions, investment securities, borrowings and interest bearing deposits in other financial institutions.
Securities : Certain debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them
to maturity. All other debt and equity securities are classified as available for sale. The Company has no trading securities.
Securities available for sale are reported at fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and reported as
accumulated other comprehensive income or loss (a separate component of equity), net of related income taxes.
Premiums and discounts on debt securities are amortized to interest income on a level-yield basis over the terms of the securities. Realized gains and losses on sales
of securities are determined based on the amortized cost of the specific securities sold.
Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and more frequently when economic or market
conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the
financial condition and
65
near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amorti zed cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference
between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned cri teria, the amount
of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to
other factors, which is recognized in other comprehensive income. The credit l oss is defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans : The Company originates mortgage loans generally secured by existing single-family residential and commercial real estate properties and, to a lesser
extent, properties under construction and development. The Company also originates commercial business loans and certain types of consumer loans. A substantial
portion of the Company’s loan portfolio is secured by real estate properties primarily located in the New York counties of Putnam, Westchester, and Dutchess, and
to a lesser extent, New York City and the adjacent New York counties of Orange and Rockland. The ability of the Company’s borrowers to make principal and
interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the
Company’s concentrated lending area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net
of deferred loan fees and costs, unamortized purchase premiums and discounts, and an allowance for loan losses. Interest income is accrued on the unpaid principal
balance. Interest income on loans is discontinued at the time the loan is ninety days delinquent unless the loan is well secured and in process of collection. Loan
purchase premiums and discounts are amortized over the contractual term of the loans . When loans are placed on non-accrual status, previously accrued but unpaid
interest is reversed from income. Interest received on non-accrual loans is applied directly against the principal balance. Loans are returned to accrual status when
all the principal and interest contractually due are brought current and future payments are reasonably assured.
Loan origination fees and certain direct loan origination costs are deferred and amortized to interest income as an adjustment to yield over the contractual term of
the loans. Unamortized fees and costs on prepaid loans are recognized in interest income at the time of prepayment.
Purchased Credit Impaired Loans : The Company purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since
origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics, such as credit score,
loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in
excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual
principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, an
allowance is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future
interest income.
Allowance for Loan Losses : The allowance for loan losses is a valuation allowance for probable incurred loan losses. The allowance for loan losses is increased by
provisions for loan losses charged to income. Losses are charged to the allowance for loan losses when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. In management’s judgment, the allowance for loan losses is
adequate to absorb probable incurred losses in the existing loan portfolio.
66
Establishing the allowance for loan losses involves significant management judgments utilizing the best information available at the time. Those judgments are
subject to further examination by the Bank’s regulators. Future adjustments to the allowance for loan losses may be necessary based on changes in economic and
real estate market conditions, further information obtained regarding known problem loans, the identification of additional problem loans, and other factors.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay,
the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis
for loans evaluated under the Company’s normal loan review procedures. Loans evaluated on an individual basis for impairment may be measured by the present
value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is
collateral dependent.
The Company’s impaired loans are generally collateral dependent. If the fair value of an impaired loan is less than its recorded investment, an impairment
allowance is recognized and included in the allowance for loan losses.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the
loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the
collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for
the allowance for loan losses.
The general component of the allowance covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss
experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over a thirty-six month period, with heaviest
weight placed on the most recent periods. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio
segment. These economic factors include consideration of the following: lending policies, underwriting, charge-off and collection procedures; national and local
economic trends and conditions; trends in nature and volume of the loan portfolio; experience, ability, and depth of lending management and other relevant staff;
trends in delinquencies, classified loans and restructurings; quality of the loan review system and Board oversight; value of underlying collateral for collateral
dependent loans; existence and effect of concentrations and levels; and effects of external factors, such as competition, legal and regulatory factors. The following
portfolio segments have been identified: residential, commercial mortgage, construction, commercial, home equity and consumer and overdrafts.
The risk characteristics of each of the identified portfolio segments are as follows:
Residential
Loans
– residential loans are generally made on the basis of the borrower’s ability to make repayment from his or her employment income or
other income, and are secured by real property whose value tends to be more easily ascertainable. Repayment of residential loans is subject to adverse
employment conditions in the local economy leading to increased default rates and decreased market values from oversupply in a geographic area. In
general, these loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including
job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans.
Commercial
Mortgage
Loans
– commercial mortgage loans, including multifamily real estate loans, are secured by multifamily and nonresidential real
estate and generally have larger balances and involve a greater degree of risk than residential real estate loans. Repayment of commercial mortgage loans
depend on the
67
global cash flow analysis of the borrower and the net operating income of the property, the borrower’s expertise, credit history and profitability, and the
value of the underlying property. Of primary conce rn in commercial real estate lending is the borrower’s creditworthiness and the cash flow generated
from the property securing the loan. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse
conditions in the real estate market or the economy. Commercial real estate is also subject to adverse market conditions that cause a decrease in market
value or lease rates, obsolescence in location or function and market conditions associated with over supply of units in a specific region.
Construction
Loans
– construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved,
occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of
construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to
permit completion of the building. If the estimate of value proves to be inaccurate, the value of the building may be insufficient to assure full repayment if
liquidation is required. If foreclosure is required on a building before or at completion due to a default, there can be no assurance that all of the unpaid
balance of, and accrued interest on, the loan as well as related foreclosure and holding costs will be recovered.
Commercial
Loans
– commercial loans are generally of higher risk than other types of loans and typically are made on the basis of the borrower’s ability to
make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend
substantially on the success of the business itself. Furthermore, any collateral securing such loans may depreciate over time, may be difficult to appraise,
and may fluctuate in value.
Home
Equity
Lines
of
Credit
– home equity lines of credit consist of both fixed and variable interest rate products. These are primarily home equity loans
to residential mortgage customers within the footprint of the primary lending territory. These loans generally will not exceed a combined (i.e., first and
second mortgage) loan-to-value ratio of 75 percent at origination.
Consumer
and
overdraft
loans
– consumer loans generally have shorter terms and higher interest rates than one-to-four family mortgage loans. In addition,
consumer loans expand the products and services we offer to better meet the financial services needs of our customers. Consumer loans generally involve
greater credit risk than residential mortgage loans because of the difference in the underlying collateral. Repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage to, loss of, or
depreciation in the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections depend on the borrower’s personal financial stability. Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Foreclosed Real Estate : Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value, less estimated costs to sell, when acquired,
establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent
to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Federal Home Loan Bank (FHLB) Stock : The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level
of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated
for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Premises and Equipment : Premises and equipment are reported at cost less accumulated depreciation and amortization, except for land which is carried at cost.
Depreciation expense is recognized on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is
recognized on a straight-line basis over the term of the lease or the life of the improvement, whichever is shorter. Costs incurred to improve or extend the life of the
existing assets are capitalized. Repairs and maintenance, as well as renewals and replacements of a routine nature, are charged to expense as incurred.
68
Bank Owned Life Insurance (BOLI) : BOLI policies are reflected on the consolidated statements of financial condition at cash surrender value, net of any deferred
fees or loans. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consoli
dated statements of operations and are not subject to income taxes.
Goodwill and Other Intangible Assets : Goodwill resulting from business combinations is determined as the excess of the fair value of the consideration transferred,
plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for
impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company
has selected June 30th as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives
to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Other intangible assets, consisting of a core deposit intangible asset arising from a whole bank acquisition, are amortized on an accelerated method over their
estimated useful lives of 10 years.
Loan Commitments and Related Financial Instruments : Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Income Taxes : Income tax expense is the total of current period income tax due or refundable and the change in net deferred tax assets. Deferred tax assets and
liabilities are recognized for the estimated future tax effects attributable to “temporary differences” between the financial statement carrying amounts and tax bases
of existing assets and liabilities. Deferred tax assets are reduced by a valuation allowance if, based on an analysis of available evidence, management determines
that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in future years. The effect on deferred tax assets and
liabilities of a change in tax laws or rates is recognized in the period that includes the enactment date of the change.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Employee Benefit Plans: The Company maintains the PCSB Bank 401(k) Plan (the “401(k) Plan”) for substantially all of its employees, and the Retirement Plan of
PCSB Bank (the “Employee Retirement Plan”), a defined benefit pension plan, as well as Supplemental Executive Retirement Plans (the “SERPs”), all of which are
tax qualified under the Internal Revenue Code.
Employee 401(k) expense is the amount of matching contributions. Pension expense is the net of service and interest cost, return on plan assets and amortization of
gains and losses not immediately recognized. SERP expense is the net of interest cost and service cost, which allocates the benefits over years of service.
The Holding Company and Bank maintain the PCSB Bank Employee Stock Ownership Plan (the “ESOP”). Compensation expense related to the ESOP is recorded
during the period in which the shares become committed to be released to participants. The compensation expense is measured based upon the average fair market
value of the
69
stock during the period, and, to the extent that the fair value of the shares committed to be released differs from the original cost of such shares, the difference is r
ecorded as an adjustment to additional paid-in capital.
Loss Contingencies : Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a
material effect on the financial statements.
Fair Value of Financial Instruments : Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the
estimates.
Segment Reporting : While management monitors the revenue streams of the various products and services, the identifiable segments are not material and
operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by
management to be aggregated in one reportable operating segment.
Reclassifications : Certain prior period amounts have been reclassified to conform to the current presentation. Reclassifications had no effect on prior period net
income or equity.
Earnings per share : Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares
outstanding for the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculation. There were no dilutive instruments at June 30,
2018 or 2017. Due to the IPO taking place on April 20, 2017, earnings per share for the period from IPO to June 30, 2017 was deemed not meaningful by
management.
N ote 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.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with
Customers,” and was later amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and 2016-20. These updates provide a comprehensive
framework for addressing revenue recognition issues that can be applied to all contracts with customers. The amendments also include improved disclosures to
enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized.
While the guidance in ASU 2014-09 supersedes most existing industry-specific revenue recognition accounting guidance, much of PCSB Bank’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.
70
The Company has evaluated the impact of ASU 2014-09 and the amendments upon adop tion 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 tha t, based on the modified retrospective method, a cumulative-effect adjustment to opening retained earnings as a result of adopting this
standard is not needed. ASU 2014-09 will require additional disclosures beginning with the quarter ending September 30, 2018.
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 Company has evaluated the impact of ASU
2016-01 and subsequent amendments upon adoption on July 1, 2018 and has concluded that there is not a material impact on the Company’s consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 affects any entity that enters into a lease and is intended to increase the transparency and
comparability of financial statements among organizations. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a
lease liability for those leases previously classified as operating leases. The lease asset would represent the right to use the underlying asset for the lease term and
the lease liability would represent the discounted value of the required lease payments to the lessor. The ASU would also require entities to disclose key
information about leasing arrangements. The amendments in this update will be effective for the Company for the fiscal year beginning on July 1, 2019, including
interim periods within that fiscal year. 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.
71
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 s ervice 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 sepa rately from the service cost component and outside a subtotal of income from operations, if one is presented.
Management has evaluated the impact of ASU 2017-07 upon adoption on July 1, 2018 and has concluded that there is not a material impact on the Comp any’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.
On February 14, 2018, the FASB issued ASU 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of certain tax effects
from accumulated other comprehensive income." The ASU intended to help organizations reclassify certain stranded income tax effects in accumulated other
comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. The ASU requires the reclassification of stranded tax effects within accumulated other
comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the TAX Cuts and Job
Act 2017 (or portion thereof) is recorded. The amount of the reclassification is the difference between the historical corporate income tax rate (34 percent) and the
newly enacted 21 percent corporate income tax rate. The Company has elected to early adopt the ASU as of March 31, 2018, resulting in a $1.1 million
reclassification between accumulated other comprehensive income and retained earnings. There is no impact to current earnings and no prior period information
has been retroactively adjusted as a result of implementing the ASU. No additional reclassifications will be required in the future periods as a result of this
guidance. The ASU is applied specifically to the impacts of the Tax Cuts and Jobs Act of 2017 and is not effective for other or future state or federal tax law
changes.
Note 3. Shareholders' Equity
The Company completed its 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 approximately $3.7 million, which resulted in net proceeds of approximately $174.6 million prior to the contribution to PCSB
Community Foundation. The Company lent approximately $14.5 million to the ESOP and retained approximately $87.3 million of the net proceeds of the offering
prior to the contribution to PCSB Community Foundation. The remainder of the net proceeds was contributed to the Bank. Prior to the IPO, the Company had no
outstanding shares.
72
Note 4 . Investment Securities
The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity securities at June 30, 2018 and 2017
were as follows:
Available for sale:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Equity securities
Total available for sale
Held to maturity:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Mortgage-backed securities – collateralized mortgage obligations
Mortgage-backed securities – commercial
Total held to maturity
Available for sale:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Equity securities
Total available for sale
Held to maturity:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Mortgage-backed securities – collateralized mortgage obligations
Mortgage-backed securities – commercial
Total held to maturity
Amortized
Cost
June 30, 2018
Gross Unrealized/Unrecognized
Gains
Losses
(Dollars in thousands)
$
$
$
$
$
$
$
$
64,389
8,406
34,619
32
107,446
122,048
4,000
140,478
53,547
33,110
353,183
$
$
$
$
-
-
81
-
81
-
-
32
-
11
43
$
$
$
$
(959)
(171)
(893)
-
(2,023)
(2,274)
(126)
(4,846)
(1,815)
(977)
(10,038)
$
$
$
$
Amortized
Cost
June 30, 2017
Gross Unrealized/Unrecognized
Losses
Gains
(Dollars in thousands)
63,630
8,460
39,710
32
111,832
155,559
999
143,452
59,476
24,065
383,551
$
$
$
$
31
58
363
-
452
23
-
828
146
412
1,409
$
$
$
$
(216)
(36)
(143)
-
(395)
(574)
-
(497)
(235)
(66)
(1,372)
$
$
$
$
Fair
Value
63,430
8,235
33,807
32
105,504
119,774
3,874
135,664
51,732
32,144
343,188
Fair
Value
63,445
8,482
39,930
32
111,889
155,008
999
143,783
59,387
24,411
383,588
For the year ended June 30, 2018, the Company sold securities with a carrying amount of $8.6 million, resulting in $236,000 of net realized gains. Included was a
disposal of $1.3 million of securities classified as held to maturity, resulting in net realized gains of $72,000. 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, comparing both principal and interest over terms. There were no sales of or realized gains or losses on
investment securities for the years ended June 30, 2017 or 2016.
73
The following table presents the fair value and carrying amount of debt securities at June 30, 2018 and 2017, 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 separat ely.
June 30, 2018:
1 year or less
1 to 5 years
5 to 10 years
Mortgage-backed securities and other
Total
June 30, 2017:
1 year or less
1 to 5 years
5 to 10 years
Mortgage-backed securities and other
Total
Held to maturity
Available for sale
Carrying
Amount
Fair
Value
Amortized
Cost
Fair
Value
(in
thousands)
25,504
96,544
-
231,135
353,183
$
$
25,342
94,432
-
223,414
343,188
$
$
12,402
58,393
2,000
34,619
107,414
$
$
12,353
57,335
1,977
33,807
105,472
Held to maturity
Available for sale
Carrying
Amount
Fair
Value
Amortized
Cost
Fair
Value
(in
thousands)
50,486
106,073
-
226,992
383,551
$
$
50,413
105,594
-
227,581
383,588
$
$
16,005
54,085
2,000
39,710
111,800
$
$
15,988
53,975
1,964
39,930
111,857
$
$
$
$
Securities pledged had carrying amounts of $140.5 million and $95.5 million at June 30, 2018 and 2017, respectively, and were pledged principally to secure
FHLB advances and public deposits.
74
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 unreali zed loss position at June 30, 2018 and 2017:
Available for sale:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Total available for sale
Held to maturity:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Mortgage-backed securities – collateralized
mortgage obligations
Mortgage-backed securities – commercial
Total held to maturity
Available for sale
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Total available for sale
Held to maturity
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Mortgage-backed securities – collateralized
mortgage obligations
Mortgage-backed securities – commercial
Total held to maturity
Less than 12 months
Fair
Value
Unrealized/
Unrecognized
Loss
June 30, 2018
Greater than 12 months
Fair
Value
Unrealized/
Unrecognized
Loss
(in
thousands)
Total
Unrealized/
Unrecognized
Loss
Fair
Value
$
$
$
41,762
6,258
13,397
61,417
46,163
3,874
102,496
31,124
21,762
$ 205,419
$
$
$
$
$
$
$
(569)
(148)
(379)
(1,096)
(871)
(126)
(3,338)
21,668
1,977
14,718
38,363
71,611
-
32,490
(884)
(582)
(5,801)
20,608
8,629
$ 133,338
$
$
$
$
(390)
(23)
(514)
(927)
$
$
63,430
8,235
28,115
99,780
(1,403)
-
(1,508)
$ 117,774
3,874
134,986
(931)
(395)
(4,237)
51,732
30,391
$ 338,757
$
$
$
$
(959)
(171)
(893)
(2,023)
(2,274)
(126)
(4,846)
(1,815)
(977)
(10,038)
Less than 12 months
Fair
Value
Unrealized/
Unrecognized
Loss
June 30, 2017
Greater than 12 months
Fair
Value
Unrealized/
Unrecognized
Loss
(in
thousands)
Total
Unrealized/
Unrecognized
Loss
Fair
Value
$
$
41,900 $
1,964
18,861
62,725
$
(200) $
(36)
(111)
(347)
$
3,993 $
-
3,200
7,193
$
$ 113,511 $
999
39,754
26,622
9,092
(531) $
-
(467)
5,981 $
-
1,626
(141)
(66)
4,444
-
$ 189,978
$
(1,205)
$
12,051
$
(16)
-
(32)
(48)
(43)
-
(30)
$
$
45,893
1,964
22,061
69,918
$ 119,492
999
41,380
(94)
-
(167)
31,066
9,092
$ 202,029
$
$
$
$
(216)
(36)
(143)
(395)
(574)
0
(497)
(235)
(66)
(1,372)
For the year ended June 30, 2018, the Company’s securities portfolio consisted of $458.7 million in securities, of which 254 securities with a fair value of $438.5
million were in an unrealized loss position. The majority of unrealized losses are related to the Company’s U.S. Government and agency obligations and mortgage-
backed securities.
For the year ended June 30, 2017, the Company’s securities portfolio consisted of $495.4 million in securities, of which 156 securities with a fair value of $271.9
million were in an unrealized loss position. The majority of unrealized losses are related to the Company’s U.S. Government and agency obligations and mortgage-
backed securities.
75
There were no securities for which the Company believes it is not probable that it will c ollect all amounts due according to the contractual terms of the security as
of June 30, 2018 and 2017. Management believes the unrealized losses are primarily a result of changing 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-temporari ly impaired as of June 30, 2018 and 2017.
Note 5. Loans Receivable
Loans receivable are summarized as follows at June 30 (in thousands):
Mortgage loans:
Residential
Commercial
Construction
Net deferred loan origination costs
Total mortgages
Commercial and consumer loans:
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Net deferred loan origination costs
Total commercial and consumer loans
Total loans receivable
Allowance for loan losses
Loans receivable, net
June 30,
2018
2017
250,578
495,265
17,352
1,041
764,236
104,135
37,395
745
729
143,004
907,240
(4,904)
902,336
$
$
217,778
437,651
22,404
397
678,230
93,631
41,927
233
777
136,568
814,798
(5,150)
809,648
$
$
In 2015, the Bank completed a merger with CMS Bancorp and its wholly owned subsidiary, CMS Bank. References to acquired loans in this note pertain only to
those loans acquired as part of the merger.
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended June 30, 2018, 2017 and 2016 (in thousands):
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Acquired:
Residential
Total
Beginning
Allowance
Provision
(Credit)
Charge-offs
Recoveries
Ending
Allowance
For the year ended June 30, 2018
$
$
360
2,589
1,150
949
76
-
$
161
114
352
(335)
45
30
$
(136)
-
(997)
(54)
(60)
(23)
26
5,150
$
47
414
$
-
(1,270)
$
$
1
370
-
220
19
-
-
610
$
$
386
3,073
505
780
80
7
-
73
4,904
76
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Acquired:
Residential
Commercial loans
Consumer and overdrafts
Total
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total
Beginning
Allowance
Provision
(Credit)
Charge-offs
Recoveries
Allowance
Ending
For the year ended June 30, 2017
$
$
$
$
237
2,149
269
1,313
73
1
-
-
-
4,042
$
$
290
421
989
(944)
3
(5)
64
2
3
823
$
$
$
(237)
-
(108)
(741)
-
-
(38)
(2)
(3)
(1,129)
$
70
19
-
1,321
-
4
-
-
-
1,414
Beginning
Allowance
Provision
(Credit)
Charge-offs
Recoveries
For the year ended June 30, 2016
193
1,766
100
1,793
69
-
3,921
$
$
444
215
(23)
1,172
28
23
1,859
$
$
(400)
(10)
-
(1,677)
(24)
(22)
(2,133)
$
$
-
178
192
25
-
-
395
$
$
$
$
360
2,589
1,150
949
76
-
-
26
-
-
5,150
Ending
Allowance
237
2,149
269
1,313
73
1
4,042
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 June 30, 2018 and June 30, 2017 (in thousands):
Loans
June 30, 2018
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total
Individually
Evaluated for
Impairment
$
$
2,360
1,683
2,260
2,451
360
-
9,114
$
Collectively
Evaluated for
Impairment
246,913
492,105
15,092
101,684
36,867
745
893,406
$
Acquired With
Deteriorated
Credit Quality
1,305
$
1,477
-
-
168
-
2,950
$
Total
$ 250,578
495,265
17,352
104,135
37,395
745
$ 905,470
77
$
Individually
Evaluated for
Impairment
154
-
276
9
12
-
451
$
$
Collectively
Evaluated for
Impairment
232
3,073
229
771
68
7
4,380
$
Acquired With
Deteriorated
Credit Quality
73
$
-
-
-
-
-
73
$
Total
459
3,073
505
780
80
7
4,904
$
$
Loans
June 30, 2017
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total
Individually
Evaluated for
Impairment
$
$
4,471
2,411
3,661
6,169
610
-
17,322
$
Collectively
Evaluated for
Impairment
211,983
433,416
18,743
87,420
41,140
233
792,935
$
Acquired With
Deteriorated
Credit Quality
1,324
$
1,824
-
42
177
-
3,367
$
Total
$ 217,778
437,651
22,404
93,631
41,927
233
$ 813,624
$
Individually
Evaluated for
Impairment
131
-
997
9
5
-
1,142
$
$
Collectively
Evaluated for
Impairment
229
2,589
153
940
71
-
3,982
$
Acquired With
Deteriorated
Credit Quality
26
$
-
-
-
-
-
26
$
Total
386
2,589
1,150
949
76
-
5,150
$
$
The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by class
of loans as of and for the years ended June 30, 2018, 2017 and 2016 (in thousands):
With no related allowance recorded:
Residential
Commercial
Commercial loans
Home equity lines of credit
With an allowance recorded:
Residential
Construction
Commercial loans
Home equity lines of credit
Total
With no related allowance recorded:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
With an allowance recorded:
Residential
Construction
Commercial loans
Home equity lines of credit
Total
Unpaid
Principal
Balance
June 30, 2018
Recorded
Investment
Allowance
for Loan
Losses
$
$
$
$
1,659
1,765
2,254
341
742
3,257
353
84
10,455
Unpaid
Principal
Balance
4,216
2,935
404
9,433
599
395
3,257
1,190
11
22,440
$
$
$
$
1,576
1,683
2,098
341
784
2,260
353
19
9,114
June 30, 2017
Recorded
Investment
4,014
2,411
404
4,979
599
457
3,257
1,190
11
17,322
$
$
$
$
-
-
-
-
154
276
9
12
451
Allowance
for Loan
Losses
-
-
-
-
-
131
997
9
5
1,142
78
With no related allowance recorded:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
With an allowance recorded:
Residential
Construction
Commercial loans
Home equity lines of credit
Total
For the year ended
June 30, 2018
For the year ended
June 30, 2017
For the year ended
June 30, 2016
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
3,041
2,350
93
3,457
507
453
2,720
1,491
11
14,123
$
$
184 $
248
17
1,049
22
15
-
66
-
1,601 $
4,238
2,448
406
5,065
599
432
3,015
1,224
11
17,438
$
$
42 $
137
12
239
(2)
15
71
61
-
575 $
5,577
9,324
13
10,755
430
-
132
422
-
26,653
$
$
6
88
-
71
-
-
-
12
-
177
The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days still on accrual status, by class of loans as of June 30,
2018 and June 30, 2017 (in thousands):
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Acquired:
Residential
Commercial
Home equity lines of credit
Total
Nonaccrual
June 30,
2018
June 30,
2017
Loans Past Due Over 90 Days
and Still Accruing
June 30,
2018
June 30,
2017
$
$
604
262
2,260
788
45
1,308
532
303
6,102
$
$
2,581
-
3,661
2,959
302
1,776
497
296
12,072
$
$
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
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 $1.8 million and $2.7 million as of June 30, 2018 and
June 30, 2017, 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.
79
The following tables present the aging of the recorded investment in past due loans by class of loans as of June 30, 2018 and June 30, 2017 (in thousands):
30-59
60-89
Days Past Due
Days Past Due
June 30, 2018
90 Days or
More Past
Due
Total Past
Due
Current
Total
$
$
- $
-
-
-
-
-
-
-
-
-
-
30
-
30
30 $
394 $
-
-
-
-
-
394
232
-
-
-
-
-
232
626 $
210 $
262
2,260
500
45
-
3,277
1,806
1,112
-
-
296
-
3,214
6,491 $
604 $
262
2,260
500
45
-
3,671
2,038
1,112
-
-
326
-
3,476
7,147 $
194,986 $
420,320
15,092
102,767
32,311
733
766,209
52,950
73,571
-
868
4,713
12
132,114
898,323 $
195,590
420,582
17,352
103,267
32,356
733
769,880
54,988
74,683
-
868
5,039
12
135,590
905,470
30-59
Days Past Due
60-89
Days Past Due
June 30, 2017
90 Days or
More Past
Due
Total Past
Due
Current
Total
$
$
94 $
-
-
-
-
-
94
237
-
-
-
-
-
237
331 $
275 $
-
-
-
199
-
474
463
-
-
-
-
-
463
937 $
1,973 $
-
3,661
544
103
-
6,281
1,472
1,054
-
-
296
2,822
9,103 $
2,342 $
-
3,661
544
302
-
6,849
2,172
1,054
-
-
296
-
3,522
10,371 $
153,390 $
355,247
18,743
88,449
35,246
211
651,286
59,874
81,350
-
4,638
6,083
22
151,967
803,253 $
155,732
355,247
22,404
88,993
35,548
211
658,135
62,046
82,404
-
4,638
6,379
22
155,489
813,624
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total originated
Acquired:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total acquired
Total
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total originated
Acquired:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total acquired
Total
Troubled Debt Restructurings
The terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the
following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new
debt with similar risk; or a permanent reduction of the recorded investment in the loan.
80
As of June 30, 2018 and June 30, 2017, the Company had 12 and 20 loans classified as troubled debt restructurings totaling $3.8 million and $9.9 million,
respectively. The Company has allocated $139,000 and $145,000, respectively, of specific reserves to customers whose loan terms have been modified in trouble d
debt restructurings as of June 30, 2018 and June 30, 2017, and has not committed to lend additional amounts to customers with outstanding loans that are classified
as troubled debt restructurings.
The following table presents loans by modified in troubled debt restructurings that occurred during the years ended June 30, 2018, 2017 and 2016 (dollars in
thousands):
Year ended June 30, 2018:
Commercial loans
Total
Year ended June 30, 2017:
Residential
Commercial loans
Total
Year ended June 30, 2016:
Residential
Commercial
Commercial loans
Home equity lines of credit
Total
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
loans
1
1
1
1
2
3
1
1
1
4
$
$
$
$
$
$
275 $
275 $
165 $
276
441 $
1,697 $
1,178
64
200
3,139 $
289
289
210
276
486
1,697
1,178
64
200
3,139
The Company had two troubled debt restructurings, both commercial loans, for which there was a payment default in the year ended June 30, 2018 that were
modified in the twelve months prior to default, which resulted in a $2,000 increase to the allowance for loan loss. There were two troubled debt restructurings, one
residential mortgage and one home equity line of credit, for which there was a payment default in the year ended June 30, 2017 that were modified in the twelve
months prior to default, and resulted in no increase to the allowance for loan loss. There was one such default, on a residential mortgage, in the year ended June 30,
2016 which resulted in no increase to the allowance for loan losses.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment
default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial
information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes
loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans.
This analysis is performed on a monthly basis. The Company utilized the same grading process for acquired loans as it does for originated loans. The Company
uses the following definitions for risk ratings:
Special
Mention
–
Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
81
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 inst itution will sustain some loss if the deficiencies are not corrected.
Doubtful
–
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process and loans in groups of homogenous loans are considered
to be pass rated loans. These loans are monitored based on delinquency and performance. Based on the most recent analysis performed, the risk category of loans
by class of loans is as follows (in thousands):
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total originated
Acquired:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total acquired
Total
Pass
Special
Mention
Substandard
Total
June 30, 2018
$
$
194,341
418,370
15,092
98,205
32,167
733
758,908
51,858
71,832
-
857
4,641
12
129,200
888,108
$
$
571
-
-
167
144
-
882
249
842
-
11
-
-
1,102
1,984
$
$
678
2,212
2,260
4,895
45
-
10,090
2,881
2,009
-
-
398
-
5,288
15,378
$
$
195,590
420,582
17,352
103,267
32,356
733
769,880
54,988
74,683
-
868
5,039
12
135,590
905,470
82
Originated:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total originated
Acquired:
Residential
Commercial
Construction
Commercial loans
Home equity lines of credit
Consumer and overdrafts
Total acquired
Total
Purchased Credit Impaired Loans
Pass
Special
Mention
Substandard
Total
June 30, 2017
$
$
153,165
352,203
18,743
79,406
35,246
211
638,974
58,665
80,082
-
4,638
5,906
22
149,313
788,287
$
$
-
134
-
-
58
-
192
-
-
-
-
-
-
-
192
$
$
2,567
2,910
3,661
9,587
244
18,969
3,381
2,322
-
-
473
-
6,176
25,145
$
$
155,732
355,247
22,404
88,993
35,548
211
658,135
62,046
82,404
-
4,638
6,379
22
155,489
813,624
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 June 30, 2018 and 2017 is as follows (in thousands):
Residential
Commercial
Commercial loans
Home equity lines of credit
Carrying amount, net of allowance of $73 and $26, respectively
Accretable yield, or income expected to be collected, for acquired loans is as follows (in thousands):
June 30,
2018
June 30,
2017
1,232
1,477
-
168
2,877
$
$
1,298
1,824
42
177
3,341
$
$
Beginning balance
New loans acquired
Accretion income
Reclassification from non-accretable difference
Disposals
Ending balance
83
2018
Year ended June 30,
2017
2016
403 $
-
(70)
5
(93)
245 $
578 $
-
(190)
15
-
403
$
713
-
(185)
132
(82)
578
$
$
Note 6. Premises and Equipment
Premises and equipment are summarized as follows at June 30 (in thousands):
Land
Building and Leasehold improvements
Furniture, fixtures and equipment
Construction and improvements in process
Less: accumulated depreciation and amortization
Total Bank premises and equipment, net
2018
2017
$
$
1,997
13,430
6,096
355
21,878
(10,280)
11,598
$
$
1,997
11,128
5,841
3,015
21,981
(9,022)
12,959
Depreciation expense was $1.3 million, $1.3 million and $1.1 million for the years ended June 30, 2018, 2017 and 2016, respectively.
Note 7 . Goodwill and Intangible Assets
The change in goodwill during the years ended June 30, 2018, 2017 and 2016 are as follows (in thousands):
Balance at July 1
Adjustment to CMS goodwill
Impairment
Total at June 30
2018
2017
2016
$
$
6,106
-
-
6,106
$
$
6,106
-
-
6,106
$
$
5,843
263
-
6,106
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Company tests for goodwill impairment on an annual basis as of
June 30 th . No impairment was recorded on goodwill for 2018, 2017, or 2016.
Acquired Intangible Assets: Acquired intangible assets were as follows at June 30 (in thousands):
Amortized intangible assets:
Core deposit intangible
2018
2017
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
887 $
(454) $
887 $
(328)
Aggregate amortization expense was $126,000, $143,000 and $158,000 for the years ended June 30, 2018, 2017 and 2016, respectively.
Estimated amortization expense for each of the next five fiscal years ended June 30 (in thousands):
2019
2020
2021
2022
2023
$
110
94
78
62
46
84
Note 8 . Deposits
Deposit balances are summarized as follows at June 30, 2018 and 2017 (in thousands):
Demand
NOW Accounts
Money market accounts
Savings
Time deposits
Total
2018
131,883
117,875
49,885
465,441
392,373
1,157,457
$
$
2017
136,361
115,527
29,097
512,697
294,779
1,088,461
$
$
Time deposits that meet or exceed the FDIC insurance limit of $250,000 were $116.0 million and $49.2 million at June 30, 2018 and 2017, respectively.
Scheduled maturities of time deposits were as follows as of June 30, 2018 and 2017 and exclude fair value adjustments on acquired time deposits (in thousands):
Within 1 year
1 year to 2 years
2 years to 3 years
3 years to 4 years
4 years to 5 years
Thereafter
Total
2018
2017
$
$
183,276
49,350
56,746
56,458
46,339
204
392,373
$
$
107,097
62,331
31,143
41,508
52,503
197
294,779
Deposits of local governments held by PCSB Commercial Bank were $39.1 million and $38.4 million at June 30, 2018 and 2017, respectively. Additionally, as of
June 30, 2018, deposits included $60.0 million of brokered time deposits with remaining maturities between five and 47 months. We had no brokered deposits as of
June 30, 2017.
Note 9 . FHLB and Other Borrowings
Borrowings consist of advances from the Federal Home Loan Bank of New York. As of June 30, 2018, FHLB advances consisted of $15.0 million of short and
long-term advances with original maturities ranging from 3 to 18 months, as well as a $3.8 million amortizing term loan with a balloon payment of $2.8 million in
2026. The maturity schedule of advances is summarized as follows as of June 30 (dollars in thousands):
Within 1 year
1 year to 2 years
2 years to 3 years
3 years to 4 years
4 years to 5 years
Thereafter
Total
2018
2017
Amount Due
Weighted
Avg. Rate
Amount Due
Weighted
Avg. Rate
$
$
10,125
5,128
131
135
138
3,184
18,841
1.70% $
1.81
2.62
2.62
2.62
2.62
1.91% $
23,757
10,125
5,128
131
135
3,322
42,598
1.27%
1.70
1.81
2.62
2.62
2.62
1.55%
As a member of the FHLB of New York, the Bank had access to funds in the form of FHLB advances of approximately $314.9 million and $350.7 million
from the Federal Home Loan Bank of New York, at June 30, 2018
85
and June 30, 2017, $18.8 million and $42.6 million of which was outstanding as of June 30, 2018 and June 30, 2017, respectively. Advances are secured by the
Bank’s investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral cert ain qualifying assets (such
as U.S. Government agency and MBSs) with a discounted fair value, as defined, at least equal to 110% of any outstanding advances.
At June 30, 2018, the Bank also had access to funds of approximately $122.1 million in the form of secured borrowings through the discount window of the Federal
Reserve Bank of New York. Collateral for these borrowings may include qualifying assets, such as one-to-four family residential loans. The Bank had no
outstanding FRB borrowings as of June 30, 2018 or 2017.
Note 10 . Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk : The Company is a party to commitments to originate loans, unused lines of credit and standby letters of credit
(“credit-related financial instruments”) that involve, to varying degrees, elements of credit risk and interest rate risk in addition to the risks associated with loans
recognized in the consolidated statements of condition. Substantially all of these credit-related financial instruments have been entered into with customers in the
Company’s primary lending area described in Note 1 .
The contract amounts of credit-related financial instruments reflect the extent of the Company’s involvement with those classes of financial instruments. The
Company’s exposure to credit loss in the event of non-performance by the counterparty is represented by the contract amount. The Company uses the same credit
policies in extending commitments, lines of credit and standby letters of credit as it does for on-balance sheet instruments.
The contract amounts of credit-related financial instruments at June 30, 2018 and 2017, are summarized below (in thousands):
Commitments to originate loans
Unused lines of credit
Standby letter of credit
2018
2017
$
$
102,644
56,553
1,420
77,600
45,439
705
Lines of credit (including undisbursed construction loans) and commitments to originate loans are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. These agreements generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since certain lines of credit and commitments are expected to expire without being funded, the contract amounts do not necessarily represent future cash
requirements. In extending lines of credit and commitments, the Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.
The Company issues financial standby letters of credit that are irrevocable undertakings by the Company to guarantee payment of a specified financial obligation.
Most of the Company’s financial standby letters of credit arise in connection with lending relationships and have terms of one year or less. The maximum potential
future payments the Company could be required to make equals the contract amount of standby letters of credit shown in the preceding table. The Company’s
recognized liability for financial standby letters of credit was insignificant at June 30, 2018 and 2017.
86
Operating Lease Commitments : The Company leases certain branch properties under operating leases. Rent expense was $1.9 million, $2.7 million and $2.1
million for the years ended June 30, 2018, 2017 an d 2016, respectively. Rent commitments, before considering renewal options that generally are present, were as
follows as of June 30, 2018 (in thousands):
Within 1 year
1 year to 2 years
2 year to 3 years
3 year to 4 years
4 year to 5 years
Thereafter
Total
$
$
2,145
2,026
1,737
1,675
1,639
8,283
17,505
Legal Proceedings : In the normal course of business, the Company is involved in certain legal proceedings. In the opinion of management, the consolidated
financial statements of the Company are not expected to be affected materially by the outcome of such legal proceedings.
Note 11 . Comprehensive 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
Balance at July 1, 2017
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Tax effect
Net other comprehensive income
Reclassification of certain tax effects on other comprehensive income (1)
Balance at June 30, 2018
$
$
37
(1,835)
(164)
558
(1,441)
(132)
(1,536)
$
$
(5,002)
335
725
(270)
790
(938)
(5,150)
$
$
(250)
10
34
(11)
33
(47)
(264)
Balance at July 1, 2016
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Tax effect
Net other comprehensive income
Balance at June 30, 2017
Net unrealized
gain (loss) on
available for sale
securities
Unrealized loss
on pension
benefits
Unrealized loss
on SERP
benefits
523
(735)
—
249
(486)
37
$
$
(7,683)
3,973
89
(1,381)
2,681
(5,002)
$
$
(810)
(755)
93
1,222
560
(250)
$
$
87
Total
(5,215)
(1,490)
595
277
(618)
(1,117)
(6,950)
Total
(7,970)
2,483
182
90
2,755
(5,215)
$
$
$
$
Balance at July 1, 2015
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Tax effect
Net other comprehensive income
Balance at June 30, 2016
Net unrealized
gain (loss) on
available for sale
securities
Unrealized loss
on pension
benefits
Unrealized loss
on SERP
benefits
$
$
323
255
—
(55)
200
523
$
$
(4,311)
(5,022)
398
1,252
(3,372)
(7,683)
$
$
(734)
89
84
(249)
(76)
(810)
$
$
Total
(4,722)
(4,678)
482
948
(3,248)
(7,970)
(1) Represents the impact of adopting ASU 2018-02 requiring the reclassification of certain stranded income tax effects in accumulated other comprehensive
income resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings in each period in which the effect of
the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) is recorded. The amount of the reclassification is
the difference between the historical corporate income tax rate (34 percent) and the newly enacted 21 percent corporate income tax rate. The reclassification is as of
March 31, 2018; no prior period information has been retroactively adjusted as a result of implementing the ASU.
Note 12 . Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the
period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. There were no potentially dilutive common stock equivalents
during the year ended June 30, 2018. Due to the IPO taking place on April 20, 2017, earnings per share for the year-ended June 30, 2017 was deemed not
meaningful by management.
Year ended June 30, 2018
(dollars in thousands,
except per share data)
Net income applicable to common stock
$
6,604
Average number of common shares outstanding
Less: Average unallocated ESOP shares
Average number of common shares outstanding used to calculate basic earnings per common
share
Earnings per Common share:
Basic
Diluted
18,165,110
1,362,216
16,802,894
0.39
0.39
$
$
88
Note 13 . 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 costs to sell when acquired, establishing a
new cost basis. These assets are subsequently accounted for at lower cost or fair value, less estimated costs to sell. Fair value is commonly based on recent real
estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches
including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the
inputs for determining fair value.
Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified
residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of
the Credit Department, as well as a third-party specialist, where deemed appropriate, reviews the assumptions and approaches utilized in the appraisal as well as the
overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Once appraisals are considered
appropriate, management discounts the appraised value for estimated selling costs, such as legal, broker, and property maintenance and insurance costs. The most
recent analysis performed indicated discount rates ranging between 10% and 20% should be applied to properties with appraisals performed.
89
Assets and liabilities measured at fair value are summarized below (in thousands):
June 30, 2018:
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Equity securities
Total assets at fair value
Measured on a non-recurring basis:
Impaired loans:
Residential mortgages
Construction
Commercial loans
Home equity lines of credit
Foreclosed real estate
Total assets at fair value
June 30, 2017
Measured on a recurring basis:
Available for sale securities:
U.S. Government and agency obligations
Corporate and other debt securities
Mortgage-backed securities – residential
Equity securities
Total assets at fair value
Measured on a non-recurring basis:
Impaired loans:
Residential mortgages
Construction
Commercial loans
Home equity lines of credit
Foreclosed real estate
Total assets at fair value
Level 1
Fair Value Measurements
Level 2
Level 3
Total
$
$
$
$
$
$
$
$
Level 1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
63,430
8,235
33,807
32
105,504
-
-
-
-
-
-
$
$
$
$
-
-
-
-
-
688
1,984
845
7
460
3,984
Fair Value Measurements
Level 2
Level 3
63,445
8,482
39,930
32
111,889
-
-
-
-
-
-
$
$
$
$
-
-
-
-
-
1,126
2,260
1,681
5
977
6,049
$
$
$
$
$
$
$
$
63,430
8,235
33,807
32
105,504
688
1,984
845
7
460
3,984
Total
63,445
8,482
39,930
32
111,889
1,126
2,260
1,681
5
977
6,049
Impaired loans in the table above had a carrying amount of $3.9 million, a remaining valuation allowance of $451,000 at June 30, 2018, incurred $1.1 million of net
charge-offs during the year ended June 30, 2018, and resulted in an additional provision for loan losses of $435,000. Impaired loans as of June 30, 2017 in the table
above had a carrying amount of $6.3 million, a remaining valuation allowance of $1.1 million at June 30, 2017, and incurred $245,000 of net charge-offs during the
year ended June 30, 2017, which resulted in an additional provision for loan losses of $1.4 million for the year.
90
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 June 30, 2018 and June 30, 2017 (dollars in thousands):
Fair Value
Valuation
Technique(s)
Unobservable
Input(s)
Range or
Rate Used
June 30, 2018:
Impaired loans - residential mortgages
$
688
Sales comparison
Impaired loans - construction
Impaired loans - commercial loans
1,984
845
Discounted cash flow
Sales contract
Discounted cash flow
Sales contract
Impaired loans - home equity lines of credit
7
Sales comparison
Foreclosed real estate
June 30, 2017:
Discounted cash flow
Sales comparison
460
Impaired loans - residential mortgages
$
1,126
Sales comparison
Impaired loans - construction
Impaired loans - commercial loans
2,260
1,681
Discounted cash flow
Cost approach
Discounted cash flow
Sales comparison
Impaired loans - home equity lines of credit
Foreclosed real estate
5
977
Discounted cash flow
Sales comparison
Adjustments for
differences in sales
comparables
Discount rate
Discount to sales
contract
Discount rate
Discount to sales
contract
Adjustments for
differences in sales
comparables
Discount rate
Adjustments for
differences in
sales comparables
Adjustments for
differences in sales
comparables
Discount rate
Discount for distressed
property
Discount rate
Adjustments for
differences in sales
comparables
Discount rate
Adjustments for
differences in
sales comparables
-5.1% to 20.9%
5.4% to 6.3%
9.8%
5.3% to 7.5%
9.8%
-5.1% to 20.9%
6.3%
-8.1% to -0.4%
-5.1% to 7.8%
5.4% to 6.3%
50.0%
6.0% to 7.5%
0.0%
6.3%
-23.4% to 7.2%
91
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):
June 30, 2018:
Financial assets:
Cash and cash equivalents
Investment securities held to maturity
Investment securities available for sale
Loans receivable, net
Accrued interest receivable
Federal Home Loan Bank stock
Financial liabilities:
Demand, NOW, money market deposits and savings accounts
Time deposits
Mortgage escrow funds
FHLB advances
June 30, 2017:
Financial assets:
Cash and cash equivalents
Investment securities held to maturity
Investment securities available for sale
Loans receivable, net
Accrued interest receivable
Federal Home Loan Bank stock
Financial liabilities:
Demand, NOW, money market deposits and savings accounts
Time deposits
Mortgage escrow funds
FHLB advances
Carrying
Amount
Level 1
Fair Value Measurements
Level 3
Level 2
Total
$
$
$
$
62,145
353,183
105,504
902,336
4,358
2,050
765,084
392,373
8,803
18,841
60,486
383,551
111,889
809,648
3,693
3,132
793,681
294,780
8,084
42,598
$
$
62,145
-
-
-
-
N/A
765,084
-
8,803
-
60,486
-
-
-
-
N/A
793,681
-
8,084
-
$
$
-
343,188
105,504
-
1,402
N/A
-
394,205
-
20,574
-
383,318
111,889
-
1,243
N/A
-
297,508
-
45,504
$
$
-
-
-
882,319
2,956
N/A
-
-
-
-
-
270
-
817,814
2,450
N/A
-
-
-
-
62,145
343,188
105,504
882,319
4,358
N/A
765,084
394,205
8,803
20,574
60,486
383,588
111,889
817,814
3,693
N/A
793,681
297,508
8,084
45,504
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
Cash and Cash Equivalents : The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Loans Receivable, Net : For valuation purposes, the loan portfolio was segregated into its significant categories such as one-to-four family residential mortgage
loans, other mortgage loans, consumer loans and commercial loans. These categories were further analyzed, where appropriate, into components based on
significant financial characteristics such as type of interest rate (adjustable or fixed). For adjustable rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. Impaired loans are valued at the lower of cost or fair value as described previously.
The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans is considered Level 3.
FHLB Stock : It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Accrued Interest Receivable : The carrying amount of accrued interest approximates fair value.
92
Deposits and escrow funds : The fair values disclosed for demand deposits (e.g., non-interest-bearing demand, NOW, money market, savings deposits and escrow
accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carryi ng amount) and are considered Level 1. Fair values for
time deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits, resulting in a Level 2 classification.
FHLB Advances : Fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar
maturity to the Company's current advance maturity schedules, resulting in a Level 2 classification.
Off Balance Sheet Instruments : Fair values of the off-balance-sheet loan commitments, unused lines of credit and standby letters of credit described in Note 10
were estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the
instruments and the creditworthiness of the potential borrowers. At June 30, 2018 and 2017, the fair values of these instruments approximated the related carrying
amounts (deferred fees), which were not material.
Note 14 . Income Taxes
The components of income tax expense (benefit) are summarized as follows for the years ended June 30 (in thousands):
Current tax expense (benefit)
Federal
State
Deferred tax expense (benefit)
Federal
State
State tax valuation allowances, net of federal benefit
Total
2018
2017
2016
$
$
2,577 $
20
2,597
2,414
313
2,727
(302)
5,022 $
1,344 $
(52)
1,292
(52)
(21)
(73)
47
1,266 $
(6)
(476)
(482)
1,216
250
1,466
149
1,133
On December 22, 2017, as part of the Tax Cuts and Jobs Act, the federal government enacted comprehensive tax reform containing provisions with a number of
impacts on corporate income taxes, the most significant of which provides a decrease in the corporate income tax rate from 34% to 21% for tax years beginning on
or after January 1, 2018. The company is required to re-measure as of the date the law is enacted, its net deferred tax asset to reflect the income tax rate expected to
be effective when deferred tax positions will be realized. As a result, the Company recorded a re-measurement charge through income tax expense of $1.6 million
for the year ended June 30, 2018.
The Company utilizes a calendar year tax year. As a result of the aforementioned tax reform, a “blended” federal statutory rate of 28.06% is used for 2018, based
on the daily weighted average statutory rate effective throughout the fiscal year. Effective tax rates differ from federal statutory rate applied to income before
income taxes due to the following (in thousands):
93
Federal statutory rate
Tax at federal statutory rate
State Taxes, net of federal benefit
Tax-exempt income
BOLI income
ESOP Compensation
Deferred tax re-remeasurement charge
Other, net
Total
2018
2017
2016
28.06%
34.00%
34.00%
$
$
3,262
24
(61)
(157)
300
1,570
84
5,022
$
$
1,529
—
(47)
(211)
63
—
(68)
$
1,266
$
1,380
—
(49)
(156)
—
—
(42)
1,133
Effective tax rate
43.20%
28.16%
27.91%
Year-end deferred tax assets and liabilities were due to the following (in thousands):
2018
2017
Deferred Tax Assets:
Allowance for Loan Losses
Deferred compensation
Accrued incentive compensation
Purchase accounting adjustments
Deferred rent
Other compensation loss (defined benefit plans)
Depreciation of premises and equipment
NOL carryforward
Charitable contribution carryforward
Nonaccrual loan interest
Other comprehensive loss (securities)
Other
Total deferred tax assets
Deferred Tax Liabilities:
Prepaid pension costs
Deferred loan costs and fees, net
Other comprehensive income (securities)
Other
Total deferred tax liabilities
Deferred tax asset valuation allowance
Net Deferred Tax Asset
$
$
$
1,222
836
110
70
182
1,439
413
131
949
118
408
—
5,878
2,424
451
—
31
2,906
(350)
2,622
$
$
$
1,983
1,071
—
277
380
2,706
405
602
1,820
540
—
104
9,888
3,622
457
19
368
4,466
(652)
4,770
The Company has an apportioned New York State net operating loss carryforward of approximately $2.1 million which will begin to expire in 2034. In addition,
the Company has approximately $3.8 million of charitable contribution carryforwards that may be carried forward up to 5 years and will begin to expire in 2022.
In 2014, New York State enacted comprehensive tax reform provisions with significant impact on financial institutions. As a result of this legislation, beginning on
January 1, 2015, the Company calculated its tax obligation to New York based upon the largest of a calculated income tax liability, a tax liability based upon
average equity capital or a fixed minimum fee. It is more likely than not the Company will generate New York tax losses in future years and therefore calculate its
New York tax liability on the basis of average equity capital or a fixed minimum fee. Consequently, the Company maintains a valuation allowance against its net
New York deferred tax asset, as it is unlikely this deferred tax asset will impact the Company's New York tax liability in future years.
94
Management has determined that it is not required to establish a valuation allowance against any other deferred tax assets in accordance with accounting principles
generally accepted in the United States of America since it is more likely than not that the deferred tax assets will be fully utilized in future periods. In assessing the
need for a valuation allowance, management considers the schedule reversal of the deferred tax liabilities, the level of historical taxable income, and the projected
future tax able income over the periods that the temporary differences comprising the deferred tax assets will be deductible.
Retained earnings at June 30, 2018 included approximately $2.8 million for which deferred income taxes of approximately $588,000 have not been provided. The
retained earnings amount represents the base year allocation of income to bad debt deductions for tax purposes only. Base year reserves are subject to recapture if
the Bank makes certain non-dividend contributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank
charter. Under ASC 740, this amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that it will be reduced and result in
taxable income in the foreseeable future. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes or distributions
in complete or partial liquidation.
The Company is subject to U.S. federal income tax as well as income tax of the states of New York, New Jersey and Connecticut. The Company’s federal and state
income tax returns are subject to examination for years after December 31, 2014.
At June 30, 2018 and 2017, the Company had no unrecognized tax benefits recorded. The Company does not expect the total amount of unrecognized tax benefits
to significantly increase or decrease in the next twelve months.
Note 15 . 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 not only 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. As a
result, during the year ended June 30, 2017 the Company recorded a $919,000 curtailment gain, which is included in earnings as a reduction to salaries and
employee benefits expense.
95
The following is a summary of the plan’s funded status as of June 30, 2018 and 2017 (the measurement date for f inancial reporting purposes) (in thousands):
2018
2017
Change in benefit obligation:
Beginning benefit obligation
Service Cost
Interest Cost
Actuarial Loss
Benefits Paid
Settlements
Curtailment
Ending benefit obligation
Change in plan assets, at fair value:
Beginning plan assets
Actual return
Employer contributions
Benefits paid
Settlements
Ending Plan assets
Funded Status
Accumulated Benefit Obligation
$
$
$
25,614
-
968
8
(868)
(958)
-
24,764
27,444
2,357
-
(868)
(958)
27,975
3,211
24,764
The following is a summary of net period pension cost, contributions and benefits paid for the years ended June 30 (in thousands):
Net period pension cost
Employer contributions
Benefits paid
2018
$
(321)
-
868
$
$
$
$
28,670
602
1,002
(2,013)
(828)
(1,301)
(518)
25,614
23,215
3,358
3,000
(828)
(1,301)
27,444
1,830
25,614
2017
(224)
3,000
828
Pre-tax amounts recognized in accumulated other comprehensive loss was $6.5 million and $7.6 million for the years ended June 30, 2018 and 2017 respectively.
Net periodic pension cost and other amounts recognized in other comprehensive income for the years ended June 30 (in thousands):
Service cost
Interest cost
Expected return on plan assets
Amortization of prior net loss
Amortization of prior service cost
Gain on curtailment
New past service liability
Net periodic cost
2018
2017
2016
$
$
- $
968
(2,014)
725
-
-
-
(321) $
602 $
1,002
(1,917)
1,200
(192)
(919)
-
(224) $
626
1,086
(1,796)
854
(287)
-
-
483
The estimated net loss and past service cost for the pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit
costs during the year ending June 30, 2019, are $580,000 and $0, respectively.
96
Contributions: The Company made no contributions to the defined benefit plan during the year ended June 30, 2018 and does not expect to make any contributions
for the year ending June 30, 2019.
Estimated Future Payments : The following benefit payments are expected for the years ending June 30, (in thousands):
2019
2020
2021
2022
2023
Following five years
$
1,232
1,259
1,303
1,347
1,365
7,202
Assumptions : Discount rates of 4.14% and 3.87% were used to determine pension benefit obligation as of June 30, 2018 and 2017, respectively.
Weighted-average assumptions used to determine net periodic pension cost are described in the table below.
Discount Rate
Expected return on plan assets
Plan Assets
Year ended June 30,
2018
2017
3.87%
7.50%
4.04%
7.50%
Plan assets are invested in a series of diversified investment funds of RSI Retirement Trust (“the Trust”). The investment funds include equity mutual funds, bond
mutual funds, or commingled trust funds, each with its own investment objectives, investment strategies and risks. The Trust has been given discretion by the
Company to determine the appropriate strategic asset allocation, as governed by the Trust’s Statement of Investment Objectives and Guidelines. The long-term
objective is to be invested 65% in equity securities (equity mutual funds), 34% in debt securities (bond mutual funds) and 1% in cash equivalents. The bond fund
portion may be temporarily increased to 50% in order to lessen the volatility of asset values. Asset rebalancing is performed at least annually, with interim
adjustments made if the investment mix varies by more than 10% from the target allocation.
The weighted average expected long-term rate of return is estimated based on current trends in the plan assets as well as projected future rates of returns on those
assets. The long-term rate of return assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of
future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges
of 6% to 8% and 3% to 5%, respectively. The long-term inflation rate was estimated to be 2.5%. When these overall return expectations are applied to the plan’s
target allocation, the result is an expected rate of return of 7.50%.
The plan is only permitted to invest in assets approved by the RSI Trustee Board. All other investments are prohibited.
The Company’s actual pension plan asset allocation and target allocation by asset category are as follows:
Asset Category
Equity mutual funds and common/collective trusts
Fixed income common/collective trusts
Cash equivalents
Total
Target
Allocation
Percentage of Plan
Assets at Year-End
2018
2017
65%
34%
1%
100%
67%
32%
1%
100%
65%
34%
1%
100%
97
Equity, Debt, Investment Funds and Other Securities : The fair values for investment securities are determined by quoted market prices, if available (Level 1). For
securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices
or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash
flows are calculated using spread to swap and the London Interbank Offered Rate (LIBOR) curves that are updated to incorporate loss severities, volatility, credit
spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research
reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
The fair value of the plan assets at June 30, 2018 and 2017, by asset category, is as follows (in thousands):
June 30, 2018
Plan assets
Equity mutual funds and common/collective trusts
Fixed income common/collective trusts
Cash equivalents
Total
June 30, 2017
Plan assets
Equity mutual funds and common/collective trusts
Fixed income common/collective trusts
Cash equivalents
Total
Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
$
$
$
$
18,914
8,893
168
27,975
17,704
9,451
289
27,444
$
$
$
$
-
-
168
168
-
-
289
289
$
$
$
$
18,914
8,893
-
27,807
17,704
9,451
-
27,155
$
$
$
$
-
-
-
-
-
-
-
-
Defined Contribution Retirement Plan : The Company maintained a defined contribution plan for eligible employees hired after October 1, 2012. All full-time
employees who have attained age twenty-one and have a minimum of one year of service received a contribution to their 401(k) account equal to 5% of their
salary. On February 15, 2017, the Board of Directors approved the freezing of this plan effective May 1, 2017. As a result, the Company had no expense for the
year ended June 30, 2018. The Plan expense was $120,000 and $162,000 for years ended June 30, 2017 and 2016, respectively.
401(k) Plan : The Company maintains a defined contribution plan for eligible employees under Section 401(k) of the Internal Revenue Code. All full-time
employees who have attained age twenty-one and have a minimum of one year of service may elect to participate in the plan, by making contributions ranging from
2% to 10% of their compensation. The Company makes matching contributions equal to 75% of the participant’s contributions up to 6% of compensation. Savings
plan expense was $414,000, $418,000 and $410,000 for the years ended June 30, 2018, 2017 and 2016, respectively. On June 20, 2018, the Board of Directors
approved the suspension of the Company match effective July 1, 2018.
Acquired Pension Plan : As part of the CMS acquisition, the Company acquired the pension plan of CMS Bank, which was frozen prior to and in the process of
termination as of the acquisition date, a process which was not complete as of the acquisition date. During the year ended June 30, 2016, the CMS pension plan was
terminated, resulting in a $629,000 charge to earnings, included on the income statement in merger and acquisition related expenses.
98
Supplemental Retirement Plan
The Company also maintains unfunded and non-qualified supplemental retirement plans to provide pension benefits in addition to those provided under the
qualified pension plan.
The accrued benefit cost for the supplemental plans was approximately $3.4 million and $3.0 million at June 30, 2018 and 2017 (included in other liabilities in the
consolidated statements of financial condition). Included in accumulated other comprehensive income were pre-tax net losses of $335,000 and $379,000 for the
supplemental retirement plans as of June 30, 2018 and 2017, respectively. The projected benefit obligation and accumulated benefit obligation were $3.4 million as
of the June 30, 2018 measurement date and $3.0 million as of June 30, 2017 measurement date.
Pension expense for the supplemental plans was $655,000, $615,000 and $539,000 for the years ended June 30, 2018, 2017 and 2016, respectively.
Supplemental retirement plan benefits of $272,000 were paid in each of the years ended June 30, 2018, 2017 and 2016.
Net periodic pension cost and other amounts recognized in other comprehensive income for the years ended June 30 (in thousands):
Service cost
Interest cost
Amortization of prior net loss
Net periodic cost
2018
2017
2016
$
$
518 $
103
34
655 $
398 $
124
93
615 $
322
133
84
539
The estimated net loss for the supplemental plans that will be amortized from accumulated other comprehensive income into net periodic benefit costs during the
year ending June 30, 2019, is $37,000.
The following benefit payments, which reflect expected future service, are expected for the years ending June 30 (in thousands):
2019
2020
2021
2022
2023
Following five years
$
272
272
3,336
272
272
136
As of June 30, 2018, the assumed discount rates used for the supplemental plans range from 3.16% to 4.14%.
Employee Stock Ownership Plan
On January 1, 2017, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock.
The plan is a tax-qualified retirement plan for the benefit of Company employees. The Company granted a loan to the ESOP for the purchase of 1,453,209 shares of
the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company to purchase the common stock is payable annually
over 15 years at a rate per annum equal to the Prime Rate, reset annually on January 1st (4.50% for 2018). 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 June 30, 2018 was $13.6 million. Contributions are allocated to eligible participants on the basis of compensation, subject
to federal tax limits. The number of shares committed to be released annually is 96,881 through 2032.
99
Shares held by the ESOP include the following (dollars in thousands):
Allocated to participants
Unearned
Total ESOP shares
2018
144,923
1,308,286
1,453,209
2017
26,975
1,426,234
1,453,209
Fair value of unearned shares
$
25,996
$
24,332
Total compensation expense recognized in connection with the ESOP for the year ended June 30, 2018 and June 30, 2017 was $2.2 million and $454,000,
respectively.
Note 16 . Regulatory Matters
The following is a summary of the Company’s and Bank’s actual capital amounts and ratios as of June 30, 2018 and June 30, 2017, compared to the required ratios
for minimum capital adequacy and for classification as well capitalized (dollars in thousands):
June 30, 2018:
PCSB Bank
Leverage (Tier 1)
Risk-based:
Common Tier 1
Tier 1
Total
PCSB Financial Corporation
Leverage (Tier 1)
Risk-based:
Common Tier 1
Tier 1
Total
June 30, 2017:
PCSB Bank
Leverage (Tier 1)
Risk-based:
Common Tier 1
Tier 1
Total
PCSB Financial Corporation
Leverage (Tier 1)
Risk-based:
Common Tier 1
Tier 1
Total
Bank Actual
For Capital
Adequacy
Purposes
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
200,488
13.6% $
58,924
4.0% $
73,655
5.0%
200,488
200,488
205,392
21.1
21.1
21.6
42,745
56,994
75,991
4.5
6.0
8.0
61,743
75,991
94,989
$
287,991
19.5% $
58,948
4.0%
N/A
287,991
287,991
292,895
30.3
30.3
30.8
42,783
57,044
76,058
4.5
6.0
8.0
N/A
N/A
N/A
6.5
8.0
10.0
N/A
N/A
N/A
N/A
$
190,990
13.7% $
55,949
4.0% $
69,936
5.0%
190,990
190,990
196,140
21.7
21.7
22.3
39,631
52,841
70,455
4.5
6.0
8.0
57,245
70,455
88,069
$
278,528
20.0% $
55,839
4.0%
N/A
278,528
278,528
283,678
31.6
31.6
32.2
39,631
52,841
70,455
4.5
6.0
8.0
N/A
N/A
N/A
6.5
8.0
10.0
N/A
N/A
N/A
N/A
100
In addition to the ratios above, the Basel III Capital Rules established that community banking institutions must maintain a capital co nservation buffer of common
equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary
bonus payments to executive officers. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in
over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
Management believes that as of June 30, 2018 and June 30, 2017, the Bank and Company each met all capital adequacy requirements to which they were subject,
including the capital conservation buffer of 1.875% as of June 30, 2018 and 1.250% as of June 30, 2017. 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 17 . Related Party Disclosures
The Company's authority to extend credit to its directors, executive officers, and stockholders owning 10% or more of the Holding Company's outstanding common
stock, as well as to entities controlled by such persons, is additionally governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of
the FRB enacted thereunder. Among other matters, these provisions require that extensions of credit to insiders: (i) be made on terms substantially the same as, and
follow credit underwriting procedures not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain amount limitations individually and in the aggregate, which
limits are based, in part, on the amount of the bank's capital. Regulation O additionally requires that extensions of credit in excess of certain limits be approved in
advance by the bank's board of directors.
New York banking regulations impose certain limits and requirements on various transactions with "insiders," as defined in the New York banking regulations to
include certain executive officers, directors and principal stockholders.
For the year ended June 30, 2018 and 2017, the Company and the Bank had no insider loans.
Note 18 . Parent Company Only Financial Statements
The following are the financial statements of the Company (Parent only) as of and for the years ended June 30, 2018 and June 30, 2017 (in thousands). The
Company was established as of December 9, 2016; therefore, financial information prior to that date is not available.
Assets
Cash and cash equivalents
Investment in Bank
ESOP Loan receivable
Other Assets
Total Assets
Liabilities and stockholders' equity
Other Liabilities
Stockholders' equity
Total Liabilities and stockholders' equity
101
June 30,
2018
2017
$
$
$
$
72,140
200,058
13,563
1,798
287,559
-
287,559
287,559
$
$
$
$
71,273
192,308
14,532
1,888
280,001
155
279,846
280,001
Interest Income
Equity in income of Bank
Contribution to PCSB Foundation
Other non-interest expenses
Income (loss) before income tax
Income tax expense (benefit)
Net Income (loss)
Cash Flows from Operating Activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income of Bank
Issuance of common stock to PCSB Foundation
Deferred tax expense (benefit)
Net increase in accrued interest receivable
Other adjustments, principally net changes in other assets and liabilities
Net cash used in operating activities
Cash Flows from Investing Activities:
Investment in PCSB Bank
Decrease (increase) in ESOP loan
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Common stock dividends declared
Allocation of ESOP shares
Issuance of common stock
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
102
Years Ended June 30,
2018
2017
668
7,188
—
689
7,167
563
6,604
$
$
125
1,055
5,000
105
(3,925)
(1,693)
(2,232)
$
$
Year Ended June 30,
2018
2017
$
6,604
$
(2,232)
(7,188)
—
733
(230)
(569)
(650)
—
969
969
(504)
1,069
(17)
548
867
71,273
72,140
$
(1,055)
3,387
(1,482)
(113)
(138)
(1,633)
(87,350)
(14,532)
(101,882)
—
184
174,604
174,788
71,273
—
71,273
Note 19 . Quarterly Financial Information (unaudited)
2018
In thousands, except per share amounts
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income (1)
Non-interest expense (2)
Income before taxes
Income tax expense (3)
Net Income (loss)
Earnings per share
Basic
Diluted
$
$
$
Fourth
Second
$ 13,358 $ 11,648 $ 11,657 $ 11,297 $ 10,723 $
Fourth
Third
First
1,926
11,432
25
601
8,264
3,744
1,075
2,669 $
1,505
10,143
54
512
7,833
2,768
591
2,177 $
1,471
10,186
200
692
8,125
2,553
2,551
2 $
1,421
9,876
135
714
7,894
2,561
805
1,756 $
1,318
9,405
-
647
12,859
(2,807)
(1,017)
(1,790) $
2017
Third
10,276 $
1,318
8,958
235
626
6,580
2,769
878
1,891 $
Second
9,850 $
1,323
8,527
562
2,259
7,794
2,430
758
1,672 $
0.16 $
0.16 $
0.13 $
0.13 $
- $
- $
0.10
0.10
N/A
N/A
N/A
N/A
N/A
N/A
First
10,109
1,334
8,775
26
552
7,198
2,103
647
1,456
N/A
N/A
(1) Non-interest income for the second quarter of 2017 includes a $1.6 million settlement on a loan charged-off by CMS Bank before the 2015 merger.
(2) Non-interest expense for the fourth quarter of 2017 includes a $5.0 million contribution expense related to Company’s establishment of the PCSB
(3)
Community Foundation.
Income tax expense for the second quarter of 2018 includes $1.6 million charge reflecting a re-measurement of our deferred tax assets resulting from a
decrease in the corporate income tax rate from 34% to 21%.
103
Item 9. Changes in and Disagreements With Acc ountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure
a)
Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive
Officer and the Executive Vice President and 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 June 30, 2018. Based on that
evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were effective.
b)
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control
process has been designed under management’s supervision to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the
United States of America .
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018 utilizing the
framework established in Internal
Control
–
Integrated
Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of June 30,
2018 is effective.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and
fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary
to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and
expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition,
use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
c)
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial
reporting. As an emerging growth company, management’s report was not subject to attestation by the Company’s registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report .
d)
Changes in Internal Control Over Financial Reporting
There were no significant changes made in the Company’s internal control over financial reporting during the fourth quarter of the year ended June 30,
2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
104
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The “Proposal I—Election of Directors” and “Corporate Governance” sections of the Company’s definitive proxy statement for the Company’s 2018
Annual Meeting of Stockholders (the “2018 Proxy Statement”) is incorporated herein by reference.
Item 11. Executive Compensation
The “Executive Compensation” section of the Company’s 2018 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The “Stock Ownership” section of the Company’s 2018 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The “Transactions with Certain Related Persons” section of the Company’s 2018 Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The “Proposal II – Ratification of Appointment of Independent Registered Public Accounting Firm” Section of the Company’s 2018 Proxy Statement is
incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following are filed as a part of this Form 10-K under Item 8:
PART IV
(A)
(B)
(C)
(D)
(E)
(F)
(G)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2018 and 2017
Consolidated Statements of Income - Years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income – Years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Equity – Years ended June 30, 2018, 2017 and 2016
Consolidated Statements of Cash Flows – Years ended June 30, 2018, 2017 and 2016
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
None .
105
3.1
3.2
4.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
21
23
31.1
31.2
32
101
(a)( 3 ) Exhibits
Articles of Incorporation of PCSB Financial Corporation (1)
Bylaws of PCSB Financial Corporation (2)
Form of Common Stock Certificate of PCSB Financial Corporation (3)
Employment Agreement between PCSB Bank and Joseph D. Roberto (4)
Employment Agreement between PCSB Bank and Scott D. Nogles (5)
Employment Agreement between PCSB Bank and Michael P. Goldrick (6)
Employment Agreement between PCSB Financial Corporation and Joseph D. Roberto (7)
Employment Agreement between PCSB Financial Corporation and Scott D. Nogles (8)
Employment Agreement between PCSB Financial Corporation and Michael P. Goldrick (9)
Supplemental Executive Retirement Plan for Joseph D. Roberto (10)
Supplemental Life Insurance Agreement for Joseph D. Roberto (11)
Supplemental Life Insurance Plan for Senior Executives (12)
Supplemental Executive Retirement Plan for Senior Executives (13)
Amended and Restated PCSB Bank Director Fee Deferral Plan
PCSB Bank Director Supplemental Life Insurance Plan (14)
PCSB Bank Death Benefit Plan for Michael T. Weber (15)
PCSB Bank Incentive Compensation Plan Policy (16)
PCSB Financial Corporation Compensation Clawback Policy (17)
PCSB Bank Death Benefit Plan for Willard I. Hill, Jr
Subsidiaries of PCSB Financial Corporation (18)
Consent of Crowe LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following financial statements for the year ended June 30, 2018, formatted in XBRL, which are furnished, and not filed: (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements
of Changes in Stockholders’ Equity (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
(1)
(2)
(3)
(4)
Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and Exchange
Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
106
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
I ncorporated by reference to Exhibit 10.2 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form 10-K (File No. 001-38065), filed with the Securities and Exchange
Commission on September 27, 2017.
Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and
Exchange Commission on December 12, 2016, as amended.
Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form 10-Q (File No. 001-38065), filed with the Securities and Exchange
Commission on November 9, 2017.
Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form 10-Q (File No. 001-38065), filed with the Securities and Exchange
Commission on November 9, 2017.
Incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 (File No. 333-215052), originally filed with the Securities and Exchange
Commission on December 12, 2016, as amended.
Item 16. Form 10-K Summary
Not applicable.
107
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNAT URES
Date: September 13, 2018
PCSB FINANCIAL CORPORATION
By:
/s/ Joseph D. Roberto
Joseph D. Roberto
Chairman, President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signatures
Title
/s/ Joseph D. Roberto
Joseph D. Roberto
/s/ Scott D. Nogles
Scott D. Nogles
/s/ William V. Cuddy, Jr.
William V. Cuddy, Jr.
/s/ Kevin B. Dwyer
Kevin B. Dwyer
/s/ Willard I. Hill, Jr.
Willard I. Hill, Jr.
/s/ Jeffrey D. Kellogg
Jeffrey D. Kellogg
/s/ Robert C. Lusardi
Robert C. Lusardi
/s/ Matthew G. McCrosson
Matthew G. McCrosson
/s/ Karl A. Thimm
Karl A. Thimm
/s/ Michael R. Weber
Michael R. Weber
/s/ Richard F. Weiss
Richard F. Weiss
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
108
Date
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
September 13, 2018
PCSB BANK
AMENDED AND RESTATED
DIRECTOR FEE DEFERRAL PLAN
ARTICLE I
PURPOSE
Exhibit 10.11
The purpose of this Amended and Restated Director Fee Deferral Plan (the “Plan,” and formerly the “Trustee Fee Deferral Plan”)
is for PCSB Bank (the “Bank”) to provide current tax planning opportunities as well as supplemental funds for retirement for Directors. The
Plan shall be effective December 16, 2015 for deferrals commencing January 1, 2016. The Plan is being amended and restated effective July
1, 2018. The Plan is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the
regulations promulgated thereunder. The Plan is also intended to qualify as a “top hat” plan for purposes of the Employee Retirement Income
Security Act of 1974, as amended.
ARTICLE II
DEFINITIONS
For the purposes of this Plan, the following terms may have the meanings indicated, unless the context clearly indicates otherwise:
Account . “Account” means the account maintained under the Plan by the Bank in the Participant’s name.
Account Balance . “Account Balance” means the balance of the Participant’s Account as of the applicable distribution date.
Bank . “Bank” means PCSB Bank, or any successor to the business thereof, and any affiliated or subsidiary corporations
designated by the Board.
Beneficiary . “Beneficiary” means the person or persons (and their heirs) designated as Beneficiary by the Participant to whom
the deceased Participant’s benefits are payable. If no Beneficiary is so designated, then the Participant’s spouse, if living, will be deemed the
Beneficiary. If the Participant’s spouse is not living, then the children of the Participant will be deemed the Beneficiaries and will take on a
per stirpes basis. If there are no living children, then the estate of the Participant will be deemed the Beneficiary.
Beneficiary Designation Form . The “Beneficiary Designation Form” shall mean the Beneficiary Designation Form attached
hereto as Exhibit C.
Board . “Board” means the Board of Directors of the Bank.
Cash Account . “Cash Account” means the sub-account of a Participant’s Account which is maintained in cash and to which
earnings is credited in accordance with Section 4.5 hereof.
Change in Control . “Change in Control” shall mean (a) a change in the ownership of the Bank, (b) a change in the effective
control of the Bank, or (c) a change in the ownership of a substantial portion of the assets of the Bank as defined in accordance with Code
Section 409A.
(a)
A change in the ownership of a corporation occurs on the date that any one person, or more than one person
acting as a gr oup (as defined in Treasury Regulation 1.409A-3(i)(5)(v)(B)), acquires ownership of stock of the Bank that, together
with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the
stock of such corporation.
(b)
A change in the effective control of the Bank occurs on the date that either (i) any one person, or more than
one person acting as a group (as defined in Treasury Regulation 1.409A-3(i)(5)(vi)(D)) acquires (or has acquired durin g the 12-
month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Bank
possessing 30 percent or more of the total voting power of the stock of the Bank, or (ii) a majority of the members of the Board is
replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the members of
the Board prior to the date of the appointment or election, provided that this subsection “(ii)” is inapplicable where a majority
shareholder of the Bank is another corporation.
(c)
A change in a substantial portion of the Bank’s assets occurs on the date that any one person or more than
one person acting as a group (as defined in Treasury Regulation 1.409A-3(i)(5)(vii)(C)) ac quires (or has acquired during the 12-
month period ending on the date of the most recent acquisition by such person or persons) assets from the Bank that have a total
gross fair market value equal to or more than 40 percent of the total gross fair market value of (i) all of the assets of the Bank, or
(ii) the value of the assets being disposed of, either of which is determined without regard to any liabilities associated with such
assets. For all purposes hereunder, the definition of Change in Control shall be construed to be consistent with the requirements of
Treasury Regulation 1.409A-3(i)(5), except to the extent that such regulations are superseded by subsequent guidance.
Code . “Code” means the Internal Revenue Code of 1986, as amended.
Committee . “Committee” means the Committee appointed to administer the Plan pursuant to Section 6.1 below.
Company . “Company” means PCSB Financial Corporation.
Deferral Contribution . “Deferral Contribution” means the amount of Director Fees a Participant elects to defer under Article IV
of the Plan.
Director . “Director” means a non-employee Director of the Bank.
Director Fees . “Director Fees” means the annual and periodic fees paid to the Participant for services rendered on the Board or
any Board committee.
Disability . “Disability” means the Participant:
(a)
is unable to engage in any substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death, or last for a continuous period of not less than 12 months; or
(b)
by reason of any medically determinable physical or mental impairment which can be expected to result in
death, or last for a continuous period of not less than 12 months, is receiving income replacement benefits for a perio d of not less
than three months under an accident and health plan covering employees of the Participant’s employer; or
2
(c)
is determined to be disabled by the Social Security Administration.
Election Form . “Election Form” means the election form attached to this Plan as Exhibit A and incorporated herein by reference.
Employer Stock . “Employer Stock” means PCSB Financial Corporation common stock.
Notice of Adjustment of Deferral Contribution . “Notice of Adjustment of Deferral Contribution” means the election form
attached to this Plan as Exhibit B and incorporated herein by reference.
One-Time Election Form . “One-Time Election Form” means the election form attached to this Plan as Exhibit D and
incorporated herein by reference that would allow a Director to convert all or a portion of his or her existing Account and ongoing Deferral
Contributions to Employer Stock as of July 1, 2018.
Participant . “Participant” means any member of the Board who completes an Election Form.
Plan Year . “Plan Year” means the period from January 1 to December 31.
Separation from Service . “Separation from Service” or “Separates from Service” means the Participant’s death, retirement or
termination from service from the Board of the Bank following the Participant’s resignation or a failure to be reappointed or reelected to the
Board. For these purposes, a Participant shall not be deemed to have a Separation from Service until the Participant no longer serves on the
Board of the Bank, the Bank’s holding company, or any member of a controlled group of corporations with the Bank or holding company
within the meaning of Treasury Regulation §1.409A-1(a)(3). Whether a Participant has had a Separation from Service shall be determined in
accordance with the requirements of Treasury Regulation 1.409A-1(h).
Stock Account . “Stock Account” means the sub-account of a Participant’s Account that is to be maintained in shares of
Employer Stock.
Unforeseeable Emergency . “Unforeseeable Emergency” means a severe hardship to the Participant resulting from:
(a)
an illness or accident of –
(i) the Participant,
(ii) the Participant’s spouse, or
(iii) the Participant’s “dependent” (as defined in Code Section 152(a));
(b)
loss of the Participant’s property due to casualty; or
(c)
other similar extraordinar y and unforeseeable circumstances arising as a result of events beyond the
Participant’s control. The term “Unforeseeable Emergency” shall be construed consistent with Code Section 409A and the
Treasury Regulations and other guidance issued thereunder.
3
AR TICLE III
ELIGIBILITY AND VESTING
3.1 Eligibility . The Plan is available to non-employee members of the Board. Each Director who is eligible to participate
in the Plan shall enroll in the Plan by completing the Election Form. A Director’s participation in the Plan shall commence as of the date
specified in the Election Form.
3.2 Vesting . Each Participant shall be 100% vested in his or her Account Balance.
ARTICLE IV
DEFERRAL CONTRIBUTIONS AND ACCOUNT
4.1 Initial Deferral Election . Each Participant shall have the right to elect to defer a fixed percentage of the Director Fees
to which the Participant would otherwise be entitled, with such Deferral Contribution to be deferred and paid at the times and in the manner
herein stated. Commencing on or after July 1, 2018, each new Participant electing to make a Deferral Contribution shall execute and deliver
to the Bank the Election Form. Each Participant shall elect on the Election Form the proportions of the Deferral Contribution which are to be
in cash and shares of Employer Stock. Such election shall be applicable only to Director Fees earned for services rendered after the date of
such election. A Participant’s deferral election shall be made no later than December 16th of the year prior to the year for which such election
is effective, or with respect to a Participant who first becomes eligible during a Plan Year, within 30 days following the Participant’s initial
eligibility date. In the latter case, the election shall be applicable only to Director Fees earned for services rendered after the date of such
election. In the event a Participant fails to elect in the Election Form the form of investment for the Deferral Contributions for a Plan Year,
the entire Deferral Contribution for such Plan Year shall be credited to the Participant’s Cash Account.
4.2 Changes to Deferral Election . Each Participant’s Deferral Contribution shall continue in effect until revoked,
provided, however, that every election to defer Director Fees shall be irrevocable as to Director Fees earned for services performed prior to
the date of such revocation. Changes or revocation of the Participant’s Deferral Contribution shall made in writing in the form of Notice of
Adjustment of Deferral Contribution attached hereto as Exhibit B, which shall be effective upon the January 1 st of the year stated therein,
provided this form is executed and delivered to the Bank by December 16 th of the previous calendar year.
4.3 One-Time Election to Convert All or Part of Account to Employer Stock . Each Participant may make a one-time
irrevocable election to convert all or part of the Participant’s Account to Employer Stock. The election under this Section 4.3 should be made
after May 23, 2018 and on or before June 19, 2018, on the One-Time Election Form.
4.4 Account . The Bank shall maintain for each Participant an Account to which the Participant’s Deferral Contributions
shall be credited thereto as of the last day of the month during which the Director Fees would have been paid to the Participant, if not
deferred.
On or after July 1, 2018, a Participant’s Account may be sub-divided into a Cash Account and a Stock Account, if applicable.
Deferral Contributions made in the form of cash shall be credited to Participants’ Cash Accounts, and Deferral Contributions that are
converted to shares of Employer Stock shall be credited to Participants’ Stock Accounts, respectively. The Bank shall credit earnings to each
Participant’s Account on an annual basis. The Earnings Rate credited to a Participant’s Cash Account each year shall be as described Section
4.5. Any dividends paid on shares of Employer Stock held in Participants’ Stock Accounts shall be immediately reinvested in additional
shares of Employer Stock and credited to
4
Participants’ Stock Accounts as soon as admini stratively practicable thereafter. A Participant’s Account balance shall be equal to the sum of
(i) cash Deferral Contributions and interest earnings credited to such Participant’s Cash Account, plus (ii) the value of shares of Employer
Stock credited to such Participant’s Stock Account.
4.5 Earnings Rate . As of the last day of the Plan Year, the Bank shall credit each Participant’s Cash Account with
interest equal to the prime rate as reported in The Wall Street Journal on the first business day of the Plan Year, compounded annually,
provided however, such crediting rate shall never be less than three percent (3%) or greater than ten percent (10%).
4.6 Unsecured Creditor . The Participant’s interest in his or her Account is limited to the right to receive payments under
the Plan, and the Participant’s position is that of a general unsecured creditor of the Bank.
ARTICLE V
DISTRIBUTION OF BENEFITS
5.1
5.2
5.3
Distribution of Account Balance . The Participant’s Account Balance shall be distributed to the Participant in
accordance with this Article V, and shall commence or be paid within 30 days following the event that triggers distribution. All
subsequent payments of the Participant’s Account Balance shall be paid in the manner specified in the Plan. All distributions from
the Cash Account shall be made in cash, and all distributions from the Stock Account shall be made in the form of Employer Stock.
Election of Time and Form of Distribution .
(a)
Time of Payment. Subject to Section 5.1, the Participant may elect for the payment of his or her Account
Balance to be triggered upon either: (i) the Participant’s Separation from Service; or (ii) a specified date by completing the Election
Form. If the Participant does not designate a time of payment pursuant to this Section 5.2(a), then the distribution of the
Participant’s Account Balance shall be triggered upon his or her Separation from Service.
(b)
Form of Payment. Subject to Section 5.1, the Participant may elect for his or her Account Balance to be
distrib uted following his or her Separation from Service or specified date in either a lump sum or equal monthly installments over
a designated period by completing the Election Form. If the Participant does not designate the manner in which his or her Account
Balance will be paid, the Account Balance shall be distributed to the Participant in a lump sum.
Death, Disability and Change in Control . In the event of the earlier of: (i) the Participant’s death; (ii) the
Participant’s Disability or (iii) a Change in Control prior to the Participant’s Separation from Service or specified date elected by
the Participant pursuant to Section 5.2, the Participant (or the Participant’s Beneficiary) shall be paid his or her Account Balance in
a lump sum within 30 days thereafter.
5.4 Hardship Distributions . Upon a finding that the Participant has suffered an Unforeseeable Emergency, the
Committee may, in its sole discretion, make distributions from the Participant’s Account prior to the time specified for payment of benefits
under the Plan. The amount of such distribution shall be limited to the amount necessary to satisfy the Unforeseeable Emergency, plus
amounts necessary to pay taxes reasonably anticipated as a result of the distribution. The amounts necessary to satisfy the Unforeseeable
Emergency will be determined after taking into account the extent to which the hardship is, or can be, relieved through reimbursement or
compensation by insurance or otherwise, or by liquidation of the Participant’s assets, to the extent that the asset liquidation would not itself
cause severe
5
financial hardships. If a hardship distribution is approved, it shall be paid in a lump-sum within 30 days following the Unforeseeable
Emergency event which triggers payment, and the Participant’s Account Balance shall be reduced by an amount equal to the hardship
distribution.
5.5 Modification of Time and Form of Payment of Account Balance . In the event a Participant desires to modify the
time or form of payment of his or her Account Balance, the Participant may do so on a written form provided by the Bank, provided that:
(a)
the subsequent election shall not be effective for at least 12 months after the date on which the subsequent
election is made;
(b)
except for payments upon the Participan t’s death, Disability, the first of a stream of payments for which the
subsequent election is made shall be deferred for a period of not less than five (5) years from the date on which such payment
would otherwise have been made; and
(c)
for payments sched uled to be made on a specified date or to commence under a fixed schedule, the
subsequent election must be made at least 12 months before the date of the first scheduled payment.
5.6 Code Section 409A . The Plan shall be interpreted to comply with or be exempt from Code Section 409A, and all
provisions of the Plan shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Code Section
409A. Each payment that is payable pursuant to this Plan is intended to constitute a “separate payment” for purposes of Treasury Regulation
Section 1.409A-2(b)(2)(iii).
ARTICLE VI
ADMINISTRATION
6.1 Committee; Duties . This Plan shall be administered by the Committee, which, unless otherwise provided by the
Board, shall be the Benefits Committee. The Committee shall have the authority to make, amend, interpret, and enforce all appropriate rules
and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretations of this Plan, as may
arise in connection with the Plan. A majority vote of the Committee members shall control any decision.
6.2 Agents . The Committee may, from time to time, employ other agents and delegate to them such administrative duties
as it sees fit, and may from time to time consult with counsel who may be counsel to the Bank.
6.3 Binding Effect of Decisions . The decision or action of the Committee in respect to any question arising out of or in
connection with the administration, interpretation and application of the Plan and the rules of regulations promulgated hereunder shall be
final, conclusive and binding upon all persons having any interest in the Plan.
6.4 Indemnity of Committee . The Bank shall indemnify and hold harmless the members of the Committee against any
and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of gross
negligence or willful misconduct.
6
ARTICLE VII CLAIMS PROCEDURE
7.1 Claim . Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information
under the Plan shall present the request in writing to the Committee, which shall respond in writing within 30 days.
7.2 Denial of Claim . If the claim or request is denied, the written notice of denial shall state:
(a)
(b)
(c)
The reasons for denial, with specific reference to the Plan provisions on which the denial is based.
A description of any additional material or information required and an explanation of why it is necessary.
An explanation of the Plan’s claim review procedure.
7.3 Review of Claim . Any person whose claim or request is denied or who has not received a response within 30 days
may request review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee who may, but shall
not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit
issues and comments in writing.
7.4 Final Decision . The decision on review shall normally be made within 60 days. If an extension of time is required for
a hearing or other special circumstance, the claimant shall be notified and the time limit shall be 120 days. The decision shall be in writing
and shall state the reasons and the relevant Plan provisions.
7.5 Arbitration . If a claimant continues to dispute the benefit denial based upon completed performance of this Plan or
the meaning and effect of the terms and conditions thereof, then the claimant may submit the dispute to mediation, administered by the
American Arbitration Association (“AAA”) (or a mediator selected by the parties) in accordance with the AAA’s Commercial Mediation
Rules. If mediation is not successful in resolving the dispute, it shall be settled by arbitration administered by the AAA under its Commercial
Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
8.1 Amendment . Notwithstanding anything herein contained to the contrary, the Board reserves the exclusive right to
freeze or to amend the Plan at any time, provided that no amendment to the Plan shall be effective to decrease or to restrict the amount
accrued to the date of such amendment.
8.2 Complete Termination . Subject to the requirements of Code Section 409A, in the event of complete termination of
the Plan, the Plan shall cease to operate and the Bank shall pay out to the Participant his or her entire Account Balance as of the date of
termination of the Plan. Such complete termination of the Plan shall occur only under the following circumstances and conditions:
(a)
The Board may terminate the Plan within 12 months of a corporate dissolution taxed under Code Section
331, or with approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred un der the
Plan are included in the Participant’s gross income in the latest of: (i) the calendar year in which the Plan terminates; (ii) the
calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the
payment is administratively practicable.
7
(b)
The Board may terminate the Plan by irrevocable action within the 30 days preceding, or 12 months
following, a Change in Control, provided that the Plan shall only be treated as terminated i f all substantially similar arrangements
sponsored by the Bank are terminated so that the Participant and all participants under substantially similar arrangements are
required to receive all amounts of compensation deferred under the terminated arrangemen ts within 12 months of the date of the
irrevocable termination of the arrangements. For these purposes, “Change in Control” shall be defined in accordance with the
Treasury Regulations under Code Section 409A.
(c)
The Board may terminate the Plan provided that: (i) the termination and liquidation does not occur proximate
to a downturn in the financial health of the Bank, (ii) all arrangements sponsored by the Bank that would be aggregated with this
Plan under Treasury Regulations Section 1.409A-1(c) if the Participant covered by this Plan was also covered by any of those other
arrangements are also terminated; (iii) no payments other than payments that would be payable under the terms of the arrangement
if the termination had not occurred are made within 12 months of the termination of the arrangement; (iv) all payments are made
within 24 months of the termination of the arrangements; and (v) the Bank does not adopt a new arrangement that would be
aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c) if the Participant participated in both
arrangements, at any time within three years following the date of termination of the arrangement.
ARTICLE IX MISCELLANEOUS
9.1 Unfunded Plan . This Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation
benefits for members of the Board. This Plan is not intended to create an investment contract, but to provide tax planning opportunities and
retirement benefits to eligible individuals who have elected to participate in the Plan. Participants are members of the Board who, by virtue of
their position, are uniquely informed as to the Bank’s operations and have the ability to materially affect the Bank’s profitability and
operations.
9.2 Trust Fund . The Bank shall be responsible for the payment of all benefits provided under the Plan. At its discretion,
the Bank may establish one or more grantor trusts within the meaning of Code Sections 671 through 679, and in accordance with Revenue
Procedures 92-64 and 92-65 with such trustees as the Board may approve, for the purpose of providing for the payment of such
benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Bank’s creditors. To the extent any
benefits provided under the Plan are actually paid from any such trust, the Bank shall have no further obligation with respect thereto, but to
the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Bank.
9.3 Payment to Participant, Legal Representative or Beneficiary . Any payment to any Participant or the legal
representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions
hereof, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Bank, which may require the Participant, legal
representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such
form as shall be determined by the Bank.
9.4 Nonassignability . Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer,
hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to
which are, expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be
subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed
8
by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or
insolvency.
9.5 Validity . In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been
inserted herein.
9.6 Notice . Any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in
writing and hand delivered, or sent by registered or certified mail, to any member of the Committee or the Secretary of the Bank. Such notice
shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for
registration or certification.
9.7 Successors . The provisions of this Plan shall bind and inure to the benefit of the Bank and its successors and
assigns. The term “successors” as used herein shall include any corporate or other business entity which shall, whether by merger,
consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Bank, and successors of any such
corporation or other business entity.
9.8 Payment of Employment and Code Section 409A Taxes . Any distribution under this Plan shall be reduced by the
amount of any taxes required to be withheld from such distribution, if any. This Plan shall permit the acceleration of the time or schedule of a
payment to pay employment related taxes as permitted under Treasury Regulation Section 1.409A-3(j) or to pay any taxes that may become
due at any time that the arrangement fails to meet the requirements of Code Section 409A and the regulations and other guidance promulgated
thereunder. In the latter case, such payments shall not exceed the amount required to be included in income as the result of the failure to
comply with the requirements of Code Section 409A.
9.9 Acceleration of Payments . Except as specifically permitted herein or in other sections of this Plan, no acceleration of
the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated hereunder by the
Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance issued by the United
States Department of the Treasury. Accordingly, payments may be accelerated, in accordance with requirements and conditions of the
Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of certain domestic relations orders; (ii) in
compliance with ethics agreements with the federal government; (iii) in compliance with ethics laws or conflicts of interest laws; (iv) in
limited cash-outs (but not in excess of the limit under Code Section 402(g)(1)(B)); (v) to apply certain offsets in satisfaction of a debt of the
Participant to the Bank; (vi) in satisfaction of certain bona fide disputes between the Participant and the Bank; or (vii) for any other purpose
set forth in the Treasury Regulations and subsequent guidance.
9.10 12 U.S. C. § 1828(k ). Any payments made to the Participant pursuant to this Plan or otherwise are subject to and
conditioned upon compliance with 12 U.S.C. § 1828(k) and 12 C.F.R. Part 359 Golden
Parachute
and
Indemnification
Payments
or any other
rules and regulations promulgated thereunder.
9.11 Governing Law . The Plan is established under, and will be construed according to, the laws of the State of New
York, to the extent such laws are not preempted by the ERISA or Code and regulations published thereunder.
[Signature Page to Follow]
9
IN WITNESS WHEREOF , the Bank, acting through its authorized officer, has adopted this Plan.
PCSB BANK
6/18/2018 ________________
Date
By: /s/ Joseph D. Roberto ______________
10
PCSB BANK
TRUSTEE FEE DEFERRAL PLAN
ELECTION FORM
Exhibit A
Instructions
:
Use
this
form
to
elect
to
defer
receipt
of
Director
Fees
that
are
ordinarily
payable
to
you
during
the
Plan
Year
as
such
compensation
is
earned,
and
to
designate
how
you
wish
to
receive
your
benefits
from
the
PCSB
Bank
Director
Fee
Deferral
Plan
(the
“Plan”)
.
Individuals
who
first
participate
in
the
Plan
during
a
Plan
year
must
complete
this
form
within
30
days
after
the
date
that
he
or
she
became
eligible
to
participate
in
the
Plan.
For
other
participants,
this
election
form
must
be
completed
no
later
than
December
16
th
of
the
Plan
Year
immediately
preceding
the
Plan
Year
for
which
such
deferrals
will
be
made.
Any
capitalized
terms
used
in
this
Election
Form
but
not
otherwise
defined
herein
shall
have
the
meanings
set
forth
in
the
Plan.
Participant Name:
Date of Participation:
PART I : DEFERRAL CONTRIBUTION (Directors to Complete) :
I hereby elect to make an irrevocable election to defer the receipt of Director Fees (which includes both board and committee fees) earned
following the date of this Election Form as follows:
_____ % of my Director Fees
Of the amounts deferred pursuant to this Election Form, I elect such deferrals to be allocated as follows:
_____ % to be allocated to my Cash Account
_____ % to be allocated to my Stock Account
I understand that my election to defer receipt of Director Fees shall continue for subsequent years in accordance with this Election Form until
such time as I submit a “Notice of Adjustment of Deferral Contribution (Exhibit B hereto) to the Committee at least 15 days prior to January 1
of any Plan Year. Such adjustment will only take effect January 1 of the calendar year following the year in which such notice is executed.
PART II : DISTRIBUTION ELECTIONS (Directors to Complete)
Except
as
provided
in
Section
5.3
of
the
Plan,
I
understand
and
agree
that
my
Account
Balance
shall
be
paid
at
the
time
and
in
the
manner
that
I
select
in
my
Election
Form
from
time
to
time
(i.e.,
the
distribution
election
made
in
this
Part
II
of
the
Election
Form
will
govern
the
amounts
deferred
pursuant
to
this
Election
Form
and
any
distribution
election
that
I
make
in
a
subsequent
Election
Form
for
a
different
plan
year
will
govern
the
amounts
deferred
pursuant
to
that
Election
Form),
and
that
such
election(s)
shall
be
irrevocable,
unless
modified
in
accordance
with
Section
5.5
of
the
Plan.
I
also
understand
and
agree
that
if
I
fail
to
select
a
time
and
form
of
benefit
payment
for
the
amounts
deferred
under
this
or
a
subsequent
Election
Form,
such
amounts
will
be
distributed
pursuant
to
the
election
made
in
my
immediately
prior
Election
Form.
If
I
have
never
made
an
election
as
to
the
form
of
distribution
of
my
Account,
I
will
be
deemed
to
have
elected
that
my
Account
Balance
will
be
distributed
in
a
lump
sum
within
30
days
after
my
Separation
from
Service
for
purposes
of
Section
5.2
of
the
Plan.
Note,
if
you
do
not
make
a
selection
below,
that
portion
of
your
Account
deferred
pursuant
to
this
Election
Form
will
be
distributed
in
accordance
with
your
last
completed
Election
Form.
If
you
have
never
made
an
election
as
to
the
form
of
distribution
of
your
Account,
your
Account
will
be
distributed
in
a
lump
sum
within
30
days
after
your
Separation
from
Service.
Please Select either (A) or (B) below :
☐ (A) Separation from Service Election
Pursuant to Section 5.2 of the Plan, in the event of my Separation from Service, I hereby elect to receive my Account Balance in the
following form: (check one):
_____lump sum distribution
_____substantially equal monthly installments over a period of ____ years
☐ (B) Specified Date Election
Pursuant to Section 5.2 of the Plan, I hereby elect to receive (or begin to receive) my Account Balance on ______________ (enter
month, day and year).
Further, I hereby elect to receive my Account Balance in the following form (check one):
_____lump sum distribution
_____substantially equal monthly installments over a period of ____ years
[Signature Page to Follow]
2
I understand that I am entitled to review or obtain a copy of the Plan, at any time, and may do so by contacting the Committee.
This Election Form shall become effective upon execution (below) by both the Participant and a duly authorized officer of the
Bank.
Dated this ___________ day of ________________, 20__.
(Bank’s duly authorized officer)
Participant’s Signature
3
PCSB BANK
TRUSTEE FEE DEFERRAL PLAN
NOTICE OF ADJUSTMENT OF DEFERRAL CONTRIBUTION
Exhibit B
The undersigned Participant of the PCSB Bank Director Fee Deferral Plan (the “Plan”) does hereby adjust the deferral of his or her Director
Fees under the Plan. The undersigned Participant acknowledges that this election is only revocable with respect to compensation earned for
services in the subsequent calendar year following the date of this notice.
Any capitalized terms used in this form but not otherwise defined herein shall have the meanings set forth in the Plan.
Adjustment of Deferral Contribution to take effect as of January 1 of the calendar year immediately following the date of this
election.
Directors (Complete this Section) :
I hereby elect to make an irrevocable election to defer the receipt of Director Fees earned following the date of this Election Form as follows
(to discontinue deferral, enter “0”):
_____ % of my Director Fees
_____ % in cash
_____ % in Employer Stock
Dated this ___________ day of ________________, 20__.
(Bank’s duly authorized officer)
Participant’s Signature
4
PCSB BANK
TRUSTEE FEE DEFERRAL PLAN
BENEFICIARY DESIGNATION FORM
Exhibit C
PART III : BENEFICIARY DESIGNATION
In accordance with the terms of the Plan, I hereby designate the following Beneficiary(ies) to receive any death benefits under the Agreement:
PRIMARY BENEFICIARY:
Name:_________________________________
% of Benefi t:___________________
Name:_________________________________
% of Benefit:___________________
Name:_________________________________
% of Benefit:___________________
SECONDARY BENEFICIARY (if all Primary Beneficiaries pre-decease the Participant):
Name:_________________________________
% of Benefit:___________________
Name:_________________________________
% of Benefit:___________________
Name:_________________________________
% of Benefit:___________________
This Beneficiary Designation hereby revokes any prior Beneficiary Designation which may have been in effect and this Beneficiary
Designation is revocable.
Date
Participant’s Signature
5
PCSB BANK
TRUSTEE FEE DEFERRAL PLAN
ONE-TIME ELECTION FORM
TO CONVERT ALL OR A PORTION OF ACCOUNT TO EMPLOYER STOCK
Exhibit D
Instructions
:
Use
this
form
to
elect
to
convert
all
or
a
portion
of
your
current
Account
Balance
in
the
PCSB
Bank
Director
Fee
Deferral
Plan
(the
“Plan”)
to
Employer
Stock.
Individuals
who
participate
in
the
Plan
must
complete
this
form
between
May
23,
2018
and
June
19,
2018
and
it
will
be
effective,
initially,
as
of
July
1,
2018.
Any
capitalized
terms
used
in
this
Election
Form
but
not
otherwise
defined
herein
shall
have
the
meanings
set
forth
in
the
Plan.
Participant Name:
Percentage of Account to Convert to Employer Stock (Director to Complete) :
I hereby elect to make an irrevocable election to transfer ______ % of my Account to my Stock Account to be invested in Employer Stock.
I understand that my election to convert all or a portion of my existing Account to Employer Stock is a one-time irrevocable election.
I also understand that I may make a one-time mid-year election to have a percentage of my current year’s Deferral Contribution invested in
Employer Stock. I elect to have (check one):
_____
_____
none of my future 2018 Deferral Contributions invested in Employer Stock
_____% (specify percentage, up to 100%, in whole percentages) invested in Employer Stock
Hereafter, I may elect to have all or a portion of each calendar year’s deferral invested in Employer Stock.
I also understand that any amount I elect to invest in Employer Stock shall remain in Employer Stock for the entire deferral period and will be
distributed to me in Employer Stock at the time of distribution unless a distribution in Employer Stock is not possible (i.e., in the event of a
distribution following a Change in Control of the Company where the merger consideration is cash or cash and stock).
I understand that I am entitled to review or obtain a copy of the Plan, at any time, and may do so by contacting the Committee.
This Election Form shall become effective upon execution (below) by both the Participant and a duly authorized officer of the Bank.
Dated this ___________ day of ________________, 20__.
(Bank’s duly authorized officer)
Participant’s Signature
6
PCSB BANK
DEATH BENEFIT ONLY PLAN
ARTICLE I
PURPOSE AND SPECIFICATIONS
Exhibit 10.16
The purpose of this Death Benefit Only Plan (the “Plan”) is to provide the selected Director (as defined below) of PCSB Bank (the
“Bank”) with a death benefit payable to his named Beneficiary in the event of the Director’s death while in the service of the Bank. The Plan
is effective as of June 4 th , 2018.
ARTICLE II
DEFINITIONS
2.1 “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with
Article IV, that are entitled to receive a benefit under the Plan after the death of the Director.
2.2 “Board” shall mean the Board of Directors of the Bank, as from time to time constituted.
2.3
“Code” shall mean the U.S. Internal Revenue Code of 1986, as amended from time to time. Reference to any
section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation that amends, supplements
or replaces such section or subsection.
2.4 “Director” shall mean Willard I Hill Jr., who serves as a Director of the Bank.
2.5 “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference
to any section or subsection of ERISA includes reference to any comparable or succeeding provisions of any legislation that amends,
supplements or replaces such section or subsection.
2.6
2.7
“Plan” shall mean the PCSB Bank Death Benefit Only Plan, which shall be evidenced by this instrument.
“Plan Administrator” shall mean the Compensation Committee of the Bank or its designee. The Director may not vote in
any Bank decision relating solely to his individual benefits under this Plan.
2.8 “Pre-Termination Death Benefit” shall
mean a total
benefit
equal
to One Hundred Fifty-Three Thousand
Eight Hundred Fifty Dollars ($153,850).
ARTICLE III
PARTICIPATION
3.1 Commencement of Participation. The Director shall participate under the Plan upon the later of the adoption
of this Plan document or upon satisfaction of the requirements of Section 3.3 below.
3.2 Cessation of Participation. The Director shall cease to participate in the Plan if he or she terminates service
with the Bank or if the Plan is terminated under the circumstances set forth in Article VII.
3.3 Required Documentation and Related Conditions of Eligibility. In no event
the Director commence
participation before filling out all documentation and taking any other steps required by the Plan Administrator as a condition of participating
in the Plan. If the Bank purchases a life insurance policy to informally fund the Director’s benefit under this Plan, such steps may include the
filling out of a life insurance consent form (as defined in Code Section 101(j)) and may include the taking of a physical examination or such
other steps as are required as a condition to the Bank’s purchase of life insurance on the life of the Director.
shall
{Clients/1511/00277090.DOC/ } 1
ARTICLE IV
BENEFICIARIES
4.1 Designation. The Director shall have the right to designate, on a form provided by the Plan Administrator, a
Beneficiary to receive the benefits provided under the Plan in the event of the Director’s death and shall have the right at any time to revoke
such designation or to substitute another such Beneficiary. Any such change shall be effective on the date of written notice from the Director
naming a new or additional Beneficiary. Such notice shall be delivered to the Plan Administrator.
4.2 Absence of Valid Designation. If, upon the death of the Director, there is no valid designation of Beneficiary
on file with the Plan Administrator, the Plan Administrator shall designate the Director’s surviving spouse as Beneficiary, or if there is no
surviving spouse, the Director’s children, in equal shares per
stirpes
or if none, the Director’s estate.
4.3
Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person
incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person
having the care or custody of such minor, incompetent person or incapable person. The Bank may require proof of incompetence, minority, or
guardianship as it may deem appropriate prior to distribution of benefit. Such distribution shall completely discharge the Bank from all
liability with respect to such benefit.
ARTICLE V
PLAN BENEFITS
5.1 Pre-Termination Death Benefit. If the Director dies before otherwise terminating service with the Bank,
the
Bank shall pay to Director’s Beneficiary the Pre-Termination Death Benefit in a single lump sum payment within ninety (90) days following
the Director’s date of death, notwithstanding anything herein to the contrary, the death benefit shall be paid no later than March 15 of the year
following the year in which the Director dies.
5.2 Suicide or Misstatement. The Bank shall not pay any benefits under this Plan if the Director commits suicide
within two (2) years after the date of this Plan. In addition, the Bank shall not pay any benefits under this Plan if the Director has made any
material misstatement of fact on any application for any benefits provided by the Bank to the Director under this Plan.
ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1 Power and Duties of the Plan Administrator. The Plan Administrator shall have the duty to manage and
administer the Plan in accordance with the terms and provisions of this Article, and shall have the power:
(a)
(b)
To construe and interpret the terms and provisions of the Plan; and
To establish rules and prescribe any forms necessary or desirable to administer the Plan.
All constructions, interpretations, and determinations made by the Bank in connection with the administration of this Plan shall be
final, binding and conclusive subject, however, to timely request for review pursuant to the terms and conditions of that Section hereof
entitled “Claims Procedure and Review.”
6.2 Named Fiduciary. The Plan Administrator shall be the named fiduciary under the Plan. The named fiduciary
may delegate to others certain aspects of the management and operation responsibilities of the Plan including the employment of advisors and
the delegation of ministerial duties to qualified individuals.
6.3 Record and Reports. The Plan Administrator shall keep a record of all actions taken and shall keep all other
books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying
all information and reports to the Internal Revenue Service, Department of Labor, Directors, Beneficiaries, and others as required by law.
{Clients/1511/00277090.DOC/ } 2
6.4 Payment of Expenses. All expenses of administration shall be paid by the Bank. Such expenses shall include
any expenses incident to the functioning of the Plan Administrator, including, but not limited to, fees of accountants, legal counsel, and other
spec ialists and their agents, and other costs of administering the Plan.
6.5 Claims Procedure and Review. Claims for benefits under the Plan shall be filed on forms supplied by the
Bank. Written or electronic notice of the disposition of a claim shall be furnished to the claimant within ninety (90) days after the application
therefore is filed, unless special circumstances require an extension of time (not to exceed 90 additional days) for processing the claim. In the
event the claim is denied, the reasons for the denial shall be specifically set forth, pertinent provisions of the Plan shall be cited and, where
appropriate, an explanation as to how the claimant can perfect the claim and whether further material or information is necessary.
If a Beneficiary has been denied a benefit or feels aggrieved by any other action of the Bank, the Beneficiary shall be entitled upon
written request to the Bank, to receive a written or electronic notice of such action, together with a full and clear statement of the reason for
the action.
If the claimant wishes further consideration of his or her position, he or she may obtain a form from the Bank on which to request a
hearing. Such form, together with a written statement of the claimant’s position, shall be filed with the Bank no later than sixty (60) days after
receipt of the written notification provided for in the paragraph above and in the paragraph preceding it. The claimant or his or her duly
authorized representative may review pertinent documents and submit issues and comments in writing.
The decisions on review shall be furnished to the claimant within the time limit described in the preceding paragraph. It shall
include specific reasons for the decision, expressed in a manner calculated to be understood by the claimant and shall specifically refer to
pertinent Plan provisions on which it is based. The claimant shall be advised that if he or she wishes to pursue his or her claim further, he or
she may file suit in federal or state court and that the court will decide who should pay court costs and legal fees.
This Section 6.5 is based on Section 2560.503-1 of the Department of Labor Regulations. If any provision of this Section 6.5
conflicts with the requirements of those regulations, the requirements of those regulations will prevail.
ARTICLE VII
AMENDMENT AND TERMINATION
7.1
The Board reserves the right to amend or terminate this Plan at any time, for any or no reason, in its sole
discretion; provided, however, that any change to the Plan shall be prospective only in its operation if it would diminish or eliminate any
benefit payable to the Director’s Beneficiary. The Plan shall automatically terminate without notice upon the occurrence of any of the
following events: (1) the total cessation of the business of the Bank; (2) the bankruptcy, receivership or dissolution of the Bank; (3) upon the
date of the Director’s termination of service with the Bank, other than due to the Director’s death; or (4) while the Director is living and in
service with the Bank, by written notice thereof by either the Bank or the Director to the other .
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Binding Effect. This Plan shall bind the Director and the Bank and their respective beneficiaries,
survivors,
executors, administrators, successors, transferees, and assigns.
8.2 Information to be Furnished. The Director and his Beneficiary shall provide the Plan Administrator with such
information and evidence, and shall sign such documents, as may reasonably be requested from time to time for the purpose of administration
of the Plan.
8.3 Limitation on Director’s Rights. Participation in the Plan shall not give the Director the right to continue to
serve as a Director, or any right or interest in the benefits provided under the Plan other than as herein provided. The Bank reserves the right
to fail or refuse to nominate the Director to service on the Board without any liability for any claim either against the Plan, except to the
extent herein provided, or against the Bank.
8.4 Applicable Law. The Plan shall be construed, administered and enforced according to the laws of the State of
New York, except to the extent the law of such state is superseded by ERISA or other federal laws.
{Clients/1511/00277090.DOC/ } 3
8.5 Receipt and Release. Any payment to any Beneficiary in accordance with the provisions of the Plan shall be, to
the extent thereof, in full satisfaction of all claims against the Plan Administrator and the Bank; and the Bank may require such Beneficiary,
as a condition precedent to such payment, to execute a receipt and relea se to such effect.
8.6 Nonassignability. None of the benefits, payments, proceeds or claims of the Director or Beneficiary shall be
subject to any claim of any creditor of the Director or Beneficiary and, in particular, the same shall not be subject to attachment or
garnishment or other legal process by any creditor of such person, nor shall the Director or Beneficiary have any right to alienate, anticipate,
commute, pledge, encumber or assign any of the benefits or payments or proceeds which may be payable under the Plan.
8.7 Benefits Solely from General Assets. The benefits provided by the Plan shall be paid solely from the general
assets of the Bank. No Director, Beneficiary or other person shall have any claim against, right to, or security or other interest in, any specific
fund, account, insurance policy, or other asset of the Bank with respect to benefits under the Plan.
8.8 Notices. Any notice, consent or demand required or permitted to be given under the provisions of this Plan by
one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the
same to such other party, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last
known address as shown on the records of the Bank. The date of such mailing shall be deemed the date of such mailed notice, consent or
demand.
8.9 Tax Withholding. Any benefits payable to a Beneficiary under the Plan shall be reduced to the extent of any
withholding of the Beneficiary’s income taxes by the Bank as required by law.
8.10 Entire Agreement. This Plan constitutes the entire agreement between the Bank and the Director as to the
subject matter hereof and supersedes any and all other oral and written agreements heretofore made, including, without limitation, the prior
Death Benefit Only Plan effective June 4, 2018. No rights are granted to the Director by virtue of this Plan other than those specifically set
forth herein.
IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the date first written above.
ATTEST:
/s/ Jeffrey M. Helf
WITNESS:
/s/ Scott D. Nogles
{Clients/1511/00277090.DOC/ } 4
PCSB Bank
/s/ Joseph D. Roberto
Joseph D. Roberto
Chairman, President and Chief Executive Officer
DIRECTOR:
/s/ Willard I. Hill, Jr.
Willard I. Hill, Jr.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-217399 on Form S-8 of PCSB Financial Corporation and Subsidiaries of our report
dated September 13, 2018, relating to the consolidated financial statements, appearing in this Annual Report on Form 10-K.
Crowe LLP
New York, New York
September 13, 2018
Exhibit 31.1
I, Joseph D. Roberto, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of PCSB Financial Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: September 13, 2018
/s/ Joseph D. Roberto
Joseph D. Roberto
Chairman, President and Chief Executive Officer
Exhibit 31.2
I, Scott D. Nogles, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of PCSB Financial Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: September 13, 2018
/s/ Scott D. Nogles
Scott D. Nogles
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
Joseph D. Roberto, Chairman, President and Chief Executive Officer and Scott D. Nogles, Executive Vice President and Chief Financial Officer of PCSB
Financial Corporation (the “Company”) each certify in their capacity as an officer of the Company that they have reviewed the annual report of the Company on
Form 10-K for the fiscal year ended June 30, 2018 and that to the best of their knowledge:
(1)
(2)
the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
Date: September 13, 2018
Date: September 13, 2018
/s/ Joseph D. Roberto
Joseph D. Roberto
Chairman, President and Chief Executive Officer
/s/ Scott D. Nogles
Scott D. Nogles
Executive Vice President and Chief Financial Officer