Company Quick10K Filing
PCSB Financial
Price20.50 EPS1
Shares18 P/E41
MCap361 P/FCF34
Net Debt0 EBIT25
TEV361 TEV/EBIT15
TTM 2019-09-30, in MM, except price, ratios
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PCSB 10Q Quarterly Report

Part I-Financial Information
Item 1. Financial Statements.
Note 1. Basis of Presentation
Note 2. Recent Accounting Pronouncements
Note 3. Investment Securities
Note 4. Loans
Note 5. Other Comprehensive Income (Loss)
Note 6. Post-Retirement Benefits
Note 7. Fair Value of Financial Instruments
Note 8. Regulatory Capital
Note 9. Plan of Conversion
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 d321763dex311.htm
EX-31.2 d321763dex312.htm
EX-32 d321763dex32.htm

PCSB Financial Earnings 2016-12-31

Balance SheetIncome StatementCash Flow
1.71.41.00.70.30.02017201820192020
Assets, Equity
0.10.10.10.00.00.02016201720182020
Rev, G Profit, Net Income
0.20.10.0-0.0-0.1-0.22017201820192020
Ops, Inv, Fin

10-Q 1 d321763d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended December 31, 2016

OR

 

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

For the transition period from                      to                     

Commission File Number: 333-215052

 

 

PCSB Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   81-4710738

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2651 Strang Blvd, Suite 100

Yorktown Heights, NY

  10598
(Address of principal executive offices)   (Zip Code)

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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 (§ 232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a small reporting company)    Small reporting company  

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

No shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of March 27, 2017.

 

 

 


Table of Contents

Table of Contents

 

            Page  

PART I.

    

FINANCIAL INFORMATION

  

Item 1.

    

Financial Statements (Unaudited)

     2  
    

Consolidated Balance Sheets

     2  
    

Consolidated Statements of Operations

     3  
    

Consolidated Statements of Comprehensive Income

     4  
    

Consolidated Statements of Equity

     5  
    

Consolidated Statements of Cash Flows

     6  
    

Notes to Unaudited Condensed Consolidated Financial Statements

     8  

Item 2.

    

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

     30  

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

     39  

Item 4.

    

Controls and Procedures

     39  

PART II.

    

OTHER INFORMATION

  

Item 1.

    

Legal Proceedings

     39  

Item 1A.

    

Risk Factors

     39  

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

     39  

Item 3.

    

Defaults Upon Senior Securities

     39  

Item 4.

    

Mine Safety Disclosures

     39  

Item 5.

    

Other Information

     39  

Item 6.

    

Exhibits

     40  

Exhibit Index

     40  

Signatures

     41  

 

i


Table of Contents

EXPLANATORY NOTE

PCSB Financial Corporation (the “Company,” “we” or “our”) was incorporated on December 1, 2016 to serve as the bank holding company for PCSB Bank upon the conversion of PCSB Bank from a New York-chartered mutual savings bank to a New York-chartered capital stock savings bank. As of December 31, 2016, the conversion had not been completed. As of December 31, 2016, the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, the unaudited consolidated financial statements and the other financial information contained in this quarterly report on Form 10-Q relate solely to PCSB Bank and subsidiaries.

The unaudited consolidated financial statements and other financial information contained in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements of PCSB Bank and subsidiaries at and for the year ended June 30, 2016 contained in the Company’s definitive prospectus dated February 10, 2017 (the “Prospectus”) as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on February 17, 2017.

 

1


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

PCSB Bank

Consolidated Balance Sheets (unaudited)

(amounts in thousands)

 

     December 31,     June 30,  
     2016     2016  

ASSETS

    

Cash and due from banks

   $ 42,953     $ 36,258  

Federal funds sold

     5,374       5,320  
  

 

 

   

 

 

 

Cash and cash equivalents

     48,327       41,578  

Held to maturity investment securities, at amortized cost (fair value of $269,658 and $273,317, respectively)

     272,591       270,679  

Available for sale investment securities, at fair value

     95,363       112,351  
  

 

 

   

 

 

 

Total investment securities

     367,954       383,030  

Loans receivable, net of allowance for loan losses of $4,628 at December 31, 2016 and $4,042 at June 30, 2016

     766,681       782,336  

Accrued interest receivable

     3,296       3,361  

Federal Home Loan Bank stock, at cost

     1,324       2,047  

Bank premises and equipment, net

     11,573       10,774  

Deferred tax assets, net

     5,652       6,164  

Foreclosed real estate

     2,214       905  

Bank-owned life insurance

     22,885       22,557  

Goodwill

     6,106       6,106  

Other intangible assets, net

     629       702  

Other assets

     4,242       2,511  
  

 

 

   

 

 

 

Total assets

   $ 1,240,883     $ 1,262,071  
  

 

 

   

 

 

 

LIABILITIES

    

Interest bearing deposits

   $ 976,568     $ 990,032  

Non-interest bearing deposits

     131,152       122,663  
  

 

 

   

 

 

 

Total deposits

     1,107,720       1,112,695  

Mortgage escrow funds

     6,737       7,023  

Advances from Federal Home Loan Bank

     4,022       20,081  

Other liabilities

     9,647       12,323  
  

 

 

   

 

 

 

Total liabilities

     1,128,126       1,152,122  
  

 

 

   

 

 

 

Commitments and Contingencies

    

EQUITY

    

Retained earnings

     121,047       117,919  

Accumulated other comprehensive loss

     (8,290     (7,970
  

 

 

   

 

 

 

Total equity

     112,757       109,949  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,240,883     $ 1,262,071  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

2


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PCSB Bank

Consolidated Statements of Operations (unaudited)

(amounts in thousands)

 

     Three months ended
December 31,
     Six months ended
December 31,
 
     2016      2015      2016      2015  

Interest and dividend income

           

Loans

   $ 8,238      $ 8,042      $ 16,763      $ 16,200  

Investment securities

     1,530        1,450        3,010        2,897  

Fed funds and other

     82        66        186        124  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     9,850        9,558        19,959        19,221  

Interest expense

           

Deposits

     1,279        1,130        2,546        2,246  

Mortgage escrow funds

     13        12        30        27  

FHLB advances

     31        45        81        93  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     1,323        1,187        2,657        2,366  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     8,527        8,371        17,302        16,855  

Provision for loan losses

     562        356        588        397  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     7,965        8,015        16,714        16,458  

Noninterest income

           

Fees and service charges

     360        291        602        547  

Bank-owned life insurance

     160        71        328        146  

Settlement on acquired loan

     1,615        —          1,615        —    

Other

     124        108        266        205  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     2,259        470        2,811        898  

Noninterest expense

           

Salaries and employee benefits

     4,444        4,152        8,694        8,269  

Occupancy and equipment

     1,844        1,188        3,135        2,283  

FDIC assessment

     106        226        321        443  

Professional fees

     276        454        585        807  

Postage, printing, stationary and supplies

     131        189        264        356  

Advertising

     90        75        229        118  

Merger and acquisition related expenses

     —          39        —          161  

Amortization of intangible assets

     37        41        73        81  

Other operating expenses

     866        1,116        1,691        2,009  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     7,794        7,480        14,992        14,527  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income before income tax expense

     2,430        1,005        4,533        2,829  

Income tax expense

     758        278        1,405        846  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,672      $ 727      $ 3,128      $ 1,983  
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

3


Table of Contents

PCSB Bank

Consolidated Statements of Comprehensive Income (unaudited)

(amounts in thousands)

 

     Three months ended
December 31,
    Six months ended
December 31,
 
     2016     2015     2016     2015  

Net income

   $ 1,672     $ 727     $ 3,128     $ 1,983  

Other comprehensive income (loss), net of tax:

        

Change in fair value of available for sale securities

     (833     (307     (732     (116

Adjustment for net periodic pension and other post-retirement benefit cost

     412       —         412       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (421     (307     (320     (116
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 1,251     $ 420     $ 2,808     $ 1,867  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

4


Table of Contents

PCSB Bank

Consolidated Statements of Changes in Equity (unaudited)

(amounts in thousands)

 

     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Total Equity  

Balance at July 1, 2016

   $ 117,919      $ (7,970   $ 109,949  

Net income

     3,128        —         3,128  

Other comprehensive loss

     —          (320     (320
  

 

 

    

 

 

   

 

 

 

Balance at December 31, 2016

   $ 121,047      $ (8,290   $ 112,757  
  

 

 

    

 

 

   

 

 

 

Balance at July 1, 2015

   $ 114,993      $ (4,722   $ 110,271  

Net income

     1,983        —         1,983  

Other comprehensive loss

     —          (116     (116
  

 

 

    

 

 

   

 

 

 

Balance at December 31, 2015

   $ 116,976      $ (4,838   $ 112,138  
  

 

 

    

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

5


Table of Contents

PCSB Bank

Consolidated Statements of Cash Flows (unaudited)

(amounts in thousands)

 

     Six months ended
December 31,
 
     2016     2015  

OPERATING ACTIVITIES

    

Net income

   $ 3,128     $ 1,983  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

    

Provision for loan loss

     588       397  

Depreciation and amortization

     705       591  

Amortization of net premiums on securities and net deferred loan origination costs

     607       648  

Deferred income tax expense, net of valuation reserves

     677       50  

Net increase (decrease) in accrued interest receivable

     65       (36

Net gain on sale of foreclosed real estate

     (30     (3

Write-downs on foreclosed real estate

     —         30  

Earnings from cash surrender value of BOLI

     (328     (146

Net accretion of purchase account adjustments

     (438     (921

Other adjustments, principally net changes in other assets and liabilities

     (3,783     1,386  
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,191       3,979  

INVESTING ACTIVITIES

    

Purchases of investment securities:

    

Held to maturity

     (52,229     (53,021

Available for sale

     (9,073     (27,202

Proceeds from maturities, calls and sales of securities:

    

Held to maturity

     50,043       64,665  

Available for sale

     24,816       14,016  

Disbursement for loan originations, net of principal repayments

     19,715       (995

Purchase of loans

     (6,041     (12,477

Net redemption (purchase) of FHLB stock

     723       (270

Purchase of bank premises and equipment

     (1,431     (2,081

Purchase of BOLI

     —         (10,000

Proceeds from sale of foreclosed real estate

     254       160  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     26,777       (27,205

FINANCING ACTIVITIES

    

Net (decrease) increase in deposits

     (4,874     3,130  

Proceeds from FHLB advances

     —         20,000  

Repayment of FHLB advances

     (16,059     (14,000

Net (decrease) increase in mortgage escrow funds

     (286     288  
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (21,219     9,418  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     6,749       (13,808

Cash and cash equivalents:

    

Cash and cash equivalents at beginning of period

     41,578       77,761  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 48,327     $ 63,953  
  

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements (unaudited)

 

6


Table of Contents

PCSB Bank

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

(amounts in thousands)

 

 

Supplemental information:

     

Cash paid for:

     

Interest

   $ 2,671      $ 2,372  

Income taxes

     134        36  

Loans transferred to foreclosed real estate

     1,533        1,015  

See accompanying notes to the consolidated financial statements (unaudited)

 

7


Table of Contents

PCSB Bank

Notes to Unaudited Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

PCSB Bank (“the 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 mutual 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 PCSB 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 Bank and its three subsidiaries – PCSB Funding Corp., PCSB Commercial Bank and 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. PCSB Realty Ltd. is a corporation that holds certain properties foreclosed upon by the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited consolidated financial statements for the three and six months ended December 31, 2016 and 2015 reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The annualized results of operations for the three and six months ended December 31, 2016 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

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

Note 2. Recent Accounting Pronouncements

The pronouncements discussed below are not intended to be an all-inclusive list, but rather only those pronouncements that could potentially have an 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.” The amendments in ASU 2014-09 provide a comprehensive framework for addressing revenue recognition issues that can be applied to all contracts with customers. 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 amendments in ASU 2014-09 also include improved disclosures to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. For public entities, ASU 2014-09, as amended, is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. ASU 2014-09 is not expected to have a material impact on the Bank’s consolidated financial position, results of operations or disclosures.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments – Overall.” 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 require equity securities to be 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. The amendments would simplify the impairment assessment of such equity

 

8


Table of Contents

securities and would require enhanced disclosure about these investments. ASU 2016-01 would also 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 public entities, the amendments in ASU 2016-01 are effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. ASU 2016-01 is not expected to have a material impact on the Bank’s consolidated financial position, results of operations or disclosures.

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. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact that ASU 2016-02 will have on the Bank’s consolidated financial position, results of operations and 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. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact that ASU 2016-13 will have on the Bank’s consolidated financial position, results of operations and disclosures.

Note 3. Investment Securities

The amortized cost, gross unrealized/unrecognized gains and losses and fair value of available for sale and held to maturity securities at December 31, 2016 and June 30, 2016 were as follows:

 

     December 31, 2016  
     Amortized      Gross Unrealized/Unrecognized      Fair  
     Cost      Gains      Losses      Value  
            (in thousands)         

Available for sale

           

U.S. Government and agency obligations

   $ 48,021      $ 18      $ (372    $ 47,667  

Corporate and other debt securities

     8,487        28        (76      8,439  

Mortgage-backed securities – residential

     36,441        435        (341      36,535  

Mortgage-backed securities – commercial

     2,682        —          (9      2,673  

Equity securities

     49        —          —          49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 95,680      $ 481      $ (798    $ 95,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Government and agency obligations

   $ 128,984      $ 43      $ (985    $ 128,042  

Corporate and other debt securities

     1,005        —          (2      1,003  

Mortgage-backed securities – residential

     74,485        236        (1,408      73,313  

Mortgage-backed securities – collateralized mortgage obligations

     33,481        25        (382      33,124  

Mortgage-backed securities – commercial

     34,636        124        (584      34,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity

   $ 272,591      $ 428      $ (3,361    $ 269,658  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     June 30, 2016  
     Amortized
Cost
     Gross Unrealized/Unrecognized      Fair
Value
 
        Gains      Losses     
            (in thousands)         

Available for sale

           

U.S. Government and agency obligations

   $ 65,953      $ 204      $ (25    $ 66,132  

Corporate and other debt securities

     8,514        132        —          8,646  

Mortgage-backed securities – residential

     37,043        542        (61      37,524  

Equity securities

     49        —          —          49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 111,559      $ 878      $ (86    $ 112,351  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Government and agency obligations

   $ 145,896      $ 357      $ (51    $ 146,202  

Mortgage-backed securities – residential

     72,842        1,342        (45      74,139  

Mortgage-backed securities – collateralized mortgage obligations

     30,268        350        (38      30,580  

Mortgage-backed securities – commercial

     21,673        723        —          22,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity

   $ 270,679      $ 2,772      $ (134    $ 273,317  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no sales of or realized gains or losses on investment securities for the three or six months ended December 31, 2016 or 2015.

The following table presents the fair value and carrying amount of debt securities at December 31, 2016, by contractual maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

     Held to maturity      Available for sale  
     Carrying
Amount
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (in thousands)  

December 31, 2016

           

1 year or less

   $ 32,490      $ 32,484      $ 16,501      $ 16,496  

1 to 5 years

     97,499        96,562        34,890        34,516  

5 to 10 years

     —          —          5,117        5,094  

Mortgage-backed securities

     142,602        140,612        39,123        39,208  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 272,591      $ 269,658      $ 95,631      $ 95,314  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities pledged had carrying amounts of $63.8 million and $93.1 million at December 31, 2016 and June 30, 2016, respectively, and were pledged principally to secure FHLB advances and public deposits.

 

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The following tables provide information regarding investment securities with unrealized/unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized/unrecognized loss position at December 31, 2016 and June 30, 2016:

 

     December 31, 2016  
     Less than 12 months     Greater than 12 months     Total  
     Fair
Value
     Unrealized/
Unrecognized
Loss
    Fair
Value
     Unrealized/
Unrecognized
Loss
    Fair
Value
     Unrealized/
Unrecognized
Loss
 
     (in thousands)  

Available for sale

               

U.S. Government and agency obligations

   $ 35,243      $ (369   $ 1,997      $ (3   $ 37,240      $ (372

Corporate and other debt securities

     6,411        (76     —          —         6,411        (76

Mortgage-backed securities – residential

     19,696        (325     2,276        (16     21,972        (341

Mortgage-backed securities – commercial

     2,153        (9     —          —         2,153        (9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 63,503      $ (779   $ 4,273      $ (19   $ 67,776      $ (798
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held to maturity

               

U.S. Government and agency obligations

   $ 85,041      $ (977   $ 1,992      $ (8   $ 87,033      $ (985

Corporate and other debt securities

     1,003        (2     —          —         1,003        (2

Mortgage-backed securities – residential

     64,177        (1,408     277        —         64,454        (1,408

Mortgage-backed securities – collateralized mortgage obligations

     18,943        (290     3,257        (92     22,200        (382

Mortgage-backed securities – commercial

     22,269        (584     —          —         22,269        (584
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 191,433      $ (3,261   $ 5,526      $ (100   $ 196,959      $ (3,361
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     June 30, 2016  
     Less than 12 months     Greater than 12 months     Total  
     Fair
Value
     Unrealized/
Unrecognized
Loss
    Fair
Value
     Unrealized/
Unrecognized
Loss
    Fair
Value
     Unrealized/
Unrecognized
Loss
 
     (in thousands)  

Available for sale

               

U.S. Government and agency obligations

   $ 19,462      $ (22   $ 1,007      $ (3   $ 20,469      $ (25

Mortgage-backed securities – residential

     11,912        (52     676        (9     12,588        (61
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,374      $ (74   $ 1,683      $ (12   $ 33,057      $ (86
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held to maturity

               

U.S. Government and agency obligations

   $ 22,000      $ (44   $ 7,993      $ (7   $ 29,993      $ (51

Mortgage-backed securities – residential

     6,886        (19     4,895        (26     11,781        (45

Mortgage-backed securities – collateralized mortgage obligation

     4,420        (20     1,333        (18     5,753        (38
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 33,306      $ (83   $ 14,221      $ (51   $ 47,527      $ (134
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of December 31, 2016, the Bank’s security portfolio consisted of $368.0 million in securities, of which 165 securities with a fair value of $264.7 million were in an unrealized/unrecognized loss position. The majority of unrealized/unrecognized losses are related to the Bank’s U.S. Government and agency obligations and mortgage-backed securities.

As of June 30, 2016, the Bank’s security portfolio consisted of $383.0 million in securities, of which 52 securities with a fair value of $80.6 million were in an unrealized/unrecognized loss position. The majority of unrealized/unrecognized losses are related to the Bank’s U.S. Government and agency obligations and mortgage-backed securities.

There were no securities for which the Bank believes it is not probable that it will collect all amounts due according to the contractual terms of the security as of December 31, 2016. Management believes the unrealized/unrecognized losses are primarily a result of changing interest rates. The Bank 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/unrecognized loss position prior to the recovery of its amortized cost basis. Therefore, the Bank did not consider any securities to be other-than-temporarily impaired as of December 31, 2016.

 

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Note 4. Loans

Loans receivable are summarized as follows (in thousands):

 

     December 31,
2016
     June 30,
2016
 

Mortgage loans:

     

Residential

   $ 219,613      $ 226,073  

Commercial

     385,641        385,827  

Construction

     33,089        25,050  

Net deferred loan origination costs

     329        319  
  

 

 

    

 

 

 

Total mortgages

     638,672        637,269  

Commercial and consumer loans:

     

Commercial loans

     31,995        40,607  

Other loans secured

     44,732        49,993  

Home equity lines of credit

     40,140        41,180  

Consumer and installment loans

     14,999        16,476  

Net deferred loan origination costs

     771        853  
  

 

 

    

 

 

 

Total commercial and consumer loans

     132,637        149,109  
  

 

 

    

 

 

 

Total loans receivable

     771,309        786,378  

Allowance for loan losses

     (4,628      (4,042
  

 

 

    

 

 

 

Loans receivable, net

   $ 766,681      $ 782,336  
  

 

 

    

 

 

 

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended December 31, 2016 and 2015 (in thousands):

 

     For three months ended December 31, 2016  
     Beginning
Allowance
     Provision
(credit)
    Charge-offs     Recoveries      Ending
Allowance
 

Originated:

            

Residential

   $ 238      $ —       $ —       $ —        $ 238  

Commercial

     2,121        909       —         1        3,031  

Construction

     302        34       —         —          336  

Commercial loans

     559        (458     —         400        501  

Other loans secured

     361        (22     —         —          339  

Home equity lines of credit

     70        —         —         —          70  

Consumer and installment loans

     414        97       (398     —          113  

Acquired:

            

Residential

     —          —         —         —          —    

Commercial loans

     —          2       (2     —          —    

Consumer and installment loans

     —          —         —         —          —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 4,065      $ 562     $ (400   $ 401      $ 4,628  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     For three months ended December 31, 2015  
     Beginning
Allowance
     Provision
(credit)
    Charge-offs     Recoveries      Ending
Allowance
 

Originated:

            

Residential

   $ 187      $ 216     $ (202   $ —        $ 201  

Commercial

     1,889        35       —         —          1,924  

Construction

     104        43       —         —          147  

Commercial loans

     1,175        7       (5     —          1,177  

Other loans secured

     409        (6     —         —          403  

Home equity lines of credit

     65        82       (18     —          129  

Consumer and installment loans

     123        47       (7     —          163  

Acquired:

            

Residential

     —          —         —         —          —    

Commercial loans

     —          (5     —         5        —    

Consumer and installment loans

     —          (63     —         63        —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 3,952      $ 356     $ (232   $ 68      $ 4,144  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

     For six months ended December 31, 2016  
     Beginning
Allowance
     Provision
(credit)
    Charge-offs     Recoveries      Ending
Allowance
 

Originated:

            

Residential

   $ 237      $ (69   $ —       $ 70      $ 238  

Commercial

     2,149        863       —         19        3,031  

Construction

     269        67       —         —          336  

Commercial loans

     604        (676     —         573        501  

Other loans secured

     397        168       (324     98        339  

Home equity lines of credit

     73        (3     —         —          70  

Consumer and installment loans

     313        198       (398     —          113  

Acquired:

            

Residential

     —          38       (38     —          —    

Commercial loans

     —          2       (2     —          —    

Consumer and installment loans

     —          —         —         —          —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 4,042      $ 588     $ (762   $ 760      $ 4,628  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

     For six months ended December 31, 2015  
     Beginning
Allowance
     Provision
(credit)
    Charge-offs     Recoveries      Ending
Allowance
 

Originated:

            

Residential

   $ 193      $ 210     $ (202   $ —        $ 201  

Commercial

     1,766        158       —         —          1,924  

Construction

     100        (145     —         192        147  

Commercial loans

     1,266        104       (193     —          1,177  

Other loans secured

     416        (13     —         —          403  

Home equity lines of credit

     69        78       (18     —          129  

Consumer and installment loans

     111        73       (21     —          163  

Acquired:

            

Residential

     —          —         —         —          —    

Commercial loans

     —          (5     —         5        —    

Consumer and installment loans

     —          (63     —         63        —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 3,921      $ 397     $ (434   $ 260      $ 4,144  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

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 due to immateriality, by portfolio segment, and based on impairment method as of December 31, 2016 and June 30, 2016 (in thousands):

 

    December 31, 2016  
    Loans     Allowance for Loan Losses  
    Individually
Evaluated for
Impairment
    Collectively
Evaluated
for
Impairment
    Acquired
With
Deteriorated
Credit
Quality
    Total     Individually
Evaluated for
Impairment
    Collectively
Evaluated for
Impairment
    Acquired With
Deteriorated
Credit Quality
    Total  

Residential

  $ 3,712     $ 214,603     $ 1,298     $ 219,613     $ —       $ 238     $ —       $ 238  

Commercial

    5,419       378,421       1,801       385,641       774       2,257       —         3,031  

Construction

    131       32,958       —         33,089       84       252       —         336  

Commercial loans

    90       31,905       —         31,995       —         501       —         501  

Other loans secured

    5,461       39,271       —         44,732       —         339       —         339  

Home equity lines of credit

    551       39,411       178       40,140       —         70       —         70  

Consumer and installment loans

    —         14,935       64       14,999       —         113       —         113  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 15,364     $ 751,504     $ 3,341     $ 770,209     $ 858     $ 3,770     $ —       $ 4,628  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    June 30, 2016  
    Loans     Allowance for Loan Losses  
    Individually
Evaluated for
Impairment
    Collectively
Evaluated
for
Impairment
    Acquired
With
Deteriorated
Credit
Quality
    Total     Individually
Evaluated for
Impairment
    Collectively
Evaluated for
Impairment
    Acquired With
Deteriorated
Credit Quality
    Total  

Residential

  $ 5,483     $ 219,310     $ 1,280     $ 226,073     $ —       $ 237     $ —       $ 237  

Commercial

    9,277       374,772       1,778       385,827       —         2,149       —         2,149  

Construction

    144       24,906       —         25,050       83       186       —         269  

Commercial loans

    2,494       38,113       —         40,607       —         604       —         604  

Other loans secured

    6,465       43,528       —         49,993       2       395       —         397  

Home equity lines of credit

    417       40,583       180       41,180       —         73       —         73  

Consumer and installment loans

    585       15,807       84       16,476       175       138       —         313  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 24,865     $ 757,019     $ 3,322     $ 785,206     $ 260     $ 3,782     $ —       $ 4,042  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

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 December 31, 2016 and June 30, 2016 (in thousands):

 

     December 31, 2016      Three months ended
December 31, 2016
     Six months ended
December 31, 2016
 
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

                    

Residential

   $ 3,832      $ 3,712      $ —        $ 3,725      $ 3      $ 3,753      $ 6  

Commercial

     2,740        2,295        —          2,303        31        2,311        63  

Commercial loans

     90        90        —          91        1        92        2  

Other loans secured

     9,892        5,461        —          5,489        66        5,513        134  

Home equity lines of credit

     552        551        —          551        —          551        (2

With an allowance recorded:

                    

Commercial

     3,177        3,124        774        3,132        25        3,141        52  

Construction

     1,323        131        84        131        —          131        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,606      $ 15,364      $ 858      $ 15,422      $ 126      $ 15,492      $ 255  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2016      Three months ended
December 31, 2015
    Six months ended
December 31, 2015
 
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
     Average
Recorded
Investment
     Interest
Income
Recognized
    Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

                   

Residential

   $ 5,683      $ 5,483      $ —        $ 5,721      $ (2   $ 5,763      $ 17  

Commercial

     9,947        9,277        —          9,353        87       9,026        239  

Construction

     12        12        —          33        —         41        —    

Commercial loans

     5,250        2,494        —          4,075        1       4,630        2  

Other loans secured

     7,762        6,408        —          6,667        68       6,724        143  

Home equity lines of credit

     445        417        —          430        —         430        —    

Consumer and installment loans

     314        236        —          235        —         269        —    

With an allowance recorded:

                   

Construction

     1,324        132        83        132        —         132        —    

Other loans secured

     57        57        2        32        —         18        —    

Consumer and installment

     353        349        175        367        5       317        10  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,147      $ 24,865      $ 260      $ 27,045      $ 159     $ 27,350      $ 411  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2016 and June 30, 2016 (in thousands):

 

     Nonaccrual      Loans Past Due Over 90 Days
and Still Accruing
 
     December 31,
2016
     June 30,
2016
     December 31,
2016
     June 30,
2016
 

Originated:

           

Residential

   $ 2,414      $ 4,717      $ —        $ —    

Commercial

     314        300        —          —    

Construction

     131        144        —          —    

Commercial loans

     —          1,615        —          —    

Other loans secured

     2,560        3,433        —          —    

Home equity lines of credit

     244        405        —          —    

Consumer and installment loans

     3        584        7        4  

Acquired:

           

Residential

     1,065        1,164        —          —    

Home equity lines of credit

     296        197        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,027      $ 12,559      $ 7      $ 4  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $3.3 million as of December 31, 2016 and June 30, 2016. 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.

 

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The following tables present the aging of the recorded investment in past due loans by class of loans as of December 31, 2016 and June 30, 2016 (in thousands):

 

     December 31, 2016  
     30-59
Days Past Due
     60-89
Days Past Due
     90 Days or
More Past
Due
     Total Past
Due
     Current      Total  

Originated:

                 

Residential

   $ 1,084      $ —        $ 1,383      $ 2,467      $ 150,598      $ 153,065  

Commercial

     579        —          314        893        296,721        297,614  

Construction

     —          —          131        131        32,642        32,773  

Commercial loans

     —          —          —          —          31,045        31,045  

Other loans secured

     —          —          81        81        41,926        42,007  

Home equity lines of credit

     503        —          45        548        33,419        33,967  

Consumer and installment loans

     19        —          10        29        14,606        14,635  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

     2,185        —          1,964        4,149        600,957        605,106  

Acquired:

                 

Residential

     1,321        467        935        2,723        63,825        66,548  

Commercial

     909        939        507        2,355        85,672        88,027  

Construction

     —          —          —          —          316        316  

Commercial loans

     851        —          —          851        99        950  

Other loans secured

     —          —          —          —          2,725        2,725  

Home equity lines of credit

     52        —          296        348        5,825        6,173  

Consumer and installment loans

     —          —          —          —          364        364  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired

     3,133        1,406        1,738        6,277        158,826        165,103  

Total

   $ 5,318      $ 1,406      $ 3,702      $ 10,426      $ 759,783      $ 770,209  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     June 30, 2016  
     30-59
Days Past Due
     60-89
Days Past Due
     90 Days or
More Past

Due
     Total Past
Due
     Current      Total  

Originated:

                 

Residential

   $ 430      $ 573      $ 2,232      $ 3,235      $ 150,010      $ 153,245  

Commercial

     —          —          300        300        291,044        291,344  

Construction

     —          —          144        144        24,590        24,734  

Commercial loans

     —          760        1,615        2,375        35,621        37,996  

Other loans secured

     —          —          100        100        47,175        47,275  

Home equity lines of credit

     —          —          113        113        34,340        34,453  

Consumer and installment loans

     5        —          589        594        15,280        15,874  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

     435        1,333        5,093        6,861        598,060        604,921  

Acquired:

                 

Residential

     732        —          1,073        1,805        71,023        72,828  

Commercial

     —          —          520        520        93,963        94,483  

Construction

     —          —          —          —          316        316  

Commercial loans

     —          —          —          —          2,611        2,611  

Other loans secured

     —          —          —          —          2,718        2,718  

Home equity lines of credit

     296        —          197        493        6,234        6,727  

Consumer and installment loans

     —          —          —          —          602        602  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired

     1,028        —          1,790        2,818        177,467        180,285  

Total

   $ 1,463      $ 1,333      $ 6,883      $ 9,679      $ 775,527      $ 785,206  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

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

As of December 31, 2016 and June 30, 2016, the Bank had 21 and 26 loans classified as troubled debt restructurings totaling $12.9 million and $18.6 million, respectively, of which $8.5 million and $13.3 million are performing in accordance with their modified terms. The Bank has allocated $774,000 and $2,000, respectively, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2016 and June 30, 2016, and has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

The Bank did not modify any loans as troubled debt restructurings during the three or six months ended December 31, 2016.

There were no troubled debt restructurings for which there was a payment default in the three or six months ended December 31, 2016 or 2015 that were modified in the twelve months prior to default.

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

Certain loans may have been modified during the periods presented which did not meet the definition of a troubled debt restructuring as the modification was a delay in a payment, ranging from thirty days to six months, which was considered to be insignificant.

 

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Table of Contents

Credit Quality Indicators

The Bank 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 Bank 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 Bank utilized the same grading process for acquired loans as it does for originated loans. The Bank uses the following definitions for risk ratings:

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

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

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

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

 

     December 31, 2016  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Originated:

              

Residential

   $ 150,225      $ —        $ 2,840      $ —        $ 153,065  

Commercial

     291,044        1,982        4,588        —          297,614  

Construction

     32,642        —          131        —          32,773  

Commercial loans

     27,322        1,327        2,396        —          31,045  

Other loans secured

     35,458        —          6,549        —          42,007  

Home equity lines of credit

     33,723        —          244        —          33,967  

Consumer and installment loans

     14,521        —          114        —          14,635  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

     584,935        3,309        16,862        —          605,106  

Acquired:

              

Residential

     63,968        —          2,580        —          66,548  

Commercial

     86,226        —          1,801        —          88,027  

Construction

     316        —          —          —          316  

Commercial loans

     950        —          —          —          950  

Other loans secured

     2,725        —          —          —          2,725  

Home equity lines of credit

     5,700        —          473        —          6,173  

Consumer and installment loans

     364        —          —          —          364  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired

     160,249        —          4,854        —          165,103  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 745,184      $ 3,309      $ 21,716      $ —        $ 770,209  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     June 30, 2016  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Originated:

              

Residential

   $ 147,944      $ 181      $ 5,120      $ —        $ 153,245  

Commercial

     278,491        2,101        10,752        —          291,344  

Construction

     24,590        —          144        —          24,734  

Commercial loans

     30,916        2,004        5,076        —          37,996  

Other loans secured

     38,382        109        8,784        —          47,275  

Home equity lines of credit

     34,047        —          406        —          34,453  

Consumer and installment loans

     15,069        24        432        349        15,874  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated

     569,439        4,419        30,714        349        604,921  

Acquired:

              

Residential

     70,629        —          2,199        —          72,828  

Commercial

     91,380        949        2,154        —          94,483  

Construction

     316        —          —          —          316  

Commercial loans

     2,611        —          —          —          2,611  

Other loans secured

     2,718        —          —          —          2,718  

Home equity lines of credit

     6,529        —          198        —          6,727  

Consumer and installment loans

     602        —          —          —          602  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquired

     174,785        949        4,551        —          180,285  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 744,224      $ 5,368      $ 35,265      $ 349      $ 785,206  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased Credit Impaired Loans

The Bank 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 December 31, 2016 and June 30, 2016 is as follows (in thousands):

 

     December 31,
2016
     June 30,
2016
 

Residential

   $ 1,298      $ 1,280  

Commercial

     1,801        1,778  

Home equity lines of credit

     178        180  

Consumer and installment loans

     64        84  
  

 

 

    

 

 

 

Carrying amount, net of allowance of $0

   $ 3,341      $ 3,322  
  

 

 

    

 

 

 

For those purchased credit impaired loans disclosed in the preceding table, the Bank did not increase or reverse the allowance for loan losses during any period presented.

 

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Table of Contents

Accretable yield, or income expected to be collected, for acquired loans is as follows (in thousands) for the three and six months ended December 31, 2016:

 

     Three months ended
December 31,
     Six months ended
December 31,
 
     2016      2015      2016      2015  

Beginning balance

   $ 532      $ 657      $ 578      $ 713  

New loans acquired

     —          —          —          —    

Accretion income

     (46      (46      (92      (102

Reclassification from non-accretable difference

     —          —          —          —    

Disposals

     —          (82      —          (82
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 486      $ 529      $ 486      $ 529  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Other Comprehensive Income (Loss)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax (in thousands) for the three and six months ended December 31, 2016:

 

    Net unrealized
gain (loss) on
available for
sale securities
    Unrealized loss
on pension
benefits
    Unrealized loss
on SERP
benefits
    Total  

Balance at October 1, 2016

  $ 624     $ (7,683   $ (810   $ (7,869

Other comprehensive income (loss) before reclassifications

    (1,262     —         —         (1,262

Amortization of prior service cost and actuarial losses(1)

    —         577       47       624  

Less tax effect

    (429     196       16       (217
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

    (833     381       31       (421
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

  $ (209   $ (7,302   $ (779   $ (8,290
 

 

 

   

 

 

   

 

 

   

 

 

 
    Net unrealized
gain (loss) on
available for
sale securities
    Unrealized loss
on pension
benefits
    Unrealized loss
on SERP
benefits
    Total  

Balance at October 1, 2015

  $ 514     $ (4,311   $ (734   $ (4,531

Other comprehensive income (loss) before reclassifications

    (512     —         —         (512

Amortization of prior service cost and actuarial losses(1)

    —         —         —         —    

Less tax effect

    (205     —         —         (205
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

    (307     —         —         (307
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ 207     $ (4,311   $ (734   $ (4,838
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Net unrealized
gain (loss) on
available for
sale securities
    Unrealized loss
on pension
benefits
    Unrealized loss
on SERP
benefits
    Total  

Balance at July 1, 2016

  $ 523     $ (7,683   $ (810   $ (7,970

Other comprehensive income (loss) before reclassifications

    (1,109     —         —         (1,109

Amortization of prior service cost and actuarial losses(1)

    —         577       47       624  

Less tax effect

    (377     196       16       (165
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

    (732     381       31       (320
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

  $ (209   $ (7,302   $ (779   $ (8,290
 

 

 

   

 

 

   

 

 

   

 

 

 
    Net unrealized
gain (loss) on
available for
sale securities
    Unrealized loss
on pension
benefits
    Unrealized loss
on SERP
benefits
    Total  

Balance at July 1, 2015

  $ 323     $ (4,311   $ (734   $ (4,722

Other comprehensive income (loss) before reclassifications

    (194     —         —         (194

Amortization of prior service cost and actuarial losses(1)

    —         —         —         —    

Less tax effect

    (78     —         —         (78
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

    (116     —         —         (116
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

  $ 207     $ (4,311   $ (734   $ (4,838
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortization of prior service cost and actuarial losses are included on the Statement of Operations as a component of salaries and benefits expense.

Note 6. Post-Retirement Benefits

Employee Pension Plan: The Bank maintains a non-contributory defined benefit pension plan that covers employees meeting specific requirements as to age and length of service. The Bank’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.

Amendments to Employee Pension Plan: On February 15, 2017, the Board of Trustees approved the freezing and termination of the pension plan effective May 1, 2017.

Supplemental Retirement Plans: The Bank also maintains unfunded and non-qualified supplemental retirement plans (“SERP”) to provide pension benefits in addition to those provided under the qualified pension plan.

 

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Table of Contents

Net periodic benefit cost and other amounts recognized in other comprehensive income for the three and six months ended December 31, 2016 and 2015 (in thousands):

 

     Three months ended
December 31, 2016
     Three months ended
December 31, 2015
 
     Defined benefit
plan
     Supplemental
retirement
plan
     Defined benefit
plan
     Supplemental
retirement
plan
 

Service cost

   $ 184      $ 81      $ 156      $ 85  

Interest cost

     253        29        272        31  

Expected return on plan assets

     (464      —          (449      —    

Amortization of prior net loss

     361        23        214        21  

Amortization of prior service cost

     (72      —          (72      —    

New past service liability

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 262      $ 133      $ 121      $ 137  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six months ended
December 31, 2016
     Six months ended
December 31, 2015
 
     Defined benefit
plan
     Supplemental
retirement
plan
     Defined benefit
plan
     Supplemental
retirement
plan
 

Service cost

   $ 369      $ 161      $ 313      $ 161  

Interest cost

     507        58        544        62  

Expected return on plan assets

     (962      —          (898      —    

Amortization of prior net loss

     721        47        427        42  

Amortization of prior service cost

     (144      —          (144      —    

New past service liability

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 491      $ 266      $ 242      $ 265  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank contributed $3.0 million to the defined benefit plan during the six months ended December 31, 2016 and expects to make no additional contributions to the plan year ended June 30, 2017.

Note 7. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Bank’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.

 

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Table of Contents

Investment Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs), or a broker’s opinion of value (Level 3 inputs).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. Appraisals are generally obtained annually and may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management performs a review of all appraisals, including any such adjustments.

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 Bank. 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.

 

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

 

     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

December 31, 2016:

           

Measured on a recurring basis:

           

Available for sale securities:

           

U.S. Government and agency obligations

   $ —        $ 50,340      $ —        $ 50,340  

Corporate and other debt securities

     —          8,439        —          8,439  

Mortgage-backed securities – residential

     —          36,535        —          36,535  

Equity securities

     —          49        —          49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —        $ 95,363      $ —        $ 95,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

Impaired loans:

           

Residential mortgages

   $ —        $ —        $ 495      $ 495  

Commercial mortgages

     —          —          2,350        2,350  

Construction

     —          —          47        47  

Foreclosed real estate

     —          —          720        720  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —        $ —        $ 3,612      $ 3,612  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  

June 30, 2016:

           

Measured on a recurring basis:

           

Available for sale securities:

           

U.S. Government and agency obligations

   $ —        $ 66,132      $ —        $ 66,132  

Corporate and other debt securities

     —          8,646        —          8,646  

Mortgage-backed securities – residential

     —          37,524        —          37,524  

Equity securities

     —          49        —          49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —        $ 112,351      $ —        $ 112,351  
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a non-recurring basis:

           

Impaired loans:

           

Residential mortgages

   $ —        $ —        $ 913      $ 913  

Construction

     —          —          49        49  

Commercial loans

     —          —          54        54  

Consumer and installment loans

     —          —          175        175  

Foreclosed real estate

     —          —          905        905  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ —        $ —        $ 2,096      $ 2,096  
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans in the table above had a carrying amount of $3.7 million, a remaining valuation allowance of $858,000 at December 31, 2016, incurred $38,000 of net charge-offs during the six months ended December 31, 2016, and resulted in an additional provision for loan losses of $814,000. Impaired loans in the table above had a carrying amount of $1.5 million, a remaining valuation allowance of $259,000 at June 30, 2016, and incurred no net charge-offs during the year ended June 30, 2016, which resulted in an additional provision for loan losses of $175,000 for the year.

 

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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 December 31 and June 30, 2016 (in thousands):

 

    Fair Value     Valuation
Technique(s)
   

Unobservable

Input(s)

  Range or
Rate Used
 

December 31, 2016:

       

Impaired loans - residential mortgages

  $ 495       Sales comparison     Adjustments for differences in sales comparables     -9.0% to 7.8%  

Impaired loans - commercial mortgages

    2,350       Discounted cash flow     Discount rate     5.0%  

Impaired loans - construction

    47       Discounted cash flow     Discount rate     1.0%  

Foreclosed real estate

    720       Sales comparison     Adjustments for differences in sales comparables     -8.5% to - 6.1%  

June 30, 2016:

       

Impaired loans - residential mortgages

  $ 913       Sales comparison     Adjustments for differences in sales comparables     -2.0% to 13.3%  

Impaired loans - construction

    49       Discounted cash flow     Discount rate     1.0%  

Impaired loans - other loans secured

    54       Discounted cash flow     Discount rate     4.5%  

Impaired loans - consumer and installment loans

    175       Discounted cash flow     Discount rate     4.3%  

Foreclosed real estate

    905       Sales comparison     Adjustments for differences in sales comparables     -14.3% to 7.5%  

 

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The following is a summary of the carrying amounts and estimated fair values of the Bank’s financial assets and liabilities (in thousands) (none of which are held for trading purposes):

 

     Carrying
Amount
     Fair Value Measurements  
        Level 1      Level 2      Level 3      Total  

December 31, 2016:

              

Financial assets:

              

Cash and cash equivalents

   $ 48,327      $ 48,327      $ —        $ —        $ 48,327  

Investment securities held to maturity

     272,591        —          269,381        277        269,658  

Investment securities available for sale

     95,363        —          95,363        —          95,363  

Loans receivable, net

     766,681        —          —          775,168        775,168  

Accrued interest receivable

     3,296        —          898        2,398        3,296  

Federal Home Loan Bank stock

     1,324        N/A        N/A        N/A        N/A  

Financial liabilities:

              

Demand, NOW, money market deposits and savings accounts

   $ 793,616      $ 793,616      $ —        $ —        $ 793,616  

Time certificate deposits

     314,104        —          317,395        —          317,395  

Mortgage escrow funds

     6,737        6,737        —          —          6,737  

FHLB advances

     4,022        —          3,924        —          3,924  

June 30, 2016:

              

Financial assets:

              

Cash and cash equivalents

   $ 41,578      $ 41,578      $ —        $ —        $ 41,578  

Investment securities held to maturity

     270,679        —          273,032        285        273,317  

Investment securities available for sale

     112,351        —          112,351        —          112,351  

Loans receivable, net

     782,336        —          —          799,242        799,242  

Accrued interest receivable

     3,361        —          958        2,403        3,361  

Federal Home Loan Bank stock

     2,047        N/A        N/A        N/A        N/A  

Financial liabilities:

              

Demand, NOW, money market deposits and savings accounts

   $ 781,638      $ 781,638      $ —        $ —        $ 781,638  

Time certificate deposits

     331,057        —          334,290        —          334,290  

Mortgage escrow funds

     7,023        7,023        —          —          7,023  

FHLB advances

     20,081        —          20,171        —          20,171  

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 are 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/Payable: The carrying amount of accrued interest approximates fair value.

 

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Deposits: 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 carrying amount) and are considered Level 1. Fair values for time certificates of deposit 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 Bank’s current advances maturities schedule, resulting in a Level 2 classification.

Note 8. Regulatory Capital

The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2016 and June 30, 2016, compared to the required ratios for minimum capital adequacy and for classification as well capitalized (dollars in thousands):

 

                  FDIC Required Ratios  
     Bank Actual     Adequacy     Well Capitalized  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2016

               

Leverage (Tier 1)

   $ 114,564        9.3   $ 49,372        4.0   $ 61,715        5.0

Risk-based:

               

Common Tier 1

     114,564        14.0       36,761        4.5       53,100        6.5  

Tier 1

     114,564        14.0       49,015        6.0       65,354        8.0  

Total

     119,192        14.6       65,354        8.0       81,692        10.0  

June 30, 2016

               

Leverage (Tier 1)

   $ 110,888        8.9   $ 49,748        4.0   $ 62,185        5.0

Risk-based:

               

Common Tier 1

     110,888        13.5       37,036        4.5       53,497        6.5  

Tier 1

     110,888        13.5       49,382        6.0       65,842        8.0  

Total

     114,930        14.0       65,842        8.0       82,303        10.0  

In addition to the ratios above, the Basel III Capital Rules established that community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and 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 December 31, 2016 and June 30, 2016, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer of 0.625%. 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.

 

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Note 9. Plan of Conversion

On December 7, 2016, the Board of Trustees of the Bank adopted a plan of conversion (“Plan”). The Plan is subject to, and has received, the approval of the FDIC, New York State Department of Financial Services, and the Board of Governors of the Federal Reserve System, and must be approved by the affirmative vote of at least a majority of the total votes eligible to be cast by the voting depositors of the Bank at a special meeting. The Plan sets forth that the Bank proposes to convert into a stock savings bank structure with the establishment of a bank holding company, PCSB Financial Corporation (the “Company”), as parent of the Bank. The Bank will convert to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to the Company. Pursuant to the Plan, the Bank has determined the total offering value and number of shares of common stock based upon a valuation by an independent appraiser. The stock will be priced at $10.00 per share. The Bank’s Board of Trustees will adopt an employee stock ownership plan (ESOP) which will purchase 8% of the common stock sold in the offering. The Company is being organized as a corporation incorporated under the laws of the State of Maryland and will own all of the outstanding common stock of the Bank upon completion of the conversion.

The costs of issuing the common stock will be deferred and deducted from the sales proceeds of the offering. If the conversion is unsuccessful, all deferred costs will be charged to operations. The Bank had $528,000 of deferred conversion costs as of December 31, 2016 and $0 as of June 30, 2016. The transaction is subject to approval by regulatory authorities and depositors of the Bank. At the completion of the conversion to stock form, the Bank will establish a liquidation account in the amount of retained earnings contained in the final prospectus. The liquidation account will be maintained for the benefit of eligible savings account holders who maintain deposit accounts in the Bank after conversion.

The conversion will be accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

 

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

General

Management’s discussion and analysis of financial condition and results of operations at December 31, 2016 and for the three and six months ended December 31, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of PCSB Bank. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

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

 

    statements of our goals, intentions and expectations;

 

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

 

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

 

    estimates of our risks and future costs and benefits.

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

 

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

 

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

 

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

 

    our ability to access cost-effective funding;

 

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

 

    demand for loans and deposits in our market area;

 

    our ability to continue to implement our business strategies;

 

    competition among depository and other financial institutions;

 

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

 

    adverse changes in the securities markets;

 

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

 

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

 

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

 

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

 

    changes in consumer spending, borrowing and savings habits;

 

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

 

    our ability to retain key employees;

 

    our compensation expense associated with equity allocated or awarded to our employees; and

 

    changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Additional factors that may affect our results are discussed in the Prospectus under the heading “Risk Factors.”

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

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Critical Accounting Policies

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

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

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.

Goodwill. Goodwill resulting from business combination transactions is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. We recognized goodwill in connection with our acquisition of CMS Bancorp, Inc. and CMS Bank.

Comparison of Financial Condition at December 31, 2016 and June 30, 2016

Total Assets. Total assets decreased $21.2 million, or 1.7%, to $1.2 billion at December 31, 2016 from $1.3 billion at June 30, 2016. The decrease is primarily the result of decreases of $15.7 million in net loans and $15.1 million in securities, partially offset by an increase of $6.7 million in cash and equivalents.

Cash and Cash Equivalents. Cash and cash equivalents increased $6.7 million, or 16.2%, to $48.3 million at December 31, 2016 from $41.6 million at June 30, 2016. The increase is due primarily to $13.7 million of net repayments of loans and a $14.4 million decrease in securities, partially offset by a $5.0 million decrease in deposits and $16.1 million in maturing Federal Home Loan Bank advances.

Securities Held-to-Maturity. Total securities held to maturity increased $1.9 million, or 0.7%, to $272.6 million at December 31, 2016 from $270.7 million at June 30, 2016. This increase was primarily caused by $7.4 million of net purchases of mortgage and asset-backed securities and $1.0 million of net purchases of municipal securities, partially offset by $6.5 million of net maturities and calls of U.S. government and agency obligations.

Securities Available for Sale. Total securities available for sale decreased $17.0 million, or 15.1%, to $95.4 million at December 31, 2016 from $112.4 million at June 30, 2016. This decline was primarily due to $15.6 million of net maturities and calls of U.S. government and agency obligations.

Net Loans. Net loans decreased $15.7 million, or 2.0%, to $766.7 million at December 31, 2016 from $782.3 million at June 30, 2016. The decrease is primarily due to net repayments of $13.9 million, or 15.3%, in commercial loans, $6.5 million, or 2.9%, in residential mortgages, $1.5 million, or 9.0%, in other loans and $1.0 million, or 2.5%, in home equity lines of credit, partially offset by net originations of $8.0 million, or 32.1%, in construction loans.

Deposits. Total deposits decreased $5.0 million, or 0.4%, to $1.1 billion at December 31, 2016 from $1.1 billion at June 30, 2016. This decrease primarily reflects a $17.0 million decrease in certificates of deposit, partially offset by an $8.4 million increase in demand accounts and a $3.9 million increase in savings accounts. The $12.3 million increase in demand and savings accounts reflects our strategy of raising low cost core deposits.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances decreased $16.1 million, or 80.0%, to $4.0 million at December 31, 2016 from $20.1 million at June 30, 2016. The decrease was due to the maturity of advances used to fund a leveraging strategy initiated two years ago, which is completed as of December 31, 2016.

 

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Total Equity. Total equity increased $2.8 million, or 2.6%, to $112.7 million at December 31, 2016 from $109.9 million at June 30, 2016 as a result of net income of $3.1 million, partially offset by an increase in accumulated other comprehensive loss of $320,000.

Comparison of Operating Results for the Three Months Ended December 31, 2016 and 2015

General. Net income increased $945,000, or 130.3%, to $1.7 million for the three months ended December 31, 2016 compared to $727,000 for the three months ended December 31, 2015. The increase was primarily due to a $156,000 increase in net interest income and a $1.8 million increase in non-interest income, partially offset by a $314,000 increase in non-interest expense, a $205,000 increase in the provision for loan losses and a $480,000 increase in income tax expense.

Net Interest Income. Net interest income increased $156,000, or 1.9%, to $8.5 million for the three months ended December 31, 2016 compared to $8.4 million for the three months ended December 31, 2015. The increase primarily reflects a one basis point increase in the net interest margin to 2.89% from 2.88% for the three months ended December 31, 2016, partially offset by a $6.9 million decrease in net interest-earning assets as growth in interest-bearing liabilities outpaced growth in interest-earning assets.

Interest and Dividend Income. Interest and dividend income increased $292,000, or 3.1%, to $9.9 million at December 31, 2016 compared to $9.6 million at December 31, 2015. The increase primarily reflects a $20.2 million increase in the average balance on interest-earning assets and a four basis point increase in the average yield to 3.33% from 3.29% for the three months ended December 31, 2015 primarily due to an increase in the average balance of higher yielding loans.

Interest income on loans increased $196,000 primarily due to a $24.9 million increase in the average balance to $762.5 million for the three months ended December 31, 2016 from $737.6 million for the three months ended December 31, 2015, partially offset by a four basis point decrease in the average yield on loans to 4.32% from 4.36% for the same period last year.

Interest income on other interest-earning assets increased $16,000 primarily due to a 17 basis point increase in the average yield on other interest-earning assets to 0.58% for the three months ended December 31, 2016 from 0.41% for the three months ended December 31, 2015 primarily due to an increase in market interest rates, partially offset by an $8.5 million decrease in the average balance on other interest-earning assets.

Interest income on securities increased $80,000 primarily due to a $3.9 million increase in the average balance of securities to $363.0 million for the three months ended December 31, 2016 from $359.1 million for the three months ended December 31, 2015 and an eight basis point increase in the average yield on securities to 1.69% for the current-year period primarily due to an increase in market interest rates.

Interest Expense. Interest expense increased $136,000, or 11.5%, to $1.3 million for the three months ended December 31, 2016 compared to $1.2 million for the three months ended December 31, 2015. The increase primarily reflects a $27.2 million increase in the average balance on interest-bearing liabilities and a four basis point increase in the average cost to 0.53% from 0.49% for the three months ended December 31, 2015, due to growth in medium-term and long-term time certificates of deposit.

Interest expense on interest-bearing deposits increased $150,000 primarily due to a $45.1 million increase in the average balance to $983.1 million for the three months ended December 31, 2016 from $938.0 million for the three months ended December 31, 2015 and a four basis point increase in the average rate paid on interest-bearing deposits to 0.52% from 0.48% for the three months ended December 31, 2015, due to growth in medium-term and long-term certificates of deposit.

Interest expense on Federal Home Loan Bank advances decreased $14,000 primarily due to a $17.8 million decrease in the average balance to $6.4 million for the three months ended December 31, 2016 from $24.2 million for the three months ended December 31, 2015, due to the maturities of advances, partially offset by a 124 basis point increase in the average cost to l.96% for the three months ended December 31, 2016 from 0.73% for the same period last year primarily due to maturities of short-term lower cost advances.

Provision for Loan Losses. We recorded a provision for loan losses of $562,000 for the three months ended December 31, 2016, primarily as a result of a net increase in specific reserves on impaired loans. We recorded provision for loan losses of $356,000 for the three months ended December 31, 2015 primarily reflecting charge-offs on residential loans, as well as growth in the overall loan portfolio.

 

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Non-Interest Income. Non-interest income increased $1.8 million to $2.3 million for the three months ended December 31, 2016 compared to $470,000 for the three months ended December 31, 2015. The increase was caused primarily by the receipt of $1.6 million in settlement of a loan charged-off by CMS Bank prior to the 2015 merger.

Non-Interest Expense. Non-interest expense increased $314,000, or 4.2%, to $7.8 million for the three months ended December 31, 2016 compared to $7.5 million for the three months ended December 31, 2015, due primarily to a $656,000 increase in occupancy expense, relating primarily to a non-recurring impairment charge on an operating lease of $521,000, and a $292,000 increase in salaries and benefits due to higher post-retirement benefits expense and increased headcount, offset by a $634,000 decrease in other non-interest expenses, primarily professional fees, FDIC assessment, among other decreases.

Income Tax Expense. Income tax expense increased $480,000, or 172.7%, to $758,000 for the three months ended December 31, 2016 from $278,000 for the three months ended December 31, 2015. The increase was caused primarily by a $1.4 million, or 141.8%, increase in pre-tax income. The effective tax rate was 31.2% and 27.7% for the three months ended December 31, 2016 and 2015, respectively.

Comparison of Operating Results for the Six Months Ended December 31, 2016 and 2015

General. Net income increased $1.1 million, or 57.7%, to $3.1 million for the six months ended December 31, 2016 compared to $2.0 million for the six months ended December 31, 2015. The increase was primarily due to a $447,000 increase in net interest income and a $1.9 million increase in non-interest income, partially offset by a $465,000 increase in non-interest expense, a $559,000 increase in income tax expense and a $191,000 increase in the provision for loan losses.

Net Interest Income. Net interest income increased $447,000, or 2.7%, to $17.3 million for the six months ended December 31, 2016 from $16.9 million for the six months ended December 31, 2015. The increase primarily reflects a $738,000 increase in interest and dividend income, partially offset by a $291,000 increase in interest expense.

Interest and Dividend Income. Interest and dividend income increased $738,000, or 3.8%, to $20.0 million for the six months ended December 31, 2016 from $19.2 million for the six months ended December 31, 2015. The increase primarily reflects a $31.3 million increase in the average balance on interest-earning assets and a four basis point increase in the average yield to 3.33% from 3.29% for the six months ended December 31, 2015 primarily due to an increase in the average balance of higher yielding loans.

Interest income on loans increased $563,000 primarily due to a $34.1 million increase in the average balance to $769.3 million for the six months ended December 31, 2016 from $735.2 million for the six months ended December 31, 2015, partially offset by a five basis point decrease in the average yield on loans to 4.35% from 4.40% for the same period last year.

Interest income on other interest-earning assets increased $62,000 primarily due to a 24 basis point increase in the average yield on other interest-earning assets to 0.62% for the six months ended December 31, 2016 from 0.38% for the six months ended December 31, 2015 primarily due to an increase in market interest rates, partially offset by a $5.1 million decrease in the average balance on other interest-earning assets.

Interest income on securities increased $113,000 primarily due to a $2.3 million increase in the average balance of securities to $368.9 million for the six months ended December 31, 2016 from $366.6 million for the six months ended December 31, 2015 and a five basis point increase in the average yield on securities to l.63% for the current year period primarily due to an increase in market interest rates.

Interest Expense. Interest expense increased $291,000, or 12.3%, to $2.7 million for the six months ended December 31, 2016 from $2.4 million for the six months ended December 31, 2015. The increase primarily reflects a $32.7 million increase in the average balance on interest-bearing liabilities and a five basis point increase in the average cost to 0.53% from 0.48% for the six months ended December 31, 2015, due to growth in medium-term and long-term certificates of deposit.

 

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Interest expense on interest-bearing deposits increased $303,000 primarily due to a $48.2 million increase in the average balance to $989.8 million for the six months ended December 31, 2016 from $941.6 million for the six months ended December 31, 2015 and a four basis point increase in the average rate paid on interest-bearing deposits to 0.52% from 0.48% for the six months ended December 31, 2015, due to growth in medium-term and long-term certificates of deposit.

Interest expense on Federal Home Loan Bank advances decreased $12,000 primarily due to a $15.5 million decrease in the average balance to $10.9 million for the six months ended December 31, 2016 from $26.4 million for the six months ended December 31, 2015, due to the maturities of advances, partially offset by a 78 basis point increase in the average cost to 1.48% for the six months ended December 31, 2016 from 0.70% for the same period last year primarily due to the maturities of lower cost advances.

Provision for Loan Losses. We recorded a provision for loan losses of $588,000 and $397,000 for the six months ended December 31, 2016 and 2015, respectively. The increase was caused primarily by a net increase in specific reserves on impaired loans in the current year period.

Non-Interest Income. Non-interest income increased $1.9 million to $2.8 million for the six months ended December 31, 2016 compared to $898,000 for the six months ended December 31, 2015. 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.

Non-Interest Expense. Non-interest expense increased $465,000, or 3.2%, to $15.0 million for the six months ended December 31, 2016 compared to $14.5 million for the six months ended December 31, 2015, due primarily to a $852,000 increase in occupancy expense, relating primarily to a non-recurring impairment charge on an operating lease of $521,000, and a $425,000 increase in salaries and benefits due to higher post-retirement benefits expense and increased headcount, offset by a $812,000 decrease in other non-interest expenses, primarily professional fees, merger and acquisition related expenses, FDIC assessment, among other decreases.

Income Tax Expense. Income tax expense increased $559,000, or 66.1%, to $1.4 million for the six months ended December 31, 2016 from $846,000 for the six months ended December 31, 2015. The increase was caused primarily by a $1.7 million, or 60.2%, increase in pre-tax income. The effective tax rate was 31.0% and 29.9% for the six months ended December 31, 2016 and 2015, respectively.

 

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Net Interest Income

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

 

     Three months ended December 31,  
     2016     2015  
     Average
Balance
    Interest/
Dividends
     Average
Rate
    Average
Balance
    Interest/
Dividends
     Average
Rate
 
     (in thousands)  

Assets:

              

Loans

   $ 762,538     $ 8,238        4.32   $ 737,622     $ 8,042        4.36

Investment securities

     362,954       1,530        1.69       359,124       1,450        1.61  

Other interest-earning assets

     56,045       82        0.58       64,545       66        0.41  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,181,537       9,850        3.33       1,161,291       9,558        3.29  
    

 

 

        

 

 

    

Non-interest-earning assets

     58,604            41,175       
  

 

 

        

 

 

      

Total assets

   $ 1,240,141          $ 1,202,466       
  

 

 

        

 

 

      

Liabilities and equity:

              

NOW accounts

   $ 105,647     $ 44        0.16     $ 85,768     $ 34        0.16  

Money market accounts

     31,874       21        0.26       33,067       23        0.27  

Savings accounts

     527,779       327        0.25       508,168       392        0.31  

Certificates of deposit

     317,757       900        1.12       311,041       693        0.88  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     983,057       1,292        0.52       938,044       1,142        0.48  

Federal Home Loan Bank advances

     6,354       31        1.96       24,194       45        0.73  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     989,411       1,323        0.53       962,238       1,187        0.49  
    

 

 

        

 

 

    

Non-interest-bearing deposits

     123,135            116,852       

Other non-interest-bearing liabilities

     15,101            10,920       
  

 

 

        

 

 

      

Total liabilities

     1,127,647            1,090,010       

Total equity

     112,494            112,456       
  

 

 

        

 

 

      

Total liabilities and equity

   $ 1,240,141          $ 1,206,466       
  

 

 

        

 

 

      

Net interest income

     $ 8,527          $ 8,371     
    

 

 

        

 

 

    

Interest rate spread (1)

          2.80            2.80  

Net interest margin (2)

          2.89            2.88  

Average interest-earning assets to interest-bearing liabilities

     119.42          120.69     

 

     Six months ended December 31,  
     2016     2015  
     Average
Balance
    Interest/
Dividends
     Average
Rate
    Average
Balance
    Interest/
Dividends
     Average
Rate
 
     (in thousands)  

Assets:

              

Loans

   $ 769,340     $ 16,763        4.35   $ 735,220     $ 16,200        4.40

Investment securities

     368,855       3,010        1.63       366,586       2,897        1.58  

Other interest-earning assets

     59,800       186        0.62       64,875       124        0.38  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,197,955       19,959        3.33       1,166,681       19,221        3.29  
    

 

 

        

 

 

    

Non-interest-earning assets

     56,929            40,268       
  

 

 

        

 

 

      

Total assets

   $ 1,254,924          $ 1,206,949       
  

 

 

        

 

 

      

Liabilities and equity:

              

NOW accounts

   $ 107,803     $ 88        0.16     $ 84,967     $ 68        0.16  

Money market accounts

     31,642       42        0.26       33,606       46        0.27  

Savings accounts

     528,580       654        0.25       510,659       790        0.31  

Certificates of deposit

     321,775       1,792        1.10       312,390       1,369        0.87  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     989,800       2,576        0.52       941,622       2,273        0.48  

Federal Home Loan Bank advances

     10,914       81        1.48       26,437       93        0.70  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,000,714       2,657        0.53       968,059       2,366        0.48  
    

 

 

        

 

 

    

Non-interest-bearing deposits

     126,951            117,214       

Other non-interest-bearing liabilities

     15,394            9,587       
  

 

 

        

 

 

      

Total liabilities

     1,143,059            1,094,860       

Total equity

     111,865            112,089       
  

 

 

        

 

 

      

Total liabilities and equity

   $ 1,254,924          $ 1,206,949       
  

 

 

        

 

 

      

Net interest income

     $ 17,302          $ 16,855     
    

 

 

        

 

 

    

Interest rate spread (1)

          2.80            2.81  

Net interest margin (2)

          2.89            2.89  

Average interest-earning assets to interest-bearing liabilities

     119.71          120.52     

 

(1)  Net interest rate spread represents the difference between the average yield on average interest-earning assets and the average cost of average interest-bearing liabilities.
(2)  Net interest margin represents annualized net interest income divided by average interest-earning assets.

 

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

 

     Three months ended December 31, 2016 versus 2015  
     Rate      Volume      Net  
     (in thousands)  

Interest income:

        

Loans

   $ (135    $ 331      $ 196  

Investment securities

     33        47        80  

Other interest-earning assets

     27        (11      16  
  

 

 

    

 

 

    

 

 

 

Total interest income

     (75      367        292  

Interest expense:

        

NOW accounts

     1        9        10  

Money market accounts

     (1      (1      (2

Savings accounts

     (82      17        (65

Certificates of deposit

     192        15        207  

Federal Home Loan Bank advances

     36        (50      (14
  

 

 

    

 

 

    

 

 

 

Total interest expense

     146        (10      136  

Increase (decrease) in net interest income

   $ (221    $ 377      $ 156