The NYSDFS has adopted a regulation which requires New York residential property widely availablechartered banks to qualified mortgagorsestablish and grant qualified mortgagors forbearancemaintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of all monthly payments due on such mortgagethe commercial bank. The regulation, which is similar to guidance issued by the federal bank regulators, requires regulated financial institutions to establish a cybersecurity program; adopt a written cybersecurity policy; designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing its new program and policy; and have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third-parties, along with a periodvariety of upother requirements to 180 days,protect the confidentiality, integrity and availability of information systems. The regulation requires annual written certification of compliance to NYSDFS. We believe that our cybersecurity policies and procedures comply with the optionregulation.

The NYSDFS has issued guidance regarding incentive compensation. The guidance prohibits the payment by New York chartered banks of incentive compensation tied to extendcertain employee performance indicators, such as the forbearancenumber of accounts opened, or the number of products sold per customer, without effective risk management, oversight and control. Banks considering the adoption of such incentive compensation plans must balance between risks and rewards, emplace effective controls and risk management and have strong corporate governance, including active and effective oversight by the board of directors. We have and will continue to ensure that any incentive compensation plan we adopt will conform to this guidance. See “Management – Executive Compensation-Proposed Short-Term Incentive Plan”.

The NYDFS has issued guidance stating the agency’s expectation that New York chartered banks will start integrating the financial hardship. Arisks from climate change into their governance frameworks, risk management processes, and business strategies. This includes conducting a risk assessment of the physical and transition risks of climate change, whether directly impacting the bank, may not charge additional interest, late fees or penalties during the forbearance period or negatively report the forbearance to a credit bureau and must demonstrate adherenceindirectly due to the law before commencing a foreclosure action stemming from missed paymentsdisruptive consequences of climate change in the communities they serve and, on a mortgage subjecttheir customers, such as business disruptions, out-migrations, loss of income and higher default rates, supply chain disruptions, and changes in investor and consumer sentiments. Under the guidance, banks must start developing strategic plans, including an outline of such risks, the impact on their balance sheets, and steps to the law. A bank that determines that it cannot offer forbearance because it lacks sufficient capital or liquidity or the abilitybe taken to operate in a safe and sound manner must so notify the NYDFS, furnish detailed supporting documentation to the NYDFS and advise the mortgagor that he or she may file a complaint regarding the denial of forbearance with the NYDFS.

New York has other statutes and regulations that are similar to the federal provisions discussed below.

Federal Bank Regulation

Capital Requirements. Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as PCSB Bank, are required to comply with minimum leverage capital requirements. The minimum leverage capital requirement is a ratio of Tier 1 capital to total assets that is not less than 4.0%. Tier 1 capital consists of “CET1” and “Additional Tier 1 capital” instruments meeting specified requirements. CET1 is defined as common stock, plus related surplus, and retained earnings plus limited amounts of minority interest in the form of common stock, less the majority of the regulatory deductions.

The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to risk-weighted categories ranging from 0% to 1,250%, with higher levels of capital being required for the categories perceived as representing greater risk.

State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital and Tier 2 capital. Tier 1 capital consists of common stock, plus related surplus and retained earnings. Under the newthese capital rules, for most banking organizations, the most common form of Additional Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the new capital rules’ specific requirements. Banks that engage in

specified levels of trading activities are subject to adjustments in their risk-based capital calculation to ensure the maintenance of sufficient capital to support market risk.

The FDIC and the other federal bank regulatory agencies have issued a final rule that establishes a common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), a minimum Tier 1 capital to risk-based assets requirement (6% of risk-weighted assets), sets the leverage ratio at a uniform 4% of total assets and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. PCSB Bank has elected to exercise its one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities holdings for purposes of calculating its regulatory capital requirements. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” which, as fully phased in, consists of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The “capital conservation buffer” was phased in over a four-year period through January 1, 2019. As of January 1, 2019, the conservation buffer was fully phased in.

The Federal Deposit Insurance Corporation Improvement Act requires each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC also has authority to establish individual minimum capital

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requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.

Among other things, Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCPA), which became law on May 24, 2018, requires the federal banking agencies to develop regulations establishing a “community bank leverage ratio” for banks and holding companies with less than $10 billion in consolidated assets and a qualifying risk profile. In 2019, the federal banking agencies jointly issued a final rule to implement Section 201. The rule, which became effective on January 1, 2020, provides certain qualifying institutions with an optional, simpler method to measure capital adequacy. Under the rule, banks and bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio ("CBLR") framework. Qualifying organizations that elect to use the CBLR framework, and that maintain a leverage ratio greater than 9 percent, will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies' capital rules. Qualifying organizations will also be deemed to have met the "well capitalized" ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The Bank has not opted into the CBLR framework as of June 30, 2020.2022.

Standards for Safety and Soundness. The federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Investment Activities. All state-chartered FDIC-insured banks, including commercial banks, are generally limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. For example, state chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national

securities exchange or the Nasdaq Global Market and in the shares of an investment company registered under the Investment Company Act of 1940. The maximum permissible investment is 100% of Tier 1 Capital, as specified by the FDIC’s regulations, or the maximum amount permitted by New York law, whichever is less.

In addition, the FDIC is authorized to permit such a state bank to engage in state-authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The FDIC has adopted procedures for institutions seeking approval to engage in such activities or investments. In addition, a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, the Dodd-Frank Act permits banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

Under FDIC regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than

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4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. At June 30, 2020,2022, PCSB Bank was classified as a “well capitalized” institution.

At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, interest rates paid on deposits, payment of dividends, and the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

Transaction with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized according to the requirements set forth in Section 23A of the Federal Reserve Act.

Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and principal shareholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% shareholder of a financial institution, and certain affiliated interests of these, together with all other outstanding loans to such person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same terms as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.

Enforcement. The FDIC has extensive enforcement authority over insured state commercial banks, including PCSB Bank. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” It may also appoint itself as conservator or receiver for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital;

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or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

Federal Insurance of Deposit Accounts. PCSB Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in PCSB Bank are insured up to a maximum of $250,000 for each separately insured depositor. The Dodd-Frank Act established a minimum Designated Reserve Ratio (DRR) for the Deposit Insurance Fund equal to 1.35% of estimated insured deposits. There is no statutory maximum on the DRR and the law provides for dividends to be paid to insured institutions from the fund when the DRR exceeds 1.5%. However, the FDIC is granted broad discretion in determining whether to suspend or limit the declaration or payment of any dividends.

The FDIC imposes an assessment for deposit insurance on all depository institutions.institutions in order to maintain the Deposit Insurance Fund. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits. Under its risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by regulation, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 1 1/2 to 30 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate by more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, requiredIn June 2022, in response to the DRR falling below 1.35% due to significant growth in insured deposits over the last two years, the FDIC approved the Amended Restoration Plan and proposed to increase assessment rates by 2 basis points beginning in January 2023 and until the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

The Dodd-Frank Act established a minimum Designated Reserve Ratio (DRR) forFDIC determines it likely that the Deposit Insurance Fund equalwill be restored to 1.35% of estimated insured deposits. There is no statutory maximum onminimums within the DRR anddeadlines set by the law provides for dividends to be paid insured institutions from the fund when the DRR exceeds 1.5%.  However, the FDIC is granted broad discretion in determining whether to suspend or limit the declaration or payment of any dividends.statute.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of PCSB Bank. Future insurance assessment rates cannot be predicted.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of PCSB Bank’s deposit insurance.

Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.

Privacy Regulations. FDIC regulations generally require that PCSB Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, PCSB Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. PCSB Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

Community Reinvestment Act. Under the Community Reinvestment Act, or CRA, as implemented by the FDIC, a state non-member bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a state non-member bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. PCSB Bank’s latest FDIC CRA rating was “Satisfactory.”

New York has its own statutory counterpart to the CRA, which is applicable to PCSB Bank. New York law requires the NYSDFS to consider a bank’s record of performance under New York law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. PCSB Bank’s most recent rating under New York law was “Satisfactory.”

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Consumer Protection and Fair Lending Regulations. New York commercial banks are subject to a variety of federal and New York statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes, including Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts and practices against consumers, authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations. New York’s Attorney General has vigorously enforced fair lending and other consumer protection laws. The Dodd Frank Act added a new statute that prohibits unfair, deceptive or abusive acts practices against consumers, which can be enforced by the Consumer Financial Protection Bureau, the FDIC and state Attorneys General. The Superintendent of Financial Services of the State of New York has stated that NYSDFS will vigorously enforce consumer protection laws to the extent that federal bank regulators reduce such enforcement.

USA Patriot Act. PCSB Bank is subject to the USA PATRIOT Act, which gave federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act provided measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.

CARES Act and Consolidated Appropriations Act.

In response to the COVID-19 pandemic, the CARES Act wasand Consolidated Appropriations Act were signed into law on March 27, 2020.2020 and December 27, 2020, respectively. Among other things, the CARES Act includesthese Acts include the following provisions impacting financial institutions like thePCSB Bank:

 

Temporary Troubled Debt Restructurings Relief. The CARES Act, as amended by the Consolidated Appropriations Act, allows banks to elect to suspend requirements under accounting principles generally accepted in the United States of America (“GAAP”) for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020.January 1, 2022. Federal banking agencies are required to defer to the determination of the banks making such suspension. Refer to Note 4 in the Notes to the Consolidated Financial Statements for additional detail.

 

Small Business Administration Paycheck Protection Program. The CARES Act authorizes the SBA’s Paycheck Protection Program (“PPP”). The PPP authorizes for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, such as thePCSB Bank, that process loan applications and service the loans. Refer to the Lending Activities discussion earlier in this section for additional details.

Enhanced Merger Oversight. On July 9, 2021, President Biden signed an Executive Order to promote competition across various industries. The Order encourages the leading antitrust agencies to focus enforcement efforts on problems in key markets and coordinates other agencies' ongoing response to corporate consolidation. Among other things, the Order: (a) calls on leading antitrust agencies, the Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") to enforce antitrust laws vigorously and recognize that the law allows them to challenge prior bad mergers that past Administrations did not previously challenge; (b) announces a policy that enforcement should focus in particular on labor markets, agricultural markets, healthcare markets, and the tech sector; and (c) establishes a White House Competition Council, led by the Director of the National Economic Council, to monitor progress on finalizing the initiatives in the Order and to coordinate the federal government's response to the rising power of large corporations in the economy. The Executive Order also urges the DOJ and the FTC to revisit their guidance on mergers and toughen scrutiny of future transactions. The Order also called for the review and revitalization of merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956. The Company cannot predict what if any impact the Order will have on its pending merger with Brookline Bancorp, Inc.

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Other Regulations

Interest and other charges collected or contracted for by PCSB Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:

The deposit operations of PCSB Bank also are subject to, among others, the:

Federal Reserve System

Federal Reserve Board regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2020,2022, the regulations generally requirewould have required that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $127.5$640.6 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $127.5$640.6 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.9$32.4 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. PCSB Bank isHowever, in compliance with these requirements.  March 2020 the Federal Reserve Board reduced all reserve requirements to zero in response to the COVID-19 pandemic.

Federal Home Loan Bank System

PCSB Bank is a member of the FHLB System, which consists of 12 regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. Members of the FHLB are required to acquire and hold shares of capital stock in the FHLB. PCSB Bank complied with this requirement at June 30, 2020.2022. Based on redemption provisions of the FHLBNY, the stock has no quoted market value and is carried at cost. PCSB Bank reviews for impairment based on the ultimate recoverability of the cost basis of the FHLBNY stock. At June 30, 2020,2022, no impairment has been recognized.

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At its discretion, the FHLBNY may declare dividends on the stock. The Federal Home Loan Banks are required to provide funds for affordable housing programs, which could reduce the amount of dividends that the FHLB pay to theirFHLBNY pays its members and result in the FHLBFHLBNY imposing a higher rate of interest on advances to their members. While the FHLBNY currently pays a dividend on its capital stock, there can be no assurance that such dividends will continue in the future. Further, there can be no assurance that the impact of recent or future legislation on the FHLB also will not cause a decrease in the value of the FHLBNY stock held by PCSB Bank.

Holding Company Regulation

PCSB Financial, as a bank holding company, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board.Board. In addition, the Federal Reserve Board has enforcement authority over PCSB Financial and its non-bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary bank.

A bank holding company is generally prohibited from engaging in non-banking activities or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.

The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking. PCSB Financial has not elected to become a financial holding company.

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.

The Federal Reserve Board has issued a policy statementstatements regarding capital distributions, including dividends, by bank holding companies. In general, the policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of PCSB Financial to pay dividends or otherwise engage in capital distributions.

Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.

The status of PCSB Financial as a registered bank holding company under the Bank Holding Company Act of 1956 will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

New York Holding Company Regulation. PCSB Financial is subject to regulation under New York banking law. Among other requirements, PCSB Financial must receive the approval of the NYSDFS before acquiring 10% or more of the voting stock of another banking institution, or to otherwise acquire a banking institution by merger or purchase.

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Federal Securities Laws

PCSB Financial’s common stock is registered with the Securities and Exchange Commission.SEC. PCSB Financial is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

NASDAQ Rules Regarding Board Diversity

NASDAQ has adopted listing rules regarding board diversity. These rules require companies listed on the Nasdaq Capital Market, like PCSB Financial, to have, or explain why they do not have, one diverse director by August 7, 2023 and two diverse directors by August 6, 2026. NASDAQ-listed companies that qualify as a “smaller reporting company” under SEC rules, like PCSB Financial, may meet the diversity requirements with two female directors, or with one female director and one director who is an underrepresented minority or LGBTQ+. PCSB Financial complies with these listing requirements, as disclosed in the Board Diversity Matrix in the Investor Relations section of its website, available at https://investors.pcsb.com/overview/board-diversity-matrix/default.aspx

Emerging Growth Company Status

As of June 30, 2022, PCSB Financial qualifiesno longer qualified as an emerging growth company under the The Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion (adjusted for inflation) during its most recently completed fiscal year qualifies as an “emerging growth company.”  

An “emerging growth company” may choose not to hold shareholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting and can provide scaled disclosure regarding executive compensation. Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company but must make such election when the company is first required to file a registration statement.  Such an election is irrevocable during the period a company is an emerging growth company. PCSB Financial has elected to comply with new or amended accounting pronouncements in the same manner as a public company.

PCSB Financial loses emerging growth company status on the earlier of: (i) the last day of the fiscal year during which it had total annual gross revenues of $1.0 billion (adjusted for inflation) or more; (ii) the last day of its fiscal year following the fifth anniversary of the date of the first sale of the Company’s common equity securities pursuant to an effective registration statement under the Securities Act of 1933, which will be June 30, 2022; (iii) the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which it is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

Smaller Reporting Company Status

PCSB Financial qualifies as a “smaller reporting company” under the federal securities laws. To qualify, a company must have a public float (i.e., aggregate market value of a company’s securities held by non-affiliates) of less than $250 million. A company with less than $100 million in annual revenues and either no public float or a public float that is less than $700 million also qualifies. Smaller reporting companies are eligible to provide scaled disclosures in itstheir periodic reports filed with the Securities and Exchange Commission (“SEC”).SEC.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. PCSB Financial has policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as PCSB Financial unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where, as is the case with PCSB Financial, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Federal regulations provide that no company may acquire control (as defined in the Bank Holding Company Act) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board. In addition, under the New York Banking Law, for a period of three years following completion of a conversion to stock form, no person may directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of equity security of a converting savings bank without prior written approval of NYSDFS.

Taxation

Federal Taxation

General. PCSB Financial and PCSB Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to PCSB Financial and PCSB Bank.

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Method of Accounting. For federal income tax purposes, PCSB Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal income tax returns.

Minimum Tax. As a result of the aforementioned tax reform, the alternative minimum tax rate is reduced from 20% to 0% for all tax years beginning after December 31, 2017. Alternative minimum tax credit carryforwards from prior tax years can be applied to reduce future taxable income and are refundable, subject to certain limitations. At June 30, 2020, PCSB Bank had no alternative minimum tax credit carryforwards.

Net Operating Loss Carryovers. Generally, for federal income tax purposes, a financial institutioninstitutions may carry forward net operating losses indefinitely and are subject to a limitation of 80% of taxable income. State income tax rules may differ from federal rules. See Note 13 to Consolidated Financial Statements for additional information.

Charitable Contributions Carryovers. Generally, charitable contributions are limited to 10% of taxable income, however, financial institutions may carryforwardcarry forward unused contributions for up to 5 years. Additionally, the CARES Act temporarily increased the charitable contribution deduction limit from 10% to 25% of taxable income for 20202021 for current year contributions. At June 30, 2020,2022, the Company has no charitable contributions carryforwards totaling $1.4 million, for which we expect to fully realize the benefit.carryforwards. See Note 13 to Consolidated Financial Statements for additional information.

Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any not deducted loss remaining after the five-year carryover period is not deductible. At June 30, 2020,2022, PCSB Bank had no capital loss carryovers.

Corporate Dividends. We may generally exclude from our income 100% of dividends received from PCSB Bank as a member of the same affiliated group of corporations. To date, no dividends have been paid by PCSB Bank.

Audit of Tax Returns. The Company’s New York State tax returns are currently undergoing routine audit for tax years 2016 through 2018. The Company’s federal income tax returns and various other state income tax returns have not been audited in the last three years.

State Taxation

Taxable income is apportioned to New York State based on the location of the taxpayer’s customers, with special rules for income from certain financial transactions. The location of the taxpayer’s offices and branches are not relevant to the determination of income apportioned to New York State. The statutory tax rate is currently 7.25% (to be reduced to 6.5%. beginning January 1, 2024) for taxpayers with a business income base greater than $5 million. An alternative tax of 0.05%0.1875% on apportioned capital is imposed to the extent that it exceeds the tax on apportioned income. The New York State alternative tax is capped at $5 million for a tax year and is gradually phased out over a six-year period, becoming fully phased outwill be eliminated beginning January 1, 2021. Thrift institutions that maintain a qualified residential loan portfolio are entitled to a specially computed modification that reduces the income taxable to New York State.2024.

The Company is also taxed in Connecticut and New Jersey, primarily as a result of income earned on loans where the borrower or the real estate collateral underlying the loan is located in these states.

The Company’s various state income tax returns have not been audited in the last three years.

Item 1A. Risk Factors

In the ordinary course of operating our business, we are exposed to a variety of risks inherent to the financial services industry. The following discusses what we believe to be the significant risk factors that could affect our business and operations. If any of the following conditions or events actually occur, our business, financial condition or results of operations could be negatively affected, the market price of your investment in the Company’s common stock could decline, and you could lose all or a part of your investment in the Company’s common stock.

Risks Related to the Company’s Business

Risks Related to Lending

Our emphasis on commercial real estate and commercial business lending involves risks that could adversely affect our financial condition and results of operations.

We originate and purchase commercial real estate and commercial business loans. At June 30, 2020,2022, our commercial real estate and commercial business loans totaled $971.4 million,$1.1 billion, or 76.6%82.1% of our loan portfolio. While these types of loans are potentially more profitable than residential mortgage loans, they are generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. These loans also generally have relatively large balances to single

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borrowers or related groups of borrowers. Accordingly, any charge-offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. See “—Loan Underwriting Risks.”

The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.

The FDIC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land (“ADC loans”) represent 100% or more of total risk-based capital, or (ii) total reported loans secured by multi-family and non-owner occupied, non-farm, non-residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total risk-based capital. At June 30, 2020,2022, the Bank’s ADC loans and total commercial real estate loans represented 9% and 324%341% of total risk-based capital, respectively.

The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Our bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in a curtailment of our multi-family and commercial real estate lending and/or the requirement that we maintain higher levels of regulatory capital, either of which would adversely affect our loan originations and profitability. We believe the Company has adequate risk management and monitoring policies and procedures in place to address the requirements of the guidance.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

We maintain an allowance for loan losses, which is established through a provision for loan losses, that represents management’s best estimate of probable incurred losses within the existing portfolio of loans. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the adequacy of the allowance for loan losses, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio and adjustment may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Consequently, a problem with one or more loans could require us to significantly increase the level of our provision for loan losses. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Material additions to the allowance would materially decrease our net income.

Loan participations could expose the Company to losses.

We purchase and participate in residential, business and commercial real estate loans with other financial institutions. The agreements documenting these transactions typically provide for retention by the selling institution of the servicing of the participated loans and require that institution to service the loan with the same degree of care that it uses for loans in its portfolio. However, if the servicing institution fails to administer loans in accordance with its contractual obligations, for example, by neglecting to enforce lender’s rights and remedies against a defaulting borrower, or by waiving or modifying loan terms without our consent, we could incur significant losses, including loss of the outstanding principal balance.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews

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may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Risks Related to Changes in Interest Rates

Changes in interest rates could reduce our profits.

Our profitability, like that of most community banks, depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements. Factors such as inflation, recession and instability in financial markets, among other factors beyond our control, may affect interest rates.

If interest rates rise and our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our interest rate spread, which would have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. If interest rates rise, we expect that our net portfolio value of equity would decrease. Net portfolio value of equity represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. At June 30, 2022, and assuming a 200 basis point increase in market interest rates, we estimate that our net portfolio value of equity would decrease by $50.6 million, or 19.9%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk—Net Portfolio Value Simulation.”

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Changes in the valuation of our securities portfolio could reduce our profits and reduce our capital levels.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Except for a nominal investment in a community development fund, PCSB Bank has no equity securities in its portfolio. Changes in market interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. Generally, increases in market interest rates result in a decrease in their estimated fair value. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. Declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securities Portfolio.”

We will be required to transition away from the use of the London interbank offered rate (“LIBOR”) in the future.

We have a number of loans, derivative contracts, and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR.

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On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On March 5, 2021, the ICE Benchmark Association (“IBA”) stated that it will cease the publication of the overnight and 1, 3, 6 and 12 months USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023, with the publication of all other LIBOR settings ceasing on December 31, 2021. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several years. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally.

The market transition away from LIBOR to an alternative reference could:

We have a number of loans, derivative contracts, and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The manner and impact of this transition, as well as the effects of these developments on the Company’s funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, are uncertain.

Risks Related to Liquidity

An increase in core deposit withdrawals may result in the utilization of higher cost funding and could reduce our profits.

The banking industry has experienced significant core deposit growth beginning in early 2020 as a result of the COVID-19 pandemic which through changes in U.S. monetary and fiscal policy have resulted in a significant increase in money supply and banking industry liquidity. As a result of recent and expected future shifts in monetary policy, including higher interest rates and planned reductions in the Federal Reserve balance sheet, we may experience significant deposit withdrawals and be required to utilize higher costing funding sources such as advances from the FHLBNY and wholesale deposits. In this case, our operating margins and profitability would be adversely affected.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of advances from the FHLBNY and wholesale deposits. As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability in accessing these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Risks Related to Operational Matters

Legal and regulatory proceedings and related matters could adversely affect us.

We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in litigation and regulatory proceedings. Most of these proceedings we consider to be in the

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normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters and we may not prevail in any proceeding or litigation. Additionally, regulatory proceedings and litigation can be costly and could divert management resources from the Company’s business. Regardless of the merits of a particular claim, and whether or not we ultimately prevail, litigation and regulatory proceedings could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Our success depends on retaining certain key personnel.

Our performance largely depends on the talents and efforts of highly skilled individuals who comprise our senior management team. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

Our business may be adversely affected by fraud and other financial crimes.

Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, losses may still occur which could cause both financial and reputational harm.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions at a specified date. These estimates and assumptions are based on management’s best estimates and experience at that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of investment securities, our determination of our income tax provision, our determination of goodwill impairment, and our evaluation of the adequacy of our allowance for loan losses.

Our operations may be adversely affected if our external vendors do not perform as expected.

TheCompany relies on certain external vendors to provide products and services necessary to maintain its day-to-day operations. These include, but are not limited to, data processing and storage, recording and monitoring transactions, internet connections and network access. The Company’s operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could disrupt the Company’s operations. If we are unable to find alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Counterparties expose the Company to risks.

The Company uses derivative financial instruments, primarily interest rate swaps, which will expose it to financial and contractual risks with counterparty banks. Additionally, the Company maintains correspondent bank relationships, manages certain loan participations, and engages in securities transactions and other activities with financial counterparties which are customary in the banking business. Financial risks are inherent in these counterparty relationships.

Our inability to achieve profitability on new branches may negatively affect our earnings.

We may pursue further expansion through de novo branching or the purchase of branches from other financial institutions. The profitability of these branches will depend on whether the income that we generate from the new branches will offset the increased expenses resulting from operating these branches. We expect that it may take a period of time before these branches can become profitable, especially in areas in which we do not have an established presence. During this period, the expense of operating these branches may negatively affect our net income.

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

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Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including interest rate, credit, strategic, market, liquidity, compliance, legal and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions, increased cybersecurity threats, and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to anticipate and manage these risks.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, all of which could adversely affect our operating results.

Risks Related to Economic Conditions

A worsening of economic conditions could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.

Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Inflation can have an adverse impact on our business and on our customers.

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there have been market indicators of a pronounced rise in inflation and the Federal Reserve Board has indicated its intention to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

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Risk Related to Acquisition Activity

The risks presented by acquisitions could adversely affect the Company's financial condition and result of operations.

The Company’s business strategy includes growth through acquisitions, which present risks, including: regulatory approval delays, operations and personnel integration challenges, litigation, potential ongoing business disruption, difficulty maintaining uniform standards, controls, procedures and policies, issues with information systems integration and the impairment of relationships with employees and customers as a result of changes in ownership and management. Further, the asset quality or other financial characteristics of a company may deteriorate after the acquisition agreement is signed or after the acquisition closes.

Failure to consummate the proposed merger with Brookline Bancorp could adversely affect the Company's financial condition, result of operations and ultimately our share price.

The proposed merger with Brookline Bancorp is expected to close in the fourth calendar quarter of 2022, however is subject customary closing conditions and a number of risks, including the Company obtaining shareholder approval, Brookline obtaining the required regulatory approvals, the Company or Brookline experiencing material adverse conditions, including, but not limited to, those detailed in the definitive merger agreement as well as those other risks detailed in this document, including potential shareholder litigation, which may result in the Company or Brookline terminating the merger agreement. Should the merger be terminated, in accordance with the merger agreement, the Company may be obligated to pay a termination fee of $12.0 million to Brookline. Should the merger be delayed or terminated, the Company's share price may be adversely affected.

Risks Related to Accounting Matters

The FASB has issued an accounting standard update that will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.

 

The Financial Accounting Standards Board ("FASB") has issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which replaces the current "incurred loss" model for recognizing credit losses with an "expected

loss" model referred to as the Current Expected Credit Loss ("CECL") model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held to maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current U.S. GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, the Company expects that the adoption of the CECL model will materially affect how we determine the allowance for loan losses and could require the Company to increase our allowance significantly. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If the Company is required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect the Company's business, financial condition and results of operations. In October 2019, the FASB unanimously voted to delay the implementation of the standard for three years for certain companies, including small reporting companies (as defined by the SEC), non-SEC public companies and private companies. The Company currently qualifies as a small reporting company and is subject to the delayed implementation. Therefore, thethe amendments in this updateUpdate will be effective for the Company for the fiscal year beginning on July 1, 2023, including interim periods within that fiscal year. As a result, the Company’s allowance for loan loss may not be comparable to the allowance for credit losses (“ACL”) established by other financial institutions that have adopted CECL. The Company is actively working through the provisions of the Update. Management has established a steering committee which is identifying the methodologies and the additional data requirements necessary to implement the Update and has engaged a third-party software service provider to assist in the Company's implementation.

A worsening of economic conditions could reduce demand for our productsRisks Related to Technology, Cybersecurity and services and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.

Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Changes in interest rates and/or a continual low interest rate environment could reduce our profits.

Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our

results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements. Factors such as inflation, recession and instability in financial markets, among other factors beyond our control, may affect interest rates.  Data Privacy

Since March 2020, it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities.  This can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income.  As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can lower interest expense as interest rates decrease.  However, our ability to lower our interest expense will be limited at current interest rate levels while the average yield on our interest-earning assets may decrease more than our cost of interest-bearing liabilities.  

If interest rates rise rates on our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our interest rate spread, which would have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. If interest rates rise, we expect that our net portfolio value of equity would decrease. Net portfolio value of equity represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. At June 30, 2020, and assuming a 200 basis point increase in market interest rates, we estimate that our net portfolio value of equity would decrease by $20.6 million, or 6.7%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk—Net Portfolio Value Simulation.”

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.  For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Changes in the valuation of our securities portfolio could reduce our profits and reduce our capital levels.  

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Except for a nominal investment in a community development fund, PCSB Bank has no equity securities in its portfolio. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. Declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Securities Portfolio.”

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

We are subject to extensive regulation, supervision and examination by our banking regulators. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of PCSB Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with the currently existing tax, accounting, securities, deposit insurance, monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of federal and state taxation, regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially retroactively, how we report our financial condition and results of operations as could our interpretation of those changes.

Strong competition within our market area could reduce our profits and slow growth.  

We face intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult, and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. Our competitors often aggressively price loan and deposit products when they enter into new lines of business or new market areas. If we are not able to effectively compete in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.  

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches.  During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have implemented policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

Legal and regulatory proceedings and related matters could adversely affect us.

We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in litigation and regulatory proceedings. Most of these proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters and we may not prevail in any proceeding or litigation. Additionally, regulatory proceedings and litigation can be costly and could divert management resources from the Company’s business. Regardless of the merits of a particular claim, and whether or not we ultimately prevail, litigation and regulatory proceedings could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our articles of incorporation and bylaws and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of PCSB Financial without our Board of Directors’ prior approval.

Under Federal Reserve Board regulations, for a period of three years following completion of the conversion and offering, no person may directly or indirectly acquire or offer to acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve Board and the NYSDFS before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including PCSB Bank.

There also are provisions in our articles of incorporation that may be used to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of the shares of common stock outstanding. Furthermore, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors, employment agreements that we have entered into with our executive officers and other factors may make it more difficult for companies or persons to acquire control of the Company without the consent of our Board of Directors. Taken as a whole, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.  

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of advances from the FHLB and wholesale deposits. As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability in accessing these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Our success depends on retaining certain key personnel.

Our performance largely depends on the talents and efforts of highly skilled individuals who comprise our senior management team. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income.  Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.  

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we and our third-party service providers use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security

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breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any breach, damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations due to the time and money needed to correct the issue. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in

and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. The Company has emplaced controls to defeat threats to its operating systems. Despite these safeguards, the Company cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures, such as cyber-attacks. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations. We have general liability and cyber-related insurance, however, there are limitations on coverage as well as dollar amount. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer losses.

Our businessWe continually encounter technological change and the failure to understand and adapt to these changes could adversely affect our business.

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. Technology has lowered barriers to entry and made it possible for "non-banks" to offer traditional bank products and services using innovative technological platforms such as Fintech and Blockchain. These "digital banks" may be adversely affectedable to achieve economies of scale and offer better pricing for banking products and services than we can. Our future success will depend, in part, on the ability to address the needs of customers by fraudusing technology to provide products and otherservices that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to customers. Failure to successfully keep pace with technological change affecting the financial crimes.services industry could have a material adverse impact on our business and, in turn, its financial condition and results of operations.

Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, losses may still occur which could cause both financial and reputational harm.

We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or anotheran incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our customers, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused, we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.

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Risks Related to Competition

Strong competition within our market area could reduce our profits and slow growth.

We continually encounter technological changeface intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult, and costly to attract and retain qualified employees. As the failure to understand and adapt to these changes could adversely affect our business.

The banking industry is undergoing rapid technological changeslabor market recovers from the effects of the COVID-19 pandemic, competition for such employees has increased, with frequent introductionsresultant cost increases. Many of new technology-driven products and services. Technology has lowered barriers to entry and made it possible for "non-

banks" to offer traditional bank products and services using innovative technological platforms such as Fintech and Blockchain. These "digital banks" may be able to achieve economies of scale and offer better pricing for banking products and services thanthe institutions with which we can. Our future success will depend, in part, on the ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitorscompete have substantially greater resources to invest in technological improvements. There can be no assuranceand lending limits than we have and may offer services that we will bedo not provide. Our competitors often aggressively price loan and deposit products when they enter into new lines of business or new market areas. If we are not able to effectively compete in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.

Risks Related to Legal, Regulatory and Governmental Actions

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations

may adversely affect our operations and/or increase our costs of operations.

We are subject to extensive regulation, supervision and examination by our banking regulators. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of PCSB Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with the currently existing tax, accounting, securities, deposit insurance, monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement new technology-driven productsstrategic initiatives and servicestax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of federal and state taxation, regulatory policy, regulations, legislation or be successful in marketing such products and services to customers. Failure to successfully keep pace with technological change affecting the financial services industry couldsupervisory action, may have a material adverse impact on our businessoperations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in turn, itstheir interpretation by us and our independent accounting firms. These changes could materially impact, potentially retroactively, how we report our financial condition and results of operations.operations as could our interpretation of those changes.

Managing reputational risk is important to attractingNon-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and maintaining customers, investorsregulations could result in fines or sanctions.

The USA PATRIOT and employees.

Threats to our reputation can come from many sources, including adverse sentiment aboutBank Secrecy Act require financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standardsdevelop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of serviceFinancial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or quality, compliance deficiencies,sanctions, including restrictions on conducting acquisitions or establishing new branches. Several banking institutions have received large fines for non-compliance with these laws and questionable or fraudulent activities of our customers. Weregulations. While we have implemented policies and procedures designed to assist in place to protect our reputationcompliance with these laws and promote ethical conduct, butregulations, these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may resulteffective in the loss of customers and employees, costly litigation and increased governmental regulation, all of which could adversely affect our operating results.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions at a specified date. These estimates and assumptions are based on management’s best estimates and experience at that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of investment securities, our determination of our income tax provision, our determination of goodwill impairment, and our evaluation of the adequacy of our allowance for loan losses.

Our operations may be adversely affected if our external vendors do not perform as expected.

The Company relies on certain external vendors to provide products and services necessary to maintain its day-to-day operations. These include, but are not limited to, data processing and storage, recording and monitoring transactions, internet connections and network access. The Company’s operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could disrupt the Company’s operations. If we are unable to find alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Counterparties expose the Company to risks.

The Company intends to use derivative financial instruments, primarily interest rate swaps, which will expose it to financial and contractual risks with counterparty banks. Additionally, the Company maintains correspondent bank relationships, manages certain loan participations, and engages in securities transactions and other activities with financial counterparties which are customary in the banking business. Financial risks are inherent in these counterparty relationships.

Our inability to achieve profitability on new branches may negatively affect our earnings.

We may pursue further expansion through de novo branching or the purchase of branches from other financial institutions. The profitabilitypreventing violations of these branches will depend on whether the income that we generate from the new branches will offset the increased expenses resulting from operating these branches. We expect that it may take a period of time before these branches can become profitable, especially in areas in which we do not have an established presence. During this period, the expense of operating these branches may negatively affect our net income.

The risks presented by acquisitions could adversely affect the Company's financial conditionlaws and result of operations.

The Company’s business strategy includes growth through acquisitions, which present risks, including: regulatory approval delays, operations and personnel integration challenges, potential ongoing business disruption, difficulty maintaining uniform standards, controls, procedures and policies, issues with information systems integration and the impairment of relationships with employees and customers as a result of changes in ownership and management. Further, the asset quality or other financial characteristics of a company may deteriorate after the acquisition agreement is signed or after the acquisition closes.

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.  

Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions, increased cybersecurity threats, and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk.  Accordingly, we could suffer losses as a result of our failure to anticipate and manage these risks.  

regulations.We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Loan participations could expose the Company to losses.

We purchase and participate in residential, business and commercial real estate loans with other financial institutions. The agreements documenting these transactions typically provide for retention by the selling institution of the servicing of the participated loans and require that institution to service the loan with the same degree of care that it uses for loans in its portfolio. However, if the servicing institution fails to administer loans in accordance with its contractual obligations, for example, by neglecting to enforce lender’s rights and remedies against a defaulting borrower, or by waiving or modifying loan terms without our consent, we could incur significant losses, including loss of the outstanding principal balance.

Our ability to pay dividends or to repurchase our common stock is subject to regulatory limitations and other limitations.

PCSB Financial is a separate legal entity from our subsidiary, the Bank, and we do not have significant operations of our own. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Bank’s regulators could assert that payment of dividends or other payments may result in an unsafe or unsound practice. If the Bank is unable to pay dividends to us or we are required to contribute capital to the Bank, we may not be able to pay dividends on or repurchase our common stock.

It is likely we will be required to transition away from the use of the London interbank offered rate (“LIBOR”) in the future.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several years. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally.

The market transition away from LIBOR to an alternative reference could:

The manner and impact of this transition, as well as the effects of these developments on the Company’s funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, are uncertain.

The performance of our multifamily and mixed-use loans could be adversely impacted by regulation.

On June 14, 2019, the New York State legislature passed the Housing Stability and Tenant Protection Act of 2019, impacting about one million rent regulated apartment units. Among other things, the new legislation: (i) curtails rent increases from Material Capital Improvements and Individual Apartment Improvements; (ii) all but eliminates the ability for apartments to exit rent regulation; (iii) does away with vacancy decontrol and high-income deregulation; and (iv) repealed the 20% vacancy bonus. While it is too early to measure the full long-term impact of the legislation, in total, it generally limits a landlord’s ability to increase rents on rent regulated apartments and makes it more difficult to convert rent regulated apartments to market rate apartments. As a result, the value of the collateral located in New York State securing the Company’s multi-family loans or the future net operating income of such properties could be potentially impaired.

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted and outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has created extensive disruptionsAny future action by the U.S. Congress to the globalamend federal tax laws and U.S. economiesregulations could impact our future profitability through higher tax expense and to the lives of individuals throughout the world. The New York City Metropolitan area and environs have one of the highest incidence of COVID-19 in the nation, and the neighboring Tri-State area of New Jersey and Connecticut also has been particularly affected by COVID-19.  Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.  If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in this Form 10-K could be exacerbated and the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail below.

Credit Risk – Our risks of timely loan repayment andchange the value of collateral supportingour net deferred tax asset causing a corresponding charge against earnings.

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The net deferred tax asset reported on our balance sheet represents the loans are affectednet amount of income taxes expected to be received upon the reversal of temporary differences between the bases of assets and liabilities as measured by enacted tax laws, and their bases as reported in the strengthfinancial statements. As of June 30, 2022, our net deferred tax asset was computed using the federal statutory rate of 21%. Additionally, the Company’s effective tax rate was 21.00% for the year ended June 30, 2022.

The President of the United States and members of Congress have announced plans to pursue tax law changes including raising the federal corporate income tax rate from its current level of 21%, introducing excise taxes on share repurchases, among other changes. If these plans ultimately result in the enactment of new laws raising the corporate income tax rate, our net deferred tax asset would need to be re-measured. This could result in an increase to the deferred tax asset in the period of the law change and a corresponding credit to earnings but could be offset by an increase to the income tax provision in the year of enactment and future years. Beyond changes affecting the corporate income tax rate, other tax law changes could also increase our tax expense and negatively impact our results of operations.

Risks Relating to Ownership of Our Common Stock

Our ability to pay dividends or to repurchase our common stock is subject to regulatory limitations and other limitations.

PCSB Financial is a separate legal entity from our subsidiary, PCSB Bank, and we do not have significant operations of our borrowers. Concern about the spreadown. The availability of COVID-19 has causeddividends from PCSB Bank is limited by various statutes and may continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. Hotel and restaurant operators and others in the leisure, hospitality and travel industries and the agricultural industry, among other industries, have been particularly hurt by COVID-19. For additional details on the Company’s exposure to industries deemed more susceptible to these events, see the Management Discussion & Analysis section of this Form 10-K. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateralregulations. It is insufficient to cover our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, andpossible, depending upon the financial condition of PCSB Bank and credit riskother factors, that PCSB Bank’s regulators could assert that payment of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slowdividends or prevent us from making our business decisions orother payments may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitmentsan unsafe or unsound practice. If the Bank is unable to extend creditpay dividends to customers. During a challenging economic environment like now, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic,us or we are participating in the Paycheck Protection Program under the CARES Act (“PPP”) whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit. Additionally, it is the Company’s understanding that loans funded through PPP are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan losses through a provision for loan losses chargedcontribute capital to earnings.

Strategic Risk – Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets.

Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking productsPCSB Bank, we provide, including a decline in originating loans.

Operational Risk – Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as inable to pay dividends on or repurchase our officescommon stock.

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our articles of incorporation and could cause the networks, information systems, applications,bylaws and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.

Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and localstate and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacitiesbanking laws, including regulatory approval requirements, could make it more difficult for a prolonged periodthird party to acquire control of PCSB Financial without our Board of Directors’ prior approval.

Under federal law, subject to certain exemptions, a person, entity or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Interest Rate Risk/Market Value Risk – Our net interest income, lending and investment activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020,group must notify the Federal Reserve loweredBoard before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company creates a rebuttable presumption that the target rangeacquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve Board and the NYSDFS before, among other things, acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, including PCSB Bank.

There also are provisions in our articles of incorporation that may be used to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of the shares of common stock outstanding. Furthermore, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors, employment agreements that we have entered into with our executive officers and other factors may make it more difficult for companies or persons to acquire control of the federal funds rateCompany without the consent of our Board of Directors. Taken as a whole, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a range from 0% to 0.25%, citing concerns aboutpotential acquirer and thus could adversely affect the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market valuesprice of our investment securities and other assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.common stock.

Legal Risk-Litigation related to the COVID-19 pandemic has been commenced against some banks. These lawsuits assert a variety of claims, including alleged mishandling of the Paycheck Protection Program, violations of executive orders and regulatory guidance prohibiting or limiting debt collection, evictions and foreclosures, discriminatory program administration, workplace safety claims and claims alleging minimization in securities filings of the COVID effect on operations. The Company is not a party to any such litigation, and we are not aware of any facts which may give rise to such litigation. While we believe our strong compliance and risk culture, proactive pandemic actions and clear communication with our customers employees and shareholders mitigate this legal risk, there can be no assurance that we will not become a party to COVID related litigation.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic.

The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

Item 1B. Unresolved Staff Comments

Not applicable.

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Item 2. Properties

At June 30, 2020,2022, we conducted business through our executive offices/headquarters in Yorktown Heights and our 1514 banking offices located in Brewster (main banking office), Eastchester, Fishkill, Greenburgh, Jefferson Valley, Kent, Mahopac, Mount Kisco, Mount Vernon, New City, Pawling, (2 branch offices), East White Plains, Somers, and Yorktown Heights, all of which are located in New York. We own 4 and lease 1110 of our properties.banking offices. At June 30, 2020,2022, the net book value of our land, buildings, lease assets, furniture, fixtures and equipment was $11.3$19.4 million. The Company’s and Bank’s executive offices/headquarters are located in a leased facility at 2651 Strang Blvd., Suite 100, Yorktown Heights, New York.

Item 3. Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.

In addition, the Company has received demand letters from putative stockholders of the Company regarding the proposed merger between the Company and Brookline Bancorp, Inc. In addition, on August 25, 2022, a complaint captioned Stephen Bushansky v. PCSB Financial Corporation et al. was filed in the United States District Court, Southern District of New York, naming as defendants the Company and the members of the Company’s board of directors (the “Complaint”). The complaint and the demand letters allege, among other things, that the proxy statement/prospectus contains materially incomplete and misleading information regarding the process that culminated in the merger agreement and the proposed transaction, the valuation analyses performed by the Company’s financial advisor, and potential conflicts of interest in connection with the proposed merger. The relief sought includes enjoining the consummation of the merger unless and until certain additional and allegedly material information is disclosed to the Company’s stockholders, rescinding and setting aside the merger to the extent already implemented, or granting rescissory damages, and awarding the plaintiff the cost of the action, including reasonable attorneys’ and experts’ fees. The Company believes that all allegations in the demand letters and complaint are without merit and intends to defend against them as appropriate.

We aredo not a party tobelieve that any pending legal proceedings that we believe would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Company’s shares of common stock are traded on the NASDAQ Capital Market under the symbol “PCSB”. The approximate number of shareholders of record of the Company’s common stock as of June 30, 20202022 was 1,330.1,261.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

None.

Securities Authorized for Issuance under Equity Compensation Plans

 

The following information is presented for the PCSB Financial Corporation 2018 Equity Incentive Plan as of June 30, 2020:2022:

 

Issuer Purchases of Equity Securities

 

On June 20, 2019,February 3, 2021, the BoardCompany announced the authorization of Directors authorized thea repurchase ofprogram to repurchase up to 890,021801,856 shares, or 5.0%5%, of the Company’sits then outstanding common stock. As of February 19, 2020, the repurchase was completed, with the Company repurchasing $17.8 million or 890,021 shares at an average price of $19.99 per share of its common stock. On August 20, 2020, a repurchase program was authorized by the Board of Directors to repurchase up to 844,907 shares, or 5% of the Company’s common stock. Subsequent to June 30, 2020, and through September 9, 2020,2022, the Company repurchased 96,900682,561 shares of common stock, at an average cost of $13.07$18.23 per share.

The following table sets forth certain information with respect to

There were no repurchases of PCSB Financial Corporation common stock repurchases during the quarter ended June 30, 2020:2022.

Item 6. Selected Financial Data

The summary information presented below at or for each of the fiscal years presented is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Item 8.

Non-GAAP Financial Measures[Reserved]

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Using non-GAAP financial measures can help investors in providing a more meaningful picture of the company’s performance and value. It can also provide additional insight into a company’s business beyond that found in the Financial Statements.

We identify “efficiency ratio” and “tangible book value per common share” as non-GAAP financial measures. In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, in the most directly comparable measure calculated and presented in accordance with GAAP.  Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measure that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this annual report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP.

Efficiency ratio is a non-GAAP measure and is defined as noninterest expense, divided by operating revenue, which is equal to net interest income plus non-interest income. In our judgment, it allows investors and analysts to better understand our ability to turn resources into revenue. The lower the ratio, the better. An increase in the efficiency ratio indicates either increasing costs or decreasing revenues.

Tangible book value per common share is a non-GAAP measure and equals total shareholders’ equity, less goodwill and other intangible assets, divided by shares outstanding. We believe this disclosure may be meaningful to those investors who seek to evaluate our equity without giving effect to goodwill and other intangible assets.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

This section is intended to help investors understand the consolidated financial performance of PCSB Financial through a discussion of the factors affecting our financial condition at June 30, 20202022 and 20192021 and our results of operations for the years ended June 30, 20202022 and 2019.2021. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this annual report.

Overview

Income. Our primary source of income is net interest and dividend income. Net interest and dividend income is the difference between interest and dividend income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Other sources of income include earnings from customer service fees (mostly from service charges on deposit accounts), bank-owned life insurance and gains on the sale of securities.

Provision for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of probable incurred losses in the loan portfolio, based upon management’s evaluation of the portfolio’s collectability. The allowance is established through the provision for loan losses, which is charged against income. Charge-offs are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Allocation of the allowance may be made for specific loans or pools of loans, but the entire allowance is available for the entire loan portfolio.

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits, occupancy and equipment, data processing, federal deposit insurance, merger-related expenses and other general and administrative expenses.

Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans, stock-based compensation and other employee benefits. We have started to recognize additional annual employee compensation expenses stemming from the adoption of new equity benefit plans, which was previously approved by shareholders.

Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets or the expected lease terms, if shorter. Data processing expenses are the fees we pay to third parties for the use of their software and for processing customer information, deposits and loans.

Federal deposit insurance premiums are payments we make to the FDIC for insurance of our deposit accounts.

Other expenses include expenses for professional services, advertising, office supplies, postage, telephone, insurance and other miscellaneous operating expenses.

Merger-related expenses consist primarily of professional services as well as other miscellaneous expenses.

Critical Accounting Policies

A summary of our accounting policies is described in Note 1 to Notes to Consolidated Financial Statements. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets 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 a valuation allowance for probable incurred loan losses. The allowance for loan losses is increased by provisions for loan losses charged to income. Losses are charged to the allowance for loan losses when all or a portion of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. See Note 4 to Notes to Consolidated Financial Statements for a complete discussion of the allowance for loan losses.

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Selected Financial Data

The summary information presented below at or for each of the fiscal years presented is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Item 8.

		At June 30,
		2022				2021				2020				2019				2018
		(in thousands)
Selected Financial Condition Data:
Total Assets		$	1,989,132			$	1,874,935			$	1,791,929			$	1,637,579			$	1,480,187
Cash and cash equivalents			118,457				159,305				136,302				60,029				62,145
Held to maturity debt securities			412,449				337,584				275,772				345,545				353,183
Available for sale debt securities			34,621				57,387				37,426				72,228				105,504
Loans receivable, net			1,329,372				1,229,451				1,260,947				1,093,121				902,336
Goodwill and other intangible assets			6,195				6,257				6,335				6,429				6,539
Total Liabilities			1,711,970				1,600,375				1,518,216				1,356,272				1,192,628
Deposits			1,626,250				1,491,682				1,373,255				1,225,821				1,157,457
Advances from FHLB			48,323				65,957				106,089				111,216				18,841
Total shareholders' equity			277,162				274,560				273,713				281,307				287,559
		For the Year Ended June 30,
		2022				2021				2020				2019				2018
		(Dollars in thousands, except per share data)
Selected Operating Data:
Interest and dividend income		$	58,680			$	57,264			$	61,910			$	53,447			$	47,960
Interest expense			6,241				9,922				15,231				10,743				6,323
Net interest income			52,439				47,342				46,679				42,704				41,637
Provision (benefit) for loan losses			772				(673	)			3,064				808				414
Net interest income after provision			51,667				48,015				43,615				41,896				41,223
Non-interest income			3,819				2,497				3,069				3,102				2,519
Non-interest expense (1)			36,653				34,754				34,634				33,994				32,116
Income before income tax expense			18,833				15,758				12,050				11,004				11,626
Income tax expense (2)			3,954				3,334				2,691				2,686				5,022
Net income		$	14,879			$	12,424			$	9,359			$	8,318			$	6,604
Earnings per share:
Basic		$	1.05			$	0.84			$	0.60			$	0.50			$	0.39
Diluted		$	1.04			$	0.84			$	0.60			$	0.50			$	0.39

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	At or For the Year Ended June 30,
	2022			2021			2020			2019			2018
Selected Financial Ratios:
Return on average assets (1)		0.78	%		0.68	%		0.56	%		0.55	%		0.46	%
Return on average equity (2)		5.39			4.55			3.36			2.92			2.33
Noninterest income to average assets		0.20			0.14			0.18			0.21			0.18
Noninterest expense to average assets		1.93			1.91			2.06			2.26			2.24
Interest rate spread		2.79			2.55			2.61			2.70			2.86
Net interest margin (3)(4)		2.90			2.73			2.89			2.95			3.03
Efficiency ratio (4)		65.15			69.73			69.62			74.21			72.73
Dividend payout ratio (5)		24.22			21.93			27.47			26.24			7.63
Average interest-earning assets to average interest-bearing liabilities		131.32			131.35			130.68			134.34			135.94
Loans to deposits		81.74			82.42			91.82			89.17			77.96
Equity to assets (6)		14.52			15.05			16.54			19.00			19.80
Book value per common share	$	18.07		$	17.41		$	16.20		$	15.80		$	15.83
Tangible book value per common share (4)	$	17.67		$	17.01		$	15.82		$	15.44		$	15.47
Capital Ratios (PCSB Bank only):
Tier 1 capital (to adjusted total assets)		12.78	%		12.48	%		12.51	%		13.81	%		13.61	%
Tier 1 capital (to risk-weighted assets)		17.22			17.93			16.98			17.96			21.11
Total capital (to risk-weighted assets)		17.22			17.93			16.98			17.96			21.11
Common equity Tier 1 capital (to risk-weighted assets)		17.83			18.53			17.65			18.45			21.62
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans receivable		0.67			0.64			0.68			0.52			0.54
Allowance for loan losses as a percent of total non-accrual loans receivable		97.07			147.20			481.28			207.78			80.37
Allowance for loan losses as a percent of non-performing loans receivable		96.66			136.70			481.28			207.70			80.37
Net (recoveries) charge-offs to average outstanding loans during the period		(0.02	)		0.00			0.01			0.01			0.08
Non-accrual loans receivable as a percent of total loans receivable		0.69			0.43			0.14			0.25			0.67
Non-performing loans receivable as a percent of total loans receivable		0.69			0.47			0.14			0.25			0.67
Non-performing assets as a percent of total assets		0.46			0.31			0.10			0.24			0.44
Other Data:
Number of offices		14			15			15			15			15
Number of full-time equivalent employees		162			162			169			172			170

Non-GAAP Financial Measures and Their Reconciliation with GAAP Financial Measures

Using non-GAAP financial measures can help investors in providing a more meaningful picture of the Company’s performance and value. It can also provide additional insight into Company’s business beyond that found in the Financial Statements.

We identify “efficiency ratio” and “tangible book value per common share” as non-GAAP financial measures. In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial

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measures calculated in accordance with GAAP, operating measures or other measure that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this annual report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP.

Tangible book value per common share is a non-GAAP measure and equals total shareholders’ equity, less goodwill and other intangible assets, divided by shares outstanding. We believe this disclosure may be meaningful to those investors who seek to evaluate our equity without giving effect to goodwill and other intangible assets.

	For the Year Ended June 30,
	2022			2021			2020			2019			2018
	(Dollars in thousands, except share and per share data)
Computation of Tangible Book Value per Common Share
Total shareholders' equity	$	277,162		$	274,560		$	273,713		$	281,307		$	287,559
Adjustments:
Preferred stock		-			-			-			-			-
Common shareholders' equity (GAAP)		277,162			274,560			273,713			281,307			287,559
Adjustments:
Goodwill		(6,106	)		(6,106	)		(6,106	)		(6,106	)		(6,106	)
Other intangible assets		(89	)		(151	)		(229	)		(323	)		(433	)
Tangible common shareholders' equity (Non-GAAP)	$	270,967		$	268,303		$	267,378		$	274,878		$	281,020
Common shares outstanding		15,334,857			15,770,645			16,898,137			17,804,039			18,165,110
Book value per share (GAAP)	$	18.07		$	17.41		$	16.20		$	15.80		$	15.83
Adjustments:
Effects of intangible assets		(0.40	)		(0.40	)		(0.38	)		(0.36	)		(0.36	)
Tangible book value per common share (Non-GAAP)	$	17.67		$	17.01		$	15.82		$	15.44		$	15.47

Tax equivalent net interest income is a non-GAAP measure and equals net interest income plus income tax benefits arising from income earned on loans and securities exempt from federal, state, and/or local taxes. We believe this disclosure may be meaningful to those investors who seek to evaluate our net interest income.

	For the Year Ended June 30,
	2022			2021			2020			2019			2018
	(Dollars in thousands)
Computation of Tax Equivalent Net Interest Income
Total interest income	$	58,680		$	57,264		$	61,910		$	53,447		$	47,960
Total interest expense		6,241			9,922			15,231			10,743			6,323
Net interest income (GAAP)		52,439			47,342			46,679			42,704			41,637
Tax equivalent adjustment		400			198			56			-			-
Net interest income - tax equivalent (Non-GAAP)	$	52,839		$	47,540		$	46,735		$	42,704		$	41,637

Loan Portfolio

General. Loans are our primary interest-earning asset. At June 30, 2020,2022, net loans represented 70.4%66.8% of our total assets. The following tables set forth certain information about our loan portfolio.

Loan Portfolio Analysis. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

 

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	At June 30,
	2022						2021
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Mortgage loans:
Residential	$	214,167			16.01	%	$	224,305			18.13	%
Commercial		942,130			70.43			826,624			66.79
Construction		20,896			1.56			10,151			0.82
Total		1,177,193			88.00			1,061,080			85.74
Commercial loans		136,304			10.19			150,658			12.17
Home equity lines of credit		23,688			1.77			25,439			2.06
Consumer and overdrafts		594			0.04			345			0.03
Total loans receivable		1,337,779			100.00	%		1,237,522			100.00	%
Plus: net deferred loans origination (fees) costs		520						(190	)
Less: allowance for loan losses		(8,927	)					(7,881	)
Loans receivable, net	$	1,329,372					$	1,229,451

Loan Maturity. The following tables settable sets forth certain information at June 30, 20202022 regarding the dollar amount of loan maturities for the periods indicated. The tables dotable does not include scheduled amortization or any estimate of prepayments that significantly shorten the average loan life and may cause actual repayment experience to differ from that shown below.

 

	Residential Mortgage Loans			Commercial Mortgage Loans			Construction Loans			Commercial Loans			Home equity Lines of Credit			Consumer and Overdrafts			Total Loans
	(in thousands)
Amounts due in:
One year or less	$	84		$	5,030		$	14,102		$	39,715		$	-		$	422		$	59,353
More than one year through five years		3,094			135,416			6,794			53,815			40			172			199,331
More than five years through fifteen years		43,817			690,645			-			41,262			5,943			-			781,667
More than fifteen years		167,172			111,039			-			1,512			17,705			-			297,428
Total	$	214,167		$	942,130		$	20,896		$	136,304		$	23,688		$	594		$	1,337,779

 

The following table sets forth the dollar amount of all loans at June 30, 20202022 that are due after June 30, 20212023 and have either fixed interest rates or floating or adjustable interest rates.

	Fixed Rates				%				Floating or Adjustable Rates				%				Total
	(Dollars in thousands)
Residential mortgage loans	$	184,517				86.19	%		$	29,566				13.81	%		$	214,083
Commercial mortgage loans		190,862				20.37				746,238				79.63				937,100
Construction		6,794				100.00				-				-				6,794
Commercial loans		68,996				71.43				27,593				28.57				96,589
Home equity lines of credit		74				0.31				23,614				99.69				23,688
Consumer and overdrafts		172				100.00				-				-				172
Total	$	451,415				35.31	%		$	827,011				64.69	%		$	1,278,426

Loan Originations, Purchases and Sales. Loan originations come from a variety of sources. The primary sources of loan originations are current customers, business development by our relationship managers, walk-in traffic, referrals from customers, and other professionals. We generally originate loans for our portfolio rather than for sale in the secondary market.

We occasionally purchase whole loans and loan participation interests from other financial institutions, which consist of interests in commercial mortgage loans, multi-family mortgage loans and residential mortgages,mortgage loans, primarily in our market area. At June 30, 2020,2022, we had $215.3$168.0 million in purchased whole loan and participation interests.

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Asset Quality

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, the borrowers on individual commercial real estate, construction and land development and commercial business loans are assigned a risk rating, including a collateral rating, based on pre-determined criteria and levels of risk. The borrower and collateral risk ratings are generally monitored annually, or more frequently should we become aware of a material adverse change in the borrower’s condition, and may change during the life of the loan as appropriate.

Internal and independent third-party loan reviews vary by loan type, as well as the nature and complexity of the loan. Depending on the size and complexity of the loan, some loans may warrant detailed individual review, while other loans may have less risk based upon size or be of a homogeneous nature reducing the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and loans secured by residential real estate, may be reviewed on the basis of risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan. Some loans may be re-evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general loan loss reserves.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Loan Committee of the Board of Directors monthly of the amount of loans delinquent more than 30 days and the Board of Directors monthly of the amount of loans delinquent 90 days or more.

Delinquent Loans. The following tables settable sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

	At June 30, 2022												At June 30, 2021
	30-89 Days						90 Days or More						30-89 Days						90 Days or More
	Number of Loans		Carrying Amount				Number of Loans		Carrying Amount				Number of Loans		Carrying Amount				Number of Loans		Carrying Amount
	(Dollars in thousands)
Residential mortgage loans	-		$	-			3		$	367			2		$	324			4		$	948
Commercial mortgage loans	-			-			1			1,197			2			453			1			411
Construction	-			-			1			1,113			-			-			-			-
Commercial loans	2			16			1			400			3			145			-			-
Home equity lines of credit	-			-			3			399			1			19			3			381
Consumer and overdrafts	-			-			1			39			-			-			-			-
Total	2		$	16			10		$	3,515			8		$	941			8		$	1,740

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status,and real estate and other loan collateral acquired through foreclosure and repossession. Non-accrual loans exclude acquired loans that are accounted for as purchased credit impaired loans because the loans are in pools that are considered performing. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection.  For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income.

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The following table sets forth information regarding our non-performing assets at the dates indicated. This table excludes $1.2 million of loans modified in troubled debt restructurings that are accruing interest.

 

 

Interest income that would have been recorded for the year ended June 30, 20202022 had non-accruing loans been current according to their original terms, amounted to $71,000.  $342,000.

Potential Problem Loans. Certain loans are identified during our loan review process that are currently performing according to their contractual terms and we expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect all the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions such as cash flows, collateral values or creditworthiness of the borrower.

Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. These loans are notinclude non-impaired classified as impaired.loans. At June 30, 2020,2022, other potential problem loans totaled $10.0$7.0 million.

Additionally, as detailed in Note 4 to the consolidated financial statements, in association with the COVID-19 pandemic, including the New York State Department of Financial Services emergency regulations on providing consumer and small business payment accommodations, the Company has granted loan payment deferrals, generally for a 90-day period, for 320 loans totaling $216.2 million as of June 30, 2020. A vast majority of these loans were performing according to their contractual terms prior to modification, and thus are not reported as nonperforming as of June 30, 2020, however the potential impact of the COVID-19 pandemic causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms following the deferral period provided by the modification.

Classified Assets. The following table sets forth information regarding our classified assets, as defined under applicable regulatory standards, at the dates indicated.

	At June 30,
	2022				2021
	(in thousands)
Special mention	$	3,580			$	6,301
Substandard		12,568				21,602
Doubtful		-				-
Loss		-				-
Total	$	16,148			$	27,903

 

Troubled Debt Restructurings. The Company may choose to modify the terms of certain loans where the modification qualifies as troubled debt restructurings as a result of the borrower experiencing financial difficulty and/or the Company providing a more than insignificant concession to the borrower that it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans qualifying as a concession by the Company may include 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

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risk; or a permanent reduction of the recorded investment in the loan. As of June 30, 2022, the Company had 9 loans classified as troubled debt restructurings totaling $1.4 million.

COVID-19 Related Loan Payment Deferrals. The COVID-19 pandemic has created extensive disruptions to the local economy and our customers. In accordance with emergency regulations promulgated by New York State Department of Financial Services, financial institutions are required to provide payment accommodations, which may include payment deferrals, to any consumer andor small businessesbusiness who can demonstrate financial hardship caused by COVID-19. Throughout the pandemic and as of August 31, 2020,through June 30, 2022, the Company has granted loan payment deferrals for 109114 residential mortgage loans and home equity linelines of credit totaling $31.3$32.1 million, as well as deferrals for 211217 commercial mortgage, commercial loan and construction loans totaling $181.2$188.2 million. The table below summarizes the deferrals granted and their statusAs of June 30, 2022 there were no loans remaining on deferral, compared to 19 loans totaling $27.3 million as of August 31, 2020 (dollar amounts in thousands):June 30, 2021.

Of those loans still on deferral as of August 31, 2020, $9.2 million are currently scheduled to resume payments prior to September 30, 2020, with the remainder scheduled to resume payments prior to December 31, 2020. As our borrowers’ financial condition and individual circumstances are assessed in the coming weeks and months, additional payment deferrals may be granted.

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

The following table sets forth activity in our allowance for loan losses for the years indicated.

 

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Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

The Company has taken actions to identify, assess and address its COVID-19-related credit exposure. Many factors are unknown, including the length of the resulting economic shutdown and phased re-opening imposed by New York State and other neighboring states, the impacts of the government fiscal and monetary relief measures, including payment deferral programs, as well as the long-term impacts COVID-19 may have on our consumer and commercial borrowers. The following table provides the Company’s commercial and construction exposures to those industries the Company believes to be the most directly and significantly impacted by the pandemic:

As of June 30, 2020, the Company has no exposure to leveraged lending, shared national credits, energy exploration or credit cards.

See Note 4 to Notes to Consolidated Financial Statements for a complete discussion of the allowance for loan losses. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the

existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Securities Portfolio

The following table sets forth the amortized cost and estimated fair value of our available-for-saleheld to maturity and available for sale securities portfolioportfolios at the dates indicated.

 

At June 30, 2020,2022, we had no investments in a single issuer, other than securities issued by the U.S. government and government agencies, which had an aggregate book value in excess of 10% of our shareholders’ equity.

 

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Securities Portfolio Maturities and Yields. The following table sets forth the stated maturities and weighted average yields of investment securities at June 30, 2020.2022. The tables dotable does not include any estimate of principal payments or prepayments that significantly shorten the average life of mortgage-backed securities. Certain mortgage-backed securities, corporate and other debt securities have adjustable interest rates and will reprice annuallyperiodically within the various maturity ranges. These repricing schedules are not reflected in the following table. Weighted average yield calculations on investment securities available for sale do not give effect to changes in fair value that are reflected as a component of equity. At June 30, 2020,2022, we did not have any investments in any private-label collateralized mortgage obligations.

 

	One Year or Less							More than One Year to Five Years							More than Five Years to Ten Years							More than Ten Years							Total
	Amortized Cost			Weighted Average Yield				Amortized Cost			Weighted Average Yield				Amortized Cost			Weighted Average Yield				Amortized Cost			Weighted Average Yield				Amortized Cost			Fair Value			Weighted Average Yield
	(Dollars in thousands)
Held to maturity debt securities:
U.S. Government and agency obligations	$	5,000			2.54	%		$	54,995			1.51	%		$	-			–	%		$	-			–	%		$	59,995		$	56,955			1.60	%
Corporate		-			-				10,000			2.82				42,076			3.65				-			-				52,076			49,391			3.49
State and municipal		115			1.35				975			1.09				1,725			1.35				84,296			1.99				87,111			64,804			1.97
Mortgage-backed securities – residential		-			-				3,157			1.89				18,433			2.28				79,935			2.21				101,525			91,783			2.21
Mortgage-backed securities – collateralized mortgage obligations		-			-				516			1.95				1,135			1.92				22,547			1.82				24,198			22,074			1.82
Mortgage-backed securities – commercial		3,615			3.10				3,815			2.66				10,857			1.76				69,257			1.87				87,544			76,601			1.94
Total	$	8,730			2.76	%		$	73,458			1.76	%		$	74,226			2.95	%		$	256,035			2.01	%		$	412,449		$	361,608			2.15	%
Available for sale debt securities:
U.S. Government and agency obligations	$	-			–	%		$	3,000			1.05	%		$	7,942			1.06	%		$	-			–	%		$	10,942		$	9,928			1.05	%
Corporate		-			-				2,000			2.39				3,000			4.38				-			-				5,000			4,854			3.58
State and municipal		-			-				-			-				-							7,040			2.16				7,040			4,796			2.16
Mortgage-backed securities – residential		-			-				-			-				-			-				14,351			1.70				14,351			12,712			1.70
Mortgage-backed securities – commercial		-			-				2,416			2.22				-			-				-			-				2,416			2,331			2.22
Total	$	-			–	%		$	7,416			1.79	%		$	10,942			1.97	%		$	21,391			1.85	%		$	39,749		$	34,621			1.87	%

Other-than-temporary Impairment. Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be recognized if (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in our noninterest income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the years ended June 30, 20202022 or 2019.2021.

Deposits

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Deposits

Deposits have traditionally been our primary source of funds for our lending and investment activities. The substantial majority of our deposits are from depositors who reside in our primary market area. Deposits are attracted through the offering of a broad selection of deposit instruments for both individuals and businesses. The following table sets forth the distribution of total deposits by account type at the dates indicated.

 

      AtDeposits of local governments held by PCSB Bank were $127.5 million and $74.4 million at June 30, 20202022 and 2019, we had municipal deposits of $44.1 million and $40.1 million,2021, respectively. Additionally, as of June 30, 20202022 and 2019,2021, deposits included $67.5 million and $77.5 million, respectively, of brokered time deposits withof $20.0 million and $30.0 million, respectively. At June 30, 2022, brokered time deposits had remaining maturities of between 6 and 4420 months.

At June 30, 2022, the aggregate amount of all uninsured deposits (the portion of deposit accounts that exceed the FDIC insurance limit of $250,000 per accountholder) was $436.1 million. At June 30, 2022, the aggregate amount of all uninsured time deposits was $43.6 million. At June 30, 2022, there were no time deposits that were uninsured for any reason other than being in excess of the FDIC limit.

The following table indicates the amount of jumbo time depositssets forth, by time remaining until maturity, the uninsured time deposits, that exceed the FDIC insurance limit of $250,000 per account, at June 30, 2020.  Jumbo time deposits require minimum deposits of $100,000.2022 (in thousands).

 

Maturity Period
Three months or less	$	3,845
Over three through six months		6,762
Over six through twelve months		2,664
Over twelve months		30,290
Total	$	43,561

The following tables settable sets forth time deposit accounts classified by rate and maturity at June 30, 2020.2022.

 

Borrowings

We primarily utilize advances from the FHLB of New YorkFHLBNY to supplement our supply of investable funds. At June 30, 20202022 we had the ability to borrow up to $218.4$280.9 million from the FHLB of New York,FHLBNY, of which $106.1$48.3 million was outstanding as of June 30, 2020.2022. Additionally, as of June 30, 2020,2022, we had an available line of credit with the FRB of New York’sFRBNY’s discount window program of $108.7

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$96.3 million as well as $25.0 million of fed funds lines of credit, neither of which had outstanding balances as of June 30, 2020. 2022.

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents decreased $40.8 million, or 25.6%, to $118.5 million at June 30, 2022 from $159.3 million at June 30, 2021. The decrease is primarily due to a $99.9 million increase in net loans receivable, $52.1 million increase in total investment securities, a $17.7 million decrease in FHLB advances and a $6.0 million decrease in other liabilities, partially offset by a $134.6 million increase in deposits.

Investment Securities Portfolio

The following table sets forth information concerning our FHLB borrowingsis a summary of the Company's investment securities portfolio at carrying value (Dollars in thousands):

									Increase / (Decrease)
		June 30, 2022			June 30, 2021				$			%
Available for sale debt securities
U.S. Government and agency obligations		$	9,928		$	21,816			$	(11,888	)		-54.5	%
Corporate			4,854			8,189				(3,335	)		-40.7
State and municipal			4,796			7,115				(2,319	)		-32.6
Mortgage-backed securities – residential			12,712			17,654				(4,942	)		-28.0
Mortgage-backed securities – commercial			2,331			2,613				(282	)		-10.8
Total available for sale debt securities		$	34,621		$	57,387			$	(22,766	)		-39.7	%
Held to maturity debt securities
U.S. Government and agency obligations		$	59,995		$	33,994			$	26,001			76.5	%
Corporate			52,076			43,605				8,471			19.4
State and municipal			87,111			57,625				29,486			51.2
Mortgage-backed securities – residential			101,525			96,181				5,344			5.6
Mortgage-backed securities – collateralized mortgage obligations			24,198			33,300				(9,102	)		-27.3
Mortgage-backed securities – commercial			87,544			72,879				14,665			20.1
Total held to maturity debt securities		$	412,449		$	337,584			$	74,865			22.2	%

The increase in investment securities was the dates and forresult of the periods indicated.Company deploying excess liquidity.

 

Loans Receivable Portfolio

Average Balance Sheets and Related Yields and Rates

The following table presentsis a summary of the Company's loan portfolio (Dollars in thousands):

									Increase / (Decrease)
		June 30, 2022			June 30, 2021				$			%
Mortgage loans
Residential		$	214,167		$	224,305			$	(10,138	)		-4.5	%
Commercial			942,130			826,624				115,506			14.0
Construction			20,896			10,151				10,745			105.9
Net deferred loan origination (fees) costs			(100	)		196				(296	)		-151.0
Total mortgage loans			1,177,093			1,061,276				115,817			10.9
Commercial and consumer loans:
Commercial loans			136,304			150,658				(14,354	)		-9.5
Home equity lines of credit			23,688			25,439				(1,751	)		-6.9
Consumer and overdrafts			594			345				249			72.2
Net deferred loan origination costs (fees)			620			(386	)			1,006			-260.6
Total commercial and consumer loans			161,206			176,056				(14,850	)		-8.4
Total loans receivable			1,338,299			1,237,332				100,967			8.2
Allowance for loan losses			(8,927	)		(7,881	)			(1,046	)		13.3
Loans receivable, net		$	1,329,372		$	1,229,451			$	99,921			8.1	%

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The increase in loans receivable was primarily the result of increases in commercial mortgage loans and construction loans, partially offset by decreases in commercial loans, residential mortgage loans and home equity lines of credit. The decrease in commercial loans includes a decrease in PPP loans of $35.1 million, driven by loan forgiveness and paydowns, largely offset by a net increase of $20.7 million in all other commercial loans.

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

The allowance for loan losses increased $1.0 million, or 13.3%, to $8.9 million at June 30, 2022 from $7.9 million at June 30, 2021. The increase is primarily due to loan portfolio growth and net recoveries of $274,000. Non-performing loans as a percent of total loans receivable (excluding PPP loans) were 0.69% as of June 30, 2022, an increase from 0.48% as of June 30, 2021, however the allowance for loan losses associated with loans individually evaluated for impairment decreased $2,000 from the prior year to $119,000 as of June 20, 2022

The COVID-19 pandemic has created extensive disruptions to the local economy and our customers. From March 2020 to December 2021, the Company has granted loan payment deferrals on 331 commercial and consumer loans totaling $220.3 million for borrowers experiencing financial hardship due to the pandemic. The Company had no loans on COVID-19 related payment deferral as of June 30, 2022, compared to $27.3 million (19 loans), or 2.21% of gross loans, as of June 30, 2021.

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

The following table is a summary of the Company's deposits (Dollars in thousands):

									Increase / (Decrease)
		June 30, 2022			June 30, 2021				$			%
Demand		$	245,297		$	219,072			$	26,225			12.0	%
NOW accounts			243,006			177,223				65,783			37.1
Money market accounts			399,026			332,843				66,183			19.9
Savings			411,332			387,529				23,803			6.1
Time deposits			327,589			375,015				(47,426	)		-12.6
Total deposits		$	1,626,250		$	1,491,682			$	134,568			9.0	%

Federal Home Loan Bank Advances. FHLB advances decreased $17.7 million to $48.3 million at June 30, 2022 as compared to $66.0 million at June 30, 2021. This decrease is due to maturities and principal paydowns of $17.6 million.

Total Shareholder’s Equity. Total shareholders’ equity increased $2.6 million, or 0.9%, to $277.2 million at June 30, 2022 from $274.6 million at June 30, 2021. This increase was primarily due to net income of $14.9 million and $5.0 million of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period, partially offset by the repurchase of $8.2 million (443,788 shares) of common stock, $5.5 million of other comprehensive losses related primarily to unrealized losses on available for sale investment securities driven by higher market interest rates and $3.6 million of cash dividends declared and paid. We would expect that further increases in market interest rates would lead to additional unrealized losses on available for sale investment securities. On February 3, 2021, a repurchase plan was authorized to repurchase up to 801,856 shares, or 5% of the Company’s then outstanding common stock. As of June 30, 2022, the Company repurchased 682,561 shares of common stock at an average cost of $18.23 per share under this plan. At June 30, 2022, the Bank was considered “well capitalized” under applicable regulatory guidelines.

Results of Operations for the Year Ended June 30, 2022 and June 30, 2021

Net Income. Net incomeincreased $2.5 million, or 19.8%, to $14.9 million for the year ended June 30, 2022 compared to $12.4 million for the year ended June 30, 2021. The increase was primarily due to increases of $5.1 million in net interest income and $1.3 million in noninterest income, partially offset by increases of $1.9 million in noninterest expense, $1.4 million in provision for loan losses and $620,000 in income tax expense.

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Net Interest Income.

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

 

		Year Ended June 30,
		2022												2021
		Average Balance				Interest/ Dividends				Average Rate				Average Balance				Interest/ Dividends				Average Rate
Assets:
Loans receivable (1)		$	1,258,513			$	49,502				3.94	%		$	1,245,818			$	49,470				3.97	%
Investment securities (1)			428,203				8,609				2.10				327,879				7,340				2.29
Other interest-earning assets			136,760				569				0.42				169,855				454				0.27
Total interest-earning assets			1,823,476				58,680				3.24				1,743,552				57,264				3.30
Non-interest-earning assets			77,769												72,522
Total assets		$	1,901,245											$	1,816,074
Liabilities and equity:
NOW accounts		$	203,804				345				0.17			$	160,652				296				0.18
Money market accounts			363,705				665				0.18				273,007				819				0.30
Savings accounts and escrow			409,732				458				0.11				369,681				611				0.17
Time deposits			352,474				3,607				1.02				421,168				6,165				1.46
Total interest-bearing deposits			1,329,715				5,075				0.38				1,224,508				7,891				0.64
FHLB advances			58,816				1,166				1.98				102,919				2,031				1.97
Total interest-bearing liabilities			1,388,531				6,241				0.45				1,327,427				9,922				0.75
Non-interest-bearing deposits			218,823												189,667
Other non-interest-bearing liabilities			17,785												25,707
Total liabilities			1,625,139												1,542,801
Total shareholders' equity			276,106												273,273
Total liabilities and shareholders' equity		$	1,901,245											$	1,816,074
Net interest income						$	52,439											$	47,342
Interest rate spread - tax equivalent (2)											2.79												2.55
Net interest margin - tax equivalent (3)											2.90												2.73
Average interest-earning assets to interest-bearing liabilities			131.32	%											131.35	%

 

 

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

 

		For The Year Ended June 30,
		2022				2021
Total interest income		$	58,680			$	57,264
Total interest expense			6,241				9,922
Net interest income (GAAP)			52,439				47,342
Tax equivalent adjustment			400				198
Net interest income - tax equivalent (non-GAAP)		$	52,839			$	47,540

Rate/Volume AnalysisAnalysis.

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume

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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.volume (in thousands).

 

 

Comparison of Financial Condition atProvision for Loan Losses. The provision for loan losses increased for the year ended June 30, 2020 and June 30, 2019

Total Assets. Total assets increased $154.4 million, or 9.4%,2022, compared to $1.79 billion at June 30, 2020 from $1.64 billion at June 30, 2019. The increase is primarily the result of increases of $167.8 million in net loans receivable, $76.3 million in cash and cash equivalents and $9.1 million in premises and equipment, partially offset by decreases of $69.7 million in held to maturity securities and $34.8 million in securities available for sale.

Cash and Cash Equivalents. Cash and cash equivalents increased $76.3 million, or 127.1%, to $136.3 million at June 30, 2020 from $60.0 million at June 30, 2019.previous year. The increase is primarily due to a $147.4 increase in deposits and a $104.6 million decrease in total investment securities, partially offset by a $167.8 million increase in loans receivable and a $5.1 million decrease in FHLB advances.

Securities Held to Maturity. Total securities held to maturity decreased $69.7 million, or 20.2%, to $275.8 million at June 30, 2020 from $345.5 million at June 30, 2019. This decrease was caused primarily by $54.5 million of calls and maturities, net of purchases of U.S. government and agency obligations and $45.5 million of amortization of mortgage-backed securities, partially offset by net purchases of corporate and other bonds and mortgage-backed securities of $18.8 million and $11.5 million, respectively.

Securities Available for Sale. Total securities available for sale decreased $34.8 million, or 48.2%, to $37.4 million at June 30, 2020 from $72.2 million at June 30, 2019. This decrease was primarily due to $26.0 million in maturities of U.S. government and agency obligations, amortization and sales, net of purchases of mortgage-backed securities of $6.3 million and purchases net of sales of corporate bonds of $3.3 million, partially offset by a $805,000 increase in net unrealized gains.

Net Loans Receivable. Net loans receivable increased $167.8 million, or 15.4%, to $1.26 billion at June 30, 2020 from $1.09 billion at June 30, 2019. The increase in loans receivable was the result of $206.3 million of non-PPPhigher loan originations, $49.6 million of PPP loan originations and $47.9 million of loan purchases, partially offset by $136.0 million of net amortization, repayments and other loan activity. Commercial mortgage loans and commercial loans increased $155.7 million and $30.6 million, respectively, while all other loans had a net decrease of $18.5 million. The increase in commercial loans includes $49.6 million of PPP loans originated in the fourth quarter.

Premises and Equipment. Premises and equipment, net, increased $9.1 million, to $20.9 million at June 30, 2020 from $11.8 million at June 30, 2019. This increase is primarily the result of an $11.9 million net increase in lease assets (a net increase in lease liabilities of $12.0 million was recorded in other liabilities) associated with the adoption of ASU 2016-02 and the acquisition of $1.5 million in lease assets and other premises and equipment during the year, partially offset by $13.6 million in amortization and depreciation.

Deposits. Total deposits increased $147.4 million, or 12.0%, to $1.37 billion at June 30, 2020 as compared to $1.23 billion at June 30, 2019. This increase primarily reflects increases of $91.8 million in money market accounts, $50.5 million in demand deposits and $28.7 million in NOW accounts, partially offset by $14.5 million decrease in savings accounts and $9.1 million in time deposits. A majority of theportfolio growth in deposits, $93.7 million or 7.3%, occurred in the fourth quarter, likely the result of numerous economic trends associated with COVID-19, including reduced consumer and commercial spending, various forms of government stimulus and volatile stock market performance.

Federal Home Loan Bank Advances. FHLB advances decreased $5.1 million, or 4.6%, to $106.1 million at June 30, 2020 as compared to $111.2 million at June 30, 2019. This decrease is primarily due to $50.0 million of net repayments of short-term advances and $5.1 million of repayments of long-term amortizing advances, partially offset by $50.0 million of additional long-term advances.

Total Shareholder’s Equity. Total shareholders’ equity decreased $7.6 million, or 2.7%, to $273.7 million at June 30, 2020 from $281.3 million at June 30, 2019.  This decrease was primarily due to the repurchase of $18.1 million (905,902 shares) of common stock, $2.6 million of cash dividends declared and paid and $1.3 million of other comprehensive loss, partially offset by net income of $9.4 million, as well as $5.0 million of stock-based compensation and reduction in unearned ESOP shares for plan shares earned during the period. During the year-ended June 30, 2020 the Company repurchased 890,021 shares at an average price of $19.99 per share. As of August 20, 2020, a repurchase plan was authorized to repurchase up to 844,907 shares, or 5% of the Company’s outstanding common stock. At June 30, 2020, the Company’s book value per share and tangible book value per share were $16.20 and $15.82, respectively, compared to $15.80 and $15.44, respectively, at June 30, 2019. At June 30, 2020, the Bank was considered “well capitalized” under applicable regulatory guidelines.

Comparison of Operating Results for the Year Ended June 30, 2020 and 2019

General. Net income increased $1.1 million, or 12.5%, to $9.4 million for the year ended June 30, 2020 compared to $8.3 million for the year ended June 30, 2019. The increase was primarily due to a $4.0 million increase in net interest income, partially offset by $2.3 million increase in the provision for loan losses and a $640,000 increase in noninterest expense.

Net Interest Income. Net interest income increased $4.0 million, or 9.3%, to $46.7 million for the year ended June 30, 2020 compared to $42.7 million for the year ended June 30, 2019. The increase primarily reflects a $168.9 million increase in average interest-earning assets, partially offset by a 6 basis point decrease in net interest margin to 2.89% for the year ended June 30, 2020 compared to 2.95% for the year ended June 30, 2019. The increase in average interest-earning assets reflects a $274.3 million increase in average loans receivable, partially offset by a $97.5 million decrease in average investment securities and a $7.9 million decrease in average other interest earning assets. Despite continued asset growth and a higher yielding asset mix, which resulted in a 13 basis point increase in the yield on interest earning assets, the interest rate spread has been impacted by rising funding costs due to higher average short-term interest rates along with competitive pricing, which caused a 23 basis point increase in the average cost of interest-bearing liabilities, resulting in net interest margin compression.

Interest and Dividend Income. Interest and dividend income increased $8.5 million, or 15.8%, to $61.9 million for the year ended June 30, 2020 compared to $53.4 million for the year ended June 30, 2019. The increase primarily reflects a $168.8 million increase in total average interest-earning assets and a 13 basis point increase in the yield on total interest-earning assets.

Interest income on loans receivable increased $10.5 million, or 25.2%, primarily due to a $274.3 million increase in the average balance of loans receivable to $1.20 billion for the year ended June 30, 2020 from $924.2 million for the same period last year, partially offset by a 15 basis point decrease in the average yield on loans to 4.35% for the year ended June 30, 2020 from 4.50% for the same period last year, as growth in higher yielding loan products, such as commercial mortgages, were more than offset by decreases in market interest rates.

Interest income on investment securities decreased $1.2 million, or 11.5%, primarily due to a $97.5 million decrease in the average balance of investment securities to $346.6 million for the year ended June 30, 2020 from $444.0 million for the same period last year, partially offset by a 30 basis point increase in the average yield on investment securities to 2.56% for the year ended June 30, 2020 from 2.26% for the same period last year. The decrease in the average balance of investment securities is the result of the Company utilizing securities portfolio runoff to fund loan growth. The increase in yield is a result of prepayment income earned in the current year as well as a more profitable asset mix as higher yielding corporate bonds and mortgage-backed securities increased as a percentage of the total portfolio.

Interest income on other interest-earning assets, primarily consisting of cash balances at correspondent banks including the Federal Reserve, decreased $873,000, or 48.3%, primarily due to a 100 basis point decrease$944,000 benefit for loan losses recorded in the average yield on other interest-earning assets to 1.34%prior year associated with the release of allowance for loan loss established in the year-ended June 30, 2020 associated with the COVID-19 pandemic. Recoveries, net of charge-offs, were $274,000 for the year ended June 30, 2020, from 2.34%2022, compared to charge-offs, net of recoveries, of $85,000 for the same period lastprevious year. Substandard loans were $12.6 million as of June 30, 2022, a decrease from $21.6 million as of June 30, 2021.

Noninterest Income

The following table displays noninterest income for the years ended June 30, (Dollars in thousands).

									Net Change
		2022			2021				$			%
Fees and service charges		$	1,640		$	1,428			$	212			14.8	%
Bank-owned life insurance			754			549				205			37.3
Gain on sale of premises			548			-				548			100.0
Gain on sale of securities			-			113				(113	)		-100.0
Net gains on sales of loans receivable			56			-				56			100.0
Swap income			785			367				418			113.9
Other			36			40				(4	)		-10.0
Total noninterest income		$	3,819		$	2,497			$	1,322			52.9	%

During the year ended June 30, 2022, the Company sold a parcel of unused land, resulting in the gain on sale of premises. The increase in swap income is due to increased loan originations. The increase in fees and a $7.9 millionservice charges compared to the previous year was primarily the result of increases in debit card and interchange income, as well as increases in overdraft, ATM and wire fees which declined substantially during the beginning of the COVID-19 pandemic and have since recovered to near pre-pandemic levels. The increase in Bank-owned life insurance income is due to additional investments made in the prior fiscal year.

Noninterest Expense

The following table displays noninterest expense for the years ended June 30, (Dollars in thousands).

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									Net Change
		2022			2021				$			%
Salaries and employee benefits		$	23,416		$	22,517			$	899			4.0	%
Occupancy and equipment			5,501			5,413				88			1.6
Communication and data processing			2,211			2,064				147			7.1
Merger-related expenses			1,252			-				1,252			100.0
Professional fees			1,673			1,690				(17	)		-1.0
Postage, printing, stationery and supplies			620			589				31			5.3
FDIC assessment			496			463				33			7.1
Advertising			477			400				77			19.3
Amortization of intangible assets			62			78				(16	)		-20.5
Other operating expenses			945			1,540				(595	)		-38.6
Total noninterest expense		$	36,653		$	34,754			$	1,899			5.5	%

The increase in salaries and employee benefits in the year ended June 30, 2022 compared to the previous year is primarily due to higher salary and ESOP costs. Merger-related expenses relate to the proposed Brookline Bancorp merger and primarily include professional services as well as other miscellaneous expenses. The decrease in the average balance of other interest-earning assets to $69.4 millionoperating expenses for the year ended June 30, 20202022 compared to $77.3 millionthe previous year is primarily due to lower pension costs in the current year.

Income Tax Expense. The effective income tax rate was 21.0% for the year ended June 30, 2019. The decrease in the yield on other interest-earning assets was primarily due2022 as compared to a decrease in market interest rates, specifically fed funds.

Interest Expense. Interest expense increased $4.5 million, or 41.8%, to $15.2 million21.2% for the previous year, ended June 30, 2020 compared to $10.7 million forwith the year ended June 30, 2019. The increase primarily reflects a $159.4 milliondecrease largely driven by an increase in the average balance of interest-bearing liabilities to $1.24 billion for the year ended June 30, 2020 from $1.08 billion for the same period last year,tax-exempt interest income on municipal investments and a 23 basis point increase in the average cost of interest-bearing liabilities to 1.23% for the year ended June 30, 2020 from 1.00% for the same period last year.

Interest expense on interest-bearing deposits increased $2.6 million, or 25.5%, primarily due to a $72.5 million increase in the average balance to $1.12 billion for the year ended June 30, 2020 from a $1.05 billion for the year ended June 30, 2019 and a 17 basis point increase in the average cost of interest-bearing deposits to 1.14% for the year ended June 30, 2020 from 0.97% for the same period last year. The increase in the average rate paid on interest-bearing deposits was primarily caused by rising funding costs due to short-term interest rates increases experienced in the prior year along with competitive pricing. The Company has experienced a shift in deposit mix over the past several quarters as customers in generally lower rate savings products moved to generally higher rate money market and time deposits, however the pace of this shift has slowed and reversed in the most recent quarter. In response to the significant decrease in market interest rates in mid-March, deposit rate reductions were implemented, the effects of which have begun to be realized in fourth quarter results. At June 30, 2020, the weighted average cost of interest-bearing deposits was 0.85%.

Interest expense on FHLB advances increased $1.9 million, primarily due to a $86.9 million increase in the average balance to $111.0 million for the year ended June 30, 2020 from $24.1 million for the same period last year, partiallybank-owned life insurance income, largely offset by a 13 basis point decrease in the average cost to 2.21% for the year ended June 30, 2020 from 2.34% for the same period last year.

Provision for Loan Losses. The provision for loan losses was $3.1 million for the year ended June 30, 2020, compared to $808,000 for the year ended June 30, 2019. The increase is primarily due to loan portfolio growth and a $1.9 million increase in qualitative reserves as the Company continues to assess the economic impacts the COVID-19 pandemic has had on our local economy and loan portfolio. This qualitative reserve is equal to 0.16% of total loans (excluding PPP loans) and resulted in a 28.4% increase to allowance for loan losses. The allowance for loan loss as of June 30, 2020 was 0.68% (or 0.71% excluding PPP loans) of total loans. Loans classified as

substandard or doubtful totaled $7.3 million, a decrease of $1.1 million, or 13.3%, from June 30, 2019. Non-performing loans as a percent of total loans receivable was 0.14% as of June 30, 2020, a decrease from 0.25% as of June 30, 2019. Charge-offs, net of recoveries, were $89,000 and $48,000 for the year ended June 30, 2020 and 2019, respectively.

Noninterest Income. Noninterest income decreased $33,000, or 1.1%, to $3.1 million for the year ended June 30, 2020 compared to June 30, 2019. The decrease was caused primarily by decreases of $366,000 in fees and service charges, $155,000 in gain on sale of bank premises, and $24,000 in net gains on sale of securities, partially offset by increases of $477,000 in swap income and $63,000 gain on sale of foreclosed real estate. The reduction in fees and service charge income was primarily due to the combined effects of reduced customer transaction activity as a result of “stay-at-home” orders issued by New York and surrounding states and our waiver of certain overdraft fees, ATM usage fees, wire and CD early withdrawal fees in response to COVID-19, as required by emergency regulations promulgated by the New York State Department of Financial Services. The Company began waiving such fees in accordance with this guidance on or about March 20, 2020, with approximately $197,000 in fees waived or lostnon-deductible merger-related expenses incurred in the current year. The Company reinstituted these fees on July 15, 2020, however, we expect to continue to be subject to some level of reduced customer activity and waivers based on customer-specific circumstances. The remaining decrease in fees and service charges was due to a $152,000 decrease in early CD withdrawal fees as the low interest rate environment has reduced the occurrence of early withdrawals.

 

Noninterest Expense. Noninterest expense increased $640,000, or 1.9%, to $34.6 million for the year ended June 30, 2020 compared to $34.0 million for the year ended June 30, 2019. The increase was caused primarily by a $1.3 million increase in salaries and benefits expense and $5,000 in all other expenses, partially offset by decreases of $334,000 in FDIC assessment costs and $354,000 in other post-retirement benefit costs. The increase in salaries and benefits was primarily due to a $1.2 million increase in stock-based compensation as the current compensation plan was implemented midway through the prior year period. During the current year, the Bank applied small bank assessment credits of $314,000 which mostly offset the Bank’s FDIC assessment for the current year.

Income Tax Expense. Income tax expense increased $5,000, or 0.2%, for the year ended June 30, 2020 in comparison to the year ended June 30, 2019. The increase was caused primarily by higher pre-tax income, partially offset by a lower effective tax rate. The effective income tax rate was 22.3% for the year ended June 30, 2020 as compared to 24.4% for the year ended June 30, 2019.

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, we have established a management-level Asset/Liability Management Committee, which takes initial responsibility for developing an asset/liability management process and related procedures, establishing and monitoring reporting systems and developing asset/liability strategies. On at least a quarterly basis, the Asset/Liability Management Committee reviews asset/liability management with the Investment Asset/Liability Committee of the Board of Directors. This Committee also reviews any changes in strategies as well as the performance of any specific asset/liability management actions that have been implemented previously. On a quarterly basis, an outside consulting firm provides us with detailed information and analysis as to asset/liability management, including our interest rate risk profile. Ultimate responsibility for effective asset/liability management rests with our Board of Directors.

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

Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of equity ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase and decrease 100 and 200 basis points from current market rates. As a result of increases in market rates and that interest ratesover the past year, the 50 basis point decrease 50 and 100 basis points from current market rates. Based on recent decreasesscenario utilized in the fed funds rate, as of June 30, 2020 we have removedprior year analysis was replaced by the 200 basis point decrease scenario in favor of a 50 basis point decrease to evaluate NPV.scenario.

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The following table presents the estimated changes in our NPV that would result from changes in market interest rates at June 30, 20202022 and 2019.2021. All estimated changes presented in the table are within the policy limits approved by our Board of Directors.Directors (Dollars in thousands).

 

 

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

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2020,2022, cash and cash equivalents totaled $136.3$118.5 million,, an increase a decrease from $60.0$159.3 million as of June 30, 2019. Securities2021. Unpledged securities classified as available for sale, which provide an additional source of liquidity, totaled $13.9$18.5 million at June 30, 2020,2022, a decrease from $72.2$28.9 million as of June 30, 2019.  2021.

We had the ability to borrow up to $218.4$280.9 million from the FHLB of New York,FHLBNY at June 30, 2020,2022, of which $106.1$48.3 million was outstanding as of June 30, 2020.2022. Additionally, as of June 30, 2020,2022, we had an available line of credit with the FRB of New York’sFRBNY’s discount window program of $108.7$96.3 million as well asand $25.0 million of fed funds lines of credit, neither of which had outstanding balances as of June 30, 2020.2022.

We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. If loan demand was to increase faster than expected, or any unforeseen demand or commitment was to occur, we could access our borrowing capacity with the FHLB of New YorkFHLBNY or the Federal Reserve Bank of New York.FRBNY.

We had $48.1$33.2 million of loan commitments outstanding as of June 30, 2020,2022, and $141.1$160.8 million of approved, but unadvanced, funds to borrowers. We also had $1.8$2.9 million in outstanding letters of credit at June 30, 2020.  2022.

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Time deposits due within one year of June 30, 20202022 totaled $270.5 $198.6 million, an increase a decrease of $48.7$28.3 million from $221.8$226.9 million as of June 30, 2019.2021. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB of New YorkFHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits at June 30, 2020.2022. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Liquidity is needed for financing and investing activities. The following table sets forth our primary investing and financing activities for the periods presented.presented (in thousands).

 

	Year ended June 30,
	2022				2021
Investing activities:
Loan (originations) repayments, net	$	(100,029	)		$	32,928
Proceeds from maturities and calls of held to maturity debt securities		58,287				105,684
Proceeds from maturities and calls of available for sale debt securities		17,310				17,496
Proceeds from sales of available for sale debt securities		-				3,339
Purchases of held to maturity debt securities		(143,809	)			(158,420	)
Purchases of available for sale debt securities		-				(41,307	)
Financing activities:
Net increase in deposits		134,568				118,427
Decrease in FHLB advances		(17,634	)			(40,132	)
Repurchase of common stock		(7,863	)			(16,608	)

The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its stockholders and for other corporate purposes. The Company’s primary source of liquidity is dividend payments it may receive from the Bank. The Bank’s ability to pay dividends to the Company is governed by applicable law and regulations. At June 30, 2020,2022, the Company (on an unconsolidated, stand-alone basis) had liquid assets of $41.2$18.4 million.

Capital Resources. PCSB Bank is subject to various regulatory capital requirements administered by the NYSDFS and the FDIC. At June 30, 2020,2022, PCSB Bank exceeded all applicable regulatory capital requirements, and the Bank was considered “well capitalized” under applicable regulatory guidelines. See Note 15 of Notes to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. See Note 9 of Notes to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Management of Market Risk”.

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Item 8. Financial Statements and Supplementary Data

 

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Report of Independent Registered Public Accounting Firm

 

Shareholders and the Board of Directors

of PCSB Financial Corporation and Subsidiaries

Yorktown Heights, New York

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of PCSB Financial Corporation and Subsidiaries (the “Company”"Company") as of June 30, 20202022 and 2019, and2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years thenin the period ended June 30, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the two years thenin the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Factors

As described in Notes 1 and 4 to the consolidated financial statements, the allowance for loan losses is a valuation allowance for probable incurred losses inherent in the loan portfolio. The Company’s consolidated allowance for loan losses was $8,927,000 at June 30, 2022, which consisted of the allowance for loan losses allocated to loans individually evaluated for impairment (“specific component”), representing $119,000, and loans collectively evaluated for impairment (“general component”), representing $8,808,000. The general component is based on historical loss experience adjusted for qualitative factors which are determined based on the various risk characteristics of each loan segment.

The general component of the Company’s allowance for loan losses involves consideration of various qualitative factors. Management’s analysis of these qualitative factors requires significant judgment, and management’s allocation of qualitative factors relies on a subjective analysis to determine the quantitative impact the qualitative factors have on the general component. We identified auditing management’s analysis and allocation of the qualitative factors to the general component of the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment.

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The primary audit procedures we performed to address this critical audit matter included:

/s/ Crowe LLP

 

We have served as the Company's auditor since 2007.

Livingston, New Jersey
September 9, 2022

 

New York, New York54

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September 11, 2020

PCSB Financial Corporation and Subsidiaries

Consolidated Balance Sheets

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

 

 

See accompanying notes to the consolidated financial statements

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Operations

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

 

		Year Ended
		June 30,
		2022				2021
Interest and dividend income
Loans receivable		$	49,502			$	49,470
Investment securities			8,609				7,340
Federal funds and other			569				454
Total interest and dividend income			58,680				57,264
Interest expense
Deposits and escrow interest			5,075				7,891
FHLB advances			1,166				2,031
Total interest expense			6,241				9,922
Net interest income			52,439				47,342
Provision (benefit) for loan losses			772				(673	)
Net interest income after provision (benefit) for loan losses			51,667				48,015
Noninterest income
Fees and service charges			1,640				1,428
Bank-owned life insurance			754				549
Gain on sale of premises			548				-
Swap income			785				367
Gains on sales of loans receivable			56				-
Gains on sales of securities			-				113
Other			36				40
Total noninterest income			3,819				2,497
Noninterest expense
Salaries and employee benefits			23,416				22,517
Occupancy and equipment			5,501				5,413
Merger-related expenses			1,252				-
Communication and data processing			2,211				2,064
Professional fees			1,673				1,690
Postage, printing, stationery and supplies			620				589
FDIC assessment			496				463
Advertising			477				400
Amortization of intangible assets			62				78
Other operating expenses			945				1,540
Total noninterest expense			36,653				34,754
Net income before income tax expense			18,833				15,758
Income tax expense			3,954				3,334
Net income		$	14,879			$	12,424
Earnings per common share:
Basic		$	1.05			$	0.84
Diluted			1.04				0.84
Weighted average common shares outstanding:
Basic			14,232,855				14,846,786
Diluted			14,289,020				14,847,579

 

See accompanying notes to the consolidated financial statements

56

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(amounts in thousands)

 

		Year ended June 30,
		2022				2021
Net income		$	14,879			$	12,424
Other comprehensive income:
Unrealized (losses) gains on available for sale debt securities:
Net change in unrealized gains/losses before reclassification adjustment			(5,302	)			(316	)
Reclassification adjustment for gains realized in net income			-				(52	)
Net change in unrealized gains/losses			(5,302	)			(368	)
Tax effect			1,113				77
Net of tax			(4,189	)			(291	)
Defined benefit pension plan:
Net (loss) gain arising during the period			(2,109	)			3,343
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost			340				1,151
Net change in unrealized gains/losses			(1,769	)			4,494
Tax effect			372				(944	)
Net of tax			(1,397	)			3,550
Supplemental retirement plans:
Net gain arising during the period			5				2
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost			65				55
Net change in unrealized gains/losses			70				57
Tax effect			(14	)			(12	)
Net of tax			56				45
Total other comprehensive (loss) income			(5,530	)			3,304
Comprehensive income		$	9,349			$	15,728

 

See accompanying notes to the consolidated financial statements

57

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

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

 

 

See accompanying notes to the consolidated financial statements

58

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(amounts in thousands)

		Year ended June 30,
		2022				2021
OPERATING ACTIVITIES
Net income		$	14,879			$	12,424
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for loan losses			772				(673	)
Depreciation and amortization			2,969				2,974
Amortization of net premiums on securities and net deferred loan origination costs			285				642
Net decrease in accrued interest receivable			2				482
Deferred income tax credit, net of valuation reserves			(126	)			(333	)
Gains on sales of securities			-				(113	)
Gains on sales of loans receivable			(56	)			-
Gain on sale of premises			(548	)			-
Stock-based compensation			3,270				3,269
ESOP compensation			1,810				1,486
Earnings from cash surrender value of BOLI			(754	)			(549	)
Originations of loans receivable held for sale			(3,708	)			-
Proceeds from loans receivable held for sale			3,764				-
Net accretion of purchase accounting adjustments			(110	)			(249	)
Other adjustments, principally net changes in other assets and liabilities			(1,638	)			(4,269	)
Net cash provided by operating activities			20,811				15,091
INVESTING ACTIVITIES
Purchases of investment securities:
Held to maturity			(143,809	)			(158,420	)
Available for sale			-				(41,307	)
Sale of investment securities available for sale			-				3,339
Maturities, calls and amortization of investment securities:
Held to maturity			58,287				105,684
Available for sale			17,310				17,496
Loan (originations) repayments, net			(100,029	)			32,928
Net redemption of FHLB stock			741				1,801
Purchase of BOLI			-				(10,000	)
Net sale (purchase) of bank premises and equipment			97				(2,681	)
Net cash used in investing activities			(167,403	)			(51,160	)
FINANCING ACTIVITIES
Net increase in deposits			134,568				118,427
Net decrease in short-term FHLB advances			-				(10,000	)
Repayment of long-term FHLB advances			(17,634	)			(30,132	)
Net increase in mortgage escrow funds			637				413
Common stock dividends paid			(3,604	)			(2,725	)
Repurchase of shares from employees for income tax withholding purpose			(360	)			(303	)
Repurchase of common stock			(7,863	)			(16,608	)
Net cash provided by financing activities			105,744				59,072
Net (decrease) increase in cash and cash equivalents			(40,848	)			23,003
Cash and cash equivalents at beginning of period			159,305				136,302
Cash and cash equivalents at end of period		$	118,457			$	159,305
Supplemental information:
Cash paid for:
Interest		$	6,293			$	10,023
Income taxes			4,536				5,839
Establishment of right to use lease asset			715				436
Transfers from premises and equipment to other assets			398				-

See accompanying notes to the consolidated financial statements

59

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PCSB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows - (Continued)

(amounts in thousands)

See accompanying notes to the consolidated financial statements

PCSB Financial Corporation and Subsidiaries

Notes to ConsolidatedConsolidated Financial Statements

 

Note 2.2. Recent Accounting Pronouncements